> WP version | Online appendix | Replication codes

> Summary: SUERF Policy Brief | VoxEU | ECB conference | AI-generated podcast 

> Media Coverage: InterConnectedness Newsletter 2023 Halloween | Klement on Investing blog

We identify a new channel in the monetary policy transmission to nonfinancial corporates—the zombie lending channel. Our findings show that unviable and unproductive zombie firms are less affected by contractionary monetary policy relative to other firms due to a more muted tightening in credit conditions. We rationalize this result with a strengthening in evergreening motives when interest rates rise: lenders face incentives to extend loans to zombies to prevent them from defaulting. Strengthening banks’ balance sheets and curbing risky lending behavior could help mitigate zombie lending practices when financial conditions tighten.

> WP version

> Summary: SUERF Policy Brief 

We study the role of regional housing markets in the transmission of US monetary policy. Using a FAVAR model over 1999q1–2019q4, we find sizeable heterogeneity in the responses of US states to a contractionary monetary policy shock. Part of this regional variation is due to differences in housing supply elasticities, household debt overhang, and housing wealth (volatility). Our analysis indicates that house prices and consumption respond more in supply-inelastic states and in states with large household debt imbalances, where negative housing wealth effects bite more strongly and borrowing constraints become more binding. Moreover, financial stability risks increase sharply in these areas as mortgage delinquencies and foreclosures surge, worsening banks’ balance sheets. Finally, monetary policy may have a stronger effect on housing tenure decisions in supply-inelastic states, where the homeownership rate and price-to-rent ratios decline by more. Our findings stress the importance of regional housing supply conditions in assessing the macrofinancial effects of rising interest rates.

> Dataset on housing booms | WP version

> Summary: SUERF Policy Brief | VoxEU

> Media Coverage: Centralbanking.com

This paper shows that not all housing price cycles are alike. The speed and persistence of house price increases during housing expansions are key determinants of both the severity of the subsequent downturn and the net macroeconomic impact over the cycle. Analyzing 180 housing expansions across 68 countries, we classify 49 percent as housing booms, characterized by rapid and persistent real house price increases. We find that economic downturns are significantly deeper and longer when housing contractions are preceded by a housing boom. The housing contraction is more severe the more intensive the preceding housing boom, and when accompanied by a credit boom. Overall, while housing booms spur stronger economic growth during the expansion phase, their sharp reversals lead to severe housing contractions, resulting in significant net negative effects on the real economy.

> Online appendix | WP version

> Summary: VoxEU | Bank Underground blog

We use UK transaction-level data to study whether nationwide mortgage moratoria, or payment holidays (PH), can act as a mechanism for smoothing mortgagors’ consumption following negative aggregate shocks. We find that both borrowers with pre-existing financial vulnerabilities and with stronger balance sheets, including buy-to-let investors, had an incentive to access the policy. This is not surprising since PH were available to all mortgagors and without affecting households' credit risk scores. Using a quasi-experimental DiD research design based on eligibility, we then find that the policy allowed liquidity-constrained households to smooth consumption during the pandemic relative to the control group. By contrast, other mortgagors did not seem to increase consumption relative to the control group, preferring to save the liquidity relief provided by PH. Overall, we find evidence that PH were able to support consumption of more vulnerable households, who are more likely to pull away from consumption during stress periods.

> WP version | Online appendix | Dataset | Replication codes

> Summary: VoxEU

> Media Coverage: Financial Times (I, II, III, IV) | The Economist | CNBC (interview, article) | Bloomberg (Newsletter, Opinion) | The Washington Post | Barron's | NACM | Instituto + Liberdade (in Portuguese) | InterConnectedness Newsletter (2023Q3, 2023 Halloween) | Portuguese Economy Research report | Het Financieele Dagblad (I), (II).  

We build a comprehensive new dataset spanning listed and private nonfinancial zombie firms across Advanced Economies and Emerging Markets over the past two decades. Our findings reveal a global rise in the prevalence of these unproductive and unviable firms, particularly since the Global Financial Crisis and the Covid-19 pandemic. We show that private firms exhibit lower zombification rates due to their lower average survival rates. Our paper also offers a new perspective on zombie lending drivers: lenders may rationalize zombie lending based on overly optimistic expectations of a recovery in zombies’ future earnings. We then document that macroprudential policies targeting bank capital and loan restrictions can effectively mitigate the adverse effects of zombification. However, strengthening the banking sector alone may not suffice without robust insolvency frameworks prepared to manage firm restructuring and insolvency.

> Online appendix | WP version | Replication codes

> Summary: VoxEU | Bank Underground blog

How do corporate debt booms affect investment? Using US firm-level data over 1984Q1-2019Q4, and an instrument for firm-specific debt booms that exploits systematic differences in firms’ exposure to industry-level debt booms, I find that debt booms cause investment growth to decline over the medium term. This result is driven by the financial constraints channel: vulnerable firms experience a higher cost of debt in the short run, lower stock returns, and an increase in indicators proxying financial risk. Vulnerable firms also cut their investment spending after a debt boom, irrespective of their growth opportunities. Finally, I find that congestion effects from vulnerable firms on healthy firms are amplified during debt booms, stressing the risk that debt booms in a subset of firms may spill over to the rest of the economy.

> Online Appendix | WP version | Replication codes | Estimated housing supply elasticities 

> Summary: VoxEU | Bank Underground blog

> Media coverage: The Economist (I), (II), (III), (IV), (V) | Marginal Revolution

Developments in US house prices over the past decade mirror those of the 1996-2006 boom. Construction activity has, however, been weak. Using data for 254 US metropolitan areas, we show that housing supply elasticities have fallen markedly in recent years. We find that housing supply elasticities have declined more in areas in which land-use regulation has tightened the most, and in areas that experienced the sharpest housing busts. Consistent with the declining housing supply elasticities, we find that monetary policy shocks have had a stronger effect on house prices during the past decade than during the previous boom. At the same time, building permits respond less.

> WP version

> Summary: VoxEU | Bank Underground blog

> Media coverage: Centralbanking.com

We study how household concerns about their future financial situation may affect the marginal propensity to consume (MPC) during the COVID-19 pandemic. We use a representative survey of UK households to compute the MPC from a hypothetical transfer of £500. We find that household expectations play a key role in determining differences in MPCs across households: households concerned  about not being able to make ends meet have a 20% higher MPC than other households. Our findings suggest that policies targeted to vulnerable and financially distressed households may prove more effective in stimulating demand than providing stimulus payments to all households.

> Online appendix

> Summary: VoxEU | Bank Underground blog

We challenge the assumption in the literature of constant housing supply elasticities across housing expansions. Using a time-varying parameter (TVP)-VAR model on monthly US data since the early 1990s, we find that the response of housing supply to an expansionary monetary policy shock relative to the response of house prices has declined substantially since the Great Financial Crisis (GFC). Our findings are consistent with research suggesting that land-use regulation has tightened. Absent major reversions in regulation, our results point to a post-COVID-19 housing recovery characterised by a sluggish response of housebuilding to demand, but a relatively stronger response of house prices. 

> Online appendix | WP version | Replication codes

I investigate the nonlinear effects of monetary policy through differences in household debt across U.S. states. After constructing a novel indicator of inflation for the states, I compute state-specific monetary policy stances as deviations from an aggregate Taylor rule. I find that the effectiveness of monetary policy is curtailed during periods of large household debt imbalances. Moreover, a common U.S. monetary policy does not fit all; it may have asymmetric effects on the economic performance across states, particularly at times of high dispersion in the household debt imbalances, as it may have been the case around the Great Recession. 

I study the effects of borrowing and liquidity constraints on the response of consumption to anticipated income changes. Using the PSID over 1999–2013, I find that the well-documented strong excess sensitivity of consumption to income of highly constrained households can be explained by episodes of income increases. In addition, I look into the heterogeneity of households without debt, a group that has been largely disregarded by the literature. My fixed-effects estimates show that only those without debt tend to increase their saving in response to anticipated income declines, irrespective of the amount of liquid assets held. 

> Supplementary material | WP version

Using a novel data set for the U.S. states, this paper examines whether household debt and the protracted debt deleveraging help explain the dismal performance of U.S. consumption since 2007 in the aftermath of the housing bubble. By separating the concepts of deleveraging and debt overhang—a flow and a stock effect—we find that excessive indebtedness exerted a meaningful drag on consumption over and beyond wealth and income effects. The overall effect, however, is modest—around one sixth of the slowdown in consumption between 2000–06 and 2007–12—and mostly driven by states with particularly large imbalances in their household sector. This might be indicative of non-linearities, whereby indebtedness begins to bite only when misalignments from sustainable debt dynamics become excessive. 

> WP version

The response of US inflation to the high levels of spare capacity during the Great Recession of 2007–09 was rather muted. At the same time, some have argued that the short-term unemployment gap has a more prominent role than the standard unemployment gap in determining inflation, and either the closing of this gap or non-linearities in the Phillips curve could lead to a sudden pick-up in inflation. In this context, our main aim is to provide guidance to policymakers as regards the reliability of the Phillips curve to forecast inflation. Our main findings from Phillips curves estimated since the early-1990s suggest that the consideration of a time-variation in the Phillips curve slope is more relevant than just focusing on finding the “correct” slack measure. Although the Phillips curve may be relatively flat over the full sample (1992Q1–2015Q1), time-varying estimates with rolling windows and with the Kalman filter suggest that the slope does vary over time and that it has increased slightly since 2013. These non-linear specifications outperform the benchmark linear model in an out-of-sample exercise. The main policy implication is that decision-makers should not exclude the possibility that inflation might rise suddenly given its non-linear behaviour, and more strongly than a linear model would dictate. 

> WP version

We analyse the forecasting power of different monetary aggregates and credit variables for US GDP. Special attention is paid to the influence of the recent financial market crisis. For that purpose, in the first step we use a three-variable single-equation framework with real GDP, an interest rate spread and a monetary or credit variable, in forecasting horizons of one to eight quarters. This first stage thus serves to pre-select the variables with the highest forecasting content. In a second step, we use the selected monetary and credit variables within different VAR models, and compare their forecasting properties against a benchmark VAR model with GDP and the term spread (and univariate AR models). Our findings suggest that narrow monetary aggregates, as well as different credit variables, comprise useful predictive information for economic dynamics beyond that contained in the term spread. However, this finding only holds true in a sample that includes the most recent financial crisis. Looking forward, an open question is whether this change in the relationship between money, credit, the term spread and economic activity has been the result of a permanent structural break or whether we might return to the previous relationships.

> WP version

> Summary: VoxEU

> Media coverage: The Economist | FEDS Notes

The balance sheet adjustment in the household sector was a prominent feature of the Great Recession that is widely believed to have held back the cyclical recovery of the US economy. A key question for the US outlook is therefore whether household deleveraging has ended or whether further adjustment is needed. The novelty of this paper is to estimate a time-varying equilibrium household debt-to-income ratio determined by economic fundamentals to examine this question. The paper uses state-level data for household debt from the FRBNY Consumer Credit Panel over the period 1999Q1–2012Q4 and employs the Pooled Mean Group (PMG) estimator developed by Pesaran, Shin, and Smith (1999), adjusted for cross-section dependence. The results support the view that, despite significant progress in household balance sheet repair, household deleveraging still had some way to go as of 2012Q4, as the actual debt-to-income-ratio continued to exceed its estimated equilibrium. The baseline conclusions are rather robust to a set of alternative specifications. Going forward, our model suggests that part of this debt gap could, however, be closed by improving economic conditions rather than only by further declines in actual debt. Nevertheless, the normalisation of the monetary policy stance may imply challenges for the deleveraging process by reducing the level of sustainable household debt. 

> WP version

This work provides empirical evidence for a sizeable, statistically significant negative impact of the quality of fiscal institutions on public spending volatility for a panel of 23 EU countries over the 1980–2007 period. The dependent variable is the volatility of discretionary fiscal policy, which does not represent reactions to changes in economic conditions. Our baseline results thus give support to the strengthening of institutions to deal with excessive levels of discretion volatility, as more checks and balances make it harder for governments to change fiscal policy for reasons unrelated to the current state of the economy. Our results also show that bigger countries and bigger governments have less public spending volatility. In contrast to previous studies, the political factors do not seem to play a role, with the exception of the Herfindahl index, which suggests that a high concentration of parliamentary seats in a few parties would increase public spending volatility.