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Monetary Policy, Excess Reserves and Credit Supply: Old-Style vs. New-Style Central Banking

Abstract: The operational framework in the U.S. changed from a corridor to a floor system in 2008 as a consequence of unconventional policies implemented to mitigate the Great Financial Crisis. In this paper I examine the effects of this switch on the transmission mechanism of conventional monetary policy. Concretely, I analyze if the bank-lending channel changed due to the alterations in the operational system. To this end, I first estimate a Hybrid-VAR model using U.S. data for both the pre-switch and post-switch sample. In the sample prior to the operational framework switch the bank-lending channel is shown to be active. However, in the post-switch sample, bank loans increase after a policy tightening shock. Additionally, I develop a regime-switching two-agent New Keynesian (TANK) model with an interbank market to compare the transmission mechanism of conventional policy across both systems. In line with the estimates, I find that under the old-style corridor system real activity declines after a monetary contraction. However, I show that under a new-style floor system, monetary tightening stimulates credit supply, due to the presence of a friction introduced by banks’ liquidity management costs.

Keywords: TANK; Monetary Transmission Mechanism; Interbank Market; Liquidity Management

JEL Classification: E42, E44, E51, E52

Introduction and link to full paper.

Identifying Heterogeneous Bank Responses to U.S. Monetary Policy Shocks

Joint work with Dennis Zander (Ph.D. Candidate at The University of Warwick)

Abstract: Using an informationally-robust monetary policy instrument we identify a strong heterogeneity in the monetary policy transmission across commercial banks. We show that the degree of liquidity systematically influences how banks change their lending behavior after an unexpected change in monetary policy, when including crisis and post-GFC periods. Following an unexpected monetary tightening, highly liquid banks (those with excess reserves exceeding 1% of total assets) react with a significant expansion of loans, whereas less liquid banks react with a reduction in their loan supply. Additionally, our instrument allows us to distinguish between conventional and unconventional monetary policy. We find that our results are qualitatively robust, but exhibit quantitative differences across the alternative monetary policies. Finally, we show that neglecting to control for the information effects of monetary policy yield qualitatively different results that are at odds with economic theory.

Keywords: Excess Reserves; External Instruments; Local Projections; Bank-lending Channel; Information Channel

JEL Classification: C13, E42, E44, E52

Introduction and link to full paper.

Is the Bank-Lending Channel Present in Post Financial Crisis U.S. Data?

Abstract: The bank-lending channel is often considered one of the most important channels for the transmission of monetary policy. It relies, however, on the assumption of binding reserve requirements. It is therefore interesting to analyze whether the effects of monetary policy on the lending behavior of individual banks changed since the Great Financial Crisis. To answer this question I use a standard two-step regression approach using U.S. bank-level data between 1990Q1 and 2019Q3. I find evidence supporting the lending channel in the subsample prior to the crisis. On the other hand, I find that since the Great Financial Crisis, the bank-lending channel is no longer present in U.S. data. Instead, monetary tightening is now associated with looser liquidity constraints, and thus, with growth in bank lending. These findings suggest that unconventional policies unintentionally reshaped the transmission mechanism of conventional monetary policy.

Keywords: Bank-lending Channel; Monetary Policy; Transmission Mechanism

JEL Classification: E42, E44, E52, G32

Introduction and link to full paper.

Work in Progress

Climate-Related Disclosures in the UK Financial Sector and their Determinants

Joint work with J. Acosta-Smith (PSID, Bank of England), B. Guin (BPD, Bank of England) and Q.A. Vo (FSSR, Bank of England)

Abstract: We investigate climate-related, voluntary disclosures in the UK banking and insurance industries. We first examine the extent to which UK financial institutions regulated by the Prudential Regulation Authority (PRA) already disclose information in line with TCFD recommendations using Natural Language Processing (NLP) techniques and Machine Learning (ML) classifiers. We then analyse if PRA climate-related policy affects firms’ decisions to voluntary disclose in line with TCFD, and what are the main determinants of firms’ disclosure incentives. We find that climate-related disclosures by UK banks and insurers are increasing over time (with a significant jump in 2019), but that there exists vast heterogeneity in disclosure levels across firms and sectors. The PRA’s 2020 “Dear CEO letter” had a significant impact on firms’ decisions to disclose climate-related information, and total assets are the most important determinants of firms’ disclosure incentives.

Keywords: Climate Disclosure; Market Discipline; TCFD

JEL Classification: G2, C4, C8

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