“Financial frictions and asymmetric interest rate pass through in India”, 2020. Job market paper.
Using panel data on Indian banks, we find that the pass through of policy rate to deposit rates is incomplete, highly asymmetric and subject to liquidity conditions, both at the individual and systemic (aggregate) level. The interest rate response is higher for an increase (as compared to a decrease) in policy rate. This asymmetry is higher when the aggregate (systemic) liquidity deficit is higher. The key factor mitigating this asymmetry is the proportion of liquid assets held by banks. Higher liquid investments enable banks to lower the deposit rates more effectively in response to a policy rate cut. We explain these findings using a model where banks face an occasionally binding collateral constraint while borrowing funds from the central bank. The model also provides an explanation for the observed asymmetry in the context of width of policy interest corridor.
“Macroprudential Policy Interactions in a sectoral DSGE model with Staggered Interest Rates”, 2020.
We develop a two-sector DSGE model with a detailed banking sector along the lines of Clerc et al. (2015) to assess the impact of macroprudential tools (minimum, countercyclical and sectoral capital requirements, as well as a loan-to-value limit) on key macroeconomic and financial variables. The banking sector features residential mortgages and corporate lending subject to staggered interest rates à la Calvo (1983), which is motivated by the sluggish movement of lending rates due to fixed interest rate loan contracts. Other distortions in the model include limited liability, bankruptcy costs and penalty costs for deviations from regulatory capital. We estimate the model using Bayesian methods based on quarterly U.K. data over 1998Q1-2016Q2.
Our contributions are threefold. We show that: (i) coordination of macroprudential tools may have a welfare-improving effect, (ii) macroprudential tools would have improved some macroeconomic indicators but, within our model, not have prevented the Global Financial Crisis, (iii) staggered interest rates may alter the transmission of macroprudential tools that work through interest rates.
WORK IN PROGRESS:
“Impact of Sectoral Capital Requirements”
We develop a two sector DSGE model with detailed banking sector to assess the impact of the introduction of Sectoral Capital requirement on the economy. The banking sector in the model features residential mortgages and corporate lending, subject to borrower default as well as bank defaults. Default and Bankruptcy costs, coupled with limited liability and deposit insurance for banks imply a role for regulatory bank capital. Bank capital is scarce and hence expensive creating a trade-off. We calibrate the model to the UK data and compute the optimal Sectoral Capital requirements, including sectoral countercyclical capital. We compare the performance of the SCR policy (which targets sectoral credit growth) with a Counter-cyclical buffer policy (which targets aggregate Credit) under different shocks (Technology, Housing demand, Credit expansion and Default risk shocks). We find that the SCR rule is more effective in smoothing the fluctuations in the economy. We also explore an alternative Macro Prudential Policy in the form of LTV limit and counter cyclical LTV buffer. Preliminary results show that LTV policy could be a substitute for SCR.
"Endogenous Default, Financial Cycle and Macro Prudential Regulation".
"Monetary Policy and the Valuation of Banks".
PRE-PhD publications:
"Real exchange rate and Real Interest rate differential: A Co-integration Approach with Structural shifts", 2015. Journal of Quantitative Economics 13 (2), 201-214 (2015)."
"Revisiting the Reinvestment rate", 2016. The Management Accountant Journal 51 (5), 78-83 (2016)."