Yann Koby

WORKING PAPERS

The Reversal Interest Rate | American Economic Review, August 2023

with Markus Brunnermeier and Joseph Abadi 

The reversal interest rate is the rate at which accommodative monetary policy reverses and becomes contractionary for lending. Its determinants are 1) banks’ fixed-income holdings, 2) the strictness of capital constraints, 3) the degree of pass-through to deposit rates, and 4) the initial capitalization of banks. Quantitative easing increases the reversal interest rate and should only be employed after interest rate cuts are exhausted. Over time the reversal interest rate creeps up since asset revaluation fades out as fixed-income holdings mature while net interest income stays low. We calibrate a New Keynesian model that embeds our banking frictions.

• Media: Wall Street Journal (Greg Ip), Financial Times (Martin Sandbu), Bloomberg, Nikkei Asian Review

• Policy: P. Cœuré (ECB), P. Lane (Central Bank of Ireland/ECB), H. Kuroda (Bank of Japan), BOJ minutes 

• Blogs: M Kimball, T. Taylor 

Low Rates and Bank Loan Supply: Theory and Evidence from Japan |  July 2023, Submitted 

with Cynthia Balloch

What are the long-run consequences of low nominal interest rates for credit supply? In this paper we (1) provide panel evidence from Japan of the adverse effects of low rates on long-run bank profitability and loan supply, (2) propose a quantitative macroeconomic model with heterogeneous banks that rationalizes our key empirical findings, and (3) discipline the model using our panel evidence to estimate the aggregate impact on credit supply. Our empirical evidence exploits the differential exposure of banks to nominal rates through their historical liability structure. We show that exposed banks face relatively higher costs of funding, have lower profitability, and decrease loan supply as low rates unfold. In the model, loans are undersupplied in equilibrium due to financial frictions. Market power in deposits  helps mitigate these frictions, but is sensitive to nominal rates due to competition from money. This force is stronger for banks with more ex-ante market power, generating heterogeneity that we use to discipline the model. We find that low rates resulted in significantly lower loan growth in Japan. We explore in counterfactuals two commonly discussed policies: tiering bank reserves and taxing cash. Although tiering has a limited effect, both policies alleviate the negative effects of low rates on credit supply.

Making Sense of Negative Rates  | June 2022

with Cynthia Balloch and Mauricio Ulate

Several advanced economies implemented negative nominal interest rates in the middle of the last decade, seeking to provide further monetary accommodation once cuts in positive territory had been exhausted. Negative rates affect banks in novel ways, mostly because during times of negative policy rates the interest rate that banks pay households on their deposits usually remains close to zero. In this review, we analyze the large literature that studies the impact of negative nominal interest rates, proceeding in four steps. First, we explain the theoretical channels through which negative rates affect banks. Second, we discuss the empirical findings about bank outcomes under negative rates. Third, we describe the aggregate transmission channels that influence the macroeconomic implications of a policy rate cut in negative territory. Finally, we compare the general-equilibrium models that have been used to quantify the effectiveness of negative rates and highlight why they have obtained mixed results. We conclude that, if properly implemented, negative rates are a valuable tool that central banks should not discard outright. However, negative rates can have quantifiable costs for the financial sector, and their effectiveness is likely to decline if implemented for long periods.

Aggregation in Heterogeneous-Firm Models: A Sufficient Statistics Approach  | July 2020 (New version coming soon)

with Christian Wolf

When does the distribution of capital across firms matter for aggregate investment dynamics? We show that the real and financial micro frictions popular in the recent heterogeneous-firm literature invariably shape investment demand in partial equilibrium, but become irrelevant in general equilibrium if investment is sufficiently price-elastic. Previous work disagrees on the importance of micro frictions precisely because of implicit disagreement on this price elasticity. We find that quasi-experimental micro evidence on the response of firm investment to tax changes implies price elasticities that are orders of magnitude below those found in structural models with strong general equilibrium smoothing. To illustrate our results we show that, in heterogeneous-firm models with data-consistent dampened price elasticities, firm-level real and financial frictions also shape the cyclical behavior of aggregate investment. 

WORK IN PROGRESS

Reinsurance Markets and the Price of Catastrophic Risk  

I study the market for catastrophic weather-related risks. I show that a concentrated market can deliver better outcomes than a perfectly competitive market amid the presence of financial frictions affecting the capacity of reinsurers to take on risk. I use detailed insurance and reinsurance data from Florida to estimate the model, and also discuss the role of public reinsurance. 

Monetary Policy Transmission through Banks in the United States  

Joint with Christian Wolf

We show that shocks to the federal funds rate transmit imperfectly to retail bank products households use to borrow or save at short and medium-term horizons. We show in a heterogeneous-households model that this dampens monetary policy, albeit less so than in a representative agent model.