Money and Credit
Paper Session
Friday, Jan. 3, 2025 8:00 AM - 10:00 AM (PST)
- Chair: Jens Christensen, Federal Reserve Bank of San Francisco
Monetary Policy Shocks and Firms’ Bank Loan Expectations
Abstract
We evaluate the impact of the ECB’s monetary policy (MP) between 2009 and 2022 on euro area enterprises’ bank loan expectations using data from the Survey on the Access to Finance of Enterprises, a bi-annual euro area firm-level survey. We identify MP comparing expectations of those firms that respond to the survey shortly before and after the selected MP shocks. First, we find that contractionary MP shocks decrease bank loan expectations. Second, we document that only large and contractionary shocks have a significant impact on expectations, suggesting that the attention that firms pay to MP is endogenous to the size and the sign of the shocks. Third, we find that the information content and nature of shocks matter. We partition the MP shocks into pure MP shocks and the central bank information shocks –the latter capturing the possible impact on expectations of news of the current state of the economy revealed by the ECB during its MP announcements. Both shocks have the expected sign —a positive (contractionary) pure MP shock decreases expectations, while a positive central bank information shock increases them– but the effect of the latter is weak, suggesting that MP impacts firms’ bank loan expectations through its expected impact on bank loan conditions. By contrast, it might be not trivial for firms to understand how the current state of the economy revealed by an ECB announcement might impact bank loan conditions and update expectations accordingly. Nonetheless, this last finding does not apply to QE. While conventional contractionary MP shocks have a negative and significant impact on bank loan availability beliefs, QE contractionary shocks deliver a counter-intuitive positive impact on expectations, driven by the information content of these announcements. Finally, we show that the response to MP depends on firms’ characteristicsMoney Markets, Collateral and Monetary Policy
Abstract
During the financial and sovereign debt crises, euro area interbank money markets underwent dramatic changes: the share of unsecured borrowing declined throughout the euro area, while private market haircuts on sovereign bonds and bank borrowing from the European Central Bank increased in the South. We construct a quantitative general equilibrium model to evaluate the macroeconomic impact of these developments and the associated policy response. Our model features heterogeneous banks and sovereign bonds, secured and unsecured money markets, and a central bank. We compare a benchmark policy – the central bank providing collateralized lending to banks at haircuts lower than the market - to an alternative policy that maintains a constant central bank balance sheet. We show that the fall in output, investment, and capital would have been twice as high under the alternative policy. More generally, the model allows the analysis of monetary policy tools beyond interest rate policies and quantitative easingSavings-and-Credit Contracts
Abstract
In this paper, we introduce a Savings-and-Credit Contract (SCC) that mandates asavings period with a default penalty before providing credit. This design mitigates
adverse selection. We show that SCCs can dominate classic loan contracts amidst
information frictions, thereby expanding access to credit. Empirical evidence from a
financial product that features an SCC design supports the theory. While appearing
riskier on observables, product participants have lower realized default rates than bank
borrowers. Further consistent with the theory, a reform that reduces the default penalty
during the savings period leads to worse selection and higher realized default rates
among product participants.
“If You Don't Know Me by Now ...” Banks’ Private Information and Relationship Length
Abstract
Does private information banks generate about their corporate borrowers deepen and change in nature over time, and if so, how? Exploiting the comprehensive Federal Reserve’s supervisory dataset, we distinguish two private information dimensions embedded in internal credit ratings: depth and direction (better or worse). After showing that depth and direction are associated with loan terms, we document that longer firmbank relationships deepen private information often strongly nonlinear, in both directions, and peaking at about five years. Learning effects are particularly salient for smaller and leveraged firms, smaller, leveraged, and illiquid banks, at longer firm-bank distances, and during non-COVID times.JEL Classifications
- G2 - Financial Institutions and Services