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  5. Monetary Policy Transmission
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Monetary Policy Transmission

Paper Session

Friday, Jan. 3, 2025 10:15 AM - 12:15 PM (PST)

San Francisco Marriott Marquis, Juniper
Hosted By: International Banking, Economics, and Finance Association
  • Chair: Margherita Bottero, Bank of Italy

Monetary Tightening, Inflation Drivers and Financial Stress

Frederic Boissay
,
Bank for International Settlements
Fabrice Collard
,
Toulouse School of Economics
Cristina Manea
,
Bank for International Settlements
Adam Shapiro
,
Federal Reserve Bank of San Francisco

Abstract

The paper explores the state–dependent effects of a monetary tightening on financial stress, focusing on a novel dimension: the nature of supply versus demand inflation at the time of policy rate hikes. We use local projections to estimate the effect of high frequency identified monetary policy surprises on a variety of financial stress measures, differentiating the effects based on whether inflation is supply–driven (e.g. due to adverse supply or cost–push shocks) or demand–driven (e.g. due to positive demand factors). We find that financial stress flares up after a policy rate hike when inflation is supply–driven, but it remains roughly unchanged, or even declines when inflation is demand–driven. Our findings point to a particular tension between price stability and financial stability when inflation is high and largely supply–driven.

Monetary Policy Transmission through the Exchange Rate Factor Structure

Erik Loualiche
,
University of Minnesota
Alexandre R. Pecora
,
Virginia Tech
Fabricius Somogyi
,
Northeastern University
Colin Ward
,
University of Alberta

Abstract

We show that US monetary policy is transmitted internationally through the factor structure of exchange rates. Following an unexpected easing, investment funds sell safe and buy risky currencies. Global US banks, similarly, tilt their distribution of foreign loan origination toward currencies of greater systematic currency risk. The effects of monetary policy on currency flows and loans persist for several months and feed into the leverage and real investment decisions of firms and, in particular, those that operate using a high-risk currency. We argue that currencies' factor exposures are a lens through which we can understand the international transmission of US monetary policy.

Relationship Lending and Monetary Policy Shocks: Evidence from the U.S.

Allen N. Berger
,
University of South Carolina
Christa H.S. Bouwman
,
Texas A&M University
Lars Norden
,
Getulio Vargas Foundation
Raluca A. Roman
,
Federal Reserve Bank of Philadelphia
Gregory F. Udell
,
Indiana University
Teng Wang
,
Federal Reserve Board

Abstract

We investigate monetary policy transmission in the presence of relationship lending. Analyzing confidential Y-14Q loan-level supervisory data for C&I loans, we find that U.S. banks reduce the pass-through of monetary policy shocks to relationship borrowers by at least 40 percent. The effect is driven by contractionary monetary policy and by banks better able to absorb monetary policy shocks (large banks, highly reliant on deposits, with low deposit betas, and high liquidity). Small firms borrowing from these banks obtain the greatest benefits. The evidence highlights an important yet overlooked impediment to monetary policy transmission and significant benefits for relationship borrowers.

Discussant(s)
Flavio Moraes
,
FGV EBAPE
Jens Christensen
,
Federal Reserve Bank of San Francisco
Ricardo Correa
,
Federal Reserve Board
JEL Classifications
  • E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit
  • G2 - Financial Institutions and Services