Monetary Economics

Members of the NBER's Monetary Economics Programs met November 1 in San Francisco. Faculty Research Fellows Adrien Auclert of Stanford University and Marco Di Maggio of Harvard University, and Program Directors Emi Nakamura and Jón Steinsson of University of California, Berkeley organized the meeting. These researchers' papers were presented and discussed:

Andres Blanco, University of Michigan, and Isaac Baley, Universitat Pompeu Fabra

Aggregate Dynamics in Lumpy Economies

In economies with lumpy microeconomic adjustment, Blanco and Baley establish structural relationships between the dynamics of the cross-sectional distribution of agents and its steady-state counterpart and discipline these relationships using micro data. Applying the methodology to firm lumpy investment, the researchers discover that the dynamics of aggregate capital are structurally linked to two cross-sectional moments of the capital-to-productivity ratio: its dispersion and its covariance with the time elapsed since the last adjustment. The researchers compute these sufficient statistics using plant-level data on the size and frequency of investments. They find that, in order to explain investment dynamics, the benchmark model with fixed adjustment costs must also feature a precise combination of irreversibility and random opportunities of free adjustment.

Saki Bigio, University of California, Los Angeles and NBER, and Yuliy Sannikov, Stanford University

A Model of Intermediation, Money, Interest, and Prices

A model integrates a modern implementation of monetary policy (MP) into an incompletemarkets monetary economy. Policy sets corridor rates and conducts open-market operations and fiscal transfers. These tools grant independent control over credit spreads and inflation. Bigio and Sannikov study the implementation of spreads and inflation via different MP instruments. Through its influence on spreads, MP affects the evolution of real credit, interests, output, and wealth distribution (both in the long and the short run). The researchers decompose effects through different transmission channels. They study the optimal spread management and find that the active management of spreads is a desirable target.

Anthony A. DeFusco and John A. Mondragon, Northwestern University

No Job, No Money, No Refi: Frictions to Refinancing in a Recession

DeFusco and Mondragon study how employment documentation requirements and out-of-pocket closing costs constrain mortgage refinancing. These frictions, which bind most severely during recessions, may significantly inhibit monetary policy pass-through. To study their effects on refinancing, the researchers exploit an FHA policy change that excluded unemployed borrowers from refinancing and increased others' out-of-pocket costs substantially. These changes dramatically reduced refinancing rates, particularly among the likely unemployed and those facing new out-of-pocket costs. The results imply that unemployed and liquidity constrained borrowers have a high latent demand for refinancing. Cyclical variation in these factors may therefore affect both the aggregate and distributional consequences of monetary policy.

Greg Buchak, Stanford University; Gregor Matvos, Northwestern University and NBER; Tomasz Piskorski, Columbia University and NBER; and Amit Seru, Stanford University and NBER

The Limits of Shadow Banks (NBER Working Paper 25149)

Buchak, Matvos, Piskorski, and Seru study which types of activities migrate to the shadow banking sector, why migration occurs in some sectors, and not others, and the quantitative importance of this migration. They explore this question in the $10 trillion US residential mortgage market, in which shadow banks account for more than half of new lending. Using micro data, the researchers document a large degree of market segmentation in shadow bank penetration. They substitute for traditional — deposit taking — banks in easily securitized lending, but are limited from engaging in activities requiring on-balance sheet financing. Traditional banks adjust their financing and lending activities to balance sheet shocks, and behave more like shadow banks following negative shocks. Motivated by this evidence, the researchers build a structural model. Banks and shadow banks compete for borrowers. Banks face regulatory constraints, but benefit from the ability to engage in balance sheet lending. Like shadow banks, banks can choose to access the securitization market. To evaluate distributional consequences, the researchers model a rich demand system with income and house price differences across borrowers. The model is estimated using spatial pricing rules and bunching at the regulatory threshold for identification. The researchers study the consequences of capital requirements, access to securitization market, and unconventional monetary policy on lending volume and pricing, bank stability and the distribution of consumer surplus across rich and poor households. Disruptions in securitization markets rather than capital requirements have the largest quantitative impact on aggregate lending volume and pricing.

Ian Dew-Becker, Northwestern University and NBER; Alireza Tahbaz-Salehi, Northwestern University; and Andrea Vedolin, Boston University and NBER

Macro Skewness and Conditional Second Moments: Evidence and Theories

Dew-Becker, Tahbaz-Salehi, and Vedolin establish four facts about skewness and conditional volatility in the economy: (1) aggregate activity is negatively skewed; (2) sector activity is negatively skewed, but less than aggregate; (3) the cross-sectional variance of output growth is countercyclical; (4) when a sector shrinks, it subsequently covaries more with other sectors. Those facts can all be generated qualitatively and quantitatively by a multisector equilibrium model with the key feature that production inputs are gross complements. Three alternative models that have been proposed to generate skewness and stochastic volatility are unable to simultaneously match all four facts even qualitatively.

Rohan Kekre, University of Chicago, and Moritz Lenel, Princeton University

Monetary Policy, Redistribution, and Risk Premia

Kekre and Lenel study the transmission of monetary policy through risk premia in a heterogeneous agent New Keynesian environment. Heterogeneity in households' marginal propensity to take risk (MPR) summarizes differences in risk aversion, constraints, rules of thumb, background risk, and beliefs relevant for portfolio choice on the margin. An unexpected reduction in the nominal interest rate redistributes to households with high MPRs, lowering risk premia and amplifying the stimulus to investment. Quantitatively, this mechanism rationalizes the role of news about future excess returns in driving the stock market response to monetary policy shocks.

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