Monetary Economics

November 3, 2017
Valerie A. Ramey and Johannes Wieland, both of the University of California at San Diego, Organizers

Germán Gutiérrez, New York University, and Thomas Philippon, New York University and NBER

Declining Competition and Investment in the U.S. (NBER Working Paper No. 23583)

The U.S. business sector has under-invested relative to Tobin's Q since the early 2000's. Gutiérrez and Philippon argue that declining competition is partly responsible for this phenomenon. They use a combination of natural experiments and instrumental variables to establish a causal relationship between competition and investment. Within manufacturing, researchers show that industry leaders invest and innovate more in response to exogenous changes in Chinese competition. Beyond manufacturing Gutiérrez and Philippon show that excess entry in the late 1990's, which is orthogonal to demand shocks in the 2000's, predicts higher industry investment given Q. Finally, they provide some evidence that the increase in concentration can be explained by increasing regulations.

Nicolas Crouzet, Northwestern University, and Neil Mehrotra, Federal Reserve Bank of Minneapolis

Small and Large Firms over the Business Cycle

Drawing from new, confidential data on income statements and balance sheets of US manufacturing firms, Crouzet and Mehrotra provide evidence on the relationship between size, cyclicality and financial frictions. First, while sales and investment of smaller firms tend to fluctuate more over the business cycle, the difference is too small to have an impact on aggregates — especially given the high and rising degree of skewness of the firm size distribution. Second, the size effect remains unchanged when directly conditioning on firm-level proxies for financial strength; moreover, while there is a size effect for sales and investment, there is none for measures of external financing. This evidence suggests that the relative behavior of small firms may not be informative about the role of financing frictions in amplifying business cycles.

George-Marios Angeletos, MIT and NBER, and Chen Lian, MIT

Forward Guidance without Common Knowledge (NBER Working Paper No. 22785)

Forward guidance — and macroeconomic policy more generally — relies on shifting expectations, not only of future policy, but also of future economic outcomes such as income and inflation. These expectations matter through general-equilibrium mechanisms. Recasting these expectations and these mechanisms in terms of higher-order beliefs reveals how standard policy predictions hinge on the assumption of common knowledge. Relaxing this assumption anchors expectations and attenuates the associated general-equilibrium effects. In the context of interest, this helps lessen the forward-guidance puzzle, as well as the paradox of flexibility. Angeletos and Lian show that more broadly, it helps operationalize the idea that policy makers may find it hard to shift expectations of economic outcomes even if they can easily shift expectations of policy.

Stephan Luck and Tom Zimmermann, Federal Reserve Board

Employment Effects of Unconventional Monetary Policy: Evidence from QE

This paper investigates the effect of the Federal Reserve's unconventional monetary policy on employment via a bank lending channel. Luck and Zimmermann find that while banks with higher MBS holdings issued relatively more loans after the first and third rounds of quantitative easing (QE1 and QE3), additional volume is concentrated in refinanced mortgages after QE1, and originated home purchase mortgages and C&I lending after QE3. Using spatial variation, they show that regions with a high share of affected banks experienced stronger lending and overall employment growth after QE3, but only weak employment effects after QE1. While the ability of households to refinance mortgages after QE1 spurred local demand, the resulting employment growth was confined to the non-tradable goods sector. In contrast, the researchers use new confidential loan-level data to show that firms with stronger ties to affected banks increased employment and capital investment more after QE3. Altogether, their findings suggest that unconventional monetary policy can, similar to conventional monetary policy, affect real economic outcomes, but its effect depends on the type of targeted assets and on market forces outside the central bank's authority.

Christopher Martin and Alexander Ufier, FDIC, and Manju Puri, Duke University and NBER

On Deposit Stability in Failing Banks

Martin, Puri, and Ufier use a novel dataset from a US bank which failed after the financial crisis of 2007-2009 to study depositor behavior in distressed banks. Their unique data allow us to observe daily, account-level balances in all deposit accounts at the bank to examine the effect of deposit insurance (both regular and temporary measures) and other account characteristics on deposit stability, as well as the important role deposit inflows play in distressed banks. Researhers find, when faced with bad regulatory news, uninsured depositors flee the bank. Government deposit guarantees, both regular deposit insurance and temporary deposit insurance measures (e.g., the FDIC's Transaction Account Guarantee program), reduce the outflow of deposits and meaningfully improve deposit stability. Further, Martin, Puri, and Ufier find older accounts are less prone to leave in the face of bad news, and, consistent with assumptions in Basel III, checking accounts are more stable than savings accounts. However, contrary to conventional wisdom, term deposits are more risk-sensitive than transaction accounts. Their evidence also suggests that run-off rates assumed in the Net Stable Funding Ratio may be too low, especially during periods of extreme stress. Finally, researchers show there was simultaneously a run-in at the bank during times of stress with a substantial inflow of insured deposits from new depositors. Effectively, the bank was able to offset losses of uninsured deposits with new insured deposits remarkably well as it approached failure, raising questions on the effectiveness of depositor discipline widely considered to be one of the key pillars of financial stability.

Sigríður Benediktsdóttir, Yale University; Gauti B. Eggertsson, Brown University and NBER; and Eggert Þórarinsson, Central Bank of Iceland

The Rise, the Fall, and the Resurrection of Iceland

This paper documents how the Icelandic banking system grew from 100 percent of GDP in 1998 to 9 times GDP in 2008 when it failed. Sigríður, Eggertsson, and Þórarinsson base the analysis on data from the banks that was made public when the Icelandic parliament lifted among others bank secrecy laws to investigate the run up to the financial crisis. They document how the banks were funded, and where the money went with a comprehensive analysis of their lending. The recovery from the crisis is based on policy decisions which in hindsight seem to have worked well. Researchers will analyze some of these policies, including emergency legislation, capital control, alleviation of balance of payment risks and preservation of the financial stability. They also estimate the output costs of the crisis, which was about average relative to the 147 banking crisis documented Laeven and Valencia (2012) and the 100 banking crisis documented by Reinhart and Rogoff (2014). Their computation of the governments direct costs, reveals that the recently concluded negotiation with foreign creditors may even leave the Icelandic government in net surplus as a consequence of the crisis, although there is still some uncertainty about the ultimate cost and our benchmark estimate is a cost corresponding to 5 percent of GDP. Sigríður, Eggertsson, and Þórarinsson summarize several lessons from the episode.

NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us