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Title: The pass-through of monetary rates to bank interest rates: implications for monetary policy
Authors: Koby, Yann
Advisors: Brunnermeier, Markus K
Contributors: Economics Department
Keywords: Banking
Monetary Policy
Negative Interest Rates
Nominal Interest Rates
Reversal Rate
Subjects: Economics
Issue Date: 2021
Publisher: Princeton, NJ : Princeton University
Abstract: I study the pass-through of monetary rates into bank interest rates using both empirical and theoretical methods. I use the results of my study to derive implications for the conduct of monetary policy. Chapter 1, co-authored with Cynthia Balloch, provides theory and evidence that banks’ profitability and credit supply fundamentally depend on the level of nominal interest rates. I use a forty-year panel of Japanese banks to show that their profitability and lending terms depend on the level of nominal interest rates. These facts hold in the aggregate and in the cross-section, where I exploit bank heterogeneity. I build a macroeconomic model that rationalizes these facts and use it to study the implications for the aggregate supply of credit and the choice of an optimal inflation target. Chapter 2 , co-authored with Markus Brunnermeier, studies how bank lending reacts to monetary policy shocks in very-low or negative interest rate environments. In such environments, further decrease in rates can lead to lower bank profitability if banks are not sufficiently hedged, generating lower credit supply when their credit constraints bind. When these effects dominate the stimulatory effects of monetary shocks coming from presence of sticky prices, monetary policy reaches a “reversal rate” below which interest rate cuts are contractionary for lending. Chapter 3 studies how banks pass-through changes in monetary rates into their bank product. I study both bank assets, such as loans, and bank liabilities, such as various forms of deposits. I show that there is significant heterogeneity across products, and that the pass-through is highly non-linear, with dependence on the direction of the change as well as the economy’s state. The heterogeneity in bank product pass-through delivers heterogeneous pass-through to households that positively correlate with their liquid wealth. I show in a heterogenous-agents New Keynesian model that this reduces monetary policy propagation, affects the Taylor principle, and makes any effective lower bound – such as the reversal rate – bind more often.
Alternate format: The Mudd Manuscript Library retains one bound copy of each dissertation. Search for these copies in the library's main catalog:
Type of Material: Academic dissertations (Ph.D.)
Language: en
Appears in Collections:Economics

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