Ensuring Financial Stability: Financial Structure and the Impact of Monetary Policy on Asset Prices

Assenmacher, Katrin; Gerlach, Stefan

doi:10.2139/ssrn.1114053

Cited by 72 publications

(51 citation statements)

References 22 publications

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“…5 Hence, the expected discounted pro…ts that the intermediary obtains by lending new debt in a given period at a …xed interest rate must be equal to the expected discounted pro…ts the intermediary would obtain by lending it at a variable rate: 6…”

Section: The Financial Intermediarymentioning

confidence: 99%

Monetary and Macroprudential Policies Under Fixed and Variable Interest Rates

Rubio

2017

Macroecon. Dynam.

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In this paper, I analyze the ability of monetary policy to stabilize both the macroeconomy and …nancial markets under two di¤erent scenarios: …xed and variable-rate mortgages. I develop and solve a New Keynesian dynamic stochastic general equilibrium model (DSGE) that features a housing market and a group of constrained individuals who need housing collateral to obtain loans. A given share of constrained households borrows at a variable rate, while the rest borrow at a …xed rate.I consider two alternative ways of introducing a macroprudential approach to enhancing …nancial stability: one in which monetary policy, using the interest rate as an instrument, responds to credit growth; and a second one in which the macroprudential instrument is instead the loan-to-value ratio (LTV). The results show that when rates are variable, a countercyclical LTV rule performs better in stabilizing …nancial markets than monetary policy. However, when rates are …xed, even though monetary policy is less e¤ective in stabilizing the macroeconomy, it does a good job in promoting …nancial stability.

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Section: The Financial Intermediarymentioning

confidence: 99%

Monetary and Macroprudential Policies Under Fixed and Variable Interest Rates

Rubio

2017

Macroecon. Dynam.

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“…However, pooling in dynamic panel data models when the dynamics are in fact cross-section specific entails even asymptotically a heterogeneity bias. Pesaran and Smith (1995) propose the mean-group estimator as a solution, in which the panel nature of the data set is exploited for estimation of the mean of the slope co-2 A different approach is pursued by Assenmacher-Wesche and Gerlach (2008), who split their sample based on the value of one structural characteristic and compare the averages of the impulse responses across country subsamples. The results of this approach may be hard to interpret, as one cannot control for more than one structural characteristic at a time.…”

Section: Nicht-technische Zusammenfassungmentioning

confidence: 99%

“…An economy's financial structure may affect the monetary transmission mechanism in numerous ways (see Barran, Coudert and Mojon, 1996;Dornbusch, Favero and Giavazzi, 1998;Assenmacher-Wesche and Gerlach, 2008). In this paper, I focus on the degree of competitive pressures in the banking sector and the importance of bank credit in the economy.…”

Section: Financial Structure: Banking Sector Competitive Pressures Anmentioning

confidence: 99%

Towards an explanation of cross-country asymmetries in monetary transmission

Georgiadis

2014

Journal of Macroeconomics

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I quantify the importance of financial structure, labor market rigidities and industry mix for cross-country asymmetries in monetary transmission. To do so, I determine how closely the impulse responses to a monetary policy shock obtained from country-specific vectorautoregressive (VAR) models and a non-standard panel VAR model match. In the country-specific VAR models, the impulse responses vary across countries in an unrestricted fashion. In the panel VAR model, the impulse responses also vary across countries, but only to the extent that countries differ regarding their financial structure, labor market rigidities and industry mix. For a sample of 20 industrialized countries over the time period from 1995 to 2009, I find that up to 70% (50%) of the cross-country asymmetries in the responses of output (prices) to a monetary policy shock can be accounted for by crosscountry differences in financial structure, labor market rigidities and industry mix. While in the short run asymmetries in the output responses arise mainly due to cross-country differences in industry mix, in the medium and long run differences in financial structure and labor market rigidities gain more importance. Moreover, cross-country differences in industry mix appear to be of rather minor importance for cross-country asymmetries in the transmission of monetary policy to prices. Non-technical SummaryThe structures of many industrialized economies have changed markedly over the last decades. Globalization nd technological progress have fostered structural change, labor market deregulation and financial market development as well as integration. These changes may have important implications for the conduct of monetary policy, as labor market rigidities may dampen the sensitivity of inflation to monetary policy and enhance that of output; output and prices may be more sensitive to monetary policy changes the larger the share of an economy's output that is accounted for by durable goods manufacturing, that is, goods with high interest rate sensitivity of demand; the intensity of competitive pressures in an economy's banking system may affect the speed and extent of pass-through of changes in the policy rate to market rates faced by households and firms; the more important external financing in an economy, the stronger the amplification of the effects of The results suggest that policies in a currency union that aim at harmonizing labor market regulations, fostering structural change and financial integration as well as innovation have a large potential to reduce asymmetries in monetary transmission. Moreover, since the driving forces of structural change, labor market deregulation and financial market development observed in the last decades are likely to persist, these results suggest that the monetary transmission mechanism is likely to change in the future. Finally, the results of this paper suggest that financial structure, labor market rigidities and industry mix should be incorporated in theoretical business cycle models which are...

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“…The proportion of each type of borrower is …xed and exogenous. 4 Consumers can be constrained or unconstrained in the sense that constrained individuals need to collateralize their debt repayments in order to borrow from the …nancial intermediary. Interest payments in the next period cannot exceed a proportion of the future value of the current house stock.…”

Section: The Consumer' S Problemmentioning

confidence: 99%

“…For the two types of mortgage to be o¤ered, the …xed-interest rate has to be such that the intermediary 4 According to the European Mortgage Federation, the type of mortgage contracts across countries responds to a large extent to institutional or cultural factors, which are out of the scope of the present model. In the short run, the proportion of each type of mortgage contract can ‡uctuate, but typically it does not imply a change in the …xed-or variable-rate category of the country.…”

Section: The Financial Intermediarymentioning

confidence: 99%

Housing-market heterogeneity in a monetary union

Rubio

2014

Journal of International Money and Finance

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This paper studies the implications of cross-country housing-market heterogeneity in a monetary union for both shock transmission and welfare. I develop a two-country new Keynesian general equilibrium model with housing and collateral constraints to explore this issue. The conventional wisdom is that welfare would be higher in a monetary union if mortgage markets were homogeneous. This paper shows instead that welfare is higher only when homogenization does not result in higher aggregate volatility (because of …nancial accelerator e¤ects) or does not redistribute too much wealth from borrowers to savers.

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Ensuring Financial Stability: Financial Structure and the Impact of Monetary Policy on Asset Prices

Cited by 72 publications

References 22 publications

Monetary and Macroprudential Policies Under Fixed and Variable Interest Rates

Monetary and Macroprudential Policies Under Fixed and Variable Interest Rates

Towards an explanation of cross-country asymmetries in monetary transmission

Housing-market heterogeneity in a monetary union

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