Monetary Policy and Mispricing in Stock Markets

Abstract

We investigate the role of monetary policy in stock price misalignments and explore whether central banks can attenuate excessive mispricing as suggested by the proponents of a “leaning against the wind” monetary policy. Decomposing stock prices into expected excess dividends, an equity risk premium, and a mispricing component, we find that prices fall more strongly in response to an increase in the policy rate than what is implied by their underlying fundamentals. This systematic overreaction suggests that tighter monetary policy may contain emerging asset price misalignments. Our findings are at odds with the predictions of a rational bubble framework, but can be explained by mispricing arising from false subjective expectations of irrational investors.

Media Treatment of Monetary Policy Surprises and Their Impact on Firms’ and Consumers’ Expectations

Abstract

We investigate whether monetary policy announcements affect firms' and consumers' expectations by considering their media treatment. We initially use standard monetary policy surprise measures and analyze how the main general newspapers in France report on the announcements. Eighty-five percent of the monetary policy surprises are either not associated with the newspapers reporting a change in the monetary policy stance or have a sign inconsistent with the media report. Only when we consider media-consistent monetary policy surprises do we find that consumers and firms respond to monetary policy announcements. The economic tonality of the media reports drives the sign of consumers' response.

Real Interest Rates and Population Growth across Generations*

Abstract

This paper empirically examines the correlation between population growth and real interest rates. Although this correlation is well founded in macroeconomic theory, the corresponding empirical results have been rather tenuous. Demographic interest rate theories are typically based on long-term relationships across generations. Accordingly, key population trends appear often only across decades, if not centuries, worth of data. To capture these trends, we distinguish between population growth resulting from a birth surplus and net migration. Within a panel covering 12 countries and the years since 1820, we find robust evidence that the birth surplus is significantly correlated with the real interest rate.

Can Internet Banking Affect Households’ Participation in Financial Markets and Financial Awareness?

Abstract

We are in a digital era and more and more banks have begun to offer Internet banking. The availability of this new channel can reduce households' cost of acquiring information and the time spent on financial transactions; therefore, it could also impact on households' decisions to start investing in financial markets. Using an instrumental variable approach, we find that the adoption of Internet banking induces households to participate in financial markets and, in particular, to hold short-term assets with a low risk/return profile. Over time, the adoption of Internet banking also drives a better understanding of basic financial concepts.

Oil Shocks, External Adjustment, and Country Portfolio

Abstract

This study examines the intertemporal nature of countries’ external adjustment by using two oil income shocks with different timings: giant oil discovery news shocks and contemporaneous oil revenue shocks from international oil price changes. Empirical estimates using a large panel of countries support the intertemporal theory. Net foreign assets hike immediately upon oil revenue shocks, but decline for the first 5 years after oil discoveries and rebound subsequently. These adjustments are largely through the current account but partially stabilized by valuation effects for oil revenue shocks. Oil discoveries attract FDI inflows, while oil revenue shocks increase foreign debt assets holdings.

Housing Boom‐Bust Cycles and Asymmetric Macroprudential Policy

Abstract

In this paper, I argue that occasionally binding borrowing constraints are a source of nonlinearity that warrant an appropriate nonlinear macroprudential policy response. Nonlinear policy responses likely better capture the spirit of macroprudential policy. I show that an asymmetric macroprudential policy rule, which lowers the borrowing limit more aggressively during credit booms, obtains better economic outcomes compared to an optimized symmetric rule that is typically studied in the literature. An asymmetric policy response reduces output and inflation tail risks, generating not only better economic stabilization but also positive externalities to monetary policy.

Monetary and Macroprudential Policy and Welfare in an Estimated Four‐Agent New Keynesian Model

Abstract

We examine the social and agent-specific welfare effects of monetary and macroprudential policy in a four-agent estimated macro-economic model comprising “banked simple households,” “underbanked simple households,” “firm owners,” and “bank owners.” Optimal capital requirement and loan loss provisions ratios improve all agent-specific and social welfare, but imply smaller gains for simple households and firm owners that rely on credit. Countercyclical capital buffers support firm owners and bank owners with smaller gains for the two simple households, while countercyclical loan loss provisions improve social welfare only for specific shocks. Coordination between monetary and macroprudential policies yields higher social welfare than no coordination.

R&D, Market Power, and the Cyclicality of Employment

Abstract

This paper provides a first look into the joint effects of research and development (R&D) and market power on the cyclicality of employment. It presents a theoretical model with R&D and monopolistically competitive firms which shows that firms smooth their R&D activities when they face large R&D adjustment costs. This smoothing behavior comes at the expense of higher labor volatility, and it is stronger for firms with high R&D intensity and low market power. Firm-level data support these predictions. Dynamic panel estimations reveal that employment at competitive firms engaging in a high level of R&D is more procyclical.

The Asymmetric Effect of Credit Supply on Firm‐Level Productivity Growth

Abstract

We study the impact of bank credit on firm productivity. We exploit a matched firm-bank database, covering all the credit relationships of Italian corporations, to measure idiosyncratic supply-side shocks to credit availability and estimate a production model augmented with financial frictions. We find the effect of credit supply to be asymmetric: contractions harm TFP growth, halting productivity-enhancing activities; positive credit supply shocks have limited effects. This points toward a role of financial stability in preserving productivity growth.

Dampening Global Financial Shocks: Can Macroprudential Regulation Help (More than Capital Controls)?

Abstract

We show that macroprudential regulation significantly dampens the impact of global financial shocks on emerging markets. Specifically, a tighter level of regulation reduces the sensitivity of GDP growth to capital flow shocks and movements in the Chicago Board Options Exchange's VIX. A broad set of macroprudential tools contributes to this result, including measures targeting bank capital and liquidity, foreign currency mismatches, and risky credit. We also find that tighter macroprudential regulation allows monetary policy to respond more countercyclically to global financial shocks. This could be an important channel through which macroprudential regulation enhances macro-economic stability. We do not find evidence that capital controls provide similar benefits.