Money Supply Chain
Exorbitant Privilege? Quantitative Easing and the Bond Market Subsidy of Prospective Fallen Angels
Viral Acharya et al.
NBER Working Paper, February 2022
Abstract:
We document capital misallocation in the U.S. investment-grade (IG) corporate bond market, driven by quantitative easing (QE). Prospective fallen angels -- risky firms just above the IG rating cutoff -- enjoyed subsidized bond financing since 2009, especially when the scale of QE purchases peaked and from IG-focused investors that held more securities purchased in QE programs. The benefiting firms used this privilege to fund risky acquisitions and increase market share, exploiting the sluggish adjustment of credit ratings in downgrading after M&A and adversely affecting competitors' employment and investment. Eventually, these firms suffered more severe downgrades at the onset of the pandemic.
Historical evidence for larger government spending multipliers in uncertain times than in slumps
Pascal Goemans
Economic Inquiry, forthcoming
Abstract:
We investigate whether US government spending multipliers are higher during periods of heightened uncertainty or economic slumps as opposed to normal times. Using quarterly data from 1890 onward and local projections, we estimate a cumulative 1-year multiplier of 2 during uncertain periods. In contrast, the multiplier is about 1 in times of high unemployment and about 0.4-0.8 during normal times. While we find positive employment effects in slumps as well as in uncertain times, two transmission channels can explain the higher multipliers in the latter: greater price flexibility leading to short-term inflation (lowering the real interest rate) and diminishing risk premiums.
Information spillovers of US monetary policy
Prasanna Gai & Eric Tong
Journal of Macroeconomics, forthcoming
Abstract:
We examine the international impact of the information content in US monetary policy. When the Federal Reserve tightens monetary policy, it reveals not only a tightened monetary stance, but also optimism about the economy, raising global output and asset prices as a result. Using a panel dataset of fifty-eight countries over the period 1994-2020, we disentangle "information shocks" from pure monetary shocks and show that (i) while tightening shocks are contractionary for the global economy, the information inherent in a tightening announcement can have expansionary effects; (ii) monetary and information shocks tend to offset each other, softening the net spillovers to the world economy; and (iii) the information inherent in monetary easing lowers output and asset prices. US monetary announcements can thus reveal optimism or pessimism with consequences for global economic activity.
The cleansing effect of banking crises
Reint Gropp et al.
Economic Inquiry, forthcoming
Abstract:
We assess the cleansing effects of the 2008-2009 financial crisis. U.S. regions with higher levels of supervisory forbearance on distressed banks see less restructuring in the real sector: fewer establishments, firms, and jobs are lost when more distressed banks remain in business. In these regions, the banking sector has been less healthy for several years after the crisis. Regions with less forbearance experience higher productivity growth after the crisis with more firm entries, job creation, and employment, wages, patents, and output growth. Forbearance is greater for state-chartered banks and in regions with weaker banking competition and more independent banks.
Fraud and Abuse in the Paycheck Protection Program? Evidence from Investment Advisory Firms
William Beggs & Thuong Harvison
Journal of Banking & Finance, forthcoming
Abstract:
This study investigates the nature and magnitude of abuse in the Paycheck Protection Program (PPP or the Program) using PPP loans made to 2,999 investment advisory firms registered with the U.S. Securities and Exchange Commission (SEC). The data suggest that PPP abuse was relatively widespread as approximately 25% of firms receiving PPP loans indicated they would retain more jobs in their loan application than the number of employees they disclosed on their most recent regulatory filing (Form ADV). We show an existing model of investment advisor fraud predicts the most egregious PPP loans at a rate similar to actual cases of fraud. Investment advisors abusing the Program were significantly more likely to disclose a history of past fraud and other legal and/or regulatory misconduct. Using a conservative approach, we estimate that more than 6% of the $590 million in PPP funds received by SEC registered investment advisors consisted of overallocations to firms abusing the Program. We test a variety of hypotheses to shed further light on the nature of PPP abuse.
FinTech Lending and Bank Credit Access for Consumers
Tetyana Balyuk
Management Science, forthcoming
Abstract:
Using a unique setting of an online peer-to-peer lender, I show that banks expand credit access for consumers who obtain FinTech loans. Consistent with FinTech relieving information frictions, this effect is stronger for more credit-constrained consumers. Many borrowers, especially higher-quality ones, use peer-to-peer loans to repay expensive revolving debt. Yet, debt financing and credit score changes cannot fully explain higher bank credit. The increase in bank credit access is stronger when information sets between banks and peer-to-peer lenders diverge more. These results highlight information spillovers as a novel mechanism through which FinTech lending can relieve financial constraints for consumers.
Calling All Issuers: The Market for Debt Monitoring
Huaizhi Chen, Lauren Cohen & Weiling Liu
NBER Working Paper, February 2022
Abstract:
A substantial fraction of local governments refinance their long-term debt with significant delays - resulting in sizable losses. Using data from 2001 to 2018, we estimate that U.S. municipals lost over $31 billion from this delayed refinancing, whereas the entire U.S. corporate sector, facing the same low interest-rate environment, lost only a comparatively modest $1.4 billion. We present evidence that these delays are related to gaps in localized debt monitoring. For instance, when a bond's call option unlocks in a month that is the fiscal year-end of a local government - a particularly busy time for finance departments - the decision to call is delayed significantly longer. A significantly longer delay also occurs when a municipality is faced with a wave of calls all due at once. These effects are magnified in smaller municipalities, with fewer finance staff. In addition, the market for outside monitoring (e.g., underwriters), is a fractured one. It is characterized by extreme stickiness: 87% of a municipality's bonds are issued with the same underwriter over our sample period. Moreover, the usage of a less locally-focused underwriter is associated with significantly greater delays.
Active Depositors
Mikael Homanen
Journal of Banking & Finance, March 2022
Abstract:
Do households react to negative non-financial and climate related information about their financial institutions? Using branch level data for the United States, I show that banks that financed the highly controversial Dakota Access Pipeline experienced significant decreases in deposit growth. These effects were greater in localities with higher support for the protests and higher environmental awareness. Data suggests that locally oriented banks were among the main beneficiaries of this depositor movement. Overall, this paper adds significantly to our understanding on the non-financial preferences of household financial investment decisions and climate finance debate.
Psychic Moving Costs and Mortgage Default with Positive Equity
David Low
Consumer Financial Protection Bureau Working Paper, October 2021
Abstract:
Many struggling mortgage borrowers who have home equity lose it through foreclosure. To explain why they do not just sell their homes instead, this paper develops a new model of mortgage default in which homeowners face psychic moving costs. A transparent calibration procedure yields psychic moving costs that are empirically accurate, heterogeneous, and large. The model explains above water default: after a liquidity shock, above water homeowners often default rather than sell in an ex-ante optimal gamble to avoid moving. Psychic moving costs also mostly explain why underwater borrowers so rarely walk away from their homes, another major puzzle in the literature. Relative to a nested model without above water default, the full model produces starkly different results in policy experiments. Wealth maximization motivates many fewer defaults, so suing defaulters prevents less than one-fifth as many foreclosures after a drop in house prices. But liquidity constraints alone drive many more defaults, so forbearance prevents between three and seven times more foreclosures after a drop in aggregate income.
Are higher U.S. interest rates always bad news for emerging markets?
Jasper Hoek, Steve Kamin & Emre Yoldas
Journal of International Economics, forthcoming
Abstract:
Increases in U.S. interest rates are often thought to generate adverse spillovers to emerging market economies (EMEs). We show that whether U.S. rate hikes are bad news for EMEs depends on the source of these hikes. Higher rates stemming from stronger U.S. growth generate only modest spillovers to EME financial markets, while those stemming from hawkish Fed policy or inflationary pressures are much more disruptive. We identify the sources of U.S. rate changes using moves in financial asset prices around FOMC announcements and U.S. employment reports. Drawing on the literature identifying Fed "information" effects, we interpret positive comovements of Treasury yields and U.S. equity prices around these events as growth shocks and negative comovements as monetary shocks, and estimate the effect of these shocks on emerging market asset prices. For EMEs with greater macroeconomic and financial vulnerabilities, the difference between the impact of monetary and growth shocks is magnified.
Fiscal transparency or fiscal illusion? Housing and credit market responses to fiscal monitoring
Lang (Kate) Yang
International Tax and Public Finance, February 2022, Pages 1-29
Abstract:
Nongovernmental stakeholders, including taxpayers and investors of government bonds, have an interest in government financial information. Fiscal transparency entails both access to and understandability of government information. Analyses of a government borrower's financial information, often facilitated by market intermediaries, directly affect investor return on the bond market. In contrast, taxpayers may lack the incentive or capacity to comprehend government financial data prepared based on complex accounting rules. State fiscal monitoring programs compile and analyze local government financial data to track fiscal stress. This paper examines how housing and municipal bond markets respond to the New York monitoring program implemented in 2013, which uses existing, account-level local government financial data to assign simple labels signifying local government insolvency. Housing prices decreased following significant fiscal stress designations, but not statistically significantly following the other more modest stress labels. In contrast, the bond market priced in government financial information even before the state monitoring.