Job Market Paper
Loan Market Power and Monetary Policy Passthrough under Low Interest Rates
paper
Abstract: Is monetary policy less effective in a low interest-rate environment? To answer this question, I study how the passthrough of monetary policy to banks' deposit rates has changed, during the secular decline in interest rates in the U.S. over the last decades. In the data, the passthrough increased (decreased) for banks who started with a low (high) passthrough. I explain this observation in a model where banks have market power over loans and face capital constraints. In the model, when interest rates are low, the passthrough falls as policy rates fall, only in markets where loan competition is high. Hence, the overall passthrough depends on the distribution of loan market power. I confirm the model's prediction using the branch-level data of U.S. banks. This channel also impacts the transmission of monetary policy to bank lending under low interest rates.
paper
Abstract: Is monetary policy less effective in a low interest-rate environment? To answer this question, I study how the passthrough of monetary policy to banks' deposit rates has changed, during the secular decline in interest rates in the U.S. over the last decades. In the data, the passthrough increased (decreased) for banks who started with a low (high) passthrough. I explain this observation in a model where banks have market power over loans and face capital constraints. In the model, when interest rates are low, the passthrough falls as policy rates fall, only in markets where loan competition is high. Hence, the overall passthrough depends on the distribution of loan market power. I confirm the model's prediction using the branch-level data of U.S. banks. This channel also impacts the transmission of monetary policy to bank lending under low interest rates.
Working Papers
Transfers vs Credit Policy: Macroeconomic Policy Trade-offs during Covid-19
with Saki Bigio and Eduardo Zilberman. paper, NBER Working Paper 27118
Abstract: The Covid-19 crisis has lead to a reduction in the demand and supply of sectors that produce goods that need social interaction to be produced or consumed. We interpret the Covid-19 shock as a shock that reduces utility stemming from “social” goods in a two-sector economy with incomplete markets. We compare the advantages of lump-sum transfers versus a credit policy. For the same path of government debt, transfers are preferable when debt limits are tight, whereas credit policy is preferable when they are slack. A credit policy has the advantage of targeting fiscal resources toward agents that matter most for stabilizing demand. We illustrate this result with a calibrated model. We discuss various shortcomings and possible extensions to the model.
with Saki Bigio and Eduardo Zilberman. paper, NBER Working Paper 27118
Abstract: The Covid-19 crisis has lead to a reduction in the demand and supply of sectors that produce goods that need social interaction to be produced or consumed. We interpret the Covid-19 shock as a shock that reduces utility stemming from “social” goods in a two-sector economy with incomplete markets. We compare the advantages of lump-sum transfers versus a credit policy. For the same path of government debt, transfers are preferable when debt limits are tight, whereas credit policy is preferable when they are slack. A credit policy has the advantage of targeting fiscal resources toward agents that matter most for stabilizing demand. We illustrate this result with a calibrated model. We discuss various shortcomings and possible extensions to the model.
Disintermediating the Federal Funds Market
with Tsz-Nga Wong
Abstract: We document a new channel mediating the effects of monetary policy and regulation, the disintermediation channel. When the interest rate on excess reserves (IOER) increases, fewer banks are intermediating in the Fed funds market, and they intermediate less. Thus, the total Fed funds traded decreases and the dispersion of Fed fund rates widens. Similarly, disintermediation happens after Basel III and raising the balance sheet cost. The magnitude of the disintermediation channel is significant and comparable to the direct channel, for example, of IOER, which is insignificant. To explain that, we develop a continuous-time search-and-bargaining model of divisible funds that includes the matching model (e.g. Afonso-Lagos ECTA 2015) and the transaction cost model (e.g. Hamilton JPE 1996) as special cases. We solve the equilibrium in closed form, derive the dynamic distributions of trades and Fed fund rates, and the stopping times of entry and exit from the Fed fund market. IOER reduces the spread of marginal value of the fund, and hence the gain of intermediation. In general, the equilibrium is constrained inefficient, as banks trade too frequently.
with Tsz-Nga Wong
Abstract: We document a new channel mediating the effects of monetary policy and regulation, the disintermediation channel. When the interest rate on excess reserves (IOER) increases, fewer banks are intermediating in the Fed funds market, and they intermediate less. Thus, the total Fed funds traded decreases and the dispersion of Fed fund rates widens. Similarly, disintermediation happens after Basel III and raising the balance sheet cost. The magnitude of the disintermediation channel is significant and comparable to the direct channel, for example, of IOER, which is insignificant. To explain that, we develop a continuous-time search-and-bargaining model of divisible funds that includes the matching model (e.g. Afonso-Lagos ECTA 2015) and the transaction cost model (e.g. Hamilton JPE 1996) as special cases. We solve the equilibrium in closed form, derive the dynamic distributions of trades and Fed fund rates, and the stopping times of entry and exit from the Fed fund market. IOER reduces the spread of marginal value of the fund, and hence the gain of intermediation. In general, the equilibrium is constrained inefficient, as banks trade too frequently.
Work in Progress
Adverse Selection and Fund Allocation in Venture Capital Market
with Shuo Liu
Abstract: This paper investigates the relationship between adverse selection and funding resource allocation in venture capital market. By using micro-level data of all rounds of venture capital funding in the U.S. between 1980 and 2017, we find that: the start-up firms that get first-round funding at an older age are more likely to raise a larger amount of money, but have worse ex-post performances by different measures. This result implies that the adverse selection problem is significant for a start-up firm's first-round funding in the U.S. venture capital market. To explain the empirical facts, we build a competitive search model in which VC investors can enter a series of submarkets to screen the unobserved qualities of start-up firms. The model predicts that high-quality start-up firms prefer the matching speed with VC investors to the amount of funds raised, which makes them more likely complete first-round funding at their earlier ages than low-quality firms.
with Shuo Liu
Abstract: This paper investigates the relationship between adverse selection and funding resource allocation in venture capital market. By using micro-level data of all rounds of venture capital funding in the U.S. between 1980 and 2017, we find that: the start-up firms that get first-round funding at an older age are more likely to raise a larger amount of money, but have worse ex-post performances by different measures. This result implies that the adverse selection problem is significant for a start-up firm's first-round funding in the U.S. venture capital market. To explain the empirical facts, we build a competitive search model in which VC investors can enter a series of submarkets to screen the unobserved qualities of start-up firms. The model predicts that high-quality start-up firms prefer the matching speed with VC investors to the amount of funds raised, which makes them more likely complete first-round funding at their earlier ages than low-quality firms.
Bank Competition, Firm Ownership, and Margins of Innovation
with Zhiyuan Chen, Fu Xin and Jie Zhang
Abstract: This paper investigates the effect of bank competition on innovation and how the effect is dependent on the ownership structure of the firms. Combining the data of Chinese manufacturing firms with bank branching information in 2006 and 2007, we find that: first, intensified bank competition has a positive impact on the probability of investing in R&D of State-Owned Firms (SOFs), but not Private Firms (PFs); second, increased banking competition only enhances the level of investment in R&D of PFs. These results are stable to a series of robustness checks. Then we build a model to explain the empirical results. The model relies on the assumptions that: SOFs are less likely to default; asymmetric information on the riskiness of R&D exists between firms and banks; banks compete with each other in a Bertrand-Edgeworth game in the loan market. Under these assumptions, in equilibrium only PFs face credit rationing. We numerically solve the model and obtain results that are consistent with our empirical findings. The counterfactual experiments show that the welfare gains are much more sensitive to banking deregulation when the loan guarantee provided to SOFs are removed.
with Zhiyuan Chen, Fu Xin and Jie Zhang
Abstract: This paper investigates the effect of bank competition on innovation and how the effect is dependent on the ownership structure of the firms. Combining the data of Chinese manufacturing firms with bank branching information in 2006 and 2007, we find that: first, intensified bank competition has a positive impact on the probability of investing in R&D of State-Owned Firms (SOFs), but not Private Firms (PFs); second, increased banking competition only enhances the level of investment in R&D of PFs. These results are stable to a series of robustness checks. Then we build a model to explain the empirical results. The model relies on the assumptions that: SOFs are less likely to default; asymmetric information on the riskiness of R&D exists between firms and banks; banks compete with each other in a Bertrand-Edgeworth game in the loan market. Under these assumptions, in equilibrium only PFs face credit rationing. We numerically solve the model and obtain results that are consistent with our empirical findings. The counterfactual experiments show that the welfare gains are much more sensitive to banking deregulation when the loan guarantee provided to SOFs are removed.