A Capital Structure Channel of Monetary Policy
Benjamin Grosse-Rueschkamp, Sascha Steffen, Daniel Streitz
Journal of Financial Economics,
Nr. 2,
2019
Abstract
We study the transmission channels from central banks’ quantitative easing programs via the banking sector when central banks start purchasing corporate bonds. We find evidence consistent with a “capital structure channel” of monetary policy. The announcement of central bank purchases reduces the bond yields of firms whose bonds are eligible for central bank purchases. These firms substitute bank term loans with bond debt, thereby relaxing banks’ lending constraints: banks with low tier-1 ratios and high nonperforming loans increase lending to private (and profitable) firms, which experience a growth in investment. The credit reallocation increases banks’ risk-taking in corporate credit.
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What Does Peer-to-Peer Lending Evidence Say About the Risk-taking Channel of Monetary Policy?
Yiping Huang, Xiang Li, Chu Wang
Abstract
This paper uses loan application-level data from a Chinese peer-to-peer lending platform to study the risk-taking channel of monetary policy. By employing a direct ex-ante measure of risk-taking and estimating the simultaneous equations of loan approval and loan amount, we are the first to provide quantitative evidence of the impact of monetary policy on the risk-taking of nonbank financial institution. We find that the search-for-yield is the main workhorse of the risk-taking effect, while we do not observe consistent findings of risk-shifting from the liquidity change. Monetary policy easing is associated with a higher probability of granting loans to risky borrowers and a greater riskiness of credit allocation, but these changes do not necessarily relate to a larger loan amount on average.
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What Does Peer-to-Peer Lending Evidence Say About the Risk-taking Channel of Monetary Policy?
Yiping Huang, Xiang Li, Chu Wang
Abstract
This paper uses loan application-level data from a peer-to-peer lending platform to study the risk-taking channel of monetary policy. By employing a direct ex-ante measure of risk-taking and estimating the simultaneous equations of loan approval and loan amount, we are the first to provide quantitative evidence of the impact of monetary policy on the risk-taking of nonbank financial institution. We find that the search-for-yield is the main workhorse of the risk-taking effect, while we do not observe consistent findings of risk-shifting from the liquidity change. Monetary policy easing is associated with a higher probability of granting loans to risky borrowers and a greater riskiness of credit allocation, but these changes do not necessarily relate to a larger loan amount on average.
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Vertical Grants and Local Public Efficiency
Ivo Bischoff, Peter Bönisch, Peter Haug, Annette Illy
Public Finance Review,
Nr. 3,
2019
Abstract
The existing empirical literature on the impact of vertical grants on local public-sector efficiency yields mixed results. Given the fact that vertical financial equalization systems often reduce differences in fiscal capacity, we argue that empirical studies based on cross-sectional data may yield a positive relationship between grants and efficiency of public service production even when the underlying causal effect is not. We provide a simple illustrative theoretical model to show the logic of our argument and illustrate its relevance by an empirical case study for the German state of Saxony-Anhalt. We show that our main argument of an inference-disturbing effect applies to those existing studies that are more optimistic about the impact of vertical grants. Finally, we argue that it may disturb the inference drawn from studies in a number of other countries where vertical grants—intended or not—concentrate in fiscally weak municipalities.
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The Joint Dynamics of Sovereign Ratings and Government Bond Yields
Makram El-Shagi, Gregor von Schweinitz
Journal of Banking and Finance,
2018
Abstract
Can a negative shock to sovereign ratings invoke a vicious cycle of increasing government bond yields and further downgrades, ultimately pushing a country toward default? The narratives of public and political discussions, as well as of some widely cited papers, suggest this possibility. In this paper, we will investigate the possible existence of such a vicious cycle. We find no evidence of a bad long-run equilibrium and cannot confirm a feedback loop leading into default as a transitory state for all but the very worst ratings. We use a bivariate semiparametric dynamic panel model to reproduce the joint dynamics of sovereign ratings and government bond yields. The individual equations resemble Pesaran-type cointegration models, which allow for valid interference regardless of whether the employed variables display unit-root behavior. To incorporate most of the empirical features previously documented (separately) in the literature, we allow for different long-run relationships in both equations, nonlinearities in the level effects of ratings, and asymmetric effects in changes of ratings and yields. Our finding of a single good equilibrium implies the slow convergence of ratings and yields toward this equilibrium. However, the persistence of ratings is sufficiently high that a rating shock can have substantial costs if it occurs at a highly speculative rating or lower. Rating shocks that drive the rating below this threshold can increase the interest rate sharply, and for a long time. Yet, simulation studies based on our estimations show that it is highly improbable that rating agencies can be made responsible for the most dramatic spikes in interest rates.
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Interactions Between Regulatory and Corporate Taxes: How Is Bank Leverage Affected?
Franziska Bremus, Kirsten Schmidt, Lena Tonzer
Abstract
Regulatory bank levies set incentives for banks to reduce leverage. At the same time, corporate income taxation makes funding through debt more attractive. In this paper, we explore how regulatory levies affect bank capital structure, depending on corporate income taxation. Based on bank balance sheet data from 2006 to 2014 for a panel of EU-banks, our analysis yields three main results: The introduction of bank levies leads to lower leverage as liabilities become more expensive. This effect is weaker the more elevated corporate income taxes are. In countries charging very high corporate income taxes, the incentives of bank levies to reduce leverage turn ineffective. Thus, bank levies can counteract the debt bias of taxation only partially.
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Endogenous Institution Formation in Public Good Games: The Effect of Economic Education
Martin Altemeyer-Bartscher, Dmitri Bershadskyy, Philipp Schreck, Florian Timme
IWH Discussion Papers,
Nr. 29,
2017
Abstract
In a public good experiment, the paper analyses to which extent individuals with economic education behave differently in a second-order dilemma. Second-order dilemmas may arise, when individuals endogenously build up costly institutions that help to overcome a public good problem (first-order dilemma). The specific institution used in the experiment is a communication platform allowing for group communication before the first-order public good game takes place. The experimental results confirm the finding of the literature that economists tend to free ride more intensively in public good games than non-economists. The difference is the strongest in the end-game phase, yielding in the conclusion that the magnitude of the end-game effect depends on the share of economists in the pool of participants. When it comes to the building-up of institutions, the individual efficiency gain of the institution and its inherent cost function constitute the driving forces for the contribution behaviour. Providing an investment friendly environment yields in economists contributing more to the institution than non-economists. Therefore, we make clear that first-order results of a simple public good game cannot be simply applied for second-order incentive problems.
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How Do Political Factors Shape the Bank Risk-Sovereign Risk Nexus in Emerging Markets?
Stefan Eichler
Review of Development Economics,
Nr. 3,
2017
Abstract
This paper studies the role of political factors for determining the impact of banking sector distress on sovereign bond yield spreads for a sample of 19 emerging market economies in the period 1994–2013. Using interaction models, I find that the adverse impact of banking sector distress on sovereign solvency is less pronounced for countries with a high degree of political stability, a high level of power sharing within the government coalition, a low level of political constraint within the political system, and for countries run by powerful and effective governments. The electoral cycle pronounces the bank risk–sovereign risk transfer.
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Joint R&D Subsidies, Related Variety, and Regional Innovation
T. Broekel, Matthias Brachert, M. Duschl, T. Brenner
International Regional Science Review,
Nr. 3,
2017
Abstract
Subsidies for research and development (R&D) are an important tool of public R&D policy, which motivates extensive scientific analyses and evaluations. This article adds to this literature by arguing that the effects of R&D subsidies go beyond the extension of organizations’ monetary resources invested into R&D. It is argued that collaboration induced by subsidized joint R&D projects yield significant effects that are missed in traditional analyses. An empirical study on the level of German labor market regions substantiates this claim, showing that collaborative R&D subsidies impact regions’ innovation growth when providing access to related variety and embedding regions into central positions in cross-regional knowledge networks.
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