Shohini Kundu, University of California-Los Angeles
Francis Longstaff, University of California-Los Angeles
Abstract: We develop a formal continuous-time no-arbitrage valuation model for sticky deposits. We obtain closed-form expressions for deposit values and study the impact of stickiness on deposit interest-rate risk. The duration of a deposit can be either positive or negative, which has important implications for hedging the interest-rate risk of bank balance sheets. Financial institutions that maximize deposit value by following optimal deposit beta strategies may significantly increase their interest-rate and deposit runoff risks. We test the model using market deposit premia from bank merger/acquisition transactions and find strong support for its empirical implications.
Abstract: I study the impact of government debt on bond yields and fiscal capacity when there is uncertainty about who will bear the burden of debt repayments. A trade-off emerges when future taxes reduce households’ exposure to income risks but expose them to unanticipated tax changes and policy un- certainty. Households’ consumption volatility, and so precautionary asset demand, scales with debt levels, but the relation is non-monotonic if there is uncertainty about relative tax incidence that is unrelated to income risks. I characterize a threshold above which further debt issuance erodes fiscal insurance and hurts welfare, and show that this threshold declines with the level of foreign demand and increases when taxation is more progressive. Negative β assets such as long-term debt can pro- vide better insurance than short-term debt by lowering consumption volatility when it is needed the most. In a dynamic production economy, fiscal insurance raises interest rates, compresses risk premia, and reduces investment. I show that even in incomplete markets, a version of Ricardian neutrality holds if taxes are lump-sum. Ruling out bubbles, my results indicate that debt alone does not improve risk sharing and that supply effects will persist even if government bonds lose their specialness.
Discussant: Lorenzo Garlappi, University of British Columbia
Kerry Siani, Massachusetts Institute of Technology
Abstract: We explore how monetary policy affects corporate investment decisions, and why there are long lags in transmission. To do so, we hand-collect a firm-level dataset of U.S. investment plans and link it to managers’ cash-flow expectations. Plans strongly predict realized investment, and allow us to observe decision changes separately from implementation. Using high-frequency monetary policy surprises, we show that firms revise investment plans in response to monetary policy, but the response varies by horizon: long-horizon plans are much more sensitive to policy than near-term plans. Consistent with theories of capital production frictions, plans for new projects respond more to monetary policy than plans related to ongoing projects. These results help to explain the long lags in monetary policy transmission. Regarding transmission mechanisms, we document evidence of a cost of capital channel. Cash flow expectations respond to policy but explain a small fraction of investment-plan adjustments for firms in our sample.
Discussant: Qiping Xu, University of Illinois-Urbana-Champaign
