Abstract: We measure the cross-country transfers that result from unconventional monetary policy in the Eurozone. The ECB funds its balance sheet expansion mostly by issuing bank reserves and cash in core countries. National central banks (NCBs) in periphery countries then borrow from the core NCBs at below-market rates, and use these funds to finance asset purchases and bank lending. This arrangement exposes taxpayers in core countries to credit and currency risk without corresponding compensation. By comparing the cross-country distribution of NCB income to a counterfactual scenario without non- marketable intra-Eurozone claims, we document significant and persistent cross-country transfers in the Target2 system.
Nina Boyarchenko, Federal Reserve Bank of New York
Leonardo Elias, Federal Reserve Bank of New York
Abstract: We document a global credit cycle that generates predictable comovement in corporate bond returns worldwide. Using a large panel of international corporate bonds, we construct a single factor as a nonlinear function of credit spreads, equity market volatility, and their interactions. The global credit factor explains up to 13% of in-sample and up to 8% of out-of-sample variation in bond-level three-month-ahead returns. Unlike broader measures of global financial conditions, the global credit factor simultaneously captures time-series return predictability and cross-sectional differences in risk exposures across ratings, currencies, and countries. Tighter global credit conditions are associated with deteriorations in local credit conditions and outflows from global bond funds. Taken together, our results are consistent with the factor proxying for a common, time-varying global price of credit risk.
Discussant: Kerry Siani, Massachusetts Institute of Technology
Abstract: This paper develops a quantitative model to analyze the role of bank heterogeneity in the transmission of monetary policy through the bank lending channel. We calibrate the model to the euro area to capture two distinct forms of heterogeneity: ex-ante differences in loan pricing practices and ex-post variation in capital positions driven by idiosyncratic default risks. Consistent with empirical impulse responses, banks in fixed-rate economies experience severe net interest margin compression during monetary tightening as funding costs rise while income from legacy loans remains unchanged, leading to capital erosion and deeper lending contractions. The elasticity of new lending to monetary policy is approximately one-third larger in fixed-rate economies. Highly leveraged banks drive these differences: without default risk, banks would remain far from their regulatory limits. We discuss additional tradeoffs between monetary policy and financial stability, study the implications for gradual policy rate increases, and demonstrate fundamental limitations of representative-agent banking models.
Discussant: Wenhao Li, University of Southern California
