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Friday, Jan. 3, 2020
10:15 AM - 12:15 PM (PDT)
American Economic Association
Cheap TIPS or Expensive Inflation Swaps? Mispricing in Real Asset Markets
Inflation risks are explicit in either (i) the nominal pricing of real payoffs in which prices are denominated in dollars, or (ii) the real pricing of nominal payoffs in which prices are denominated in consumption baskets. While the former involves over-the-counter inflation-indexed contracts of real asset market, the latter involves exchange-traded and highly liquid contracts of nominal asset market. We employ a parametric pricing model to investigate the asymmetry between these two markets. The model
obtains a liquidity-free distribution of future inflation using new price data of T-note futures in nominal asset market, and implies liquidity risk premia separately for any traded contract in real asset market. These premia indicate both an underpricing for TIPS and an overpricing for inflation swaps, whose significance increases with the tenor of these assets. Such a mispricing in inflation swaps helps temper a severe implied mispricing of TIPS needed to match the puzzling trade profit on the nominal-TIPS yield spread. While yields on TIPS still command a liquidity component, this finding implicates less pronounced borrowing costs to the U.S. government in issuing TIPS.
Bank Competition and Targeted Monetary Policy
We exploit an allocation rule by the ECB for Targeted Longer-Term Refinancing Operations (TLTROs) to provide causal evidence on the effect of unconventional monetary policy on the cost of credit for firms. Using transaction-level data from the Italian credit register and a difference-in-difference identification strategy, we show that treated banks decrease loan rates to the same firm by approximately 20 basis points relative to control banks. We then study how the effects of the liquidity injection vary with competition in the banking sector, exploiting the local nature of bank-firm lending relationships and exogenous variation in the number of pawnshops across Italian cities during the Renaissance. Our results suggest that banks' market power can significantly impair the effectiveness of unconventional monetary policy, especially for safer and smaller firms.
Securitization, Monetary Policy and Bank Stability
We provide new evidence about the effect of securitization activities on bank stability and systemic risk in the run-up to and following the global financial crisis by considering the role of monetary policy interest rates. In so doing, we propose S-score as a new measure of the net effect of securitization activities on bank stability. Analyzing the dynamics of this measure at the individual bank level and the banking system level shows that securitization activities have a destabilizing effect on banks. We also find that securitization increases commonality of asset returns among banks leading to increased interconnectedness and systemic risk. We also find that low monetary policy interest rates in the aftermath of the global financial crisis have mitigated the destabilizing effect of securitization on banks.
Real Effects on Corporate Behaviors of Share Repurchases Legalization
This paper examines the real impacts of share repurchases legalization on corporate behaviors. To ensure causality, we use an exogenous shock induced by staggered share repurchases legalization in 17 markets across the world from the 1980s to 2000s, and we focus on firms for which stock buybacks are triggered by the legalization instead of firm-specific factors. We find that these share-repurchasing firms do not cut dividends as a substitution. The source for repurchasing shares comes from internal cash instead of external debt issuance, leading to reductions in capital expenditures and R&D expenses. This strategy boosts stock prices, whereas it is detrimental to long-run firm valuation, as implied by lower Tobin’s Q and market capitalization and lower beneficiary ownership.
The Missing Link: Monetary Policy and the Labor Share
The textbook New-Keynesian (NK) model implies that the labor share is pro-cyclical conditional on
a monetary policy shock. We present evidence that a monetary policy tightening robustly
increased the labor share and decreased real wages and labor productivity during the Great
Moderation period in the US, the Euro Area, the UK, Australia, and Canada. We show that this is
inconsistent not only with the basic NK model, but with a wide variety of NK models commonly
used for monetary policy analysis and where the direct link between the labor share and the
markup can be broken.
E3 - Prices, Business Fluctuations, and Cycles