The external finance premium and the macroeconomy: US post-WWII evidence

The central variable of theories of financial frictions--the external finance premium--is unobservable. This paper distils the external finance premium from a DSGE model estimated on U.S. macroeconomic data. Within the DSGE framework, movements in the premium can be given an interpretation in terms of shocks driving business cycles. A key result is that the estimate--based solely on nonfinancial macroeconomic data--picks up over 70 percent of the dynamics of lower grade corporate bond spreads. The paper also identifies a gain in fitting key macroeconomic aggregates by including financial frictions in the model and documents how shock transmission is affected.Financial markets ; Corporate bonds ; Corporations - Finance

The External Finance Premium and the Macroeconomy: US post-WWII Evidence

This paper embeds the financial accelerator into a medium-scale DSGE model and estimates it using Bayesian methods. Incorporation of financial frictions enhances the model's description of the main macroeconomic aggregates. The financial accelerator accounts for approximately ten percent of monetary policy transmission. The model-consistent premium for external finance compares well to observable proxies of the premium, such as the high-yield spread. Fluctuations in the external finance premium are primarily driven by investment supply and monetary policy shocks. In terms of recession prediction, false signals of the premium can be given an economic interpretationfinancial accelerator, external finance premium, DSGE model, Bayesian estimation

The External Finance Premium and the Macroeconomy: US post-WWII Evidence

This paper embeds the financial accelerator into a medium-scale DSGE model and estimates it using Bayesian methods. Incorporation of financial frictions enhances the model's description of the main macroeconomic aggregates. The financial accelerator accounts for approximately ten percent of monetary policy transmission. The model-consistent premium for external finance compares well to observable proxies of the premium, such as the high-yield spread. Fluctuations in the external finance premium are primarily driven by investment supply and monetary policy shocks. In terms of recession prediction, false signals of the premium can be given an economic interpretationfinancial accelerator, external finance premium, DSGE model, Bayesian estimation

Monetary policy and bank distress: an integrated micro-macro approach

Evidence on the interdependency between monetary policy and the state of the banking system is scarce. We suggest an integrated micro-macro approach with two core virtues. First, we measure the probability of bank distress directly at the bank level. Second, we integrate a microeconomic hazard model for bank distress and a standard macroeconomic model. The advantage of this approach is to incorporate micro information, to allow for non-linearities and to permit general feedback effects between bank distress and the real economy. We base the analysis on German bank and macro data between 1995 and 2004. Our results confirm the existence of a relationship between monetary policy and bank distress. A monetary contraction increases the mean probability of distress. This effect disappears when neglecting micro effects, underlining the crucial importance of the former. Distress responses are economically most significant for weak distress events and at times when capitalization is low. --Stress testing,bank distress,monetary policy

The Determinants of Pass-Through of Market Conditions to Bank Retail Interest Rates in Belgium

We analyse the pass-through of money market rates to retail interest rates at the disaggregate level in the Belgian banking market. First, we measure the extent of pass-through for a total of fourteen products. We find that the response varies over loans and deposits and depends positively on the maturity of the product. Second, the launch of EMU has generally not resulted in more competitive pricing by banks. Third, we assess the importance of several biases and find that heterogeneity in price-setting behaviour should be accounted for in analysing the pass-through. Fourth, we analyse bank-specific determinants of heterogeneous interest rate pass-through. We find a role for capital, liquidity and market share and we relate these results to the various channels in monetary policy transmission and to the structure-conduct-performance hypothesis in banking.pass-through, Heterogeneous panel, aggregation bias, panel cointegration, retailbanking, bank-level interest rates, bank-level determinants

Risk premiums and macroeconomic dynamics in a heterogeneous agent model

We analyze financial risk premiums and real economic dynamics in a DSGE model with three types of agents - shareholders, bondholders and workers - that differ in participation in the capital market and in terms of risk aversion. Aggregate productivity and distribution risk are shared among these agents via the bond market and via an efficient labor contract. The result is a combination of volatile returns to capital and a highly cyclical consumption process for the shareholders, which are two important ingredients for generating high and countercyclical risk premiums. These risk premiums are consistent with a strong propagation mechanism through an elastic supply of labor, rigid real wages and a countercyclical labor share. We discuss the implications for the real and nominal component of the risk premium on equity and bonds. We show how these premiums react to changes in the volatility of the shocks, as experienced during the great moderation. We also analyze the effects of changes in monetary policy behavior and the resulting inflation dynamics.