8 Works

The Side Effects of Safe Asset Creation

Sushant Acharya & Keshav Dogra
The secular decline in real interest rates has created a challenge for monetary policy, now confronting the zero lower bound more often. An increase in the supply of safe assets reduces downward pressure on the natural interest rate. This allows monetary policy to reach price stability and full employment, but not without cost—permanently lower investment.

Non-Bank Investors and Loan Renegotiations

Teodora Paligorova & João A. C. Santos
We document that the structure of syndicates affects loan renegotiations. Lead banks with large retained shares have positive effects on renegotiations. In contrast, more diverse syndicates deter renegotiations, but only for credit lines. The former result can be explained with coordination theories. The puzzling effect of syndicate diversity in term loan renegotiations derives from the growth of collateralized loan obligations (CLOs) in the syndicated loan market and the coordination between these vehicles and lead banks....

Oil Price Movements and the Global Economy: A Model-Based Assessment

Selim Elekdag, René Lalonde, Douglas Laxton, Dirk Muir & Paolo Pesenti
We develop a five-region version (Canada, an oil exporter, the United States, emerging Asia and Japan plus the euro area) of the Global Economy Model (GEM) encompassing production and trade of crude oil, and use it to study the international transmission mechanism of shocks that drive oil prices. In the presence of real adjustment costs that reduce the short- and medium-term responses of oil supply and demand, our simulations can account for large endogenous variations...

Optimal Monetary Policy According to HANK

Sushant Acharya, Edouard Challe & Keshav Dogra
"We study optimal monetary policy in an analytically tractable Heterogeneous Agent New Keynesian (HANK) model with rich cross-sectional heterogeneity in income, wealth and consumption. In such an economy, a central bank has an incentive to reduce consumption inequality in addition to keeping inflation stable and economic activity at its efficient level. These are the central bank’s only objectives in the standard Representative Agent New Keynesian (RANK) model. Our framework allows monetary policy to affect both...

Labor Market Policies During an Epidemic

Serdar Birinci, Fatih Karahan, Yusuf Mercan & Kurt See
The COVID-19 pandemic has resulted in a marked slowdown of economic activity and the loss of many jobs. We look at two major policy responses designed to counteract the consequences of containment measures—the introduction of payroll subsidies and the expansion of unemployment insurance (UI)—and study their implications for the labour market and economic welfare. We develop a search model of the labour market and combine it with a standard epidemiological model. Our model features three...

Rediscounting Under Aggregate Risk with Moral Hazard

James Chapman & Antoine Martin
Freeman (1999) proposes a model in which discount window lending and open market operations have different effects. This is important because in most of the literature, these policies are indistinguishable. However, Freeman's argument that the central bank should absorb losses associated with default to provide risk-sharing stands in stark contrast to the concern that central banks should limit their exposure to credit risk. We extend Freeman's model by introducing moral hazard. With moral hazard, the...

Which Bank is the \"Central\" Bank? An Application of Markov Theory to the Canadian Large Value Transfer System

Morten Bech, James Chapman & Rod Garrat
We use a method similar to Google's PageRank procedure to rank banks in the Canadian Large Value Transfer System (LVTS). Along the way we obtain estimates of the payment processing speeds for the individual banks. These differences in processing speeds are essential for explaining why observed daily distributions of liquidity differ from the initial distributions, which are determined by the credit limits selected by banks.

When Is It Less Costly for Risky Firms to Borrow? Evidence from the Bank Risk- Taking Channel of Monetary Policy

Teodora Paligorova & João A. C. Santos
In an investigation of banks’ loan pricing policies in the United States over the past two decades, this study finds supporting evidence for the bank risk-taking channel of monetary policy. We show that banks charge lower spreads when they lend to riskier borrowers relative to the spreads they charge on loans to safer borrowers in periods of low short-term rates compared to periods of high short-term rates. The interest discount that banks offer riskier borrowers...

Registration Year

  • 2021

Resource Types

  • Text


  • Bank of Canada
  • Federal Reserve Bank of New York
  • University of Melbourne
  • Federal Reserve Bank of St. Louis
  • University of California, Santa Barbara
  • Center for Research in Economics and Statistics
  • International Monetary Fund