Financial Dampening / Johannes F. Wieland, Mu-Jeung Yang.

Format:

Book

Author/Creator:

Wieland, Johannes F.

Contributor:

National Bureau of Economic Research.

Yang, Mu-Jeung.

Series:

Working Paper Series (National Bureau of Economic Research) no. w22141.

NBER working paper series no. w22141

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2016.

Summary:

We propose a novel mechanism, "financial dampening," whereby loan retrenchment by banks attenuates the effectiveness of monetary policy. The theory unifies an endogenous supply of illiquid local loans and risk-sharing among subsidiaries of bank holding companies (BHCs). We derive an IV-strategy that separates supply-driven loan retrenchment from local loan demand, by exploiting linkages through BHC-internal capital markets across spatially-separate BHC member-banks. We estimate that retrenching banks increase loan supply substantially less in response to exogenous monetary policy rate reductions. This relative decline has persistent effects on local employment and thus provides a rationale for slow recoveries from financial distress.

Notes:

Print version record

March 2016.