New Keynesian economics

The effect of new housing supply in structural models: a forecasting performance evaluation

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Sunday, February 4, 2024
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Key Points: 

    Nothing compares to your loan officer – continuity of relationships and loan renegotiation

    Retrieved on: 
    Friday, February 26, 2021

    At such times, managing lending relationships effectively becomes even more important for bank governance, risk, and credit supply.

    Key Points: 
    • At such times, managing lending relationships effectively becomes even more important for bank governance, risk, and credit supply.
    • My study presents evidence that continuous lending relationships between bank loan officers and corporate borrowers improve the outcomes of loan renegotiations.
    • My main findings are that firms that experience an exogenous interruption in their loan officer relationship are faced with three consequences.
    • First, the firms are less likely to renegotiate a loan compared to firms with continuous relationships.
    • Second, when loans are renegotiated, firms with interrupted loan officer relationships receive tougher loan terms.

    Introduction

      • Firms in the euro area rely to a large extent on loans from credit institutions.
      • Such loans account for approximately 30% of euro area firms total liabilities and approximately 85% of their total credit.
      • For that reason, the relationship between a loan officer and a firm is expected to affect the issuance and renegotiation of a loan.
      • The central finding of the paper is that relationships between loan officers and firms do have a significant positive impact on loan renegotiation.
      • In this study firms with interrupted relationships are less likely to renegotiate a loan compared to firms with continuous relationships.
      • Lastly, firms alter their capital structure and sources of financing after the relationship with the loan officer is interrupted.

    Interruption of bank lending relationships

      • Lending relationships between loan officers and borrowers may be interrupted as a consequence of bank mergers and consolidations, interventions by banking supervisors, fintech developments or regular staff rotation policies.
      • For example, banks often consolidate their branch networks in response to financial distress, as consolidation reduces operating costs and centralises lending decisions.
      • There are two main challenges for accurately estimating the impact of lending relationships on loan renegotiation.
      • The reorganisation of the bank gives rise to variation in the length of the relationships between loan officers and firms that is exogenous, i.e.
      • A bank unit closure interrupts the relationships between loan officers and firms, because merged accounts are assigned to new loan officers.
      • Hard information passes from one loan officer to another during transfers, because the transfer happens within the same bank.
      • Therefore any differences observed between the two groups after the consolidation period should be the consequence of interrupted relationships.

    Impact on loan renegotiation

      • According to my results, firms assigned to a new loan officer were significantly less likely to renegotiate a loan.
      • The empirical results show a statistically significant difference in the probability of these firms renegotiating a loan compared to firms with continuous relationships.
      • In particular, the results imply a 49% probability of loan renegotiation for firms with an interrupted relationship, compared with a 59% probability for firms with a continuous relationship.
      • After the reorganisation (2014-15), the probability of renegotiating a loan is lower for the firms with interrupted relationships.
    Figure 1

      Effect of an interruption in the relationship between a loan officer and a firm on loan renegotiation relative to the year before the reorganisation (2013) Source: Papoutsi (2021).
      • Moreover, when loans are renegotiated, the firms with interrupted loan officer relationships receive less beneficial terms and conditions on their renegotiated loans than firms with continuous relationships.
      • Firms with interrupted relationships face higher interest rates and significantly shorter maturities, while being required to pledge collateral for an amount 65% higher than firms with continuous relationships.
      • The plots below present the evolution of these results graphically.
      • The difference in the loan terms appears in the first year after the interruption of the relationship and increases the following year.
    Figure 2

      Impact of interrupted relationships on renegotiated loans’ terms relative to the year before the reorganisation (2013) Effect on interest rate Effect on collateral value Source: Papoutsi (2021).
      • A change in the capital structure indicates that firms cannot simply substitute lending from other banks without cost when the relationship with one bank is interrupted.
      • Firms only partially substitute loans from other banks to make up for reducing the borrowing from the bank where its loan officer relationship was severed.
      • First, we do not observe a difference in loan performance in the short run between firms with interrupted relationships and firms with continuous relationships.
      • This means that the effects on the terms and conditions of renegotiated loans cannot be explained by firms performing worse economically.
      • In contrast, the impact of an interrupted loan officer relationship on loan renegotiation is found to be stronger for firms with good repayment histories, high leverage, and positive growth in earnings.

    Conclusions

      • This analysis shows that lending relationships have a significant positive effect on corporate loan renegotiation, mitigating the cost of distress for firms.
      • Even though the analysis is not directly linked to the COVID-19 crisis, it provides strong evidence that continuous lending relationships help firms during default episodes.
      • An uninterrupted relationship between a particular loan officer and a firm helps eliminate frictions that arise when loans are renegotiated.
      • For example, in a context of general stress, individual firms could experience interruptions to several different bank loan officer relationships.
      • Indeed, while no one is irreplaceable, when it comes to a firms relationship with a bank changing loan officer can be a big deal.

    References

      • Incentivizing calculated risk-taking: Evidence from an experiment with commercial bank loan officers, The Journal of Finance, Vol.
      • 70, pp.
      • 60, pp.
      • 103, pp.
      • 107, pp.
      • Information and incentives inside the firm: Evidence from loan officer rotation, The Journal of Finance, Vol.
      • 65, pp.
      • 73, pp.
      • Estimating the effect of hierarchies on information use, The Review of Financial Studies, Vol.
      • 22, pp.

    Philip R. Lane: Households and the transmission of monetary policy

    Retrieved on: 
    Tuesday, December 17, 2019

    SPEECHHouseholds and the transmission of monetary policySpeech by Philip R. Lane, Member of the Executive Board of the ECB, at the Central Bank of Ireland/ECB Conference on Household Finance and Consumption Dublin, 16 December 2019Introduction[1] The engine behind this conference series is the Eurosystems Household Finance and Consumption Network, which coordinates the Household Finance and Consumption Survey (HFCS).

    Key Points: 


    SPEECH

    Households and the transmission of monetary policy

      Speech by Philip R. Lane, Member of the Executive Board of the ECB, at the Central Bank of Ireland/ECB Conference on Household Finance and Consumption


        Dublin, 16 December 2019

      Introduction

        • [1] The engine behind this conference series is the Eurosystems Household Finance and Consumption Network, which coordinates the Household Finance and Consumption Survey (HFCS).
        • The HFCS gives us an insight into the distributions of assets, liabilities and incomes across euro area households.
        • It is very promising that many of you, together with other researchers, are using this dataset to improve our understanding of key features of economic behaviour in Europe.
        • In my remarks today, I wish to discuss the relevance of differences across households for macroeconomic outcomes and the transmission of monetary policy.
        • It follows that the impact of a macroeconomic shock or a shift in monetary policy will naturally vary across households.
        • Before turning to the microeconomic evidence, a natural starting point is to review the standard macroeconomic analysis of aggregate consumption dynamics.


        Chart 2 (percentage balances, deviation from mean) Sources: European Commission and ECB calculations.
        (year-on-year percentage changes) Sources: Eurostat and ECB. Note: The data refer to nominal gross fixed capital formation by households and non-profit institutions serving households.

        • A comprehensive analysis of this question requires a microeconomic approach, which takes into account relevant differences across households.
        • [2] Household-level data, such as those available from the HFCS, are essential for this purpose.
        • These data highlight some quantitatively-important dimensions of heterogeneity in the euro area, which can be grouped into two broad categories.
        • First, the level and volatility of income varies across households according to socio-economic characteristics such as education, age and occupation.
        • employees, firm owners, unemployed), different skill levels, or different labour supply elasticities will respond differently to macroeconomic shocks.
        • [6] Chart 4 Effect of monetary policy easing on household income by income quintile (percentages) Sources: Lenza, M. and Slacalek, J.
        • Second, households differ substantially in the size and composition of the assets they own and in their indebtedness (Chart 5).
        • Based on the second wave of the HFCS almost 60 percent of euro area households are homeowners, of which about a third have a mortgage.
        • Almost all households own financial assets, even if their value is typically only a small fraction of the value of their real estate holdings.
        • For instance, ECB simulations suggest that unexpectedly-low inflation tends to harm young and middle-aged households, and more so for young income-rich households that disproportionately have nominal debt liabilities.
        • [8] By contrast, older households tend to gain from unexpectedly-low inflation, especially if they are income-rich, since this group tends to hold nominal assets.
        • [9] To the extent that their financial assets have short maturities and their mortgages have adjustable rates, households will also be differently affected by a reduction in the interest rate.
        • [11] Chart 6 Change in net interest income for borrowers and savers in the euro area (euros per household; change in annual net interest income, 2007-2017) Sources: Dossche, M. et al.
        • Conversely, Chart 7 reports estimates of the evolution of household net wealth as a result of the lower house prices observed in many countries between 2011 and 2014.
        • It suggests that the net wealth of homeowners declined by 6 percentage points more than the wealth of renters.
        • The decline was especially marked for homeowners with mortgages, for whom it amounted to as much as around 20 percent.
        • Recent ECB research suggests that the most important dimension of heterogeneity is related to employment status.
        • [13] At the same time, it is worth keeping in mind that the degree of home ownership can vary considerably across countries.
        • This type of information is available in certain countries and it is encouraging that researchers are starting to make use of it.
        • [15] The results indicate that this heterogeneity does play a role in shaping the transmission of monetary policy.
        • Beyond the intertemporal substitution channel, other channels have been highlighted by the expanding literature on heterogeneous-agent New Keynesian (HANK) models.
        • Some initial estimates of the quantitative impact of all these channels are also available for the euro area.
        • Chart 8 decomposes the overall effect on consumer spending into the components attributable to the various transmission channels.
        • [18] First, the standard, intertemporal substitution channel is present only for financially-unconstrained households which are able to save.
        • It makes up only about a third of the total impact on aggregate consumption.
        • Second, the cash-flow channel is particularly strong for homeowners with limited financial assets, who tend to have large mortgages, often with adjustable rates.
        • These three channels contribute about two thirds of the total response of aggregate consumption to a monetary policy shift.
        • Comparisons between winners and losers based on a single channel, or a specific factor, are necessarily incomplete and likely to prove misleading.

      Concluding remarks

      Price-setting behaviour: insights from a survey of large firms

      Retrieved on: 
      Tuesday, November 5, 2019

      Firms price-setting strategies are crucial pointers for understanding how prices adjust to shocks and, therefore, implicitly the effect of monetary policy on inflation.

      Key Points: 
      • Firms price-setting strategies are crucial pointers for understanding how prices adjust to shocks and, therefore, implicitly the effect of monetary policy on inflation.
      • Survey evidence of the price-setting behaviour of firms in the euro area was collated some time ago in the context of the Eurosystem Inflation Persistence Network (see Fabiani et al., 2005[2]).
      • Our survey draws on elements of those earlier surveys, while also gathering more qualitative evidence concerning the various dimensions of price-setting.
      • The main objective of the survey was to obtain an overview of how firms set prices, including the following specific dimensions.
      • The global sales of these firms would be the equivalent of around 2% of euro area economy-wide output.
      • Most firms said that they vary their prices by geographical market and by type of customer (see Chart A).
      • Hence, for example, most firms charged the same price for online sales as for sales in the store or over the phone.
      • Chart A Price variation by geographical market, customer and sales platform (percentage of firms)
      • Firms were asked to focus on their main (or representative) product and given a choice of frequencies at which price reviews and changes were carried out.
      • Some firms indicated that they reviewed prices both at a regular frequency and irregularly in response to specific events.
      • Chart B Typical frequency of price reviews and price changes for a representative product (percentage of firms)
      • Most retailers who replied to the survey said that they reviewed their prices on a monthly, weekly or even daily basis, depending on their range of products.
      • Still, identifying a typical frequency of price review and/or change is clearly difficult for firms with a large range of products and different customer or contract types.
      • When setting prices, firms pay most attention to their competitors prices, closely followed by supply costs and product demand (see Chart C).
      • In the survey, respondents were given a list of factors and asked to judge whether these were not important, important or very important when setting prices.
      • Chart C Information that firms consider when setting prices (average score of responses: 0 = not important; 1 = important; 2 = very important)
      • Increases in average selling prices are achieved, to a large extent, by introducing new products with higher value content (see Chart D).
      • Rebranding or changing the specification of existing products was less important, albeit still considered important by around one-third of firms.
      • Chart D How increases in average selling prices are achieved (average score of responses: 0 = not important; 1 = important; 2 = very important)
      • Firms pricing strategies are consistent with a range of theories concerning sticky prices.
      • Firms were presented with a number of statements, each of which related to a different theory of sticky prices, as originally surveyed by Blinder (see the table below).
      • For firms overall, the roles of cost-based pricing, contracts (either explicit or implicit) and coordination failure would appear to be the main causes of price stickiness.

      Price and Wage Setting when Accurate Decisions Are Costly: Implications for Monetary Policy Transmission

      Retrieved on: 
      Sunday, July 7, 2019

      In this article, we describe a new approach which emphasises that the costs of decision-making may limit the precision of price and wage changes.

      Key Points: 
      • In this article, we describe a new approach which emphasises that the costs of decision-making may limit the precision of price and wage changes.
      • As well as making better sense of price and wage changes in microeconomic data, this new approach also strikes a middle ground between two leading models of monetary policy transmission, improving our quantitative understanding of the short-run effects of monetary policy on output and the short-run trade-off between inflation and unemployment.
      • Understanding inflation and the effects of monetary policy requires an understanding of the way in which firms and workers set prices and wages.
      • Motivated by the current low inflation environment, this article discusses ongoing research on modelling price and wage setting at the level of individual firms and workers.
      • It then traces out the macroeconomic and policy implications of this new modelling approach for understanding how monetary policy is transmitted to inflation and output.
      • Most models used to analyse monetary policy issues today rely on the assumption that nominal prices are sticky, meaning that they adjust relatively infrequently.
      • Moreover, menu cost models generate a very flexible aggregate price level, implying speedy transmission of monetary policy to inflation and hence much smaller real effects of monetary policy than the Calvo model predicts.
      • Finding the right model of price adjustment is not an idle academic question, since different approaches have very different implications for the impact of monetary policy.
      • The blue lines show the predicted price changes; the blue shaded area shows the actual price changes.
      • The FMC and Calvo models are at odds with the actual data, where some very tiny price changes coexist with some very large ones.
      • In contrast, our control cost framework better matches the entire range of small and large price changes observed in the data.
      • This spreads out the range of predicted price changes, resembling the widely dispersed distribution observed in the data.
      • It shows that the FMC model generates an immediate burst of inflation in response to this policy change, and a relatively muted and brief response of consumption.
      • The differences reflect errors in the timing of price changes, which slow down the inflation response and increase the real effects on consumption.
      • In other words, control costs inject randomness into the adjustment timing, muting the strong selection effect found with the FMC model.
      • Figure 3 Effects of money growth shocks with price and/or wage stickiness
      • Figure 3 compares the effects of an unexpected increase in money growth in model variants with sticky prices only, with sticky wages only, and then with both sticky prices and sticky wages.
      • It shows that sticky wages generate a more gradual and persistent inflation response than sticky prices do.
      • Relatedly, if wages are sticky, then the short-run real effects of a money growth shock on consumption are larger and longer-lasting.
      • These findings suggest that the real effects of monetary policy may depend more on wage rigidities than on price rigidities per se, and imply that monitoring wage developments is crucial for appropriate monetary policy decisions.
      • In the current environment of prolonged low inflation, both price and wage adjustments should become smaller and less frequent.
      • The largest real effects occur when trend inflation is zero; they are slightly smaller at either plus or minus one per cent trend inflation.
      • Figure 4 shows that the real effects of monetary policy shocks become much less persistent as trend inflation rises from 0% to 2% and to 10% per annum.
      • [6] Our results also emphasise the continued relevance of monetary policy for stabilising the real macroeconomy.

      References