The conference is sponsored jointly by De Nederlandsche Bank, the Journal of Economic Dynamics and Control and the European Banking Center at Tilburg University.
Location: Amsterdam, the Netherlands.
(Summary by Michal Kobielarz, Tilburg University)
The recent financial crisis revealed how superficial current knowledge about the role of financial intermediaries in the economy is. However, if central banks are going to become responsible for financial stability, it is crucial that they better understand the interconnections between the financial and the real sector. Moreover, with the use of non-standard tools of monetary policy, the economic profession has found itself in a position where the applications went ahead of research. The conference “The Role of Financial Intermediaries in Monetary Policy Transmission” held at the Dutch Central Bank in Amsterdam, organized by the European Banking Center, DNB and the Journal of Economic Dynamics and Control, aimed at filling the existing gap. The event brought together Researchers from both universities and central banks from both sides of the Atlantic.
The first day of the conference was opened by a keynote speech by Anil Kashyap. Anil highlighted the problem that there is no uniform framework for the analysis of bank regulations. Such a framework is necessary for the discussion of Basel III regulations, which at the moment relies mostly on intuition. Given the trade-off between capturing all the frictions in the model and keeping the model tractable, Anil postulated that it is crucial to recognize which frictions are the most important ones.
The first session of the conference concentrated on the links between the real economy and the financial sector. Victors Stebunovs (jointly with S. J. Lee and S. Halthenhof) applied US survey data to find that the loss of jobs in the US manufacturing sector during the recent crisis was mostly due to households’, and not firms’, access to credit, indicating that demand-related channels are more important for employment than supply-related channels. Next, a theoretical framework based on the CIA model to analyze the different reactions of cash-constrained and unconstrained firms to shocks was presented by Anastasia Zervou. Ralf Meisenzahl, on the other hand, investigated the state of financing constraints in the US economy in a period prior to the crisis. His results reveal that it was the firms’ collateral constraints, rather than banks’ balance sheet constraints that played a major role in this period.
The second, and last, session of the day was devoted to monetary policy. Martin Ellison (with A. Tischbirek) developed a stylized theoretical model showing that unconventional government debt purchases could be beneficial even in normal times. A more complex framework was presented by Michael Kiley (joint work with J. W. Sim) for analyzing the effects of several monetary policy tools, i.e. asset purchases, capital injections and capital standards, on the economy in normal as well as stressful times. The session was closed with the presentation by Jens Eisenschmidt (joint work with S. Carpenter and S. Demiralp) of a simultaneous equations econometric model attempting to disentangle the demand and supply for loans. The obtained results allowed also estimating the effects of non-standard policy measures applied by the ECB and the Fed during the crisis, which showed that the policies adapted by the Fed were more effective in relaxing the supply side constraints.
The second day was opened by a plenary talk delivered by Frank Smets, who posed the question of whether we can keep price and financial stability apart. Frank discussed three alternative views on the feasibility of central banks pursuing both objectives. The differences in the views are based mainly on the beliefs about how independent the two objectives are, and how successful macro prudential regulations may be as a policy tool. He stated his personal preference for incorporating financial stability as an objective of central banks, but only as a secondary one.
The highly interesting speech was followed by a session on DSGE models and financial risk. Federico Signoretti (with L. Gambacorta) argued that the central bank might reduce output and price volatility by reacting also to changes in financial variables. This argument was supported by a model with firms’ borrowing constraints and banks’ leverage targets calibrated for the Euro Area. The next paper in this session shed some light on the Spanish sovereign debt problems that followed the recent bank bail-outs. The author, Christian van der Kwaak (joint work with S. van Wijnbergen), showed that a bank bail-out may increase the risk of sovereign default and, if the banks hold sovereign bonds, adversely affect the stability of the banking system. Raf Wouters (with H. Dewachter) introduced a simplified mechanism reproducing the nonlinear results of the Occasionally Binding Constraints. This novel mechanism allows incorporating this friction into large scale DSGE models.
The closing session consisted of three empirical papers. The first presentation of this session emphasized the positive side of financial innovation. Lars Norden (with C.S. Buston and W. Wagner) discovered that although the introduction of CDS is commonly criticized as a source of financial instability, banks trading in CDS were able to reduce corporate loan spreads. The second presentation by Johanna L. Francis (joint work with S.-H. Chang and S. Contessi) concentrated on the reasons for excess reserves accumulation by banks during the U.S. Financial Crisis. The authors used bank level data to show that this accumulation was done partially by precautionary reasons, i.e. banks with more ‘bad loans’ hoarded more reserves, and partially due to lack of attractive investment alternatives. The last paper of the session, and at the same time the last paper of the conference, concentrated on identifying monetary policy transmission channels. Esteban Prieto (with C. Buch and S. Eickmeier) used Fed’s Survey of Terms of Business Lending data to construct a FAVAR model, by which they identified that only small banks react to monetary policy and that the risk-taking channel plays a significant role.
The conference was the third conference which the EBC and the DNB jointly organized, and based on the positive experiences on both sides we might expect future events to follow. Selected papers from the conference will be published in a special issue of the Journal of Economic Dynamics and Control.