This dissertation studies topics related to monetary policy, macro finance, and international finance. The first two chapters study (1) the impact of shadow banks on the transmission of monetary policy, and (2) the effects of securitized versus balance sheet credit booms on the severity of the Great Recession. These studies utilize micro data, which allows me to carefully construct econometric specifications that take seriously issues of endogeneity that are ubiquitous in macroeconomics. The third chapter is co-authored work with Michael Hutchison and Fernando Chertman. In this paper, we study the behavior of Taylor rules and foreign exchange intervention functions in large emerging market economies.
In Chapter 1 I present empirical evidence that shadow banks weaken the pass through of monetary policy to the real economy by weakening the bank lending channel. I construct a dataset of home mortgage loan originations from the Home Mortgage Disclosure Act (HMDA) matched with county level home prices and labor market outcomes for years 2000 through 2019. I find that shadow banks expand mortgage originations relative to traditional banks as the monetary policy rate increases. This effect is economically large even when controlling for loan demand by comparing shadow and traditional bank lenders within the same county. In addition, I estimate the impact of shadow bank presence on the transmission of monetary policy to the real economy by exploiting county level heterogeneity ixin shadow bank exposure. My results indicate that as the monetary policy rate increases counties with more exposure to shadow banking experience smaller contractions in home prices, employment, and wages relative to those with less exposure to shadow banking. These results indicate that the recent expansion in shadow mortgage banking has weakened an important channel through which monetary policy affects the real economy.
In Chapter 2 I separately estimate the effect of local credit booms driven by balance sheet lending and those driven by securitization during the 2002-2006 period on the severity of the 2007-2009 Great Recession in the United States. I link data on bank mortgage originations from HMDA with bank financial statements and county level economic outcomes. I exploit geographic variation in bank origination activity across counties to construct county level measures of exposure to securitization and balance sheet lending activity during the 2002-2006 credit boom that are orthogonal to local economic conditions. Results show that 2002-2006 securitization exposure is predictive of declines in home prices, employment, and a rise in mortgage delinquencies during the 2007-2009 crisis period. The same is not true for balance sheet lending, which has a small positive effect on crisis period home prices and minimal employment effects. Results suggest that this difference is driven by risk taking that is specific to securitized lending. Balance sheet booms generate an expansion in lending to higher quality borrowers, while securitization booms increase credit availability at the lower end of the credit distribution.
The final chapter investigates extended Taylor rules and foreign exchange intervention functions in large Emerging Markets (EM), measuring the extent to which policies are designed to stabilize output, inflation, exchange rates and accumulate international reserves. We focus on two large emerging markets - India and Brazil. We also consider the impact of greater capital account openness and which rules dominate when policy conflicts arise. We find that output stabilization is a dominant characteristic of interest rate policy in India, as is inflation targeting in Brazil. Both countries actively use intervention policy to achieve exchange rate stabilization and, at times, stabilizing reserves around a target level tied to observable economic fundamentals. Large unpredicted intervention purchases (sales) accommodate low (high) interest rates, suggesting that external operations are sub ordinate to domestic policy objectives. We extend the work to Chile and China for purposes of comparison. Chile’s policy functions are similar to Brazil, while China pursues policies that substantially diverge from other EMs.
