I study the transmission of monetary policy through banks and nonbank financial intermediaries (NBFIs) in the United States. First, I construct a measure of nonbank lending that takes into account the complex linkages within the NBFI sector.
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Then, I show empirically that following a surprise monetary policy tightening the households substitute away from bank deposits and towards nonbank-created liquidity. Bank lending to firms contracts while NBFIs' provision of credit expands. Thus, the households' portfolio rebalancing diminishes the impact of monetary policy on economic activity. To rationalize these findings, I build a New-Keynesian model with banks and investment funds that provide liquidity to households and lending to firms. The model captures the two channels of monetary policy transmission where the households' portfolio choices take the central stage: the deposits and the shadow banking channels. Through these channels, the model replicates the portfolio shifts and increased nonbank finance observed in the data, and the presence of investment funds dampens the efficacy of monetary policy.
Central Bank Digital Currency: Demand Shocks and Optimal Monetary Policy
We study the implications of a central bank digital currency (CBDC) for the transmission of household preference shocks and for welfare in a New Keynesian framework where the CBDC competes with bank deposits for household resources and banks have market power. We show that an increase in the perceived benefit of CBDC has a mildly expansionary effect, weakening bank market power and significantly reducing the deposit spread.
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As households economize on liquid asset holdings, they reduce both CBDC and deposit balances. However, the degree of bank disintermediation is low, as deposit outflows remain modest. We then examine the welfare implications of CBDC rate setting and find that, compared to a non-interest-bearing CBDC, the gains with standard coefficients for a CBDC interest rate Taylor rule are modest, but they become considerable when the coefficients are optimized. Welfare gains increase with the CBDC benefit, and the optimal policy responses vary with the banking market structure.
Central Bank Digital Currency with Collateral-constrained Banks
We analyze the risks to bank intermediation following the introduction of a central bank digital currency (CBDC) competing with commercial bank deposits as households’ source of liquidity. We revisit the result in the literature regarding the equivalence of payment systems introducing a collateral constraint on banks borrowing from the central bank.
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Comparing two equilibria with and without the CBDC, we find that even with this constraint, the central bank can ensure the same equilibrium allocation and price system by offering loans to banks. However, to access loans, banks must hold collateral at the expense of extending credit to firms. Thus, while the CBDC introduction has no real effects on the economy, it does not guarantee full neutrality as it affects banks’ business models. In a dynamic model extension, we examine the effects of an increase in the CBDC and show that the CBDC not only does not cause bank disintermediation or crowd out deposits but may foster an expansion of bank credit to firms.
