Pub Date : 2025-11-19DOI: 10.1016/j.jfs.2025.101482
Matthew Peppe , Haluk Unal
In this paper, we investigate why municipalities do not obtain ratings for their bond issues and whether this raises their issuance costs. Approximately 34 % of local municipal bonds were issued without ratings during 1998–2017. We show that issuers are less likely to obtain ratings for smaller, negotiated offerings, and bonds issued by municipalities with low personal income. Using a doubly robust inverse probability weighted regression adjustment, we estimate that rated bonds have 37–59 basis points lower offering yields than the unrated bonds. We find the choice of issuers to forgo ratings despite the substantial potential savings is associated with the choice of underwriter. Prior to the reform that prohibited underwriters from also working as advisors to the issuer, use of a dual underwriter was associated with not obtaining a rating.
{"title":"Do municipalities pay more to issue unrated bonds?","authors":"Matthew Peppe , Haluk Unal","doi":"10.1016/j.jfs.2025.101482","DOIUrl":"10.1016/j.jfs.2025.101482","url":null,"abstract":"<div><div>In this paper, we investigate why municipalities do not obtain ratings for their bond issues and whether this raises their issuance costs. Approximately 34 % of local municipal bonds were issued without ratings during 1998–2017. We show that issuers are less likely to obtain ratings for smaller, negotiated offerings, and bonds issued by municipalities with low personal income. Using a doubly robust inverse probability weighted regression adjustment, we estimate that rated bonds have 37–59 basis points lower offering yields than the unrated bonds. We find the choice of issuers to forgo ratings despite the substantial potential savings is associated with the choice of underwriter. Prior to the reform that prohibited underwriters from also working as advisors to the issuer, use of a dual underwriter was associated with not obtaining a rating.</div></div>","PeriodicalId":48027,"journal":{"name":"Journal of Financial Stability","volume":"82 ","pages":"Article 101482"},"PeriodicalIF":4.2,"publicationDate":"2025-11-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145580369","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-11-16DOI: 10.1016/j.jfs.2025.101481
Linghua Kong, Thomas To, Eliza Wu
Tariffs are commonly used to protect domestic firms from foreign competition. Using 25 major trade reforms implemented in 17 countries around the world since 1990, we document that firm value significantly increases following reductions in import tariffs. This value enhancement is concentrated in emerging markets and countries with stronger ex-ante competition laws. We identify two channels driving the increase in firm value: an increase in firm efficiency and profit margins due to lower input costs, and an increase in CEO turnover-performance and pay-performance sensitivity driven by increased competition. Overall, our findings underscore the importance of trade liberalization, while also highlighting the critical role of institutional support in fostering competition from foreign firms to stimulate private sector growth.
{"title":"Trade reforms and firm value: Worldwide evidence","authors":"Linghua Kong, Thomas To, Eliza Wu","doi":"10.1016/j.jfs.2025.101481","DOIUrl":"10.1016/j.jfs.2025.101481","url":null,"abstract":"<div><div>Tariffs are commonly used to protect domestic firms from foreign competition. Using 25 major trade reforms implemented in 17 countries around the world since 1990, we document that firm value significantly increases following reductions in import tariffs. This value enhancement is concentrated in emerging markets and countries with stronger ex-ante competition laws. We identify two channels driving the increase in firm value: an increase in firm efficiency and profit margins due to lower input costs, and an increase in CEO turnover-performance and pay-performance sensitivity driven by increased competition. Overall, our findings underscore the importance of trade liberalization, while also highlighting the critical role of institutional support in fostering competition from foreign firms to stimulate private sector growth.</div></div>","PeriodicalId":48027,"journal":{"name":"Journal of Financial Stability","volume":"82 ","pages":"Article 101481"},"PeriodicalIF":4.2,"publicationDate":"2025-11-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145616535","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-11-16DOI: 10.1016/j.jfs.2025.101480
Jyoti Ranjan Sahoo, Ajay Kumar Mishra
This study investigates the impact of India’s Insolvency and Bankruptcy Code (IBC) on capital allocation efficiency among firms with higher long-term debt maturity. Using a difference-in-differences framework on a panel of listed firms from 2010 to 2021, the analysis examines how strengthened creditor rights under the IBC have influenced firms’ investment behavior, particularly those with greater long-term debt exposure. The results show that the implementation of the IBC significantly enhanced capital allocation efficiency by mitigating both underinvestment and overinvestment. Overall, the results suggest that the reform improved firms’ financial decision-making and contributed to greater capital market stability in India. The results remain robust across alternative model specifications and controls for firm, industry, and time-specific effects.
{"title":"Debt maturity, creditor rights, and capital allocation efficiency: Evidence from quasi-natural experiments in India","authors":"Jyoti Ranjan Sahoo, Ajay Kumar Mishra","doi":"10.1016/j.jfs.2025.101480","DOIUrl":"10.1016/j.jfs.2025.101480","url":null,"abstract":"<div><div>This study investigates the impact of India’s Insolvency and Bankruptcy Code (IBC) on capital allocation efficiency among firms with higher long-term debt maturity. Using a difference-in-differences framework on a panel of listed firms from 2010 to 2021, the analysis examines how strengthened creditor rights under the IBC have influenced firms’ investment behavior, particularly those with greater long-term debt exposure. The results show that the implementation of the IBC significantly enhanced capital allocation efficiency by mitigating both underinvestment and overinvestment. Overall, the results suggest that the reform improved firms’ financial decision-making and contributed to greater capital market stability in India. The results remain robust across alternative model specifications and controls for firm, industry, and time-specific effects.</div></div>","PeriodicalId":48027,"journal":{"name":"Journal of Financial Stability","volume":"81 ","pages":"Article 101480"},"PeriodicalIF":4.2,"publicationDate":"2025-11-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145578841","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-11-14DOI: 10.1016/j.jfs.2025.101479
Zhisheng Li , Bingxuan Lin , Zhouyi Liu , H. Zafer Yüksel
This paper examines how the COVID-19 pandemic affected international equity flows through two different channels: a direct channel, capturing the real economic disruptions caused by rising infection rates, and an indirect channel, reflecting pandemic-related panic and uncertainty amplified by media coverage. Using high-frequency country/regional-level data for 66 economies—26 advanced and 40 emerging economies—between January 2020 and December 2022, we disentangle and quantify these two effects. Compared to the direct effect of pandemic, we show that the indirect panic-driven effect is stronger, and not simply a reflection of pandemic severity. The negative impact of panic on equity flows is more pronounced in the early months of 2020, and is partially offset by government interventions—particularly in advanced economies—while similar measures in emerging markets have limited impact. Taken together, our findings highlight the importance of distinguishing between real economic shocks and sentiment-driven dynamics of the pandemic, and offer practical insights for policymakers in preparing for future crisis.
{"title":"Unpacking the crisis: Impact of COVID-19 on global equity flows","authors":"Zhisheng Li , Bingxuan Lin , Zhouyi Liu , H. Zafer Yüksel","doi":"10.1016/j.jfs.2025.101479","DOIUrl":"10.1016/j.jfs.2025.101479","url":null,"abstract":"<div><div>This paper examines how the COVID-19 pandemic affected international equity flows through two different channels: a direct channel, capturing the real economic disruptions caused by rising infection rates, and an indirect channel, reflecting pandemic-related panic and uncertainty amplified by media coverage. Using high-frequency country/regional-level data for 66 economies—26 advanced and 40 emerging economies—between January 2020 and December 2022, we disentangle and quantify these two effects. Compared to the direct effect of pandemic, we show that the indirect panic-driven effect is stronger, and not simply a reflection of pandemic severity. The negative impact of panic on equity flows is more pronounced in the early months of 2020, and is partially offset by government interventions—particularly in advanced economies—while similar measures in emerging markets have limited impact. Taken together, our findings highlight the importance of distinguishing between real economic shocks and sentiment-driven dynamics of the pandemic, and offer practical insights for policymakers in preparing for future crisis.</div></div>","PeriodicalId":48027,"journal":{"name":"Journal of Financial Stability","volume":"81 ","pages":"Article 101479"},"PeriodicalIF":4.2,"publicationDate":"2025-11-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145578843","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-11-13DOI: 10.1016/j.jfs.2025.101477
Jian Wang , Lin Wu , Xinpei Wu , Youngjin Hwang , Yunjae Nam , Soobin Kwak , Taehui Lee , Junseok Kim
We propose an explicit finite difference method for the Black–Scholes (BS) equation that avoids artificial far-field boundary conditions. The method uses an alternating direction explicit (ADE) update on a dynamically shrinking grid, thereby eliminating the need for boundary values at the far end of the domain. It effectively alleviates the stability constraints of the explicit format through the alternating direction advancement. Numerical experiments on European and cash or nothing options confirm second-order convergence and demonstrate a high level of efficiency. For example, repeatedly doubling time resolution from 160 to 1280 reduces pricing error from to , with observed convergence rates close to 2. This makes the method suitable for low-latency financial applications such as real-time pricing and risk management.
{"title":"A second-order finite difference method for the Black–Scholes model without far-field boundary conditions","authors":"Jian Wang , Lin Wu , Xinpei Wu , Youngjin Hwang , Yunjae Nam , Soobin Kwak , Taehui Lee , Junseok Kim","doi":"10.1016/j.jfs.2025.101477","DOIUrl":"10.1016/j.jfs.2025.101477","url":null,"abstract":"<div><div>We propose an explicit finite difference method for the Black–Scholes (BS) equation that avoids artificial far-field boundary conditions. The method uses an alternating direction explicit (ADE) update on a dynamically shrinking grid, thereby eliminating the need for boundary values at the far end of the domain. It effectively alleviates the stability constraints of the explicit format through the alternating direction advancement. Numerical experiments on European and cash or nothing options confirm second-order convergence and demonstrate a high level of efficiency. For example, repeatedly doubling time resolution from 160 to 1280 reduces pricing error from <span><math><mrow><mn>7</mn><mo>.</mo><mn>45</mn><mo>×</mo><mn>1</mn><msup><mrow><mn>0</mn></mrow><mrow><mo>−</mo><mn>1</mn></mrow></msup></mrow></math></span> to <span><math><mrow><mn>6</mn><mo>.</mo><mn>56</mn><mo>×</mo><mn>1</mn><msup><mrow><mn>0</mn></mrow><mrow><mo>−</mo><mn>3</mn></mrow></msup></mrow></math></span>, with observed convergence rates close to 2. This makes the method suitable for low-latency financial applications such as real-time pricing and risk management.</div></div>","PeriodicalId":48027,"journal":{"name":"Journal of Financial Stability","volume":"81 ","pages":"Article 101477"},"PeriodicalIF":4.2,"publicationDate":"2025-11-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145525676","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-11-13DOI: 10.1016/j.jfs.2025.101478
Liu Desheng , Mingsheng Li , Xinran Wang , Ying Wang
Firms tend to attract disproportionately more attention from nearby investors, a phenomenon known as local attention bias. While both cognitive biases and market frictions have been proposed as key drivers of investor attention bias, direct evidence on the role of information acquisition costs, especially for retail investors in emerging markets, remains scarce. We address this gap by exploiting the staggered expansion of China’s high-speed rail (HSR) network as a quasinatural experiment that exogenously reduces geographic information frictions. Using province-level internet search activity as a proxy for retail investor attention, we find that HSR development is negatively associated with the proportion of attention that retail investors direct toward local firms. Robustness checks underscore the central role of information friction in shaping investor attention behavior. Increased intercity connectivity from HSR also boosts tourism, which emerges as a key channel for attenuating local attention bias. The effect is more pronounced for firms with lower information transparency and weaker corporate governance. Furthermore, HSR connections encourage firms to expand into nonlocal subsidiaries, reducing investment “home bias,” and lead to stronger stock return comovement, indicating improved information integration across regions. Our findings highlight how infrastructure development can reshape retail investor behavior and support broader economic integration.
{"title":"Fading familiarity: High-speed rail and the decline in retail investors' attention to local firms","authors":"Liu Desheng , Mingsheng Li , Xinran Wang , Ying Wang","doi":"10.1016/j.jfs.2025.101478","DOIUrl":"10.1016/j.jfs.2025.101478","url":null,"abstract":"<div><div>Firms tend to attract disproportionately more attention from nearby investors, a phenomenon known as <em>local attention bias</em>. While both cognitive biases and market frictions have been proposed as key drivers of investor attention bias, direct evidence on the role of information acquisition costs, especially for retail investors in emerging markets, remains scarce. We address this gap by exploiting the staggered expansion of China’s high-speed rail (HSR) network as a quasinatural experiment that exogenously reduces geographic information frictions. Using province-level internet search activity as a proxy for retail investor attention, we find that HSR development is negatively associated with the proportion of attention that retail investors direct toward local firms. Robustness checks underscore the central role of information friction in shaping investor attention behavior. Increased intercity connectivity from HSR also boosts tourism, which emerges as a key channel for attenuating local attention bias. The effect is more pronounced for firms with lower information transparency and weaker corporate governance. Furthermore, HSR connections encourage firms to expand into nonlocal subsidiaries, reducing investment “home bias,” and lead to stronger stock return comovement, indicating improved information integration across regions. Our findings highlight how infrastructure development can reshape retail investor behavior and support broader economic integration.</div></div>","PeriodicalId":48027,"journal":{"name":"Journal of Financial Stability","volume":"81 ","pages":"Article 101478"},"PeriodicalIF":4.2,"publicationDate":"2025-11-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145578842","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-11-03DOI: 10.1016/j.jfs.2025.101474
Desislava Andreeva , Andra Coman , Mary Everett , Maren Froemel , Kelvin Ho , Simon Lloyd , Baptiste Meunier , Justine Pedrono , Dennis Reinhardt , Andrew Wong , Eric Wong , Dawid Żochowski
We study the effects of negative interest rate policies (NIRP) on the transmission of monetary policy through cross-border lending. Using bank-level data from international financial centers (IFCs) – the United Kingdom and Hong Kong, as well as Ireland – we examine how NIRP in the economies where banks have their headquarters influences cross-border lending from financial-center affiliates. Outside of NIRP periods, tighter monetary policy in affiliates’ headquarter country is associated with a reduction in cross-border lending from the UK and Hong Kong to non-bank borrowers abroad. In contrast, we find evidence that NIRP impairs the bank-lending channel for cross-border lending to non-bank sectors from the UK and Hong Kong, especially for those banks that have only a weak deposit base in these IFCs – and are thus relatively more exposed to NIRP in their headquarters. Consistent with these IFC findings, using euro-area data that includes bank-level information for France, we find that NIRP also impairs headquarter-banks’ lending to bank borrowers in IFCs, which include their IFC affiliates.
{"title":"Negative rates, monetary policy transmission and cross-border lending via international financial centers","authors":"Desislava Andreeva , Andra Coman , Mary Everett , Maren Froemel , Kelvin Ho , Simon Lloyd , Baptiste Meunier , Justine Pedrono , Dennis Reinhardt , Andrew Wong , Eric Wong , Dawid Żochowski","doi":"10.1016/j.jfs.2025.101474","DOIUrl":"10.1016/j.jfs.2025.101474","url":null,"abstract":"<div><div>We study the effects of negative interest rate policies (NIRP) on the transmission of monetary policy through cross-border lending. Using bank-level data from international financial centers (IFCs) – the United Kingdom and Hong Kong, as well as Ireland – we examine how NIRP in the economies where banks have their headquarters influences cross-border lending from financial-center affiliates. Outside of NIRP periods, tighter monetary policy in affiliates’ headquarter country is associated with a reduction in cross-border lending from the UK and Hong Kong to non-bank borrowers abroad. In contrast, we find evidence that NIRP impairs the bank-lending channel for cross-border lending to non-bank sectors from the UK and Hong Kong, especially for those banks that have only a weak deposit base in these IFCs – and are thus relatively more exposed to NIRP in their headquarters. Consistent with these IFC findings, using euro-area data that includes bank-level information for France, we find that NIRP also impairs headquarter-banks’ lending to bank borrowers in IFCs, which include their IFC affiliates.</div></div>","PeriodicalId":48027,"journal":{"name":"Journal of Financial Stability","volume":"81 ","pages":"Article 101474"},"PeriodicalIF":4.2,"publicationDate":"2025-11-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145525677","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-10-30DOI: 10.1016/j.jfs.2025.101473
Rodrigo Londoño van Rutten
This paper examines the effect of firms’ lobbying activities on US federal grants. My model indicates that firms lobbying the granting agency during the grant allocation process have 7.04 times higher odds of getting a federal award. The main results are robust across lobbying measures and account for endogeneity concerns by employing instrumental variables and propensity score matching strategies. I also observe that federal grants are more responsive to lobbying expenditures to the granting agency when a firm’s information is more opaque. In addition, I find that firms receiving more federal grants tend to have lower costs of debt and higher CEO compensation without being able to show higher firm performance. Overall, these results appear consistent with the informational lobbying theory at the regulator level and self-serving behavior at the management level.
{"title":"Corporate lobbying and US federal grants: Information in exchange for compensation","authors":"Rodrigo Londoño van Rutten","doi":"10.1016/j.jfs.2025.101473","DOIUrl":"10.1016/j.jfs.2025.101473","url":null,"abstract":"<div><div>This paper examines the effect of firms’ lobbying activities on US federal grants. My model indicates that firms lobbying the granting agency during the grant allocation process have 7.04 times higher odds of getting a federal award. The main results are robust across lobbying measures and account for endogeneity concerns by employing instrumental variables and propensity score matching strategies. I also observe that federal grants are more responsive to lobbying expenditures to the granting agency when a firm’s information is more opaque. In addition, I find that firms receiving more federal grants tend to have lower costs of debt and higher CEO compensation without being able to show higher firm performance. Overall, these results appear consistent with the informational lobbying theory at the regulator level and self-serving behavior at the management level.</div></div>","PeriodicalId":48027,"journal":{"name":"Journal of Financial Stability","volume":"81 ","pages":"Article 101473"},"PeriodicalIF":4.2,"publicationDate":"2025-10-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145415635","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-10-29DOI: 10.1016/j.jfs.2025.101472
I. Aldasoro , L. Gambacorta , A. Korinek , V. Shreeti , M. Stein
At the core of the financial system is the processing and aggregation of vast amounts of information into price signals that coordinate participants in the economy. Throughout history, advances in information processing, from simple book-keeping to artificial intelligence (AI), have transformed the financial sector. We use this framing to analyze how generative AI (GenAI), emerging AI agents and, more speculatively, artificial general intelligence will impact finance. We focus on four functions of the financial system: financial intermediation, insurance, asset management, and payments. We also assess the implications of advances in AI for financial stability and prudential policy. Moreover, we investigate potential spillover effects of AI on the real economy, examining both an optimistic and a disruptive AI scenario. To address the transformative impact of advances in AI on the financial system, we propose a framework for upgrading financial regulation based on well-established general principles for AI governance.
{"title":"Intelligent financial system: How AI is transforming finance","authors":"I. Aldasoro , L. Gambacorta , A. Korinek , V. Shreeti , M. Stein","doi":"10.1016/j.jfs.2025.101472","DOIUrl":"10.1016/j.jfs.2025.101472","url":null,"abstract":"<div><div>At the core of the financial system is the processing and aggregation of vast amounts of information into price signals that coordinate participants in the economy. Throughout history, advances in information processing, from simple book-keeping to artificial intelligence (AI), have transformed the financial sector. We use this framing to analyze how generative AI (GenAI), emerging AI agents and, more speculatively, artificial general intelligence will impact finance. We focus on four functions of the financial system: financial intermediation, insurance, asset management, and payments. We also assess the implications of advances in AI for financial stability and prudential policy. Moreover, we investigate potential spillover effects of AI on the real economy, examining both an optimistic and a disruptive AI scenario. To address the transformative impact of advances in AI on the financial system, we propose a framework for upgrading financial regulation based on well-established general principles for AI governance.</div></div>","PeriodicalId":48027,"journal":{"name":"Journal of Financial Stability","volume":"81 ","pages":"Article 101472"},"PeriodicalIF":4.2,"publicationDate":"2025-10-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145525675","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-10-27DOI: 10.1016/j.jfs.2025.101470
Matthew Schaffer , Nimrod Segev
This paper suggests a new channel through which central bank Quantitative Easing (QE) policies can amplify aggregate fluctuations. By significantly increasing excess reserve holdings in the banking sector, QE policies reduce liquidity risk and increase banks’ lending potential. Thus, disturbances that increase credit demand generate a stronger increase in lending, further amplifying the shock’s impact. We offer empirical evidence supporting this mechanism by utilizing two sources of variation in the US during the COVID-19 pandemic. First, we use cross-bank variation in mortgage-backed security (MBS) holdings to measure banks’ exposure to QE policies. Second, we use cross-state variation in the per capita Economic Impact Payments (EIP) to quantify the local aggregate demand shock stemming from pandemic-related fiscal relief. Bank-level analysis reveals that while QE is associated with an overall increase in reserves, its impact on credit expansion depends on the magnitude of the economic stimulus payments. Additionally, state-level evidence suggests increases in credit expansion and house prices following the shock were larger in states with greater banking sector exposure to QE. The results, therefore, suggest that QE amplified the impact of government stimulus programs during COVID-19.
{"title":"Quantitative easing, bank lending, and aggregate fluctuations","authors":"Matthew Schaffer , Nimrod Segev","doi":"10.1016/j.jfs.2025.101470","DOIUrl":"10.1016/j.jfs.2025.101470","url":null,"abstract":"<div><div>This paper suggests a new channel through which central bank Quantitative Easing (QE) policies can amplify aggregate fluctuations. By significantly increasing excess reserve holdings in the banking sector, QE policies reduce liquidity risk and increase banks’ lending potential. Thus, disturbances that increase credit demand generate a stronger increase in lending, further amplifying the shock’s impact. We offer empirical evidence supporting this mechanism by utilizing two sources of variation in the US during the COVID-19 pandemic. First, we use cross-bank variation in mortgage-backed security (MBS) holdings to measure banks’ exposure to QE policies. Second, we use cross-state variation in the per capita Economic Impact Payments (EIP) to quantify the local aggregate demand shock stemming from pandemic-related fiscal relief. Bank-level analysis reveals that while QE is associated with an overall increase in reserves, its impact on credit expansion depends on the magnitude of the economic stimulus payments. Additionally, state-level evidence suggests increases in credit expansion and house prices following the shock were larger in states with greater banking sector exposure to QE. The results, therefore, suggest that QE amplified the impact of government stimulus programs during COVID-19.</div></div>","PeriodicalId":48027,"journal":{"name":"Journal of Financial Stability","volume":"81 ","pages":"Article 101470"},"PeriodicalIF":4.2,"publicationDate":"2025-10-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145416375","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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