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Monetary Policy and Defaults in the US

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  • Michele Piffer

Abstract

This paper uses a structural VAR model to study the effect of monetary policy on the delinquency rate of business loans and consumer credit. The VAR is identified using at the same time several external instruments, which cover different approaches from the literature. Delinquency rates, defined as the rate of loans whose repayment is overdue for more than a month relative to total loans, are found to decrease in response to a monetary expansion. The results are consistent with a general equilibrium effect formalized in the paper using a standard model of optimal defaults. According to the model, the decrease in defaults is driven by the fact that monetary expansions increase aggregate demand and push up profits and income, thereby improving the repayment possibility of borrowers.

Suggested Citation

  • Michele Piffer, 2016. "Monetary Policy and Defaults in the US," Discussion Papers of DIW Berlin 1559, DIW Berlin, German Institute for Economic Research.
  • Handle: RePEc:diw:diwwpp:dp1559
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    File URL: https://www.diw.de/documents/publikationen/73/diw_01.c.529193.de/dp1559.pdf
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    References listed on IDEAS

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    Cited by:

    1. Ettmeier, Stephanie & Kriwoluzky, Alexander, 2019. "Same, but different? Testing monetary policy shock measures," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 184.
    2. Elena Afanasyeva & Jochen Güntner, 2014. "Lending Standards, Credit Booms and Monetary Policy," Economics working papers 2014-11, Department of Economics, Johannes Kepler University Linz, Austria.

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    More about this item

    Keywords

    Monetary shocks; risk-taking channel; SVAR with external instruments;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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