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Why Are Banks Exposed to Monetary Policy?

Author

Listed:
  • Di Tella, Sebastian

    (Stanford University)

  • Kurlat, Pablo

    (Stanford University)

Abstract

We propose a model of banks' exposure to movements in interest rates and their role in the transmission of monetary shocks. Since bank deposits provide liquidity, higher interest rates allow banks to earn larger spreads on deposits. Therefore, if risk aversion is higher than one, banks' optimal dynamic hedging strategy is to take losses when interest rates rise. This risk exposure can be achieved by a traditional maturity mismatched balance sheet, and amplifies the effects of monetary shocks on the cost of liquidity. The model can match the level, time pattern, and cross-sectional pattern of banks' maturity mismatch.

Suggested Citation

  • Di Tella, Sebastian & Kurlat, Pablo, 2017. "Why Are Banks Exposed to Monetary Policy?," Research Papers repec:ecl:stabus:3525, Stanford University, Graduate School of Business.
  • Handle: RePEc:ecl:stabus:repec:ecl:stabus:3525
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    File URL: https://www.gsb.stanford.edu/gsb-cmis/gsb-cmis-download-auth/433546
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    Cited by:

    1. Andrew G. Atkeson & Adrien d’Avernas & Andrea L. Eisfeldt & Pierre-Olivier Weill, 2019. "Government Guarantees and the Valuation of American Banks," NBER Macroeconomics Annual, University of Chicago Press, vol. 33(1), pages 81-145.
    2. Markus K. Brunnermeier & Yann Koby, 2019. "The Reversal Interest Rate," IMES Discussion Paper Series 19-E-06, Institute for Monetary and Economic Studies, Bank of Japan.
    3. Itamar Drechsler & Alexi Savov & Philipp Schnabl, 2018. "Banking on Deposits: Maturity Transformation without Interest Rate Risk," NBER Working Papers 24582, National Bureau of Economic Research, Inc.
    4. Hoffmann, Peter & Langfield, Sam & Pierobon, Federico & Vuillemey, Guillaume, 2018. "Who bears interest rate risk?," Working Paper Series 2176, European Central Bank.

    More about this item

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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