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Securitization and the Balance Sheet Channel of Monetary Transmission

  • Uluc Aysun

    (University of Connecticut, Department of Economics)

  • Ralf Hepp

    (Fordham University, Department of Economics)

This paper shows that the balance sheet channel of monetary transmission works mainly through U.S. bank holding companies that securitize their assets. This finding is different, in spirit, from the widely-found negative relationship between financial development and the strength of the lending channel of monetary transmission. Focusing on the balance sheet channel, and using bank-level observations, we find that securitized banks are more sensitive to borrowers' balance sheets and that monetary policy has a greater impact on this sensitivity for securitizing bank holding companies. The optimality conditions from a simple partial equilibrium framework suggest that the positive effects of securitization on policy effectiveness could be due to the high sensitivity of security prices to policy rates.

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Paper provided by Fordham University, Department of Economics in its series Fordham Economics Discussion Paper Series with number dp2010-05.

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Date of creation: 2010
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Handle: RePEc:frd:wpaper:dp2010-05
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