Working Paper: NBER ID: w18857
Authors: Augustin Landier; David Sraer; David Thesmar
Abstract: We show empirically that banks' exposure to interest rate risk, or income gap, plays a crucial role in monetary policy transmission. In a first step, we show that banks typically retain a large exposure to interest rates that can be predicted with income gap. Secondly, we show that income gap also predicts the sensitivity of bank lending to interest rates. Quantitatively, a 100 basis point increase in the Fed funds rate leads a bank at the 75th percentile of the income gap distribution to increase lending by about 1.6 percentage points annually relative to a bank at the 25th percentile.
Keywords: Interest Rate Risk; Monetary Policy; Bank Lending; Income Gap
JEL Codes: E51; E52; G21; G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| banks' income gap (G21) | lending increase (G21) |
| interest rate changes (E43) | lending increase (G21) |
| banks' income gap (G21) | bank profits reaction (G21) |
| interest rate changes (E43) | bank profits reaction (G21) |