Working Paper: NBER ID: w20230
Authors: Gabriel Chodorow-Reich
Abstract: Monetary policy affects the real economy in part through its effects on financial institutions. High frequency event studies show the introduction of unconventional monetary policy in the winter of 2008-09 had a strong, beneficial impact on banks and especially on life insurance companies. I interpret the positive effects on life insurers as expansionary policy recapitalizing the sector by raising the value of legacy assets. Expansionary policy had small positive or neutral effects on banks and life insurers through 2013. The interaction of low nominal interest rates and administrative costs forced money market funds to waive fees, producing a possible incentive to reach for yield to reduce waivers. I show money market funds with higher costs reached for higher returns in 2009-11, but not thereafter. Some private defined benefit pension funds increased their risk taking beginning in 2009, but again such behavior largely dissipated by 2012. In sum, unconventional monetary policy helped to stabilize some sectors and provoked modest additional risk taking in others. I do not find evidence that the financial institutions studied formented a tradeoff between expansionary policy and financial stability at the end of 2013.
Keywords: Unconventional monetary policy; Financial institutions; Risk-taking; Banks; Life insurance companies
JEL Codes: E44; E52; G20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Unconventional monetary policy (E52) | Banks (G21) |
| Unconventional monetary policy (E52) | Life insurance companies (G22) |
| Low nominal interest rates (E43) | Risk-taking behavior in financial institutions (G21) |
| Low nominal interest rates + Administrative costs (E43) | Reaching for yield behavior (G11) |
| Increased asset prices (G19) | Financial institutions (G21) |
| Unconventional monetary policy (E52) | Recapitalization of the sector (O16) |
| Private defined benefit pension funds (G23) | Increased risk-taking (G41) |
| Increased risk-taking (G41) | Diminished behavior (D91) |