Pascal Paul
Senior Economist
Macroeconomic Research
Macroeconomics, Financial Economics, Applied Econometrics
CV (pdf, 95.81 kb)
Profiles: Personal website
Working Papers
Monetary Transmission through Bank Securities Portfolios
2023-18 | with Krainer | July 2023
abstract (+)We study the transmission of monetary policy through bank securities portfolios for the United States using granular supervisory data on bank securities, hedging positions, and corporate credit. We find that banks that experienced larger market value losses on their securities during the monetary tightening cycle in 2022 extended relatively less credit to firms. Such a spillover effect was stronger for (i) available-for sale securities, (ii) unhedged securities, (iii) low-capitalized banks, and (iv) banks that have to include unrealized gains and losses on their available-for-sale securities in their regulatory capital. Our findings provide evidence for a forceful transmission channel of monetary policy that is shaped by the regulatory framework of the banking system.
The Credit Line Channel
2020-26 | with Greenwald and Krainer | August 2023
abstract (+)Aggregate U.S. bank lending to firms expanded following the outbreak of COVID-19. Using loan-level supervisory data, we show that this expansion was driven by draws on credit lines by large firms. Banks that experienced larger credit line drawdowns restricted term lending more, crowding out credit to smaller firms, which reacted by reducing investment. A structural model calibrated to match our empirical results shows that while credit lines increase total bank credit in bad times, they redistribute credit from firms with high propensities to invest to firms with low propensities to invest, exacerbating the fall in aggregate investment.
Published Articles (Refereed Journals and Volumes)
Evergreening
Forthcoming in Journal of Financial Economics | with Faria-e-Castro and Sanchez
abstract (+)We develop a simple model of concentrated lending where lenders have incentives for evergreening loans by offering better terms to firms that are close to default. We detect such lending behavior using loan-level supervisory data for the United States. Banks that own a larger share of a firm’s debt provide distressed firms with relatively more credit at lower interest rates. Building on this empirical validation, we incorporate the theoretical mechanism into a dynamic heterogeneous-firm model to show that evergreening affects aggregate outcomes, resulting in lower interest rates, higher levels of debt, and lower productivity.
Historical Patterns of Inequality and Productivity around Financial Crises
Forthcoming in Journal of Money, Credit, and Banking
abstract (+)To understand the determinants of financial crises, previous research focused on developments closely related to financial markets. In contrast, this paper considers changes originating in the real economy as drivers of financial instability. To this end, I assemble a novel data set of long-run measures of income inequality, productivity, and other macrofinancial indicators for advanced economies. I find that rising top income inequality and low productivity growth are robust predictors of crises, and their slow-moving trend components largely explain these relations. Moreover, recessions that are preceded by such developments are deeper than recessions without such ex-ante trends.
Banks, Maturity Transformation, and Monetary Policy
Journal of Financial Intermediation 53, January 2023
abstract (+)Banks engage in maturity transformation and the term premium compensates them for bearing the associated interest rate risk. Consistent with this view, I show that banks’ net interest margins and term premia have comoved in the United States over the last decades. On monetary policy announcement days, bank equity falls more sharply than nonbank equity following an increase in expected future short-term rates, but also responds more positively if term premia increase. These effects are reflected in bank cash-flows and amplified for banks with a larger maturity mismatch. The results reveal that banks are not immune to interest rate risk.
The Transmission of Monetary Policy under the Microscope
Journal of Political Economy 129 (10), October 2021, 2861-2904 | with Holm and Tischbirek
abstract (+)We investigate the transmission of monetary policy to household consumption using administrative data on the universe of households in Norway. On the basis of identified monetary policy shocks, we estimate the dynamic responses of consumption, income, and saving along the liquid asset distribution of households. For low-liquidity but also for high-liquidity households, changes in disposable income are associated with a sizable consumption reaction. The impact consumption response is closely linked to interest rate exposure, which is negative at the bottom but positive at the top of the distribution. Indirect effects of monetary policy gradually build up and eventually outweigh the direct effects.
The Time-Varying Effect of Monetary Policy on Asset Prices
Review of Economics and Statistics 102(4), October 2020, 690-704
abstract (+)This paper studies how monetary policy jointly affects asset prices and the real economy in the United States. I develop an estimator that uses high-frequency surprises as a proxy for the structural monetary policy shocks. This is achieved by integrating the surprises into a vector autoregressive model as an exogenous variable. I use current short-term rate surprises because these are least affected by an information effect. When allowing for time-varying model parameters, I find that, compared to the response of output, the reaction of stock and house prices to monetary policy shocks was particularly low before the 2007-09 financial crisis.
A Macroeconomic Model with Occasional Financial Crises
Journal of Economic Dynamics and Control 112, March 2020, 1-21
abstract (+)Financial crises occur out of prolonged and credit-fueled boom periods and, at times, they are initiated by relatively small shocks that can have large effects. Consistent with these empirical observations, this paper extends a standard macroeconomic model to include financial intermediation, long-term loans, and occasional financial crises. Within this framework, intermediaries raise their lending and leverage in good times, thereby building up financial fragility. Crises typically occur at the end of a prolonged boom, initiated by a moderate adverse shock that triggers a liquidation of existing investment, a contraction in lending, and ultimately a deep and persistent recession.
FRBSF Publications
When the Fed Raises Rates, Are Banks Less Profitable?
Economic Letter 2022-35 | December 20, 2022
Two Years into COVID, What’s the State of U.S. Businesses?
Economic Letter 2022-22 | August 15, 2022
Are Banks Exposed to Interest Rate Risk?
Economic Letter 2020-16 | June 22, 2020 | with Zhu
Historical Patterns around Financial Crises
Economic Letter 2020-10 | May 4, 2020 | with Pedtke
Does the Fed Know More about the Economy?
Economic Letter 2019-11 | April 8, 2019
Modeling Financial Crises
Economic Letter 2019-08 | March 4, 2019
Monetary Policy Cycles and Financial Stability
Economic Letter 2018-06 | February 26, 2018
