Pascal Paul

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Pascal Paul

Senior Economist
Macroeconomic Research
Macroeconomics, Financial Economics, Applied Econometrics

pascal.paul (at)

Profiles: Personal website

Working Papers
A Macroeconomic Model of Central Bank Digital Currency

2024-11 | with Ulate and Wu | April 2024


We develop a quantitative New Keynesian DSGE model to study the introduction of a central bank digital currency (CBDC): government-backed digital money available to retail consumers. At the heart of our model are monopolistic banks with market power in deposit and loan markets. When a CBDC is introduced, households benefit from an expansion of liquidity services and higher deposit rates as bank deposit market power is curtailed. However, deposits also flow out of the banking system and bank lending contracts. We assess this welfare trade-off for a wide range of economies that differ in their level of interest rates. We find substantial welfare gains from introducing a CBDC with an optimal interest rate that can be approximated by a simple rule of thumb: the maximum between 0% and the policy rate minus 1%.

Monetary Transmission through Bank Securities Portfolios

2023-18 | with Krainer | July 2023


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.

Published Articles (Refereed Journals and Volumes)
The Credit Line Channel

Forthcoming in Journal of Finance | with Greenwald and Krainer


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.


Journal of Financial Economics, March 2024 | with Faria-e-Castro and Sanchez


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

Journal of Money, Credit, and Banking 55(7), October 2023, 1,641-1,665


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


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


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


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


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
Do Banks Lend to Distressed Firms?

Economic Letter 2023-31 | November 27, 2023 | with Faria-e-Castro and Sanchez

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

Other Works
Loan Evergreening: Recent Evidence from the United States

Economic Synopses 2022(26), September 2022 | with Faria e Castro and Sanchez

The Credit Line Channel, 2021 | with Greenwald and Krainer


Aggregate US bank lending to firms tends to expand following adverse macroeconomic shocks, such as the outbreak of COVID-19 or a monetary policy tightening. Based on detailed loan-level supervisory data, this column shows that these responses are almost entirely explained by large firms drawing on their bank credit lines. However, funding stability for large firms may imply that smaller firms face tighter borrowing conditions. The authors show that such a crowding out effect was at play during the COVID-19 crisis and explore the implications of such spillovers within a structural model.

Monetary Policy under the Microscope: Household Heterogeneity and Consumption, 2020 | with Holm and Tischbirek


Empirical evaluations of monetary policy have traditionally focused on the responses of macroeconomic aggregates. Instead, this column uses detailed administrative data from Norway to uncover substantial heterogeneity in the effects of monetary policy at the household level. The authors find that not only low-liquidity households but also high-liquidity ones show strong responses. Interest rate changes faced by borrowers and savers feed into consumption, and indirect effects of monetary policy are sizable, but occur with a delay. While the results confirm several predictions of recent heterogeneous-agent New Keynesian models, they also provide new challenges.