Skander J. Van den Heuvel
Research
Ø Temporal Risk Aversion and Asset Prices [new]
Agents
with standard, time-separable preferences do not care about the temporal
distribution of risk. This is a strong assumption. For example, it seems
plausible that a consumer may find persistent shocks to consumption less
desirable than uncorrelated fluctuations. Such a consumer is said to exhibit
temporal risk aversion. This paper examines the implications of temporal risk
aversion for asset prices. The innovation is to work with expected utility
preferences that (i) are not time-separable, (ii) exhibit temporal risk
aversion, (iii) separate risk aversion from the intertemporal elasticity of
substitution, (iv) separate short-run from long-run risk aversion and (v) yield
stationary asset pricing implications in the context of an endowment economy.
Closed form solutions are derived for the equity premium and the risk free
rate. The equity premium depends only on a parameter indexing long-run risk
aversion. The risk-free rate instead depends primarily on a separate parameter
indexing the desire to smooth consumption over time and the rate of time
preference.
Ø
The Welfare Cost of
Bank Capital Requirements
Journal
of Monetary Economics,
March 2008.
Capital
requirements are the cornerstone of modern bank regulation, yet little is known
about their welfare cost. This paper measures this cost and finds that it is
surprisingly large. I present a simple framework which embeds the role of
liquidity creating banks in an otherwise standard general equilibrium growth
model. A capital requirement limits the moral hazard on the part of banks that
arises due to deposit insurance. However, this capital requirement is also
costly because it reduces the ability of banks to create liquidity. The key
insight is that equilibrium asset returns reveal the strength of households’
preferences for liquidity and this allows for the derivation of a simple
formula for the welfare cost of capital requirements that is a function of
observable variables only. Using
Additional materials: Technical
Appendix Older working
paper version (This version first develops an easy special case of
the model, with costless financial intermediation. It also has a separate
section on the effect of the capital requirement on capital accumulation and
economic activity.)
Ø The Bank Capital Channel of
Monetary Policy
This
paper examines the role of bank lending in the transmission of monetary policy in
the presence of capital adequacy regulations. I develop a dynamic model of bank
asset and liability management that incorporates risk-based capital
requirements and an imperfect market for bank equity. These conditions imply a
failure of the Modigliani-Miller theorem for the bank: its lending will depend
on the bank’s financial structure, as well as on lending opportunities and
market interest rates. Combined with a maturity mismatch on the bank’s balance
sheet, this gives rise to a ‘bank capital channel’ by which monetary policy
affects bank lending through its impact on bank equity capital. This mechanism
does not rely on any particular role of bank reserves and thus falls outside
the conventional ‘bank lending channel’. I analyze the dynamics of the new
channel. An important result is that monetary policy effects on bank lending
depend on the capital adequacy of the banking sector; lending by banks with low
capital has a delayed and then amplified reaction to interest rate shocks,
relative to well-capitalized banks. Other implications are that bank capital
affects lending even when the regulatory constraint is not momentarily binding,
and that shocks to bank profits, such as loan defaults, can have a persistent
impact on lending.
Ø Banking Conditions and the Effects of Monetary Policy:
Evidence from U.S. States
Using
data from
Ø Do Monetary Policy Effects on Bank Lending Depend on Bank
Capitalization?
This paper uses bank-level data to examine
empirically whether the financial structure of banks matters for the impact of
monetary policy on bank lending. I find that poorly capitalized banks react more strongly to monetary policy shocks than well-capitalized banks. In
addition, this differential response is more pronounced for large banks than
for small banks. The evidence is consistent with the existence of a ‘bank
capital channel’ of monetary policy.
Ø
Does Bank
Capital Matter for Monetary Transmission?
Economic Policy Review, Federal
Reserve Bank of
This
article discusses the role of bank capital in the monetary transmission
mechanism from the perspective of the bank lending channel, as well as the bank
capital channel.
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