Research

Why does the same monetary tightening lead some banks to write safer loans than others? We develop a model and identify a novel deposit-franchise mechanism within the risk-taking channel of monetary policy. Sticky deposits generate rents that vanish if the bank fails, giving low-deposit-beta banks more skin in the game. The model predicts that tightening lowers the payoff to risk-taking, so banks with a stronger deposit franchise cut risk more because failure destroys larger rents. We test this prediction using the Federal Reserve’s confidential loan-level data, interacting high-frequency monetary policy surprises with predetermined deposit betas in specifications with bank and borrower-time fixed effects. Our findings show that monetary tightening reduces risk-taking, especially at low-beta banks, and the result survives a horse race with bank capital. New-loan originations reveal how banks de-risk: for the same borrower-quarter, low-beta banks originate loans that are more likely to be collateralised and senior.

We study how ratings inflation can undermine financial regulation and inadvertently fuel the growth of privately rated credit. We exploit the 2021 Risk-Based Capital reform for U.S. life insurers, which aimed to curb reaching-for-yield through its treatment of credit ratings. Following the reform, more exposed insurers—especially those with tighter capital constraints—shifted toward privately rated bonds. These bonds exhibit within-issuer ratings inflation and offer higher yields within rating categories, consistent with greater underlying risk behind similar regulatory labels. Accounting for this inflation substantially attenuates the reform’s apparent improvement in portfolio risk. Despite targeting ratings rather than market structure, the reform indirectly increased demand for private bonds. Consistent with this demand shift, firms more connected to exposed life insurers increased their private debt issuance.

A vast theoretical literature claims that increasing interest rates reduce bank leverage, making banks safer. Validating this empirically is key to understanding monetary policy transmission and its impact on financial stability. I show that raising interest rates increases bank leverage. This rise in leverage is consequential as it is accompanied by a meaningful increase in bank failure rates. I propose and validate the loan-loss mechanism which explains the entire increase in leverage: contractionary shocks increase loan losses, reduce profits and equity, thus raising leverage. I document why existing models cannot account for this and develop a model of bank risk transformation in which floating-rate loans convert interest rate risk to credit risk, leading to loan losses. Empirical evidence from microdata is consistent with the model’s predictions.

Cieslak et al. (2019) document that between 1994 and 2016, the US equity premium is earned entirely in even weeks of the Federal Open Market Committee cycle, and these even weeks also drive returns internationally. Updating their data, I show this result does not hold out-of-sample, weakening as early as 2004. Their proposed mechanism—informal leaks following biweekly board meetings—ceases after 2004, as meetings are no longer biweekly. Before 2004, outliers appear to drive the result. Finally, I construct central bank cycles for the UK and Japan and show that, when accounting for pre-announcement effects, the international result disappears.

We develop a model in which the central bank incorporates financial stability concerns into its monetary policy and communication decisions, while systemic banks strategically choose portfolios to influence policy. Because fully responding to economic shocks would generate policy surprises that threaten bank stability, the central bank underreacts to those shocks, consistent with the Federal Reserve’s response during the 2023 banking crisis. Anticipating this accommodation, banks tilt their portfolios to increase the financial-stability costs of rate hikes, pulling monetary policy toward lower rates while giving the central bank an incentive to announce higher future rates than it expects to set. Financial stability concerns can therefore backfire, creating a novel responsiveness–credibility trade-off: the more the central bank accommodates banks’ exposures ex post, the less credible its forward guidance becomes ex ante, making it harder for banks to align their portfolios with future policy and leaving them more exposed to policy surprises. Even when society values financial stability, it benefits from appointing a central banker who places less weight on it. Paradoxically, even banks may prefer such a central banker when the benefits of more credible guidance outweigh the loss of policy influence.

This paper analyzes food inflation trends in Sub-Saharan Africa (SSA) from 2000 to 2016 using two novel datasets of disaggregated CPI baskets. Average food inflation is higher, more volatile, and similarly persistent as non-food non-fuel inflation, especially in low-income countries in SSA. We find evidence that food inflation became less persistent from 2009 onwards, related to recent improvements in monetary policy frameworks. We also find that high food prices are driven mainly by non-tradable food in SSA and there is incomplete pass-through from world food and fuel prices and exchange rates to domestic food prices. Taken together, these finding suggest that central banks in low-income countries with high and persistent food inflation should continue to pay attention to headline inflation to anchor inflation expectations. Other policy levers include reducing tariffs and improving storage and transport infrastructure to reduce food pressures.