Time: June 20 (Mon.), 16:00 – 17:00 (Beijing Time)
Title: Paper 1: Banks, Money, and the Zero Lower Bound on Deposit Rates
Paper 2: Corporate Legacy Debt, Inflation, and the Efficacy of Monetary Policy
About the Speaker:
Xuan Wang (PhD in Financial Economics, MPhil Economics, University of Oxford), Assistant Professor of Finance at Vrije Universiteit Amsterdam, Lecturer at Tinbergen Institute, research fellowship visitor at HKMA. Research areas focus on international and macro-finance, money and default, financial stability, climate risks. Papers have been published in Journal of Economic Dynamics and Control, Journal of Banking and Finance. Referee service for Journal of Economic Theory, Economic Theory, International Journal of Central Banking, China Economic Review. Working papers have been accepted to AEA, EEA, CEBRA, Econometric Society Meeting, KVS, Royal Economic Society, MFA international conferences. Working Paper ‘Bankruptcy Codes and Risk Sharing of Currency Unions’ awarded top 10 finalist of the 2020 European Central Bank Young Economist Competition and was invited to be presented at the European Commission. Co-organiser of Oxford SAID – ETH Zurich Risk Centre Macro-Finance Conference. Teaching covers PhD level Macroeconomics with Financial Frictions and undergraduate level International Finance.
Abstract:
Paper 1:
We develop a New Keynesian model where all payments between agents require bank deposits, bank deposits are created through disbursement of bank loans, and banks face convex lending costs. At the zero lower bound on deposit rates (ZLBD), changes in policy rates affect activity through both real interest rates and banks’ net interest margins (NIMs). At empirically plausible credit supply elasticities, the Phillips curve is very flat at the ZLBD. This is because inflation increases NIMs, credit, deposits, and thereby output, while higher NIMs also dampen inflation by relaxing price setters’ credit rationing constraint. At the ZLBD, monetary policy has far larger effects on output relative to inflation, and inflation feedback rules stabilize output less effectively than rules that also respond to credit. For post-COVID-19 policy, this suggests urgency in returning inflation to targets, caution with negative policy rates, and a strong influence of credit conditions on rate setting.
Paper 2:
The COVID-19 pandemic has coincided with a rapid increase in indebtedness. Although the rise in public debt and its policy implications have recently received much attention, the rise in corporate debt has received less so. We argue that high levels of corporate debt may impede the transmission mechanism of monetary policy and make it less effective in controlling inflation. In an environment with working capital financing requirements, when firms' indebtedness is sufficiently high, the income effect of higher nominal interest rates offsets or even dominates its usual negative substitution effect on aggregate demand and is quantitatively important. This mechanism is independent of standard financial and nominal frictions and aggravates the trade-off between inflation and output stabilisation.
