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Annual Review of Financial Economics - Early Publication
Reviews in Advance appear online ahead of the full published volume. View expected publication dates for upcoming volumes.
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Central Banks, Stock Markets, and the Real Economy
First published online: 29 April 2024More LessIn this article, we summarize empirical research on the interaction between monetary policy and asset markets and review our previous theoretical work that captures these interactions. We present a concise model in which monetary policy impacts the aggregate asset price, which in turn influences economic activity with lags. In this context, the following occurs: (a) the central bank (the Fed, for short) stabilizes the aggregate asset price in response to financial shocks, using large-scale asset purchases if needed (the Fed put); (b) when the Fed is constrained, negative financial shocks cause demand recessions; (c) the Fed's response to aggregate demand shocks increases asset price volatility, but this volatility plays a useful macroeconomic stabilization role; (d) the Fed's beliefs about the future aggregate demand and supply drive the aggregate asset price; (e) macroeconomic news influences the Fed's beliefs and asset prices; ( f ) more precise news reduces output volatility but heightens asset market volatility; and (g) disagreements between the market and the Fed provide a microfoundation for monetary policy shocks and generate a policy risk premium.
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Supply and Demand and the Term Structure of Interest Rates
First published online: 19 April 2024More LessWe survey the growing literature emphasizing the role that supply and demand forces play in shaping the term structure of interest rates. Our starting point is the Vayanos and Vila model of the term structure of default-free bond yields, which we present in both discrete and continuous time. The key friction in the model is that the bond market is partially segmented from other financial markets: The prices of short-rate and bond supply risks are set by specialized bond arbitrageurs who must absorb shocks to the supply and demand for bonds from other preferred-habitat agents. We discuss extensions of this model in the context of default-free bonds and other asset classes.
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Market Power in Banking
First published online: 10 April 2024More LessBank market power, in both loan and deposit markets, has important implications for credit provision and for financial stability. This article discusses these issues through the lens of a simple theoretical framework. On the asset side, banks choose the quality and quantity of loans. On the liability side, they may be subject to depositor runs whenever they offer demandable contracts. This structure allows us to review the literature on the role of market power for credit provision and stability and also highlight the interactions between the two sides of banks’ balance sheets. Our approach identifies relevant channels that deserve further analysis, especially given the rising importance of bank market power for monetary policy transmission and the rise of the digital economy.
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