Financial Innovation, Market Structure, and the Macroeconomy
Open AccessThis dissertation consists of three independent essays about the financial market and macroeconomy. Chapter 1 studies the heterogeneous impact of monetary policy on the investment of State-owned enterprise(SOE) and nonState-owned enterprise(nonSOE) in China. The conventional wisdom is that State-owned enterprises(SOEs) should be less sensitive to monetary policy shocks. Yet, I find that investment of SOEs declines by 5%-12% more than nonSOEs after a 100 basis point monetary tightening shock using recent data from China. I also find there is a “pushing on the string” effect that monetary tightening is more effective in reining in the investment of SOEs than nonSOEs. I provide evidence that a shadow banking channel could account for the empirical results. Chapter 2 studies the impact of shadow banking regulation on the financial system and the real economy. For identification, I exploit a policy - “New Asset Management Rules” (NAMR) - that restrict the issuance and investment directions of wealth management products (WMPs) in China. I find that depositors substitute the WMPs with deposits, leading to an increase in bank loans. I provide evidence the substitution is imperfect and the aggregate credit supply of banks declines. Using a bank-firm linked database, I show that private-owned enterprises (POEs) with high shadow banking or WMP exposure experienced a decline in investments, the growth rate of total assets, liabilities, and revenue. The province-level data shows the aggregate impact of the NAMR is sizable. A counterfactual analysis shows that the investment growth rate would have been 1.6 percentage points higher, translating to a 1 percentage point higher GDP growth rate in 2018. Chapter 3 discusses the monetary policy, funding cost, and banks' risk-taking behavior in the United States. We notice that the volume of deposits and equity influences how a banks' lending responds to monetary policy. While the responsiveness for the bank lending channel has been well established, this is not the case for the risk-taking channel (RTC). We address this issue by showing in a value-at-risk (VaR) model that the banks with relatively more equity and noninterest-bearing deposits should respond less to monetary policy tightening in terms of risk-taking. This suggests that noninterest-bearing deposits act as "Pseudo Capital". We subsequently test these implications using a panel of US banks and find strong evidence in support of our model for various risk measures. We also find that there is a hierarchy in deposits where lower interest rate deposits reduce the monetary policy reaction while higher interest rate deposits increase the monetary policy reaction.
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