Research

This paper examines, theoretically and empirically, the impact of deposits on banks’ balance-sheet composition. I propose a novel mechanism where a bank’s wholesale borrowing constraint determines the effect of deposits on the bank. Unconstrained banks treat deposits and wholesale funding as substitutes. However, deposits relax the whole- sale borrowing constraint because deposits are effectively subordinate to wholesale debt. Thus for constrained banks, deposits and wholesale funding can be complements. For such banks, an increase in deposits enables them to borrow more aggressively from wholesale creditors and hence issue more loans. Empirically, using the cross-sectional variation in deposit fluctuations driven by monetary policy rate changes, I estimate the causal effect of deposits on banks’ balance-sheet composition. The empirical evidence supports the model predictions. In response to a 1% increase in deposit growth as a share of assets, unconstrained banks reduce wholesale funding growth by 0.2% of assets, while constrained banks increase their wholesale funding growth by 0.76% of assets. At the aggregate level of the banking sector, I find that deposit shocks account for a significant share of the variance of wholesale funding and loan growth. My findings also shed light on how monetary policy affects bank funding composition and vulnerability.

This paper tests the deposit channel of bank risk-taking in the U.S. syndicated loan market during the zero lower bound period. The channel, proposed by White et al. (2021), operates through banks’ market power over depositors. When policy rates approach zero, deposit markups are squeezed and bank profits fall. Combined with limited liability, the lost income incentivizes banks to take more risks, especially poorly capitalized banks. I measure each bank’s pre-period reliance on deposit-markup income and compare banks’ lending to the same firm in the same quarter, so that credit demand is held fixed. Markup-reliant banks lent more during the low-rate period. The additional lending was concentrated in thinly capitalized banks and went disproportionately to riskier firms. Importantly, banks charged no additional spread for the additional risk. The findings reveal a trade-off facing monetary policy at the effective lower bound: part of the credit stimulated by low rates is under-priced risky credit on the weakest balance sheets. Whether the markup squeeze becomes a financial-stability cost depends on bank capital.

This paper analyzes a global map of dollar exposures and examines the relationship between net dollar exposures, defined as the difference between dollar assets and liabilities, and covered interest parity (CIP) deviations. We find that the cross-sectional relationship is significantly negative in advanced economies but positive in emerging markets. CIP deviations represent the hedging cost that foreign holders of dollar assets or liabilities incur to manage exchange rate risk. To explain, we develop a model in which the CIP deviations are determined by the demand and the supply side of hedging. The negative correlation in advanced economies can be explained by the variations in hedging demand. Larger net dollar exposures increase the hedging demand, raising hedging costs (reflected as more negative CIP deviations) and producing a negative correlation. In contrast, the positive correlation in emerging markets is explained by the supply side of the hedging market. Limited hedging supply leads to wider CIP deviations (more negative), encouraging firms to borrow in U.S. dollars rather than local currencies, thereby reducing net dollar exposures and generating a positive correlation.

This paper investigates how shocks to the U.S. long-term risk-neutral interest rate influence emerging market local currency sovereign bonds and how domestic investor participation affects this relationship. Using the instrumental variable approach and data on investor types in local currency sovereign bond markets, we have two main findings. First, a rise in the U.S. long-term interest rate leads to an increase in both local currency sovereign yields and term premia in emerging markets. Second, domestic investor participation mitigates these spillover effects from the U.S. interest rate, primarily driven by domestic banks and non-bank institutional investors rather than central banks. These results underscore the importance of policies aimed at broadening and deepening local investor bases to strengthen local market resilience against unexpected external interest-rate shocks.

E-money development has important yet theoretically ambiguous consequences for monetary policy transmission, because nonbank deposit-taking e-money issuers (EMIs) (e.g., mobile network operators) can either complement or substitute banks. Case studies of e-money regulations point to complementarity of EMIs with banks, implying that the development of e-money could deepen financial intermediation and strengthen monetary policy transmission. The issue is further explored with panel data, on both monthly (covering 21 countries) and annual (covering 47 countries) frequencies, over 2001 to 2019. We use a two-way fixed effect estimator to estimate the causal effects of e-money development on monetary policy transmission. We find that e-money development has accompanied stronger monetary policy transmission (measured by the responsiveness of interest rates to the policy rate), growth in bank deposits and credit, and efficiency gains in financial intermediation (measured by the lending-to-deposit rate spread). Evidence is more pronounced in countries where e-money development takes off in a context of limited financial inclusion. This paper highlights the potential benefits of e-money development in strengthening monetary policy transmission, especially in countries with limited financial inclusion.

This paper studies the transmission of U.S. macroeconomic surprises on components of emerging market (EM) sovereign yields. By decomposing yields into expected short-term interest rates, term premia, and credit risk premia, and using high frequency data, I identify a distinct “fiscal channel”: Favorable surprises in initial jobless claims lead to a statistically significant decline in credit risk premia in emerging markets, particularly at longer maturities, which offset pressures from rising term premia. Conversely, EM yields remain relatively muted in response to U.S. core CPI surprises. These findings suggest: 1) the importance to examine credit risk in term structures of emerging markets to understand U.S. spillover effects, and 2) that investors’ risk perceptions respond differently to distinct types of U.S. economic news, even when the underlying surprises are nominally positive.

This paper provides a survey of foreign investment activity in China’s high-technology manufacturing industry. In addition, we closely examine the relationship between industrial policy, foreign investment and China’s high-technology export success using the development of an indigenous integrated circuits industry as a case study. This paper finds that China’s efforts to raise the productivity and innovative capacity of indigenous enterprises is consistent with rising domestic shares of high-technology assets and profits. Nevertheless, foreign-funded enterprises remain the source of most high-technology manufactured exports, primarily from wholly foreign-owned firms. In sum, despite indigenous development, Chinese high-technology manufacturing and exports remain deeply tied to foreign investment.