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Monetary Policy and Defaults in the United States

Author

Listed:
  • Michele Pfiffer

    (DIW Berlin)

Abstract
This paper uses a structural VAR model to study the effect of monetary policy on the delinquency rate of business loans and consumer credit. The VAR is identified using, jointly, several external instruments that reflect different approaches from the literature. Delinquency rates, defined as the rate of loans with overdue repayments relative to total loans, are found to decrease in response to an exogenous monetary expansion. The results are consistent with a general equilibrium effect formalized in the paper using a standard model of optimal defaults. According to both the theoretical model and the reported empirical evidence, the decrease in defaults is driven by the fact that monetary expansions increase aggregate demand and push up profits and income, thereby improving the repayment possibility of borrowers.

Suggested Citation

  • Michele Pfiffer, 2018. "Monetary Policy and Defaults in the United States," International Journal of Central Banking, International Journal of Central Banking, vol. 14(4), pages 327-358, September.
    • Handle: RePEc:ijc:ijcjou:y:2018:q:3:a:8
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    Citations

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    Cited by:

    1. Mutarindwa, Samuel & Schäfer, Dorothea & Stephan, Andreas, 2020. "Central banks' supervisory guidance on corporate governance and bank stability: Evidence from African countries," Emerging Markets Review, Elsevier, vol. 43(C).

    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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