Author
Haibin Zhu
Other affiliations: J.P. Morgan & Co., JPMorgan Chase
Bio: Haibin Zhu is an academic researcher from Bank for International Settlements. The author has contributed to research in topics: Credit risk & Financial crisis. The author has an hindex of 25, co-authored 43 publications receiving 4945 citations. Previous affiliations of Haibin Zhu include J.P. Morgan & Co. & JPMorgan Chase.
Papers
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TL;DR: In this paper, the authors argue that insufficient attention has so far been paid to the link between monetary policy and the perception and pricing of risk by economic agents - what might be termed the "risk-taking channel" of monetary policy.
Abstract: Few areas of monetary economics have been studied as extensively as the transmission mechanism. The literature on this topic has evolved substantially over the years, following the waxing and waning of conceptual frameworks and the changing characteristics of the financial system. In this paper, taking as a starting point a brief overview of the extant work on the interaction between capital regulation, the business cycle and the transmission mechanism, we offer some broader reflections on the characteristics of the transmission mechanism in light of the evolution of the financial system. We argue that insufficient attention has so far been paid to the link between monetary policy and the perception and pricing of risk by economic agents - what might be termed the "risk-taking channel" of monetary policy. We develop the concept, compare it with current views of the transmission mechanism, explore its mutually reinforcing link with "liquidity" and analyse its interaction with monetary policy reaction functions. We argue that changes in the financial system and prudential regulation may have increased the importance of the risk-taking channel and that prevailing macroeconomic paradigms and associated models are not well suited to capturing it, thereby also reducing their effectiveness as guides to monetary policy.
1,365 citations
TL;DR: In this article, the authors argue that insufficient attention has so far been paid to the link between monetary policy and the perception and pricing of risk by economic agents, what might be termed the "risk-taking channel" of monetary policy.
862 citations
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TL;DR: This paper found that house prices are more sensitive to short-term rates where floating rate mortgages are more widely used and more aggressive lending practices are associated with stronger feedback from prices to bank credit.
Abstract: House prices generally depend on inflation, the yield curve and bank credit, but national differences in the mortgage markets also matter. House prices are more sensitive to short-term rates where floating rate mortgages are more widely used and more aggressive lending practices are associated with stronger feedback from prices to bank credit.
474 citations
TL;DR: In this article, the authors compare the pricing of credit risk in the bond market and the fast-growing credit default swap (CDS) market and find that the CDS market appears to move ahead of the bond markets in price discovery.
Abstract: This paper compares the pricing of credit risk in the bond market and the fast-growing credit default swap (CDS) market. The empirical findings confirm the theoretical prediction that bond spreads and CDS spreads move together in the long run. Nevertheless, in the short run this relationship does not always hold. My study shows that the deviation is largely due to different responses of the two markets to changes in credit conditions. In particular, the CDS market appears to move ahead of the bond market in price discovery.
447 citations
TL;DR: In this article, the authors compare the pricing of credit risk in the bond market and the fast-growing credit default swap (CDS) market and show that the theoretical parity relationship between the two credit spreads holds as a long-run equilibrium condition.
Abstract: This paper compares the pricing of credit risk in the bond market and the fast-growing credit default swap (CDS) market. The cointegration test confirms that the theoretical parity relationship between the two credit spreads holds as a long-run equilibrium condition. Nevertheless, substantial deviation from the parity can arise in the short run. The panel data study and the VECM analysis both suggest that the deviation is largely due to the higher responsiveness of CDS premia to changes in credit conditions. Moreover, it exhibits a certain degree of persistence in that only 10% of price discrepancies can be removed within a business day.
385 citations
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TL;DR: In this paper, the authors argue that the global financial cycle is not aligned with countries' specific macroeconomic conditions and propose a convex combination of targeted capital control, macroprudential control, and stricter limit on leverage for all financial intermediaries.
Abstract: There is a global financial cycle in capital flows, asset prices and in credit growth. This cycle co‐moves with the VIX, a measure of uncertainty and risk aversion of the markets. Asset markets in countries with more credit inflows are more sensitive to the global cycle. The global financial cycle is not aligned with countries’ specific macroeconomic conditions. Symp toms can go from benign to large asset price bubbles and excess credit creation, which are among the best predictors of financial crises. A VAR analysis suggests that one of the determinants of the global financial cycle is monetary policy in the centre country , which affects leverage of global banks, capital flows and credit growth in the international financial system. Whenever capital is freely mobile, the global financial cycle constrains national monetary policies regardless of the exchange rate regime. For the past few decades, international macroeconomics has postulated the “trilemma”: with free capital mobility, inde pendent monetary policies are feasible if and only if exchange rates are floating. The global financial cycle transforms the trilemma into a “dilemma” or an “irreconcilable duo”: independent monetary policies are possible if and only if the capital account is managed. So should policy restrict capital mobility? Gains to international capital flows have proved elusive whether in calibrated models or in the data. Large gross flows disrupt asset markets and financial intermediation, so the costs may be very large. To deal with the global financial cycle and the “dilemma”, we have the following policy options: ( a) targeted capital controls; (b) acting on one of the sources of the financial cyc le itself, the monetary policy of the Fed and other main central banks; (c) acting on the transmission channel cyclically by limiting credit growth and leverage during the upturn of the cycle, using national macroprudential policies; (d) acting on the transmission channel structurally by imposing stricter limit s on leverage for all financial intermediaries. We argue for a convex combination of (a), (c) and (d).
1,428 citations
TL;DR: In this paper, the authors argue that insufficient attention has so far been paid to the link between monetary policy and the perception and pricing of risk by economic agents - what might be termed the "risk-taking channel" of monetary policy.
Abstract: Few areas of monetary economics have been studied as extensively as the transmission mechanism. The literature on this topic has evolved substantially over the years, following the waxing and waning of conceptual frameworks and the changing characteristics of the financial system. In this paper, taking as a starting point a brief overview of the extant work on the interaction between capital regulation, the business cycle and the transmission mechanism, we offer some broader reflections on the characteristics of the transmission mechanism in light of the evolution of the financial system. We argue that insufficient attention has so far been paid to the link between monetary policy and the perception and pricing of risk by economic agents - what might be termed the "risk-taking channel" of monetary policy. We develop the concept, compare it with current views of the transmission mechanism, explore its mutually reinforcing link with "liquidity" and analyse its interaction with monetary policy reaction functions. We argue that changes in the financial system and prudential regulation may have increased the importance of the risk-taking channel and that prevailing macroeconomic paradigms and associated models are not well suited to capturing it, thereby also reducing their effectiveness as guides to monetary policy.
1,365 citations
TL;DR: The authors review the main elements of the pre-crisis consensus, identify where we were wrong and what tenets of the framework still hold, and take a tentative first pass at the contours of a new macroeconomic policy framework.
Abstract: The great moderation lulled macro-economists and policymakers alike in the belief that we knew how to conduct macroeconomic policy. The crisis clearly forces to question that assessment. This paper reviews the main elements of the pre-crisis consensus, identify where we were wrong and what tenets of the pre-crisis framework still hold, and take a tentative first pass at the contours of a new macroeconomic policy framework.
1,212 citations
TL;DR: In this paper, the authors identify the effects of monetary policy on credit risk-taking with an exhaustive credit register of loan applications and contracts, and find that a lower overnight interest rate induces lowly capitalized banks to grant more loan applications to ex ante risky firms and to commit larger loan volumes with fewer collateral requirements to these firms, yet with a higher ex post likelihood of default.
Abstract: We identify the effects of monetary policy on credit risk-taking with an exhaustive credit register of loan applications and contracts. We separate the changes in the composition of the supply of credit from the concurrent changes in the volume of supply and quality, and the volume of demand. We employ a two-stage model that analyzes the granting of loan applications in the first stage and loan outcomes for the applications granted in the second stage, and that controls for both observed and unobserved, time-varying, firm and bank heterogeneity through time*firm and time*bank fixed effects. We find that a lower overnight interest rate induces lowly capitalized banks to grant more loan applications to ex ante risky firms and to commit larger loan volumes with fewer collateral requirements to these firms, yet with a higher ex post likelihood of default. A lower long-term interest rate and other relevant macroeconomic variables have no such effects.
965 citations
TL;DR: In this article, the authors argue that insufficient attention has so far been paid to the link between monetary policy and the perception and pricing of risk by economic agents, what might be termed the "risk-taking channel" of monetary policy.
862 citations