Monetary Policy and Defaults in the United States

Michele Pfiffer
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Michele Pfiffer: DIW Berlin

International Journal of Central Banking, 2018, vol. 14, issue 4, 327-358

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.

JEL-codes: E52 E58 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (1)

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