Presenter: Jean Tirole
Affiliation: Toulouse School of Economics
Paper: Industrial Monetary Policy (link available soon)
Date: December 14, 2021
Time: 13:00 GMT
Abstract: We consider “industrial monetary policies”: Liquidity support policies through which authorities shape the location and continuation of economic activity on their soil, with consequences for banks’ international specialization, place of incorporation, charter of affiliates and supervisory regime. We study banking behavior and competition in a multi-country environment. Banks’ country-specific investment decisions depend on their prospect of receiving liquidity support; the latter in turn hinges on the amount of “leakage” associated with liquidity assistance: A country’s liquidity provision may in part benefit the other country. This leakage hinges on the bank’s international specialization, the size of shocks and their asymmetry across countries, and the type of presence in the country (subsidiary vs. branch). We show how global banks become national in times of stress. Global banking competition is hampered by the banks’ desire to secure support; indeed, an increase in the number of banks makes it more likely that they stay national. We also look at the strategies that countries can deploy to attract banking activity on their soil, such as increasing their capability and eagerness to provide liquidity and committing to (specific forms of) liquidity support. For example, the model rationalizes central-bank swap lines as attempts by central banks to boost foreign demand for domestic assets by committing to bringing assistance to foreign financial institutions (via foreign central banks) in case of currency shortage. Finally, currency appreciation is a corollary of industrial monetary policies.
Coauthors: Emmanuel Farhi (Harvard University).