Hutchins Roundup: Zombie lending, quantitative easing, and more

Studies in this week’s Hutchins Roundup find that European Central Bank’s policies unintentionally facilitated zombie lending behavior by European banks, the Fed’s unconventional monetary policies had strong positive effects on asset prices and macroeconomic indicators, and more.

ECB policies indirectly supported zombie lending behavior of distressed banks

When the European Central Bank announced its willingness to buy an unlimited amount of government bonds of fiscally distressed European countries, banks with significant holdings of those bonds experienced substantial gains from the resulting increase in the bonds’ value. Viral Acharya of New York University, Tim Eisert of Erasmus University Rotterdam, Christian Eufinger of the IESE Business School and Christian Hirsch of the Goethe University at Frankfurt find that those banks then increased lending to their existing borrowers with low creditworthiness but not to high-quality or new borrowers. The authors interpret this as evidence of zombie lending behavior by banks—in other words, distressed banks continued to lend to their impaired borrowers to avoid realizing losses on outstanding loans. The authors document that creditworthy firms in industries with a high prevalence of zombie firms suffered significantly from this credit misallocation, which slowed down the economic recovery.

Empirical evidence suggests the Fed’s unconventional monetary policies had a significant positive effect on the economy

Saroj Bhattarai of the University of Texas at Austin and Christopher Neely of the St. Louis Fed review the literature on the Fed’s large-scale asset purchases, popularly known as quantitative easing. They conclude that most event studies— studies that capture the immediate effects of monetary policy announcements on financial markets—show that unconventional policies influenced international bond yields, exchange rates, and equity prices in the desired manner. Other studies strongly suggest that these policies significantly improved macroeconomic outcomes, raising U.S. GDP and inflation.

Immigration of workers of all skill levels raises GDP per capita of advanced economies

Florence Jaumotte, Ksenia Koloskova, and Sweta Saxena of the IMF find that immigration increases GDP per capita of advanced economies, mostly by raising labor productivity and, to a lesser extent, through an increase in the ratio of working-age to total population. In particular, a 1 percentage point increase in the share of migrants in the adult population raises GDP per capita by up to 2 percent in the long run. Both high- and low-skilled migrants contribute to this positive impact, in part by complementing the existing skill set of the population. At the same time, they find no significant negative effect on employment in host economies. Finally, the gains from immigration appear to be broadly shared; an increase in the migrant share raises per capita income of both the bottom 90 percent and the top 10 percent of earners in the host economies.

Chart of the week: Business investment in the buildings, equipment and know-how is down this year

Quote of the week: “The central question is whether banks will continue to be able to earn enough money to be resilient, and therefore stable,” says Deutsche Bundesbank executive board member Andreas Dombret.

“Broadly speaking, there are two positions. One side argues that banks and savings banks must radically alter their business models in order to cope with future, choppier waters: digitalization, a low-interest-rate environment, an unstable global economy and demographic change. New strategies and more efficient organization would increase earnings, which in turn would stabilize banks. The other side argues that this will not be enough to end the sector’s plight, and that further market consolidation is needed, which means a further reduction in volume in the banking and financial system. Only then can banks regain a level of competitiveness which enables sustainable profits. As is so often the case, the truth lies somewhere between the two extremes.”