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Working Paper
Banks' search for yield in the low interest rate environment: a tale of regulatory adaptation
This paper examines whether the low interest rate environment that has prevailed since the Great Recession has compelled banks to reach for yield. It is important to recognize that banks can take on a variety of risks that offer higher yields today but incur different forms of future losses. Some losses, such as mark-to-market losses due to yield increases, can be avoided with accounting treatments whereas others, chiefly credit losses, cannot. A simple model shows that a bank?s incentive to take on risks for which potential future losses can be managed, such as interest rate risk, is ...
Working Paper
Nominal Maturity Mismatch and the Liquidity Cost of Inflation
We document a liquidity channel through which unexpected inflation generates substantial welfare losses. Households hold nominal liabilities with longer duration than their nominal assets. Due to this mismatch, losses from unexpected inflation concentrate over short horizons while gains accumulate over the long run, harming liquidity-constrained households who cannot borrow against future gains. The 2021–2022 inflation shock caused welfare losses valued at 1.1% of lifetime wealth for the lower half of the wealth distribution—equivalent in dollar terms to 47% of annual consumption. More ...