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This paper investigates the risk channel of monetary policy on the asset side of banks’ balance sheets. We use a factoraugmented vector autoregression (FAVAR) model to show that aggregate lending standards of U.S. banks, such as their collateral requirements for firms, are significantly loosened in response to an unexpected decrease in the Federal Funds rate. Based on this evidence, we reformulate the costly state verification (CSV) contract to allow for an active financial intermediary, embed it in a New Keynesian dynamic stochastic general equilibrium (DSGE) model, and show that – consistent with our empirical findings – an expansionary monetary policy shock implies a temporary increase in bank lending relative to borrower collateral. In the model, this is accompanied by a higher default rate of borrowers.
We use a structural VAR model to study the German natural gas market and investigate the impact of the 2022 Russian supply stop on the German economy. Combining conventional and narrative sign restrictions, we find that gas supply and demand shocks have large and persistent price effects, while output effects tend to be moderate. The 2022 natural gas price spike was driven by adverse supply
shocks and positive storage demand shocks, as Germany filled its inventories before the winter. Counterfactual simulations of an embargo on natural gas imports from Russia indicate similar positive price and negative output effects compared to what we observe in the data.
