Charles O'Donnell
Information monopolies and monetary policy pass-through
joint with Fergal McCann

We empirically investigate the role of frictions in bank-borrower relationships on the transmission channel of monetary policy. We argue that banks’ incentives to pass on reductions in their funding costs depend on the ease at which their borrowers can solicit outside competition for their financing. We test this hypothesis by comparing the loan spreads of small bank-dependent firms with those of group-affiliated and large firms. Using a large sample of French investment-grade firms, we show that following the ECB’s monetary policy stimulus in the winter of 2008, the loan spreads (banks’ mark-up) of small bank-dependent firms increased by 42 basis points more than those of large and group-affiliated firms. This effect is robust, but at a lower magnitude, when using alternative measures of bank-dependency based on firms’ debt concentration with a main lender, and controlling for firm size and group-affiliation. Our evidence is in line with theories of heterogeneously informed lenders, which show that banks’ private information allows them to charge higher rates to their ‘locked-in’ borrowers.

Alberto Prati
Money illusion and money delusion: the impact of perceived inflation on subjective well-being

One of the key contributions of subjective well-being data is to test the validity of theoretical assumptions about the arguments of the utility function. In this respect, the role of income has been extensively studied, while the price level has received scant attention in microeconomic applications. In this paper we focus on individually perceived inflation and relax the assumptions that 1) losses and gains affect well-being symmetrically; 2) heterogeneous consumers face homogeneous inflation and 3) official inflation is what matters to consumers. We exploit newly available longitudinal data on life satisfaction in France and the opinion price index to estimate the effect of perceived price variations on satisfaction. Perceived inflation is confirmed to strongly predict well-being, even when controlling for relevant socio-demographic factors. We estimate its impact to be higher than an equivalent change in perceived income, challenging the hypothesis of money illusion. When we explore the reasons underlying this strong correlation, we show that delusive recall biases could explain part of it, inasmuch as unsatisfied consumers recall past prices to be lower than they used to be.