Revised version of Sveriges Riksbank Working Paper Series No. 319

“Monetary Normalizations and Consumer Credit: Evidence from Fed Liftoff and Online Lending” with Isaiah Hull (Sveriges Riksbank) and Xin Zhang (Sveriges Riksbank)
(This version: 05/2017; First version: 03/2016; Sveriges Riksbank Working Paper No. 319)

  • Abstract:

On December 16th of 2015, the Fed initiated “liftoff,” a critical step in the monetary normalization process. We use a unique panel dataset of 640,000 loan-hour observations to measure the impact of liftoff on interest rates, demand, and supply in the online primary market for uncollateralized consumer credit. We find that credit supply increased, reducing the spread by 16% and lowering the average interest rate by 16.9-22.6 basis points. Our findings are consistent with an investor-perceived reduction in default probabilities; and suggest that liftoff provided a strong, positive signal about the future solvency of borrowers.

  • Keywords: monetary normalization, monetary policy signaling, consumer loans, credit risk.

New paper on online lending and monetary policy; Sveriges Riksbank Working Paper Series No. 319

“Fed Liftoff and Subprime Loan Interest Rates: Evidence from the Peer-to-Peer Lending Market” with Isaiah Hull (Sveriges Riksbank) and Xin Zhang (Sveriges Riksbank) (First version: March 2016)

  • Abstract:

On December 16th of 2015, the Fed initiated “liftoff,” raising the federal funds rate range by 25 basis points and ending a 7-year regime of near-zero rates. We use a unique dataset of 640,000 loan-hour observations to measure the impact of liftoff on interest rates in the peer-to-peer lending segment of the subprime market. We find that the average interest rate dropped by 16.9-22.6 basis points. This holds for 14 and 28 day windows centered around liftoff, and is robust to the inclusion of time dummies and a broad set of loan-level controls. We also find that the spread between high and low credit rating borrowers decreased by 16% and demonstrate that this was not generated by a change in the composition of borrowers along observable dimensions. Furthermore, we find no evidence that either result was driven by a collapse in demand for funds. Our results are consistent with an investor-perceived reduction in default probabilities; and suggest that liftoff provided a strong, positive signal about the future solvency of subprime borrowers, reducing their borrowing cost, even as short term rates increased in other markets.

  • Keywords: peer-to-peer lending, subprime consumer loans, Fed liftoff, monetary policy signaling, default channel, household debt.