Finance Seminar（2018-22）

Topic: Inflows and Spillovers: Tracing the Impact of Bond Market Liberalization

Speaker: Cynthia Mei Balloch, Columbia Business School

Time: Wednesday, 17 October, 10:00-11:30

Location: Room 217, Guanghua Building 2

Abstract:

As bond markets grow, this affects not only the financing decisions of firms, but also the lending behavior of banks, and the resulting equilibrium allocation of credit and capital. This paper makes three contributions to understand the impact of bond market liberalization. First, using evidence from reforms in Japan that gave borrowers selective access to bond markets during the 1980s, it shows that firms that obtained access to the bond market used bond issuance to pay back bank debt. More importantly, this led banks to increase lending to small and medium enterprises and real estate firms. Second, it proposes a model of financial frictions that is consistent with the empirical findings, and uses the model to derive general conditions under which bond liberalization has this effect on banks. The model predicts that bond liberalization can significantly worsen the quality of the pool of bank borrowers, and so lower bank profitability. These results suggest that Japan’s bond market liberalization contributed to both the real estate bubble in the 1980s and bank problems in the 1990s. Third, the model implies that bond markets amplify the effects of shocks to the risk-free rate and firm borrowing, in addition to attenuating the effects of financial shocks.

Introduction:

Cynthia Mei Balloch is a Postdoctoral Research Scholar at Columbia Business School, and will join the Department of Finance of the London School of Economics as an Assistant Professor in September 2019. Her research focuses on the role of financial institutions in the macroeconomy, with a particular focus on macroeconomic policy, market-based alternatives to traditional banks, and sovereign and corporate lending markets. Cynthia received her Ph.D. in Economics from Columbia University, and was awarded a dissertation fellowship by the Macro Financial Modeling Project of the Becker Friedman Institute at the University of Chicago. Previously she worked at JPMorgan and the International Finance Corporation, World Bank Group. She earned her B.Sc., cum laude, from Harvard College, and a Masters in Public Administration in International Development from Harvard Kennedy School.

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