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on Banking |
| By: | Zoltan Pozsar; Tobias Adrian; Adam Ashcraft; Hayley Boesky |
| Abstract: | The rapid growth of the market-based financial system since the mid-1980s changed the nature of financial intermediation in the United States profoundly. Within the market-based financial system, "shadow banks" are particularly important institutions. Shadow banks are financial intermediaries that conduct maturity, credit, and liquidity transformation without access to central bank liquidity or public sector credit guarantees. Examples of shadow banks include finance companies, asset-backed commercial paper (ABCP) conduits, limited-purpose finance companies, structured investment vehicles, credit hedge funds, money market mutual funds, securities lenders, and government-sponsored enterprises. ; Shadow banks are interconnected along a vertically integrated, long intermediation chain, which intermediates credit through a wide range of securitization and secured funding techniques such as ABCP, asset-backed securities, collateralized debt obligations, and repo. This intermediation chain binds shadow banks into a network, which is the shadow banking system. The shadow banking system rivals the traditional banking system in the intermediation of credit to households and businesses. Over the past decade, the shadow banking system provided sources of inexpensive funding for credit by converting opaque, risky, long-term assets into money-like and seemingly riskless short-term liabilities. Maturity and credit transformation in the shadow banking system thus contributed significantly to asset bubbles in residential and commercial real estate markets prior to the financial crisis. ; We document that the shadow banking system became severely strained during the financial crisis because, like traditional banks, shadow banks conduct credit, maturity, and liquidity transformation, but unlike traditional financial intermediaries, they lack access to public sources of liquidity, such as the Federal Reserve's discount window, or public sources of insurance, such as federal deposit insurance. The liquidity facilities of the Federal Reserve and other government agencies' guarantee schemes were a direct response to the liquidity and capital shortfalls of shadow banks and, effectively, provided either a backstop to credit intermediation by the shadow banking system or to traditional banks for the exposure to shadow banks. Our paper documents the institutional features of shadow banks, discusses their economic roles, and analyzes their relation to the traditional banking system. |
| Keywords: | Intermediation (Finance) ; Credit ; Financial institutions ; Bank liquidity |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:458&r=ban |
| By: | Adam Gersl (Czech National Bank; Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Petr Jakubík (European Central Bank; Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic) |
| Abstract: | This paper examines procyclicality of the financial system. The introduction describes the natural and regulatory sources of procyclicality, focusing on the potential procyclical effect of the current Basel II regulatory framework for banks. It also mentions the regulatory tools for mitigating procyclical behaviour by financial institutions currently being discussed in international forums. Under certain conditions, procyclical behaviour of the banking sector can lead to an adverse feedback loop whereby banks, in response to an economic downswing, engage in deleveraging and reduce their lending to the economy in order to maintain the required capital adequacy ratio. This then further negatively affects economic output and impacts back on banks in the form of, for example, increased loan losses. In the main empirical section of the paper, this effect was simulated on the example of the Czech banking sector. The simulation results suggest that under certain assumptions the feedback loop may play an important role. |
| Keywords: | procyclicality; feedback loop; bank regulation; deleveragin |
| JEL: | G21 E44 E47 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2010_14&r=ban |
| By: | Patricia Tecles; Benjamin M. Tabak |
| Abstract: | This paper analyzes the efficiency of the Brazilian banking sector over the post-privatization period of 2000-2007. We employ a Bayesian stochastic frontier approach, which provides exact efficiency estimates and confidence intervals and thus, allows an accurate comparison across institutions and bank groups. The results suggest that large banks are the most cost and profit efficient, supporting the concentration process observed in recent years. Foreign banks have achieved a good performance through either the establishment of new affiliates and the acquisition of local banks. The remaining public banks have had improvements in cost efficiency, but are relatively profit inefficient. Finally, we observe a positive impact of capitalization on efficiency. |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:210&r=ban |
| By: | Nikolov, Pavel |
| Abstract: | This paper examines the relationship between adverse shocks to the banking system and their effect on the general economy in Europe. This topic was brought to the spotlight during the 2007-2009 financial and economic crisis, when the relatively healthy, at that time, European economy was severely hit by the spread of the US sub-prime mortgage problems. This interbanking contagion may have been one of the main, if not the primary, reasons why the region entered into a recession during the period. If significant evidence can be found to support this theory, it will make the need for more regulations on the financial system and stricter capital requirements even more apparent. The research includes comprehensive literature survey on past and recent financial crises, procyclical banking practices and their impact on the economy. Then it goes on to developing a theoretical model of the transmission of negative economic shocks from the financial system to the rest of the economy. The theoretical model is empirically tested on a range of banking specific and macroeconomic variables. The results show that a loss of confidence in the financial system and banking losses are followed by a significant decrease in the new loans to non-financial companies and subsequent economic contraction. Moreover, countries with better capitalized banks experienced smaller declines during the crisis and in general Tier 1 capital is correlated positively with economic growth. |
| Keywords: | economic shocks; financial crisis; banking system stability; procyclical effects |
| JEL: | E0 E32 E5 |
| Date: | 2010–06–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:23945&r=ban |
| By: | Lamont K. Black; Diana Hancock; Wayne Passmore |
| Abstract: | The bank lending channel of monetary policy suggests that banks play a special role in the transmission of monetary policy. We look for this special role by examining the business strategies of banks as it relates to mortgage funding and mortgage lending. "Traditional banks" have a large supply of excess core deposits and specialize in information-intensive lending to borrowers (which is proxied here using mortgage lending in subprime communities), whereas "market-based banks" are funded with managed liabilities and mainly lend to relatively easy-to-evaluate borrowers. We predict that only "transition banks" operating between these business strategies are likely to increase their loan rate spreads substantially in response to monetary tightening. To fund ongoing mortgage originations, these banks must substitute from core deposits to managed liabilities, which have a large external finance premium due to these banks' information-intensive lending. Consistent with this prediction, we find evidence of a bank lending channel only among transition banks - they significantly reduce mortgage lending in response to monetary contractions. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2010-39&r=ban |
| By: | Adam Gersl (Czech National Bank; Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Jakub Seidler (Czech National Bank; Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic) |
| Abstract: | This paper focuses on how to calibrate models used to stress test the most important risks in the banking system. Based on the results of a verification of the Czech National Bank’s stress testing methodology, the paper argues that stress tests should be calibrated conservatively and slightly overestimate the risks. However, to ensure that the stress test framework is conservative enough over time, a verification, i.e. comparison of the actual values of key banking sector variables – in particular the capital adequacy ratio – with predictions generated by the stress-testing models should become a standard part of the stress-testing framework. |
| Keywords: | stress testing; credit risk; bank capital |
| JEL: | E44 E47 G21 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2010_12&r=ban |
| By: | Jean Tirole (Toulouse School of Economics) |
| Abstract: | The recent crisis was characterized by massive illiquidity. This paper reviews what we know and don't know about illiquidity and all its friends: market freezes, fire sales, contagion, and ultimately insolvencies and bailouts. It first explains why liquidity cannot easily be apprehended through a single statistics, and asks whether liquidity should be regulated given that a capital adequacy requirement is already in place. The paper then analyzes market breakdowns due to either adverse selection or shortages of financial muscle, and explains why such breakdowns are endogenous to balance sheet choices and to information acquisition. It then looks at what economics can contribute to the debate on systemic risk and its containment. Finally, the paper takes a macroeconomic perspective, discusses shortages of aggregate liquidity and analyses how market value accounting and capital adequacy should react to asset prices. It concludes with a topical form of liquidity provision, monetary bailouts and recapitalizations, and analyses optimal combinations thereof; it stresses the need for macro-prudential policies. |
| Keywords: | Liquidity, Contagion, Bailouts, Regulation |
| JEL: | E44 E52 G28 |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2010.78&r=ban |
| By: | Wilko Bolt; Leo de Haan; Marco Hoeberichts; Maarten van Oordt; Job Swank |
| Abstract: | This paper estimates the relation between bank profitability and economic downturns using a theoretical model that takes into account the bank’s lending history as well as amortization and losses on outstanding loans. We focus on total bank profits and its components: net interest income, other income, and net provisioning plus other costs. Using both aggregate and individual bank panel datasets, our results confirm that pro-cyclicality of bank profits is stronger for deep recessions than during mild ones. Loan-losses are found to be the main driver of this nonlinearity. We find evidence that each percent contraction of real GDP during severe recessions leads to a 0.24 percent decrease in return on bank assets. |
| Keywords: | Bank profitability; Business cycle |
| JEL: | E32 G21 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:251&r=ban |
| By: | Anna Kovner |
| Abstract: | The financial crisis provides a natural experiment for testing theoretical predictions of the equity underwriter's role following an initial public offering. Clients of Bear Stearns, Lehman Brothers, Merrill Lynch, and Wachovia saw their stock prices fall almost 5 percent, on average, on the day it appeared that their equity underwriter might collapse. Representing a loss in equity value of more than $3 billion, the decline was more than 1 percent lower than the conditional return predicted by a market model. The price impact was worse for companies with more opaque operations and fewer monitors, suggesting that underwriters play an important role in monitoring newly public companies. There is no evidence that the abnormal price decrease was related to the role of the underwriter as market maker or lender. |
| Keywords: | Bank underwriting ; Financial crises ; Going public (Securities) ; Investment banking |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:459&r=ban |
| By: | Leonard I. Nakamura |
| Abstract: | This paper sets forth a discussion framework for the information requirements of systemic financial regulation. It specifically proposes a large macro-micro database for the U.S. based on an extended version of the Flow of Funds. The author argues that such a database would have been of material value to U.S. regulators in ameliorating the recent financial crisis and will be of aid in understanding the potential vulnerabilities of an innovative financial system in the future. The author also argues that the data should -- under strict confidentiality conditions -- be made available to academic researchers investigating the detection and measurement of systemic risk. |
| Keywords: | Flow of funds ; Financial crises ; Financial institutions - Law and legislation |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:10-22&r=ban |
| By: | Zuzana Iršová (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic) |
| Abstract: | This article provides an empirical insight on the heterogeneity in the estimates of banking efficiency produced by the stochastic frontier approach. Using data from five countries of Central and Eastern Europe, we study the sensitivity of the efficiency score and the efficiency ranking to a change in the design of the frontier. We found that the average scores are significantly smaller when the transcendental logarithmic functional form is used in the profit efficiency measurement and when the scaling effect is neglected in the cost efficiency measurement. The implied bank ranking is robust to changes in the stochastic frontier definition for cost efficiency, but not for profit efficiency. |
| Keywords: | Banking, Efficiency, Stochastic Frontier Approach, Transitional countries |
| JEL: | C13 G21 L25 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2010_13&r=ban |
| By: | Christine Cumming; Robert A. Eisenbeis |
| Abstract: | This paper explores the advantages of a new financial charter for large, complex, internationally active financial institutions that would address the corporate governance challenges of such organizations, including incentive problems in risk decisions and the complicated corporate and regulatory structures that impede cross-border resolutions. The charter envisions a single entity with broad powers in which the extent and timing of compensation are tied to financial results, senior managers and risk takers form a new risk-bearing stakeholder class, and a home-country-based resolution regime operates for the benefit of all creditors. The proposal is offered 1) to highlight the point that even in the face of a more efficient and effective resolution process, incentives for excessive risk taking will continue unless the costs of risk decisions are internalized by institutions, 2) to suggest another avenue for moving toward a streamlined organizational structure and single global resolution process, and 3) to complement other proposals aimed at preserving a large role for market discipline and firm incentives in a post-reform financial system. |
| Keywords: | International business enterprises ; Corporate governance ; Executives - Salaries ; Financial risk management ; Reward (Psychology) ; Bank charters |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:457&r=ban |
| By: | Patrick Bolton; Hamid Mehran; Joel Shapiro |
| Abstract: | This paper studies the connection between risk taking and executive compensation in financial institutions. A theoretical model of shareholders, debtholders, depositors, and an executive suggests that 1) in principle, excessive risk taking (in the form of risk shifting) may be addressed by basing compensation on both stock price and the price of debt (proxied by the credit default swap spread), but 2) shareholders may be unable to commit to designing compensation contracts in this way and indeed may not want to because of distortions introduced by either deposit insurance or naive debtholders. The paper then provides an empirical analysis that suggests that debt-like compensation for executives is believed by the market to reduce risk for financial institutions. |
| Keywords: | Executives - Salaries ; Financial risk management ; Stock - Prices |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:456&r=ban |
| By: | Abdul Karim, Zulkefly |
| Abstract: | Since the establishment of Grameen Bank in 1976 by Professor Muhammad Yunus , many economists have studied extensively, either theoretically or empirically, the success of the Grameen Bank in eradicating the poverty problem in Bangladesh. Therefore, this paper aims to apply the mechanism design theory in microfinance by examining the role of joint liability and cross-reporting mechanism in the loan contract which designing by microfinance lender. In doing so, this study simplified the joint liability mechanism proposed by Ghatak (1999, 2000) and cross-reporting mechanism by Rai and Sjostrom (2004). Based on the joint-liability mechanism, it is clearly stated that the microfinance lender can minimize or avoid the adverse selection problem in the credit market through peer selection and peer screening. In the meantime, the joint liability mechanism is better than individual lending in terms of increasing the social welfare among the poor borrower, charging lower interest rates and generating high repayment rates. In contrast, Rai and Sjostrom (2004) argue that joint liability alone is not enough to efficiently induce borrowers to help each other. Indeed, the cross-reporting mechanism is also important for lenders in order to minimize the problem of asymmetric information in the credit market. The cross-reporting mechanism is also efficient because it can influence the borrower to be truthful-telling about the state of the project and subsequently can minimize the deadweight loss (punishment) among the borrowers. In comparison, without cross-reporting, the lending mechanism is inefficient because the borrower will be imposed harsh punishment from the bank and the bank can undertake auditing or verify the state of the project and punish accordingly. |
| Keywords: | Microfinance; mechanism design; joint liability; cross-reporting |
| JEL: | B21 N20 C70 |
| Date: | 2009–07–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:23934&r=ban |
| By: | Efraim Benmelech; Nittai K. Bergman |
| Abstract: | This paper studies the limitations of monetary policy transmission within a credit channel frame- work. We show that, under certain circumstances, the credit channel transmission mechanism fails in that liquidity injections by the central bank into the banking sector are hoarded and not lent out. We use the term ‘credit traps’ to describe such situations and show how they can arise due to the interplay between financing frictions, liquidity, and collateral values. Our analysis offers a characterization of the problems created by credit traps as well as potential solutions and policy implications. Among these, the analysis shows how quantitative easing and fiscal policy acting in conjunction with monetary policy may be useful in increasing bank lending. Further, the model shows how small contractions in monetary policy or in loan supply can lead to collapses in lending, aggregate investment, and collateral prices. |
| JEL: | E44 E51 E58 G32 G33 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16200&r=ban |
| By: | Carlos Garcia (ILADES-Georgetown University, Universidad Alberto Hurtado); Virginia Simoncelli (ILADES-Georgetown University, Universidad Alberto Hurtado) |
| Abstract: | This work develops an empirical study of the credit channel in Chile. We found that the interest rate has a positive effect in the long run credit supply. Nevertheless, the disequilibrium in the short run credit supply has a significant negative effect on economic activity. This is most marked when the central bank is carried out a contractive monetary policy. Thus, all this evidence supports the fact that the central bank should implement a monetary policy beyond the control of the interest rate i.e. non conventional monetary policies to affect directly the liquidity restriction on the banking system to avoid a collapse of the economy in crisis times. |
| Keywords: | Credit Channel; Cointegration; Vector Error Correction Model (VECM). |
| JEL: | E44 E58 G21 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:ila:ilades:inv230&r=ban |
| By: | Michael B. Gordy; James Marrone |
| Abstract: | The impact of undiversified idiosyncratic risk on value-at-risk and expected shortfall can be approximated analytically via a methodology known as granularity adjustment (GA). In principle, the GA methodology can be applied to any risk-factor model of portfolio risk. Thus far, however, analytical results have been derived only for simple models of actuarial loss, i.e., credit loss due to default. We demonstrate that the GA is entirely tractable for single-factor versions of a large class of models that includes all the commonly used mark-to-market approaches. Our approach covers both finite ratings-based models and models with a continuum of obligor states. We apply our methodology to CreditMetrics and KMV Portfolio Manager, as these are benchmark models for the finite and continuous classes, respectively. Comparative statics of the GA with respect to model parameters in CreditMetrics reveal striking and counterintuitive patterns. We explain these relationships with a stylized model of portfolio risk. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2010-37&r=ban |
| By: | Weber, Enzo |
| Abstract: | This paper proposes a new approach to modelling financial transmission effects. In simultaneous systems of stock returns, fundamental shocks are identified through heteroscedasticity. The size of contemporaneous spillovers is determined in the fashion of smooth transition regression by the innovations' variances and (negative) signs, both representing typical crisis-related magnitudes. Thereby, contagion describes higher inward transmission in times of foreign crisis, whereas vulnerability is defined as increased susceptibility to foreign shocks in times of domestic turmoil. The application to major American stock indices confirms US dominance and demonstrates that volatility and sign of the equity returns significantly govern spillover size. |
| Keywords: | Contagion; Vulnerability; Identification; Smooth Transition Regression |
| JEL: | C32 G15 |
| Date: | 2009–07–10 |
| URL: | http://d.repec.org/n?u=RePEc:bay:rdwiwi:8573&r=ban |
| By: | Sagarika Mishra; Paresh Kumar Narayan |
| Abstract: | In this paper we examine a familiar topic in financial economics: the financial system-economic growth nexus. However, we depart from the extant literature in the sense that we empirically show that proposed models and variables are nonparametric, implying that the use of estimation techniques that assume a linear data generating process are questionable. We, thus, use a nonparametric panel data model to estimate the financial-economic growth relationship. We find that the banking sector shows a greater case of a statistically significant positive effect on GDP: for example, domestic credit and private credit both have a statistically significant positive effect on GDP in six of the seven panels. On the other hand, the evidence from the stock market suggests relatively less cases of a statistically significant positive effect on GDP: for only four panels in the case of market capitalization and two panels in the case of stocks traded. |
| Date: | 2010–07–16 |
| URL: | http://d.repec.org/n?u=RePEc:dkn:econwp:eco_2010_12&r=ban |
| By: | Stéphanie Marie Stolz (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Michael Wedow (Deutsche Bundesbank, Wilhelm-Epstein-Straße 14, 60431 Frankfurt am Main, Germany.) |
| Abstract: | The extensive public support measures for the financial sector have been key for the management of the current financial crisis. This paper gives a detailed description of the measures taken by central banks and governments and attempts a preliminary assessment of the effectiveness of such measures. The geographical focus of the paper is on the European Union (EU) and the United States. The crisis response in bothregions has been largely similar in terms of both tools and scope, and monetary policy actions and bank rescue measures have become increasingly intertwined. However, there are important differences, not only between the EU and the United States (e.g. with regard to the involvement of the central bank), but also within the EU (e.g. asset relief schemes). JEL Classification: E58, E61, G21, G38 |
| Keywords: | Bank rescue measures, public crisis management |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20100117&r=ban |
| By: | Daniel R. Sanches |
| Abstract: | The author studies the terms of credit in a competitive market in which sellers are willing to repeatedly finance the purchases of buyers by extending direct credit. Lenders (sellers) can commit to deliver any long-term credit contract that does not result in a payoff that is lower than that associated with autarky, while borrowers (buyers) cannot commit to any contract. A borrower's ability to repay a loan is privately observable. As a result, the terms of credit within an enduring relationship change over time, according to the history of trades. Two borrowers are treated differently by the lenders with whom they are paired because they have had distinct repayment histories. Although there is free entry of lenders in the credit market, each lender has to pay a cost to contact a borrower. A lower cost makes each borrower better off from the perspective of the contracting date, results in less variability in a borrower's expected discounted utility, and makes each lender uniformly worse off ex post. As this cost becomes small, borrowers get nearly the same terms of credit within their credit relationships with lenders, regardless of individual repayment histories. |
| Keywords: | Credit ; Loans |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:10-23&r=ban |
| By: | Neil Bhutta; Jane Dokko; Hui Shan |
| Abstract: | A central question in the literature on mortgage default is at what point underwater homeowners walk away from their homes even if they can afford to pay. We study borrowers from Arizona, California, Florida, and Nevada who purchased homes in 2006 using non-prime mortgages with 100 percent financing. Almost 80 percent of these borrowers default by the end of the observation period in September 2009. After distinguishing between defaults induced by job losses and other income shocks from those induced purely by negative equity, we find that the median borrower does not strategically default until equity falls to -62 percent of their home's value. This result suggests that borrowers face high default and transaction costs. Our estimates show that about 80 percent of defaults in our sample are the result of income shocks combined with negative equity. However, when equity falls below -50 percent, half of the defaults are driven purely by negative equity. Therefore, our findings lend support to both the "double-trigger" theory of default and the view that mortgage borrowers exercise the implicit put option when it is in their interest. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2010-35&r=ban |
| By: | Becchettiy, Leonardo (Department of Economics, University of Roma Tor Vergata); Ceniccola, Claudia (School of Management, University of Leicester); Ciciretti, Rocco (SEFeMEQ Department, University of Roma Tor Vergata) |
| Abstract: | We analyse with an event study approach the stock market reaction to one of the most important episodes in the global nancial crisis (Lehman Brothers ling for chapter 11). Our inquiry on abnormal returns of about 2,700 stocks around the event date documents that the shock induces investors to incorporate insights from (or re-adjust the pre-event expected impact of) corporate social responsibility (CSR) ratings in stock evaluation in a sort of "flight to CSR quality". The main CSR domains with signi cant effects on abnormal returns (corporate governance and product quality) are exactly those in which the defaulted company presented weaknesses according to its ex-ante CSR ratings. We also document that the reaction to the Lehman event extends beyond the event date and that investors rationally attribute more value to the direct information on strengths and weaknesses in each CSR rating domain than to aliation/non aliation to the CSR stock market index (FTSE KLD 400 Social Index). A more general result of our paper is that investors seem to discover, after the event, that CSR ratings provide original information which is not captured by traditional - nancial rating indicators. |
| Keywords: | Global Financial Crisis; Event Study; Corporate Governance; Product Quality; Ratings. |
| Date: | 2010–07–08 |
| URL: | http://d.repec.org/n?u=RePEc:hhb:sicgwp:2010_014&r=ban |
| By: | Bezemer, Dirk J; Gardiner, Geoffrey |
| Abstract: | This paper discusses recent UK monetary policies as instances of Galbraith’s ‘innocent frauds’, including the idea that money is a thing rather than a relationship, the fallacy of composition that what is possible for one bank is possible for all banks, and the belief that the money supply can be controlled by reserves management. The origins of the idea of QE, and its defense when it was applied in Britain, are analysed through this lens. An empirical analysis of the effect of reserves on lending is conducted; we do not find evidence that QE ‘worked’ either by a direct effect on money spending, or through an equity market effect. These findings are placed in a historical context in a comparison with earlier money control experiments in the UK. |
| Keywords: | quantitative easing; UK; innocent frauds; accounting |
| JEL: | E58 E52 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:23961&r=ban |