nep-ban New Economics Papers
on Banking
Issue of 2014‒12‒03
twenty-six papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Competition and bank risk: the effect of securitization and bank capital By Marqués-Ibáñez, David; Altunbas, Yener; van Leuvensteijn, Michiel
  2. Interbank lending and distress: Observables, unobservables, and network structure By Craig, Ben; Koetter, Michael; Krüger, Ulrich
  3. Bank Liquidity and Capital Regulation in General Equilibrium By Covas, Francisco; Driscoll, John C.
  4. Financial Crises and the Composition of Cross-Border Lending By Eugenio Cerutti; Galina Hale; Camelia Minoiu
  5. Banks, shadow banking, and fragility By Luck, Stephan; Schempp, Paul
  6. Macro-Prudential Policies to Mitigate Financial System Vulnerabilities By Stijn Claessens; Swati R. Ghosh; Roxana Mihet
  7. Systemic risk spillovers in the European banking and sovereign network By Betz, Frank; Hautsch, Nikolaus; Peltonen, Tuomas A.; Schienle, Melanie
  8. Wishful thinking or effective threat? tightening bank resolution regimes and bank risk-taking By Ignatowski, Magdalena; Korte, Josef
  9. Payment Instruments and Collateral in the Interbank Payment System By Hajime Tomura
  10. The Bank Capital Debate: Should Fragility Be Reduced? By Philipp König; David Pothier
  11. Capital Requirements in a Quantitative Model of Banking Industry Dynamics By Pablo D'Erasmo
  12. Identifying excessive credit growth and leverage By Alessi, Lucia; Detken, Carsten
  13. The effect of credit conditions on the Dutch housing market By Marc Francke; Alex van de Minne; Johan Verbruggen
  14. Efficiency Gains from Removing Trade Barriers: Evidence from Asian Banking Industries By Kai Du
  15. An Analysis of the Macroeconomic Conditions Required for SME Lending: The Case of Turkey By Hatice Jenkins; Monir Hussain
  16. Supervisory Roles in Loan Loss Provisioning in Countries Implementing IFRS By Ellen Gaston; Inwon Song
  17. Stability and Identification with Optimal Macroprudential Policy Rules By Jean-Bernard Chatelain; Kirsten Ralf
  18. The multivariate option iPoD framework: assessing systemic financial risk By Matros, Philipp; Vilsmeier, Johannes
  19. Stress Testing Engineering: the real risk measurement? By Dominique Guegan; Bertrand Hassani
  20. Effective resolution of banks: Problems and solutions By Franke, Günter; Krahnen, Jan Pieter; von Lüpke, Thomas
  21. Competition, performance and portfolio quality in microfinance markets By Kumar Kar, Ashim; Bali Swain, Ranjula
  22. Cost Efficient Joint Liability Lending By Ralph-C Bayer
  23. Moral Hazard and the Optimality of Debt By Benjamin Hébert
  24. The Balkan and Baltic experience of financial services privatization By Consigilio, John
  25. Reserve Requirement Policy over the Business Cycle By Pablo Federico; Carlos A. Vegh; Guillermo Vuletin
  26. The effect of G20 summits on global financial markets By Lo Duca, Marco; Stracca, Livio

  1. By: Marqués-Ibáñez, David; Altunbas, Yener; van Leuvensteijn, Michiel
    Abstract: We find that the increased use of securitisation activity in the banking sector prior to the 2007- 2009 crisis augmented the effect of competition on realised bank risk (i.e. more intense competition and greater use of securitisation is correlated with higher levels of realised risk) during the crisis. In contrast, higher levels of capital did not buffer the impact of competition on realised risk. It follows that cooperation between supervisory and competition authorities is warranted to account for the stability implications of financial innovation and capital regulation. JEL Classification: G21, D22
    Keywords: bank risk, competition, securitisation
    Date: 2014–05
  2. By: Craig, Ben; Koetter, Michael; Krüger, Ulrich
    Abstract: We provide empirical evidence on the relevance of systemic risk through the interbank lending channel. We adapt a spatial probit model that allows for correlated error terms in the cross-sectional variation that depend on the measured network connections of the banks. The latter are in our application observed interbank exposures among German bank holding companies during 2001 and 2006. The results clearly indicate significant spillover effects between banks' probabilities of distress and the financial profiles of connected peers. Better capitalized and managed connections reduce the banks own risk. Higher network centrality reduces the probability of distress, supporting the notion that more complete networks tend to be more stable. Finally, spatial autocorrelation is significant and negative. This last result may indicate too-many-to-fail mechanics such that bank distress is less likely if many peers already experienced distress.
    Keywords: Spatial Autoregression,interbank connections,bank risk
    JEL: E31 G21
    Date: 2014
  3. By: Covas, Francisco (Board of Governors of the Federal Reserve System (U.S.)); Driscoll, John C. (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: We develop a nonlinear dynamic general equilibrium model with a banking sector and use it to study the macroeconomic impact of introducing a minimum liquidity standard for banks on top of existing capital adequacy requirements. The model generates a distribution of bank sizes arising from differences in banks' ability to generate revenue from loans and from occasionally binding capital and liquidity constraints. Under our baseline calibration, imposing a liquidity requirement would lead to a steady-state decrease of about 3 percent in the amount of loans made, an increase in banks' holdings of securities of at least 6 percent, a fall in the interest rate on securities of a few basis points, and a decline in output of about 0.3 percent. Our results are sensitive to the supply of safe assets: the larger the supply of such securities, the smaller the macroeconomic impact of introducing a minimum liquidity standard for banks, all else being equal. Finally, we show that relaxing the liquidity requirement under a situation of financial stress dampens the response of output to aggregate shocks.
    Keywords: Bank regulation; liquidity requirements; capital requirements; incomplete markets; idiosyncratic risk; macroprudential policy
    JEL: D52 E13 G21 G28
    Date: 2014–09–12
  4. By: Eugenio Cerutti; Galina Hale; Camelia Minoiu
    Abstract: We examine the composition and drivers of cross-border bank lending between 1995 and 2012, distinguishing between syndicated and non-syndicated loans. We show that on-balance sheet syndicated loan exposures account for almost one third of total cross-border loan exposures during this period. Furthermore, syndicated loan exposures increased during the global financial crisis due to large drawdowns on credit lines extended before the crisis. Our empirical analysis of the drivers of cross-border loan exposures in a large bilateral dataset shows three main results. First, banks with lower levels of capital favor syndicated over other kinds of cross-border loans. Second, borrower country characteristics such as level of development, economic size, and capital account openness, are less important in driving syndicated than non-syndicated loan activity, suggesting a diversification motive for syndication. Third, information asymmetries between lender and borrower countries, which are important both in normal and crisis times, became more binding for both types of cross-border lending activity during the recent crisis.
    Keywords: Financial crises;Cross-border banking;Loans;Regression analysis;cross-border banking, syndicated loans, global financial crisis, BIS international banking statistics, Dealogic Loan Analytics
    Date: 2014–10–16
  5. By: Luck, Stephan; Schempp, Paul
    Abstract: This paper studies a banking model of maturity transformation in which regulatory arbitrage induces the coexistence of regulated commercial banks and unregulated shadow banks. We derive three main results: First, the relative size of the shadow banking sector determines the stability of the financial system. If the shadow banking sector is small relative to the capacity of secondary markets for shadow banks' assets, shadow banking is stable. In turn, if the sector grows too large, it becomes fragile: an additional equilibrium emerges that is characterized by a panic-based run in the shadow banking sector. Second, if regulated commercial banks themselves operate shadow banks, a larger shadow banking sector is sustainable. However, once the threat of a crisis reappears, a crisis in the shadow banking sector spreads to the commercial banking sector. Third, in the presence of regulatory arbitrage, a safety net for banks may fail to prevent a banking crisis. Moreover, the safety net may be tested and may eventually become costly for the regulator. JEL Classification: G21, G23, G28
    Keywords: bank runs, financial crisis, maturity transformation, regulatory arbitrage, shadow banking
    Date: 2014–08
  6. By: Stijn Claessens; Swati R. Ghosh; Roxana Mihet
    Abstract: Macro-prudential policies aimed at mitigating systemic financial risks have become part of the policy toolkit in many emerging markets and some advanced countries. Their effectiveness and efficacy are not well-known, however. Using panel data regressions, we analyze how changes in balance sheets of some 2,800 banks in 48 countries over 2000–2010 respond to specific macro-prudential policies. Controlling for endogeneity, we find that measures aimed at borrowers––caps on debt-to-income and loan-to-value ratios––and at financial institutions––limits on credit growth and foreign currency lending––are effective in reducing asset growth. Countercyclical buffers are little effective through the cycle, and some measures are even counterproductive during downswings, serving to aggravate declines, consistent with the ex-ante nature of macro-prudential tools.
    Keywords: Macroprudential policies and financial stability;Banking systems;Systemic risk;Risk management;Econometric models;Systemic risk, Macropudential policies, Effectiveness, Banking vulnerabilities
    Date: 2014–08–19
  7. By: Betz, Frank; Hautsch, Nikolaus; Peltonen, Tuomas A.; Schienle, Melanie
    Abstract: We propose a framework for estimating network-driven time-varying systemic risk contributions that is applicable to a high-dimensional financial system. Tail risk dependencies and contributions are estimated based on a penalized two-stage fixed-effects quantile approach, which explicitly links bank interconnectedness to systemic risk contributions. The framework is applied to a system of 51 large European banks and 17 sovereigns through the period 2006 to 2013, utilizing both equity and CDS prices. We provide new evidence on how banking sector fragmentation and sovereign-bank linkages evolved over the European sovereign debt crisis and how it is reflected in network statistics and systemic risk measures. Illustrating the usefulness of the framework as a monitoring tool, we provide indication for the fragmentation of the European financial system having peaked and that recovery has started.
    Keywords: systemic risk contribution,tail dependence,network topology,sovereignbank linkages,Value-at-Risk
    JEL: G01 G18 G32 G38 C21 C51 C63
    Date: 2014
  8. By: Ignatowski, Magdalena; Korte, Josef
    Abstract: We propose a framework for testing the effects of changes in bank resolution regimes on bank behaviour. By exploiting the differential relevance of recent changes in U.S. bank resolution (i.e., the introduction of the Orderly Liquidation Authority, OLA) for different types of banks, we are able to simulate a quasi-natural experiment using a difference-in-difference framework. We find that banks that are more affected by the introduction of the OLA (1) significantly decrease their overall risk-taking and (2) shift their business model and loan origination towards lower risk, indicating the general effectiveness of the regime change. This effect, however, does (3) not hold for the largest and most systemically important banks. Hence, the introduction of the OLA in the U.S. alone does not appear to have solved the too-big-to-fail problem and might need to be complemented with other measures to limit financial institutions' risk-taking. JEL Classification: G21, G28, G33
    Keywords: bank behavior, bank insolvency, bank resolution, FDIC, Orderly Liquidation Authority, risk-taking
    Date: 2014–03
  9. By: Hajime Tomura (Graduate School of Economics, University of Tokyo)
    Abstract: This paper analyzes the distinction between payment instruments and collateral in the interbank payment system. Given the interbank market is an over-the-counter market, decentralized settlement of bank transfers is inefficient if bank loans are illiquid. In this case, a collat- eralized interbank settlement contract improves efficiency through a liquidity-saving effect. The large value payment system operated by the central bank can be regarded as an implicit implementation of such a contract. This result explains why banks swap Treasury secu- rities for bank reserves despite that both are liquid assets. This paper also discusses if a private clearing house can implement the contract.
    Date: 2014–11
  10. By: Philipp König; David Pothier
    Abstract: The recent financial crisis has exposed the fragility of the banking sector to sudden withdrawals of wholesale funding, asset price declines and market dry-ups. Governments and central banks had to step in to prevent major banks from defaulting. These events led to renewed interest in the question whether the fragility of banks should be tolerated as a necessary, even desirable feature of an efficient process of financial intermediation, or whether banks should be subject to stricter regulation ex ante. This Round-Up summarizes the key arguments on both sides of the debate.
    Date: 2014
  11. By: Pablo D'Erasmo (University of Maryland / FRB Philadelphi)
    Abstract: We develop a model of banking industry dynamics to study the quantitative impact of capital requirements on bank risk taking, commercial bank failure, and market structure. We propose a market structure where big, dominant banks interact with small, competitive fringe banks. The paper extends our previous work by letting banks accumulate securities like treasury bills and to undertake short-term borrowing when there are cash flow shortfalls. A nontrivial size distribution of banks arises out of endogenous entry and exit, as well as banks' buffer stocks of securities. We find that a 50% rise in capital requirements leads to a 45% reduction in exit rates of small banks and a more concentrated industry. Aggregate loan supply falls by 8.71% and interest rates rise by 50 basis points. The lower exit rate causes the tax/output rate necessary to fund deposit insurance to drop in half. Higher interest rates, on the other hand, result in a higher default frequency as well as a lower level of intermediated output. We also use the model to study the effect of lowering the rate different sized banks are charged when borrowing on their lending behavior studied by Kashyap and Stein (2001).
    Date: 2014
  12. By: Alessi, Lucia; Detken, Carsten
    Abstract: This paper aims at providing policymakers with a set of early warning indicators helpful in guiding decisions on when to activate macroprudential tools targeting excessive credit growth and leverage. To robustly select the key indicators we apply the “Random Forest” method, which bootstraps and aggregates a multitude of decision trees. On these identified key indicators we grow a binary classification tree which derives the associated optimal early warning thresholds. By using credit to GDP gaps, credit to GDP ratios and credit growth rates, as well as real estate variables in addition to a set of other conditioning variables, the model is designed to not only predict banking crises, but also to give an indication on which macro-prudential policy instrument would be best suited to address specific vulnerabilities. JEL Classification: C40, G01, E44, E61, G21
    Keywords: banking crises, decision trees, early warning systems, macroprudential policy, random forest
    Date: 2014–08
  13. By: Marc Francke; Alex van de Minne; Johan Verbruggen
    Abstract: It is widely perceived that the supply of mortgages, especially since the extensive liberalization of the mortgage market of the 1980s, has had implications for the housing market in the Netherlands. In this paper we introduce a new method to estimate a credit condition index (CCI). The CCI represents changes in the supply of credit over time, apart from changes in interest rates and income. It has been estimated by an unobserved component in an error-correction model in which the average amount of new provided mortgages per period is explained by the borrowing capacity and additional control variables. The model has been estimated on data representing first time buyers (FTB). For FTB we can assume that the housing and non-housing wealth is essentially zero. The CCI has subsequently been used as an explanatory variable in an error-correction model for house prices representing not only FTB, but all households. The models have been estimated on quarterly data from 1995 to 2012. The estimated CCI has a high correlation with the Bank Lending Survey, a quarterly survey in which banks are asked whether there is a tightening or relaxation of (mortgage) lending standards compared to the preceding period. The CCI has explanatory power in the error-correction model for house prices. In real terms house prices declined about 25% from 2009 to 2012. The estimation results show that nearly half of this decline can be attributed to a decline in the CCI.
    Keywords: lending standards; financial liberation; housing prices
    JEL: C32 E44 E51 G21
  14. By: Kai Du (School of Economics, University of Adelaide)
    Abstract: This paper employs two stage data envelopment analysis (DEA) to investigate the efficiency effects of removing trade barriers on banking performance for a sample of Asian developing economies over the period 1997-2006. First, the DEA is employed to estimate the efficiency scores of banks. After that, the estimated DEA scores are analysed by density analysis and regressed on indices of trade barriers (Dinh 2008) that represent how restrictive the national trade policies are in the selected banking industries. The empirical evidence shows that deregulation policies that reduce restrictions on foreign banks have enhanced bank efficiency, while the deregulation of domestic banks has not resulted in significant efficiency gains.
    Keywords: Data envelopment analysis, financial deregulation, banking services
    JEL: D21 D24 G21
    Date: 2014–06
  15. By: Hatice Jenkins (Department of Banking and Finance, Eastern Mediterranean University, North Cyprus); Monir Hussain (Department of Banking and Finance, Eastern Mediterranean University, North Cyprus)
    Abstract: Providing SMEs with access to external finance has been a major concern for many governments and international organizations for three decades. In recent years the experiences of emerging market countries suggest that a paradigm shift is taking place in SME finance. Particularly in fast-growing emerging market countries, banks are increasingly targeting SMEs as a new line of banking business. This research analyzes how the macroeconomic factors have contributed to the increased commercial bank lending to SMEs in Turkey, a fast-growing emerging market country. Based on an econometric analysis it is found that a high GDP growth rate and increasing competition in the Turkish banking sector have contributed to the growing banking sector credit to SMEs. The findings also reveal that curbing the high inflation rate and reducing government domestic borrowings have significantly helped to encourage bank lending to the SME segment. This research contributes to the literature by providing empirical evidence to much-discussed theoretical arguments on the characteristics of an enabling macroeconomic environment for SME finance.
    Keywords: SME lending, macroeconomics, banking sector, emerging markets, access to credit
    JEL: G21 G28 O12
    Date: 2014–06
  16. By: Ellen Gaston; Inwon Song
    Abstract: Countries implementing International Financial Reporting Standards (IFRS) for loan loss provisioning by banks have been guided by two different approaches: International Accounting Standards (IAS) 39 and Basel standards. This paper discusses the different accounting and regulatory approaches in loan loss provisioning, and the challenges supervisors face when there are different perspectives and lack of guidance from IFRS. It suggests actions that supervisors can take to help banks meet regulatory and capital requirements and, at the same time, comply with accounting principles.
    Keywords: Loans;Banks;Bank supervision;Accounting standards;Basel Core Principles;Supervisory role, loan loss provisioning, IFRS implementation
    Date: 2014–09–15
  17. By: Jean-Bernard Chatelain (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, UP1 - Université Paris 1, Panthéon-Sorbonne - Université Paris I - Panthéon-Sorbonne - PRES HESAM); Kirsten Ralf (Ecole Supérieure du Commerce Extérieur - ESCE - International business school)
    Abstract: This paper investigates the identification, the determinacy and the stability of ad hoc, "quasi-optimal" and optimal policy rules augmented with financial stability indicators (such as asset prices deviations from their fundamental values) and minimizing the volatility of the policy interest rates, when the central bank precommits to financial stability. Firstly, ad hoc and quasi-optimal rules parameters of financial stability indicators cannot be identified. For those rules, non zero policy rule parameters of financial stability indicators are observationally equivalent to rule parameters set to zero in another rule, so that they are unable to inform monetary policy. Secondly, under controllability conditions, optimal policy rules parameters of financial stability indicators can all be identified, along with a bounded solution stabilizing an unstable economy as in Woodford (2003), with determinacy of the initial conditions of non- predetermined variables.
    Keywords: Identification; Financial Stability; Optimal Policy under Commitment; Augmented Taylor rule; Monetary Policy.
    Date: 2014–04–12
  18. By: Matros, Philipp; Vilsmeier, Johannes
    Abstract: We derive multivariate risk-neutral asset distributions for major US financial institutions (FIs) using option implied marginal risk-neutral asset distributions (RNDs) and probabilities of default (PoDs). The multivariate densities are estimated by combining the entropy approach, dynamic copulas and rank correlations. Our density estimates yield information about the conditional distributions of the individual FIs, and we propose several financial distress measures based on default scenarios in the financial sector. Empirical results around the period of the US sub-prime crisis show that the proposed risk measures identify in a timely manner: i) the most distressed FIs in the system; ii) the systemically most important FIs; iii) the implicit bailout guarantees given to some FIs; and iv) a "too connected to fail" problem in the US financial sector throughout the year 2008.
    Keywords: Financial Distress,Conditional Probability of Default,Copulas,Option Prices,Entropy Principle
    JEL: C14 C32 G01 G21
    Date: 2014
  19. By: Dominique Guegan (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne); Bertrand Hassani (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne)
    Abstract: Stress testing is used to determine the stability or the resilience of a given financial institution by deliberately submitting. In this paper, we focus on what may lead a bank to fail and how its resilience can be measured. Two families of triggers are analysed: the first stands in the stands in the impact of external (and / or extreme) events, the second one stands on the impacts of the choice of inadequate models for predictions or risks measurement; more precisely on models becoming inadequate with time because of not being sufficiently flexible to adapt themselves to dynamical changes.
    Keywords: Stress test; risk; VaR
    Date: 2014–02
  20. By: Franke, Günter; Krahnen, Jan Pieter; von Lüpke, Thomas
    Abstract: This essay reviews a cornerstone of the European Banking Union project, the resolution of systemically important banks. The focus is on the inherent conflict between a possible intervention by resolution authorities, conditional on a crisis situation, and effective prevention prior to a crisis. Moreover, the paper discusses the rules for bail-in debt and conversion rules for different layers of debt. Finally, some organizational requirements to achieve effective resolution results will be analyzed.
    Keywords: Bank Recovery and Resolution Directive (BRRD),Single Resolution Mechanism (SRM),Bail-in
    Date: 2014
  21. By: Kumar Kar, Ashim (Helsinki Center of Economic Research (HECER)); Bali Swain, Ranjula (Department of Economics)
    Abstract: In recent years growing competition in the microfinance industry has been censured for multiple borrowing, default crises, high interest rates and coercive recovery of loans. Using the Boone indicator as a measure for competition, our paper investigates the impact of competition on microfinance institutions’ (MFIs) outreach, financial performance and quality of loan portfolio. We deal with the potential endogeneity issues by employing the instrumental variable approach using the generalized methods of moments (GMM) estimation technique. Analysing the Microfinance Information Exchange data our empirical results show that increased competition in microfinance sector leads to a larger average loans and a decrease in the financial self-sustainability. The data also supports the view that increased competition in the microfinance industry leads to a decline in the loan portfolio quality.
    Keywords: microfinance institutions; competition; outreach; financial performance; capitalization; panel data IV estimation
    JEL: G21 G32
    Date: 2014–10–31
  22. By: Ralph-C Bayer (School of Economics, University of Adelaide)
    Abstract: Traditional micro-lending schemes suffer from high transaction costs relative to the loan size, which renders many small loans uneconomical. This paper proposes an alternative lending protocol with lower transaction costs and shows that in theory repayment rates are not compromised. We then use laboratory experiments to confirm this finding. Finally we conclude that our lending protocol if implemented could improve social welfare by reducing transaction cost.
    Keywords: micro nance, group lending, group liability, joint liability.
    JEL: C70 C92 D71 D82 O12 O16
    Date: 2013–11
  23. By: Benjamin Hébert
    Abstract: Abstract. Why are debt securities so common? I show that debt securities minimize the welfare losses from the moral hazards of excessive risk-taking and lax effort. For any security design, the variance of the security payoff is a statistic that summarizes these welfare losses. Debt securities have the least variance, among all limited liability securities with the same expected value. The optimality of debt is exact in my benchmark model, and holds approximately in a wide range of models. I study both static and dynamic security design problems, and show that these two types of problems are equivalent. The models I develop are motivated by moral hazard in mortgage lending, where securitization may have induced lax screening of potential borrowers and lending to excessively risky borrowers. My results also apply to corporate finance and other principal-agent problems.
    Date: 2014–02
  24. By: Consigilio, John
    Abstract: The financial services sectors of Romania and Estonia moved towards privatization in sharply contrasting manners. For a long time Romania's enthusiasm for its 1998 promise to the IMF to privatize its leading banks was only a commitment on paper; few steps were made towards its fulfillment. By contrast, Estonia's experience of privatization was generally a positive one, based on norms and structures often comparable to those in advanced industrial economies.
    Keywords: privatization,financial,services,Romania,Estonia,EBRD,IMF
    JEL: G21 G28 N24 P34
    Date: 2014
  25. By: Pablo Federico; Carlos A. Vegh; Guillermo Vuletin
    Abstract: Based on a novel quarterly dataset for 52 countries for the period 1970-2011, we analyze the use and cyclical properties of reserve requirements (RR) as a macroeconomic stabilization tool and whether RR policy substitutes or complements monetary policy. We find that (i) around two thirds of developing countries have used RR policy as a macroeconomic stabilization tool compared to just one third of industrial countries (and no industrial country since 2004); (ii) most developing countries that rely on RR use them countercyclically; and (iii) in many developing countries, monetary policy is procyclical and hence RR policy has substituted monetary policy as a countercyclical tool. We interpret the latter finding as reflecting the need of many emerging markets to raise interest rates in bad times to defend the currency and not raise or lower the interest rate in good times to prevent further currency appreciation. Under these circumstances, RR policy provides a second instrument that substitutes for monetary policy. Evidence from expanded Taylor rules (i.e., Taylor rules that include a nominal exchange rate target) supports these mechanisms.
    JEL: E52 F41
    Date: 2014–10
  26. By: Lo Duca, Marco; Stracca, Livio
    Abstract: In the wake of the global financial crisis, the G20 has become the most important forum of global governance and cooperation, largely replacing the once powerful G7. In this paper we run an event study to test whether G20 meetings at ministerial and Leaders level have had an impact on global financial markets. We focus on the period from 2007 to 2013, looking at equity returns, bond yields and measures of market risk such as implied volatility, skewness and kurtosis. Our main finding is that G20 summits have not had a strong, consistent and durable effect on any of the markets that we consider, suggesting that the information and decision content of G20 summits is of limited relevance for market participants. JEL Classification: G14, G15, F53
    Keywords: event studies, financial crisis, G20, global financial markets, global governance, volatility
    Date: 2014–04

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