nep-ban New Economics Papers
on Banking
Issue of 2021‒11‒15
thirty papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Know Your Customer: Relationship Lending and Bank Trading By Haselmann, Rainer; Leuz, Christian; Schreiber, Sebastian
  2. The Limits of Model-Based Regulation By Behn, Markus; Haselmann, Rainer; Vig, Vikrant
  3. Mixing QE and Interest Rate Policies at the Effective Lower Bound: Micro Evidence from the Euro Area By Christian Bittner; Alexander Rodnyansky; Farzad Saidi; Yannick Timmer
  4. Does regulation only bite the less profitable? Evidence from the too-big-to-fail reforms By Goel, Tirupam; Lewrick, Ulf; Mathur, Aakriti
  5. THE MORE THE BETTER? INFORMATION SHARING AND CREDIT RISK By Irina Iakimenko; Maria Semenova; Eugeny Zimin
  6. How do bank lenders use borrowers’ financial statements? Evidence from a survey of Japanese banks By Takuma Kochiyama; Ryosuke Nakamura; Akinobu Shuto
  7. TLTROs and collateral availability in Italy By Paola Antilici; Annino Agnes; Gianluca Mosconi
  8. Regulatory arbitrage and global push factors By Uluc Aysun; Michael Tseng
  9. Оценка качества ссудного портфеля по данным на уровне займа // Assessing the quality of loan portfolio based on the loan level data By Конурбаева Наталья // Konurbayeva Natalya; Нурханова Оксана // Nurkhanova Oxana; Хакимжанов Сабит // Khakimzhanov Sabit
  10. Market finance as a spare tyre? Corporate investment and access to bank credit in Europe By Maurin, Laurent; Andersson, Malin; Rusinova, Desislava
  11. The simpler, the better: Measuring financial conditions for monetary policy and financial stability By Arrigoni, Simone; Bobasu, Alina; Venditti, Fabrizio
  12. Understanding corporate default using Random Forest: The role of accounting and market information By Alessandro Bitetto; Stefano Filomeni; Michele Modina
  13. Working Paper 358 - The Colonial Origins of Banking Crisis in Africa By Lisa D. Cook; Linguère Mously Mbaye; Janet Gerson; Anthony Simpasa
  14. Going Cashless: Evidence from Japan’s Point Reward Program By Toshitaka Sekine; Toshiaki Shoji; Tsutomu Watanabe
  15. Working Paper 355 - Public debt, Chinese loans and optimal exploration-extraction in Africa By Chuku Chuku; Lin Lang; King Yoong Lim
  16. Forecasting Inflation and Output Growth with Credit-Card-Augmented Divisia Monetary Aggregates By Barnett, William; Park, Sohee
  17. The Existential Trilemma of EMU in a Model of Fiscal Target Zone By Pompeo Della Posta; Roberto Tamborini
  18. Liquidity, Capital Pledgeability and Inflation Redistribution By Paola Boel; Julian Diaz; Daria Finocchiaro
  19. A Model for Central Bank Digital Currencies: Implications for Bank Funding and Monetary Policy By Schiller, Jonathan; Gross, Jonas
  20. The Internationalization of Domestic Banks and the Credit Channel of Monetary Policy By Morales, Paola; Osorio, Daniel; Lemus, Juan S.; Sarmiento Paipilla, Miguel
  21. Mark my words: the transmission of central bank communication to the general public via the print media By Munday, Tim; Brookes, James
  22. Do Required Minimum Distribution 401(k) Rules Matter, and for Whom? Insights from a Lifecylce Model By Horneff, Vanya; Maurer, Raimond; Mitchell, Olivia S.
  23. De la monétisation à l'annulation des dettes publiques, quels enjeux pour les banques centrales ? By Christophe Blot; Paul Hubert
  24. Evaluating the Effects of Forward Guidance and Large-scale Asset Purchases By Xu Zhang
  25. The ECB's Policy, the Recovery Fund and the Importance of Trust: The Case of Greece By Vasiliki Dimakopoulou; George Economides; Apostolis Philippopoulos
  26. A primer on green finance: From wishful thinking to marginal impact By Krahnen, Jan Pieter; Rocholl, Jörg; Thum, Marcel
  27. Assessing COVID impacts, sustainable finance, current and future implications for banks and monetary policy: “Breaking the tragedy of the horizon, climate change and financial stability" By Ojo, Marianne
  28. Optimal monetary policy in a two-country new Keynesian model with deep consumption habits By Okano, Mitsuhiro
  29. Does money growth tell us anything about inflation? By Leonardo Cadamuro; Francesco Papadia
  30. A post Keynesian perspective on the eco zone project: Liquidity premia and external financial fragility in the West African Economic and Monetary Union, Ghana and Nigeria By Lampe, Florian; Löscher, Anne

  1. By: Haselmann, Rainer; Leuz, Christian; Schreiber, Sebastian
    Abstract: In this study, we analyze the trading behavior of banks with lending relationships. We combine detailed German data on banks' proprietary trading and market making with lending information from the credit register and then examine how banks trade stocks of their borrowers around important corporate events. We find that banks trade more frequently and also profitably ahead of events when they are the main lender (or relationship bank) for the borrower. Specifically, we show that relationship banks are more likely to build up positive (negative) trading positions in the two weeks before positive (negative) news events, and also that they unwind these positions shortly after the event. This trading pattern is more pronounced for unscheduled earnings events, M&A transactions, and after borrower obtain new bank loans. Our results suggest that lending relationships endow banks with important information, highlighting the potential for conflicts of interest in banking, which has been a prominent concern in the regulatory debate.
    Date: 2021
  2. By: Behn, Markus; Haselmann, Rainer; Vig, Vikrant
    Abstract: Using loan-level data from Germany, we investigate how the introduction of model-based capital regulation affected banks' ability to absorb shocks. The objective of this regulation was to enhance financial stability by making capital requirements responsive to asset risk. Our evidence suggests that banks 'optimized' model-based regulation to lower their capital requirements. Banks systematically underreported risk, with under reporting being more pronounced for banks with higher gains from it. Moreover, large banks benefitted from the regulation at the expense of smaller banks. Overall, our results suggest that sophisticated rules may have undesired effects if strategic misbehavior is difficult to detect.
    Keywords: capital regulation,internal ratings,complexity of regulation,Basel regulation
    JEL: G01 G21 G28
    Date: 2021
  3. By: Christian Bittner; Alexander Rodnyansky; Farzad Saidi; Yannick Timmer
    Abstract: In the presence of negative monetary-policy rates and a zero lower bound on deposit rates, banks that are more exposed to central banks’ asset-purchase programs reduce their lending to the real economy by more than their counterparts. When banks face a lower bound on customer deposit rates, an asset swap between securities and reserves reduces banks’ net worth as the cost of holding reserves cannot be matched with a reduction in their cost of funding. Exploiting euro-area syndicated lending data and the German credit registry, we provide evidence that deposit-reliant banks with relatively higher funding costs and greater exposure to large-scale asset purchases reduce corporate lending relatively more, have lower stock returns, and rebalance their interbank lending from safe to risky countries.
    Keywords: negative interest rates, quantitative easing, unconventional monetary policy, bank lending channel
    JEL: E52 E58 G21
    Date: 2021
  4. By: Goel, Tirupam (Bank for International Settlements); Lewrick, Ulf (Bank for International Settlements); Mathur, Aakriti (Bank of England)
    Abstract: Profitability underpins the opportunity cost of shrinking assets and the ability to generate capital. It thus shapes banks’ responses to higher capital requirements. We present a stylised model to formalise this insight and test our theoretical predictions on a cornerstone of the too-big-to-fail reforms. Leveraging textual analysis to identify the treatment date, we show that less profitable banks reduced their systemic importance as intended by regulation. Those close to the regulatory thresholds that determine bank-specific capital surcharges – a source of exogenous variation in the regulatory treatment – shrunk by even more. In contrast, more profitable banks continued to expand.
    Keywords: Global systemically important bank (G-SIB); textual analysis; capital regulation; systemic risk; bank profitability; difference-in-differences (DD)
    JEL: G21 G28 L51
    Date: 2021–10–29
  5. By: Irina Iakimenko (National Research University Higher School of Economics); Maria Semenova (National Research University Higher School of Economics); Eugeny Zimin (National Research University Higher School of Economics)
    Abstract: Correctly estimating borrower credit risk is a task of particular and growing importance for banks all around the globe. Formal information sharing mechanisms are aimed to reduce information asymmetry in the credit markets and to enhance the precision of those estimates. In the literature, however, whether more, and more detailed, borrower information shared by credit bureaus and credit registries is always associated with higher quality bank credit portfolios and lower credit risk is not completely unambiguous. More credit information disclosed by information intermediaries tends to result in a weaker disciplinary effect of credit history, which means higher credit risk. The accuracy of assessing the creditworthiness of borrowers grows due to an increase in the predictive power of scoring models, which leads to a reduction in credit risk. In this paper, we make a first attempt to examine the nonlinearity of this effect. We study the relationship between the depth of credit information disclosed and the stability of the banking sector in terms of credit risk. Based on data on 80 countries for 2004–2015, we show that the relationship between disclosure and credit risk is non-linear: we observe the lowest levels of credit risk at the minimum and maximum levels of disclosure. We analyze the influence of national institutional quality and financial development on the nature of the relationship. We show that credit risk decreases with increasing amounts of disclosure by credit bureaus and credit registers in well-developed financial markets and in a high-quality institutional environment.
    Keywords: Credit risk, Credit bureau, Credit registry, Bank, Information sharing
    JEL: G21 G28
    Date: 2021
  6. By: Takuma Kochiyama (The Graduate School of Business Administration, Hitotsubashi University); Ryosuke Nakamura (The Faculty of Business Sciences, University of Tsukuba); Akinobu Shuto (The Graduate School of Economics, The University of Tokyo)
    Abstract: Previous studies suggest that Japanese suppliers of capital, such as main banks, have private sources of information, and thus, the quality of public accounting information may be less relevant to their decisions. Studies also indicate that the firm–bank relationship in Japan has weakened with time, potentially increasing the importance of public accounting information in the Japanese loan market. Given these contradictory results, we survey bank lenders in Japan—a bank-centered economy— and provide evidence on whether and how they use borrowers’ accounting information. Using responses from 99 Japanese banks, we examine bank lenders’ views on (1) the main bank system, (2) the use of accounting information, and (3) financial covenants. Whereas main bank lending has declined over time, nearly all respondents agreed that the main bank system is still prevalent in loan markets. Moreover, bank lenders tend to use accounting information for lending decisions and continuous monitoring purposes, prefer persistent accounting earnings tied to cash flows, and modify borrowers’ working capital conservatively. We also find that bank lenders mainly use financial covenants in syndicated loans as tripwires to obtain bargaining power in the event of borrower financial distress. The evidence complements archival studies and provides additional insights on the importance of accounting information in lenders’ practice.
    Date: 2021–11
  7. By: Paola Antilici (Bank of Italy); Annino Agnes (Bank of Italy); Gianluca Mosconi (Bank of Italy)
    Abstract: In response to the Covid-19 pandemic, the ECB has adopted a broad set of measures aimed at ensuring that banks maintain wide access to central bank liquidity. In an environment where refinancing operations are conducted under a full allotment regime, it is important to analyse whether collateral scarcity might have influenced participation in the TLTRO-III operations and the contribution made by collateral easing measures. The analysis shows that the collateral availability of the Italian banking system proved to be adequate and it allowed Italian banks to benefit from the favorable conditions introduced under the TLTRO-III programme. For almost all the banks, the absence of collateral easing measures would not have been a restricting factor on a full TLTRO-III take-up. Such interventions have allowed banks to increase the usage of non-marketable assets as collateral and have reduced their reliance on more liquid assets. Empirical evidence suggests that the monetary policy package, together with the fiscal measures adopted by the government, have helped to support bank lending to the real economy.
    Keywords: TLTRO, central bank collateral, collateral easing, central bank credit operations.
    JEL: E52 E58
    Date: 2021–11
  8. By: Uluc Aysun (University of Central Florida, Orlando, FL); Michael Tseng (University of Central Florida, Orlando, FL)
    Abstract: This paper identifies two theoretical mechanisms that relate the regulatory arbitrage behavior of internationally active banks (IABs) to global financial conditions. According to the first mechanism, regulation becomes more binding during adverse financial conditions. Under these conditions, IABs face higher compliance costs in more regulated markets. According to the second mechanism, higher regulation suppresses the degree of risk-taking and asset returns so that highly-regulated nations are more insulated from global financial risk. These results are reversed in less-regulated nations. We use a panel of bilateral BIS banking statistics and a unique empirical strategy to find that the first of the two theoretical mechanisms above is more prevalent. Specifically, IABs expand their claims more rapidly in less-regulated nations when global perception of financial risk is higher. The direction of arbitrage is reversed under loose conditions. This evidence is corroborated by the inferences from a structural vector autoregressive model fitted to data from individual countries.
    Keywords: push factors, global banks, BIS statistics, regulation, arbitrage.
    JEL: F44 G11 G15 G21
    Date: 2021–11
  9. By: Конурбаева Наталья // Konurbayeva Natalya (National Bank of Kazakhstan); Нурханова Оксана // Nurkhanova Oxana (National Bank of Kazakhstan); Хакимжанов Сабит // Khakimzhanov Sabit (National Bank of Kazakhstan)
    Abstract: В этой статье проводится анализ источника информации – Кредитный регистр, для оценки портфеля банков на уровне каждого займа (loan level data). В статье вводится понятие дефолта, основанного на косвенных показателях с использованием кредитного регистра. Разрабатываются показатели, которые можно использовать для оценки динамики состояния каждого займа с возможностью агрегирования на уровень заёмщика. Проводится аналитическая оценка, позволяющая выявить рефинансированные займы и «вечнозелёные» займы. Описаны и внедрены категории для распределения займов внутри портфеля с целью своевременного выявления ухудшения состояния займа, позволяющего применять меры раннего реагирования со стороны надзорного органа, а также оценивать кредитный риск на уровне банковской системы. Проведена проверка качества методики на основе имеющихся исторических сведений по передаче портфеля в Фонд проблемных кредитов и признания банком займов с просроченной задолженностью свыше 90 дней перед лишением лицензии, а также оценён объём ложноположительных значений, выявляемых по методике, но в последующем предоставленным в Кредитный регистр с нулевым основным долгом. Представленная методика является первой попыткой применения анализа на основе займа в Казахстане, которую можно развивать с использованием новых расширенных данных по займу и заёмщику, внедрённых в Кредитный регистр с июля 2019 года. Кроме того, следующим этапом после оценки качества портфеля планируется оценка вероятности дефолта заёмщика, а также проведение стресс тестирования. // This Paper analyzes the source of information – the Credit Registry – to assess the portfolio of banks at the level of each loan (loan level data). The Paper introduces the concept of default based on indirect indicators using the Credit Registry. Indicators that can be used to assess the dynamics in the status of each loan with the ability to aggregate at the borrower level are being designed. An analytical assessment is conducted to identify refinanced loans and “evergreen” loans. The categories for the distribution of loans within the portfolio are described and introduced in order to identify the deterioration of loan on a timely basis, allowing the application of early response measures by the supervisor as well as the assessment of credit risk at the banking system’s level. The quality of the methodology was checked on the basis of available historical information about the transfer of the portfolio to the Problem Loans Fund and the recognition by the bank of loans past due more than 90 days before the license was revoked; in addition, the volume of false positives detected by the methodology but subsequently submitted to the Credit Registry with zero main debt was assessed. The presented methodology is the first attempt of applying a loan-based analysis in Kazakhstan that can be developed using the new extended loan and borrower data incorporated into the Credit Registry since July 2019. Besides, the next stage after assessing the quality of portfolio will be the assessment of probability of borrower’s default as well as the stress testing.
    Keywords: кредитный риск, кредитный анализ, вероятность дефолта, кредитный регистр, анализ на уровне займа, рефинансирование, «вечнозелёные» займы, сredit risk, loan review, probability of default, сredit Registry, loan level review, refinancing, "evergreen" loans
    JEL: C81 C83 G21
    Date: 2021
  10. By: Maurin, Laurent; Andersson, Malin; Rusinova, Desislava
    Abstract: We estimate a FAVAR with Bayesian techniques in order to investigate the impact of loan supply conditions on euro area corporate investment and its financing structure. We identify shocks to overall demand and loan supply with sign and impact restrictions. Although tightened financial conditions have adversely impacted corporate investment during and after the sovereign debt crisis, the resulting impediments in loan supply, illustrated by lower loan volumes and higher spreads, have been partly alleviated by strengthened corporate debt issuance. We show that (1) part of the protracted increase in debt to loan ratio since the crisis reflects bottlenecks in the provision of bank credit and (2) the tightened loan supply has been more adverse for small corporations with limited market access. Overall, our analysis of macro-financial developments suggests the need for policy actions to deepen the European corporate debt market and enhance market access for smaller corporates.
    Keywords: financing structure,small and medium size corporates,size spread,corporate debt issuance,FAVAR model
    JEL: E22 E66 G21
    Date: 2021
  11. By: Arrigoni, Simone; Bobasu, Alina; Venditti, Fabrizio
    Abstract: In this paper we assess the merits of financial condition indices constructed using simple averages versus a more sophisticated alternative that uses factor models with time varying parameters. Our analysis is based on data for 18 advanced and emerging economies at a monthly frequency covering about 70% of the world's GDP.We assess the performance of these indicators based on their ability to capture tail risk for economic activity and to predict banking and currency crises. We find that averaging across the indicators of interest, using judgmental but intuitive weights, produces financial condition indices that are not inferior to, and actually perform better than, those constructed with more sophisticated statistical methods. An indicator that gives more weight to measures of financial stress, which we term WA-FSI, emerges as the best indicator for anticipating banking crisis, and is therefore better suited for financial stability.
    Keywords: financial conditions,quantile regressions,banking crises,SVARs,spillovers
    JEL: E32 E44 C11 C55
    Date: 2021
  12. By: Alessandro Bitetto (University of Pavia); Stefano Filomeni (University of Essex); Michele Modina (University of Molise)
    Abstract: Recent evidence highlights the importance of hybrid credit scoring models to evaluate borrowers’ creditworthiness. However, the current hybrid models neglect to consider the role of public-peer market information in addition to accounting information on default prediction. This paper aims to fill this gap in the literature by providing novel evidence on the impact of market information in predicting corporate defaults for unlisted firms. We employ a sample of 10,136 Italian micro-, small-, and mid-sized enterprises (MSMEs) that borrow from 113 cooperative banks from 2012–2014 to examine whether market pricing of public firms adds additional information to accounting measures in predicting default of private firms. Specifically, we estimate the probability of default (PD) of MSMEs using equity price of size-and industry- matched public firms, and then we adopt advanced statistical techniques based on parametric algorithm (Multivariate Adaptive Regression Spline) and non-parametric machine learning model (Random Forest). Moreover, by using Shapley values, we assess the relevance of market information in predicting corporate credit risk. Firstly, we show the predictive power of Merton’s PD on default prediction for unlisted firms. Secondly, we show the increased predictive power of credit risk models that consider both the Merton’s PD and accounting information to assess corporate credit risk. We trust the results of this paper contribute to the current debate on safeguarding the continuity and the resilience of the banking sector. Indeed, banks’ hybrid credit scoring methodologies that also embed market information prove to be successful to assess credit risk of unlisted firms and could be useful for forward-looking financial risk management frameworks
    Keywords: Default Risk, Distance to Default, Machine Learning, Merton model, SME, PD, SHAP, Autoencoder, Random Forest, XAI
    JEL: C52 C53 D82 D83 G21 G22
    Date: 2021–10
  13. By: Lisa D. Cook (Michigan State University); Linguère Mously Mbaye (African Development Bank); Janet Gerson (University of Michigan); Anthony Simpasa (African Development Bank)
    Abstract: Could initial – colonial and early post-colonial – conditions explain episodes of systemic crisis in banking systems today? We exploit differences in ethnic concentration of initial ownership and management structure of Nigerian banks established during the colonial era to examine banking crisis and vulnerability of the financial system in contemporary Nigeria. Although banking institutions emerged from or were a reaction to British colonial banking structure, they pursued different practices with respect to ownership and management structure. To measure these initial conditions, we use historical data from the Nigerian banking system to construct an index of diversity in the initial ownership and management structure of each bank, where more diversity corresponds to a lower concentration of insiders, including family members, tribal affiliates, and political partners. We collected data from the “Blue Books”, British colonial banking records from 1887 to 1940, data on indigenous banks established during the colonial period from 1929 to 1960, and data on banks from 1960 to 2016. These data allow us to track the first Nigerian families, ethnic groups, and their associates who were part of the formation of the formal banking institutions in the country. We also collect individual and aggregate bank data from 2001 to 2016 collected from bank balance sheets, financial statements, annual reports, statistical bulletins, banking supervision reports, and other reports of the Central Bank of Nigeria and the Nigeria Deposit Insurance Corporation. Our estimates suggest that lower levels of diversity are associated with higher levels of risk for a bank. That is, lack of initial diversity in ownership and management of Nigerian banks may have played a role in the performance and fragility of the Nigerian banking system that lent itself to systemic crisis. Our findings are consistent with the broader recent literature that shows higher profit and stronger performance of more diverse firms relative to less diverse firms due to, for example, diversity-driven innovation and product development.
    Keywords: Banks, financial institutions, banking crisis, financial crisis, colonial economic history, African economic history, social networks, Africa JEL classification: G21, G32, N47, N27, O16
    Date: 2021–10–12
  14. By: Toshitaka Sekine (Hitotsubashi University); Toshiaki Shoji (Seikei University); Tsutomu Watanabe (University of Tokyo)
    Abstract: In October 2019, the Japanese government started a unique program that offered points (discounts) for cashless payments. Using credit card transaction data, we compare credit card usage at restaurants that participated in this program and those that did not. Our main findings are as follows. First, the number of card users was 9-12 percent higher in participating than in non-participating restaurants. Second, the positive impact of the program on the number of card users persisted even after the program ended in June 2020, indicating that the program had a lasting effect to promote cashless payments. Third, the impact of the program was significantly larger at restaurants that started accepting credit cards more recently, since the share of cash users at those restaurants was larger just before the program started. Finally, two-thirds of the difference between participating and non-participating restaurants disappeared during the first surge of COVID-19 in April 2020, suggesting that customers switched from cash to cashless payments to reduce the risk of infection both at participating and non-participating restaurants, but the extent to which customers switched was larger at non-participating restaurants with a larger share of cash users just before the pandemic.
    Date: 2021–11
  15. By: Chuku Chuku (African Development Bank); Lin Lang (School of Social Sciences, University of Manchester); King Yoong Lim (Nottingham Business School, Nottingham Trent University)
    Abstract: TBased on an optimal oil explorationextraction model with public debts and Chinese loans, we examine analytically and empirically two theoretical propositions pertaining to the impacts of public debt and Chinese loan on economic and physical scarcity/abundance in Africa economies. First, despite a baseline independent relationship between public debt level and optimal operations, the level of public debts in an economy can have an adverse effect on the abundance measures if it breached the debt-sustainability threshold. Second, with alternative Chinese loans, the effect on optimal exploration-extraction is analytically ambiguous. To examine both propositions, we estimate endogenous binary-treatment regression models based on a panel data of 18 African economies over 2000-17. We find empirical support with regards to the adverse effect of public debt sustainability. Further, we find positive effect from Chinese loans to both abundance measures, indicating that the combined marginal benefits outweigh the marginal costs associated with the resourcecollateralized funding nature of these loans.
    Keywords: Africa, Chinese loans, Economic scarcity, Exploration and extraction, Non-renewable resources JEL classification: Q31, Q35, Q48
    Date: 2021–10–12
  16. By: Barnett, William; Park, Sohee
    Abstract: This paper investigates the performance of the Credit-Card-Augmented Divisia monetary aggregates in forecasting U.S. inflation and output growth at the 12-month horizon. We compute recursive and rolling out-of-sample forecasts using an Autoregressive Distributed Lag (ADL) model based on Divisia monetary aggregates. We use the three available versions of those monetary aggregate indices, including the original Divisia aggregates, the credit card-augmented Divisia, and the credit-card-augmented Divisia inside money aggregates. The source of each is the Center for Financial Stability (CFS). We find that the smallest Root Mean Square Forecast Errors (RMSFE) are attained with the credit-card-augmented Divisia indices used as the forecast indicators. We also consider Bayesian vector autoregression (BVAR) for forecasting annual inflation and output growth.
    Keywords: Divisia, credit-card-augmented Divisia, monetary aggregates, forecasting, Bayesian vector autoregression, inflation, output growth.
    JEL: C32 C53 E31 E47 E51
    Date: 2021–10–19
  17. By: Pompeo Della Posta; Roberto Tamborini
    Abstract: The lesson of the sovereign debt crises of the 2010s, and of the outbreak of the COVID- 19 pandemic is that EMU irreversibility, if not to remain a wishful statement in the founding treaties, necessitates to be completed by carefully designed ramparts for extraordinary times beside regulations for ordinary times. In this paper we wish to contribute to this line of thought in two points. First, we highlight that when exposed to large, systemic shocks the EMU faces a trilemma: its integrity can only be saved by relaxing either monetary orthodoxy, or fiscal orthodoxy, or both. We elaborate this concept by means of a fiscal target-zone model, where EMU member governments are willing to abide with the commitment to debt stability under the no-bailout clause only up to an upper bound of their feasible fiscal effort. Second, we show that EMU completion means providing a monetary and/or fiscal emergency backstop to the irreversibility principle. Drawing on the target-zone literature, we show how these devices can be designed in a consistent manner that minimises their extension and mitigates the moral hazard concerns. The alternative to these devices is not retaining both the EMU irreversibility and the twin orthodoxies, but reformulating the treaties with explicit and regulated exit procedures
    Date: 2021
  18. By: Paola Boel; Julian Diaz; Daria Finocchiaro
    Abstract: We study the redistributive effects of expected inflation in a microfounded monetary model with heterogeneous discount factors and collateral constraints. In equilibrium, this heterogeneity leads to borrowing and lending. Model assumptions also guarantee a tractable distribution of money and capital holdings. Several results emerge from our analysis. First, in this framework expected inflation is detrimental to capital accumulation. Second, expected inflation affects borrowing and lending when collateral constraints are present, thus also inducing redistributive effects through credit. Third, we find this channel to be regressive when we calibrate our model using US data. This is because the drop in borrowers’ capital caused by inflation is larger when capital is used as collateral.
    Keywords: money; heterogeneity; collateral constraint; welfare cost of inflation
    JEL: E40 E50
    Date: 2021–11–10
  19. By: Schiller, Jonathan; Gross, Jonas
    JEL: E42
    Date: 2021
  20. By: Morales, Paola; Osorio, Daniel; Lemus, Juan S.; Sarmiento Paipilla, Miguel (Tilburg University, School of Economics and Management)
    Date: 2021
  21. By: Munday, Tim (University of Oxford); Brookes, James (Bank of England)
    Abstract: We ask how central banks can change their communication in order to receive greater newspaper coverage. We write down a model of news production and consumption in which news generation is endogenous because the central bank must draft its communication in such a way that newspapers choose to report it, while still retaining the message the central bank wishes to convey to the public. We use our model to show that standard econometric techniques that correlate central bank text with measures of news coverage in order to determine what causes central bank communication to be reported on will likely prove to be biased. We use techniques from computational linguistics combined with an event-study methodology to measure the extent of news coverage a central bank communication receives, and the textual features that might cause a communication to be more (or less) likely to be considered newsworthy. We consider the case of the Bank of England, and estimate the relationship between news coverage and central bank communication implied by our model. We find that the interaction between the state of the economy and the way in which the Bank of England writes its communication is important for determining news coverage. We provide concrete suggestions for ways in which central bank communication can increase its news coverage by improving readability in line with our results.
    Keywords: Central bank communication; print media; high-dimensional estimation; natural language processing
    JEL: C01 C55 C82 E43 E52 E58
    Date: 2021–10–27
  22. By: Horneff, Vanya; Maurer, Raimond; Mitchell, Olivia S.
    Abstract: Tax-qualified vehicles helped U.S. private-sector workers accumulate {dollar}25Tr in retirement assets. An often-overlooked important institutional feature shaping decumulations from these retirement plans is the "Required Minimum Distribution" (RMD) regulation, requiring retirees to withdraw a minimum fraction from their retirement accounts or pay excise taxes on withdrawal shortfalls. Our calibrated lifecycle model measures the impact of RMD rules on financial behavior of heterogeneous households during their worklives and retirement. We show that proposed reforms to delay or eliminate the RMD rules should have little effects on consumption profiles but more impact on withdrawals and tax payments for households with bequest motives.
    Keywords: life cycle saving,household finance,401(k) plan,retirement,tax policy
    JEL: D14 G11 G50 G51 H24
    Date: 2021
  23. By: Christophe Blot (OFCE - Observatoire français des conjonctures économiques - Sciences Po - Sciences Po); Paul Hubert (OFCE - Observatoire français des conjonctures économiques - Sciences Po - Sciences Po)
    Abstract: Depuis 2009, les banques centrales achètent massivement des titres de dette publique. Cette politique d'assouplissement quantitatif (QE) a fait exploser la taille de leur bilan et certains y voient de facto une monétisation des dettes publiques. La monétisation, concept flou dans le débat public, est associée à l'image d'une banque centrale « faisant tourner la planche à billets », ce qui en pratique ne correspond pas aux opérations conduites aujourd'hui. La monétisation devrait se traduire par i) une économie d'intérêts payés par le gouvernement, ii) une création de monnaie, iii) permanente (ou durable) et iv) refléter un changement implicite de l'objectif des banques centrales ou de leur cible d'inflation. Le QE se distingue de la monétisation parce qu'il ne crée pas de la monnaie mais des réserves excédentaires. Les caractéristiques de ces réserves sont très différentes de celle de la monnaie. Elles sont soumises à un taux d'intérêt et ne circulent qu'au sein du système bancaire. Le QE permet de réduire la charge d'intérêts payée par le gouvernement mais ne modifie pas ses obligations à l'égard du remboursement de la dette. Cette politique est efficace pour limiter la hausse des taux d'intérêt souverains, notamment leurs écarts dans la zone euro, et améliorer la soutenabilité des dettes publiques. Elle montre cependant ses limites en tant qu'outil de stabilisation macroéconomique. Une politique de monétisation, qui elle crée de la monnaie, serait probablement plus efficace en termes de stabilisation de la croissance nominale. Elle requiert cependant une plus forte coordination avec la politique budgétaire, ce qui la rend plus difficile à mettre en œuvre dans la zone euro. L'annulation de dette publique détenue par les banques centrales est une autre option possible. Son objectif est de donner des marges de manœuvre supplémentaires à la politique budgétaire. Ce choix n'aurait pas d'incidence sur l'orientation de la politique monétaire. Cependant, le signal envoyé aux investisseurs est ambigu : en suggérant qu'un défaut souverain est possible, il pourrait se traduire in fine par une hausse des taux d'intérêt. L'annulation pourrait donc être contreproductive alors que les gouvernements n'ont actuellement aucun mal à financer leur dette et que les taux d'intérêts souverains sont négatifs dans de nombreux pays.
    Keywords: Dettes publiques,Banques centrales,Monétisation
    Date: 2020–11–09
  24. By: Xu Zhang
    Abstract: This paper evaluates the effects of forward guidance and large-scale asset purchases (LSAP) when the nominal interest rate reaches the zero lower bound. I investigate the effects of the two policies in a dynamic new Keynesian model with financial frictions adapted from Gertler and Karadi (2011, 2013), with changes implemented so that the framework delivers realistic predictions for the effects of each policy on the entire yield curve. I then match the change that the model predicts would arise from a linear combination of the two shocks with the observed change in the yield curve in a 30-minute window around Federal Reserve announcements, allowing me to identify the separate contributions of each shock to the effects of the announcement. My estimates imply that LSAP was more important in influencing output and inflation than forward guidance.
    Keywords: Business fluctuations and cycles; Central bank research; Econometric and statistical methods; Interest rates
    JEL: E5 G0
    Date: 2021–11
  25. By: Vasiliki Dimakopoulou; George Economides; Apostolis Philippopoulos
    Abstract: This paper, using a microfounded macroeconomic model that embeds the key features of the Greek economy, studies the efficacy of the various policy measures taken, at national and EU level, to cushion the economic effects of the pandemic shock. The paper attempts to give quantitative answers to questions like: What are the effects of these policies and, especially, what are the implications of the fiscal transfers and grants from the Recovery Fund and the quantitative policies of the ECB, like the PEPP, for the Greek economy? Do they help the real economy and, if yes, by how much? What would have happened had these measures not taken? How costly will be the re-emergence of the fear of debt default and risk premia?
    Keywords: central banking, fiscal policy, international lending, pandemic
    JEL: E50 E60 F30
    Date: 2021
  26. By: Krahnen, Jan Pieter; Rocholl, Jörg; Thum, Marcel
    Abstract: We raise some critical points against a naïve interpretation of "green finance" products and strategies. These critical insights are the background against which we take a closer look at instruments and policies that might allow green finance to become more impactful. In particular, we focus on the role of a taxonomy and investor activism. We also describe the interaction of government policies with green finance practice - an aspect, which has been mostly neglected in policy debates but needs to be taken into account. Finally, the special case of green government bonds is discussed.
    Keywords: Green Finance,Climate Change,Sustainability,Taxonomy,ESG
    Date: 2021
  27. By: Ojo, Marianne
    Abstract: As well as considering the current implications of measures that have been instigated to address the impacts of the pandemic, drawing from past and current lessons from selected jurisdictions, this paper also considers why the transition to a net zero carbon economy may prove more challenging than may first appear. However, jurisdictional differences and historical developments will play a part in determining how sustainable certain implemented policies and measures are – as well as in facilitating a transition to normality. The paper also aims to highlight not only the growing importance of the roles of central banks in financial stability, in particular with reference to the management of risks associated with climate risks, in managing financial stability risks, but also place an emphasis on longer term perspectives and a need to incorporate greater uncertainty elements, particularly consequential of COVID impacts, in monetary policy setting instruments. In respect of longer term perspectives, the relevance and importance of other financial sector regulators, namely the insurance and securities sectors, in managing other forms of risks, namely, liability risks, will be considered. The paper adopts a predominantly qualitative based and interdisciplinary approach to the study. Reasons for adopting this approach will be highlighted later in the paper. As a result, the literature review section will focus on conceptual and theoretical aspects – as opposed to predominantly empirical related data. In consolidating on those conceptual aspects of the framework already introduced under the literature review section, namely definitions ascribed to physical and transition risks, the next section illustrates how the above primary source related categories extend to a far reaching third category which presents fundamental relevance, not only in terms of climate risks, but also in respect of uncertainty, third party liability – and particularly for non common law jurisdictions which do not recognize principles of tort law which deals exclusively with related principles and concepts of remoteness of damage, foreseeability and the neighbor principle introduced through the leading case of Donoghue v Stevenson. These principles are linked to liability risks whereby the insurance sector will increasingly have an important role to play, in respect of addressing climate risks, in years to come. In highlighting and illustrating the issues and arguments, particularly those relating to sustainable finance, monetary policies and climate risks, as well as the links between monetary policy responsibilities and the need to mitigate financial stability risks attributed to climate risks, reference will be made to evidence and discussions, as well as analyses and results obtained from the “Climate Risk Europe Virtual Week”, September 2021, as well as other reports and analyses documented in the manuscript and highlighted in the references section of this paper. This paper is also unique because it highlights the need for interaction with legal disciplines, as well as an interdisciplinary approach to addressing economic issues. The pandemic is indeed also unique since it is not merely a financial and economic pandemic, but also a medical pandemic. As such, a mere economic perspective, cannot resolve all issues at hand. It will demonstrate that depending on the structure of financial regulation which operates in different jurisdictions, as well as whether common law principles of tort law apply in these jurisdictions in addressing liability risks, it will be feasible, realistic and possible to break the tragedy of the horizon.
    Keywords: EU Green Deal; sustainable finance; interest rates; inflation; pandemic asset purchase program (PEPP); APP asset purchase program; longer term financing operations; transition risks; financial stability; CBDCs
    JEL: E50 E58 F18 F64 K2
    Date: 2021–10
  28. By: Okano, Mitsuhiro
    Abstract: This study develops a two-country new Keynesian (NK) model that incorporates deep habits in consumption and investigates the macroeconomic dynamics under the optimal coordinated monetary policy. We show that in response to the structural shocks, the central bank changes the interest rate significantly in the two-country open economy model compared with the closed economy where the central bank is reluctant to move interest rates. When a deep consumption habit exists, the international central bank can exploit the terms of trade externalities. Habit formation might boost the expenditure switching effect, which differentiates the aggressiveness of the central bank between closed and open economies with deep habit. Moreover, we showed that the deviations from the law of one price, or the goods-specific real exchange rate, generated endogenously by the deep habit are significantly related to the degree of home bias. In particular, the deviations fully disappeared when there is no home bias.
    Keywords: Optimal monetary policy; Deep habit; Policy coordination; Commitment;
    JEL: E52 E58 F41
    Date: 2021–10–17
  29. By: Leonardo Cadamuro; Francesco Papadia
    Abstract: Economists and central bankers no longer consider monetary aggregates relevant for inflation forecasts. We explain this neglect by advancing and testing the hypothesis that monetary aggregates are only relevant for inflation in unsettled monetary and inflationary conditions. When inflation is basically stable around the central bank target (1.9 percent), as it has been in most of the last two decades, there is no apparent relationship between monetary aggregates and inflation....
    Date: 2021–11
  30. By: Lampe, Florian; Löscher, Anne
    Abstract: The paper treats the eco currency union project in West Africa and its implications for monetary policies against the backdrop of the international monetary order from a post-Keynesian perspective. The eco zone project envisions a common monetary union of the West African Economic and Monetary Union (WAEMU), i.e. the independent Western subzone of the CFA franc union, and the remaining non-CFA countries of the Economic Community of West African States (ECOWAS) with Nigeria and Ghana as the economically most important member states. The literature on the international currency hierarchy developed by Latin-American structuralists and the post-Keynesian Berlin School of thought focuses on the notion of a currency-specific liquidity premium that structurally determines the interest rate level in the corresponding currency areas. Based on this set of literature, we conduct a comparison between the liquidity premia of the Western CFA-franc, the Nigerian naira and the Ghanaian cedi to make conjectures about what implications a common ECOWAS currency union would have regarding monetary policy space. Being a non-pecuniary variable, the liquidity premium cannot be observed directly. We therefore approximate the liquidity premium by calculating differences in interest rates such as the central bank's base rate, the coupon rate on T-bills and bonds and the interest rate spread between Eurobonds and bonds denominated in local currency. Besides, we use balance of payment data to identify external financial fragilities that might become a crucial factor for monetary policy due to an increasing financialisation in West African economies. We find that investors demand structurally higher yields on bonds originating in Ghana and Nigeria than in the CFA-franc zone. One could interpret this as the CFA-franc conveying over a higher liquidity premium because it has to have lower yields rates to compensate for liquidity-differences to financial assets denominated in the US dollar or euro. However, another explanation is that expectations about the future developments of the cedi's and naira's exchange value by investors are more pessimistic in comparison to that of the CFA-franc. This is rooted in two major factors: Firstly, under the current arrangement, France still has leeway in monetary policy making and acts as exchange rate stabiliser by pushing for restrictive monetary policies and guaranteeing foreign exchange reserve provision. Secondly, the estimation of external financial fragility in the CFA-franc zone and Nigeria shows that the naira implies a greater risk of sudden devaluation due to a higher exposure to mobile liabilities vis-à-vis its asset endowments.
    Keywords: West African Economic and Monetary Union,CFA franc,eco zone,international currency hierarchy,external financial fragility
    JEL: E12 F33 F41 G11 O57
    Date: 2021

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