nep-ban New Economics Papers
on Banking
Issue of 2021‒11‒22
35 papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Distant Lending for Regional Small Businesses Using Public Credit Guarantee Schemes: Evidence from Japan By TSURUTA Daisuke
  2. Banks' credit losses and lending dynamics By Raupach, Peter; Memmel, Christoph
  3. Loan Guarantees, Bank Lending and Credit Risk Reallocation By Carlo Altavilla; Andrew Ellul; Marco Pagano; Andrea Polo; Thomas Vlassopoulos
  4. Financial integration and the co-movement of economic activity: Evidence from U.S. states By Götz, Martin; Gozzi, Juan Carlos
  5. Quantitative easing, safe asset scarcity and bank lending By Tischer, Johannes
  6. Predictive power of the Financial Activity Indexes - A case study of banking crisis in multiple countries - By Ryuichiro Hirano; Yoshihiko Hogen; Nao Sudo
  7. Are Bank Bailouts Welfare Improving? By Shukayev, Malik; Ueberfeldt, Alexander
  8. The Impact of the ECB Banking Supervision Announcements on the EU Stock Market By Angelo Baglioni; Andrea Monticini; David Peel
  9. Safe asset shortage and collateral reuse By Jank, Stephan; Mönch, Emanuel; Schneider, Michael
  10. Credit Card Trends Begin to Normalize after Pandemic Paydown By Andrew F. Haughwout; Donghoon Lee; Daniel Mangrum; Joelle Scally; Wilbert Van der Klaauw
  11. Bank Money Creation and the Payments System By Biagio Bossone
  12. Financial inclusion and legal system quality: are they correlated? By Ozili, Peterson Kitakogelu
  13. Risk and return prediction for pricing portfolios of non-performing consumer credit By Siyi Wang; Xing Yan; Bangqi Zheng; Hu Wang; Wangli Xu; Nanbo Peng; Qi Wu
  14. Optimal Monetary Policy with the Risk-Taking Channel By Angela Abbate; Dominik Thaler
  15. How Does Market Power Affect Fire-Sale Externalities? By Thomas M. Eisenbach; Gregory Phelan
  16. Natural rate chimera and bond pricing reality By Brand, Claus; Goy, Gavin; Lemke, Wolfgang
  17. Updated Methodology for Assigning Credit Ratings to Sovereigns By Karim McDaniels; Nico Palesch; Sanjam Suri; Zacharie Quiviger; John Walsh
  18. The Rise in Household Liquidity By Gianni La Cava; Lydia Wang
  19. Measuring Market Liquidity and Liquidity Mismatches across Sectors By Arthur Akhmetov; Anna Burova; Natalia Makhankova; Alexey Ponomarenko
  20. Crypto-exchanges and Credit Risk: Modelling and Forecasting the Probability of Closure By Fantazzini, Dean; Calabrese, Raffaella
  21. The role of risk attitudes and expectations in household borrowing in Estonia By Eva Brandten
  22. Forecasting with VAR-teXt and DFM-teXt Models:exploring the predictive power of central bank communication By Leonardo Nogueira Ferreira
  23. Conventional and Unconventional Monetary Policy Rate Uncertainty and Stock Market Volatility: A Forecasting Perspective By Ruipeng Liu; Rangan Gupta; Elie Bouri
  24. Creating an effective transparent banking and financial system in Ghana to promote foreign direct investment for the private sector development By Tweneboah Senzu, Emmanuel
  25. Hitting the elusive inflation target By Bianchi, Francesco; Melosi, Leonardo; Rottner, Matthias
  26. The Effects of Forward Guidance: Theory with Measured Expectations By Christopher Roth; Mirko Wiederholt; Johannes Wohlfart
  27. The Debt Capacity of a Government By Bernard Dumas; Paul Ehling; Chunyu Yang
  28. Assessing the nexus between mobile financial service usage and inflation – evidence from Bangladesh By Ehsan, Zaeem-Al
  29. The Deflationary Bias of the ZLB and the FED’s Strategic Response By Adrian Penalver; Daniele Siena
  30. High Public Debt in an Uncertain World: Post-Covid-19 Dangers for Public Finance By Daniel Gros
  31. Heterogenous criticality in high frequency finance: a phase transition in flash crashes By Jeremy Turiel; Tomaso Aste
  32. Ask "Who", Not "What": Bitcoin Volatility Forecasting with Twitter Data By M. Eren Akbiyik; Mert Erkul; Killian Kaempf; Vaiva Vasiliauskaite; Nino Antulov-Fantulin
  33. Do inflation expectations improve model-based inflation Forecasts? By Marta Bañbura; Danilo Leiva-León; Jan-Oliver Menz
  34. Оценка влияния финансов на экономический рост через призму инвестиций, кредитов и денежной массы // Assessing the influence of finance on economic growth through the prism of investments, credits and money supply By Оразалин Рустем // Orazalin Rustem
  35. Towards net zero carbon emissions: carbon pricing strategies and the role of innovative technologies By Ojo, Marianne; Dierker, Theodore

  1. By: TSURUTA Daisuke
    Abstract: In this paper, we investigate to what extent banks use public credit guaranteed loans for distant small business borrowers. Existing studies argue that when banks provide loans for these borrowers, the information asymmetry between them is severe. These studies then empirically show how banks can mitigate this problem. In this analysis, we focus instead on the role of Japan's public credit guarantee scheme in mitigating these same information problems. If banks provide credit guaranteed loans, they suffer few losses from borrower default because the public credit guarantee corporations (not the small business borrowers) make payments to the banks. Therefore, banks can provide loans to distant borrowers even if the information asymmetry is severe. To conduct our analysis, we use semiannual bank-region level data from Japan, which allows us to control for several unobserved fixed effects. The results show that the credit guarantee loan size is larger if banks provide loans to distant small business borrowers. In addition, the default rate is higher when banks provide credit guaranteed loans to distant borrowers. These results suggest that banks successfully mitigate the losses of distant lending using the public credit guarantee scheme.
    Date: 2021–10
  2. By: Raupach, Peter; Memmel, Christoph
    Abstract: Using detailed data of all German banks, we find that banks which have suffered heavy credit losses reduce their corporate lending business by 1.32 euro for each euro lost; with 95% confidence, the effect is between 0.85 and 1.80 euros. This sensitivity is in line with (quite heterogeneous) results of earlier studies but significantly lower than those arising from the assumption of constant leverage. Weakly capitalized banks grant fewer new loans than other banks. We control for credit demand using a new method, the construction of tailored hypothetical bank competitors.
    Keywords: Credit losses,Bank lending
    JEL: G21
    Date: 2021
  3. By: Carlo Altavilla (European Central Bank, CSEF and CEPR); Andrew Ellul (Indiana University, CSEF, CEPR and ECGI); Marco Pagano (University of Naples Federico II, CSEF, EIEF, CEPR and ECGI); Andrea Polo (Luiss University, EIEF, CEPR and ECGI); Thomas Vlassopoulos (European Central Bank)
    Abstract: We investigate whether government credit guarantee schemes, extensively used at the onset of the Covid-19 pandemic, led to substitution of non-guaranteed with guaranteed credit rather than fully adding to the supply of lending. We study this issue using a unique euro-area credit register data, matched with supervisory bank data, and establish two main findings. First, guaranteed loans were mostly extended to small but comparatively creditworthy firms in sectors severely affected by the pandemic, borrowing from large, liquid and well-capitalized banks. Second, guaranteed loans partially substitute pre-existing nonguaranteed debt. For firms borrowing from multiple banks, the substitution mainly arises from the lending behavior of the bank extending guaranteed loans. Substitution was highest for funding granted to riskier and smaller firms in sectors more affected by the pandemic, and borrowing from larger and stronger banks. Overall, the evidence indicates that government guarantees contributed to the continued extension of credit to relatively creditworthy firms hit by the pandemic, but also benefited banks’ balance sheets to some extent.
    Date: 2021
  4. By: Götz, Martin; Gozzi, Juan Carlos
    Abstract: We analyze the effect of the geographic expansion of banks across U.S. states on the co-movement of economic activity between states. Exploiting the removal of interstate banking restrictions to construct time-varying instrumental variables at the state-pair level, we find that bilateral banking integration increases output co-movement between states. The effect of financial integration depends on the nature of the idiosyncratic shocks faced by states and is stronger for financially dependent industries. Finally, we show that integration increases the similarity of bank lending fluctuations between states and contributes to the transmission of deposit shocks across states.
    Keywords: banking integration,synchronization,financial deregulation,business cycles
    JEL: E32 F36 F44 G21
    Date: 2021
  5. By: Tischer, Johannes
    Abstract: The Eurosystem's Public Sector Purchase Programme (PSPP) increased the scarcity of safe assets, which caused significant declines and substantial dispersion in European repo rates. However, banks holding these safe assets benefited from this development: First, using the German security register, this paper shows that scarcity affects bank funding costs, as their collateral supply is determined by their ex ante securities holdings and repo rates. Second, it makes use of the German credit register to show that asset scarcity had real effects: Banks more exposed to asset scarcity increased their credit supply.
    Keywords: Quantitative easing,safe asset scarcity,repo rates,bank lending,monetary transmission
    JEL: E51 E58 G11 G21
    Date: 2021
  6. By: Ryuichiro Hirano (Bank of Japan); Yoshihiko Hogen (Bank of Japan); Nao Sudo (Bank of Japan)
    Abstract: In the Financial System Report, the Bank of Japan monitors developments of the Financial Activity Indexes (FAIXs), which showed large deviations from the trend during Japan fs bubble period of the late 1980s, as a means to detect early warning signals of financial imbalances caused by overheating of domestic financial activities. This article constructs corresponding FAIXs in 17 countries and asks if they are able to predict a banking crisis in these countries. The result shows that among the FAIXs, total credit to GDP ratio, which is an indicator that is considered to capture credit activities of the private sector as a whole, has a reasonable degree of predictive power for these crises. The nature of banking crises differs, however, and these indicators do not necessarily have high predictive power for banking crises that occur when domestic financial activity is not overheated. In addition, the probability of a banking crisis occurring rises when the "red" signal of the total credit to GDP ratio lasts for a prolonged period or when this "red" signal happens together with "red" signals of other indicators.
    Keywords: Financial Imbalance; Banking Crisis; Heat map
    JEL: G01 G21 G32
    Date: 2021–11–19
  7. By: Shukayev, Malik (University of Alberta, Department of Economics); Ueberfeldt, Alexander (Bank of Canada)
    Abstract: The financial sector bailouts seen during the Great Recession generated substantial opposition and controversy. We assess the welfare benefits of government-funded emergency support to the financial sector, taking into account its effects on risk-taking incentives. In our quantitative general equilibrium model, the financial crisis probability depends on financial intermediaries' balance sheet choices, influenced by capital adequacy constraints and ex ante known emergency support provisions. These policy tools interact to make financial sector bailouts welfare improving when capital adequacy constraints are consistent with the current Basel III regulation, but potentially welfare decreasing with looser capital adequacy regulation existing before the Great Recession.
    Keywords: fire sales externality; short-term bank funding; endogenous financial crises; bank regulation; bailouts; government guarantees
    JEL: D62 E32 E44 G01
    Date: 2021–11–16
  8. By: Angelo Baglioni (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore); Andrea Monticini (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore); David Peel
    Abstract: We study the impact of ECB’s supervisory announcements on the Bank Stock index, from 2013 through 2017. Our evidence shows that the news, related to supervisory actions, do have highly significant effects on the market price of banks, contributing to the volatility of the Bank Stock Index for Europe and Italy. Most announcements signal the need to raise more regulatory capital and lead to negative returns in the stock market, thus increasing the cost of raising new capital. Our study is related to previous ones (by Bernanke and Kuttner) focusing on the impact of monetary policy announcements on the stock exchange.
    Keywords: Banking Supervision, ECB, GARCH, Stock Market.
    JEL: G21 G28
    Date: 2021–11
  9. By: Jank, Stephan; Mönch, Emanuel; Schneider, Michael
    Abstract: The reuse of collateral can support the efficient allocation of assets in the financial system. Exploiting a novel dataset, we quantify banks' collateral reuse at the security level. We show that banks substantially increase their reuse of collateral in response to scarcity induced by central bank asset purchases. Repo rates are less sensitive to purchase-induced scarcity at low levels of reuse, when the banking system can easily supply collateral through reuse. Repo rates are more sensitive to scarcity and more volatile at high levels of reuse, highlighting the trade-off between the shock absorption and shock amplification effects of collateral reuse.
    Keywords: safe assets,government bonds,collateral reuse,rehypothecation,repo market,securities lending
    JEL: E4 E5 G1 G2
    Date: 2021
  10. By: Andrew F. Haughwout; Donghoon Lee; Daniel Mangrum; Joelle Scally; Wilbert Van der Klaauw
    Abstract: Today, the New York Fed’s Center for Microeconomic Data released its Quarterly Report on Household Debt and Credit for the third quarter of 2021. Overall debt balances increased, bolstered primarily by a sizeable increase in mortgage balances, and for the second consecutive quarter, an increase in credit card balances. The changes in credit card balances in the second and third quarters of 2021 are remarkable since they appear to be a return to the normal seasonal patterns in balances. In a Liberty Street Economics post earlier this year we wrote about some demographic variation in these balance changes and the likely role of stimulus checks and forbearance programs in helping borrowers pay down expensive revolving debt balances. Here, we’ll take a fresh look at credit card balances and at the dynamics behind new and closing credit card accounts and limit changes, to examine how credit access and usage continue to evolve. The Quarterly Report and this analysis are based on our Consumer Credit Panel, which is itself based on Equifax credit data.
    Keywords: household finance; Consumer Credit Panel (CCP)
    JEL: D14
    Date: 2021–11–09
  11. By: Biagio Bossone
    Abstract: This article investigates how the role that banks play in the payment system space affects their money creation power and process. In particular, the article analyzes how the payments market share of each bank affects its money creation power and how payment settlement technologies and rules determine the banks’ demand for funding and, hence, their money creation power. Also, as the power to create money enables money creators to extract extra-profits or rents ("seigniorage") from the economy, the article evaluates analytically how banks extract seigniorage through money creation and how bank seigniorage differs from profits from pure financial intermediation. By showing the central role that payment systems play in the context of such an important economics topic as money creation, the article seeks to emphasize the relevance of payment system analysis for macroeconomic theory and practice and points to the need for achieving better integration of the two disciplines.
    Keywords: Bank; Bank money creation; Central bank policy; Demand deposits; Financial intermediaries; Funding; Lending; Payment and settlement systems
    JEL: E51 E58 G21
    Date: 2021–11
  12. By: Ozili, Peterson Kitakogelu
    Abstract: This study investigates the correlation between financial inclusion and legal system quality among developed countries from 2004 to 2012. The findings reveal a positive correlation between financial inclusion and legal system quality. The findings suggest that improvements in legal system quality goes hand in hand with improvements in the level of financial inclusion. More specifically, higher supply of ATM per 100,000 adults is correlated with stronger insolvency resolution framework among G7, European and non-European countries. Also, the number of bank branch per 100,000 adults is positively correlated with strong rule of law and legal rights in non-European countries. Also, the number of ATMs per 100,000 adults is positively correlated with strength of insolvency resolution framework and negatively correlated with the time it takes to resolve insolvency before, during and after the global financial crisis.
    Keywords: Law, development, financial inclusion, ATM, bank branch, legal rights, legal system, rule of law, insolvency resolution.
    JEL: G20 G21 G28 K00 K12 K23 K40 K42 K49
    Date: 2021–12
  13. By: Siyi Wang; Xing Yan; Bangqi Zheng; Hu Wang; Wangli Xu; Nanbo Peng; Qi Wu
    Abstract: We design a system for risk-analyzing and pricing portfolios of non-performing consumer credit loans. The rapid development of credit lending business for consumers heightens the need for trading portfolios formed by overdue loans as a manner of risk transferring. However, the problem is nontrivial technically and related research is absent. We tackle the challenge by building a bottom-up architecture, in which we model the distribution of every single loan's repayment rate, followed by modeling the distribution of the portfolio's overall repayment rate. To address the technical issues encountered, we adopt the approaches of simultaneous quantile regression, R-copula, and Gaussian one-factor copula model. To our best knowledge, this is the first study that successfully adopts a bottom-up system for analyzing credit portfolio risks of consumer loans. We conduct experiments on a vast amount of data and prove that our methodology can be applied successfully in real business tasks.
    Date: 2021–10
  14. By: Angela Abbate (Swiss National Bank); Dominik Thaler (Banco de España)
    Abstract: Empirical research suggests that lower interest rates induce banks to take higher risks. We assess analytically what this risk-taking channel implies for optimal monetary policy in a tractable New Keynesian model. We show that this channel creates a motive for the planner to stabilize the real rate. This objective conflicts with the standard inflation stabilization objective. Optimal policy thus tolerates more inflation volatility. An inertial Taylor-type reaction function becomes optimal. We then quantify the significance of the risk-taking channel for monetary policy in an estimated medium-scale extension of the model. Ignoring the channel when designing policy entails non-negligible welfare costs (0.7% lifetime consumption equivalent).
    Keywords: risk-taking channel, optimal monetary policy, inertial policy rate
    JEL: E44 E52
    Date: 2021–10
  15. By: Thomas M. Eisenbach; Gregory Phelan
    Abstract: An important role of capital and liquidity regulations for financial institutions is to counteract inefficiencies associated with “fire-sale externalities,” such as the tendency of institutions to lever up and hold illiquid assets to the extent that their collective actions increase financial vulnerabilities. However, theoretical models that study such externalities commonly assume perfect competition among financial institutions, in spite of high (and increasing) financial sector concentration. In this post, which is based on our forthcoming article, we consider instead how the effects of fire-sale externalities change when financial institutions have market power.
    Keywords: financial institution; fire sale; concentration; market power
    JEL: G1 G2 E2
    Date: 2021–11–10
  16. By: Brand, Claus; Goy, Gavin; Lemke, Wolfgang
    Abstract: We build a novel macro-finance model that combines a semi-structural macroeconomic module with arbitrage-free yield-curve dynamics. We estimate it for the United States and the euro area using a Bayesian approach and jointly infer the real equilibrium interest rate (r*), trend inflation (π*), and term premia. Similar to Bauer and Rudebusch (2020, AER), π* and r* constitute a time-varying trend for the nominal short-term rate in our model, rendering estimated term premia more stable than standard yield curve models operating with time-invariant means. In line with the literature, our r* estimates display a distinct decline over the last four decades. JEL Classification: C11, C32, E43, G12, E44, E52
    Keywords: arbitrage-free Nelson-Siegel term structure model, Bayesian estimation, equilibrium real rate, natural rate of interest, r*, term premia, unobserved components
    Date: 2021–11
  17. By: Karim McDaniels; Nico Palesch; Sanjam Suri; Zacharie Quiviger; John Walsh
    Abstract: The investment of foreign exchange reserves or other asset portfolios requires an assessment of the credit quality of investment counterparties. Traditionally, foreign exchange reserve and other asset managers relied on credit rating agencies (CRAs) as the main source of information for credit assessments. In October 2010, the Financial Stability Board issued principles to reduce reliance on CRA ratings in standards, laws and regulations, in support of financial stability. Moreover, best practices in the asset management industry suggest that investors should understand the credit risks they are exposed to and, more broadly, that they should rely on internal credit assessments to inform investment decisions. In support of these objectives, the Bank of Canada first published its sovereign rating methodology in 2017. It provided a detailed technical description of the process developed to assign internal credit ratings to sovereigns, using only publicly available data. This publication updates the internal sovereign rating methodology to stay abreast of evolving best practices and leverage internal experience. This updated methodology proposes three key innovations: (i) a new approach to assessing a sovereign’s fiscal position, (ii) adjustments to the approach to assessing monetary policy flexibility and (iii) the explicit consideration of climate-related factors.
    Keywords: Credit risk management; Foreign reserves management
    JEL: G28 G32 F31
    Date: 2021–11
  18. By: Gianni La Cava (Reserve Bank of Australia); Lydia Wang (Reserve Bank of Australia)
    Abstract: It is well documented that household wealth has risen significantly in recent decades and that both sides of the household balance sheet – assets and liabilities – have expanded. We document a less well-known phenomenon: household liquid assets (such as cash, deposits and equities) have also risen strongly relative to income over the same period. This is true for Australia and for most advanced economies. We explore the determinants of liquidity across households and over time, using a range of household surveys for Australia. We find that household liquidity is strongly associated with life cycle factors, such as age and housing tenure. The increase in liquidity over recent decades has been broad based across households, though strongest amongst those with mortgage debt. Consistent with this, the share of liquidity-constrained households has declined significantly. The growth in liquidity is closely connected to developments in the housing market. First, higher housing prices have lifted the deposit requirement for potential home buyers, encouraging such households to save more in liquid assets. Second, higher mortgage debt has increased the repayment risks associated with future income declines, leading indebted home owners to save more for precautionary reasons, partly through paying down debt ahead of schedule. The process of building wealth and liquidity through debt amortisation has been supported by the trend decline in interest rates and unique financial innovations such as mortgage offset and redraw accounts that have made housing wealth more liquid. Overall, the rise in household liquidity appears to have increased the financial resilience of the household sector.
    Keywords: household liquidity; mortgage debt; housing prices; liquidity constraints; amortisation
    JEL: B22 E13 E20 E40 E50 E7 G51 R21
    Date: 2021–11
  19. By: Arthur Akhmetov (Bank of Russia, Russian Federation); Anna Burova (Bank of Russia, Russian Federation); Natalia Makhankova (Bank of Russia, Russian Federation); Alexey Ponomarenko (Bank of Russia, Russian Federation)
    Abstract: We offer tools for measuring, monitoring and analysing the liquidity of financial markets in the context of various liquidity aspects. The liquidity mismatch concept makes it possible to assess how liquidity risk acceptance varies across economic sectors. We calculate liquidity indices – that is, liquidity mismatch indicators, and conduct a comparative analysis of the degree of liquidity risk acceptance by various sectors of the Russian economy. The values of liquidity indices in the household sector vary significantly across countries, depending on the degree of population involvement in the stock market. We use the proposed tools to assess the development of financial market segments in Russia and conduct cross-country comparisons of the degree of liquidity of capital markets. Higher liquidity of financial markets is associated with a higher development of these markets; however, this is fraught with liquidity risks that may lead to financial losses. Considering the concept of liquidity in various aspects, we expand the discussion of the availability and development of long-term investment financing in Russia.
    Keywords: market liquidity, liquidity mismatch, liquidity risks, bank-based and market- based financing, financial instruments, balances of financial assets and liabilities
    JEL: G10 G23 O16
    Date: 2021–11
  20. By: Fantazzini, Dean; Calabrese, Raffaella
    Abstract: While there is an increasing interest in crypto-assets, the credit risk of these exchanges is still relatively unexplored. To fill this gap, we consider a unique data set on 144 exchanges active from the first quarter of 2018 to the first quarter of 2021. We analyze the determinants of the decision of closing an exchange using credit scoring and machine learning techniques. The cybersecurity grades, having a public developer team, the age of the exchange, and the number of available traded cryptocurrencies are the main significant covariates across different model specifications. Both in-sample and out-of-sample analyses confirm these findings. These results are robust to the inclusion of additional variables considering the country of registration of these exchanges and whether they are centralized or decentralized.
    Keywords: Exchange; Bitcoin; Crypto-assets; Crypto-currencies; Credit risk; Bankruptcy; Default Probability
    JEL: C21 C35 C51 C53 G23 G32 G33
    Date: 2021
  21. By: Eva Brandten
    Abstract: This study investigates the relations between risk attitudes and expectations and different aspects of borrowing by households in Estonia. The central research question is whether risk aversion and optimism provide additional information beyond the main economic and sociodemographic characteristics in explaining borrowing behaviour. The paper uses microdata from the Estonian Household Finance and Consumption Survey (HFCS) to estimate probit and Heckman models. My analysis shows that risk-tolerant households apply for loans more often than risk-averse households do and that their loans are larger. For mortgage loans, risk aversion is related to the probability of having a loan, whereas for non-mortgage loans, risk aversion is related to the size of the outstanding liabilities. The variables describing the household’s expectations for its future financial situation are on their own related to the decision to apply for a loan, but they do not contain any relevant additional information beyond the main economic and sociodemographic characteristics of the household
    Keywords: household debt, mortgage loans, non-mortgage loans, borrowing decisions, income and price expectations, risk attitudes, Household Finance and Consumption Survey
    JEL: G51 D14
    Date: 2021–11–10
  22. By: Leonardo Nogueira Ferreira
    Abstract: This paper explores the complementarity between traditional econometrics and machine learning and applies the resulting model – the VAR-teXt – to central bank communication. The VAR-teXt is a vector autoregressive (VAR) model augmented with information retrieved from text, turned into quantitative data via a Latent Dirichlet Allocation (LDA) model, whereby the number of topics (or textual factors) is chosen based on their predictive performance. A Markov chain Monte Carlo (MCMC) sampling algorithm for the estimation of the VAR-teXt that takes into account the fact that the textual factors are estimates is also provided. The approach is then extended to dynamic factor models (DFM) generating the DFM-teXt. Results show that textual factors based on Federal Open Market Committee (FOMC) statements are indeed useful for forecasting.
    Date: 2021–11
  23. By: Ruipeng Liu (Department of Finance, Deakin Business School, Deakin University, Melbourne, VIC 3125, Australia); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Elie Bouri (School of Business, Lebanese American University, Lebanon)
    Abstract: Theory suggests the existence of a bi-directional relationship between stock market volatility and monetary policy rate uncertainty. In light of this, we forecast volatilities of equity markets and shadow short rates (SSR) - a common metric of both conventional and unconventional monetary policy decisions, by applying a bivariate Markov-switching multifractal (MSM) model. Using daily data of eight advanced economies (Australia, Canada, Euro area, Japan, New Zealand, Switzerland, the UK, and the US) over the period of January, 1995 to March, 2021, we find that the bivariate MSM model outperforms, in a statistically significant manner, not only the benchmark historical volatility and the univariate MSM models, but also the Dynamic Conditional Correlation-Generalized Autoregressive Conditional Heteroskedasticity (DCC-GARCH) framework, particularly at longer forecast horizons. This finding confirms the bi-directional relationship between stock market volatility and uncertainty surrounding conventional and unconventional monetary policies, which in turn has important implications for academics, investors and policymakers.
    Keywords: Shadow short rate uncertainty, Stock market volatility, Markov-switching multifractal model (MSM), Forecasting
    JEL: C22 C32 C53 D80 E52 G15
    Date: 2021–11
  24. By: Tweneboah Senzu, Emmanuel
    Abstract: It is a paper presented at the project finance conference 2019 in Accra-Ghana, with the article focus to propose structural innovations required to attract foreign direct investment for the current emerging market dynamics evolving around the formal and informal economy of Ghana with a special study focus to the small and medium scale enterprises towards its sustainable economic growth.
    Keywords: Banking & Finance, Financial Sector, Macroeconomics, Monetary Policy, Central Bank, Foreign Direct investment
    JEL: E22 E26 E5 G21 G28
    Date: 2019–11–13
  25. By: Bianchi, Francesco; Melosi, Leonardo; Rottner, Matthias
    Abstract: Since the 2001 recession, average core inflation has been below the Federal Reserve's 2% target. This deflationary bias is a predictable consequence of a symmetric monetary policy strategy that fails to recognize the risk of encountering the zero-lower-bound. An asymmetric rule according to which the central bank responds less aggressively to above-target inflation corrects the bias, improves welfare, and reduces the risk of deflationary spirals - a pathological situation in which inflation keeps falling indefinitely. This approach does not entail any history dependence or commitment to overshoot the inflation target and can be implemented with an asymmetric target range. A counterfactual simulation shows that a modest level of asymmetry would have removed the deflationary bias observed in the United States.
    Keywords: Asymmetric monetary policy,deflationary bias,deflationary spiral,target range,framework review
    JEL: E31 E52
    Date: 2021
  26. By: Christopher Roth (University of Cologne, ECONtribute, C-SEB, briq, CESifo, CEPR, CAGE); Mirko Wiederholt (LMU Munich and Sciences Po, CESifo, CEPR); Johannes Wohlfart (Department of Economics and CEBI, University of Copenhagen, CESifo, Danish Finance Institute)
    Abstract: We study the effects of forward guidance with an approach that combines theory with experimental estimates of counterfactual expectation adjustments. Guided by the model, we conduct experiments with representative samples of the US population to study how households adjust their expectations in response to changes in the Fed’s projections about future interest rates. Respondents significantly downward-adjust their inflation expectations in response to learning about an increase in the Fed’s pro-jection about the federal funds rate three years in the future, and they expect inflation to respond most strongly immediately after the announcement. By contrast, respon-dents do not adjust their nominal income expectations. Our model-based estimates highlight a small average consumption response to forward guidance due to oppos-ing effects from intertemporal substitution and changes in expected real income.
    Keywords: Expectation Formation, Information, Updating
    JEL: D12 D14 D83 D84 E32 G11
    Date: 2021–11
  27. By: Bernard Dumas; Paul Ehling; Chunyu Yang
    Abstract: In a deterministic overlapping-generations economy with production and physical capital, the price of debt can be positive without any budget surpluses being in the offing, because debt incorporates a rational bubble. Yet the dynamics of debt remain a function of the dynamics of the primary budget deficit. As a way to study their joint behavior, we endogenize a structural deficit in the form of an underfunded social-security scheme. We define debt capacity as the level of debt that can be just sustained without a change of policy all the way to an unstable steady state. When it starts below the capacity, the debt converges to a stable steady state, in which the bubble is sustained. Above capacity the bubble unravels and the deficit cannot be financed. In several realistic scenarios occurring in economies, we calculate the needed policy response, which is the true "fiscal cost" of exceeding debt capacity.
    JEL: E13 E43 E44 E50 E62 E63 H30 H62 H63 H68
    Date: 2021–10
  28. By: Ehsan, Zaeem-Al
    Abstract: This paper set out to uncover the nexus between the propensity of mobile financial service (MFS) usage and inflation in Bangladesh, if any. This paper hypothesizes that the usage of MFS will lead to an increase in the velocity of money, i.e., the ease of using MFS in lieu of cash will lead to money transferring ownership quicker. All things constant, this will lead to inflation—as stipulated by the quantity theory of money. To this end, monthly data pertaining to the general price index, number of MFS agents, number of average daily MFS transactions, number of MFS clients and number of banks supporting MFS transactions have been used ranging from FY16 to FY20, subject to availability. The objective of the paper was to understand the relationship between usage of MFS and inflation, if any. To this end, two models were developed and subsequently tested. Upon undertaking a Johannsen co-integration test, it was found that there is indeed one long run equilibrium relationship between the variables used as per the second model. The use of the Vector Auto Regression (VAR) on model 1 failed to upholster the hypothesis of the paper. The subsequent use of a Vector-Error Correction model (VECM) on model 2 to capture the nexus between the propensity of MFS usage and inflation in Bangladesh also failed to diagnose a statistically significant relationship between MFS velocity and inflation in Bangladesh.
    Keywords: Inflation, MFS, VAR, VECM
    JEL: D4 E51
    Date: 2021–11–01
  29. By: Adrian Penalver; Daniele Siena
    Abstract: The paper shows, in a simple analytical framework, the existence of a deflationary bias in an economy with a low natural rate of interest, a Zero Lower Bound (ZLB) constraint on nominal interest rates and a discretionary Central Bank with an inflation mandate. The presence of the ZLB prevents the central bank from offsetting negative shocks to inflation whereas it can offset positive shocks. This asymmetry pushes average inflation below the target which in turn drags down inflation expectations and reinforces the likelihood of hitting the ZLB. We show that this deflationary bias is particularly relevant for a Central Bank with a symmetric dual mandate (i.e. minimizing deviations from inflation and employment), especially when facing demand shocks. But a strict inflation targeter cannot escape the suboptimal deflationary equilibrium either. The deflationary bias can be mitigated by targeting “shortfalls” instead of “deviations” from maximum employment and/or using flexible average inflation targeting. However, changing monetary policy strategy risks inflation expectations becoming entrenched above the target if the natural interest rate increases.
    Keywords: Monetary Policy Strategy, Inflation-Bias, Zero Lower Bound, Inflation Expectations.
    JEL: E52 E58
    Date: 2021
  30. By: Daniel Gros
    Abstract: Key messages: High debt ratios represent a danger, even if interest rates are low. The key reason is increased uncertainty of growth prospects in a post-Covid economy coupled with and uncertainty with regard to the probability of future large shocks. Large negative shocks are more frequent than assumed in standard models. Another reason is that the cost of public debt might increase more than linearly as the debt ratio rises. Large negative shocks create much more problems when debt is already high.
    Date: 2021
  31. By: Jeremy Turiel; Tomaso Aste
    Abstract: Flash crashes in financial markets have become increasingly important attracting attention from financial regulators, market makers as well as from the media and the broader audience. Systemic risk and propagation of shocks in financial markets is also a topic or great relevance who has attracted increasing attention in recent years. In the present work we bridge the gap between these two topics with an in-depth investigation of the systemic risk structure of co-crashes in high frequency trading. We find that large co-crashes are systemic in their nature and differ from small crashes. We demonstrate that there is a phase transition between co-crashes of small and large sizes, where the former involves mostly illiquid stocks while large and liquid stocks are the most represented and central in the latter. This suggest that systemic effects and shock propagation might be triggered by simultaneous withdrawn or movement of liquidity by HFTs and market makers having cross-asset.
    Date: 2021–10
  32. By: M. Eren Akbiyik; Mert Erkul; Killian Kaempf; Vaiva Vasiliauskaite; Nino Antulov-Fantulin
    Abstract: Understanding the variations in trading price (volatility), and its response to external information is a well-studied topic in finance. In this study, we focus on volatility predictions for a relatively new asset class of cryptocurrencies (in particular, Bitcoin) using deep learning representations of public social media data from Twitter. For the field work, we extracted semantic information and user interaction statistics from over 30 million Bitcoin-related tweets, in conjunction with 15-minute intraday price data over a 144-day horizon. Using this data, we built several deep learning architectures that utilized a combination of the gathered information. For all architectures, we conducted ablation studies to assess the influence of each component and feature set in our model. We found statistical evidences for the hypotheses that: (i) temporal convolutional networks perform significantly better than both autoregressive and other deep learning-based models in the literature, and (ii) the tweet author meta-information, even detached from the tweet itself, is a better predictor than the semantic content and tweet volume statistics.
    Date: 2021–10
  33. By: Marta Bañbura (European Central Bank); Danilo Leiva-León (Banco de España); Jan-Oliver Menz (Deutsche Bundesbank)
    Abstract: Those of professional forecasters do. For a wide range of time series models for the euro area and its member states we find a higher average forecast accuracy of models that incorporate information on inflation expectations from the ECB’s SPF and Consensus Economics compared to their counterparts that do not. The gains in forecast accuracy from incorporating inflation expectations are typically not large but significant in some periods. Both short- and long-term expectations provide useful information. By contrast, incorporating expectations derived from financial market prices or those of firms and households does not lead to systematic improvements in forecast performance. Individual models we consider are typically better than univariate benchmarks but for the euro area the professional forecasters are more accurate, especially in recent years (not always for the countries). The analysis is undertaken for headline inflation and inflation excluding energy and food and both point and density forecast are evaluated using real-time data vintages over 2001-2019.
    Keywords: forecasting, inflation, inflation expectations, Phillips curve, bayesian VAR
    JEL: C53 E31 E37
    Date: 2021–10
  34. By: Оразалин Рустем // Orazalin Rustem (National Bank of Kazakhstan)
    Abstract: В данном исследовании изучается динамика инвестиций в основной капитал, кредитов экономике и денежной массы, а также прямых иностранных инвестиций и их роли в обеспечении экономического роста. Результаты исследования показывают, что до глобального кризиса 2008-2009 годов финансовый цикл был перегрет в условиях неограниченного доступа на внешние рынки капитала и явного проявления признаков «голландской болезни» в экономике. В последующем ребалансировка потоков капитала и завершение сырьевого «суперцикла» повлияли на деловую активность и спрос на заемные ресурсы. На основе модели Солоу выявлено, что, несмотря на снижение темпов инвестиций, кредитов и в целом денежной массы, вклад финансов в экономический рост повышается. Однако, рост вклада инвестиций в основной капитал не приводит к пропорциональному росту экономики, что указывает на убывающую отдачу инвестиций. Оценки показывают, что основная причина снижения долгосрочного экономического роста заключается не в снижении объемов финансирования экономики, а преимущественно в снижении производительности факторов производства. Было показано, что увеличение инвестиций, кредитов и денежной массы не может поддерживать высокий уровень экономического роста и заменить рост производительности в долгосрочной перспективе. // This study examines the dynamics of fixed capital investments, credits to the economy and money supply as well as foreign direct investments and their role in ensuring the economic growth. The results of the study show that before the global crisis of 2008-2009, the financial cycle was overheated due to an unlimited access to external capital markets and clear signs of the Dutch disease in the economy. Subsequently, the rebalancing of capital flows and the completion of the commodity "super cycle" affected the business activity and the demand for borrowed resources. Based on the Solow model, it was found out that, despite a decrease in the rates of investments, loans and the money supply in general, the contribution of finance to the economic growth is increasing. However, a larger contribution by fixed capital investments does not lead to a proportional economic growth, which indicates a diminishing return on investment. Assessments show that the main reason for the decline in long-term economic growth is not a reduction in the volume of financing of the economy, but mainly a decrease in the factor productivity. It has been shown that an increase in investments, loans and money supply cannot maintain a high level of the economic growth and replace the productivity growth in the longterm perspective.
    Keywords: экономический рост, инвестиции, кредиты экономике, монетизация, economic growth, investments, credits to the economy, monetization
    JEL: O11 O16 O41
    Date: 2021
  35. By: Ojo, Marianne; Dierker, Theodore
    Abstract: The 2021 COP 26 Summit held in Glasgow, has resulted, not only in groundbreaking agreements, but also the involvement of private sector investment, the participation of formidable alliances such as the Global Energy Alliance – and for the first time, the engagement of indigenous communities. Whilst ongoing negotiations and outcomes from the Summit appear promising, there are still concerns in relation to the lack of enforceability of agreements. This paper, not only aims to highlight the rationales underlying such concerns, but also consider the merits and applicability of innovative techniques and technologies – as well as notable progress and developments made during the ongoing Summit. The engagement of several economies in the asset purchasing programs and uncertainty in decision making by some in respect of when, how or whether to commence winding up activities, also bears several monetary policy implications. This could in turn, impact outcomes – both intended and unintended, in relation to carbon, and more specifically, oil pricing strategies – which are ideally targeted at mitigating carbon emissions, whilst fostering climate goals and objectives. Given the demands and pressures of governments and economies in deploying funds to households, businesses; central bank engagements in deciding how and when to wind down asset purchase programs, and the need by governments to focus on more urgent and pressing matters such as those related to health, education, in the light of ongoing global developments, how ready and willing are governments able to commit to environmental issues? Herein lies a role for the private sector and private sector investment.
    Keywords: COP 26; double counting; fossil fuels; renewable energy; oil pricing; monetary policy; inflation; innovative techniques; Article 6 of the Paris Agreement; transparency; disclosure; emissions gap; NDCs
    JEL: D8 F6 F64 G3 K2
    Date: 2021–11

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