nep-ban New Economics Papers
on Banking
Issue of 2021‒11‒29
33 papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. O.M.W. Sprague (the Man Who “Wrote the Book” on Financial Crises) meets the Great Depression By Hugh Rockoff
  2. Does Corruption Discourage More Female Entrepreneurs from Applying for Credit? By Jean-Christophe STATNIK; Thi-Le Giang VU; Laurent WEILL
  3. The internationalization of domestic banks and the credit channel of monetary policy By Paola Morales; Daniel Osorio-Rodríguez; Juan S. Lemus-Esquivel; Miguel Sarmiento
  4. How Bad Are Weather Disasters for Banks? By Kristian S. Blickle; Sarah Ngo Hamerling; Donald P. Morgan
  5. Decomposing Gender Differences in Bankcard Credit Limits By Nathan Blascak; Anna Tranfaglia
  6. Inflation Narratives By Peter Andre; Ingar Haaland; Christopher Roth; Johannes Wohlfart
  7. Trade Flows, Private Credit and the Covid-19-Pandemic: Panel Evidence from 35 OECD Countries By Guglielmo Maria Caporale; Anamaria Sova; Robert Sova
  8. Fintech and Financial Inclusion: The Fifth Annual Fintech Conference By Patrick T. Harker
  9. FinTech Lending By Tobias Berg; Andreas Fuster; Manju Puri
  10. Should Central Banks Issue Digital Currency? By Todd Keister; Daniel R. Sanches
  11. Paying Banks to Lend? Evidence from the Eurosystem's TLTRO and the Euro Area Credit Registry By Emilie Da Silva; Vincent Grossmann-Wirth; Benoit Nguyen; Miklos Vari
  12. Forecasting with a Panel Tobit Model By Laura Liu; Hyungsik Roger Moon; Frank Schorfheide
  13. Impact of the central bank’s financial result on the transfers of benefits across sectors of the economy By Krzysztof Kruszewski; Mikołaj Szadkowski
  14. Loan Guarantees, Bank Lending and Credit Risk Reallocation By Carlo Altavilla; Andrew Ellul; Marco Pagano; Andrea Polo; Thomas Vlassopoulos
  15. Intermediation and Voluntary Exposure to Counterparty Risk By Maryam Farboodi
  16. Funding liquidity, credit risk and unconventional monetary policy in the Euro area: a GVAR approach By Graziano Moramarco
  17. Reducing Strategic Default in a Financial Crisis By Sumit Agarwal; Slava Mikhed; Barry Scholnick; Man Zhang
  18. Scrambling for Dollars: International Liquidity, Banks and Exchange Rates By Javier Bianchi; Saki Bigio; Charles Engel
  19. Financial Liberalization, Credit Market Dynamism, and Allocative Efficiency By Minetti, Raoul; Herrera, Ana Maria; Schaffer, Matthew
  20. The Rise of Regional Financial Cycle and Domestic Credit Markets in Asia By Banti, Chiara; Bose, Udichibarna
  21. Limited Asset Market Participation and Monetary Policy in a Small Open Economy By Paul Levine; Stephen McKnight; Alexander Mihailov; Jonathan Swarbrick
  22. FinTech as a Financial Liberator By Greg Buchak; Jiayin Hu; Shang-Jin Wei
  23. Aging, migration and monetary policy in Poland By Marcin Bielecki; Michał Brzoza-Brzezina; Marcin Kolasa
  24. CLO Performance By Larry Cordell; Michael R. Roberts; Michael Schwert
  25. Parameter Uncertainty and Effective Lower Bound Risk By Naoto Soma
  26. Elections Hinder Firms’ Access to Credit By Florian LEON; Laurent WEILL
  27. Measuring and Testing a Modified Version of the South African Financial Cycle By Malibongwe C Nyati; Christian K Tipoy; Paul F Muzindutsi
  28. COVID-19 pandemic increases the divide between cash and cashless payment users in Europe By Radoslaw Kotkowski; Michal Polasik
  29. Does Public Debt Granger-Cause Inflation in Tanzania? A Multivariate Analysis By Saungweme; Odhiambo
  30. Macroprudential Policies and The Covid-19 Pandemic: Risks and Challenges For Emerging Markets By Sebastian Edwards
  31. Dynamic Pricing of Credit Cards and the Effects of Regulation By Suting Hong; Robert M. Hunt; Konstantinos Serfes
  32. Optimal bailout strategies resulting from the drift controlled supercooled Stefan problem By Christa Cuchiero; Christoph Reisinger; Stefan Rigger
  33. Corporate bond financing of Italian non-financial firms By Giorgio Meucci; Fabio Parlapiano

  1. By: Hugh Rockoff
    Abstract: When the Great Depression struck the United States, Oliver M.W. Sprague was America’s foremost expert on financial crises. His History of Crises under the National Banking System is a frequently cited classic. Had he diagnosed a banking panic and called for an aggressive response by the Federal Reserve, it might have made a difference; but he did not. Sprague’s misdiagnosis had, I argue, two causes. First, the crisis lacked the symptoms of a panic, such as high short-term interest rates in the New York money market, which Sprague had identified from his studies of previous crises. Second, Sprague’s macro-economic ideas led him to conclude that an expansionary monetary policy would be of little help once a depression was underway. Sprague’s main concern was that abandoning the gold standard would intensify the crisis, a concern that led him to resign his position as advisor to the U.S. Treasury to protest Roosevelt’s gold policy.
    JEL: B2 N12 N2
    Date: 2021–10
  2. By: Jean-Christophe STATNIK (Université de Lille, Yncréa Lille); Thi-Le Giang VU (Université de Lille); Laurent WEILL (LaRGE Research Center, Université de Strasbourg)
    Abstract: There is evidence of a gender gap in access to finance. In this paper, we test the hypothesis that corruption discourages more female than male entrepreneurs from applying for credit. We use data on access to credit and corruption at the firm level for a large dataset of firms from 68 countries worldwide. We demonstrate that female entrepreneurs are more discouraged by corruption to ask for credit than male borrowers. We find evidence for two explanations for the gendered impact of corruption on borrower discouragement: women have less experience in management than men and as such can have less experience to deal with corruption, and gender inequality in society enhances the discouragement of female borrowers. Thus, our findings provide evidence that corruption enhances the gender gap in access to finance, enhancing gender inequality in participation in economic activity.
    Keywords: gender, access to credit, borrower discouragement, corruption.
    JEL: D73 G21 J16
    Date: 2021
  3. By: Paola Morales; Daniel Osorio-Rodríguez; Juan S. Lemus-Esquivel; Miguel Sarmiento
    Abstract: How does the expansion of domestic banks in international markets affect the bank lending channel of monetary policy? Using bank-firm loan-level data, we find that loan growth and loan rates from international banks respond less to monetary policy changes than domestic banks and that internationalization partially mitigates the risk-taking channel of monetary policy. Banks with a large international presence tend to tolerate more their credit risk exposition relative to domestic banks. Moreover, international banks tend to rely more on foreign funding when policy rates change, allowing them to insulate better the monetary policy changes from their credit supply than domestic banks. This result is consistent with the predictions of the internal capital markets hypothesis. We also show that macroprudential FX regulation reduces banks with high FX exposition access to foreign funding, ultimately contributing to monetary policy transmission. Overall, our results suggest that the internationalization of banks lowers the potency of the bank lending channel. Furthermore, it diminishes the risk-taking channel of monetary policy within the limit established by macroprudential FX regulations. **** RESUMEN: ¿Cómo afecta la expansión de los bancos domésticos en los mercados internacionales el canal del crédito bancario de la política monetaria? Usando datos a nivel de banco-firma-préstamo, este estudio encuentra que el crecimiento del crédito y las tasas de interés de los créditos otorgados por los bancos internacionales (i.e., bancos domésticos que se expandieron en los mercados internacionales) responden menos a cambios en la política monetaria y que la internacionalización mitiga parcialmente el canal de la toma de riesgos de la política monetaria. Encontramos también que los bancos con una mayor presencia internacional tienden a tolerar mejor su exposición al riesgo de crédito frente a los bancos domésticos. Además, identificamos que los bancos internacionales tienden a usar más el fondeo externo cuando cambian las tasas de política, lo que les permite aislar en mayor medida su oferta de crédito de los cambios de la política monetaria en comparación con los bancos domésticos. Este resultado es consistente con las predicciones de la hipótesis de los mercados de capital internos. Se muestra que la regulación cambiaria macroprudencial reduce el acceso al fondeo externo por parte de los bancos con alta exposición cambiaria, lo que contribuye a la transmisión de la política monetaria. En general, los resultados sugieren que la internacionalización de los bancos disminuye la potencia del canal del crédito bancario y reduce el canal de la toma de riesgos de la política monetaria dentro del límite establecido por la regulación cambiaria macroprudencial.
    Keywords: Bank-lending channel, internationalization of banks, banks’ business models, monetary policy, bank risk-taking, macroprudential FX regulation, Canal del crédito bancario, internacionalización de la banca, modelos de negocio de los bancos, política monetaria, toma de riesgos bancarios, regulación cambiaria macroprudencial.
    JEL: E43 E52 F23 F34 F44
    Date: 2021–11
  4. By: Kristian S. Blickle; Sarah Ngo Hamerling; Donald P. Morgan
    Abstract: Not very. We find that weather disasters over the last quarter century had insignificant or small effects on U.S. banks’ performance. This stability seems endogenous rather than a mere reflection of federal aid. Disasters increase loan demand, which offsets losses and actually boosts profits at larger banks. Local banks tend to avoid mortgage lending where floods are more common than official flood maps would predict, suggesting that local knowledge may also mitigate disaster impacts.
    Keywords: hurricanes; wildfires; floods; climate change; weather disasters; FEMA; banks; financial stability; local knowledge
    JEL: G21 H84
    Date: 2021–11–01
  5. By: Nathan Blascak; Anna Tranfaglia
    Abstract: In this paper, we examine if there are gender differences in total bankcard limits by utilizing a data set that links mortgage applicant information with individual-level credit bureau data from 2006 to 2016. We document that after controlling for credit score, income, and demographic characteristics, male borrowers on average have higher total bankcard limits than female borrowers. Using a standard Kitagawa-Oaxaca-Blinder decomposition, we find that 87 percent of the gap is explained by differences in the effect of observed characteristics between male and female borrowers, while approximately 10 percent of the difference can be explained by differences in the levels of observed characteristics. Using a quantile decomposition strategy to analyze the gender gap along the entire bankcard credit limit distribution, we show that gender differences in bankcard limits favor female borrowers at smaller limits and favor male borrowers at larger limits. The primary factors that drive this gap have changed over time and vary across the distribution of credit limits.
    Keywords: gender; credit; credit cards; decomposition
    JEL: J16 G51 G53
    Date: 2021–11–02
  6. By: Peter Andre (University of Bonn); Ingar Haaland (University of Bergen and CESifo); Christopher Roth (University of Cologne, ECONtribute, briq, CESifo, CEPR, and CAGE Warwick); Johannes Wohlfart (Department of Economics and CEBI, University of Copenhagen, CESifo, and Danish Finance Institute)
    Abstract: We provide evidence on the stories that people tell to explain a historically no-table rise in inflation using samples of experts, U.S. households, and managers. We document substantial heterogeneity in narratives about the drivers of higher inflation rates. Experts put more emphasis on demand-side factors, such as fiscal and monetary policy, and on supply chain disruptions. Other supply-side factors, such as labor shortages or increased energy costs, are equally prominent across samples. Households and managers are more likely to tell generic stories related to the pandemic or mismanagement by the government. We also find that house-holds and managers expect the increase in inflation to be more persistent than experts. Moreover, narratives about the drivers of the inflation increase are strongly correlated with beliefs about its persistence. Our findings have implications for understanding macroeconomic expectation formation.
    Keywords: Narratives, Inflation, Beliefs, Macroeconomics, Fiscal Policy, Monetary Policy.
    JEL: D83 D84 E31 E52 E71
    Date: 2021–11
  7. By: Guglielmo Maria Caporale; Anamaria Sova; Robert Sova
    Abstract: This paper analyses the impact of the Covid-19 pandemic on exports and imports in the case of 35 OECD countries during the 2019Q1-2021Q2 period using a dynamic panel approach, specifically the system Generalized Method of Moments (GMM). In contrast to earlier studies, the empirical specification incorporates not only an index for the restrictive (and fiscal) measures adopted by national governments, but also an interaction term with private credit which captures the role of the financial sector in the context of the current crisis. The findings suggest that the negative effects of the Covid-19 pandemic on international trade can be attenuated through (policies supporting) private credit, which confirms the importance of the trade-finance nexus.
    Keywords: Covid-19 pandemic, stringency index, overall government response index, credit to the private non-financial sector, dynamic panel models, GMM
    JEL: C25 E61 F13 F15
    Date: 2021
  8. By: Patrick T. Harker
    Abstract: Speaking to a virtual audience at the Fifth Annual Fintech Conference, Philadelphia Fed President Patrick T. Harker said he sees great opportunities in using fintech as a tool to promote financial inclusion. But he cautioned that human judgment is still responsible for training algorithms and determining how financial technologies operate.
    Date: 2021–11–16
  9. By: Tobias Berg; Andreas Fuster; Manju Puri
    Abstract: In this paper, we review the growing literature on FinTech lending – the provision of credit facilitated by technology that improves the customer-lender interaction or lenders’ screening and monitoring of borrowers. FinTech lending has grown rapidly, though in developed economies like the U.S. it still only accounts for a small share of total credit. An increase in convenience and speed appears to have been more central to FinTech lending’s growth than improved screening or monitoring, though there is certainly potential for the latter, as is the case for increased financial inclusion. The COVID-19 pandemic has shown potential vulnerabilities of FinTech lenders, although in certain segments they have displayed rapid growth.
    JEL: G2 G20 G21 G23
    Date: 2021–10
  10. By: Todd Keister; Daniel R. Sanches
    Abstract: We study how the introduction of central bank digital currency affects interest rates, the level of economic activity, and welfare in an environment where both central bank money and private bank deposits are used in exchange. We highlight an important policy tradeoff: While a digital currency tends to promote efficiency in exchange, it may also crowd out bank deposits, raise banks’ funding costs, and decrease investment. We derive conditions under which targeted digital currencies, which compete only with physical currency or only with bank deposits, raise welfare. If such targeted currencies are infeasible, we illustrate the policy tradeoffs that arise when issuing a single, universal digital currency.
    Keywords: Monetary policy; public vs. private money; electronic payments; liquidity premium; disintermediation
    JEL: E42 E58 G28
    Date: 2021–11–03
  11. By: Emilie Da Silva; Vincent Grossmann-Wirth; Benoit Nguyen; Miklos Vari
    Abstract: Since March 2020 the Eurosystem has provided subsidies to Euro-Area banks, via its Targeted Longer-Term Refinancing Operations (TLTRO). Under this program, banks can borrow from the Eurosystem at a rate as low as -1%, conditional on their lending to the real economy. This paper uses a simple theoretical model to disentangle between so-called “targeted” and “profitability" channels. We test those channels on the new Euro-Area credit registry data (AnaCredit). To overcome reverse causality, we employ novel identification strategies based on TLTRO parameters set before the pandemic and unexpected changes afterward. We find support for both channels and conclude the targeted channel is stronger.
    Keywords: TLTRO ; ECB ; Funding-for-Lending; AnaCredit
    JEL: G11 G15 G23 H55 Q54 Q56
    Date: 2021
  12. By: Laura Liu; Hyungsik Roger Moon; Frank Schorfheide
    Abstract: We use a dynamic panel Tobit model with heteroskedasticity to generate forecasts for a large cross-section of short time series of censored observations. Our fully Bayesian approach allows us to flexibly estimate the cross-sectional distribution of heterogeneous coefficients and then implicitly use this distribution as prior to construct Bayes forecasts for the individual time series. In addition to density forecasts, we construct set forecasts that explicitly target the average coverage probability for the cross-section. We present a novel application in which we forecast bank-level loan charge-off rates for small banks.
    Date: 2021–10
  13. By: Krzysztof Kruszewski (Narodowy Bank Polski); Mikołaj Szadkowski (Narodowy Bank Polski, Warsaw School of Economics)
    Abstract: This paper presents an analysis of the impact of the central bank’s financial result and its components on the inter-sectoral transfers of benefits and the creation of central bank money. Transfers of benefits depend on the structure of the central bank’s balance sheet and its financial result. The structure of its balance sheet, its financial result as well as profit distribution influence central bank money creation. If the central bank records a profit, fully transferred to the state budget, and its assets are mainly denominated in domestic currency, then the central bank’s financial result can be seen only as a tool for intermediation in the transfer of benefits between different sectors of the national economy. In such a situation, the bank’s financial result does not affect the volume of the central bank’s money. On the other hand, if the central bank records a profit, fully paid to the state budget, and its assets are mainly denominated in foreign currency, then there is a transfer from foreign entities to the domestic economy, and there is simultaneously an increase in central bank money volume. However, if the central bank incurs a loss and the loss is not covered, for example, by the government, then the central bank transfers benefits directly from itself to other sectors of the economy, and regardless of the structure of its balance sheet, there is an increase in the central bank’s money issuance.
    Keywords: central bank, financial result, balance sheet, transfers between sectors of the economy
    JEL: E51 E58
    Date: 2021
  14. 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 after 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 non-guaranteed debt. For firms borrowing from multiple banks, the substitution arises from the lending behavior of the bank extending guaranteed loans, whose drop in non-guaranteed lending is about 9 times larger than for other banks that lend to the same firm. 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: 2021–11–14
  15. By: Maryam Farboodi
    Abstract: I study a model of the financial sector in which intermediation among debt financed banks gives rise to an endogenous core-periphery network – few highly interconnected and many sparsely connected banks. Endogenous intermediation generates excessive systemic risk in the financial network. Financial institutions have incentives to capture intermediation spreads through strategic borrowing and lending decisions. By doing so, they tilt the division of surplus along an intermediation chain in their favor, while at the same time reducing aggregate surplus. The network is inefficient relative to a constrained efficient benchmark since banks who make risky investments “overconnect”, exposing themselves to excessive counterparty risk, while banks who mainly provide funding end up with too few connections.
    JEL: D85 G20 G21
    Date: 2021–11
  16. By: Graziano Moramarco
    Abstract: This paper investigates the transmission of funding liquidity shocks, credit risk shocks and unconventional monetary policy within the Euro area. To this aim, a financial GVAR model is estimated for Germany, France, Italy and Spain on monthly data over the period 2006-2017. The interactions between repo markets, sovereign bonds and banks' CDS spreads are analyzed, explicitly accounting for the country-specific effects of the ECB's asset purchase programmes. Impulse response analysis signals core-periphery heterogeneity and persistent flight to quality. A simulated reduction in any ECB programme ultimately results in rising yields and bank CDS spreads in Italy and Spain, as well as in falling repo trade volumes and rising repo rates in all four countries.
    Date: 2021–11
  17. By: Sumit Agarwal; Slava Mikhed; Barry Scholnick; Man Zhang
    Abstract: We document that increasing penalties for default reduces strategic default in financial crises by exploiting the 2009 changes to Canadian consumer insolvency regulations. Our novelty is that the incentives from increasing penalties for default operate in the opposite direction from incentives in more typical financial crisis policy interventions, which increase the liquidity of debtors. We can identify strategic default because our policy intervention is independent of debtors’ liquidity and initial selection into long-term debt contracts. Our results imply that even insolvent debtors can be incentivized to reduce default during financial crises without the typical interventions, which increase debtors’ liquidity
    Keywords: strategic default; financial crisis
    JEL: G01 G21 G51
    Date: 2021–11–08
  18. By: Javier Bianchi; Saki Bigio; Charles Engel
    Abstract: We develop a theory of exchange rate fluctuations arising from financial institutions’ demand for dollar liquid assets. Financial flows are unpredictable and may leave banks “scrambling for dollars.” Because of settlement frictions in interbank markets, a precautionary demand for dollar reserves emerges and gives rise to an endogenous convenience yield on the dollar. We show that an increase in the dollar funding risk leads to a rise in the convenience yield and an appreciation of the dollar, as banks scramble for dollars. We present empirical evidence on the relationship between exchange rate fluctuations for the G10 currencies and the quantity of dollar liquidity, which is consistent with the theory.
    JEL: F41 F44 G20
    Date: 2021–11
  19. By: Minetti, Raoul (Michigan State University, Department of Economics); Herrera, Ana Maria (University of Kentucky); Schaffer, Matthew (UNC Greensboro)
    Abstract: We investigate the effects of financial liberalization on the dynamism of the credit market, as measured by the intensity of credit reallocation across firms. We construct measures of inter-firm credit reallocation in the U.S. states following a methodology akin to Davis and Haltiwanger (1992). We then exploit the staggered deregulation of the credit markets of the states of the eighties as a natural experiment to identify an exogenous shock to the process of credit reallocation. The analysis reveals that the credit market liberalization intensified inter-firm credit reallocation in the states, even within narrowly defined groups of continuing firms, while leaving aggregate credit growth essentially unaltered. The results suggest that, in turn, the increased allocative dynamism of the credit market enhanced the allocation of funds to more productive firms and the TFP growth of the states.
    Keywords: Credit Market; Credit Reallocation; Allocative Efficiency; Liberalization
    JEL: E44 G20
    Date: 2021–11–18
  20. By: Banti, Chiara; Bose, Udichibarna
    Abstract: This paper documents the emergence of a regional financial cycle in Asia, evidenced by commonality in regional bank flows, and its impact on domestic credit. Using a dataset of 24,169 non-financial Indian firms for the period 2001-2019, we establish that the regional financial cycle has a positive and significant impact on domestic corporate debt, as opposed to an insignificant effect on foreign currency corporate debt, after controlling for the global financial cycle. We find that both interbank markets and monetary policy conditions in the region act as transmission channels for this effect. We show that transparent firms which have lower monitoring costs are relatively more exposed to the regional financial cycle, suggesting that affiliates of foreign banks play an important role. However, the exposure of domestic credit markets reduces once regulators institute more stringent policy actions such as macroprudential policies, selective capital controls and floating currency regimes.
    Keywords: Regional financial cycle; domestic credit markets; macroprudential policies; capital controls; emerging markets
    Date: 2021–11–19
  21. By: Paul Levine (University of Surrey); Stephen McKnight (El Colegio de Mexico); Alexander Mihailov (University of Reading); Jonathan Swarbrick (University of St Andrews)
    Abstract: Limited asset market participation (LAMP) and trade openness are crucial features that characterize all real-world economies. We study equilibrium determinacy and optimal monetary policy in a model of a small open economy with LAMP. With low enough participation in asset markets, the conventional wisdom concerning the stabilizing benefits of policy inertia can be overturned irrespective of the constraint of a zero lower bound on the nominal interest rate. In contrast to recent studies, in LAMP economies trade openness can play an important stabilizing role. We also show that the central bank must balance the opposing influence of openness and LAMP on the aggressiveness of optimal policy, and that the equivalence between efficient and equitable optimal allocation found in closed economies breaks down in open economies. We derive targeting rules and demonstrate the superiority of commitment over discretion in implementable optimal interest rate rules.
    JEL: E31 E44 E52 E58 E63 F41
    Date: 2021–10
  22. By: Greg Buchak; Jiayin Hu; Shang-Jin Wei
    Abstract: A binding interest rate cap on household savings is a common form of financial repression in developing economies and typically benefits banks. Using proprietary data from a leading Chinese FinTech company, we study Fintech's role in ending financial repression in China through the introduction of a money market fund with deposit-like features available through an already widely-adopted household payment platform. Cities and banks whose depositor base is more exposed to FinTech see greater deposit outflows. Importantly, exposed banks respond to FinTech competition by offering competing products with market interest rates. FinTech thus facilitates a bottom-up interest rate liberalization.
    JEL: E21 E42 E43 E44 E52 E58 G21 G28 G51
    Date: 2021–11
  23. By: Marcin Bielecki (Narodowy Bank Polski); Michał Brzoza-Brzezina (Narodowy Bank Polski); Marcin Kolasa (SGH Warsaw School of Economics)
    Abstract: Poland faces a particularly sharp demographic transition. The old-age dependency ratio is expected to increase from slightly above 20% in 2000 to over 60% in 2050. At the same time the country has recently witnessed a huge wave of immigration, mostly from Ukraine. In this paper we investigate how aging and migration will affect the Polish economy and what consequences these adjustments have for its monetary policy. Using a general equilibrium model with life-cycle considerations, we show that the decline in the natural rate of interest (NRI) due to demographic processes is substantial, amounting to more than 1.5 percentage points, albeit spread over a period of 40 years. The impact of migration flows is relatively small and cannot significantly alleviate the downward pressure on the NRI induced by populating aging. If the central bank is slow in learning about the declining NRI, an extended period of inflation running below the target is likely. In this case, the probability of hitting the zero lower bound (ZLB) becomes a major constraint on monetary policy while it could remain under control if the central bank uses demographic trends to update the NRI estimates in real time.
    Keywords: aging, monetary policy, migration, life-cycle models
    JEL: E43 E52
    Date: 2021
  24. By: Larry Cordell; Michael R. Roberts; Michael Schwert
    Abstract: We study the performance of collateralized loan obligations (CLOs) to understand the market imperfections giving rise to these vehicles and their corresponding economic costs. CLO equity tranches earn positive abnormal returns from the risk-adjusted price differential between leveraged loans and CLO debt tranches. Debt tranches offer higher returns than similarly rated corporate bonds, making them attractive to banks and insurers that face risk-based capital requirements. Temporal variation in equity performance highlights the resilience of CLOs to market volatility due to their closed-end structure, long-term funding, and embedded options to reinvest principal proceeds.
    JEL: G12 G14 G23 G24
    Date: 2021–10
  25. By: Naoto Soma (Economist, Institute for Monetary and Economic Studies, Bank of Japan (currently, Associate Professor, Yokohama National University, E-mail:
    Abstract: Uncertainty is a fact of life for central banks, and the effective lower bound (ELB) of short-term nominal interest rates has become one source of uncertainty for many of them. This paper analyzes the effects of uncertainty about monetary policy transmission on inflation in a canonical New Keynesian model with optimal discretionary monetary policy under the ELB. The main finding is that a greater degree of uncertainty enlarges the "deflationary bias" of the economy. In the model, the central bank reacts to the uncertainty by attenuating the response of the nominal interest rate to exogenous shocks. Such inactive policy response leaves the fall in inflation caused by the ELB risk partially untreated, which lowers the inflation expectations of private agents and results in undershooting of the inflation target.
    Keywords: Model Uncertainty, Effective Lower Bound, Deflationary Bias, Risky Steady State
    JEL: D81 E32 E52
    Date: 2021–11
  26. By: Florian LEON (FERDI, Clermont-Ferrand); Laurent WEILL (LaRGE Research Center, Université de Strasbourg)
    Abstract: We investigate whether the occurrence of elections affect access to credit for firms. We perform an investigation using firm-level data covering 44 developed and developing countries. We find that elections have a detrimental influence on access to credit: firms are more credit-constrained in election years but also in pre-election years. We explain this finding by the fact that elections exacerbate political uncertainty. The negative effect of elections takes place through lower credit demand, whereas the occurrence of elections does not affect credit supply. We further establish that the design of political and financial systems affects how elections influence access to credit.
    Keywords: Elections, access to credit, credit constraints.
    JEL: G21 D72
    Date: 2021
  27. By: Malibongwe C Nyati; Christian K Tipoy; Paul F Muzindutsi
    Abstract: This study reports on measuring and testing of a Composite Financial Cycle Index (CFCI) as a modified version of a South African Financial Cycle (FC). This is achieved through the adoption of thirteen monthly financial time series indicators observed over the period 2000M1 to 2018M12. In this context, a Two-Step Markov Switching Dynamic Factor in State-Space Form is utilised. The analyses are extended through the measurement of the SARB proxy index in order to facilitate comparison. The study provided evidence that the indicators of credit, house price and equity prices are the best indicators for measuring FCs in South Africa. However, there exist room for extension of the scope of financial time series variables used beyond these indicators. The added indicators proved to have more information content for financial crises forecasting. They have further proved to be better signals and to be better early warning indicators of financial crises in South Africa. Therefore, the addition of time series indicators beyond credit, house price and equity, increased the accuracy in measuring FCs, which could help prevent vulnerabilities from accumulating unnoticed.
    Keywords: Composite Financial Cycle Index, Macroprudential policy, State Space modelling, Dynamic Factor Model, Multinomial Logit Model, Markov Regime Switching
    Date: 2021–10
  28. By: Radoslaw Kotkowski (Narodowy Bank Polski); Michal Polasik (Nicolaus Copernicus University)
    Abstract: This paper investigates the way in which the COVID-19 pandemic has changed an important aspect of everyday life, viz. how people make payments. The empirical study is based on a survey of over 5,000 respondents from 22 European countries. It shows that consumers who had been making cashless payments prior to the outbreak of the pandemic have been even more likely to do so since it broke out. On the other hand, the consumers who had mostly been paying in cash have often continued to do so. Results indicate that the usage of banking and payment innovations proved to be the catalyst leading to the growth of cashless payment usage. The divide between those who pay in cash and those who do not, therefore, seems to have widened during the pandemic. We found that the probability of more frequent cashless payments as a result of the pandemic differs considerably between countries and therefore depends on local conditions. The results indicate that the pandemic has exacerbated major financial inclusion issues and that this needs to be addressed by policymakers, but also that further analysis of factors differentiating usage of cash and the cashless instrument is needed.
    Keywords: COVID-19 pandemic; Cash; Cashless payments; Change in payment behaviour
    JEL: E41 E42 I12 I18
    Date: 2021
  29. By: Saungweme; Odhiambo
    Abstract: The optimal balance between fiscal and monetary policy in achieving price stability has been contested in literature. In the main, however, it is widely recognised that whether public debts are financed in a monetary way or otherwise, the choice of policy action affects the effectiveness of monetary policy in ensuring price stability. This study contributes to the debate by testing the dynamic causal relationship between public debt and inflation in Tanzania covering the period 1970-2020. The study applies the autoregressive distributed lag (ARDL) bounds testing technique to cointegration and the ECM-based Granger-causality test to explore this relationship. In order to address the omission-of-variable bias, which has been the major methodological deficiency detected in some previous studies, two monetary variables, namely money supply and interest rate, were added as intermittent variables alongside public debt and inflation. The findings from this study show that there is a consistent long-run cointegrating relationship between public debt, inflation, money supply and interest rate in Tanzania. However, the results fail to find evidence of causality between public debt and inflation in Tanzania, irrespective of whether the causality is estimated in the short run or in the long run. The findings of this study, therefore, show that Tanzania’s current debt is not inflationary; hence, policymakers may continue to pursue the desirable fiscal policies necessary for the country’s long-term optimal growth path.
    Date: 2021–10
  30. By: Sebastian Edwards
    Abstract: This paper deals with COVID and macroprudential regulations in emerging markets. I document the build-up of a sturdy macroprudential structure during 2009-2019, and the relaxation of regulations in 2020-2021, as part of the effort to deal with the sanitary emergency. I show that in every country, regulatory forbearance played a key role in the response to COVID. I discuss capital controls as macroprudential instruments. I argue that rebuilding the macroprudential fabric is important to reduce the costs of future systemic shocks. I maintain that post-COVID regulations should incorporate the risks associated with digital currencies.
    JEL: E31 E52 E58 F3 F41
    Date: 2021–10
  31. By: Suting Hong; Robert M. Hunt; Konstantinos Serfes
    Abstract: We construct a two-period model of revolving credit with asymmetric information and adverse selection. In the second period, lenders exploit an informational advantage with respect to their own customers. Those rents stimulate competition for customers in the first period. The informational advantage the current lender enjoys relative to its competitors determines interest rates, credit supply, and switching behavior. We evaluate the consequences of limiting the repricing of existing balances as implemented by recent legislation. Such restrictions increase deadweight losses and reduce ex-ante consumer surplus. The model suggests novel approaches to identify empirically the effects of this law. We find the pattern of changes to interest rates and balance transfer activity before and after the CARD Act are consistent with the testable implications of the model.
    Keywords: Financial contracts; Credit Card Accountability Responsibility and Disclosure Act; holdup; risk-based pricing; credit supply
    JEL: D14 D18 D86 G28 K12
    Date: 2021–11–23
  32. By: Christa Cuchiero; Christoph Reisinger; Stefan Rigger
    Abstract: We consider the problem faced by a central bank which bails out distressed financial institutions that pose systemic risk to the banking sector. In a structural default model with mutual obligations, the central agent seeks to inject a minimum amount of cash to a subset of the entities in order to limit defaults to a given proportion of entities. We prove that the value of the agent's control problem converges as the number of defaultable agents goes to infinity, and that it satisfies a drift controlled version of the supercooled Stefan problem. We compute optimal strategies in feedback form by solving numerically a forward-backward coupled system of PDEs. Our simulations show that the agent's optimal strategy is to subsidise banks whose asset values lie in a non-trivial time-dependent region. Finally, we study a linear-quadratic version of the model where instead of the terminal losses, the agent optimises a terminal cost function of the equity values. In this case, we are able to give semi-analytic strategies, which we again illustrate numerically.
    Date: 2021–11
  33. By: Giorgio Meucci (Bank of Italy); Fabio Parlapiano (Bank of Italy)
    Abstract: This work analyses the main trends in bond financing by Italian non-financial firms and its role in relation to bank credit across different economic phases. The first part of the analysis refers to the 2008-2019 period, characterized by both crisis and recovery episodes, while the second part focuses on the specific effects of the recent pandemic crisis. The corporate bond market experienced substantial growth over the years, with an increasing number and more diverse types of issuers tapping the market. At the same time, not all crises episodes have had similar effects for bond financing. The 2008 and 2012 crises encouraged non-financial firms, especially the larger ones, to use bond instruments as an alternative to (rationed) bank credit, highlighting substitutability between market and bank-based financing channels. Instead, during the 2020 pandemic crisis, both bond issuances and bank credit expanded at unprecedentedly high rates, highlighting complementarities.
    Keywords: non-performing loans, firm distress, firm recovery
    JEL: G1 G3 G32
    Date: 2021–11

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