nep-ban New Economics Papers
on Banking
Issue of 2021‒12‒06
35 papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Adapting lending policies in a “negative-for-long” scenario By Oscar Arce; Miguel Garcia-Posada; Sergio Mayordomo; Steven Ongena
  2. Financial crises and political radicalization: How failing banks paved Hitler's path to power By Sebastian Doerr; Stefan Gissler; Jose-Luis Peydro; Hans-Joachim Voth
  3. Exogenous shocks, credit reports and access to credit: Evidence from colombian coffee producers By Nicolás de Roux
  4. Central bank digital currencies: motives, economic implications and the research frontier By Raphael Auer; Jon Frost; Leonardo Gambacorta; Cyril Monnet; Tara Rice; Hyun Song Shin
  5. The ECB's policy measures during the COVID-19 crisis By Pierpaolo Benigno; Paolo Canofari; Giovanni Di Bartolomeo; Marcello Messori
  6. Democratic Political Economy of Financial Regulation By Igor Livshits; Youngmin Park
  7. Discount Rates, Debt Maturity, and the Fiscal Theory By Alexandre Corhay; Thilo Kind; Howard Kung; Gonzalo Morales
  8. Bitcoin Adoption and Beliefs in Canada By Daniela Balutel; Christopher Henry; Jorge Vásquez; Marcel Voia
  9. Financial instability and economic activity By Fortin, Ines; Hlouskova, Jaroslava; Soegner, Leopold
  10. Sovereign debt in the 21st century: Looking backward, looking forward By Mitchener, Kris; Trebesch, Christoph
  11. Choosing the European Fiscal Rule By Ginters Buss; Patrick Gruning; Olegs Tkacevs
  12. The natural rate of interest through a hall of mirrors By Phurichai Rungcharoenkitkul; Fabian Winkler
  13. Financial institutions, poverty and severity of poverty in Sub-Saharan Africa By Simplice A. Asongu; Valentine B. Soumtang; Ofeh M. Edoh
  14. Inflation Targeting Mattered: a multivariate synthetic control approach By Ricardo D. Brito; Robison F. Kudamatsu, Vladimir K. Teles
  15. Testing the gender gap in subjective financial literacy of spouses By Marie-Hélène BROIHANNE
  16. Central bank’s stabilization and communication policies when firms have motivated overconfidence in their own information accuracy or processing By Camille Cornand; Rodolphe Dos Santos Ferreira
  17. Credit Creation, Economic Progress and the Saturation Effect: A Sector Level Analysis By Nader AlKathiri; Sambit Bhattacharyya
  18. To be or not to be “green”: how can monetary policy react to climate change? By Boneva, Lena; Ferrucci, Gianluigi; Mongelli, Francesco Paolo
  19. Quantitative easing and corporate innovation By Grimm, Niklas; Laeven, Luc; Popov, Alexander
  20. Back to the future: intellectual challenges for monetary policy By Claudio Borio
  21. The Price of Money: How Collateral Policy Affects the Yield Curve By Kjell G. Nyborg; Jiri Woschitz
  22. Monetarist arithmetic at Covid-19 time: a take on how not to misapply the quantity theory of money By Julien Pinter
  23. The Persistent Effects of Financial Crises on the Composition of Real Investment By Jiang, Sheila; Li, Ye; Xu, Douglas
  24. Do NBFCs Propagate Real Shocks? By Ghosh, Saurabh; Mazumder, Debojyoti
  25. Credit Risk Database: Credit Scoring Models for Thai SMEs By Bhumjai Tangsawasdirat; Suranan Tanpoonkiat; Burasakorn Tangsatchanan
  26. Payment Risk and Bank Lending By Li, Ye; Li, Yi
  27. The Effects of Macroprudential and Monetary Policy Shocks in BRICS economies By Kaelo Mpho Ntwaepelo
  28. Common Ownership Patterns in the European Banking Sector – The Impact of the Financial Crisis By Albert Banal-Estañol; Nuria Boot; Jo Seldeslachts
  29. Revisiting the Properties of Money By Isaiah Hull; Or Sattath
  30. Dampening the financial accelerator? Direct lenders and monetary policy By Ryan Niladri Banerjee; José María Serena Garralda
  31. The impact of a macroprudential borrower based measure on households’ leverage and housing choices By Sónia Félix; Daniel Abreu; Vítor Oliveira; Fátima Silva
  32. Predicting Mortality from Credit Reports By Giacomo De Giorgi; Matthew Harding; Gabriel Vasconcelos
  33. Monetary Policy Spillover to Small Open Economies: Is the Transmission Different under Low Interest Rates? By Jin Cao; Valeriya Dinger; Tomas Gomez; Zuzana Gric; Martin Hodula; Alejandro Jara; Ragnar Juelsrud; Karolis Liaudinskas; Simona Malovana; Yaz Terajima
  34. Banking Diversity, Financial Complexity and Resilience to Financial Shocks: Evidence From Italian Provinces By Beniamino Pisicoli
  35. Navigating by r*: safe or hazardous? By Claudio Borio

  1. By: Oscar Arce (Banco de España); Miguel Garcia-Posada (Banco de España); Sergio Mayordomo (Banco de España); Steven Ongena (University of Zurich - Department of Banking and Finance; NTNU Business School; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR))
    Abstract: What is the long-term impact of negative interest rates on bank lending? To answer this question we construct a unique summary measure of negative rate exposure by individual banks based on exclusive survey data and banks’ balance sheets and couple it with the credit register of Spain and firms’ balance sheets to identify this impact on the supply of credit to firms. We find that only after a few years of negative rates do affected banks (relative to non-affected banks) decrease their supply and increase their rates, especially when lowly capitalized and lending to risky firms. This suggests that the adverse effects of the negative interest rates on banks’ intermediation capacity only show up after a protracted period of ultra-low rates.
    Keywords: negative interest rates, risk taking, lending policies
    JEL: G21 E52 E58
    Date: 2021–11
  2. By: Sebastian Doerr; Stefan Gissler; Jose-Luis Peydro; Hans-Joachim Voth
    Abstract: Do financial crises radicalize voters? We study Germany's 1931 banking crisis, collecting new data on bank branches and firm-bank connections. Exploiting cross- sectional variation in pre-crisis exposure to the bank at the center of the crisis, we show that Nazi votes surged in locations more affected by its failure. Radicalization in response to the shock was exacerbated in cities with a history of anti- Semitism. After the Nazis seized power, both pogroms and deportations were more frequent in places affected by the banking crisis. Our results suggest an important synergy between financial distress and cultural predispositions, with far-reaching consequences.
    Keywords: financial crisis, political extremism, populism, anti-Semitism, culture, Great Depression
    JEL: E44 G01 G21 N20 P16
    Date: 2021–11
  3. By: Nicolás de Roux
    Abstract: Credit reporting systems have become a widespread tool to assess the creditworthiness of prospective borrowers. This paper studies the implications for credit access of using them in contexts where exogenous and transitory shocks affect income and repayment. Using a novel administrative data set with the near universe of formal loans to coffee producers in Colombia together with data from close to 1,200 rainfall stations, I show that transitory weather shocks lead to lower rates of loan repayment, lower credit scores, and more frequent denials of future loan applications. I present evidence that affected producers' incomes and ability to repay recover more quickly from shocks than credit access. This implies that these producers become credit constrained despite their ability to repay a loan. Insurance, contingency-dependent repayment schemes, or the inclusion of information on exogenous shocks in credit scoring models have the potential to alleviate the problem.
    Keywords: Shocks, Credit Reports, Access to Credit
    JEL: G21 O12 O13 Q12 Q14 Q54
    Date: 2021–11–19
  4. By: Raphael Auer; Jon Frost; Leonardo Gambacorta; Cyril Monnet; Tara Rice; Hyun Song Shin
    Abstract: In just a few years, central banks have rapidly ramped up their research and development effort on central bank digital currencies (CBDCs). A growing body of economic research informs these activities, often focusing on the "reserves for all" aspect of CBDCs for retail use. However, CBDCs should be considered in the full context of the digital economy and the centrality of data, which raises concerns around competition, payment system integrity and privacy. This paper gives a guided tour of the growing literature on CBDCs on the microeconomic considerations related to operational architectures, technologies and privacy, and the macroeconomic implications for the financial system, financial stability and monetary policy. A set of questions, particularly on the cross-border dimensions of CBDCs, remains unresolved, and calls for further work to expand the research frontier.
    JEL: C72 C73 D4 E42 E58 G21 O32 L86
    Date: 2021–11
  5. By: Pierpaolo Benigno; Paolo Canofari; Giovanni Di Bartolomeo; Marcello Messori
    Abstract: This paper illustrates the ECB's monetary policies, implemented in response to the Covid-19 crisis, and discusses their macroeconomic impact. By using an event-based analysis, it argues that these policies have stabilised the economic and financial system by incentivising banks' lending to households and businesses and by indirectly creating short-term fiscal capacity for those euro-area member states characterised by high government debt/GDP ratio.
    Keywords: Covid-19; ECB policy announcements; Financial market volatility; ECB policy reaction; Event-study analysis; Bank and Government borrowing costs
    JEL: E58 E44 E52
    Date: 2021–11
  6. By: Igor Livshits; Youngmin Park
    Abstract: This paper offers a simple theory of inefficiently lax financial regulation arising as an outcome of a democratic political process. Lax financial regulation encourages some banks to issue risky residential mortgages. In the event of an adverse aggregate housing shock, these banks fail. When banks do not fully internalize the losses from such failure (due to limited liability), they offer mortgages at less than actuarially fair interest rates. This opens the door to home ownership for young, low net-worth individuals. In turn, the additional demand from these new home-buyers drives up house prices. This leads to a non-trivial distribution of gains and losses from lax regulation among households. On the one hand, renters and individuals with large non-housing wealth suffer from the fragility of the banking system. On the other hand, some young, low net-worth households are able to get a mortgage and buy a house, and current (old) home-owners benefit from the increase in the price of their houses. When these latter two groups, who benefit from the lax regulation, constitute a majority of the voting population, then regulatory failure can be an outcome of the democratic political process.
    Keywords: Financial stability; Financial system regulation and policies; Housing; Interest rates
    JEL: E44 E63 G12
    Date: 2021–11
  7. By: Alexandre Corhay; Thilo Kind; Howard Kung; Gonzalo Morales
    Abstract: This paper examines how the transmission of government portfolio risk arising from maturity operations depends on the stance of monetary/fiscal policy. Accounting for risk premia in the fiscal theory allows the government portfolio to affect the expected inflation, even in a frictionless economy. The effects of maturity rebalancing on expected inflation in the fiscal theory directly depend on the conditional nominal term premium, giving rise to an optimal debt maturity policy that is state dependent. In a calibrated macro-finance model, we demonstrate that maturity operations have sizable effects on expected inflation and output through our novel risk transmission mechanism.
    Keywords: Fiscal policy; Interest rates; Monetary policy
    JEL: E44 E63 G12
    Date: 2021–11
  8. By: Daniela Balutel; Christopher Henry; Jorge Vásquez; Marcel Voia
    Abstract: We develop a tractable model of Bitcoin adoption with network effects and social learning, which we then connect to unique data from the Bank of Canada’s Bitcoin Omnibus Survey for the years 2017 and 2018. The model determines how the probability of Bitcoin adoption depends on (1) network effects; (2) individual learning effects; and (3) social learning effects. After accounting for the endogeneity of beliefs, we find that both network effects and individual learning effects have a positive and significant direct impact on Bitcoin adoption, whereas the role of social learning is to ameliorate the marginal effect of the network size on the likelihood of adoption. In particular, in 2017 and 2018, a one percentage point increase in the network size increased the probability of adoption by 0.45 and 0.32 percentage points, respectively. Similarly, a one percentage point increase in Bitcoin beliefs increased the probability of adoption by 0.43 and 0.72 percentage points. Our results suggest that network effects, individual learning, and social learning were important drivers of Bitcoin adoption in 2017 and 2018 in Canada.
    Keywords: Digital currencies and fintech; Econometric and statistical methods; Economic models
    JEL: D83 O33
    Date: 2021–11
  9. By: Fortin, Ines (Macroeconomics and Business Cycles, Institute for Advanced Studies, Vienna, Austria); Hlouskova, Jaroslava (Macroeconomics and Business Cycles, Institute for Advanced Studies, Vienna, Austria and Dept. of Economics, Faculty of National Economy, University of Economics in Bratislava, Slovakia); Soegner, Leopold (Macroeconomics and Business Cycles, Institute for Advanced Studies, Vienna, Austria and Vienna Graduate School of Finance (VGSF), Vienna, Austria)
    Abstract: We estimate new indices measuring financial and economic (in)stability in Austria and in the euro area. Instead of estimating the level of (in)stability in a financial or economic system we measure the degree of predictability of (in)stability, where our methodological approach is based on the uncertainty index of Jurado, Ludvigson and Ng (2015). We perform an impulse response analysis in a vector error correction framework, where we focus on the impact of uncertainty shocks on industrial production, employment and the stock market. We and that financial uncertainty shows a strong significantly negative impact on the stock market, for both Austria and the euro area, while economic uncertainty shows a strong significantly negative impact on the economic variables for the euro area. We also perform a forecasting analysis, where we assess the merits of uncertainty indicators for forecasting industrial production, employment and the stock market, using different forecast performance measures. The results suggest that financial uncertainty improves the forecasts of the stock market while economic uncertainty improves the forecasts of macroeconomic variables. We also use aggregate banking data to construct an augmented financial uncertainty index and examine whether models including this augmented financial uncertainty index outperform models including the original financial uncertainty index in terms of forecasting.
    Keywords: financial (in)stability, uncertainty, financial crisis, forecasting, stochastic volatility, factor models
    JEL: C53 G01 G20 E44
    Date: 2021–11
  10. By: Mitchener, Kris; Trebesch, Christoph
    Abstract: How will sovereign debt markets evolve in the 21st century? We survey how the literature has responded to the eurozone debt crisis, placing "lessons learned" in historical perspective. The crisis featured: (i) the return of debt problems to advanced economies; (ii) a bank-sovereign "doom-loop" and the propagation of sovereign risk to households and firms; (iii) roll-over problems and self-fulfilling crisis dynamics; (iv) severe debt distress without outright sovereign defaults; (v) large-scale sovereign bailouts from abroad; and (vi) creditor threats to litigate and hold out in a debt restructuring. Many of these characteristics were already present in historical debt crises and are likely to remain relevant in the future. Looking forward, our survey points to a growing role of sovereign-bank linkages, legal risks, domestic debt and default, and of official creditors, due to new lenders such as China as well as the increasing dominance of central banks in global debt markets. Questions of debt sustainability and default will remain acute in both developing and advanced economies.
    JEL: F30 F34 G12 G15 N10 N20
    Date: 2021
  11. By: Ginters Buss (Latvijas Banka); Patrick Gruning (Latvijas Banka, Vilnius University); Olegs Tkacevs (Latvijas Banka)
    Abstract: Contributing to the ongoing discussions at the European Union level about the potential simplification of its fiscal framework, we evaluate the economic and public finance stabilization properties of two benchmark fiscal rules – the structural balance rule and the expenditure growth rule – using a New Keynesian small open economy model. If these fiscal rules are implemented one at a time, having just an expenditure growth rule tends to yield more stable macroeconomic outcomes, but more volatile public finances, as compared to having only a structural balance rule. Much of the quantitative differences in relative volatilities can be accounted for by the modifications of the public expenditure definition in the expenditure growth rule, in particular, the removal of debt service payments. Accounting for debt service payments in fiscal rules strengthens the monetary-fiscal policy interaction but it may turn vicious to macroeconomic stability at business cycle frequencies. Strong-enough debt correction for either fiscal rule contains public debt volatility at little expense to macroeconomic stability in the long run. The households' welfare gain from having the expenditure growth rule instead of the structural balance rule is 4% for a small country in a monetary union and 5% for a country with sovereign monetary policy.
    Keywords: fiscal policy, DSGE, small open economy, fiscal-monetary policy interaction
    JEL: E0 E2 E3 E6 F4 H2 H3 H6
    Date: 2021–11–17
  12. By: Phurichai Rungcharoenkitkul; Fabian Winkler
    Abstract: Prevailing justifications of low-for-long interest rates appeal to a secular decline in the natural interest rate, or r-star, due to factors outside monetary policy's control. We propose informational feedback via learning as an alternative explanation for persistently low rates, where monetary policy plays a crucial role. We extend the canonical New Keynesian model to an incomplete information setting where the central bank and the private sector must learn about r-star and infer each other's information from observed macroeconomic outcomes. An informational feedback loop emerges when each side underestimates the effect of its own action on the other's inference, leading to large and persistent changes in perceived r-star disconnected from fundamentals. Monetary policy, through its influence on the private sector's beliefs, endogenously determines r-star as a result. We simulate a calibrated model and show that this 'hall of mirrors' effect can explain much of the decline in real interest rates since 2008.
    JEL: E43 E52 E58 D82 D83
    Date: 2021–11
  13. By: Simplice A. Asongu (Yaounde, Cameroon); Valentine B. Soumtang (Yaoundé, Cameroon); Ofeh M. Edoh (Yaoundé, Cameroon)
    Abstract: The study assesses how financial institution dynamics have affected poverty and the severity of poverty in 42 sub-Saharan African countries for the period 1980-2019. In order to increase for policy relevance of the study, three financial development indicators are used, namely: financial institutions depth, financial institutions access and financial institutions efficiency. The adopted empirical strategy is a quantile regressions approach which enables the study to assess how financial institutions dynamics affect poverty and the severity of poverty throughout the conditional distribution of poverty and severity of poverty. The findings show various tendencies, inter alia: (i) financial institutions depth (efficiency) consistently decreases the severity of poverty (poverty headcount) and (ii) financial institutions access consistently decreases both poverty and the severity of poverty and the decreasing effect increases with increasing levels of poverty in the top quantiles and throughout the conditional distribution of the severity of poverty. Policy implications are discussed with respect of SDG1 on poverty reduction.
    Keywords: financial development; poverty alleviation; Africa
    JEL: G20 I10 I20 I30 O10
    Date: 2021–11
  14. By: Ricardo D. Brito; Robison F. Kudamatsu, Vladimir K. Teles
    Abstract: We use a multivariate synthetic control method that matches the price and output dynamics jointly to evaluate the effects of the inflation targeting regime (IT) on the inflation and output growth of its early adopters (the ITers) – New Zealand, Canada, the United Kingdom, Sweden, and Australia. Once accounting for the inflation-output tradeoff in the conduct of monetary policy, the ITers enjoyed lower inflation and/or higher output growth than their counterfactuals. These performances were economically important to justify IT central banks’ optimism with IT, both case-by-case and on average.
    Keywords: Inflation targeting; Multivariate synthetic control
    JEL: E52 E58
    Date: 2021–11–18
  15. By: Marie-Hélène BROIHANNE (LaRGE Research Center, Université de Strasbourg)
    Abstract: This article examines the gender gap in subjective financial literacy of retail clients of a large European bank. Using a database of banking records and questionnaire answers of more than 50,000 retail clients, the gender gap in subjective financial literacy was found to be significantly higher for individuals living as part of a couple. To distinguish the respective impact of financial responsibility and subjective literacy between partners in households, the study was based on 7,382 dual-income couples for which data was matched since spouses hold a joint bank account. The findings suggest that the gender gap in subjective financial literacy between spouses is reduced because of couple consensus during spouses' joint decision-making. As 70% of couples exhibit no gender gap in subjective financial literacy, the couple characteristics that explain either a classical or an inverse subjective financial literacy gender gap are identified. We show that the heterogeneity in the gender gap in subjective financial literacy of couples is related to that of spouses' financial management styles.
    Keywords: Subjective financial literacy, Gender gap, Spouses' financial decision-making, Spouse dominance, Financial management styles
    JEL: G02 G11 G28
    Date: 2021
  16. By: Camille Cornand (Univ Lyon, CNRS, GATE. Address: LSE UMR 5824, F-69130 Ecully, France); Rodolphe Dos Santos Ferreira (BETA, University of Strasbourg, 61 avenue de la Forˆet Noire, 67085 Strasbourg Cedex, France and Cat ´olica Lisbon School of Business and Economics)
    Abstract: Using a simple microfounded macroeconomic model with price making firms and a central bank maximizing the welfare of a representative household, it is shown that the presence of firms’ motivated beliefs has stark consequences for the conduct of optimal communication and stabilization policies. Under pure communication (resp. communication and stabilization policies), motivated beliefs about own private information (resp. own ability to process information) reverse the bang-bang solution of transparency (resp. opacity with full stabilization) found in the literature under objective beliefs and lead to intermediate levels of communication (and stabilization).
    Keywords: Motivated beliefs, public and private information (accuracy),overconfidence, communication policy, stabilization policy
    JEL: D83 D84 E52 E58
    Date: 2021
  17. By: Nader AlKathiri (Department of Economics, University of Sussex, Falmer, United Kingdom); Sambit Bhattacharyya (Department of Economics, University of Sussex, Falmer, United Kingdom)
    Abstract: We investigate the effect of credit creation on real value added in manufacturing, services and agriculture and whether the effect is conditional on the level of development (saturation effect). We also investigate potential heterogeneity across credit types (households and non-financial corporations) and the significance of credit impulse (or new credit creation). Using a sample of up to 95 countries covering the period 1970 to 2017, we find that private credit has strong positive effects on manufacturing value added but not on agriculture and services. We also find evidence of credit saturation across all three sectors even though the effect is noticeably weaker in agriculture. The unbundled effects of household and non-financial corporation credit on value added in manufacturing and services are statistically significant. We also do not find any effect of credit impulse.
    JEL: D72 O11
    Date: 2021–11
  18. By: Boneva, Lena; Ferrucci, Gianluigi; Mongelli, Francesco Paolo
    Abstract: Climate change has profound effects not only for societies and economies, but also for central banks’ ability to deliver price stability in the future. This paper starts by documenting why climate change matters for monetary policy: it impacts the economic variables relevant to setting the monetary policy stance, it interacts with fiscal and structural responses and it can generate dislocations in financial markets, which are impossible for monetary policy to ignore. Next, we survey several possible ways central banks can respond to climate change. These range from protective actions to more proactive measures aimed at mitigating climate change and supporting green finance and the transition to sustainable growth. We also discuss the constraints and trade-offs faced by central banks as they respond to climate risks. Finally, focusing on the specific challenges faced by inflation-targeting central banks, we consider how certain design features of this regime might interact with, and evolve in response to, the climate challenge. JEL Classification: E52, E58, Q54
    Keywords: climate change, environmental economics, green finance, monetary policy, sustainable growth economics
    Date: 2021–11
  19. By: Grimm, Niklas; Laeven, Luc; Popov, Alexander
    Abstract: To what extent can Quantitative Easing impact productivity growth? We document a strong and heterogeneous response of corporate R&D investment to changes in debt financing conditions induced by corporate debt purchases under the ECB’s Corporate Sector Purchase Program. Companies eligible for the program increase significantly their investment in R&D, relative to similar ineligible companies operating in the same country and sector. The evidence further suggests that by subsidizing the cost of debt, corporate bond purchases by the central bank stimulate innovation through a wealth transfer to innovative companies with low debt levels, rather than by supporting credit constrained firms. JEL Classification: E5, G10, O3
    Keywords: corporate innovation, productivity growth, quantitative easing, unconventional monetary policy
    Date: 2021–11
  20. By: Claudio Borio
    Abstract: The central banking community is facing major challenges – economic, intellectual and institutional. A key economic challenge is the need to rebuild room for policy manoeuvre, which has fallen drastically over time. This lecture focuses on the intellectual challenge, ie facts on the ground are increasingly testing the longstanding analytical paradigms on which central banks can rely to inform their policies. It argues that certain deeply held beliefs underpinning those paradigms can complicate the task of regaining policy headroom.
    Keywords: monetary policy, business cycle, financial cycle, inflation, deflation, natural interest rate
    JEL: E43 E51 E52 E58 E31
    Date: 2021–11
  21. By: Kjell G. Nyborg (University of Zurich - Department of Banking and Finance; Centre for Economic Policy Research (CEPR); Swiss Finance Institute); Jiri Woschitz (University of Zurich)
    Abstract: Central-bank collateral policy governs the convertibility of assets into central-bank money provided directly by the central bank. Focusing on government bonds, we develop clean identification of variation in such convertibility by exploiting differential treatment of same-country government bonds in the euro area. Combining difference-in-differences analysis with yield-curve modeling on four separate events, we show that reduced convertibility lifts yields, but with the effect tapering off at longer maturities. Our findings imply that central-bank money is priced in the market and that a central bank can move and shape the yield curve through collateral policy.
    Keywords: Yield curve, central bank, collateral policy, monetary policy, haircuts, repo, asset prices, liquidity, central-bank money, government bonds
    JEL: G12 E43 E52
    Date: 2021–11
  22. By: Julien Pinter (NIPE - University of Minho)
    Abstract: The Covid-19 crisis has revived an old heated debate on whether significant increases in the money supply -such as the ones accompanying central banks’ unconventional policies- ultimately lead to higher inflation. Some observers have alluded to the quantity theory of money for that purpose, sometimes in a misleading way in our view. Against this background, this paper seeks to clarify several aspects of the quantity theory of money and the so-called "monetarist" approach to it, useful to apply it fairly in the current world. First, we review and discuss the meaning of the velocity term in the quantity equation. We argue that it has no relevance as a behavioral concept: there is no such thing as a "desired velocity". Rather, income velocity should be seen as a reduced-form variable, obtained from a larger system of parameters and variables related to money demand, as the monetarist approach clearly puts it. Second, we clarify the practical relevance that the quantity theory approach can bear in the 21st century. We argue that although the quantity theory is unsuitable to explain conventional monetary policies, the mechanism on which it builds bears relevance in analyzing some recent unconventional monetary policies. Third, we review the channels and assumptions underlying the asserted quantity theory link between money growth and inflation. In light of our analysis, we conclude that the high money growth rates seen since the Covid-19 outbreak are not likely to automatically translate into higher inflation rates.
    Keywords: quantity theory of money; quantity equation; money growth; inflation; velocity of money
    JEL: B00 E41 E50 E58
    Date: 2021
  23. By: Jiang, Sheila (University of Florida); Li, Ye (Ohio State University); Xu, Douglas (University of Chicago)
    Abstract: Our paper provides the first cross-country evidence on the distinct dynamics of tangible and intangible investments during and after the global financial crisis. The pre-crisis rise of intangible-to-tangible capital ratio was reversed outside the U.S. due to a greater decline of intangible investment and a much slower recovery. Tangible capital can be externally financed, and its post-crisis recovery benefits from the restoration of credit supply. In contrast, Intangible investment relies on firms’ liquidity holdings that were drawn down in the crisis and can only be rebuilt gradually through retained profits. We provide a unified account of the findings through a dynamic model of corporate investment and liquidity management. Consistent with our model predictions, the divergence between tangible and intangible investments is more prominent in countries with weaker intellectual property protection (less external financing options for intangibles) and riskier government bonds (less robust corporate liquidity holdings).
    JEL: E22 E23 E41 E44 G01 G15 G31 G32
    Date: 2021–11
  24. By: Ghosh, Saurabh; Mazumder, Debojyoti
    Abstract: In this paper, we try to explain the role of Non-bank Financial Intermediation (NBFI) to percolate and propel a real shock to the rest of the economy through the bank-NBFI interactions. We propose a simple theoretical model which identifies the channels and distinguishes between idiosyncratic, structural and sectoral shocks, cleanly. In our model, the non-deposit taking Non-bank Financial companies (NBFCs) which are the provider of risky, small and fragmented loans, are financed by borrowing from commercial banks. This link connects the NBFCs with the commercial banks and, in turn, with the rest of the economy. A higher realization of the failed firms (idiosyncratic shock) in the NBFC financed sector and a rise in the sector-wide productivity risk (sectoral risk) increase the interest rate charged by the banks and unemployment rate but reduces the real wages and per capita capital formation of the economy. However, when the average number of failed firms increases (structural shock), the reverse happens.
    Keywords: NBFC, Bank-NBFC interaction, Real Shock, Search and matching unemployment
    JEL: E44 G21 G23 J64
    Date: 2021–11–11
  25. By: Bhumjai Tangsawasdirat; Suranan Tanpoonkiat; Burasakorn Tangsatchanan
    Abstract: This paper aims to provide an introduction to Credit Risk Database (CRD), a collection of financial and non-financial data for SME credit risk analysis, for Thailand. Aligning with the Bank of Thailand (BOT)’s strategic plan to develop the data ecosystem to help reduce asymmetric information problem in the financial sector, CRD is an initiative to effectively utilize data already collected from financial institutions as a part of the BOT’s supervisory mandate. Our first use case is intended to help improve financial access for SMEs, by building credit risk models that can work as a complementary tool to help financial institutions and Credit Guarantee Corporation assess SMEs financial prospects in parallel with internal credit score. Focusing on SMEs who are new borrowers, we use only SME’s financial and non-financial data as our explanatory variables while disregarding past default-related data such as loan repayment behavior. Credit risk models of various methodologies are then built from CRD data to allow financial institutions to conduct effective risk-based pricing, offering different sets of interest rates and loan terms. Statistical methods (i.e. logit regression and credit scoring) and machine learning methods (i.e. decision tree and random forest) are used to build credit risk models that can help quantify the SME’s one-year forward probability of default. Out-of-sample prediction results indicate that the statistical and machine learning models yield reasonably accurate probability of default predictions, with the maximum Area under the ROC Curve (AUC) at approximately 70-80%. The model with the best performance, as compared by the maximum AUC, is the random forest model. However, the credit scoring model that is developed from logistic regression of weighted-of-evidence variables is more user-friendly for credit loan providers to interpret and develop practical application, achieving the second-best AUC.
    Keywords: Credit Risk Database; Credit Score; Credit Risk Assessment; Credit Scoring Model; Thai SMEs
    JEL: C52 C53 C55 D81 G21 G32
    Date: 2021–11
  26. By: Li, Ye (Ohio State University); Li, Yi (Board of Governors of the Federal Reserve System)
    Abstract: Deposits finance bank lending and serve as means of payment for bank customers. Under uncertain payment flows, deposits are debts with random maturities. Payment outflows drain reserves, and the risk is most prominent when funding markets are under stress and banks are unable to smooth out payment shocks. We provide the first evidence on the negative impact of payment risk on bank lending, bridging the literatures on payment systems and credit supply. An interquartile increase in payment risk is associated with a decline in loan growth rate that is 10% of standard deviation. Our findings are stronger in times of funding stress and robust across banks of different sizes and loans of long and short maturities. Banks with higher payment risk raise deposit rates to expand customer base and internalize payment flows. Finally, we show that payment risk dampens the bank lending channel of monetary policy transmission.
    JEL: E42 E43 E44 E51 E52 G21 G28
    Date: 2021–11
  27. By: Kaelo Mpho Ntwaepelo
    Abstract: This paper examines the macroeconomic effects of the macroprudential and monetary policy shocks, in a framework where the policies target both the price and financial stability objectives. I employ the system-generalised method of moments (system-GMM) technique in a dynamic panel data model, over the 1990-2016 period. The study uses the novel integrated macroprudential policy dataset (iMaPP) in the context of the five major emerging market economies: Brazil, Russia, India, China and South Africa (BRICS). The results indicate that a contractionary monetary policy shock eliminates the excessive growth of credit and house prices but increases the price levels (price puzzle). The presence of a price puzzle after a contractionary monetary policy shock indicates that there is a trade-off between the financial stability and price stability objectives. Similarly, the impulse response function analysis reveals the presence of a negative correlation between the financial variables and output, after a contractionary macroprudential policy shock. Overall, the empirical findings suggest that there is a policy conflict when the policies respond to additional objectives beyond their primary targets. It is therefore beneficial for each policy to focus on its primary objective while considering the spillover effects of the other policy.
    Keywords: emerging markets, macroprudential policy, financial stability, monetary policy, price stability
    JEL: E58 E61 G28
    Date: 2021–11–10
  28. By: Albert Banal-Estañol; Nuria Boot; Jo Seldeslachts
    Abstract: We provide a description of ownership patterns in the top 25 European banks for the period 2003–2015, where we especially focus on the global financial crisis. Investment managers, such as Blackrock, are dominant in terms of number of blockholdings in different banks, maintaining fairly stable “common ownership” networks throughout our sample. However, the financial crisis led to capital injections by governments in several banks in trouble, which in turn led to a jump in holdings by governments, which typically are “non-common owners” (i.e., they hold only shares in only one bank). This jump translated into these investors temporarily being the top investor with a large share, and non-common owners being the majority among large shareholders. A brief comparison with US banks uncovers large ownership differences between the European and US banking sectors. We briefly discuss what these ownership patterns might imply for competition, stability and performance in the banking industry.
    Date: 2021–11–08
  29. By: Isaiah Hull; Or Sattath
    Abstract: The properties of money commonly referenced in the economics literature were originally identified by Jevons (1876) and Menger (1892) in the late 1800s and were intended to describe physical currencies, such as commodity money, metallic coins, and paper bills. In the digital era, many non-physical currencies have either entered circulation or are under development, including demand deposits, cryptocurrencies, stablecoins, central bank digital currencies (CBDCs), in-game currencies, and quantum money. These forms of money have novel properties that have not been studied extensively within the economics literature, but may be important determinants of the monetary equilibrium that emerges in the forthcoming era of heightened currency competition. This paper makes the first exhaustive attempt to identify and define the properties of all physical and digital forms of money. It reviews both the economics and computer science literatures and categorizes properties within an expanded version of the original functions-and-properties framework of money that includes societal and regulatory objectives.
    Date: 2021–11
  30. By: Ryan Niladri Banerjee; José María Serena Garralda
    Abstract: Direct lenders, non-bank credit intermediaries with low leverage, have become increasingly important players in corporate loan markets. In this paper we investigate the role they play in the monetary policy transmission mechanism, using syndicated loan data covering the 2000-2018 period. We show that direct lenders are more likely to join loan syndicates whenever monetary policy announcements trigger a contraction in borrowers' net worth irrespective of the directional change in interest rates. Thus, our findings suggest that direct lenders dampen the financial accelerator channel of monetary policy.
    Keywords: direct lending, monetary policy, financial accelerator, credit channel
    JEL: G21 G32 F32 F34
    Date: 2021–11
  31. By: Sónia Félix; Daniel Abreu; Vítor Oliveira; Fátima Silva
    Abstract: Banco de Portugal implemented new limits to the loan-to-value (LTV) ratio in July 2018. This paper investigates the impact of these new lending limits on households’ leverage and housing choices. Using credit register data that covers the universe of loans granted to households, which allows us to account for loan and households’ characteristics and bank heterogeneity, we document a decline in the LTV ratio after the implementation of the macroprudential measure. Importantly, using a difference-in-differences estimation strategy we estimate the impact of the policy change on households that were more likely to exceed the new LTV limits in the absence of the policy change. Our results show that the policy change was effective in reducing households’ leverage as constrained households take out smaller loans and have lower loan-to-income ratios. These households pay higher interest rate spreads and have higher loan-service-to-income ratios than the control group. This paper also shows that the policy change affected households’ housing choices as constrained households bought cheaper houses. Overall, our results highlight the improvement of the risk profile of households following the introduction of the LTV limits.
    JEL: D14 E58 E61 G21 G28
    Date: 2021
  32. By: Giacomo De Giorgi; Matthew Harding; Gabriel Vasconcelos
    Abstract: Data on hundreds of variables related to individual consumer finance behavior (such as credit card and loan activity) is routinely collected in many countries and plays an important role in lending decisions. We postulate that the detailed nature of this data may be used to predict outcomes in seemingly unrelated domains such as individual health. We build a series of machine learning models to demonstrate that credit report data can be used to predict individual mortality. Variable groups related to credit cards and various loans, mostly unsecured loans, are shown to carry significant predictive power. Lags of these variables are also significant thus indicating that dynamics also matters. Improved mortality predictions based on consumer finance data can have important economic implications in insurance markets but may also raise privacy concerns.
    Date: 2021–11
  33. By: Jin Cao; Valeriya Dinger; Tomas Gomez; Zuzana Gric; Martin Hodula; Alejandro Jara; Ragnar Juelsrud; Karolis Liaudinskas; Simona Malovana; Yaz Terajima
    Abstract: We explore the impact of low and negative monetary policy rates in core world economies on bank lending in four small open economies - Canada, Chile, the Czech Republic and Norway - using confidential bank-level data. Our results show that the impact on lending in these small open economies depends on the interest rate level in the core. When interest rates are high, monetary policy cuts in core economies can reduce credit supply in small open economies. In contrast, when interest rates in core economies are low, further expansionary monetary policy increases lending in small open economies, consistent with an international bank lending channel. These results have important policy implications, suggesting that central banks in small open economies should watch for the impact of potential regime switches in core economies' monetary policy when rates shift to and from the very low end of the distribution.
    Keywords: Cross-border monetary policy spillover, international bank lending channel, low and negative interest rate environment (LNIRE), portfolio channel
    JEL: E43 E52 E58 F34 F42 G21 G28
    Date: 2021–11
  34. By: Beniamino Pisicoli (DEF, University of Rome "Tor Vergata")
    Abstract: In this paper we investigate the influence of banking and financial diversity on stability. We compute an index of banking diversity for Italian provinces and, drawing from network theory, we propose a measure of the diversity and development of the overall provincial financial sector. Our results show that diversity in the banking and financial markets promotes greater stability. Such beneficial effects are particularly evident during periods of financial distress. We ascribe our findings to the better diversification achieved by more diverse financial systems, as documented by lower loans concentration and higher loans diversification in terms of economic destination and borrower category.
    Keywords: financial diversity; financial stability; non-performing loans; financial complexity; financial crises; banking diversity
    JEL: G01 G20 P34
    Date: 2021–11–09
  35. By: Claudio Borio
    Abstract: The concept of the natural rate of interest, or r*, has risen to prominence in monetary policy following the Great Financial Crisis. No doubt a key reason for the concept's newfound prominence has been the further decline of real and nominal interest rates to new lows, which has further constrained monetary policy's room for manoeuvre. This lecture explores the extent to which the concept can be a useful guide to policy. It concludes that, depending on how it is employed, the concept has the potential of leading policy astray and of complicating the task of regaining the needed policy headroom. If so, within a credible policy regime, there is a premium on flexibility in the pursuit of tightly defined inflation targets – on tolerance for transitory, but possibly persistent, shortfalls of inflation from target.
    Keywords: natural interest rate, central banking, monetary policy
    JEL: E40 E43 E52 E58
    Date: 2021–11

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