nep-ban New Economics Papers
on Banking
Issue of 2021‒12‒20
35 papers chosen by
Sergio Castellanos-Gamboa, , Pontificia Universidad Javeriana

  1. Borrower versus bank channels in lending: Experimental- and administrative-based evidence By Valentina Michelangeli; José-Luis Peydró; Enrico Sette
  2. The aftermath of sovereign debt crises: a narrative approach By Lennard, Jason; Kenny, Seán; Esteves, Rui
  3. Competition and regulation in the Finnish ATM industry By Markkula, Tuomas; Takalo, Tuomas
  4. Vermögenspreise, Zinseffekte und die Robustheit der öffentlichen Finanzen in Deutschland - eine Szenario-Analyse By Boysen-Hogrefe, Jens; Fiedler, Salomon; Gern, Klaus-Jürgen; Groll, Dominik; Jannsen, Nils; Kooths, Stefan
  5. Could transaction-based financial benchmarks be susceptible to collusive behaviour? By Lilian Muchimba
  6. Prudential policy with distorted beliefs By Dávila, Eduardo; Walther, Ansgar
  7. If public spending can be reinterpreted as public investment. Can public debt be reinterpreted as public asset? By Morgan, Robert
  8. How did the Complementary Deposit Facility affect commercial bank fs demand for reserve? Empirical analysis using bank fs financial data By Katsutoshi Takehana; Hisashi Tanizaki
  9. "Still Flying Blind after All These Years: The Federal Reserve's Continuing Experiments with Unobservables" By Dimitri B. Papadimitriou; L. Randall Wray
  10. Central Bank Digital Currencies and The Emerging Markets: The Currency Substitution Challenge By Sebastian Edwards
  11. The role of systemic risk spillovers in the transmission of Euro Area monetary policy By Skouralis, Alexandros
  12. The Evolution of Monetary Policy Focal Points By Alexis Stenfors; Ioannis Chatziantoniou; David Gabauer
  13. The Cost of Consumer Collateral: Evidence from Bunching By Benjamin L. Collier; Cameron Ellis; Benjamin J. Keys
  14. Monetary policy implications of deviations in inflation targeting: the need for a global cooperative, coordinated and correlated response By Ojo, Marianne; Dierker, Theodore
  15. Financial frictions: micro vs macro volatility By Lee, Seungcheol; Luetticke, Ralph; Ravn, Morten O.
  16. Elections Hinder Firms' Access to Credit By Florian Léon; Laurent Weill
  17. Financialisation of Nature By Tone Smith
  18. Assessing the fiscal-monetary policy mix in the euro area By Bańkowski, Krzysztof; Christoffel, Kai; Faria, Thomas
  19. Global spillovers of the Fed information effect By Pinchetti, Marco; Szczepaniak, Andrzej
  20. Macroprudential Policy, Bank Competition and Bank Risk in East Asia By E Philip Davis; Ka Kei Chan; Dilruba Karim
  21. Financial behavior for status seeking purposes of consumers in emerging markets. A case study of suburban Jakarta, Indonesia. By A.R.S. Ibn Ali
  22. Developments in Banknotes in Circulation since the Start of the Pandemic By Kento Yoshizawa; Kohei Maehashi; Hiroaki Yanagihara; Yoichi Kadogawa; Masakazu Inada
  23. CBDC as Imperfect Substitute for Bank Deposits: A Macroeconomic Perspective By Philippe Bacchetta; Elena Perazzi
  24. Financial institutions, poverty and severity of poverty in Sub-Saharan Africa By Simplice A. Asongu; Valentine B. Soumtang; Ofeh M. Edoh
  25. Feeling the heat: extreme temperatures and price stability By Faccia, Donata; Parker, Miles; Stracca, Livio
  26. What are banks’ actual capital targets? By Couaillier, Cyril
  27. Predicting Macroeconomic and Macrofinancial Stress in Low-Income Countries By Mr. Irineu E de Carvalho Filho; Hans Weisfeld; Fei Liu; Mr. Fabio Comelli; Mr. Andrea F Presbitero; Alexis Meyer-Cirkel; Mrs. Sandra V Lizarazo Ruiz; Klaus-Peter Hellwig; Rahul Giri; Chengyu Huang
  28. Assessing Banking and Currency Crisis Risk in Small States: An application to the Eastern Caribbean Currency Union By Kotaro Ishi; Carlo Pizzinelli; Tariq Khan
  29. Can central bank digital currency increase financial inclusion? Arguments for and against By Ozili, Peterson K
  30. Credit, crises and inequality By Bridges, Jonathan; Green, Georgina; Joy, Mark
  31. Ups and downs in finance, ups without downs in inequality By Godechot, Olivier; Neumann, Nils; Apascaritei, Paula; Boza, István; Hällsten, Martin; Henriksen, Lasse Folke; Hermansen, Are; Hou, Feng; Jung, Jiwook; Kodama, Naomi; Křížková, Alena; Lippényi, Zoltán; Marta, Elvira; Melzer, Silvia Maja; Mun, Eunmi; Sabanci, Halil; Soener, Matthew; Thaning, Max
  32. Do analysts forecast differently in periods of uncertainty? An empirical analysis of target prices for Spanish banks By Roberto Pascual
  33. Refinancing cross-subsidies in the mortgage market By Fisher, Jack; Gavazza, Alessandro; Liu, Lu; Ramadorai, Tarun; Tripathy, Jagdish
  34. Cash demand in times of crises By Rösl, Gerhard; Seitz, Franz
  35. Optimal Bank Reserve Remuneration and Capital Control Policy By Chun-Che Chi; Stephanie Schmitt-Grohé; Martín Uribe

  1. By: Valentina Michelangeli; José-Luis Peydró; Enrico Sette
    Abstract: We identify the relative importance for bank lending of borrower (demand-side) versus bank (supply-side) factors. We submit thousands of fictitious mortgage applications, changing one borrower-level factor at time, to the major Italian online mortgage platform. Each application goes to all banks. Borrower and bank factors are equally strong in causing and explaining loan acceptance. For pricing, borrower factors are instead stronger. Moreover, banks supplying less credit accept riskier borrowers. Exploiting the administrative credit register, there is borrower-lender assortative matching, and the bank-level strength measure estimated on the experimental data is associated to credit supply and risk-taking to real firms.
    Keywords: credit; banks; mortgages; SMEs; risk-taking.
    JEL: G21 G51 E51
    Date: 2021–12
  2. By: Lennard, Jason; Kenny, Seán; Esteves, Rui
    Abstract: Default is as old as sovereign debt. Since 1820, sovereigns have spent 18% of time in a state of default. Despite the scale of the problem, the causes and consequences of defaults are still imperfectly understood. In this paper we quantify the aggregate cost of defaults, based on a sample of 50 sovereigns between 1870 and 2010. Since defaults are endogenous to the business cycle, we use the narrative approach to identify plausibly exogenous episodes. We find significant and persistent costs of defaults starting at 1.6% of GDP and peaking at 3.3% before recovering to the pre-crisis level after five years. Moreover, we identify a large heterogeneity of costs by the cause of default. Higher costs are associated with defaults initiated by negative supply shocks, political crises, or adverse terms of trade. In contrast, domestic demand shocks have a moderate effect that is quickly reversed.
    JEL: E32 F41 H63 N10 N20
    Date: 2021–11
  3. By: Markkula, Tuomas; Takalo, Tuomas
    Abstract: Declining ATM numbers pose a challenge for competition policy and financial regulatory authorities. In this report we review the Finnish experience of regulating the competition in the ATM industry. To analyze the Finnish developments we extend the model of Kopsakangas-Savolainen and Takalo (2014), and draw on the existing literature and benchmarks from the selected other countries. We document how changes in the ATM market regulation and market structure has decoupled the ATM network size from the declining cash use in Finland. The Finnish regulation has almost exclusively focused on foreign fees, while in general it would be better to regulate interchange fees. If the optimal fee regulation is not feasible, the authorities could also consider quantity regulation.
    Keywords: ATM industry,cash,competition policy,optimal regulation,retail payments
    Date: 2021
  4. By: Boysen-Hogrefe, Jens; Fiedler, Salomon; Gern, Klaus-Jürgen; Groll, Dominik; Jannsen, Nils; Kooths, Stefan
    Abstract: Die äußerst günstigen Finanzierungskonditionen hatten in den 2010er Jahren einen wesentlichen Anteil daran, dass die Bruttostaatsschuldenquote in Deutschland nach der Weltfinanzkrise merklich zurückgeführt wurde. Die Autoren stellen fest, dass es jedoch keineswegs klar ist, wie lange die extreme Niedrigzinsphase andauert, was Fragen der Resilienz der Staatsfinanzen in der längeren Frist aufwirft. Die Folgen einer möglichen Zinswende für die öffentlichen Finanzen hängen maßgeblich von den Ursachen für die zurückliegende Niedrigzinsphase ab. Die in der Studie durchgeführte Szenarioanalyse konzentriert sich auf vier zyklische Einflussfaktoren auf das Zinsniveau: Geldpolitik- und Risikoprämienschock sowie Investitions- und Preisschock. Wird die Zinswende durch Faktoren verursacht, die auch eine höhere makroökonomische Dynamik induzieren, wirkt dies im öffentlichen Budget dem Anstieg der Zinslast entgegen. Die Zinswende stellt in solchen Fällen kein ernsthaftes Problem für die öffentlichen Haushalte dar. Wird die Zinswende durch Faktoren verursacht, die eine makroökonomische Abschwächung induzieren, ergibt sich ein deutlicher Anpassungsbedarf für die öffentlichen Haushalte. Dies wäre insbesondere dann der Fall, wenn die Geldpolitik der Europäischen Zentralbank derzeit 'zu expansiv' ausgerichtet ist. In einem solchen Szenario befände sich die deutsche Wirtschaft in einem monetären Boom, der bei einer Normalisierung der Zinsen wegfallen würde. Fluktuationen von Vermögenspreisen, die durch Zinsschwankungen hervorgerufen werden, dürften hingegen eine untergeordnete Rolle spielen, da das deutsche Steuer- und Transfersystem in dieser Hinsicht vergleichsweise wenig sensitiv ist. Ein wesentlicher Grund hierfür ist, dass sich Immobilienpreisschwankungen nur unwesentlich in Einnahmeveränderungen bei der Einkommensteuer übersetzen.
    Keywords: Öffentliche Finanzen,Staatsschulden,Zinsentwicklung,gesamtwirtschaftliche Szenarien,Public finance,government debt,interest rates,macroeconomic scenarios
    Date: 2021
  5. By: Lilian Muchimba (University of Portsmouth)
    Abstract: Prior to the series of manipulation scandals, financial benchmarks were perceived as a competitive and objective reflection of underlying money markets (Stenfors and Lindo 2018). For example, the manipulation of the London Interbank Offered Rate (LIBOR), underpinning financial contracts worth trillions of dollars was unthinkable. To prevent manipulation, financial market regulators around the world have recommended a paradigm shift from estimation-based to transaction-based financial benchmarks. This shift is based on the mainstream economic view that financial benchmarks anchored on actual transactions are not susceptible to anticompetitive behaviour. However, unlike auction markets, underlying interbank money markets have unique features. As most activity takes place over-the-counter, they are opaque and are governed by conventions, trust and reciprocity. This complicates the achievement of competitive pricing. Using a novel dataset from Bank of Zambia, this paper makes an empirical investigation into transaction-based benchmarks’ susceptibility to anticompetitive behaviour. Additionally, it contributes to the theoretical understanding of transaction-based financial market benchmarks. The study reflects on financial market regulators’ recommendation to transit from estimation-based to transaction-based financial market benchmarks. Further, the study is of interest to central bankers, as short-term interbank rates are the first stage of the monetary transmission mechanism.
    Keywords: Bank of Zambia; banks; collusion; LIBOR; monetary transmission mechanism; reference rates
    JEL: B52 E43 E52 G15 G28
    Date: 2021–12–14
  6. By: Dávila, Eduardo; Walther, Ansgar
    Abstract: This paper studies leverage regulation and monetary policy when equity investors and/or creditors have distorted beliefs relative to a planner. We characterize how the optimal leverage regulation responds to arbitrary changes in investors’ and creditors’ beliefs and relate our results to practical scenarios. We show that the optimal regulation depends on the type and magnitude of such changes. Optimism by investors calls for looser leverage regulation, while optimism by creditors, or jointly by both investors and creditors, calls for tighter leverage regulation. Monetary policy should be tightened (loosened) in response to either investors’ or creditors’ optimism (pessimism). JEL Classification: G28, G21, E61, E52
    Keywords: bailouts, distorted beliefs, leverage regulation, monetary policy, prudential policy
    Date: 2021–12
  7. By: Morgan, Robert
    Abstract: Since the Great Financial Crash (GFC) of 2008, there has been a great deal of soul searching and hand wringing when it comes to public debt. This collective anxiety over the national debt, government debt or public spending debt or whatever you choose to call it, all comes down to the same thing. The basic idea is that the government is broke, we are out of money and that cuts to benefits and public services, are not only desirable but necessary. Despite the fact that what started as aprivate sector crisis which saw the private banking sector being bailed out with billions of pounds in public money to avoid collapse, both politicians and economists rebranded this same crisis as a crisis of public spending. By any measure is a clever piece of sleight of hand worthy of any great magician. However this does raise the question, is this true? Do the poorest and most vulnerable in UK society, have to suffer for the actions of the very richest playing fast and loose with the economy? Can it be true that because a huge amount of public money has been given to secure the private profits of the banks, those at the bottom of society have to go without? In effect, are we saying that because the UK government has spent all its money on the richest in society, the government has nothing left for the poorest?
    Keywords: Government finances, Modern Monetary Theory, Great Financial Crash, seigniorage, Kelton, Mosler, Mitchell,
    JEL: H00 H50
    Date: 2021–11–15
  8. By: Katsutoshi Takehana (Graduate School of Economics, Osaka University); Hisashi Tanizaki (Graduate School of Economics, Osaka University)
    Abstract: In this paper, we investigated how the Complementary Deposit Facility, interest on excess reserves, introduced by the Bank of Japan in Oct. 2008 affected commercial bank fs demands for reserves by empirical analysis using bank fs financial data. Our main findings are summarized as follows. First, interest on excess reserves has the significant impact on the commercial bank fs demand for reserves. Second, although the holdings of reserve with precautionary demand that was clarified in the previous researches w as confirmed in this study as well, the reasons why commercial banks have precautionary demand for reserve were not the same as these papers.
    Keywords: reserve demand, the Complementary Deposit Facility , bank fs financial data
    JEL: C23 E52
    Date: 2021–11
  9. By: Dimitri B. Papadimitriou; L. Randall Wray
    Abstract: Institute President Dimitri B. Papadimitriou and Senior Scholar L. Randall Wray contend that the prevailing approach to monetary policy and inflation is influenced by a set of concepts that are a poor guide to action. In this policy brief, they examine two previous cases in which the Federal Reserve misread the data and raised rates too soon, as well as the evolution of the Fed's thought and practice over the past three decades--a period in which the central bank has increasingly turned to unobservable indicators that are supposed to predict inflation. Noting that their criticisms have now been raised by the Fed's own members and research staff, the authors highlight the ways in which we need to rethink our overall framework for monetary and fiscal policy. The Fed has far less control over inflation than is presumed, they argue, and, at worst, might have the whole inflation-fighting strategy backwards. Managing inflation, they conclude, should not be left entirely in the hands of central banks.
    Date: 2021–12
  10. By: Sebastian Edwards
    Abstract: In this paper, I discuss the implications for emerging countries of the adoption of central bank digital currencies (CBDCs) in advanced jurisdictions, such as the United States, the United Kingdom, and the Euro Zone. The analysis identifies benefits as well as costs. Among the former, one of the most important is lower costs for migrants’ remittances. Some of the costs of global CBDCs are associated with currency substitution, sudden currency depreciations, and lower seigniorage. At the global level, a smooth rollout of CBDCs in center countries requires international coordination. In addition, emerging countries will benefit from the implementation of stronger macroprudential regulations
    JEL: E31 E41 E58 F31 F36
    Date: 2021–11
  11. By: Skouralis, Alexandros
    Abstract: This paper empirically investigates the transmission of systemic risk across the Euro Area by employing a Global VAR model. We find that a union aggregate systemic risk shock results in a sharp decline in output, with two thirds of the response to be attributed to cross-country spillovers. The results indicate that peripheral economies have a disproportionate importance in spreading systemic risk compared to core countries. Then, we incorporate high-frequency monetary surprises into the model and we find evidence of the risk-taking channel of monetary policy. However, the relationship is reversed in the period of the ZLB, when expansionary shocks mitigate systemic risk. Cross-country spillovers account for a significant fraction (17.4%) of systemic risk responses’ variation. We also show that near term guidance reduces systemic risk, whereas the initiation of the QE program has the opposite effect. Finally, the effectiveness of monetary policy exhibits significant asymmetries, with core countries driving the union response. JEL Classification: C32, E44, F36, F45
    Keywords: Eurozone, global VAR model, systemic risk
    Date: 2021–12
  12. By: Alexis Stenfors (University of Portsmouth); Ioannis Chatziantoniou (Hellenic Mediterranean University); David Gabauer (Software Competence Center Hagenberg)
    Abstract: With near-zero policy rates becoming the norm in many advanced economies, the focus on long-term bond yields has strengthened considerably. The unconventional monetary policy decision by the Bank of Japan (BOJ) in September 2016 to explicitly target the 10-year Japanese government bond (JGB) yield institutionalised this process – by effectively creating a new monetary policy focal point. In this paper, we study the importance of such focal points. Empirically, we also investigate how JGB benchmark maturities ranging from 1 to 30 years has affected other benchmark maturities over time. We find that the 10-year bond, indeed, became more influential in 2016. However, the effect was surprisingly short-lived. The results suggest that once financial market participants anchored their expectations of the 10-year JGB yield to the new BOJ target, the attention merely shifted towards even longer maturities. Contrary to the logic of the monetary transmission mechanism, we also find the short end of the yield curve has been an absorber, rather than transmitter, of influence during the last decades.
    Keywords: Bank of Japan; bonds; focal points; monetary policy; yield curve control
    JEL: C32 C5 E43 E52 G15
    Date: 2021–12–14
  13. By: Benjamin L. Collier; Cameron Ellis; Benjamin J. Keys
    Abstract: We show that borrowers are highly sensitive to the requirement of posting their homes as collateral. Using administrative loan application and performance data from the U.S. Federal Disaster Loan Program, we exploit a loan amount threshold above which households must post their residence as collateral. One-third of all borrowers select the maximum uncollateralized loan amount, and our bunching estimates suggest that the median borrower is willing to give up 40% of their loan amount to avoid collateral. Exploiting time variation in the loan amount threshold, we find that collateral causally reduces default rates by 35%. Our results help to explain high perceived default costs in the mortgage market, and uniquely quantify the extent to which collateral reduces moral hazard in consumer credit markets.
    JEL: D14 D82 G23 G28
    Date: 2021–11
  14. By: Ojo, Marianne; Dierker, Theodore
    Abstract: It is argued that “much of the variation in inflation is due to global factors such as imported goods and energy prices” and that much of that variation is expected to be transitory. However there are growing signs that such transitory nature of inflation may not be as transitory as was initially considered. As rightly argued, the extent and deviations of current inflationary levels necessitates extraordinary intervention – such as cannot be easily compared to previous experiences. To which it has to be added that the prevailing nature of inflation also necessitates a coordinated, cooperative global approach which incorporates the harnessing of similarities and expertise in historical supervisory and regulatory practices in facilitating a harmonized and correlated result. In order to better appreciate the magnitude of the issue at hand, reference needs to be made to past and current levels of energy prices, as well as other major contributors to current inflationary levels, and their implications for inflationary targeting and monetary policy. The nature and relationships involved in the inflationary dynamics is also not as straightforward and clear cut as it used to be and as it may appear to be – other previously absent variables having been incorporated into the equation. This paper aims to provide a clearer picture of the nature and relationships involved in the inflation dynamics – as well as illustrate the complexity of the relationships involved. Further, by highlighting similarities in the review frameworks and approaches by several major central banking economies and regulators, the paper also aims to highlight and illustrate that whilst coordination and cooperation may prove to be a daunting task, several approaches can be adopted to facilitate harmonization and coordination.
    Keywords: inflation, energy prices; imports, wage rates; monetary policy; central bank independence; the Global Financial Crisis (GFC); the Global Pandemic Collapse (GPC); the Effective Lower Bound (ELB); flexible average inflation targeting
    JEL: E5 F1 F16 F18 G2 G3 G38 K2
    Date: 2021–12–02
  15. By: Lee, Seungcheol; Luetticke, Ralph; Ravn, Morten O.
    Abstract: We introduce frictional financial intermediation into a HANK model. Households are subject to idiosyncratic and aggregate risk and smooth consumption through savings and consumer loans intermediated by banks. The banking friction introduces an endogenous countercyclical spread between the interest rate on savings and on loans. This interacts with incomplete markets because borrowers and savers face different intertemporal prices, and induces a time-varying mass point of high MPC households. Aggregate shocks through their impact on the spread give rise to consumption inequality. We show this mechanism to be empirically relevant. Ex-ante macro prudential regulation reduces welfare by reducing consumption smoothing. JEL Classification: C11, D31, E32, E63
    Keywords: business cycles, incomplete markets, macroprudential regulation, monetary policy, financial frictions
    Date: 2021–12
  16. By: Florian Léon (FERDI - Fondation pour les Etudes et Recherches sur le Développement International); Laurent Weill (EM Strasbourg Business School)
    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
    Date: 2021–12–01
  17. By: Tone Smith
    Abstract: The ‘financialisation of nature’ is related to a shift in environmental governance—from regulation to marked-based approaches—involving strong state support to facilitate the establishment of ‘innovative financial instruments’ and markets related to nature. Although innovative finance got a bad reputation after the 2008 financial crisis, they are strongly encouraged in the environmental policy domain and supported by actors such as UNEP or the CBD. This paper explains the theoretical underpinning and the process of establishing such financial instruments, focusing in particular on offsetting and related ideas such as ‘net-zero’ calculations and ‘nature-based solutions’. It explains how natural entities are converted into abstract units of equivalence to allow the establishment of schemes for tradable ‘nature credits’ (supposedly) compensating damage across time and space. The financialisation of nature is then analysed and critiqued with respect to its lack of environmental effectiveness, its problematic socio-economic consequences and its impact on human-nature relationships. Instead of dealing with the environmental problems at hand, the conversion of nature into financial assets simply turns nature into objects of investment and speculation, while simultaneously creating a potential for financial bubbles.
    Keywords: environmental governance, innovative financial instruments, natural capital, offsetting, biodiversity banking, mitigation hierarchy, net zero, nature-based solutions, restoration of nature
    JEL: D6 E44 F54 G10 Q01 Q2 Q57
    Date: 2021
  18. By: Bańkowski, Krzysztof; Christoffel, Kai; Faria, Thomas
    Abstract: This paper attempts to gauge the effects of various fiscal and monetary policy rules on macroeconomic outcomes in the euro area. It consists of two major parts – a historical assessment and an assessment based on an extended scenario until 2030 – and it builds on the ECB-BASE –a semistructural model for the euro area. The historical analysis (until end-2019, `pre-pandemic´) demonstrates that a consistently countercyclical fiscal policy could have created a fiscal buffer in good economic times and it would have been able to eliminate a large portion of the second downturn in the euro area. In turn, the post-pandemic simulations until 2030 reveal that certain combinations of policy rules can be particularly powerful in reaching favourable macroeconomic outcomes (i.e. recovering pandemic output losses and bringing inflation close to the ECB target). These consist of expansionary-for-longer fiscal policy, which maintains support for longer than usually prescribed, and lower-for-longer monetary policy, which keeps the rates lower for longer than stipulated by a standard reaction function of a central bank. Moreover, we demonstrate that in the current macroeconomic situation, fiscal and monetary policies reinforce each other and mutually create space for each other. This provides a strong case for coordination of the two policies in this situation. JEL Classification: E32, E62, E63
    Keywords: fiscal rules, joint analysis of fiscal and monetary policy, model simulations, monetary policy rules
    Date: 2021–12
  19. By: Pinchetti, Marco (Bank of England); Szczepaniak, Andrzej (Ghent University)
    Abstract: This paper sheds lights on the open economy dimension of the Fed information effect, by evaluating its international spillovers on exchange rates, capital flows, and global economic activity. We provide empirical evidence that in response to unexpected increases in the Federal Funds rate associated with Fed information shocks, the dollar depreciates instead of appreciating. We show that this phenomenon occurs because Fed announcements affect investors’ risk appetite. Expansionary Fed information shocks increase investors’ risk appetite and drive capital towards foreign markets in pursuit of higher yields. Conversely, contractionary Fed information shocks decrease investors’ risk appetite and drive capital towards safe-haven currencies, causing an appreciation of the dollar and safe-haven currencies vis-à-visforeign currencies. We provide evidence that the Fed information effect is associated with large spillovers onto global safe-haven currencies, risk premia, cross-border credit, and ultimately, on global economic activity. These findings highlight the presence of global spillovers of the Fed information effect.
    Keywords: Monetary policy; information effects; international spillovers; flight to quality; high-frequency identification; sign restrictions; bayesian VAR
    JEL: E52 F31 F32 F41 F44
    Date: 2021–11–26
  20. By: E Philip Davis; Ka Kei Chan; Dilruba Karim
    Abstract: Studies of the effect of macroprudential policy on bank risk tend to disregard the potential complementary role of bank competition, which could influence policy's effectiveness in achieving its financial stability objectives. Accordingly, we assess the relation of macroprudential policy and competition to bank risk jointly from a sample of 1373 banks from 13 East Asian countries, using the latest IMF dataset of macroprudential policy from 1990 to 2018. Among our results, we have found that whereas macroprudential policies did commonly have a beneficial effect on risk at a bank level controlling for competition, there are a number of cases where policies were deleterious through increased risk. Notably in the developing and emerging East Asian countries and in the short term, the interactions between competition and macroprudential measures often show a lesser response in terms of risk reduction for banks with more market power, a form of "competition-stability". We suggest that this links in turn to ability of such banks to undertake risk-shifting in response to macroprudential policy. On the other hand, we find for banks in advanced East Asian countries some tendency in the long term for banks facing intense competition to take relatively more risks in face of macroprudential measures, i.e. "competition fragility". These findings provide important implications for regulators.
    Keywords: Macroprudential policy, bank risk, Z score, bank competition
    JEL: E44 E58 G17 G28
    Date: 2021–12
  21. By: A.R.S. Ibn Ali (Graduate School of Economics, Osaka University)
    Abstract: This study addresses the influencing factors on financial behavior of consumers in emerging markets. In particular, we examine the role of psychographic variables (i.e., lifestyle, brand loyalty, and personality) and demographic variables (i.e., age, income, education, family size, and occupation) in affecting individual decisions to use several types of consumer loans. A survey was conducted to collect data from 447 Indonesian consumers, and a probit model analysis was used to measure the effect of the variables. The results revealed that the effect of psychographic and demographic variables varies depending on financial product types (i.e., housing loans, car loans, and motorbike loans). Saving is positively associated with the use of car loans, but is negatively associated with the use of motorbike loans. The findings could be useful for marketers of financial products to improve market segmentation and target their offerings more effectively.
    Keywords: Microcredit, status consumption, emerging markets, psychographic variables, demographic variables, financial behavior.
    JEL: G21 G41 G51 G53
    Date: 2021–11
  22. By: Kento Yoshizawa (Bank of Japan); Kohei Maehashi (Bank of Japan); Hiroaki Yanagihara (Bank of Japan); Yoichi Kadogawa (Bank of Japan); Masakazu Inada (Bank of Japan)
    Abstract: In recent years, a phenomenon referred to as the gparadox of banknotes h has been observed worldwide: despite reduced opportunities to pay in cash due to the increase in cashless payments such as payment by credit card, the amount of banknotes in circulation has increased. Reasons that have been highlighted include the decline in the opportunity costs of holding cash amid the low interest rate environment as well as increased precautionary demand due to heightened economic uncertainty. Since the onset of the COVID-19 pandemic, this paradox has become more pronounced: cash in circulation has jumped even though opportunities to use cash have dropped sharply due to the economic downturn and the increase in e-commerce due to stay-at-home consumption. Our empirical analysis suggests that public health measures led to a significant increase in cash in circulation, with the effect being greatest immediately after the outbreak of pandemic and waning thereafter. It thus appears that developments in banknotes in circulation have been affected by precautionary demand for cash due to the heightened uncertainty brought about by the pandemic.
    Keywords: Banknotes; Cashless payments; COVID-19
    JEL: E41 E50 E51 E58
    Date: 2021–12–10
  23. By: Philippe Bacchetta (University of Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute); Elena Perazzi (Ecole Polytechnique Fédérale de Lausanne)
    Abstract: The impact of Central Bank Digital Currency (CBDC) is analyzed in a small open economy model with monopolistic competition in banking and where CBDC is an imperfect substitute with bank deposits. The design of CBDC is characterized by its interest rate, its substitutability with bank deposits, and its relative liquidity. We examine how interest-bearing CBDC would affect the banking sector, public finance, GDP and welfare. Welfare may improve through three channels: seigniorage; a lower opportunity cost of money; and a redistribution away from bank owners. In our numerical analysis we find a maximum welfare improvement of 60 bps in consumption terms.
    Date: 2021–12
  24. 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
  25. By: Faccia, Donata; Parker, Miles; Stracca, Livio
    Abstract: We contribute to the debate surrounding central banks and climate change by investigating how extreme temperatures affect medium-term inflation, the primary objective of monetary policy. Using panel local projections for 48 advanced and emerging market economies (EMEs), we study the impact of country-specific temperature shocks on a range of prices: consumer prices, including the food and non-food components, producer prices and the GDP deflator. Hot summers increase food price inflation in the near term, especially in EMEs. But over the medium term, the impact across the various price indices tends to be either insignificant or negative. Such effect is largely non-linear, being more significant for larger shocks and at higher absolute temperatures. We also provide simulations from a two-country model to understand the rationale behind the results. Overall, our results suggest that temperature plays a non-negligible role in driving medium-term price developments. Climate change matters for price stability. JEL Classification: E03, E31, Q51, Q54
    Keywords: climate change, extreme temperatures, inflation, panel local projections
    Date: 2021–12
  26. By: Couaillier, Cyril
    Abstract: How do banks set their target capital ratio? How do they adjust to reach it? This paper answers these questions using an original dataset of capital ratio targets directly announced to investors by European banks, materially improving data quality compared to usual estimated implicit target. It provides the following key lessons. First, targets are affected by capital requirements and a procyclical behavior consistent with market pressure. Second, banks do not distinguish between the different types of capital requirements for setting their targets, suggesting weak usability of the regulatory buffers. Third, the distance between actual CET1 ratio and the target is a valuable predictor of future balance-sheet adjustment, suggesting that banks actively drive their capital ratios toward their announced targets, through capital accumulation and portfolio rebalancing. Fourth, this adjustment occurs both above and below targets, but banks below target adjust faster, suggesting stronger pressure. These results provide important lessons for policymakers regarding the design of the prudential framework and the effectiveness of countercyclical policies. JEL Classification: E51, E58, G21, G28
    Keywords: bank credit, bank regulation, target capital structure
    Date: 2021–12
  27. By: Mr. Irineu E de Carvalho Filho; Hans Weisfeld; Fei Liu; Mr. Fabio Comelli; Mr. Andrea F Presbitero; Alexis Meyer-Cirkel; Mrs. Sandra V Lizarazo Ruiz; Klaus-Peter Hellwig; Rahul Giri; Chengyu Huang
    Abstract: In recent years, Fund staff has prepared cross-country analyses of macroeconomic vulnerabilities in low-income countries, focusing on the risk of sharp declines in economic growth and of debt distress. We discuss routes to broadening this focus by adding several macroeconomic and macrofinancial vulnerability concepts. The associated early warning systems draw on advances in predictive modeling.
    Keywords: Early warning systems; crisis prediction; machine learning; low-income countries; inflation crisis; stress episode; crisis concept; crisis probability; missed crisis; LIC inflation trend; Inflation; Banking crises; Commodity prices; Global
    Date: 2020–12–18
  28. By: Kotaro Ishi; Carlo Pizzinelli; Tariq Khan
    Abstract: To complement the early warning signals literature, we study the determinants of banking and currency crises for small states and currency boards. Building on the crisis dataset by Laeven and Valencia (2020), we estimate a binominal logit model to identify the determinants of crises, and as a case study, we apply our models to the Eastern Caribbean Currency Union (ECCU). Our findings largely confirm past studies’ results that both external and domestic fundamentals matter in predicting crisis likelihood, but we find that small states and fixed exchange rate regimes are more sensitive to these fundamentals, compared to larger economies. Our empirical results also suggest that for currency board economies, keeping a high level of the foreign reserve cover—the “backing ratio” defined as official foreign reserves as a share of central bank demand liabilities—is critical to reduce the likelihood of both banking and currency crises. The backing ratio is particularly important during years of global economic downturn.
    Keywords: Banking crises, currency crises, early warning signals, currency boards, small states
    Date: 2021–11–19
  29. By: Ozili, Peterson K
    Abstract: This paper presents the arguments for and against central bank digital currency increasing financial inclusion. Financial inclusion is arguably one of the many reasons for issuing a central bank digital currency. The arguments in support of CBDC increasing financial inclusion are that CBDC can digitize value chains, CBDCs can improve access to digital financial services, CBDC can help to enlarge the digital economy, CBDC can enhance the efficiency of digital payments, CBDC can be used offline when there is no internet coverage, and CBDC offer low transaction costs. The arguments against CBDC increasing financial inclusion are that CBDC may not prioritize financial inclusion, the high cost to purchase digital devices for holding a CBDC, non-interest bearing CBDC, the strong preference for cash over digital currency, the burdensome identification and regulatory requirements, and the imposition of transaction costs. The arguments presented in this paper shows that there is still disagreement over whether a central bank digital currency can increase financial inclusion. Nevertheless, in the light of recent events, many central banks are determined to issue a central bank digital currency for many reasons. Even though a central bank digital currency does not achieve the intended financial inclusion objective, at least, the other objectives for issuing a central bank digital currency can be achieved such as the reduction in cash management costs and the effective conduct of monetary policy.
    Keywords: financial inclusion, central bank digital currency, CBDC, debate, arguments, digital currency, monetary policy, cash.
    JEL: E42 E50 E51 E52 E58 E59 G2 G21 I31 I38 I39
    Date: 2022
  30. By: Bridges, Jonathan (Bank of England); Green, Georgina (Bank of England); Joy, Mark (Bank of England)
    Abstract: Using a panel dataset of 26 advanced economies over the five decades preceding the Covid crisis, we show that inequality rises following recessions and that rapid credit growth in the run up to a downturn exacerbates that effect. A one standard deviation credit boom leads to a 40% amplification of the distributional fallout in the bust that follows. These links between inequality, credit and downturns are particularly significant for recessions associated with financial crises. We also find some evidence that low bank capital ahead of a downturn amplifies the inequality increase that follows. These insights add a new dimension to policy cost-benefit analysis, at the distributional level. Newly established macroprudential regimes have been empowered with tools to safeguard financial stability by bolstering both lender and borrower resilience. Using those tools may have distributional effects, potentially limiting individual borrowing choices. Our findings make clear, however, that not using those tools can lead to distributional costs, in the event of an untamed crisis.
    Keywords: Recessions; local projections; inequality; macroprudential policy
    JEL: D63 G01 N10
    Date: 2021–11–12
  31. By: Godechot, Olivier; Neumann, Nils; Apascaritei, Paula; Boza, István; Hällsten, Martin; Henriksen, Lasse Folke; Hermansen, Are; Hou, Feng; Jung, Jiwook; Kodama, Naomi; Křížková, Alena; Lippényi, Zoltán; Marta, Elvira; Melzer, Silvia Maja; Mun, Eunmi; Sabanci, Halil; Soener, Matthew; Thaning, Max
    Abstract: The upswing in finance over the past several decades has led to rising inequality, but do downswings in finance lead to a symmetric decline in inequality? In this paper, we analyze the asymmetry of the effect of ups and downs in financial markets, as well as the effect of increased capital requirements and the bonus cap on national earnings inequality. We use administrative employer-employee linked data on earnings from 1990 to 2017 for twelve countries. Additionally, we use data on earnings from bank reports, from 2009 to 2017 in thirteen European countries. We find a strong asymmetry in the effects of financial ups and downs on earnings inequality, a mitigating effect of rising capital requirements on the contribution of finance to inequality, and a restructuring effect of the bonus cap for the earnings of financiers, while neither policy affects absolute levels of earnings inequality.
    Keywords: inequality,finance,financial crisis,regulation
    JEL: N2 D31 G38
    Date: 2021
  32. By: Roberto Pascual (Banco de España)
    Abstract: Target prices are an estimation of the future value of a company’s stock price. Although there is a general consensus about the importance of firm’s fundamentals when forecasting, there are also other determinants. This article sheds light on the effects of uncertainty, financial stress and volatility on target price estimations. To do so, different indicators are elaborated for the eight main Spanish financial entities from 1999 to 2020. They show that, on average, analysts have an optimistic bias in their valuations, and tend to react with a delay to stock movements. The different measures of uncertainty, financial stress and volatility affect their estimations a) fostering the optimistic bias, b) reducing the speed and c) willingness of the adjustment to share price movements, and d) make them trust less on stock prices as indicators of banks’ fundamentals. This effects are reinforced by the aggregation method of the composite target price (in particular the role of the older individual contributions). Both factors work in tandem: as the more uncertain the economic and financial environment is, the less likely aggregate target prices would move according to stock prices, because older individual contributions will slow the adjustment process. A simple change in the aggregation method reduces its impact on the indicators, without substantially altering their conclusions.
    Keywords: target price, analyst forecast, financial analyst, analyst bias, uncertainty
    JEL: G14 G17 G41
    Date: 2021–12
  33. By: Fisher, Jack (London School of Economics); Gavazza, Alessandro (London School of Economics); Liu, Lu (Imperial College Business School); Ramadorai, Tarun (Imperial College Business School); Tripathy, Jagdish (Bank of England)
    Abstract: Evidence from a range of countries reveals that household inaction in mortgage refinancing can be pervasive despite financial incentives to take action. Inactive households may implicitly cross-subsidise active households, allowing competitive lenders to set lower average mortgage rates. To provide a money-metric assessment of cross-subsidies, we construct a model of household refinancing and structurally estimate it on rich administrative data on the stock of loans in the UK mortgage market in June 2015. We estimate sizeable cross-subsidies during this sample period, from relatively poorer households and those located in less-wealthy areas towards richer households and those located in wealthier areas. The findings over this sample period highlight how the design of household finance markets can contribute to wealth inequality. Estimated cross-subsidies may differ in more recent periods given changes in the UK mortgage market since 2015.
    Keywords: Mortgages; refinancing; cross-subsidies; wealth inequality; household inaction; household finance
    JEL: D63 G21 L51 N20 R21 R31
    Date: 2021–11–05
  34. By: Rösl, Gerhard; Seitz, Franz
    Abstract: In this paper, we focus on the role of different types of crises (technological crises, financial market crises, natural disasters) and their effects on the demand for cash in an international context. It becomes evident that over the past 30 years cash demand always increased in times of crises, independent of the nature of the crisis itself.However, the type of crises determines whether small or large banknote denominations are affected more. In case of payment uncertainties, we find a crisis-related increased demand for small denominations, probably reflecting an increased demand for transaction balances. In times of uncertainties regarding the financial and/or general economic development (also possibly driven by natural disasters), large banknote denominations were comparatively more in demand indicating that the crises-related need for non-transaction balances was the dominant driver.
    Keywords: Cash,banknotes,crises,Covid
    JEL: E41 E51 E58
    Date: 2021
  35. By: Chun-Che Chi; Stephanie Schmitt-Grohé; Martín Uribe
    Abstract: This paper studies optimal capital-control and bank-reserve remuneration policy in an open economy with a banking channel and a collateral constraint that limits household debt by a fraction of income. It finds that the unregulated economy borrows too little relative to what is optimal (underborrowing). This finding contrasts with the standard overborrowing result obtained in the absence of a banking channel. Under optimal policy, the central bank injects bank reserves during recessions. In this way, the monetary authority is able to uncouple household deleveraging from economy-wide deleveraging, thereby ameliorating the severity of the financial crisis. The paper documents that in emerging and developed economies the lending spread (lending rate minus deposit rate) displayed a muted response during the 2007-2009 financial crisis. This fact is consistent with a decline in the demand rather than in the supply of loans and gives credence to models in which the collateral constraint is placed at the level of the nonfinancial sector as opposed to at the level of the bank.
    JEL: E58 F38 F41
    Date: 2021–11

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