nep-ban New Economics Papers
on Banking
Issue of 2022‒01‒10
34 papers chosen by
Sergio Castellanos-Gamboa, , Pontificia Universidad Javeriana

  1. Do the Fed’s International Dollar Liquidity Facilities Affect Offshore Dollar Funding Markets and Credit? By Linda S. Goldberg; Fabiola Ravazzolo
  2. Climate-Related Stress Testing: Transition Risk in Colombia By Can Sever; Manuel Perez-Archila
  3. An ECB’s Staff Narrative of Two Decades of European Central Banking: a critical review By Sergio Cesaratto
  4. Consumer Loan Rate Dispersion and the Role of Competition: Evidence from the Turkish Banking Sector By Selva Bahar Baziki; Yavuz Kilic; Muhammed Hasan Yilmaz
  5. Mortgage Lenders and the Geographic Concentration of Foreclosures By Stephen L. Ross; Yuan Wang
  6. Stimulus, Savings, and Inflation: The Top Five Liberty Street Economics Posts of 2021 By Peter Stevens
  7. A Model To Think About Crypto-Assets and Central Bank Digital Currency By Hernán D. Seoane
  8. The strategic allocation and sustainability of central banks' investment By Davide Di Zio; Marco Fanari; Simone Letta; Tommaso Perez; Giovanni Secondin
  9. Public Certification to Fight against Illegality: Evidence on Private Investment By Antonio Acconcia; Maria Rosaria Alfano; Anna Laura Baraldi; Claudia Cantabene
  10. Bank Loan Network in Turkey By Ayca Topaloglu Bozkurt; Suheyla Ozyildirim
  11. Der Digitale Euro: Ein Zahlungsmittel für die Zukunft? By Manuel Walz; Matthias Neuenkirch
  12. The Payday Loan Puzzle: A Credit Scoring Explanation By Tsung-Hsien Li; Jan Sun
  13. Mobile Payments and Interoperability: Insights from the Academic Literature By Bianchi, Milo; Bouvard, Matthieu; Gomes, Renato; Rhodes, Andrew; Shreeti, Vatsala
  14. Financial Inclusion: Theory and Policy guide for fragile economies. By Tweneboah Senzu, Emmanuel
  15. Investigation of Dogecoin Price Movements: A GSADF Analysis By Oncu, Erdem
  16. The Prudence Principle: A New Framework for Eurozone Fiscal Policy By Eric Lonergan; Mark Blyth
  17. Bank equity, interest payments, and credit creation under Basel III regulations By Li, Boyao
  18. Climate and environmental risks: measuring the exposure of investments By Enrico Bernardini; Johnny Di Giampaolo; Ivan Faiella; Marco Fruzzetti; Simone Letta; Raffaele Loffredo; Davide Nasti
  19. Time discounting predicts loan forbearance takeup By Edina Berlinger; Sára Khayouti; Hubert János Kiss
  20. Why Did Credit Card Balances Decline so Much during the COVID-19 Pandemic? By Robert M. Adams; Vitaly M. Bord; Bradley Katcher
  21. The role of the Australian financial sector in supporting a sustainable and inclusive recovery By Christine Lewis; Ben Westmore
  22. A Double-Edged Sword – Can a Currency Board Help Stabilise the Lebanese Economy? By Uwe Böwer
  23. Bank regulation, lending and patenting: Evidence from the EBA capital exercise By Krzyzanowski, Jan; Walz, Uwe
  24. Contagion in Debt and Collateral Markets By Chang, Jin-Wook
  25. The Inflation Shock of 2021 By James B. Bullard
  26. Central Bank Credibility During COVID-19: Evidence from Japan By Jens H. E. Christensen; Mark M. Spiegel
  27. The Political Economy of Currency Unions By Kai Arvai
  28. Monetary policy communication: perspectives from former policy makers at the ECB By Ehrmann, Michael; Holton, Sarah; Kedan, Danielle; Phelan, Gillian
  29. Let the Worst One Fail: A Credible Solution to the Too-Big-To-Fail Conundrum By Thomas Philippon; Olivier Wang
  30. Bank Branches and COVID-19: Where are Banks Closing Branches during the Pandemic? By Kimberly Kreiss
  31. 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
  32. Endogenous growth, downward wage rigidity and optimal inflation By Abbritti, Mirko; Consolo, Agostino; Weber, Sebastian
  33. Information frictions in inflation expectations among five types of economic agents By Camille Cornand; Paul Hubert
  34. Motivating Banks to Lend? Credit Spillover Effects of the Main Street Lending Program By Camelia Minoiu; Rebecca Zarutskie; Andrei Zlate

  1. By: Linda S. Goldberg; Fabiola Ravazzolo
    Abstract: At the outbreak of the pandemic, in March 2020, the Federal Reserve implemented a suite of facilities, including two associated with international dollar liquidity—the central bank swap lines and the Foreign International Monetary Authorities (FIMA) repo facility—to provide dollar liquidity. This post discusses recent evidence showing the contributions of these facilities to financial and economic stability, highlighting evidence from recent research by Goldberg and Ravazzolo (December 2021).
    Keywords: dollar; facilities; swap lines; FEMA repo
    JEL: F3 G15
    Date: 2021–12–20
  2. By: Can Sever; Manuel Perez-Archila
    Abstract: This paper builds a framework to quantify the financial stability implications of climate-related transition risk in Colombia. We explore risks imposed on the banking system based on scenarios of an increase in the domestic carbon tax by using bank- and firm-level data. Focusing on the deterioration of firms’ balance sheets and the exposure of banks to different sectors, we assess the extent to which such policy shock would transmit from nonfinancial firms to the banking system. We observe that sectors are affected unevenly by a higher carbon tax. Agriculture, manufacturing, electricity, wholesale and retail trade, and transportation sectors appear to be the most important in the transmission of the risk to the banking system. Results also suggest that a large increase in the carbon tax can generate significant but likely manageable financial stability risks, and that a gradual increase in the carbon tax to meet a higher target over several years could be preferable in terms of financial risks. A gradual increase would also have the benefit of allowing for a smoother adjustment to higher carbon tax for stakeholders.
    Keywords: Climate crisis, climate change, transition risk, carbon emission, carbon tax, green economy, environmental taxes, banking stress, stress testing, financial stability, Colombia
    Date: 2021–11–05
  3. By: Sergio Cesaratto
    Abstract: Monetary Policy in Times of Crisis (Rostagno et al. 2021) has three relevant features. The first is its criticism of the absence of an adequate European fiscal policy during the financial crisis. This left the ECB on its own. The second feature concerns the explanation of the theoretical framework that guided the ECB's action. While it is interesting that the authors point out that monetary policy acts on the demand side (and is therefore neutral neither in the short nor in the long-run), a plain explanation of the channels through which the central bank can influence demand is absent. The third feature is the chronicle of events and of the clash of positions within the ECB. This aspect would have, however, gained from a bolder and less conventional interpretative scheme. The book thus appears to be lacking both in a clear exposition of the ECB's analytical background and its evolution during the crisis, and in a comprehensive explanation of its policies. It is likely that the authors' economic training based on the neo-Keynesian mainstream model has greatly conditioned them in a technically convoluted, but too often uninspiring interpretation of events and policies. It is also possible that the difficulty of demonstrating the effectiveness of the monetary policy measures undertaken by the ECB in the absence of a proactive fiscal policy contributed to the widespread technical laboriousness of the argument in many pages of the book. Especially for academic teaching, but also for the informed public debate, a more accessible level would have been advisable. An appendix seeks to explain T-LTRO operations, the logic of which the book fails to elucidate
    JEL: E11 E12 E52 E58 N14
    Date: 2021–12
  4. By: Selva Bahar Baziki; Yavuz Kilic; Muhammed Hasan Yilmaz
    Abstract: This paper aims to examine the degree of dispersion in the loan pricing of commercial banks and its association with competitive conditions. To this end, an indexation mechanism processing a novel bank-level dataset is proposed to quantify the lending rate variability in general-purpose, vehicle, and housing loans for the period January 2007-April 2020. In panel convergence tests, we show that there exists heterogeneity in long-term co-movements in banks’ loan pricing, while periods following the tightening in financial conditions display short-term deviations from general tendencies demonstrated by dispersion indices. The methodological setting also entails the construction of competition indicators for total and segment-based credit market developments. The competitive conditions monitored by Herfindahl-Hirschman Indicator (HHI) present that housing and vehicle loan segments have been concentrated in recent years. Quantile regression results further validate that improvements in the competition are associated with a lower level of lending rate dispersion in housing and vehicle segments in a statistically significant manner, whereas this relation is not applicable for general-purpose loans.
    Keywords: Loan rate dispersion, Competition, Log-t convergence test, Quantile regression
    JEL: C31 C33 G21 D40
    Date: 2021
  5. By: Stephen L. Ross (University of Connecticut); Yuan Wang (FreddieMac)
    Abstract: We use HMDA rate spread loans to identify lenders involved in riskier lending prior to the foreclosure crisis. We develop a shift-share measure of changes in high rate spread share lender representation in housing submarkets across origination years. While half the cross-sectional correlation between foreclosure and high rate spread lender share is explained by borrower observables, we find robust and stable estimates of the within housing submarket relationship between foreclosure and predicted changes in market share. Estimates are not explained by local housing price variation, rather evidence suggests servicer behavior in response to rising local foreclosure rates as a mechanism.
    Keywords: rate spread loans, subprime lending, local housing markets, home purchase mortgages, house price declines, loan servicers
    JEL: D14 G01 G21 R21 R23
    Date: 2022–01
  6. By: Peter Stevens
    Abstract: New York Fed researchers tackled a wide array of topics on Liberty Street Economics (LSE) over the past year, with the myriad effects of the pandemic—on supply chains, the banking system, and inequality, for example—remaining a major area of focus. Judging by the list below, LSE readers were particularly interested in understanding what comes next: the most-viewed posts of the year analyze households’ use of stimulus payments, the implications of lockdown-period savings, the risk of a new housing bubble, the compression of the breakeven inflation curve, and the potential roles that central banks could play in the digital currency sphere. As the year draws to a close, take a look back at the top five posts of 2021.
    Keywords: stimulus payments; pandemic; excess savings; breakeven inflation; housing bubble; housing market; central bank digital currency; cryptocurrency; digital currency; COVID-19
    JEL: E2 R31
    Date: 2021–12–22
  7. By: Hernán D. Seoane
    Abstract: This paper introduces digital assets, crypto assets in general, and Central Bank Dig- ital Currency in particular, into an otherwise standard New-Keynesian closed economy model with Financial Frictions. We use this setting to study the impact of a change in preferences towards the use of digital assets and to address whether the emergence of this type of instruments affect the transmission of monetary policy shocks. In this context we study the introduction of Central Bank Digital Currencies. The model is stylized but it could be a baseline for the design of models for quantitative analysis.
    Date: 2021
  8. By: Davide Di Zio (Bank of Italy); Marco Fanari (Bank of Italy); Simone Letta (Bank of Italy); Tommaso Perez (Bank of Italy); Giovanni Secondin (Bank of Italy)
    Abstract: In recent years, the extensive recourse to unconventional monetary policy measures and the growing importance of the transition process towards a sustainable economy have given rise to new challenges for the Eurosystem’s central banks in managing financial risks. In this context, central banks’ investment strategies, whose goal is to reinforce capital strength, have been combined with the adoption of criteria aimed at fostering a sustainable growth model. This work describes the strategic allocation process for investment developed by the Bank of Italy and the methodology adopted for applying sustainability criteria to some of the portfolio’s asset classes.
    Keywords: central banks, investment allocation, sustainability, Bayesian VAR
    JEL: E58 G11 G17 Q56
    Date: 2021–12
  9. By: Antonio Acconcia (Università di Napoli Federico II and CSEF); Maria Rosaria Alfano (Università della Campania L. Vanvitelli); Anna Laura Baraldi (Università della Campania L. Vanvitelli); Claudia Cantabene (Università della Campania L. Vanvitelli)
    Abstract: In 2012, the Italian government introduced public certification to signal creditworthy firms not involved in corruption and accounting frauds, and with no connections to mafias. In the case of loan applications, this certification can determine lower credit costs due to the lower firm screening costs incurred by the banks. We provide evidence consistent with its effectiveness in mitigating financial frictions. Our results show that certified firms increase their tangible capital expenditure, and show also that the effect of the certification is stronger in areas where it is more difficult for the banks to assess firms' creditworthiness. This latter finding has implications for local development.
    Keywords: Corruption and Organized Crime, Creditworthiness, Investment, Public Certification.
    JEL: G14 G21 H40 H81 R38
    Date: 2021–12–21
  10. By: Ayca Topaloglu Bozkurt; Suheyla Ozyildirim
    Abstract: In this study we document the topology of banks’ commercial loan network in Turkey using more than 44 million loan observations between 2007 and 2016 on a quarterly basis. To our knowledge, we study the largest financial network which includes all bank-firm loan transactions, i.e., population data that has not been studied up to now. First, we construct a network among banks resulting from their common borrowing firms. Second, we develop a novel weighted degree measure based on the share within the total banking sector of the loan volumes that banks lend to the same firms. Third, we empirically investigate the relationship between the credit riskiness of banks and their weighted degree centrality. Our empirical findings suggest that the credit riskiness of banks decreases with the weighted degree centrality of the banks emerging from lending to common borrowing firms. The impact remains significant after controlling for bank loan size, liquidity and even controlling for multiple lending. Finally, analysis based on micro-level stratifications where the loan size, collateral, multiple borrowings of firms and banks size are taken into account also supports our findings that there is a negative association between loan network centrality and credit risk.
    Keywords: Bank-loan network, Bipartite network, Projected network, Weighted degree centrality, Multiple lending, Credit riskiness
    JEL: G21 G01
    Date: 2021
  11. By: Manuel Walz; Matthias Neuenkirch
    Abstract: Die fortschreitende Digitalisierung und die zunehmende Popularität digitaler Zahlungsmöglichkeiten haben zu gravierenden Veränderungen im Zahlungsverhalten geführt. Als Konsequenz erörtert die EZB zurzeit die Einführung eines digitalen Euros. Vorteile bestehen in der Erweiterung geldpolitischer Optionen, u.a. durch einen direkteren Transmissionskanal, der Möglichkeit zu negativen Zinssätzen und der Implementierung von Helikoptergeld. Als Risiken sind u.a. die Disintermediation des Bankensystems, ein erhöhtes Risiko von Bank Runs und eine weitere Vergrößerung der EZB-Bilanz anzuführen.
    Keywords: Digitalisierung, Digitaler Euro, Digitales Zentralbankgeld, Geldpolitik, Finanzmarktstabilität
    Date: 2021
  12. By: Tsung-Hsien Li; Jan Sun
    Abstract: Many credit cardholders in the U.S. turn to expensive payday loans, even though they have not yet exhausted their credit lines. This results in significant monetary costs and has been coined the “Payday Loan Puzzle.” We propose the novel explanation that households use payday loans to protect their credit scores since payday lenders do not report to credit bureaus. To quantitatively examine this hypothesis, we build a two-asset Huggett-type model with two default options as well as hidden information and actions. Using our calibrated model, we can account for 40% of the empirically identified payday loan borrowers with liquidity left on their credit cards. We can also match the magnitude of monetary costs due to this seeming pecuniary mistake. To inform the policy debate over payday lending, we assess the welfare implications of several policy counterfactuals. We find that either banning payday loans or increasing their default costs results in aggregate welfare losses.
    Keywords: Consumer Credit, Bankruptcy, Default, Payday Loan, Financial Regulation, Type Score, Asymmetric Information, Hidden Action, Cross-Subsidization
    JEL: D82 E21 E49 G18 G51 K35
    Date: 2021–12
  13. By: Bianchi, Milo; Bouvard, Matthieu; Gomes, Renato; Rhodes, Andrew; Shreeti, Vatsala
    Abstract: We connect various streams of academic literature to shed light on how the degree of interoperability in mobile payments affects market outcomes and welfare. We organize our discussion around four dimensions of interoperability. First, we consider mobile network interoperability (whether clients of one telecom can access another telecom’s payment services) in connection with the IO literature on tying. Second, we discuss platform level interoperability (the ability to send money offnetwork) in light of the literature on compatibility. We also build on the behavioral IO literature to suggest how the effects of interoperability may be very heterogeneous across various types of firms and consumers, or even backfire. Third, we consider interoperability in the cash-in-cash-out agent network, in light of the literature on co-investment in network industries, and of more specific studies on ATMs’ interoperability. Fourth, we discuss how the literature in banking and on data ownership can be used to understand interoperability of data. We conclude with some broader remarks on policy implications and on possible directions for future research.
    Keywords: Mobile Payments, Interoperability, Financial Inclusion, Competition; Policy.
    JEL: L51 L96 G23 G28 O16
    Date: 2021–12–21
  14. By: Tweneboah Senzu, Emmanuel
    Abstract: It empirically argued that economic development depends on increasing productivity, mitigating income inequality, reducing dependency on natural resources, improving health outcomes, enhancing environmental quality, and importantly increasing economic growth. Which is complemented by the fact that, all requires a quality financial system, which collects information to facilitate the ex-ante evaluation and ex-post monitoring of investment opportunities to ease information asymmetry as a problem, and facilitates the allocation of resources to innovative projects and further produce complex products. The above postulation derives its core factor of achievement from sustainable financial inclusion, with the paper advancing a conceptual proposition towards an effective, and efficient financial inclusion in fragile economies, and its underlying policy architecture to sustain its performance efficiency, in medium and long term purpose.
    Keywords: Financial Inclusions, Financial ecosystem, Policy, Central Bank, Fragile Economy
    JEL: E2 E6 G23 G28 H5
    Date: 2021–12–09
  15. By: Oncu, Erdem
    Abstract: Today, people provide information through different channels. The information channels used can affect the decision-making mechanism due to asymmetric information or different tendencies. Especially in recent years, people use social media to reach information quickly. Therefore, notifications made on social media reveal economic results. Cryptocurrencies are digital currencies intended to be used as currency. Unlike their traditional financial rivals, cryptocurrencies are not backed by a central bank or authority. The success of cryptocurrencies depends on its infrastructure, the block chain. Especially in recent years, the popularity of cryptocurrencies has increased. After the popularization of cryptocurrencies, digital currencies are discussed more especially in the media. In addition to the positive features, negative features are also included in the media. There are concerns about the misuse of cryptocurrencies. It is mentioned that cryptocurrencies provide financing for criminal organizations and are used in money laundering. In addition to these, it is reported that cryptocurrencies are used for tax evasion. The lack of intrinsic value of cryptocurrencies puts investors in trouble in terms of investment and price determination. Cryptocurrencies, which are digital currencies, have many digital price determinants such as social media. Two different objectives were determined in this study. The first is the detection of the presence of bubbles in Dodgecoin prices. The second is the examination of the relationship between bubbles and tweeter notifications. In the study, Dodgecoin prices between May 2020 and May 2021 are examined with the GSADF test. From May 2020 until May 2021, 10 different price bubbles are observed. Some bubbles can be associated with tweets by Elon Musk. However, the biggest bubble observed, the April 2021 price bubble, is due to a different reason.
    Keywords: Dodgecoin, Tweets, GSADF
    JEL: G0
    Date: 2021
  16. By: Eric Lonergan (M&G Investments); Mark Blyth (Brown University)
    Abstract: This working paper is an intervention into the on-going debate over the future of fiscal rules in the European Union. It argues that rather than writing down rules and expecting the world to conform to them, a better approach is to make the concept of ‘fiscal space’ operational by tying it explicitly to rates of interest on government debt. This permits huge flexibility in the size of the deficit, in the debt/GDP ratio, leaves inflation targeting to the central bank, and guarantees debt sustainability. It would also provide clarity to the public that the government is honoring its word.
    Keywords: debt, fiscal policy, monetary policy, interest rates, functional finance
    JEL: E5 E58 E62
    Date: 2021–12
  17. By: Li, Boyao
    Abstract: Both equity and regulation play key roles in determining the ability of credit creation of banks. The equity endogenously varies while the regulations are exogenously imposed. I propose a banking model to investigate how the changes in bank equity due to interest receipt and expenditure affect credit and money creation under the Basel III regulations. Three Basel III regulations are discussed: the capital adequacy ratio, liquidity coverage ratio, and net stable funding ratio. The effects on credit creation are demonstrated by the changes in the credit supply in response to the interest payments changing the equity. My results indicate that the changes in equity cause multiplier effects on the credit supply. The multipliers depend on the regulatory constraints. Similarly, I present the impacts on money creation, given by the multiplier effects on the money supply. This study sheds considerable light on how bank equity and Basel III regulations affect credit and money creation.
    Keywords: Credit creation; Basel III; Bank equity; Interest payments; Multiplier effect; Balance sheet
    JEL: E51 G21 G28 G32
    Date: 2021–12–28
  18. By: Enrico Bernardini (Bank of Italy); Johnny Di Giampaolo (Bank of Italy); Ivan Faiella (Bank of Italy); Marco Fruzzetti (Bank of Italy); Simone Letta (Bank of Italy); Raffaele Loffredo (Bank of Italy); Davide Nasti (Bank of Italy)
    Abstract: This paper presents a number of methodologies for assessing the climate risk exposure of several financial asset classes. Regarding government bonds, the paper proposes using public information; in order to develop forward-looking measures of countries’ risk exposure, the paper uses historical trends combined with governments’ climate commitments and the scenarios developed by the Network for Greening the Financial System. With regard to private sector issuers, the paper finds quite a high coverage and correlation amongst the carbon emissions data from different providers, while the divergences in the data for other environmental indicators are still significant. Finally, the paper shows that the application of sustainability criteria in the Bank of Italy’s investment strategy delivered a non-negligible reduction in the exposure to the climate and environmental risks of the portfolios.
    Keywords: sustainable finance, investments, climate risks, environmental risks
    JEL: E58 G11 Q56
    Date: 2021–12
  19. By: Edina Berlinger (Corvinus University of Budapest, Fõvám tér 8, 1093 Budapest); Sára Khayouti (Institute of Economics, Centre for Economic and Regional Studies (KRTK KRTI), Tóth Kálmán u. 4, 1097 Budapest); Hubert János Kiss (Institute of Economics, Centre for Economic and Regional Studies (KRTK KRTI), Tóth Kálmán u. 4, 1097 Budapest and Corvinus University of Budapest, Fõvám tér 8, 1093 Budapest)
    Abstract: During the COVID-19 pandemic, many countries eased the burden of borrowers through loan forbearance. Using a representative sample of the Hungarian adult population, we investigate if time discounting and locus of control predict who takes up loan forbearance. We find convincing evidence that time discouting associates with the resort to forbearance: individuals who discount the future less are less likely to take up forbearance, even if we take into account their educational level and financial status. Data suggest that the channel through which time discounting and loan forbearance are related is savings. There is no statistically significant relationship between locus of control and forbearance takeup.
    Keywords: loan forbearance, locus of control, time discounting
    JEL: G41 G51
    Date: 2022–01
  20. By: Robert M. Adams; Vitaly M. Bord; Bradley Katcher
    Abstract: Consumer credit card balances in the United States experienced unprecedented declines during the COVID-19 pandemic. According to the G.19 Consumer Credit statistical release, revolving consumer credit fell more than $120 billion (11 percent) in 2020, the largest decline in both nominal and percentage terms in the history of the series.
    Date: 2021–12–03
  21. By: Christine Lewis; Ben Westmore
    Abstract: Australia’s financial sector entered the COVID-19 crisis in a strong position, enabling it to play a key role in cushioning the pandemic’s impact. Once the national economy reopens, policymakers will turn their focus to securing a robust, sustainable and inclusive recovery. However, low interest rates are boosting house prices and demand for credit in a banking sector that is already highly exposed to housing and highly indebted households. At the same time, many young and innovative firms – which are the drivers of job creation and productivity growth - struggle to access finance. And financial frictions impede the alignment of financial flows with environmental sustainability. Addressing these obstacles, through regulatory change, developing alternatives to bank finance and facilitating technological transformation, would raise productivity and set the recovery on a more sustainable path. Financial inclusion and financial literacy are comparatively high and financial education is entrenched at schools. Further efforts are still needed to address persistent gaps in outcomes for disadvantaged groups, accompanied by stronger consumer protections to ensure that the recovery is inclusive.
    Keywords: access to finance, Australian financial system, environmental risk exposure, financial inclusion, household debt
    JEL: G20 G21 G24 G28 G33 Q58
    Date: 2021–12–23
  22. By: Uwe Böwer
    Abstract: Lebanon is not defying gravity anymore. After a long period of surprising economic resilience, the Lebanese economy fell into a severe crisis in 2019, triggered by a sudden stop in life-sustaining capital inflows. The undercurrents of unsustainable public debt and twin deficits amid a weak institutional environment, however, had long been in the making. Drastic devaluation in parallel markets, high inflation and strong real GDP contractions reflect Lebanon’s deep crisis, which has only been aggravated by the COVID-19 pandemic and the devastating Beirut port explosions. The government is facing a momentous task to address the devaluation-inflation nexus, improve public governance, rebuild the electricity sector, restore sound public finances, repair the financial system and reinvigorate the private sector. This paper discusses the potential contributions of a currency board arrangement as a possible external anchor that could help stabilise Lebanon’s economy. Indeed, a currency board could end devaluation and rein in inflation, enhance discipline and governance, and, if accompanied by a broader reform agenda, help incentivise a return of capital inflows and improve private sector conditions. However, a currency board severely restricts certain macroeconomic adjustment mechanisms, requires a careful transition management and involves sizeable fiscal adjustments. While the stabilisation benefits of a currency board could be significant at Lebanon’s current juncture, getting the accompanying reforms in place, cushioning the social impact of the adjustment and ensuring solid implementation all present major challenges to make a currency board sustainable. Lebanon’s international partners stand ready to help. However, meeting these challenges first and foremost requires strong ownership by Lebanon itself.
    Keywords: Lebanon, currency board, exchange rate regime, monetary policy, inflation, Böwer.
    JEL: E52 E58 O53
    Date: 2021–12
  23. By: Krzyzanowski, Jan; Walz, Uwe
    Abstract: We analyze the impact of decreases in available lending resources on quantitative and qualitative dimensions of firms' patenting activities. We thereby make use of the European Banking Authority's capital exercise to carve out the causal effect of bank lending on firm innovation. In order to do so we combine various datasets to derive information on firms' financials, their patenting behaviors, as well as their relationships with their lenders. Building on this selfgenerated dataset, we provide support for the "less finance, less innovation" view. At the same time, we show that lower available financial resources for firms lead to improvement in the qualitative dimensions of their patents. Hence, we carve out a "less finance, less but better innovation" pattern.
    Keywords: financing,bank lending,patents
    JEL: D22 G30 G31 G38 N24 O31 O34
    Date: 2021
  24. By: Chang, Jin-Wook
    Abstract: This paper investigates contagion in financial networks through both debt and collateral markets. Payment from a collateralized debt contract depends not only on the borrower's balance sheet but also on the price of the underlying collateral. I show that the existence of the collateral channel of contagion amplifies the contagion from the counterparty channel, and this additional channel generates different patterns of contagion for a given network structure. If the negative liquidity shock is small, then having more connections make the network safer as contagion through debt channel is minimized by diversified exposures while contagion through collateral channel is limited. However, if the liquidity shock is large, then having more connections make the network more vulnerable as contagions through both debt and collateral channels are maximized by more exposures. The most novel and surprising result is that the ring network is safer than the complete network when the shock is large. This is because the ring network minimizes the contagion through collateral channel while maximizing the contagion through debt channel. The model also provides the minimum collateral-debt ratio (haircut) to attain robust macro-prudential state for a given network structure and aggregate shock.
    Keywords: collateral, contagion, debt, financial networks, interconnectedness, systemic risk
    JEL: D52 D53 E44 G23 G24 G28
    Date: 2021–12–12
  25. By: James B. Bullard
    Abstract: During a presentation in Clayton, Mo., for the Missouri Bankers Association, St. Louis Fed President Jim Bullard said that there has been an unexpected inflation shock in the U.S. during 2021, and that U.S. monetary policy has so far remained very accommodative. Asset price inflation has been substantial as well, he added. He said that U.S. real GDP has fully recovered and that labor markets are quite strong and likely to get stronger. He also noted that pandemic risk remains. “These considerations suggest, on balance, that the Federal Open Market Committee (FOMC) should remove monetary policy accommodation,” he said.
    Keywords: COVID-19; inflation; monetary policy
    Date: 2021–12–03
  26. By: Jens H. E. Christensen; Mark M. Spiegel
    Abstract: Japanese realized and expected inflation has been below the Bank of Japan’s two percent target for many years. We use the exogenous COVID-19 pandemic shock to examine the efficacy of monetary and fiscal policy responses for elevating inflation expectations from an arbitrage-free term structure model of nominal and real yields. We find that monetary and fiscal policy announcements during this period failed to lift inflation expectations, which instead declined notably and are projected to only slowly revert back to levels far below the announced target. Hence, our results illustrate the challenges faced in raising well-anchored low inflation expectations.
    Keywords: affine arbitrage-free term structure model; unconventional monetary policy; deflation risk; deflation protection
    JEL: C32 E43 E52 G12 G17
    Date: 2021–12–21
  27. By: Kai Arvai
    Abstract: How can a currency union be sustained when member states have an exit option? This paper derives how fiscal and monetary policies can ensure the survival of a common currency, i countries want to leave the union. A union-wide central bank can prevent a break-up by setting interest rates in favor of the country that wants to exit. I show how a central bank does this by following a monetary rule with state-dependent country weights. The paper then demonstrates in a simulation that a central bank can only sustain the union for a while with this rule, but not permanently and that the best way to sustain the union is through fiscal transfers.
    Keywords: Currency union, Monetary policy, Lack of commitment, Exit option, Fiscal Policy
    JEL: E42 E52 E61 F33 F45
    Date: 2021
  28. By: Ehrmann, Michael; Holton, Sarah; Kedan, Danielle; Phelan, Gillian
    Abstract: This paper reports the results of a survey of former members of the Governing Council of the European Central Bank, which sought their views on monetary policy communication practices, the related challenges and the road ahead. Pronounced differences across the respondent groups are rare, suggesting that there is broad consensus on the various issues. Respondents view enhancing credibility and trust as the most important objective of central bank communication. They judge communication with financial markets and experts as extremely important and adequate, but see substantial room for improvement in the communication with the general public. The central bank objective is widely seen as the most important topic for monetary policy communication, and several respondents perceived a need for clarification of the ECB’s inflation aim, citing the ambiguity of the “below, but close to, 2%” formulation that was in place at the time of the survey. JEL Classification: E52, E58
    Keywords: central bank communication, monetary policy, survey
    Date: 2021–12
  29. By: Thomas Philippon; Olivier Wang
    Abstract: We study time-consistent bank resolution mechanisms. When interventions are ex post efficient, a government cannot commit not to inject capital into the banking system. Contrary to common wisdom, we show that the government may still avoid moral hazard and implement the first best allocation by using the distribution of bailouts across banks to provide ex ante incentives. In particular, we analyze properties of credible tournament mechanisms that provide support to the best performing banks and resolve the worst performing ones, including through mergers. Our mechanism continues to perform well if banks are partially substitutable, and if they are heterogeneous in their size, interconnections, and thus systemic risk, as long as bailout funds can be targeted to particular banks.
    JEL: G01 G2 G33 G34 G38 H12
    Date: 2021–12
  30. By: Kimberly Kreiss
    Abstract: In the decade prior to the COVID-19 pandemic, bank branches were closing at a steady rate. Additionally, households with a bank account increasingly adopted mobile or online banking for at least a portion of their banking needs. As COVID-19 dramatically changes the desire and willingness for consumers to have in-person interactions, it may accelerate both of these trends and lead to a permanent shift in how people access financial services.
    Date: 2021–12–17
  31. By: Camille Cornand (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - CNRS - Centre National de la Recherche Scientifique - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UL2 - Université Lumière - Lyon 2 - ENS Lyon - École normale supérieure - Lyon); Rodolphe dos Santos Ferreira
    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
    Date: 2021–12–07
  32. By: Abbritti, Mirko; Consolo, Agostino; Weber, Sebastian
    Abstract: Standard New Keynesian (NK) models feature an optimal inflation target well below two percent, limited welfare losses from business cycle fluctuations and long-term monetary neutrality. We develop a NK framework with labour market frictions, endogenous productivity and downward wage rigidity (DWR) which challenges these results. The model features a non-vertical long-run Phillips curve between inflation and unemployment and a trade-off between price distortions and output hysteresis that change the welfare-maximizing inflation level. For a plausible set of parameters, the optimal inflation target is in excess of two percent, a target value commonly used across central banks. Deviations from the optimal target carry welfare costs multiple times higher than in traditional NK models. The main reason is that endogenous growth and DWR generate asymmetric and hysteresis effects on unemployment and output. Price level targeting or a Taylor-rule responding to the unemployment rate can handle better the asymmetric and hysteresis effects in our model and deliver significant welfare gains. Our results are robust to the inclusion of the effective lower bound on the monetary policy interest rate. JEL Classification: E24, E3, E5, O41, J64
    Keywords: downward wage rigidity, endogenous growth, monetary policy, monetary policy invariance hypothesis, optimal inflation target, zero lower bound
    Date: 2021–12
  33. By: Camille Cornand (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - CNRS - Centre National de la Recherche Scientifique - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UL2 - Université Lumière - Lyon 2 - ENS Lyon - École normale supérieure - Lyon); Paul Hubert
    Abstract: We compare disagreement in expectations and the frequency of forecast revisions among five categories of agents: households, firms, professional forecasters, policymakers and participants to laboratory experiments. We provide evidence of disagreement among all categories of agents. There is however a strong heterogeneity across categories: while policymakers and professional forecasters exhibit low disagreement, firms and households show strong disagreement. This translates into a heterogeneous frequency of forecast revision across categories of agents, with policymakers revising more frequently their forecasts than firms and professional forecasters. Households last revise less frequently. We are also able to explore the external validity of experimental expectations.
    Keywords: inflation expectations,information frictions,disagreement,forecast revisions,experimental forecasts,survey forecasts,central bank forecasts
    Date: 2021–12–07
  34. By: Camelia Minoiu; Rebecca Zarutskie; Andrei Zlate
    Abstract: We study the effects of the Main Street Lending Program (MSLP)—an emergency lending program aimed at supporting the flow of credit to small and mid-sized firms during the COVID-19 crisis on bank lending to businesses. Using instrumental variables for identification and multiple loan-level and survey data sources, we document that the MSLP increased banks' willingness to lend more generally outside the program to both large and small firms. Following the introduction of the program, participating banks were more likely to renew maturing loans and to originate new loans, as well as less likely to tighten standards on business loans than nonparticipating banks. Additional evidence suggests that the MSLP, despite low take-up, supported the flow of bank credit during the pandemic by serving as a backstop to the bank loan market and by increasing banks' levels of risk tolerance in the face of uncertainty.
    Keywords: Main Street Lending Program; Federal Reserve; Bank lending; COVID-19 pandemic; Emergency lending facilities
    JEL: E52 E58 E63 G21
    Date: 2021–12–17

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