nep-ban New Economics Papers
on Banking
Issue of 2022‒11‒14
thirty-six papers chosen by
Sergio Castellanos-Gamboa, , Pontificia Universidad Javeriana

  1. Credit Misallocation and Macro Dynamics with Oligopolistic Financial Intermediaries By Alessandro Villa
  2. Deposit and Credit Reallocation in a Banking Panic: The Role of State-Owned Banks By Viral V. Acharya; Abhiman Das; Nirupama Kulkarni; Prachi Mishra; Nagpurnanand R. Prabhala
  3. Bank lending to small firms: metamorphosis of a financing model By Paolo Finaldi Russo; Valentina Nigro; Sabrina Pastorelli
  4. The heterogeneous effects of bank mergers and acquisitions on credit to firms: evidence from Italian macro-regions By Silvia Del Prete; Cristina Demma; Iconio Garrí; Marco Piazza; Giovanni Soggia
  5. Credit-Supply Factors and Malawian Business Cycles By Kumwenda, Thomson; Mangani, Ronald; Mazalale, Jacob; Silumbu, Exley
  6. Private bank deposits and macro/fiscal risk in the euro-area By Arghyrou, Michael G; Gadea, Maria-Dolores; Kontonikas, Alexandros
  7. CBDC and cash in the euro area: Crowding out or co-circulation? By Rösl, Gerhard; Seitz, Franz
  8. Liquidity matters when measuring bank output By Raphaël CHIAPPINI; Bertrand GROSLAMBERT; Olivier BRUNO
  9. A structural analysis of foreign exchange markets in sub-Saharan Africa By Kaltenbrunner, Annina; Perez Ruiz, Daniel; Okot, Anjelo
  10. Fiscal and Macroprudential Policies in a Monetary Union By José E. Boscá; Javier Ferri; Margarita Rubio
  11. A brief history of payment netting and settlement By Bindseil, Ulrich; Pantelopoulos, George
  12. Financial education: premises, policies and experience of the Bank of Italy By Riccardo De Bonis; Marilisa Guida; Angela Romagnoli; Alessandra Staderini
  13. Why Aging Induces Deflation and Secular Stagnation By R. Anton Braun; Daisuke Ikeda
  14. Classification based credit risk analysis: The case of Lending Club By Aadi Gupta; Priya Gulati; Siddhartha P. Chakrabarty
  15. The role of central bank communication in inflation-targeting Eastern European emerging economies By Valerio Astuti; Alessio Ciarlone; Alberto Coco
  16. Central Bank Mandates and Monetary Policy Stances: through the Lens of Federal Reserve Speeches By Bertsch, Christoph; Hull, Isaiah; Lumsdaine, Robin L.; Zhang, Xin
  17. The Curious Case of the Rise in Deflation Expectations By Olivier Armantier; Gizem Koşar; Jason Somerville; Giorgio Topa; Wilbert Van der Klaauw; John C. Williams
  18. Walking a tightrope: financial regulation, climate change, and the transition to a low-carbon economy By Demekas, Dimitri; Grippa, Pierpaolo
  19. Geopolitical risks and financial stress in emerging economies By Tam NguyenHuu; Deniz Karaman Orsal
  20. Reap the Harvest on Blockchain: A Survey of Yield Farming Protocols By Jiahua Xu; Yebo Feng
  21. Micro-entrepreneurs’ financial and digital competences during the pandemic in Italy By Alessio D'Ignazio; Paolo Finaldi Russo; Massimiliano Stacchini
  22. Assessing Australian Monetary Policy in the Twenty-First Century By Gross, Isaac; Leigh, Andrew
  23. The EIF SME Access to Finance Index - October 2022 Update By Torfs, Wouter
  24. The Financial literacy of micro-entrepreneurs: evidence from Italy By Paolo Finaldi Russo; Ludovica Galotto; Cristiana Rampazzi
  25. Corporate governance with crowd investors in innovative entrepreneurial finance: Nominee structure and coinvestment in equity crowdfunding By Coakley, Jerry; Cumming, Douglas; Lazos, Aristogenis; Vismara, Silvio
  26. Research of an optimization model for servicing a network of ATMs and information payment terminals By G. A. Nigmatulin; O. B. Chaganova
  27. Term premium estimation for South Africa By Steenkamp, Daan; Erasmus, Ruan
  28. Sovereign Risk, Financial Fragility and Debt Maturity By Dallal Bendjellal
  29. Challenges for financial inclusion: the role for financial education and new directions By Magda Bianco; Daniela Marconi; Angela Romagnoli; Massimiliano Stacchini
  30. Behavioural Credit Cycles By Domenico Delli Gatti; Gabriele Iannotta
  31. Who is Afraid of Eurobonds? By Francesco Bianchi; Leonardo Melosi; Anna Rogantini Picco
  32. Inflation Expectations and Corporate Borrowing Decisions: New Causal Evidence By Ropele, Tiziano; Gorodnichenko, Yuriy; Coibion, Olivier
  33. Financial literacy, numeracy and schooling: evidence from developed countries By Sara Lamboglia; Massimiliano Stacchini
  34. Which Financial Inclusion Indicators and Dimensions Matter for Income Inequality? A Bayesian Model Averaging Approach By Rogelio V. Mercado, Jr.; Victor Pontines
  35. Statistical sources for assessing financial literacy By Sara Lamboglia; Fabio Travaglino
  36. Forecasting Inflation: The Use of Dynamic Factor Analysis and Nonlinear Combinations By Stephen G. Hall; George S. Tavlas; Yongli Wang

  1. By: Alessandro Villa
    Abstract: Bank market power shapes firm investment and financing dynamics and hence affects the transmission of macroeconomic shocks. Motivated by a secular increase in the concentration of the US banking industry, I study bank market power through the lens of a dynamic general equilibrium model with oligopolistic banks and heterogeneous firms. The lack of competition allows banks to price discriminate and charge firm-specific markups in excess of default premia. In turn, the cross-sectional dispersion of markups amplifies the impact of macroeconomic shocks. During a crisis, banks exploit their market power to extract higher markups, inducing a larger decline in real activity. When a “big” (i.e., non-atomistic) bank fails, the remaining banks use their increased market power to control the supply of credit, worsening and prolonging the recession. The results suggest that bank market power could be an important concern when formulating appropriate bail-out polices.
    Keywords: Dynamic Financial Oligopoly; Endogenous Financial Markups; Heterogeneous Firms; Firm Dynamics; Micro-Funded Financial Frictions; Price discrimination
    JEL: D43 E44 G12 G21 L11
    Date: 2022–09–08
  2. By: Viral V. Acharya; Abhiman Das; Nirupama Kulkarni; Prachi Mishra; Nagpurnanand R. Prabhala
    Abstract: We study a bank run in India in which private bank branches experience sudden and considerable loss of deposits that seek safety in state-owned public sector banks (PSBs). We trace the consequences of this reallocation using granular data on bank-firm relationships and branch balance sheets. The flight to safety is not a flight to quality. Lending shrinks and credit quality improves at the run banks but worsens at the recipient PSBs. The effects are pronounced in weaker PSBs, the ones more likely to exploit the shelter of state ownership. The resource reallocation is inefficient in the aggregate.
    JEL: G23 G28 G33 O43
    Date: 2022–10
  3. By: Paolo Finaldi Russo (Bank of Italy); Valentina Nigro (Bank of Italy); Sabrina Pastorelli (Bank of Italy)
    Abstract: This paper identifies idiosyncratic credit supply shocks across firm size before and after the 2008-2013 double-dip recession in Italy. Based on a fixed effects model, the empirical framework includes both single- and multiple-lender firms and relaxes the standard assumption of homogeneous credit supply across borrowers from the same bank. Results highlight that following the crisis banks notably tightened their corporate lending policies except towards large companies. A significant difference in credit supply arose between micro-firms and the others. The divide is wider for larger banks and for those with weaker balance sheets. This may reflect the greater difficulties on the part of these financial intermediaries in disbursing loans to firms with a significant degree of informational opacity and with high fixed costs compared with the low unit volume of operations. According to these findings, the shocks that hit the banking system during the crisis translated into a persistent change in credit standards, with an important shift in the supply of new loans from smaller to larger firms.
    Keywords: bank lending channel, credit constraints, SME financing, bank risk-taking
    JEL: G21 G32 G3
    Date: 2022–10
  4. By: Silvia Del Prete (Bank of Italy); Cristina Demma (Bank of Italy); Iconio Garrí (Bank of Italy); Marco Piazza (Bank of Italy); Giovanni Soggia (Bank of Italy)
    Abstract: The literature has shown that in the short- and medium-term bank mergers and acquisitions (M&As) may generate a temporary reduction in firm credit. Using bank-firm matched data, this paper investigates the impact of M&As involving Italian banks over the period 2009-2019 on credit to firms, exploring possible heterogeneities across several dimensions. During a 3-year time window after each deal, we detect a reduction in loans to firms financed by target banks, in line with the existing evidence. The drop is smaller for infra-group mergers, when the target is healthy or is the firm’s main bank, while is larger for southern firms, independently of bank location. Other things being equal, we suggest that this “South effect†is mainly related to the negative externalities that characterize the business environment in Southern Italy, for which southern firms are more likely to be subject to a severe selection after a bank reorganization.
    Keywords: business lending, mergers and acquisitions, banking system’s structure, North-South divide
    JEL: D40 G10 G21 G34 L10
    Date: 2022–10
  5. By: Kumwenda, Thomson; Mangani, Ronald; Mazalale, Jacob; Silumbu, Exley
    Abstract: This study investigates the role of credit-supply factors in Malawian business cycles. A developing country banking sector is embedded into a Bayesian DGSE model using data for Malawi for the period 2004 to 2020. Financial intermediation in the model includes the issuance of loans to both households and firms, deposit mobilization, and actively financing of public debt to a cash-constrained central government treasury. Our study finds that banking sector shocks emanating from financing public debt plays a significant role in explaining variations in output in Malawi, both in the short and long run. Our study also finds that shocks from banking sector profits, intermediation role to household loans, entrepreneurs and firms do not have adverse effects on the fluctuation of output in Malawi which is contrary to the public sentiments. We also established that these shocks crowd-out private sector credit supply, and hence push interest rates up in the face of a liquidity-constrained treasury. These crowding outcomes are in the form of a trade-off of investment opportunities for banks. For every excess fund above the regulatory liquidity threshold, banks are more likely induced to invest only 20.96% in loans to households and 19.56% in loans to firms.
    Keywords: Public Debt; Collaterals; Banks; Interest Rates; Crowding-Out
    JEL: E30 E32 E43 E51 E52
    Date: 2022–10
  6. By: Arghyrou, Michael G; Gadea, Maria-Dolores; Kontonikas, Alexandros
    Abstract: We use a panel of ten euro area member states to examine the link between macro/fiscal risk and private bank deposits relative to Germany. Our main findings are summarised as follows: First, the relationship between relative deposits and macro/fiscal risk factors is not stable over time. Second, the significant time variation characterizing this relationship is driven by aggregate EMU-wide macro/fiscal risk conditions. Third, relative deposits in periphery EMU countries are generally more responsive to macro/fiscal risk. Fourth, the ECB’s unconventional monetary policy moderated the effect of the global financial and European debt crises on the relationship between relative deposits and macro/fiscal risk. Our empirical findings can inform the ongoing policy debate regarding the completion of the European Banking Union.
    Keywords: Private bank deposits, macro/fiscal risk, euro area, TVP panel
    Date: 2022–10–19
  7. By: Rösl, Gerhard; Seitz, Franz
    Abstract: Cash usage at the point-of-sale decreased perceptibly in the past years. This is mainly due to the ongoing trend towards digitalization, but there are also indications that consumers were somewhat pushed into cashless payments by government regulations and supply-side restrictions by commercial banks. Nonetheless, overall demand for euro cash remained strong and even increased relative to GDP since the financial crisis in 2008. In this process, however, we observe a supply-driven shift towards lower banknote denominations. Central banks all over the world are intensively thinking about the potential issue of a Central Bank Digital Currency as a substitute or complement to cash. Although the characteristics of a possible digital euro have become more perceptible, its fundamental design properties remain unknown. We propose a double pre-paid scheme combining central elements of TARGET Instant Payment Settlement and electronic money features enabling offline and online instant payments. The issuance of a digital euro would be neutral to total money supply as banks act only as intermediaries. Since anonymity is categorically discarded by the ECB and as cash has some special advantages from a consumer perspective, the digital euro will rather co-circulate with cash than replace it in transactions.
    Keywords: Cash,banknotes,money,CBDC
    JEL: E41 E51 E58
    Date: 2022
  8. By: Raphaël CHIAPPINI; Bertrand GROSLAMBERT; Olivier BRUNO
    Abstract: We develop a new method for calculating bank output that addresses the flaws of the current approach of the System of National Accounts. We implement a simple model-free method that removes the “pure” credit risk premium from the production of banks while keeping the liquidity provision as part of the total bank output. Using both local projections and autoregressive distributed lag models, we show that our method produces bank output estimates that are consistent with the evolution of the economic activity and that remain always positive including during periods of financial stress. This method satisfies the four conditions set by the Inter-Secretariat Working Group on National Accounts. Furthermore, our method reveals that the banking output of the eurozone is overestimated by approximately 40 percent over the period 2003-2017.
    Keywords: bank output, liquidity premium, risk premium, ARDL, local projections
    JEL: E01 E44
    Date: 2022
  9. By: Kaltenbrunner, Annina; Perez Ruiz, Daniel; Okot, Anjelo
    Abstract: This paper presents detailed insights into the microstructural characteristics of several African Lower and Lower-Middle Income Countries (LLMICs) foreign exchange markets and the implications of these characteristics for macroeconomic management. It draws on 13 semi-structured interviews with 17 foreign exchange experts in central banks, banks, non-bank financial institutions, and research institutions in selected case studies (Ghana, Kenya, Malawi, Sierra Leone, Uganda, and Zambia) and the City of London. The results show that whilst most case study countries have functioning foreign exchange interbank markets, these markets are oftentimes characterised by low, volatile and "lumpy" liquidity. These liquidity dynamics and uncertainty about future foreign exchange flows can lead to FX hoarding among foreign exchange market participants, further depriving the official foreign exchange market of liquidity. Moreover, they provide those with access to FX liquidity with significant market power and the potential to affect price dynamics. These microstructural characteristics, in turn have meant that central banks in African LLMICs remain key agents in foreign exchange markets to manage scarce and volatile liquidity patterns. At the same time though, these microstructural weaknesses complicate central banks' ability to deal with volatile foreign exchange availability and structural depreciation pressures. Whereas hoarding behaviour reduces the central bank's access to foreign exchange, low trust in domestic currencies puts serious limits on the extent of nominal depreciations central banks will be able and willing to tolerate. Overall, the results show the difficulties of moving towards floating exchange rates in the context of African LLMICs, characterised by concentrated export structures, low trust in their currencies, and shallow domestic financial markets.
    Date: 2022
  10. By: José E. Boscá; Javier Ferri; Margarita Rubio
    Abstract: In the European Monetary Union (EMU), monetary policy is decided by the European Central Bank (ECB). This can create some imbalances that can potentially be corrected by national policies. So far, Öscal policy was the natural candidate to adjust those imbalances. Nevertheless, after the global Önancial crisis (GFC), a new policy candidate has emerged, namely national macroprudential policies, with the mission of reducing Önancial risks. This issue gives rise to an interesting research question: how do macroprudential and Öscal policies interact? By a§ecting real interest rates and the level of activity, a discretionary macroprudential policy alters the evolution of public debt and can impose a Öscal cost when the government is forced to increase tax rates to stabilize the public debt-to-GDP ratio. In a monetary union, a domestic macroprudential shock creates substantial crossborder Önancial e§ects and also ináuences the foreign country Öscal stance. Moreover, a discretionary government spending policy a§ects housing prices, so the strenght with which macroprudential policy reacts to a change in the price of houses has an impact on the Öscal multiplier.
    Date: 2022–10
  11. By: Bindseil, Ulrich; Pantelopoulos, George
    Abstract: In earlier times, societies relied extensively on "IOUs" ("I owe you") to avert the need for settlement in specie. However, an IOU reliant economy is complex and fraught with financial stability risks. These problems can be overcome through clearing, netting and settlement, either without or with novation. From the perspective of creditors, the most expedient solution is for residual claims to be denominated in a large-scale, riskfree and divisible IOU that is analogous to settlement in specie, but without incurring the disadvantages ofsettlement in preciousmetalcoins. If such solutions are not feasible, it is then desirable that (1) networks of IOUs are simplified through netting, and (2) residual claims are denominated in relatively high-quality claims, which can be readily converted into risk-free positions. The purpose of this paper is to explore how such outcomes have been achieved through the lens of history. As will be shown - whilst netting and settlement with novation is an effective technique to mitigate financial instability risks - it is only through central banks acting as correspondents to the domestic financial system that the drawbacks of the IOU economy can be alleviated to the largest extent in order to attain lean balance sheets, lower credit risk and improved financial stability. At the same time, such a solution also ensures that the financial system remains layered.
    JEL: F33 G21 N20 N24
    Date: 2022
  12. By: Riccardo De Bonis (Bank of Italy); Marilisa Guida (Bank of Italy); Angela Romagnoli (Bank of Italy); Alessandra Staderini (Bank of Italy)
    Abstract: The paper provides a literature review on financial education; it summarizes the results of the surveys held in Italy, as well as the challenges of measuring financial literacy, and offers an overview of the international policy debate. The paper also describes the initiatives undertaken by the Bank of Italy, with special focus on methodology and on the programs launched by the Institute, both for the youth and for adults, in the last 15 years; lastly, it suggests some directions for future progress.
    Keywords: financial education, measurement of financial literacy, Bank of Italy financial education initiatives
    JEL: A20 D91 G53 I22
    Date: 2022–10
  13. By: R. Anton Braun (Federal Reserve Bank of Atlanta (E-mail:; Daisuke Ikeda (Director, Financial System and Bank Examination Department, Bank of Japan (E-mail:
    Abstract: We provide a quantitative theory of deflation and secular stagnation. In our lifecycle framework an aging population puts persistent downward pressure on the price level, real interest rates, and output. A novel feature of our theory is that it also recognizes the reactions of government policy. The central bank responds to falling prices by reducing its policy nominal interest rate and the fiscal authority responds by allowing the public debt-GDP ratio to rise.
    Keywords: Aging, Deflation, Lifecycle, Monetary policy, Portfolio choice, Secular stagnation, Tobin effect
    JEL: E52 E62 G51 D15
    Date: 2022–10
  14. By: Aadi Gupta; Priya Gulati; Siddhartha P. Chakrabarty
    Abstract: In this paper, we performs a credit risk analysis, on the data of past loan applicants of a company named Lending Club. The calculation required the use of exploratory data analysis and machine learning classification algorithms, namely, Logistic Regression and Random Forest Algorithm. We further used the calculated probability of default to design a credit derivative based on the idea of a Credit Default Swap, to hedge against an event of default. The results on the test set are presented using various performance measures.
    Date: 2022–10
  15. By: Valerio Astuti (Banca d'Italia); Alessio Ciarlone (Banca d'Italia); Alberto Coco (Banca d'Italia)
    Abstract: In this paper, we analyze whether central bank communication can be an additional tool to provide guidance on monetary policy, drive private agents’ inflation expectations and financial asset prices in the main countries of Central and Eastern Europe. By applying natural language processing techniques to monetary policy statements and minutes, we first derive a series of salient topics on which central bank communications focused over the last two decades, and then develop indices of tone to gauge their respective degrees of hawkishness (dovishness) about the economic outlook. By using these indices in an econometric set-up, we find that a more hawkish (dovish) tone – reflecting a more positive (negative) assessment of the economic outlook – anticipates a more restrictive (accommodative) monetary policy decision, raises (lowers) short-term inflation expectations of private sector agents, increases (reduces) market interest rates across different maturities, and drives share prices down (up). Overall, our analysis suggests that communication may be a complementary and effective monetary policy tool available to central banks in emerging economies.
    Keywords: central banks, communication, natural language processing, Taylor rule, inflation expectations, financial markets, CEE-3
    JEL: C22 C25 C45 E44 E52 E58
    Date: 2022–10
  16. By: Bertsch, Christoph (Research Department, Central Bank of Sweden); Hull, Isaiah (Finance Department, BI Norwegian Business School); Lumsdaine, Robin L. (Kogod School of Business, American University; Erasmus University Rotterdam; National Bureau of Economic Research (NBER); Tinbergen Institute; Center for Financial Stability); Zhang, Xin (BIS Innovation Hub Nordic Centre)
    Abstract: When does the Federal Reserve deviate from its dual mandate of pursuing the economic goals of maximum employment and price stability and what are the consequences? We assemble the most comprehensive collection of Federal Reserve speeches to-date and apply state-of-the-art natural language processing methods to extract a variety of textual features from each paragraph of each speech. We find that the periodic emergence of non-dual mandate related discussions is an important determinant of time-variations in the historical conduct of monetary policy with implications for asset returns. The period from mid-1996 to late 2010 stands out as the time with the narrowest focus on balancing the dual mandate. Prior to the 1980s there was a outsized attention to employment and output growth considerations, while non dual-mandate discussions centered around financial stability considerations emerged after the Great Financial Crisis. Forward-looking financial stability concerns are a particularly important driver of a less accommodative monetary policy stance when Fed officials link these concerns to monetary policy, rather than changes in banking regulation. Conversely, discussions about current financial crises and monetary policy in the context of inflation-employment themes are associated with a more accommodative policy stance.
    Keywords: Natural Language Processing; Machine Learning; Central Bank Communication; Financial Stability; Zero Shot Classification; Extractive Question Answering; Semantic Textual Similarity
    JEL: C63 D84 E32 E70
    Date: 2022–10–01
  17. By: Olivier Armantier; Gizem Koşar; Jason Somerville; Giorgio Topa; Wilbert Van der Klaauw; John C. Williams
    Abstract: We study the behavior of U.S. consumers’ inflation expectations during the high inflation period of 2021-22 using data from the Survey of Consumer Expectations. Short- and, to a lesser extent, mediumterm inflation expectations rose as inflation surged in 2021. Disagreement and uncertainty about future inflation increased significantly. Then, in 2022, even as inflation continued to climb, medium- and longerterm inflation expectations unexpectedly fell and medium- and longer-term deflation expectations increased. We find that respondents with deflation expectations tend to expect prices to mean revert and are more optimistic about the economic outlook.
    Keywords: inflation; deflation; expectations; consumer surveys
    JEL: D12 D84 E31 E52
    Date: 2022–10–01
  18. By: Demekas, Dimitri; Grippa, Pierpaolo
    Abstract: As with the global financial crisis, there are once again demands on central banks and financial regulators to take on new responsibilities, this time for supporting the transition to a low-carbon economy. Regulators can indeed facilitate the reorientation of financial flows necessary for the transition. But they may find themselves walking a tightrope, having to balance exaggerated expectations against limited capabilities and political economy constraints. Their diagnostic and policy toolkits are still in their infancy. Expanding their legal mandates to take on these new, essentially political, responsibilities should be done through the political process and be accompanied by strengthened governance and accountability arrangements. Taking on these new responsibilities can also have potential pitfalls and unintended consequences on financial markets. Ultimately, central banks and financial regulators cannot deliver a low-carbon economy by themselves and should not risk being caught again in the role of ‘the only game in town’.
    Keywords: Financial stability; financial regulation; climate change; climate mitigation policy; low-carbon econmy; energy transition; OUP deal
    JEL: F3 G3 J1
    Date: 2022–09–14
  19. By: Tam NguyenHuu (Leuphana Universitat Luneburg); Deniz Karaman Orsal (Hamburg Universitat)
    Abstract: We investigate the impacts of geopolitical risks (GPRs) on financial stress (FS) in major emerging economies between 1985 and 2019. Applying a recently developed panel quantile estimation method, we show that GPRs pose serious risks to the stability of the financial condition in emerging economies. Namely, when FS is already equal to or above average, GPRs intensify this instability to a remarkable degree. In contrast, GPRs do not ignite the stress when the financial situation is benign. In emerging economies, foreign exchange markets, and to a lesser extent, the banking industry, and the debt market suffer more severe consequences of geopolitical tensions than the stock market. In contrast, advanced economies, represented by the Group of Seven (G7) economies, have witnessed detrimental consequences of GPRs on their stock markets but negligible effects on other parts of their financial systems.
    Keywords: geopolitical risks; financial stress; emerging economies; stock market; banking sector; foreign exchange market; debt market
    JEL: G
    Date: 2022
  20. By: Jiahua Xu; Yebo Feng
    Abstract: Yield farming represents an immensely popular asset management activity in decentralized finance (DeFi). It involves supplying, borrowing, or staking crypto assets to earn an income in forms of transaction fees, interest, or participation rewards at different DeFi marketplaces. In this systematic survey, we present yield farming protocols as an aggregation-layer constituent of the wider DeFi ecosystem that interact with primitive-layer protocols such as decentralized exchanges (DEXs) and protocols for loanable funds (PLFs). We examine the yield farming mechanism by first studying the operations encoded in the yield farming smart contracts, and then performing stylized, parameterized simulations on various yield farming strategies. We conduct a thorough literature review on related work, and establish a framework for yield farming protocols that takes into account pool structure, accepted token types, and implemented strategies. Using our framework, we characterize major yield aggregators in the market including Yearn Finance, Beefy, and Badger DAO. Moreover, we discuss anecdotal attacks against yield aggregators and generalize a number of risks associated with yield farming.
    Date: 2022–10
  21. By: Alessio D'Ignazio (Bank of Italy); Paolo Finaldi Russo (Bank of Italy); Massimiliano Stacchini (Bank of Italy)
    Abstract: We analyse new survey data from a representative sample of about 2,000 Italian micro-entrepreneurs to assess their level of financial and digital competences and to investigate whether these skills help them cope with unexpected shocks. We find that the financial literacy and digital skills of Italian micro-entrepreneurs are quite limited, especially for one-person businesses and owners with a lower level of education. By controlling for several business characteristics, we also find that financial literacy is significantly correlated with the transition to more digitalized business models and with greater resilience to external shocks: financially savvy entrepreneurs were better able to build liquidity buffers prior to the COVID-19 crisis and access government aid during the pandemic. As for the role of digital skills in supporting businesses during the crisis, empirical evidence is less clear-cut.
    Keywords: financial literacy, digitalization, micro-firms, Covid 19
    JEL: G53
    Date: 2022–10
  22. By: Gross, Isaac (Monash University); Leigh, Andrew (Australian National University)
    Abstract: Using the Reserve Bank of Australia's MARTIN model we compare actual monetary policy decisions to a counterfactual in which the cash rate is set according to an optimal simple rule. We find that monetary policy played a crucial role in avoiding a potential recession in 2001 and mitigating the downturn in 2008-2009. By contrast we find that the cash rate was too high during 2016-2019, keeping inflation below the Reserve Bank's target band. Optimal monetary policy in 2016-2019 would have involved a substantially lower cash rate and would have produced significantly better employment outcomes.
    Keywords: optimal monetary policy, unemployment, output gap, inflation
    JEL: E47 E52 E58
    Date: 2022–09
  23. By: Torfs, Wouter
    Abstract: This working paper elaborates on the most recent update of the EIF SME Access to Finance (ESAF) Index, a composite indicator used to monitor the state of SME external financing markets in the EU. The current update, using data for 2021, constitutes the nineth iteration of this exercise, resulting in a 9-year long time series for each of the 27 EU countries. The latest data captures the impact of the COVID-pandemic and the subsequent policy response on SME access to finance. For an extensive overview of the current state of SME financing markets the reader is referred to the EIF's European Small Business Finance Outlook (Kraemer-Eis et al., 2022). The EIF Working Papers are designed to make available to a wider readership selected topics and studies in relation to EIF's business. The Working Papers are edited by EIF's Research & Market Analysis and are typically authored or co-authored by EIF staff or are written in cooperation with EIF.
    Date: 2022
  24. By: Paolo Finaldi Russo (Banca d'Italia); Ludovica Galotto (Banca d'Italia); Cristiana Rampazzi (Banca d'Italia)
    Abstract: Entrepreneurs, including those who run very small businesses or sole proprietorships, are often assumed to have sound financial skills as they make frequent financial decisions. This paper explores the issue by analysing the level of financial literacy (FL) of Italian micro-entrepreneurs in comparison with other countries and other Italian adults. The results, based on the 2020 Survey on the Financial Literacy of Italian Adults conducted by the Bank of Italy according to the OECD/INFE methodology, are threefold. First, Italian micro-entrepreneurs have quite low levels of FL by international standards. Second, compared with other Italians, business owners have only a slightly higher level of FL; this is mainly attributable to their higher income and more frequent use of financial services. Third, thanks to their slightly more advanced financial skills, micro-entrepreneurs are more likely to make better financial decisions than other adults. These findings suggest that strengthening the financial literacy of micro-entrepreneurs can have a positive impact on their ability to make better financial decisions and ultimately on the resilience and growth of their businesses.
    Keywords: financial literacy, financial behaviour, micro-entrepreneurs, SMEs
    JEL: G53 L26 J24
    Date: 2022–10
  25. By: Coakley, Jerry; Cumming, Douglas; Lazos, Aristogenis; Vismara, Silvio
    Abstract: In innovative entrepreneurial finance markets, ventures raising funds target a set of heterogeneous “digital” investors using distinct governance mechanisms. We focus on the micro-functioning of equity crowdfunding (ECF) markets by investigating the differences in terms of agency issues and potential principal-principal conflicts arising from the coinvestment of angels or venture capitalists alongside crowd investors. The nominee governance structure, by allocating the same ownership and voting rights to all investors and aggregating them into a special purpose vehicle with the nominee company as sole legal owner, can reconcile such conflicts by mitigating agency and coordination problems. This structure enables angels and venture capital funds to exploit the wisdom of the crowd and crowd investors to free ride on the former’s due diligence and monitoring. Using a platform governance lens, this paper evaluates the performance of nominee versus direct ownership structure. Based a large sample of 1,103 successful and unsuccessful initial campaigns on the three largest equity crowdfunding platforms in the UK (namely Seedrs, Crowdcube, and SyndicateRoom), we document that nominee firms exhibit better short run and long run performance. Our results hold inter-platform between crowdfunding platforms as well as intra-platform, as confirmed by a quasi-natural experiment when the nominee approach became an option for startups raising capital on the Crowdcube platform. Our findings offer valuable insights to platforms and policymakers who could channel tax incentives via nominee schemes.
    Keywords: Crowdfunding; Platforms; Digital finance; Innovative entrepreneurial finance
    Date: 2022–10–19
  26. By: G. A. Nigmatulin; O. B. Chaganova
    Abstract: The steadily high demand for cash contributes to the expansion of the network of Bank payment terminals. To optimize the amount of cash in payment terminals, it is necessary to minimize the cost of servicing them and ensure that there are no excess funds in the network. The purpose of this work is to create a cash management system in the network of payment terminals. The article discusses the solution to the problem of determining the optimal amount of funds to be loaded into the terminals, and the effective frequency of collection, which allows to get additional income by investing the released funds. The paper presents the results of predicting daily cash withdrawals at ATMs using a triple exponential smoothing model, a recurrent neural network with long short-term memory, and a model of singular spectrum analysis. These forecasting models allowed us to obtain a sufficient level of correct forecasts with good accuracy and completeness. The results of forecasting cash withdrawals were used to build a discrete optimal control model, which was used to develop an optimal schedule for adding funds to the payment terminal. It is proved that the efficiency and reliability of the proposed model is higher than that of the classical Baumol-Tobin inventory management model: when tested on the time series of three ATMs, the discrete optimal control model did not allow exhaustion of funds and allowed to earn on average 30% more than the classical model.
    Date: 2022–10
  27. By: Steenkamp, Daan; Erasmus, Ruan
    Abstract: This white paper decomposes sovereign yields into expectations of future average short term rates and a term premium. We estimate that the term premium in South African sovereign bonds is lower than after the onset of the COVID pandemic, but still meaningfully higher than its historical average. Codera uses these estimates to extract market expectations of monetary policy and signals relating to the inflation and economic growth outlook, as well as produce estimates of market perceptions of liquidity premia and sovereign credit risk.
    Keywords: term premium
    JEL: E43 G12
    Date: 2022–10–07
  28. By: Dallal Bendjellal (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This paper studies the transmission of a sovereign debt crisis in which a shift in default risk generates a recession and gives rise to a doom loop between sovereign distress and bank fragility with important amplification effects. The model is used to investigate the macroeconomic and welfare effects of altering debt maturity during the crisis. Short-term maturities alleviate the bankers' losses on long-term bonds and moderate the recession at the cost of higher levels of debt in the future. In contrast, long-term maturities are more effective to reduce the households' welfare losses as they lower default risk and distortionary taxes.
    Keywords: Debt Crisis,Sovereign Default Risk,Financial Fragility,Maturity Dynamics
    Date: 2022–09
  29. By: Magda Bianco (Bank of Italy); Daniela Marconi (Bank of Italy); Angela Romagnoli (Bank of Italy); Massimiliano Stacchini (Bank of Italy)
    Abstract: Financial inclusion has received growing attention over the years as an enabling factor for promoting growth, reducing inequalities, and addressing poverty. In order to support policy choices aimed at enhancing financial inclusion, we investigate its main drivers, with a special focus on demand-side factors; more specifically, we enquire as to whether financial education may enhance financial inclusion. A cross-country analysis shows that, controlling for per capita GDP, higher levels of participation of individuals in economic life, greater financial knowledge and the existence of financial education strategies reduce the likelihood of a country being in the low financial inclusion segment. Moreover, as digitalization offers great opportunities to expand inclusion (but also some challenges), we provide evidence on the relationship between financial literacy and digital skills, showing that (at least in more advanced countries) digital skills are positively correlated with financial literacy from a young age. Based on our findings, we suggest some directions for future research, measurement and data collection, and policy actions.
    Keywords: Financial inclusion, financial literacy, financial education
    JEL: D14 G53 O38
    Date: 2022–10
  30. By: Domenico Delli Gatti; Gabriele Iannotta
    Abstract: We explore the intertwined dynamics of asset prices and the macroeconomy in a Behavioural model of Credit Cycles (BCC) characterized by a credit friction à la Kiyotaki and Moore and heterogeneous expectations cum heuristic switching à la Brock and Hommes. This behavioural approach allows to better understand and replicate the effects of shocks. In the absence of actual defaults, following a positive productivity shock, our behavioural model (BCC Mark I) generates hump-shaped impulse-response functions that are more realistic than those generated by the same shock in a corresponding model with rational expectations (RCC). When the behavioural model allows also for defaults (BCC Mark II), a productivity shock triggers ample and persistent fluctuations (if the intensity of choice of the lender is sufficiently high), a feature that is absent in BCC Mark I (and of course in RCC).
    Keywords: credit market, collateral constraints, heterogeneous expectations, bankruptcy, boom bust cycles
    JEL: E32 E44 D84
    Date: 2022
  31. By: Francesco Bianchi; Leonardo Melosi; Anna Rogantini Picco
    Abstract: The growing asymmetry in the size of fiscal imbalances poses a serious challenge to the macroeconomic stability of the Euro Area (EA). We show that following a contractionary shock, the current monetary and fiscal framework weakens economic growth even in low-debt countries because of the zero lower bound (ZLB) constraint. At the same time, the current framework also exposes the EA to the risk of fiscal stagflation if one country were to refuse to implement the necessary fiscal consolidations. We study a new framework that allows EA policymakers to separate the need for short-run macroeconomic stabilization from the issue of long-run fiscal sustainability. Following a contractionary shock, the central bank tolerates the increase in inflation needed to stabilize the amount of Eurobonds issued in response to a large EA recession. National governments remain responsible to back their country-level debt by fiscal adjustments. The policy acts as an automatic stabilizer that benefits both high-debt and low-debt countries, generating a moderate increase in inflation that mitigates the recession and allows the central bank to move away from the ZLB. At the same time, the proposed policy lowers the risk of fiscal stagflation because it endows EA countries with effective stabilization policies.
    Keywords: Monetary and Fiscal Policy Coordination; Monetary Union; Eurobonds; Zero Lower Bound; Government Debt
    JEL: E50 E62 E30
    Date: 2022–10–03
  32. By: Ropele, Tiziano (Bank of Italy); Gorodnichenko, Yuriy (University of California, Berkeley); Coibion, Olivier (University of Texas at Austin)
    Abstract: We match survey data of Italian firms that includes a repeated experiment in which information about inflation is randomly provided to firms over time with detailed credit data that covers the borrowing decisions of firms. This allows us to study how exogenous variation in inflation expectations causally affects the borrowing decisions of Italian firms. We document a number of new results. Firms with exogenously higher inflation expectations end up paying higher interest rates on average but do not change the overall demand of loans. Instead, we find a significant rebalancing of firms' borrowing decisions away from lower-interest long-term loans and toward higher-interest short-term loans. In anticipation of rising future interest rates linked to higher expected inflation, firms also take on new long-term loans to pay down existing loans, thereby locking in interest rate savings. Firms that are relatively more knowledgeable about financial tools engage in the latter particularly strongly.
    Keywords: inflation expectations, surveys, inattention
    JEL: E02 E03
    Date: 2022–10
  33. By: Sara Lamboglia (Bank of Italy); Massimiliano Stacchini (Bank of Italy)
    Abstract: Financial literacy is low among young people and their uninformed choices may have costly and long-lasting consequences. This paper uses information on approximately 52,000 fifteen-year-old students participating in the 2018 OECD Programme for International Student Assessment (PISA) to provide fresh evidence on two drivers for youth financial skills: maths skills and students’ exposure to financial education at school. Our results are threefold. First, mathematical skills have a positive impact on financial skills, and to a greater extent than reading skills. Second, an extension based on the 2012 wave of PISA suggests that the transfer of competences from mathematics to financial literacy can be enhanced when teaching strategies focus more on stimulating “cognitive activation†. Third, we show how the percentage of students having the chance to receive financial education at school varies widely across countries, and how having such an opportunity positively influences financial achievements.
    Keywords: Financial literacy, Schooling, PISA 2018
    JEL: G53 H52
    Date: 2022–10
  34. By: Rogelio V. Mercado, Jr. (South East Asian Central Banks (SEACEN) Research and Training Centre); Victor Pontines (South East Asian Central Banks (SEACEN) Research and Training Centre)
    Abstract: This paper employs Bayesian model averaging (BMA) and uses posterior inclusion probability (PIP) values to evaluate which financial inclusion indicators, dimensions, and other determinants of income inequality should be considered in an empirical specification assessing the relationship between financial inclusion and income inequality, given model uncertainty. The results show that for the low-income country group, financial access and usage indicators and dimensions are the most relevant indicators. Unfortunately, nowhere in our baseline results and in almost all our sensitivity tests do we find PIP values higher than our set threshold value for any of our financial depth indicators and dimension. These results suggest that theoretical models linking financial inclusion nd income inequality could well focus on the role of financial access and usage by providing theoretical foundations on the mechanics as to how these two dimensions of financial inclusion impact income inequality.
    Keywords: Bayesian model averaging, financial inclusion, income inequality, Bayesian inference
    JEL: C11 C52 O15 O16
    Date: 2022–10
  35. By: Sara Lamboglia (Bank of Italy); Fabio Travaglino (Bank of Italy)
    Abstract: In the past decade, institutions, researchers and professionals all around the world have designed surveys with the aim of defining a metric for measuring financial literacy. However, the topic is still under discussion due to the complexity of the definition of financial literacy. In this paper, we review the main international and Italian surveys capturing financial literacy across different target groups: young people, adults and entrepreneurs. We analyse in detail the way financial literacy is defined and measured. We also report all the information gathered in each survey with a special focus on digital skill indicators, which are increasingly important in a rapidly changing financial landscape driven by digital technology.
    Keywords: Financial literacy, survey
    JEL: G53
    Date: 2022–10
  36. By: Stephen G. Hall (Leicester University, Bank of Greece, and Pretoria University); George S. Tavlas (Bank of Greece and the Hoover Institution, Stanford University); Yongli Wang (University of Birmingham)
    Abstract: This paper considers the problem of forecasting inflation in the United States, the euro area and the United Kingdom in the presence of possible structural breaks and changing parameters. We examine a range of moving window techniques that have been proposed in the literature. We extend previous work by considering factor models using principal components and dynamic factors. We then consider the use of forecast combinations with time-varying weights. Our basic finding is that moving windows do not produce a clear benefit to forecasting. Time-varying combination of forecasts does produce a substantial improvement in forecasting accuracy.
    Keywords: forecast combinations, structural breaks, rolling windows, dynamic factor models, Kalman filter
    JEL: C52 C53
    Date: 2022–10

This nep-ban issue is ©2022 by Sergio Castellanos-Gamboa. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.