nep-ban New Economics Papers
on Banking
Issue of 2023‒02‒13
forty-nine papers chosen by
Sergio Castellanos-Gamboa, , Pontificia Universidad Javeriana

  1. The Impact of Positive Information Sharing on Banks’ Lending to Households By Tamas Briglevics; Artashes Karapetyan; Steven Ongena; Ibolya Schindele
  2. The impact of sovereign tensions on bank lending: identifying the channels at work By Fabiana Sabatini
  3. Bank manager sentiment, loan growth and bank risk By Brückbauer, Frank; Cezanne, Thibault
  4. The Anatomy of Banks’ IT Investments: Drivers and Implications By Mr. Maria Soledad Martinez Peria; Mr. Yannick Timmer; Mr. Nicola Pierri; Kosha Modi
  5. Liquidity Regulation and Bank Risk Taking on the Horizon By Joshua Bosshardt; Ali Kakhbod; Farzad Saidi
  6. Does BRRD mitigate the bank-to-sovereign risk channel? By Martien Lamers; Thomas Present; Nicolas Soenen; Rudi Vander Vennet
  7. Bank loan loss provisioning for sustainable development: the case for a sustainable or green loan loss provisioning system By Ozili, Peterson K
  8. Effect of abnormal increase in credit supply on economic growth in Nigeria By Ozili, Peterson K; Oladipo, Olajide; Iorember, Paul
  9. Does the Community Reinvestment Act Improve Consumers’ Access to Credit By Jacob Conway; Jack Glaser; Matthew Plosser
  10. Systemwide Liquidity Stress Testing Tool By Ms. Hiroko Oura
  11. Digital finance research and developments around the World: a literature review By Ozili, Peterson K;
  12. "Monetary Policy and Endogenous Financial Crises" By Frédéric Boissay; Fabrice Collard; Jordi Gali; Cristina Manea
  13. History and development of the banking sector in Kosovo By Zogjani, Jeton; Kovaci-Uruci, Fife
  14. The Greek economic crisis and the banks By Hardouvelis, Gikas A.; Vayanos, Dimitri
  15. Why European banks adjust their dividend payouts? By Belloni, Marco; Grodzicki, Maciej; Jarmuzek, Mariusz
  16. Macro-Financial Stability in the COVID-19 Crisis: Some Reflections By Mahvash S Qureshi; Mr. Tobias Adrian; Mr. Fabio M Natalucci
  17. Determinants of interest in eNaira and financial inclusion information in Nigeria: role of Fintech, cryptocurrency and central bank digital currency By Ozili, Peterson K
  18. Central Bank Digital Currencies: An Old Tale with a New Chapter By Michael D. Bordo; William Roberds
  19. “Out of Sight, Out of Mind?” Banks’ Private Information, Distance, and Relationship Length By Stijn Claessens; Steven Ongena; Teng Wang
  20. Central Bank Balance Sheet Expansion in a Dollarized Economy: The Case of Ecuador By Julien Reynaud; Juan-Pablo Erraez
  21. Global payment disruptions and firm-level exports By Haas, Ralph$cde; Kirschenmann, Karolin; Schultz, Alison
  22. Incorporating Individual Retail Loan Data into the Macro Stress Testing Framework By Jan Klacso
  23. Inequality-Constrained Monetary Policy in a Financialized Economy By Luca Eduardo Fierro; Federico Giri; Alberto Russo
  24. Collateral Cycles By Evangelos Benos; Gerardo Ferrara; Angelo Ranaldo
  25. Navigating the well-being effects of monetary policy:Evidence from the European Central Bank By El Mehdi El Herradi; Aurelien Leroy
  26. Digital Money and Remittances Costs in Central America, Panama, and the Dominican Republic By Ms. Alina Carare; Mr. Yorbol Yakhshilikov; Metodij Hadzi-Vaskov; Dmitry Vasilyev; Lavinia Franco; Justin Lesniak
  27. Monetary Policy and Credit Card Spending By Mr. Damiano Sandri; Mr. Francesco Grigoli
  28. Four mistakes in the use of measures of expected inflation By Ricardo Reis
  29. The Green Asset Ratio (GAR) - a new KPI for credit institutions By Brühl, Volker
  30. Households' financial fragility during the COVID-19 pandemic in Germany By Cziriak, Marius
  31. Inflation Surprises in a New Keynesian Economy with a True Consumption Function By Roberto Tamborini
  32. Show Me the Money: Tracking Consumer Spending with Daily Card Transaction Data During the Pandemic By Mr. Serhan Cevik
  33. Foreign Banking Organizations in the United States and the Price of Dollar Liquidity By Wenxin Du
  34. Balance Sheet Expansionary Policies in the Euro Area: Macroeconomic Impacts and a Vulnerable versus Non-Vulnerable Comparison - A Bayesian Structural VAR Approach By Francisco Gomes Pereira
  35. The 2021–22 Surge in Inflation By Oleksiy Kryvtsov; James (Jim) C. MacGee; Luis Uzeda
  36. Sustainable Finance in Southeast Asia By Swisa Ariyapruchya; Ulrich Volz
  37. Price elasticity of demand and risk-bearing capacity in sovereign bond auctions By José Miguel Cardoso da Costa; Rui Albuquerque; José Afonso Faias
  38. Artificial Intelligence & Machine Learning in Finance: A literature review By Wassima Lakhchini; Rachid Wahabi; Mounime El Kabbouri; Casa Bp; Settat Hassan
  39. Diversification quotients based on VaR and ES By Xia Han; Liyuan Lin; Ruodu Wang
  40. Why Follow the Fed? Monetary Policy in Times of US Tightening By Gonzalo Huertas
  41. Financial Openness and Inflation: Recent Evidence By Alfred V Guender; Hamish McHugh-Smith
  42. Empirical Research on Financial Efficiency and Economic Growth in Sub-Saharan Africa By Nigo, Ayine R.S.; Gibogwe, Vincent
  43. A Model of Cycles and Bubbles under Heterogeneous Beliefs in Financial Markets By Carina Burs
  44. Democratization of Retail Trading: Can Reddit's WallStreetBets Outperform Investment Bank Analysts? By Tolga Buz; Gerard de Melo
  45. Stock Market Liquidity, Monetary Policy and the Business Cycle By Markus Leippold; Vincent Wolff
  46. (Un)Conventional Monetary and Fiscal Policy By Jing Cynthia Wu; Yinxi Xie
  47. The Macroeconomic Consequences of Subsistence Self-Employment By Sergio Ocampo; Juan Herreño
  48. Bottleneck effects of monetary policy By Emilia Garcia-Appendini; Frédéric Boissay; Steven Ongena
  49. Financial De-Dollarization in Argentina. When the Wind Always Blows from the East By Eduardo Corso; Maximo Sangiacomo

  1. By: Tamas Briglevics (Boston College; Federal Reserve Bank of Boston); Artashes Karapetyan (ESSEC Business School); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)); Ibolya Schindele (Central European University; Central Bank of Hungary)
    Abstract: What is the impact of positive information sharing on households’ access to credit? Exploiting a nation-wide introduction of mandatory information sharing between banks on borrowers` current exposures, we differentiate between borrowers who apply to new banks and those who reapply to banks with already established credit contracts, as well as between borrowers with and without past negative information. We find an overall increase in credit access, in application success and credit amount, for all borrower groups. In addition, we show that while credit access increases, default rates decrease, hence “positive” information sharing may boost aggregate welfare.
    Keywords: information sharing, bank lending, household access to credit
    JEL: G21 G28
    Date: 2022–12
  2. By: Fabiana Sabatini (Bank of Italy)
    Abstract: Banks’ holdings of sovereign bonds are an important component of the multifaceted bank-sovereign nexus. This paper exploits the unexpected increase in sovereign yields in Italy in May 2018 to quantify the impact of a drop in value of banks’ government bond portfolios on their supply of loans (direct channels). It disentangles the effect stemming from the worsening in banks’ capitalization (balance sheet channel) from that associated with a reduced ability to raise funds using government bond holdings as collateral (liquidity channel). Results show that banks with large government bond portfolios reduced their lending more; evidence indicates that this is a consequence of the balance-sheet channel. The liquidity channel was not activated, partly thanks to the ample availability of Eurosystem funds held by banks. I then control for the channels at work for the banking system as a whole, regardless of government bond holdings (indirect channels), and find that the generalized increase in the cost of funding for banks (cost of funding channel) has a negative impact on bank lending.
    Keywords: credit supply, banks’ sovereign holdings, bank lending channel
    JEL: G01 G21 E5 E51
    Date: 2022–12
  3. By: Brückbauer, Frank; Cezanne, Thibault
    Abstract: We build a textual score measuring the tone of bank earnings press release documents. We use this measure to define bank manager sentiment as the variation in the textual tone score which is orthogonal to bank-specific and macroeconomic fundamentals. Using this definition of sentiment, we present evidence on how bank managers' systematic overoptimism affects the amount of credit that they supply to the real sector. Our empirical evidence suggests that decisions on the volume of new loans partially depend on past realizations of economic fundamentals, implying that loan growth and contemporaneous economic fundamentals might be systematically disconnected. Furthermore, we show that over-optimism on the part of bank managers spills over to their equity investors, who seem to perceive banks with high bank manager sentiment as having a lower systemic risk.
    Keywords: sentiment, text data, extrapolation, loan growth, systemic risk
    JEL: G00 G10 G21 G41
    Date: 2022
  4. By: Mr. Maria Soledad Martinez Peria; Mr. Yannick Timmer; Mr. Nicola Pierri; Kosha Modi
    Abstract: This paper relies on administrative data to study determinants and implications of US banks’ Information Technology (IT) investments, which have increased six-fold over two decades. Large and small banks had similar IT expenses a decade ago. Since then, large banks sharply increased their spending, especially those which were more exposed to competition from fintech lenders. Other local-level and bank-level factors, such as county income and bank income sources, also contribute to explain the heterogeneity in IT investments. Analysis of the mortgage market reveals that fintechs’ lending behavior is more similar to that of non-bank financial intermediaries rather than IT-savvy banks, suggesting that factors other than technology are responsible for the differences between banks and other lenders. However, both IT-savvy banks and fintech lend to lower income borrowers, pointing towards benefits for financial inclusion from higher IT adoption. Banks’ IT investments are also shown to matter for the responsiveness of bank lending to monetary policy.
    Keywords: IT Adoption; Fintech Competition; Financial Inclusion; Monetary Policy; banks' IT investment; IT-savvy bank; tech spend; IT bank; Fintech; Mortgages; Loans; Income; Bank credit; Global
    Date: 2022–12–09
  5. By: Joshua Bosshardt; Ali Kakhbod; Farzad Saidi
    Abstract: We examine how banks’ liquidity requirements affect their incentives to take risk with their remaining illiquid assets. Our model predicts that banks with more stable liabilities are more likely to engage in risk taking in response to tighter liquidity requirements. This prediction is borne out in transaction-level data on corporate and mortgage loans for U.S. banks subject to the liquidity coverage ratio (LCR). For identification, we exploit variation in long-term bank bonds held by insurance companies that are not affected by the LCR. Our results point to a trade-off between bank risk taking and ensuring funding resilience over different horizons.
    Keywords: Liquidity Regulation, Bank Risk Taking, Insurance Sector, LCR, NSFR
    JEL: G20 G21 G22 G28
    Date: 2023–01
  6. By: Martien Lamers; Thomas Present; Nicolas Soenen; Rudi Vander Vennet (-)
    Abstract: We investigate the effectiveness of the Bank Recovery and Resolution Directive (BRRD) in mitigating the transmission of credit risk from banks to their sovereign, using CDS spreads to capture bank and sovereign credit risk for a sample of 43 banks in 8 Euro Area countries over the period 2009-2020. If the BRRD bail-in framework is credible, changes in bank default risk should not be transmitted to sovereign risk. In a novel approach we use banks’ earnings announcements to identify exogenous shocks to bank credit risk and investigate to what extent bank risk is transmitted to sovereign risk before and during the BRRD era. We find that bank-to-sovereign risk transmission has diminished after the introduction of the BRRD, suggesting that financial markets judge the BRRD framework as credible. The decline in bank-sovereign risk transmission is particularly significant in the periphery Euro Area countries, especially Italy and Spain, where the bank-sovereign nexus was most pronounced during the sovereign debt crisis. We report that the lower bank-to-sovereign credit risk transmission is associated with the parliamentary approval of the BRRD and not with the OMT program launched by the ECB to affect sovereign yield spreads, nor with specific bail-in or bailout cases which occurred during the BRRD era. Finally, we document that the reduction in risk transmission is most pronounced for banks classified as a Global Systemically Important Bank (G-SIB), stressing the importance of additional capital buffers imposed by Basel III.
    Keywords: BRRD, bank-sovereign nexus, bank-to-sovereign risk channel, bank earnings announcement, CDS spread
    JEL: C58 G28 G32
    Date: 2023–01
  7. By: Ozili, Peterson K
    Abstract: The purpose of this study is to present a sustainable (or green) loan loss provisioning system that align bank loan loss provisioning with the sustainable development goals. The findings of the study are that the proposed sustainable (or green) loan loss provisioning system will align bank loan loss provisioning with the sustainable development goals by adjusting loan loss provisions estimates to reflect the environmental benefits and costs of borrowers’ business activities. Banks will incur additional provisions above normal provisions for loans issued to businesses whose activities are harmful to the environment and the climate. Banks will allocate fewer provisions whenever they issue loans to eco-friendly or green businesses. The implication of the proposed sustainable (or green) loan loss provisioning system is that bank regulators and supervisors need to consider the impact of the sustainable (or green) loan loss provisioning system on bank capital and bank stability.
    Keywords: Bank performance, loan loss provisions, sustainability, sustainable development, SDGs, green washing, credit risk, green loan loss provisioning, sustainable loan loss provisioning.
    JEL: G21 Q56
    Date: 2023
  8. By: Ozili, Peterson K; Oladipo, Olajide; Iorember, Paul
    Abstract: We investigate the effect of abnormal increase in credit supply on economic growth in Nigeria after controlling for the quality of the legal system, size of central bank asset, banking sector cost efficiency and bank insolvency risk. The abnormal increase in credit supply has a significant effect on economic growth. The abnormal increase in credit supply increases real GDP growth. The abnormal increase in credit supply decreases real GDP per capita during the global financial crisis. The abnormal increase in domestic credit to private sector has a significant positive effect on GDP per capita when there is strong legal system quality in Nigeria. In contrast, the abnormal increase in domestic credit to private sector has a significant negative effect on real GDP growth when there is strong legal system quality in Nigeria. The abnormal increase in credit supply is ineffective in increasing GDP per capita during crisis years. Policymakers should be cautious in pressuring financial institutions to release an abnormally large amount of credit into the economy particularly during financial crises. Rather, policymakers should encourage financial institutions to supply credit in a sustained manner – not in an abnormal manner – and in a way that supports growth.
    Keywords: Economic growth, Nigeria, credit supply, GDP growth rate, GDP per capita, abnormal credit supply, rule of law, ZSCORE, profitability, domestic credit to private sector, central bank asset.
    JEL: E51 E52 E58 G21
    Date: 2023–01
  9. By: Jacob Conway; Jack Glaser; Matthew Plosser
    Abstract: We study the impact of the Community Reinvestment Act (CRA) on access to consumer credit since 1999 using an individual-level panel and three distinct identification strategies: a regression discontinuity design centered on a CRA-eligibility cutoff; a comparison of neighboring census blocks; and an event study of changes in eligibility. All three rule out a significant effect of the CRA on consumer borrowing. We show that this is in part explained by a shift in mortgages from nonbanks, which are free from CRA obligations, to banks in need of CRA-eligible mortgages. Our findings underscore the pitfalls of a circumscribed regulatory regime.
    Keywords: Community Reinvestment Act (CRA); household finance; banks
    JEL: G21 G28
    Date: 2023–01–01
  10. By: Ms. Hiroko Oura
    Abstract: Developing a systemic liquidity stress testing tool is challenging due to data constraints and hard-to-model behavioral factors. There has yet to be a uniformly accepted model partly because the nature of systemic liquidity risks differs significantly across countries. This paper offers a simple Excel-based tool to assess the high-level impact of aggregate liquidity stress on the whole economy and gauge its spillover across banks, non-bank financial institutions (NBFIs), and non-financial economic sectors. It primarily uses the balance sheet approach (BSA) data—a sector-aggregate matrix of financial exposure by counterpart—that have become increasingly available for various economies with all income levels. The results can identify systemically important financial linkages to be analyzed further and help calibrate macroprudential measures and a liquidity support framework. When liquidity stress stems from capital outflows, the tool can enrich policy discussion based on integrated policy framework (IPF) and international reserve adequacy perspectives.
    Keywords: Systemic liquidity; NBFIs; stress test; integrated policy framework; capital flow; international reserve adequacy; interconnectedness; balance sheet approach; macroprudential policy; financial stability; central bank FX liquidity buffer; cashflow liquidity stress test; liquidity support framework; systemwide liquidity risk; central bank liquidity provision; Liquidity; Liquidity stress testing; International reserves; Stress testing; Global
    Date: 2022–12–16
  11. By: Ozili, Peterson K;
    Abstract: This paper presents a concise review of the existing digital finance research in the literature, and highlight some of the developments in digital finance around the world. The paper reached several conclusions. Firstly, it showed that digital finance has become an important part of modern finance and the major application of digital finance can be found in Fintech, embedded finance, open banking and decentralized finance, central bank digital currencies, among others. Secondly, it identified some international determinants of digital finance which includes the need for efficiency in financial services delivery, the need to achieve the United Nations sustainable development goals using existing digital technologies, the need to increase financial inclusion through digital financial inclusion and the need for efficient payments and payment settlement finality. The paper also finds that digital finance research is growing fast, and recent studies have investigated contemporary issues in digital finance that are relevant for policy and practice. Regarding the digital finance developments around the world, the paper shows that the Fintech and mobile money industries are the largest beneficiary of investments in digital finance with the total number of users of mobile money services surpassing 1 billion globally. Also, the paper predicts that the future of digital finance is to create a digital environment that permits the offering of all kinds of financial product and services that can be customized and personalized to meet the unique needs of all users on a single digital platform and without requiring any form of human assistance or intermediary. The paper then suggest some areas for future research which include the need for more research on how regulators can keep pace with emerging digital finance transformation, the need for more research on user information security and compliance, the need for more research on how to deal with bias caused by bad data, the need for more research on how to deal with algorithmic bias, and the need for more research on how to combine a risk-conscious culture with a higher risk appetite for digital finance transformation.
    Keywords: digital finance, artificial intelligence, machine learning, financial inclusion, fintech, access to finance, financial stability, economic growth, blockchain, central bank digital currency, robotics, cryptocurrency.
    JEL: G21 O32 O33
    Date: 2023
  12. By: Frédéric Boissay (BIS - Bank for International Settlements); Fabrice Collard (TSE-R - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - Université Fédérale Toulouse Midi-Pyrénées - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Jordi Gali (CREI - Centre de Recerca en Economia Internacional - UPF - Universitat Pompeu Fabra [Barcelona]); Cristina Manea (BIS - Bank for International Settlements)
    Abstract: We study whether a central bank should deviate from its objective of price stability to promote financial stability. We tackle this question within a textbook New Keynesian model augmented with capital accumulation and microfounded endogenous financial crises. We compare several interest rate rules, under which the central bank responds more or less forcefully to inflation and aggregate output. Our main findings are threefold. First, monetary policy affects the probability of a crisis both in the short run (through aggregate demand) and in the medium run (through savings and capital accumulation). Second, a central bank can both reduce the probability of a crisis and increase welfare by departing from strict inflation targeting and responding systematically to fluctuations in output. Third, financial crises may occur after a long period of unexpectedly loose monetary policy as the central bank abruptly reverses course.
    Keywords: Financial crisis, monetary policy
    Date: 2023–01–02
  13. By: Zogjani, Jeton; Kovaci-Uruci, Fife
    Abstract: This paper aims to discuss the main challenges and difficulties that the banking system in Kosovo was faced under the former Yugoslavia and the Serbian state(s). Also, this paper includes a discussion over the process of consolidation and development of the banking sector during the post-war period in Kosovo and the process of modernization in the post-independence period. The paper is based on the main banking indicators of the banking system in Kosovo, including bank assets, loans and deposits, banking performance and profitability indicators as well as banking electronic services over the last two decades. The highest growth rates of loans and deposits in Kosovo have been during the period 2004 - 2013, where household demand for loans and deposits have been higher during this period. Then, net banking profit in Kosovo has had an average annual growth of 80 million Euros during the period 2014 - 2020 and it is considered with the highest average growth over the last two decades. Since 2000, banking profitability indicators have shown a continuous improvement and their largest average annual growth has been during the period 2015 - 2020 while non-performing loans have had an average annual decline from 8.7% in 2005 to 2.7% in 2020. Also, electronic banking services have had an enormous growth and development, and these services have enabled banking customers to use them directly and continuously throughout 7/24. In conclusion, Kosovo has had the long way from a planned economy to a market economy but it has resulted in a difficult and quite challenging transformation. Since 1999, economic growth and the banking environment in Kosovo have enabled banks to improve, increase and expand their activities.
    Keywords: banking and payments authority of Kosovo; banking industry; banking performance and profitability; electronic banking services; MEB; National Bank of Kosovo (Bank Kos); UNMIK
    JEL: E43 E44 E58 G18
    Date: 2023
  14. By: Hardouvelis, Gikas A.; Vayanos, Dimitri
    Abstract: In this paper we review the Greek economic crisis focusing on the banking system. Banksovereign linkages were strong during the crisis: banks’ liquidity problems before the sovereign crisis spilled over to the real economy, and more importantly the sovereign’s default rendered all Greek banks insolvent because of their positions in government bonds. The Greek banking system was put back on its feet through a series of recapitalizations, following which industry concentration became the highest in Europe. Banks were slow to reduce non-performing loans (NPLs), which peaked at 48.9% of gross loans, because of their limited capital buffers. Government guarantees for securitizations were finally the key for NPLs to decline close to European averages. Banks’ capital buffers have improved through internal profitability but remain below European averages. Lending to the real economy is low but recovering, and banks’ exposure to the sovereign is again increasing.
    JEL: N0 F3 G3
    Date: 2023–01
  15. By: Belloni, Marco; Grodzicki, Maciej; Jarmuzek, Mariusz
    Abstract: Economic literature suggests that banks change their dividend payouts for three main reasons. They may be willing to signal good future profitability to shareholders to address information asymmetry, or use dividends to mitigate the agency costs, or could come under pressure from prudential supervisors and regulators to retain earnings. The COVID-19 pandemic led to introduction of sector-wide recommendation by regulators to suspend dividend payouts in view of prevailing large uncertainty. Using a panel data approach for two samples of listed and unlisted European banks, this paper provides evidence that, over a decade and a half preceding the pandemic, bank dividend payouts were adjusted in line with the three motivations found in the literature. The results are robust to selection of alternative variables representing these motivations. Banks are found not to discount expectations about future economic conditions or their own profitability when making payouts. Simulations shown in the paper suggest that, in the absence of supervisory recommendations, banks would likely have reduced the payouts only slightly in the first year of the pandemic. JEL Classification: G21, G35
    Keywords: bank dividends, financial regulation, payout policies
    Date: 2023–01
  16. By: Mahvash S Qureshi; Mr. Tobias Adrian; Mr. Fabio M Natalucci
    Abstract: The global financial system has shown remarkable resilience during the COVID-19 pandemic, despite a sharp decline in economic activity and the initial financial market upheaval in March 2020. This paper takes stock of the factors that contributed to this resilience, focusing on the role of monetary and financial policies. In response to the pandemic-induced crisis, major central banks acted swiftly and decisively, cutting policy rates, introducing new asset purchase programs, providing liquidity support for the banking system, and creating several emergency facilities to sustain the flow of credit to the real economy. Several emerging market central banks also deployed asset purchase programs for the first time. While the pandemic crisis has underscored the importance of policies in preventing calamitous financial outcomes, it has also brought to the fore some unintended consequences of policy actions—in particular, of providing prolonged monetary policy support and applying regulation to specific segments of the financial system rather than taking a broader approach—that could undermine financial stability in the future.
    Keywords: COVID-19 pandemic crisis; monetary policy; financial stability; emerging markets; central bank asset; purchase program; monetary policy support; market liquidity; asset purchase; COVID-19; Inflation; Global financial crisis of 2008-2009; Capital flows; Financial sector stability; Global
    Date: 2022–12–16
  17. By: Ozili, Peterson K
    Abstract: The eNaira is the central bank digital currency of Nigeria. People who are interested in the eNaira and financial inclusion will seek information about eNaira and financial inclusion. Their interest in information about eNaira and financial inclusion will make it easier for them to adopt the eNaira and embrace other financial inclusion innovations such as financial technology (Fintech) and cryptocurrency. This paper investigates the determinants of interest in eNaira and financial inclusion information. Interest over time data were analyzed using descriptive statistics, correlation analysis and ordinary least squares (OLS) regression. The study also used the GMM and 2SLS regression methods for robustness. The findings of this study reveal that interest in Fintech and eNaira information are significant positive determinants of interest in financial inclusion information. Also, interest in financial inclusion is a significant positive determinant of interest in eNaira information. Furthermore, interest in Fintech information has a positive and significant correlation with interest in financial inclusion information. There is also a significant positive correlation between interest in central bank digital currency information and interest in Fintech information. The implication of the findings is that interest in information about new financial innovations, such as Fintech and eNaira, can stimulate interest in information about financial inclusion.
    Keywords: eNaira, Fintech, financial inclusion, central bank digital currency, cryptocurrency, information, innovation, innovation diffusion theory.
    JEL: G21 G23 G24
    Date: 2023
  18. By: Michael D. Bordo; William Roberds
    Abstract: We consider the debut of a new monetary instrument, central bank digital currencies (CBDCs). Drawing on examples from monetary history, we argue that a successful monetary transformation must combine microeconomic efficiency with macroeconomic credibility. A paradoxical feature of these transformations is that success in the micro dimension can encourage macro failure. Overcoming this paradox may require politically uncomfortable compromises. We propose that such compromises will be necessary for the success of CBDCs.
    Keywords: banknotes; central banks; digital currencies; monetary systems
    JEL: E42 E58 N10
    Date: 2022–12–18
  19. By: Stijn Claessens (Bank for International Settlements (BIS)); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)); Teng Wang (Board of Governors of the Federal Reserve System)
    Abstract: What is in banks’ private information about borrowers, and how does it relate to physical distance and relationship length? Exploiting the Federal Reserve’s comprehensive supervisory loan-level dataset on corporate borrowers, we distinguish two dimensions of private information embedded in internal credit ratings: incongruity, bank’s assessment of firm risk relative to one based on observables, and unfavorability, a worse assessment. Incongruity increases in distance and bank-firm relationship length but decreases for distanced firms as length increases. Unfavorability increases in distance and decreases in relationship length and the interaction of the two. Incongruity and unfavorability also significantly affect maturity and loan amounts.
    Date: 2023–01
  20. By: Julien Reynaud; Juan-Pablo Erraez
    Abstract: A textbook argument in favor of adopting another country’s legal tender is that it imposes strong constraints on money creation and therefore fiscal dominance. In Ecuador, an officially dollarized economy since January 2000, a series of accounting practices and subsequent changes in legislations approved over the period 2009-2014 allowed an expansion of the Central Bank of Ecuador’s (CBE) balance sheet to finance the central government. At its peak, central bank financing of the government represented 10 percent of GDP. This resulted in large liabilities to the CBE that translated into low reserve coverage, putting the public and private financial systems and ultimately the dollarization regime at risk. In this paper, we first present the legal and accounting processes behind the expansion of the CBE's balance sheet and some stylized facts. In the second section, we establish a stress test-like methodology to show how the expansion of the CBE’s balance sheet induced strong pressures on CBE’s liquidity. Ultimately, such liquidity stress at the CBE translated into high cash inflows needs, i.e. external debt, for the central government.
    Keywords: Central bank; balance sheet expansion; fiscal dominance; central bank financing; financing of the government; accounting practice; liquidity ration; CBE balance sheet; CBE liability; International reserves; State-owned banks; Financial statements; Bank deposits; Public sector
    Date: 2022–12–02
  21. By: Haas, Ralph$cde; Kirschenmann, Karolin; Schultz, Alison
    Abstract: We exploit proprietary information on severed correspondent banking relationships - due to the stricter enforcement of financial crime regulation - to assess how payment disruptions impede cross-border trade. Using firm-level export data from emerging Europe, we show that when local respondent banks lose access to correspondent banking services, their corporate borrowers start to export less. This trade decline occurs on both the extensive and intensive margins and firms do not substitute foregone exports with higher domestic sales. As a result, total firm revenues and employment shrink. These findings highlight an often overlooked function of global banks: providing the payment infrastructure that enables firms in less-developed countries to export to richer parts of the world.
    Keywords: Correspondent banking, payment infrastructure, global banks, international trade, anti-money laundering
    JEL: F14 F15 F36 G21 G28
    Date: 2022
  22. By: Jan Klacso (National Bank of Slovakia)
    Abstract: Macro stress testing has become an increasingly important part of central banks’, and macroprudential authorities’ toolkits after the global financial crises. Estimation of credit risk losses under adverse circumstances is one of the most important parts of the stress testing framework within the EU/Euro area. However, standard satellite models based on econometrics of time series may not be well suited for countries with short time series or an incomplete credit cycle. This paper shows how to incorporate microdata into the stress testing framework. The paper uses a unique set of individual retail loan data available to the NBS with a large number of data items provided for each loan. The new framework using micro data yields to a much larger increase of NPLs than using time series data in the case of Slovakia. On the other hand, overall losses estimated under the adverse scenario are comparable to losses estimated using the previous framework. Last but not least, the new framework using micro data enables us to estimate the change in risk weights caused by the adverse scenario as well.
    JEL: C58 G51
    Date: 2022–12
  23. By: Luca Eduardo Fierro (Institute of Economics, Scuola Superiore Sant'Anna Pisa (SSSA),); Federico Giri (Department of Economics and Social Sciences, Universita' Politecnica delle Marche (UNIVPM)); Alberto Russo (Department of Economics, Universitat Jaume I (UJI) and Department of Economics and Social Sciences, Universita' Politecnica delle Marche (UNIVPM))
    Abstract: We study how income inequality affects monetary policy through the inequality household debt channel. We design a minimal macro Agent-Based model that replicates several stylized facts, including two novel ones: falling aggregate saving rate and decreasing bankruptcies during the household's debt boom phase. When inequality meets financial liberalization, a leaning against-the-wind strategy can preserve financial stability at the cost of high unemployment, whereas an accommodative strategy, i.e. lowering the policy rate, can dampen the fall of aggregate demand at the cost of larger leverage. We conclude that inequality may constrain the central bank, even when it is not explicitly targeted.
    Keywords: Inequality, Financial Fragility, Monetary Policy, Agent-Based Model
    JEL: D31 E21 E25 E31 E52 G51
    Date: 2023–01
  24. By: Evangelos Benos (University of Nottingham); Gerardo Ferrara (Bank of England); Angelo Ranaldo (University of St. Gallen; Swiss Finance Institute)
    Abstract: Using supervisory data from UK clearinghouses (CCPs), we document the presence of a collateral cycle in which cash goes back and forth from financial markets to CCPs. In the onward phase, clearing members provide cash to CCPs to meet margin requirements. This pattern is procyclical as the pledged collateral increases with market volatility and puts upward pressure on repurchase agreement (repo) rates. In the backward phase, CCPs return the cash to the financial markets via reverse repos and bond purchases, in compliance with regulation that requires them to collateralise their cash holdings. The cash given back by CCPs generates downward pressure on repo rates in a counter-cyclical manner.
    Keywords: Central clearing, margin procyclicality, repo rates
    JEL: G10 G12 G14
    Date: 2022–12
  25. By: El Mehdi El Herradi (BSE - Bordeaux Sciences Economiques - UB - Université de Bordeaux - CNRS - Centre National de la Recherche Scientifique); Aurelien Leroy (UB - Université de Bordeaux, BSE - Bordeaux Sciences Economiques - UB - Université de Bordeaux - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This paper assesses whether monetary policy announcements have an impact on households' (subjective) well-being by analysing life satisfaction on the days before and after monetary surprises in Germany. To do so, we use individual-level information on life satisfaction from the German Socio-Economic Panel (SOEP) survey and identify the day on which each answer is submitted to the survey. We also exploit the Euro Area Monetary Policy event study Database (EA-MPD) to obtain daily-level information on European Central Bank (ECB) monetary surprises. Our results show that life satisfaction is significantly affected by monetary policy surprises: tightening surprises decrease life satisfaction, while easing surprises increase it.
    Keywords: Monetary policy, Subjective Well-Being, Survey data, European Central Bank
    Date: 2022–12–14
  26. By: Ms. Alina Carare; Mr. Yorbol Yakhshilikov; Metodij Hadzi-Vaskov; Dmitry Vasilyev; Lavinia Franco; Justin Lesniak
    Abstract: This paper investigates factors that predict variation in digital and non-digital remittance fees over time and across countries, exploring differences between CAPDR and other regions. The paper fills a void in the literature on how country- and corridor-specific factors relate to remittance fees at different levels of digitalization of the transaction mode. It also complements stylized facts and regression analysis with a survey analysis of the CAPDR authorities’ views on the latest developments, possibilities, and risks related to digital remittances with a view to gauging the authorities’ potential role in further reducing the cost of cross-border payments more generally and remittances fees in particular. The paper finds a clear trend of declining remittance fees across countries and at any level of digitalization, albeit they remain higher for CAPDR countries relative to non-CAPDR countries. More competition, financial and digital development in receiving countries—such as debit/credit card ownership or bank branch penetration—are associated with lower remittance fees, especially in CAPDR. The surveyed authorities actively explore the use of digital money to advance domestic payment systems, expedite financial inclusion, and lower remittances fees, yet see considerable risks, especially for preserving monetary sovereignty in CAPDR.
    Keywords: Digital money; cryptocurrency; stablecoin; remittances
    Date: 2022–12–02
  27. By: Mr. Damiano Sandri; Mr. Francesco Grigoli
    Abstract: We analyze the impact of monetary policy on consumer spending using credit card data. Because of their high frequency, these data improve identification and allow for a precise characterization of the transmission lags. We find that shocks to short-term interest rates affect spending much more rapidly than shocks to longer-term interest rates. We also detect significant asymmetries. While interest rate rises are contractionary, interest rate cuts are unable to lift spending. Finally, by exploiting the disaggregation of credit card data, we uncover considerable heterogeneity in the effects of monetary policy across spending categories and a stronger impact on higher-income users.
    Keywords: Credit card spending; heterogeneity; monetary policy; transmission; credit card data; IMF working paper research Department; interest rate cut; impact of monetary policy; interest rate rise; Consumer credit; Asset prices; Monetary tightening; Consumption; Negative interest rates
    Date: 2022–12–16
  28. By: Ricardo Reis (London School of Economics (LSE); Centre for Macroeconomics (CFM))
    Abstract: With the profusion of measures of expected inflation (from market prices and from surveys of households, firms, and professionals) it is a mistake to focus on a single one while ignoring the others. This paper discusses four common arguments for a single focus, and finds each of them to be lacking. In the process, it isolates characteristics of different measures that models that combine them should take into account.
    Keywords: Phillips curve, anchoring, monetary policy, central banking
    JEL: E31 E52
    Date: 2023–01
  29. By: Brühl, Volker
    Abstract: The financial sector plays an important role in financing the green transformation. Various regulatory initiatives in the EU aim to improve transparency in relation to the sustainability of financial products and the sustainability of economic activities of non-financial and financial undertakings. For credit institutions, the Green Asset Ratio (GAR) has been established by the European regulatory authorities as a KPI for measuring the proportion of Taxonomy-aligned on-balance-sheet exposure in relation to the total assets. The breakdown of the total GAR by type of counterparty, environmental objective and type of asset provides in-depth information about the sustainability profile of a credit institution. This information, which has not been available to date, may also initiate discussions between management and shareholders or other stakeholders regarding the future sustainability strategy of credit institutions. This paper provides an overview of the regulatory background and the method of calculating the GAR along different dimensions. Finally, the potential benefits and limitations of the GAR are discussed.
    JEL: G10 G20
    Date: 2023
  30. By: Cziriak, Marius
    Abstract: I examine the financial fragility of German households during the second wave of COVID-19 infections in the winter of 2020/21 by analyzing the households' ability to come up with EUR 2, 000 within one month. About one in three households reports being unable to cover an unexpected expense of EUR 2, 000 within one month, with some subgroups being particularly at risk, including individuals with children, tenants, respondents without employment or in marginal employment, and with lower levels of income, wealth, or education. While most households have access to rainy day funds for financial emergencies, a noticeable fraction complements this with borrowing, relying on family and friends, or overdrawing their accounts. Households that experienced more severe income losses since the onset of the crisis are more likely to report being unable to cope with an unexpected expense and are more likely to complement their rainy day savings with funds from other sources. Notably, my findings underline that financial literacy may protect households' financial capabilities in times of crisis: Financial literacy is associated with lower financial fragility and appears to mitigate the negative consequences of income losses on the ability to cope with emergency expenses.
    Keywords: financial fragility, financial literacy, personal finance, financial behavior, COVID-19
    JEL: D14 D91 G51 G53 I18
    Date: 2022
  31. By: Roberto Tamborini
    Abstract: The resurgence of inflation since the late 2021 is now accompanied by a reversal of prospects of growth, reviving fears of stagflation across the world (IMF 2022, World Bank 2022). In almost all accounts of the mounting stagflation threats a prominent role is played by the fall of households' purchasing power, and hence consumption, owing to the inflation shock visà-vis nominal wages lagging behind. The theoretical issue that motivates this paper is that this endogenous real income effect of inflation surprises, independent of restrictive monetary policy, is not present in the standard New Keynesian models for monetary policy. The paper shows how this channel can be introduced reformulating the consumption function, with the consequence that it exerts a stabilisation effect on inflation endogenously. By means of simulations the paper discusses the main monetary policy implication: what is the role left to monetary policy which purports to curb inflation in the same way?
    Keywords: cost-push inflation, real income effect, stagflation, New Keynesian models for monetary policy
    JEL: E17 E30 E50
    Date: 2022
  32. By: Mr. Serhan Cevik
    Abstract: The COVID-19 pandemic has been an unprecedented shock to economic activity with abrupt and unexpected changes in household consumption behavior. This paper investigates how the spread of the pandemic and government interventions have affected consumer spending using daily card transaction data in the Baltics. The analysis shows significant effects on the amount and composition of debit and credit card transactions. First, the number of new COVID-19 infections or deaths has a strongly negative effect. Second, while public health measures designed to contain the spread of the pandemic has a negative effect, economic support measures designed to assist businesses and households have a stimulative effect. Third, there is heterogeneity across spending categories, but the drop is mostly concentrated in sectors that are restricted by lockdowns and the risk of infection. Fourth, the impact of government interventions, especially in terms of stimulating consumer spending, appears to be more pronounced on goods than services.
    Keywords: Pandemic; consumer spending; card transactions; Baltics; Estonia; Latvia; Lithuania; euro area; transition economies; household consumption behavior; credit card transactions; stimulating consumer spending; government intervention; consumer spending pattern; credit card transaction data; COVID-19; Consumer credit; Consumption; Household consumption
    Date: 2022–12–02
  33. By: Wenxin Du
    Abstract: Foreign banking organizations (FBOs) in the United States play an important role in setting the price of short-term dollar liquidity. In this post, based on remarks given at the 2022 Jackson Hole Economic Policy Symposium, we highlight FBOs’ activities in money markets and discuss how the availability of reserve balances affects these activities. Understanding the dynamics of FBOs’ business models and their balance sheet constraints helps us monitor the evolution of liquidity conditions during quantitative easing (QE) and tightening (QT) cycles.
    Keywords: foreign banking organizations (FBOs); dollar; reserves
    JEL: E5
    Date: 2023–01–11
  34. By: Francisco Gomes Pereira
    Abstract: Employing a Bayesian structural vector autoregressive (VAR) model, we estimate the impact of the European Central Bank’s (ECB) balance sheet expansionary policies (BSEP) on a range of economic and financial variables including real GDP, inflation, long-term sovereign bond yields, systemic stress, unemployment, bank loans, and equity markets in the period from 2009:Q1 to 2021:Q4. The main conclusion from this study is that more vulnerable euro area countries had larger magnitudes in desirable impulse responses to BSEPs shocks. To reach this conclusion, we estimated the same model for 16 euro area countries and used maximum, minimum, and cumulative impulse responses to assess the heterogenous responses to BSEPs across member states. We then attempt to find correlations of impulse responses with measures of financial and economic vulnerability such as debt-to-GDP ratios, unemployment, GDP per capita (PPP), and tier 1 bank capital ratios. Our results suggest that the magnitude of the responses are more pronounced in countries with higher levels of vulnerability. These findings are akin to theoretical assumptions that suggest that unconventional monetary policies are most effective in periods of severe systemic stress.
    Keywords: ECB; monetary policy; unconventional monetary policy; BVAR; euro area
    JEL: C11 E02 E52 E58 G02
    Date: 2023–01
  35. By: Oleksiy Kryvtsov; James (Jim) C. MacGee; Luis Uzeda
    Abstract: The rise in inflation in 2021–22 sparked a growing literature and debate over the causes of the surge as well as the near- and medium-term path for inflation. This review offers three key messages. First, the exceptional nature of shocks resulting from the COVID-19 pandemic and geopolitical events drove the surge in inflation and the initial underestimation by many central banks of the extent of inflationary pressures. Second, the pandemic may have accelerated structural changes in goods and labour markets, which are likely to put pressure on goods prices and wages in the medium and long term. Third, the resulting shifts in relative prices for goods, services and labour are unlikely to be large enough to threaten a return of inflation to target but may require somewhat higher interest rates than those in the decade before the pandemic.
    Keywords: Inflation and prices; Inflation targets; Monetary policy
    JEL: E31 E52 E58
    Date: 2023–01
  36. By: Swisa Ariyapruchya; Ulrich Volz
    Abstract: This chapter provides an overview of the state of sustainable finance activities and practices in Southeast Asia. It first reviews the emerging landscape of sustainable financial governance and policy efforts for scaling up funding for investments with green and social impacts across the ten member countries of the Association of Southeast Asian Nations (ASEAN). It subsequently tracks the development of sustainable finance practices in banking and capital markets in the region. The chapter also examines the challenges in scaling up sustainable finance and investment and discusses opportunities and actions that could be seized by ASEAN countries individually and collectively.
    Keywords: Development; Financial Market and Asset Pricing; Environmental and Ecological Economics
    JEL: G18 Q01 Q58
    Date: 2023–01
  37. By: José Miguel Cardoso da Costa; Rui Albuquerque; José Afonso Faias
    Abstract: The paper uses bids submitted by primary dealer banks at auctions of sovereign bonds to quantify the price elasticity of demand. The price elasticity of demand correlates strongly with the volatility of returns of the same bonds traded in the secondary market but only weakly with their bid-ask spread. The price elasticity of demand predicts same-bond post-auction returns in the secondary market, even after controlling for pre-auction volatility. The evidence suggests that the price elasticity of demand is associated with the magnitude of price pressure in the secondary market around auction days, and proxies for primary dealer risk-bearing capacity.
    JEL: G12 G20 G24
    Date: 2023
  38. By: Wassima Lakhchini (Université Hassan 1er [Settat], ENCGS - Ecole Nationale de Commerce et de Gestion de SETTAT); Rachid Wahabi (Université Hassan 1er [Settat]); Mounime El Kabbouri (Université Hassan 1er [Settat]); Casa Bp; Settat Hassan
    Abstract: In the 2020s, Artificial Intelligence (AI) has been increasingly becoming a dominant technology, and thanks to new computer technologies, Machine Learning (ML) has also experienced remarkable growth in recent years; however, Artificial Intelligence (AI) needs notable data scientist and engineers' innovation to evolve. Hence, in this paper, we aim to infer the intellectual development of AI and ML in finance research, adopting a scoping review combined with an embedded review to pursue and scrutinize the services of these concepts. For a technical literature review, we goose-step the five stages of the scoping review methodology along with Donthu et al.'s (2021) bibliometric review method. This article highlights the trends in AI and ML applications (from 1989 to 2022) in the financial field of both developed and emerging countries. The main purpose is to emphasize the minutiae of several types of research that elucidate the employment of AI and ML in finance. The findings of our study are summarized and developed into seven fields: (1) Portfolio Management and Robo-Advisory, (2) Risk Management and Financial Distress (3), Financial Fraud Detection and Anti-money laundering, (4) Sentiment Analysis and Investor Behaviour, (5) Algorithmic Stock Market Prediction and High-frequency Trading, (6) Data Protection and Cybersecurity, (7) Big Data Analytics, Blockchain, FinTech. Further, we demonstrate in each field, how research in AI and ML enhances the current financial sector, as well as their contribution in terms of possibilities and solutions for myriad financial institutions and organizations. We conclude with a global map review of 110 documents per the seven fields of AI and ML application.
    Keywords: Artificial Intelligence, Machine Learning, Finance, Scoping review, Casablanca Exchange Market
    Date: 2022–12–18
  39. By: Xia Han; Liyuan Lin; Ruodu Wang
    Abstract: The diversification quotient (DQ) is a recently introduced tool for quantifying the degree of diversification of a stochastic portfolio model. It has an axiomatic foundation and can be defined through a parametric class of risk measures. Since the Value-at-Risk (VaR) and the Expected Shortfall (ES) are the most prominent risk measures widely used in both banking and insurance, we investigate DQ constructed from VaR and ES in this paper. In particular, for the popular models of multivariate elliptical and multivariate regular varying (MRV) distributions, explicit formulas are available. The portfolio optimization problems for the elliptical and MRV models are also studied. Our results further reveal favourable features of DQ, both theoretically and practically, compared to traditional diversification indices based on a single risk measure.
    Date: 2023–01
  40. By: Gonzalo Huertas
    Abstract: I conduct interviews with 32 Central Bankers from Emerging Markets and present five unifying themes that explain their behavior when reacting to a U.S. monetary tightening. I then estimate the impulse response functions of their two main monetary tools, the policy rate and foreign exchange interventions, to an increase in the U.S. rate, using the answers from the interviews as a guide for the best econometric specification. I find that most Central Banks react to a U.S. tightening by raising domestic rates, regardless of the exchange rate regime, but their reasons for doing so vary – from controlling inflation to preventing capital outflows.
    Keywords: Monetary policy; emerging markets. international spillovers; global interest rates; trilemma.
    Date: 2022–12–09
  41. By: Alfred V Guender; Hamish McHugh-Smith
    Abstract: In a model comprising a bank and goods-producing firm, this paper advances the hypothesis that financial openness should be inversely related to the rate of inflation. Our empirical analysis reveals a strong and robust inverse link between financial openness and CPI inflation in over 100 countries over the 1997-2016 period, adding weight to the argument that inflation in financially open economies is indeed lower. This result obtains for OECD countries as well as non-OECD countries. Trade openness in contrast bears no systematic relationship to inflation.
    Keywords: Financial Openness, Trade Openness, Inflation, Bank Loans, Deposits, Nominal Price Rigidity
    JEL: E3 E5 F3
    Date: 2023–01
  42. By: Nigo, Ayine R.S.; Gibogwe, Vincent
    Abstract: This study contributes to the literature on financial efficiency and growth. Given the increase in domestic credit, we show evidence of the effects of controlling institutional variables. The domestic credit is adverse, with an insignificant impact on per capita income growth. We make two observations from our findings. First, the negative but insignificant coefficients of the measure of bank credit across all model specifications seem to go against the supply-leading hypothesis, as financial development hurts economic growth; nevertheless, given that the impact is insignificant, this draws more into a neutrality hypothesis of no effect. Second, the findings are likely indications of the underdeveloped state of sub-Saharan Africa's financial system, implying that the present state of the financial systems is not robust enough to be a contributory drive towards enhancing economic growth in the region. However, all models have positive control variables (Inflation and gross fixed capital formation). All coefficients of interactions between credit and institutional quality are statistically insignificant (negative in four of six models).
    Keywords: foreign direct investment; economic growth; absorptive capacity; human capital; market liberalization.
    JEL: O19
    Date: 2023–01–20
  43. By: Carina Burs (Paderborn University)
    Abstract: We study the effect of heterogeneous beliefs about asset prices on the long-term behavior of financial markets. Starting from the ideas of Abreu and Brunnermeier (2003), we develop a two-dimensional system of differential equations. The first dynamic variable is the asset price growth rate. The second dynamic variable is the number of investors who believe that asset prices are abnormally high. In a phase plane analysis we find both stable and unstable equilibria, depending on the spread of information and the response to other agents’ beliefs. If individuals try to increase their returns while perceiving more overpricing, these equilibria can be spirals or even approach limit cycles. Although we intend to study general price patterns, abnormally high asset prices can be caused by financial bubbles. In our model, bubbles can emerge and deflate both in cycles or directly, or they can grow until they burst. Further, we analyze market behavior after a central bank increases the interest rate. This can lead to new stable equilibria, but the emergence and bursting of bubbles cannot be prevented.
    Keywords: Financial Markets, Heterogeneous Beliefs, Asset Pricing, Financial Bubbles, Monetary Policy
    JEL: E44 E58 D83 G12
    Date: 2023–02
  44. By: Tolga Buz; Gerard de Melo
    Abstract: The recent hype around Reddit's WallStreetBets (WSB) community has inspired research on its impact on our economy and society. Still, one important question remains: Can WSB's community of anonymous contributors actually provide valuable investment advice and possibly even outperform top financial institutions? We present a data-driven empirical study of investment recommendations of WSB in comparison to recommendations made by leading investment banks, based on more than 1.6 million WSB posts published since 2018. %enriched with stock market data. To this end, we extract and evaluate investment recommendations from WSB's raw text for all S&P 500 stocks and compare their performance to more than 16, 000 analyst recommendations from the largest investment banks. While not all WSB recommendations prove profitable, our results show that they achieve average returns that compete with the best banks and outperform them in certain cases. Furthermore, the WSB community has been better than almost all investment banks at detecting top-performing stocks. We conclude that WSB may indeed constitute a freely accessible, valuable source of investment advice.
    Date: 2022–12
  45. By: Markus Leippold (University of Zurich; Swiss Finance Institute); Vincent Wolff (University of Zurich - Department of Banking and Finance)
    Abstract: Næs, Skjeltorp, and Ødegaard (2011) provide empirical evidence that stock market liquidity contains leading information about future economic activity. Their result suggests a rebalancing of small, increasingly illiquid to large stocks in recession times, an expression of “flight-to-quality”. We show that the relationship no longer holds due to the Fed’s accommodative monetary policy to buoy stock markets in crisis starting in the 1990s. Moreover, we document that liquidity dry-ups in small stocks no longer coincide with recessions. The Fed’s interventions mute the systematic link between monetary conditions and aggregate stock market liquidity’s well-established business cycle component.
    Keywords: Financial Markets and the Macroeconomy, Liquidity, Monetary Policy
    JEL: G10 E52
    Date: 2022–12
  46. By: Jing Cynthia Wu; Yinxi Xie
    Abstract: We build a tractable New Keynesian model to study four types of monetary and fiscal policy. We find that quantitative easing (QE), lump-sum fiscal transfers, and government spending have the same effects on the aggregate economy when fiscal policy is fully tax financed. Compared with these three policies, conventional monetary policy is more inflationary for the same amount of stimulus. QE and transfers have redistribution consequences, whereas government spending and conventional monetary policy do not. Ricardian equivalence breaks down: tax-financed fiscal policy is more stimulative than debt-financed policy. Finally, we study optimal policy coordination and find that adjusting two types of policy instruments—the policy rate together with QE or fiscal transfers—can stabilize three targets simultaneously: inflation, the aggregate output gap, and cross-sectional consumption dispersion.
    Keywords: Fiscal policy; Monetary policy
    JEL: E E4 E61 E62 E63
    Date: 2023–01
  47. By: Sergio Ocampo (University of Western Ontario); Juan Herreño (University of California San Diego)
    Abstract: We evaluate the aggregate effects of expansions of credit supply in environments where subsistence self-employment is prevalent. We extend a standard macro development model to include unemployment risk, which becomes a key driver of selection into self-employment. The model is consistent with the joint distribution of earnings and occupations, the reaction of wages to labor demand shocks, and the small effects of expansions in the supply of microloans on the earnings of the self-employed. We find that the elasticity of aggregate output to expansions in credit supply is proportional to the elasticity of individual earnings. This proportionality arises due to the muted effects of wages in general equilibrium in the presence of subsistence self-employment, and is not present in models without subsistence self-employment due to a larger wage response, and a larger crowding-out of private savings in response to a higher availability of credit.
    Keywords: Self-Employment, Unemployment, Development, Micro-Finance
    JEL: E44 O11 O16 O17
    Date: 2023
  48. By: Emilia Garcia-Appendini (University of Zurich - Department of Banking and Finance); Frédéric Boissay (Bank for International Settlements (BIS)); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR))
    Abstract: Is monetary policy transmitted through markets for intermediate goods? Analyzing US data on corporate linkages, we document that the financial health of downstream and upstream firms plays a key role in monetary policy transmission. Our estimates suggest that contractionary changes in monetary conditions lead to reductions in demand and supply of financially constrained firms downstream and upstream. These reductions create bottlenecks inducing the "middle" linked firms to curtail their own activities. Overall these "bottleneck effects" coming from changes in demand and supply by constrained partners have a larger impact on a firm's operations than the firm's own financial conditions.
    Keywords: Monetary policy transmission, supply chain, aggregate demand, cost channel.
    JEL: E52 G32
    Date: 2022–12
  49. By: Eduardo Corso (Central Bank of Argentina); Maximo Sangiacomo (Central Bank of Argentina)
    Abstract: dollarization hinders financial intermediation in domestic currency which is detrimental for economic growth and development. A broad branch of the financial dollarization literature is based on portfolio theory. Dollarization of savings portfolios is the result of optimal mean-variance portfolio selection. In this document, we use an optimal portfolio selection approach to analyse financial dollarization's hysteresis in Argentina. Based on the historical experience of our country, we model agents' expectations using second-order probability distributions, that allow us to incorporate positive bias in subjective distribution of dollar returns. This bias arises from the subjective perceptions of unsustainability of the current regime. Under the proposed analytical scheme, in contexts in which households and firms face difficulties in identifying informative signals about the sustainability of the current exchange-rate regime, policy measures aimed at promoting financial de-dollarization may produce unwanted behavior. For example, the usually stated mean-variance approach argument of rising real exchange rate volatility relative to domestic currency volatility (inflation) could be perceived as an increase in the subjective probability of regime change, leading to portfolio rebalancing towards the foreign currency, with opposite results to those expected.
    Keywords: dollarization, asset substitution, financial intermediation
    JEL: E52 F36 F41 G11
    Date: 2023–01

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