nep-ban New Economics Papers
on Banking
Issue of 2023‒02‒20
38 papers chosen by
Sergio Castellanos-Gamboa, , Pontificia Universidad Javeriana

  1. The effect of minority bank ownership on minority credit By Hurtado, Agustin; Sakong, Jung
  2. The impact of changes in bank capital requirements By Raja, Akash
  3. Connected Lending of Last Resort By Kris James Mitchener; Eric Monnet
  4. Macroprudential Regulation: A Risk Management Approach By Daniel Dimitrov; Sweder van Wijnbergen
  5. Who Pays For Your Rewards? Redistribution in the Credit Card Market By Sumit Agarwal; Andrea F. Presbitero; André F. Silva; Carlo Wix
  6. The Recent Rise in Discount Window Borrowing By Helene Lee; Asani Sarkar
  7. The ring-fencing bonus By Erten, Irem; Neamtu, Ioana; Thanassoulis, John
  8. Connected Lending of Last Resort By Kris James Mitchener; Eric Monnet
  9. Gender Quotas and Bank Risk By Rose C. Liao; Gilberto Loureiro; Alvaro G. Taboada
  10. The role of the Bank of Algeria in the formalization of informal finance By Derder Nacéra; Benammar Abdelkader
  11. A Survey of Private Debt Funds By Joern Block; Young Soo Jang; Steven N. Kaplan; Anna Schulze
  12. Multiple structural breaks in interactive effects panel data and the impace of quantitative easing on bank lending By Jan Ditzen; Yiannis Karavias; Joakim Westerlund
  13. A DSGE model for macroprudential policy in Morocco By Chafik, Omar; Mikou, Mohammed; Slaoui, Yassine; Motl, Tomas
  14. Inequality-Constrained Monetary Policy in a Financialized Economy By Luca Eduardo Fierro; Federico Giri; Alberto Russo
  15. Bank Stress Testing, Human Capital Investment and Risk Management By Thomas Schneider; Philip Strahan; Jun Yang
  16. The Technology of Decentralized Finance (DeFi) By Raphael Auer; Bernhard Haslhofer; Stefan Kitzler; Pietro Saggese; Friedhelm Victor
  17. Would Banks, King of Capital, Ever Be Dethroned? By Hoang, Giang
  18. Information Acquisition ahead of Monetary Policy Announcements By Michael Ehrmann; Paul Hubert
  19. Quantitative Reverse Stress Testing, Bottom Up By Claudio Albanese; Stéphane Crépey; Stefano Iabichino
  20. Have Credit Card Services Become Important to Monetary Aggregation? An Application of Sign Restricted Bayesian VAR By William Barnett; Hyun Park
  21. The Bank of Amsterdam and the limits of fiat money By Wilko Bolt; Jon Frost; Hyun Song Shin; Peter Wierts
  22. The Effect of Credit Constraints on Housing Prices: (Further) Evidence from a Survey Experiment By Tom Cusbert
  23. How the LIBOR Transition Affects the Supply of Revolving Credit By Darrell Duffie; Cooperman Harry; Alena Kang-Landsberg; Stephan Luck; Zachry Wang; Yilin Yang
  24. Currency Competition with Firms By Maxi Guennewig
  25. Households' probabilistic inflation expectations in high-inflation regimes By Becker, Christoph; Dürsch, Peter; Eife, Thomas A.; Glas, Alexander
  26. Financial access and labor market outcomes: evidence from credit lotteries By Bernardus F Nazar Van Doornik; Armando Gomes; David Schoenherr; Janis Skrastins
  27. Climate change and monetary policy By Eisei Ohtaki
  28. Business Training with a Better-Informed Lender: Theory and Evidence from Microcredit in France By Renaud Bourlès; Anastasia Cozarenco; Dominique Henriet; Xavier Joutard
  29. Investment and access to external finance in Europe: Does analyst coverage matter? By Sébastien Galanti; Aurélien Leroy; Anne-Gaël Vaubourg
  30. Welfare-enhancing inflation and liquidity premia By David Andolfatto; Fernando M. Martin
  31. Signaling with debt currency choice By Egemen Eren; Semyon Malamud; Haonan Zhou
  32. COVID-19 and Public Support for the Euro By Roth, Felix; Jonung, Lars; Most, Aisada
  33. Cognitive biases and historical turns. An empirical assessment of the intersections between minds and events in the investors’ decisions By Lorenzo Esposito; Letizia Malara
  34. DeÂ…cit sustainability and the Fiscal Theory of the Price Level: the case of Italy, 1861-2020 By Emilio Congregado; Silviano Carmen Díaz-Roldán; Vicente Esteve
  35. Structural change, global R* and the missing-investment puzzle By Bailey, Andrew; Cesa-Bianchi, Ambrogio; Garofalo, Marco; Harrison, Richard; McLaren, Nick; Sajedi, Rana; Piton, Sophie
  36. Automation and Nominal Rigidities By Takuji Fueki; Shinnosuke Katsuki; Ichiro Muto; Yu Sugisaki
  37. The Development of Local Currency Bond Markets and Uncovered Interest Rate Parity By Park, Cyn-Young; Shin, Kwanho
  38. Is Stagflation the Norm? By Fix, Blair

  1. By: Hurtado, Agustin; Sakong, Jung
    Abstract: We study the effect of racial minority bank ownership on minority credit access. Using new data for 87 million minority borrowers, we present four main findings. First, minority-owned banks specialize in same-race mortgage lending. Over 70 percent of their mortgages go to borrowers of bank owners' same race. Second, the effect of minority bank ownership on minority credit is large and exceeds that of minority loan officers. We find that minority borrowers applying for mortgages in banks whose owners are of the same minority group are nine percentage points more likely to be approved than minority borrowers in non-minority banks. This effect is over six times that of a minority loan officer. Third, the default rate of minority banks' same-race borrowers is much lower than that of otherwise-identical borrowers of other races, and Asian banks drive this difference. Fourth, evidence from plausibly exogenous bank collapses suggests that the effect of Asian bank ownership might reflect an expansion rather than a reallocation of credit to Asian borrowers. Our findings are consistent with minority bank ownership reducing information frictions and improving credit allocations.
    Date: 2022
  2. By: Raja, Akash (Bank of England)
    Abstract: This paper studies how banks respond to capital regulation using confidential data on bank‑specific requirements in the UK. Banks do adjust their capital ratios following changes in requirements, though the pass-through is incomplete. While they lower capital ratios following a loosening of requirements, they eat into their existing capital buffers when facing tighter regulatory minima. I find that the main adjustment channels have changed since the financial crisis. Prior to the crisis, banks responded to changes in their requirements through capital accumulation and loan quantities; however, they have since then primarily altered the risk composition of assets.
    Keywords: Capital requirements; microprudential policy; banking; capital ratios
    JEL: E58 G21 G28
    Date: 2023–01–23
  3. By: Kris James Mitchener; Eric Monnet
    Abstract: Because of secrecy, little is known about the political economy of central bank lending. Utilizing a novel, hand-collected historical daily dataset on loans to commercial banks, we analyze how personal connections matter for lending of last resort, highlighting the importance of governance for this core function of central banks. We show that, when faced with a banking panic in November 1930, the Banque de France (BdF) lent selectively rather than broadly, providing substantially more liquidity to connected banks – those whose board members were BdF shareholders. The BdF’s selective lending policy failed to internalize a negative externality – that lending would be insufficient to arrest the panic and that distress via contagion would spillover to connected banks. Connected lending of last resort fueled the worst banking crisis in French history, caused an unprecedented government bailout of the central bank, and resulted in loss of shareholder control over the central bank.
    Keywords: lender of last resort, fiscal backing, central-bank solvency, central-bank design, banking crises, central bank independence, Banque de France, Great Depression
    JEL: E44 E58 G01 G32 G33 G38 N14 N24
    Date: 2023
  4. By: Daniel Dimitrov; Sweder van Wijnbergen
    Abstract: We address the problem of regulating the size of banks’ macroprudential capital buffers by using market-based estimates of systemic risk combined with a structural framework for credit risk assessment. We develop a set of novel modeling mech- anisms through which capital buffers can be allocated across systemic banks: (1) equalizing the expected impact between a systemic and a non-systemic institution; (2) minimizing the aggregate systemic risk; (3) balancing the social costs and ben- efits of higher capital requirements. We apply the model to the European banking sector and find sometimes substantial differences with the capital buffers currently assigned by national regulators. Since capital buffers are one of the main policy instruments for managing banks’ potential contributions to systemic distress, our findings have substantial implications for systemic risk in the EEA.
    Keywords: systemic risk; regulation; implied market measures; financial institutions; CDS rates
    JEL: G01 G20 G18 G38
    Date: 2023–02
  5. By: Sumit Agarwal; Andrea F. Presbitero; André F. Silva; Carlo Wix
    Abstract: We study credit card rewards as an ideal laboratory to quantify redistribution between consumers in retail financial markets. Comparing cards with and without rewards, we find that, regardless of income, sophisticated individuals profit from reward credit cards at the expense of naive consumers. To probe the underlying mechanisms, we exploit bank-initiated account limit increases at the card level and show that reward cards induce more spending, leaving naive consumers with higher unpaid balances. Naive consumers also follow a sub-optimal balance-matching heuristic when repaying their credit cards, incurring higher costs. Banks incentivize the use of reward cards by offering lower interest rates than on comparable cards without rewards. We estimate an aggregate annual redistribution of $15 billion from less to more educated, poorer to richer, and high to low minority areas, widening existing disparities.
    Keywords: Household finance; Credit cards; Financial sophistication; Rewards
    JEL: G21 G40 G51 G53
    Date: 2023–01–20
  6. By: Helene Lee; Asani Sarkar
    Abstract: The Federal Reserve’s primary credit program—offered through its “discount window” (DW)—provides temporary short-term funding to fundamentally sound banks. Historically, loan activity has been low during normal times due to a variety of factors, including the DW’s status as a back-up source of liquidity with a relatively punitive interest rate, the stigma attached to DW borrowing from the central bank, and, since 2008, elevated levels of reserves in the banking system. However, beginning in 2022, DW borrowing under the primary credit program increased notably in comparison to past years. In this post, we examine the factors that may have contributed to this recent trend.
    Keywords: discount window; stigma; borrowing; Federal Home Loan Banks (FHLBs); reserves; banks; pandemic; Lender of Last Resort; Federal Reserve
    JEL: E5 G2
    Date: 2023–01–17
  7. By: Erten, Irem (Warwick Business School, University of Warwick); Neamtu, Ioana (Bank of England); Thanassoulis, John (Warwick Business School, University of Warwick, CEPR)
    Abstract: We study the impact of ring-fencing on bank risk using short-term repo rates. Exploiting confidential data on the near-universe of sterling-denominated repo transactions, we find compelling evidence that banking groups subject to ring-fencing are perceived to be safer; repo investors lend to ring-fenced groups at lower rates, controlling for bank characteristics and collateral risk. Ring-fenced groups charge more to supply liquidity. We show that these effects are driven by the ring-fenced subsidiary; the other subsidiaries are not adversely impacted by ring-fencing to any meaningful extent. We further document that the banking groups reduce their risk-taking after the imposition of the fence. Our paper suggests that structural reforms can have a significant beneficial impact on risk in the banking system.
    Keywords: Ring-fencing; repo markets; risk-taking
    JEL: G12 G18 G21
    Date: 2023–01–23
  8. By: Kris James Mitchener; Eric Monnet
    Abstract: Because of secrecy, little is known about the political economy of central bank lending. Utilizing a novel, hand-collected historical daily dataset on loans to commercial banks, we analyze how personal connections matter for lending of last resort, highlighting the importance of governance for this core function of central banks. We show that, when faced with a banking panic in November 1930, the Banque de France (BdF) lent selectively rather than broadly, providing substantially more liquidity to connected banks – those whose board members were BdF shareholders. The BdF’s selective lending policy failed to internalize a negative externality – that lending would be insufficient to arrest the panic and that distress via contagion would spillover to connected banks. Connected lending of last resort fueled the worst banking crisis in French history, caused an unprecedented government bailout of the central bank, and resulted in loss of shareholder control over the central bank.
    JEL: E4 E58 G01 G32 G38 N1 N24
    Date: 2023–01
  9. By: Rose C. Liao (Rutgers Business School, Rutgers University); Gilberto Loureiro (NIPE/Center for Research in Economics and Management, University of Minho, Portugal); Alvaro G. Taboada (Mississippi State University, College of Business)
    Abstract: We assess the effects of board gender quota laws using a sample of banks from 39 countries. We document an increase in both stand-alone and systemic risk post-quota among banks that did not meet the quota prereform; the effect is stronger for banks in countries with a smaller pool of women in finance and low gender equality. We find that the propagation of poor governance practices by overlapping female directors and deterioration in the information environment post quota are likely channels driving the results. The evidence is consistent with some banks “gaming” the reform by strategically appointing insiders, which weakens the board’s monitoring function. Our results have policy implications and suggest that supply-side factors are key determinants of the outcome of mandated quotas.
    Keywords: Gender quotas; board of directors; stand-alone bank risk, systemic risk; risk management; board monitoring.
    JEL: G15 G21 G28
    Date: 2022
  10. By: Derder Nacéra (UMBB - Université M'Hamed Bougara Boumerdes); Benammar Abdelkader (Ecole Supérieure de Commerce –Koléa, (Algérie))
    Abstract: This study aims to identify the extent of informal finance in Algeria, to review the main decisions taken by the central bank in its fight against the informal and discuss their impact on informal finance. Faced with an informal finance that persists, new actions must be taken, not only on the regulatory level, but must also be part of a strategy aimed at strengthening the operational efficiency of the banking system.
    Abstract: Ce travail vise à mettre la lumière sur l'importance de la finance informelle en Algérie, de passer en revue les principales décisions prises par la banque centrale dans sa lutte contre l'informalité et de ressortir leur impact sur la finance informelle. Face à une finance informelle qui perdure, de nouvelles actions doivent être engagées, non seulement sur le plan réglementaire, mais doivent aussi s'inscrire dans une stratégie visant à renforcer l'efficacité opérationnelle du système bancaire.
    Keywords: banque d'Algérie secteur informel finance informelle formalisation. Code jel : E26. G21. G29 bank of Algeria informal sector informal finance formalization. Jel Classification Codes : E26. G21. G29, banque d'Algérie, secteur informel, finance informelle, formalisation. Code jel : E26. G21. G29 bank of Algeria, informal sector, informal finance, formalization. Jel Classification Codes : E26. G21. G29
    Date: 2022–12–04
  11. By: Joern Block; Young Soo Jang; Steven N. Kaplan; Anna Schulze
    Abstract: Despite its large and increasing size in the U.S. and Europe, there is relatively little research on the private debt (PD) market, particularly compared to the bank and syndicated loan markets. Accordingly, in this paper, we survey U.S. and European investors with private debt assets under management (AuM) of over $300 billion. These investors are primarily direct lending funds. We ask the general partners (GPs) how they source, select, and evaluate deals, how they think of private debt relative to bank and syndicated loan financing, how they monitor their investments, how they interact with private equity (PE) sponsors and how they view the future of the market. The respondents provide primarily cash flow-based loans and believe that they finance companies and leverage levels that banks would not fund. The direct lending funds target unlevered returns that appear high relative to their risk. They use leverage in their funds, but appreciably less than banks and collateralized loan obligation funds (CLOs). They use and negotiate for both financial and incurrence covenants to monitor their investments. The presence of PE sponsors helps them lend more and craft more effective covenants. U.S. and European funds are similar on many dimensions, but the European funds rely less on PE sponsors and compete more with banks. Overall, the private debt market is both different from, but shares characteristics with the bank loan and syndicated loan markets.
    JEL: G24 G32 G34
    Date: 2023–01
  12. By: Jan Ditzen (Free University of Bozen-Bolzano); Yiannis Karavias (University of Birmingham); Joakim Westerlund (Lund University and Deaking University)
    Abstract: This paper develops a new toolbox for multiple structural break detection in panel data models with interactive effects. The toolbox includes tests for the presence of structural breaks, a break date estimator, and a break date confidence interval. The new toolbox is applied to a large panel of US banks for a period characterized by massive quantitative easing programs aimed at lessening the impact of the global financial crisis and the COVID-19 pandemic. The question we ask is: Have these programs been successful in spurring bank lending in the US economy? The short answer turns out to be: ''No''.
    Keywords: Panel Data; Structural Breaks; Cross-Section Dependence; Bank Lending; Quantitative Easing
    JEL: C13 C33 E52 E58 G21
    Date: 2023–01
  13. By: Chafik, Omar (Bank Al-Maghrib, Département de la Recherche); Mikou, Mohammed (Bank Al-Maghrib, Département de la Recherche); Slaoui, Yassine (Bank Al-Maghrib, Département de la Recherche); Motl, Tomas (Bank Al-Maghrib, Département de la Recherche)
    Abstract: This working paper presents a DSGE model for macroprudential analysis in Morocco. The model has been calibrated to match stylized facts of the Moroccan financial sector and can be used for macroprudential policy analysis, scenario building, or stress-testing. The model provides a top-down perspective on the financial sector stability, complementing the more traditional financial supervision tools currently in use at Bank Al-Maghrib. The paper describes the model structure and highlights its features that make it suitable for the analysis of macroprudential issues– strong role of nonlinearities, endogenous macro-financial feedback loops, and explicit description of the aggregate bank balance sheet. The paper presents three simulations to illustrate key transmission mechanisms: (i) Macroeconomic impact of an increase in equity capital; (ii) The role of capital flows sensitivity to capital buffers building requirement and (iii) The Impact of the COVID-19 crisis on the banking sector.
    Keywords: Macroprudential-policy; Macroeconomic-modeling; Morocco-Financial sector
    JEL: F47
    Date: 2022–12–24
  14. By: Luca Eduardo Fierro; Federico Giri; Alberto Russo
    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.
    Date: 2023–01–25
  15. By: Thomas Schneider; Philip Strahan; Jun Yang
    Abstract: This paper studies banks’ investment in risk management practices following the Global Financial Crisis and the advent of stress testing. Banks that experienced greater losses during the Crisis exhibit stronger demand for risk management talents. Banks increase their demand for highly skilled stress test labor in anticipation of a test and following poor performance on a test. Following this higher demand, banks exhibit lower systematic risk and lower profitability. While stress testing has modernized banks’ internal risk management by spurring the acquisition of highly skilled risk management talent, recent changes to the tests could erode its efficacy.
    JEL: G20
    Date: 2023–01
  16. By: Raphael Auer; Bernhard Haslhofer; Stefan Kitzler; Pietro Saggese; Friedhelm Victor
    Abstract: Decentralized Finance (DeFi) is a new financial paradigm that leverages distributed ledger technologies to offer services such as lending, investing, or exchanging cryptoassets without relying on a traditional centralized intermediary. A range of DeFi protocols implements these services as a suite of smart contracts, ie software programs that encode the logic of conventional financial operations. Instead of transacting with a counterparty, DeFi users thus interact with software programs that pool the resources of other DeFi users to maintain control over their funds. This paper provides a deep dive into the overall architecture, the technical primitives, and the financial functionalities of DeFi protocols. We analyse and explain the individual components and how they interact through the lens of a DeFi stack reference (DSR) model featuring three layers: settlement, applications and interfaces. We discuss the technical aspects of each layer of the DSR model. Then, we describe the financial services for the most relevant DeFi categories, ie decentralized exchanges, lending protocols, derivatives protocols and aggregators. The latter exploit the property that smart contracts can be "composed", ie utilize the functionalities of other protocols to provide novel financial services. We discuss how composability allows complex financial products to be assembled, which could have applications in the traditional financial industry. We discuss potential sources of systemic risk and conclude by mapping out an agenda for research in this area.
    Keywords: financial engineering, decentralized finance, DeFi, blockchain, ethereum, DLT, cryptocurrencies, stablecoins, cryptoassets
    JEL: E42 E58 F31 G19 G23 L50 O33 G12
    Date: 2023–01
  17. By: Hoang, Giang
    Abstract: With the threats from Fintech firms and regulators, would banks ever be dethroned from the crown? The answer to this question yet remains to be examined.
    Date: 2023–01–08
  18. By: Michael Ehrmann; Paul Hubert
    Abstract: How do financial markets acquire information about upcoming monetary policy decisions, beyond their reaction to central bank signals? This paper hypothesises that sharing information among investors can improve expectations, especially in the presence of disagreement or uncertainty about the economy. To test this hypothesis, the paper studies monetary policy-related content on Twitter during the “quiet period” before European Central Bank announcements, when policymakers refrain from public statements related to monetary policy. Conditional on large disagreement about the economic outlook, higher Twitter traffic is associated with smaller monetary policy surprises, suggesting that exchanging private signals among investors can help improve expectations.
    Keywords: Central Bank Communication, Quiet Period, Twitter, Market Expectations, Information Processing
    JEL: D83 E52 E58 G14
    Date: 2022
  19. By: Claudio Albanese; Stéphane Crépey (UPCité - UFR Mathématiques - Université Paris Cité - UFR Mathématiques [Sciences] - UPCité - Université Paris Cité); Stefano Iabichino
    Abstract: We propose a bottom-up quantitative reverse stress testing framework that identifies forward-looking fragilities tailored to a bank's portfolio, credit and funding strategies, models, and calibration constraints. Thus, instead of relying on historical events, we run a Monte Carlo simulation, and we mine those future states that contribute the most to a bank's cost of capital expressed in terms of scenario differential. We find that such an approach allows identifying both the systemic and idiosyncratic weaknesses of the bank's portfolio, with applications that include solvency risk, extreme events hedging, liquidity risk management, trading and credit limits, model validation and model risk management.
    Keywords: quantitative reverse stress testing cost of capital (KVA) model validation model risk trading limits PFE JEL Classification: D81 G13 G28 G32 Mathematics Subject Classification: 91B30 91G20 91G30 91G40, quantitative reverse stress testing, cost of capital (KVA), model validation, model risk, trading limits, PFE
    Date: 2022–12–21
  20. By: William Barnett (Department of Economics, University of Kansas, Lawrence, KS 66045, USA and Center for Financial Stability, New York City, NY 10036, USA); Hyun Park (Department of Economics, Tulane University, New Orleans, LA 70123, USA)
    Abstract: The purpose of this paper is to estimate the relationship among a primary set of economic variables, including two types of monetary aggregates: simple sum M2 and credit-card-augmented Divisia inside money services. The importance of that comparison has grown as the use of credit cards in purchase transactions has expanded. The data period includes the Great Recession, which was heavily associated with finance and thereby especially relevant to this study. The basic methodology in this paper is VAR-Sign Restrictions estimation. VAR is a well-known method to analyze inter-dependency among economic variables. By applying VAR-Sign Restrictions, we analyze how economic variables behave, positively or negatively, toward differently defined shocks. Imposing signs on the direction of economic variable responses to shocks is based on economic prior beliefs, using Bayesian estimation. Our results provide deeper insights into the relative merits of the two types of monetary aggregates as indicators.
    Keywords: Credit-Card-Augmented Divisia Monetary Aggregate, VAR, Sign Restrictions, Bayesian Estimation, Mixed-Frequency VAR, aggregation theory
    JEL: E42 E51 E52 E58
    Date: 2023–01
  21. By: Wilko Bolt; Jon Frost; Hyun Song Shin; Peter Wierts
    Abstract: Central banks can operate with negative equity, and many have done so in history without undermining trust in fiat money. However, there are limits. How negative can central bank equity be before fiat money loses credibility? We address this question using a global games approach motivated by the fall of the Bank of Amsterdam (1609–1820). We solve for the unique break point where negative equity and asset illiquidity renders fiat money worthless. We draw lessons on the role of fiscal support and central bank capital in sustaining trust in fiat money.
    Keywords: central banks; negative equity; fiat money; trust
    JEL: E42 E58 N13
    Date: 2023–02
  22. By: Tom Cusbert (Reserve Bank of Australia)
    Abstract: The response of housing prices to financing conditions is determined by the effect on the marginal buyer, not the average household. I use heterogeneous willingness to pay (WTP) data from a stated preference experiment in Fuster and Zafar (2021) to estimate the effects of changes in mortgage rates and collateral constraints on housing prices by analysing the structure of housing demand curves. This work builds on their research, which focused on average changes in WTP. Relaxing down payment constraints has a large average effect on WTP, but the effect on price is less than half as large. Financially constrained households tend to respond more to relaxed constraints, but those households often have WTPs that are too low to affect market prices. Changing the mortgage rate has the same average effect on WTPs and on market prices, because there is no systematic relationship between a household's response to mortgage rates and their location on the demand curve. I use a heterogeneous user cost model of individual WTPs to understand how household heterogeneity determines the structure of overall housing demand. An empirical model using observable household characteristics allows the experimental findings to be applied to other household survey data to simulate the effects of credit conditions. The simulated effects of easing collateral constraints in Australia are fairly stable over the past 20 years, and show a similar pattern to the US results.
    Keywords: credit; housing; collateral constraints
    JEL: G21 G51 R21 R38
    Date: 2023–01
  23. By: Darrell Duffie; Cooperman Harry; Alena Kang-Landsberg; Stephan Luck; Zachry Wang; Yilin Yang
    Abstract: In the United States, most commercial and industrial (C&I) lending takes the form of revolving lines of credit, known as revolvers or credit lines. For decades, like other U.S. C&I loans, credit lines were typically indexed to the London Interbank Offered Rate (LIBOR). However, since 2022, the U.S. and other developed-market economies have transitioned from credit-sensitive reference rates such as LIBOR to new risk-free rates, including the Secured Overnight Financing Rate (SOFR). This post, based on a recent New York Fed Staff Report, explores how the provision of revolving credit is likely to change as a result of the transition to a new reference rate.
    Keywords: bank funding risk; reference rates; LIBOR; SOFR; Secured Overnight Financing Rate (SOFR); credit supply; regulation
    JEL: G2
    Date: 2023–02–03
  24. By: Maxi Guennewig
    Abstract: This paper analyses the consequences for monetary policy if firms issue money which generates seignorage revenues and information on consumers. I present a benchmark economy with a unique monetary equilibrium in which firms form digital currency areas if information rents are large. The central bank loses its autonomy and is forced to implement deflationary monetary policy. I extend the benchmark to show that the central bank may regain policy autonomy when firms form currency consortia with decision powers and claims on seignorage concentrated in the hands of one firm.
    Keywords: Digital Currencies, Currency Competition, Seignorage Information, Facebook, Monetary Policy
    JEL: E4 E5 G2
    Date: 2022–12
  25. By: Becker, Christoph; Dürsch, Peter; Eife, Thomas A.; Glas, Alexander
    Abstract: Central bank surveys frequently elicit households' probabilistic beliefs about future inflation. The responses provide only a coarse picture of inflation beliefs further away from zero. Using data from the Bundesbank household panel, we show that the current high-inflation environment induces respondents to allocate considerable probability to the rightmost open interval. This pile-up of probabilities negatively affects estimates of histogram moments and leads to a divergence between average expected inflation measured by probabilistic and point forecasts. The consistency of predictions can be improved by using an alternative design of the response scale that allows respondents to state more detailed beliefs for higher inflation ranges.
    Keywords: Probabilistic expectations, inflation, survey data
    JEL: D84 E31 E58
    Date: 2023
  26. By: Bernardus F Nazar Van Doornik; Armando Gomes; David Schoenherr; Janis Skrastins
    Abstract: We assess the employment and income effects of access to credit dedicated to investment in individual mobility by exploiting time-series variation in access to credit through random lotteries for participants in a group-lending mechanism in Brazil. We find that access to credit for investment in individual mobility increases formal employment rates and salaries, yielding an annual rate of return of 12 percent. Consistent with a geographically broader job search, individuals transition to jobs farther from home and public transportation. Our results suggest that accessing distant labor markets through credit for investment in individual mobility yields high and persistent returns.
    Keywords: access to credit, household finance, labor mobility, spatial mismatch
    JEL: D14 G23 J62 R20 R23
    Date: 2023–01
  27. By: Eisei Ohtaki
    Abstract: Motivated by recent climate actions of central banks and supervisors, this study develops an overlapping generations model of the environment and money and explores a role of monetary policy on climate problems. It is shown that a stationary monetary equilibrium exists uniquely but be suboptimal so that this study explores optimal policies. When a policymaker can control money growth rates only, any monetary policy cannot attain an optimal allocation but a certain positive money growth rate can be the second-best policy. In contrast, when a policymaker can choose tax instruments in addition to money growth rates, there exists a continuum of optimal combinations of money growth rates and tax instruments, which implement an optimal allocation as a stationary monetary equilibrium allocation. These results suggest that, to resolve climate problems, monetary and fiscal authorities need to coordinate with each other.
    Date: 2023–01
  28. By: Renaud Bourlès (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, IUF - Institut Universitaire de France - M.E.N.E.S.R. - Ministère de l'Education nationale, de l’Enseignement supérieur et de la Recherche); Anastasia Cozarenco (CERMi - Centre for European Research in Microfinance, MRM - Montpellier Research in Management - UPVD - Université de Perpignan Via Domitia - Groupe Sup de Co Montpellier (GSCM) - Montpellier Business School - UM - Université de Montpellier); Dominique Henriet (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); Xavier Joutard (LEST - Laboratoire d'économie et de sociologie du travail - AMU - Aix Marseille Université - CNRS - Centre National de la Recherche Scientifique, OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)
    Abstract: In the microfinance sector, experienced lenders enjoy an information advantage over first-time entrepreneurs. Our study proposes an analysis of the business training provided on a par with microloans and its potential effect on borrowers'behavior. First, we present a simple theoretical mechanism showing that an information advantage concerning borrower risk can lead to a non-monotonic relationship between risk and business training provision. Second, using a hand-collected data set of loan applications to a French MFI, we empirically examine the relationship between business training provision and borrower risk, controlling for selection bias and endogeneity. The collected evidence supports the existence of a non-monotonic relationship and shows that business training significantly increases the survival time of loans. Our results are robust to alternative econometric models.
    Keywords: Business training, Microcredit, Informed lender
    Date: 2022–12
  29. By: Sébastien Galanti (LEO - Laboratoire d'Économie d'Orleans [UMR7322] - UO - Université d'Orléans - UT - Université de Tours - CNRS - Centre National de la Recherche Scientifique); Aurélien Leroy (Larefi - Laboratoire d'analyse et de recherche en économie et finance internationales - UB - Université de Bordeaux); Anne-Gaël Vaubourg (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers)
    Abstract: We aim to determine whether analyst coverage improves European firms' access to capital markets and investment. Based on a data set that includes firms from several European countries between 2000 and 2015, we implement a treatment effect estimate and an instrumental variables (IV) approach, in which the intensity of industry-level waves in coverage is used as an instrument for firm-level coverage. We show that analyst coverage is favorable to firms' debt and share issuance and their investment expenses. Our paper emphasizes the key role of financial analysts in improving European firms' financial conditions.
    Date: 2022
  30. By: David Andolfatto; Fernando M. Martin
    Abstract: The Friedman rule recommends eliminating liquidity premia on nominally risk-free government debt and following a deflationary monetary policy. The desirability of this prescription in a broad class of monetary models contrasts sharply with observation. In reality, the average rate of inflation is almost always positive and long-dated government securities are–as a matter of policy–allowed to trade at a discount relative to cash, even when these securities represent risk-free claims to cash. Our paper identifies a set of empirically-plausible conditions under which a strictly positive inflation and liquidity premium on long-dated government securities are both necessary to improve economic welfare. These conditions include: heterogeneous time-preferences, idiosyncratic risk over the timing of expenditure opportunities, and incomplete insurance markets. Our paper provides yet another rationale for a strictly positive inflation target and the use of penalty rates at central bank lending facilities.
    Keywords: Friedman rule; liquidity; inflation; term premium
    JEL: E4 E5
    Date: 2023–01
  31. By: Egemen Eren; Semyon Malamud; Haonan Zhou
    Abstract: We document that firms in emerging markets borrow more in foreign currency when the local currency actually provides a better hedge in downturns. Motivated by this fact, we develop an international corporate finance model in which firms facing adverse selection choose the foreign currency share of their debt. In the unique separating equilibrium, good firms optimally expose themselves to currency risk to signal their type. Crucially, the nature of this equilibrium depends on the co-movement between cash flows and the exchange rate. We provide extensive empirical evidence for this signalling channel using a granular dataset including more than 4, 800 firms in 19 emerging markets between 2005 and 2021. Our results have implications for evaluating and mitigating risks arising from currency mismatches in corporate balance sheets.
    Keywords: foreign currency debt, corporate debt, signaling, exchange rates
    JEL: D82 F34 G01 G15 G32
    Date: 2023–01
  32. By: Roth, Felix (University of Hamburg); Jonung, Lars (Department of Economics, Lund University); Most, Aisada (University of Hamburg)
    Abstract: The COVID-19 pandemic had disastrous effects on health and economic activity worldwide, including in the Euro Area. The application of mandatory lockdowns contributed to a sharp fall in production and a rise in unemployment, inducing an expansionary fiscal and monetary response. Using a uniquely large macro database, this paper examines the effects of the pandemic and the ensuing economic policies on public support for the common currency, the euro, as measured by the Eurobarometer survey. It finds that public support for the euro reached historically high levels in a majority of the 19 Euro Area member states in the midst of the pandemic. This finding suggests that the expansionary fiscal policies initiated at the EU level significantly contributed to this outcome, while the monetary measures taken by the European Central Bank did not have a similar effect.
    Keywords: COVID-19; lockdowns; support for the euro; unemployment; inflation; monetary policies; fiscal policies; EU
    JEL: C23 E24 E42 E52 E62 I18
    Date: 2023–02–06
  33. By: Lorenzo Esposito (Dipartimento di Politica Economica, DISCE, Università Cattolica del Sacro Cuore, Milano, Italy – Banca d'Italia, Milano, Italy); Letizia Malara (DISCE, Università Cattolica del Sacro Cuore, Milano, Italy)
    Abstract: Mainstream theory of finance is based on the assumptions that markets are efficient and economic agents are rational, in the sense that they use optimally the information they have in order to maximize their utility. At least since the “Allais paradox”, countless experiments have shown that this is not the case and investors’ decisions are often inconsistent. In particular, the researches by Kahneman and Tversky have highlighted that investor behaviors are not rational and sometimes are inconsistent with the logic of the traditional finance theory, due to numerous cognitive biases, which interfere with the choice process of investors. In this paper we investigate some of the most well-known cognitive biases: framing effect, loss aversion, endowment effect, decoy effect and disposition effect. In addition, the availability and representativeness heuristics and their associated biases (confirmation bias, accessibility bias, and conjunction fallacy) are examined. Our experimental methodology is based on a questionnaire consisting of 23 questions and organized into 6 sections, each referring to the various biases examined. The answers obtained differ somewhat from the huge literature on cognitive biases. We understand these differences as mainly connected to the unheard situation created by the Covid-19 pandemic, showing that personal experiences do have an effect on risk preferences.
    Keywords: cognitive biases, behavioral economics, prospect theory, pandemic
    JEL: G41
    Date: 2023–01
  34. By: Emilio Congregado (Universidad de Huelva, Spain); Silviano Carmen Díaz-Roldán (Universidad de Castilla-La Mancha, Spain); Vicente Esteve (Universidad de Valencia and Universidad de Alcalá, Spain)
    Abstract: We address a test for sustainability of the Italian government deficit over the period 1861-2020, using the fiscal theory of the price level (FTPL). This approach takes into account monetary and fiscal policy interactions and assumes that fiscal policy may determine the price level, even if monetary authorities pursue an inflation targeting strategy. We use a cointegrated model with multiple structural changes to characterize the sustainability of public finances and the prevalence of monetary versus fiscal dominance for sub-periods. We also use the recursive unit root tests for explosiveness to test Â…fiscal sustainability and to detect episodes of potential explosive behavior in Italian public debt.
    Keywords: Fiscal Theory of the Price Level; Monetary and …fiscal dominance; Fiscal sustainability; In‡ation; Public debt; Explosiveness; Cointegration; Multiple structural breaks
    JEL: E62 H62 O52
    Date: 2023–01
  35. By: Bailey, Andrew (Bank of England); Cesa-Bianchi, Ambrogio (Bank of England); Garofalo, Marco (Bank of England); Harrison, Richard (Bank of England); McLaren, Nick (Bank of England); Sajedi, Rana (Bank of England); Piton, Sophie (Bank of England)
    Abstract: The world has undergone substantial structural change over recent decades, with profound implications for the long-run policy landscape. We focus on two key trends. First, the secular decline in risk-free interest rates, suggesting a fall in the long-run global equilibrium interest rate, Global R*. Using a structural model, we find that declining productivity growth and increasing longevity played the largest roles in explaining this fall. The second trend is the recorded weakness in investment, despite an increasing wedge between the return on capital and the risk-free rate. We use industry-level data for the United Kingdom to investigate the potential structural factors behind this ‘missing-investment puzzle’, and find a strong role for intangible capital.
    Keywords: Structural change; equilibrium interest rates; investment
    JEL: E22 E43 J11
    Date: 2023–01–23
  36. By: Takuji Fueki (Director and senior economist, Institute for Monetary and Economic Studies, Bank of Japan (currently, Lecturer, Kagawa University, E-mail:; Shinnosuke Katsuki (Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Ichiro Muto (Associate Director-General, Institute for Monetary and Economic Studies (currently, General Manager, Aomori Branch), Bank of Japan (E-mail:; Yu Sugisaki (Economist, Institute for Monetary and Economic Studies, Bank of Japan (currently, Boston College, E-mail:
    Abstract: This study examines how automation can have an impact on the effectiveness of monetary policy and inflation dynamics. We incorporate a task-based production technology into a standard New Keynesian model with two kinds of nominal rigidities (price/wage rigidity). When monetary easing raises wages, automation opportunities allow firms to substitute costly human labor with cheaper machines. This yields the automation effect of monetary policy, which increases labor productivity and magnifies the rise in real output. In turn, automation lowers real marginal costs for firms, thereby restraining the rise of inflation and flattening the Phillips curve. When prices are rigid and wages are flexible, the automation effect of monetary policy is particularly large, and the flattening of the Phillips curve is most pronounced. The automation effect also depends on the automation frontier, i.e., the remaining opportunities for automation, and a kinked Phillips curve emerges when firms face technological constraints on automation.
    Keywords: Automation, Monetary policy, Nominal rigidities, Phillips curve
    JEL: E22 E31
    Date: 2023–01
  37. By: Park, Cyn-Young (Asian Development Bank); Shin, Kwanho (Department of Economics, Korea University)
    Abstract: This paper investigates whether the uncovered interest parity (UIP) will hold more firmly if the local currency bond markets (LCBMs) are more developed, and the presence of nonbank financial institutions (NBFIs) is expanded. Deviations in UIP decrease as LCBMs develop, while the patterns of the UIP premium in emerging markets increasingly resemble patterns in advanced economies. Capital flows respond more sensitively to the UIP premium for emerging markets when LCBMs are more developed. These suggest the development of LCBMs and NBFIs might induce more active cross-border carry trades and reduce UIP deviations. However, greater carry trade positions may increase a country’s exposure to market disruptions and exchange rate volatility. Empirical results show that gross portfolio debt inflows increase (decrease) when the exchange rate appreciates (depreciates). While LCBMs becoming more developed can mitigate the negative effect of the original sin redux hypothesis in advanced economies, this aggravates the impact of exchange rate depreciation in emerging markets.
    Keywords: uncovered interest parity; local currency bond markets; emerging economies; nonbank financial institutions; capital inflows
    JEL: E44 F34 F62 G12 G21 G23
    Date: 2023–02–09
  38. By: Fix, Blair
    Abstract: As much of the world grapples with post-Covid price gouging, it seems like a good time to revisit our understanding of inflation. In this post, I’m going to test Jonathan Nitzan and Shimshon Bichler’s ‘stagflation thesis’. The idea is that ‘stagflation’ — economic stagnation combined with high inflation — is not some exogenous ‘market shock’. According to Nitzan and Bichler, stagflation is a business strategy — one of two main routes to profit. The first route to profit is for businesses to hold prices steady while they try to sell more stuff. The second route is to jack up prices. Since this latter option requires restricting the flow of resources (stuff that flows freely cannot be dear), Nitzan and Bichler reason that when inflation rears its head, it ought to come with economic stagnation. In other words, stagflation is the norm. If this stagflation thesis is correct, then inflation ought to correlate negatively with economic growth. Looking at the United States, Nitzan and Bichler find evidence that it does. Here, I broaden their stagflation research by looking at all countries in the World Bank’s global development database. I find that both within and across countries, economic growth (measured in terms of energy use) tends to decline as inflation increases. So Nitzan and Bichler appear to be onto something. Over the last half century, stagflation is the general rule.
    Keywords: breadth, depth, energy, inflation, stagflation
    JEL: P16 Q4 N1
    Date: 2023

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