nep-ban New Economics Papers
on Banking
Issue of 2023‒03‒27
29 papers chosen by
Sergio Castellanos-Gamboa, , Pontificia Universidad Javeriana

  1. Central Banks as Dollar Lenders of Last Resort: Implications for Regulation and Reserve Holdings By Ms. Mitali Das; Ms. Gita Gopinath; Mr. Taehoon Kim; Jeremy C. Stein
  2. The Global Dollar Cycle By Maurice Obstfeld; Haonan Zhou
  3. Loose Monetary Policy and Financial Instability By Maximilian Grimm; Òscar Jordà; Moritz Schularick; Alan M. Taylor
  4. Quantifying Systemic Risk in the Presence of Unlisted Banks: Application to the European Banking Sector By Daniel Dimitrov; Sweder van Wijnbergen
  5. Bounded Rational Expectation: How It Can Affect the Effectiveness of Monetary Rules in the Open Economy By Dong, Xue; Minford, Patrick; Meenagh, David; Yang, Xiaoliang
  6. Reevaluating the Taylor Rule with Machine Learning By Alper Deniz Karakas
  7. Stability and Bifurcations in Banks and Small Enterprises—A Three-Dimensional Continuous-Time Dynamical System By Desogus, Marco; Venturi, Beatrice
  8. Optimal Monetary Policy with Heterogeneous Agents: Discretion, Commitment, and Timeless Policy By Eduardo Dávila; Andreas Schaab
  9. Early pension withdrawal as stimulus By Steven Hamilton; Geoffrey Liu; Tristram Sainsbury
  10. A Market for Brown Assets To Make Finance Green By Laura Cerami; Mr. Domenico Fanizza
  11. Das Transformationspotential des deutschen Sustainable Finance Diskurses: Eine Einschätzung auf Basis von Logiken und Frames By Dimmelmeier, Andreas; Egerer, Elsa
  12. Top Executive Turnover and Loan Loss Provisions: Evidence from Japanese Regional Banks By Masahiro Enomoto; Yusuke Fukaya
  13. On the Effectiveness of Foreign Exchange Reserves During the 2021-22 U.S. Monetary Tightening Cycle By Rashad Ahmed; Joshua Aizenman; Jamel Saadaoui; Gazi Salah Uddin
  14. The Value of Intermediaries for GSE Loans By Joshua Bosshardt; Ali Kakhbod; Amir Kermani
  15. Money Market Funds and the Pricing of Near-Money Assets By Sebastian Doerr; Egemen Eren; Semyon Malamud
  16. The optimal quantity of CBDC in a bank-based economy By Lorenzo Burlon; Carlos Montes-Galdón; Manuel A. Muñoz; Frank Smets
  17. Do firm expectations respond to Monetary Policy announcements? By Federico Di Pace; Giacomo Mangiante; Riccardo Masolo
  18. Do technological innovation and financial development affect inequality? Evidence from BRICS countries By Mduduzi Biyase; Talent Zwane; Precious Mncayi; Mokgadi Maleka
  19. The systemic risk approach based on implied and realized volatility By Paweł Sakowski; Rafał Sieradzki; Robert Ślepaczuk
  20. The Application of Multiple-Output Quantile Regression on the US Financial Cycle By Michal Franta
  21. Financial Development and Minimum Capital Requirements in Macroeconomic Analysis By Miho Sunaga
  22. Long-term Investors, Demand Shifts, and Yields By Kristy Jansen
  23. How do Borrowers Respond to a Debt Moratorium? Experimental Evidence from Consumer Loans in India By Stefano Fiorin; Joseph Hall; Martin Kanz
  24. Macroeconomic Policy Regime Change in Advanced Economies By Otaviano Canuto
  25. Foreign Banks and Firms' Export Dynamics: Evidence from China's Banking Reform By Ana P. Fernandes; Jing-Lin Duanmu
  26. Effects of Sustainable Monetary and Fiscal Policy on FDI Inflows to EMDE Countries By Bruno Pires Tiberto; Helder Ferreira de Mendonça
  27. A Tale of Two Currencies: Cash and Crypto By Ravi Kashyap
  28. Monetary Policy, Digital Assets, and DeFi Activity By Antzelos Kyriazis; Iason Ofeidis; Georgios Palaiokrassas; Leandros Tassiulas
  29. The World Needs a Green Bank By Hafez Ghanem

  1. By: Ms. Mitali Das; Ms. Gita Gopinath; Mr. Taehoon Kim; Jeremy C. Stein
    Abstract: This paper explores how non-U.S. central banks behave when firms in their economies engage in currency mismatch, borrowing more heavily in dollars than justified by their operating exposures. We begin by documenting that, in a panel of 53 countries, central bank holdings of dollar reserves are significantly correlated with the dollar-denominated bank borrowing of their non-financial corporate sectors, controlling for a number of known covariates of reserve accumulation. We then build a model in which the central bank can deal with private-sector mismatch, and the associated risk of a domestic financial crisis, in two ways: (i) by imposing ex ante financial regulations such as bank capital requirements; or (ii) by building a stockpile of dollar reserves that allow it to serve as an ex post dollar lender of last resort. The model highlights a novel externality: individual central banks may tend to over-accumulate dollar reserves, relative to what a global planner would choose. This is because individual central banks do not internalize that their hoarding of reserves exacerbates a global scarcity of dollar-denominated safe assets, which lowers dollar interest rates and encourages firms to increase the currency mismatch of their liabilities. Relative to the decentralized outcome, a global planner may prefer stricter financial regulation (e.g., higher bank capital requirements) and reduced holdings of dollar reserves.
    Keywords: Foreign reserves; central banks; currency mismatch; lender of last resort; financial regulation; dollar reserve; bank borrowing; post dollar lender of last resort; dollar interest rates; reserve holding; International reserves; Banking crises; Currency mismatches; Reserves accumulation; Exchange rates; Global
    Date: 2023–01–18
  2. By: Maurice Obstfeld; Haonan Zhou
    Abstract: The U.S. dollar’s nominal effective exchange rate closely tracks global financial conditions, which themselves show a cyclical pattern. Over that cycle, world asset prices, leverage, and capital flows move in concert with global growth, especially influencing the fortunes of emerging and developing economies (EMDEs). This paper documents that dollar appreciation shocks predict economic downturns in EMDEs and highlights policies countries could implement to dampen the effects of dollar fluctuations. Dollar appreciation shocks themselves are highly correlated not just with tighter U.S. monetary policies, but also with measures of U.S. domestic and international dollar funding stress that themselves reflect global investors’ risk appetite. After the initial market panic and upward dollar spike at the start of the COVID-19 pandemic, the dollar fell as global financial conditions eased; but the higher inflation that followed has induced central banks everywhere to tighten monetary policies more recently. The dollar has strengthened considerably since mid-2021 and a contractionary phase of the global financial cycle is now under way. Owing to increases in public- and business-sector debts during the pandemic, a strong dollar, higher interest rates, and slower economic growth will be challenging for EMDEs.
    JEL: E58 F31 F41 F44 O11
    Date: 2023–03
  3. By: Maximilian Grimm; Òscar Jordà; Moritz Schularick; Alan M. Taylor
    Abstract: Do periods of persistently loose monetary policy increase financial fragility and the likelihood of a financial crisis? This is a central question for policymakers, yet the literature does not provide systematic empirical evidence about this link at the aggregate level. In this paper we fill this gap by analyzing long-run historical data. We find that when the stance of monetary policy is accommodative over an extended period, the likelihood of financial turmoil down the road increases considerably. We investigate the causal pathways that lead to this result and argue that credit creation and asset price overheating are important intermediating channels.
    JEL: E43 E44 E52 E58 G01 G21 N10
    Date: 2023–02
  4. By: Daniel Dimitrov; Sweder van Wijnbergen
    Abstract: We propose a credit portfolio approach for evaluating systemic risk and attributing it across institutions. We construct a model that can be estimated from high-frequency CDS data. This captures risks from publicly traded banks, privately held institutions, and cooperative banks, extending approaches that rely on information from the public equity market only. We account for correlated losses between the institutions, overcoming a modeling weakness in earlier studies. We also offer a modeling extension to account for fat tails and skewness of asset returns. The model is applied to a universe of banks where we find discrepancies between the capital adequacy of the largest contributors to systemic risk relative to less systemically important banks on a European scale.
    Keywords: systemic risk; CDS rates; implied market measures; financial institutions; fat tails; O-SII buffers
    JEL: G01 G20 G18 G38
    Date: 2023–03
  5. By: Dong, Xue (Zhejiang University of Finance and Economics, China); Minford, Patrick (Cardiff Business School); Meenagh, David (Cardiff Business School); Yang, Xiaoliang (Cardiff Business School)
    Abstract: Since the channel for agents’ expectations matters for the effectiveness of monetary policies, it is crucial for policy-makers to assess the degree to which economic agents are boundedly rational and understand how the bounded rationality affects the monetary rules in stabilising the economy. We investigate the empirical evidence for the bounded rationality in a small open economy model of the UK, and compare the results with those for the conventional rational expectations model. Overall, comparing the estimated models favours the bounded rationality framework. The results show that bounded rationality model helps to explain the hump-shaped dynamics of real exchange rate following monetary shocks, while the rational expectations model cannot. Also, we find that the exchange rate channel in the bounded rationality enlarges the effects of foreign mark-up shock, policymakers should send stronger signals over its target to the economics agents to combat the inflation. So the bounded rationality that can be found in the data still leaves scope for the forward guidance channel to work strongly enough to be exploited by policymakers.
    Keywords: bounded rationality, monetary policy, small open economy, exchange rate channel
    JEL: E52 E70 F41 C51 F31
    Date: 2023–02
  6. By: Alper Deniz Karakas
    Abstract: This paper aims to reevaluate the Taylor Rule, through a linear and a nonlinear method, such that its estimated federal funds rates match those actually previously implemented by the Federal Reserve Bank. In the linear method, this paper uses an OLS regression model to find more accurate coefficients within the same Taylor Rule equation in which the dependent variable is the federal funds rate, and the independent variables are the inflation rate, the inflation gap, and the output gap. The intercept in the OLS regression model would capture the constant equilibrium target real interest rate set at 2. The linear OLS method suggests that the Taylor Rule overestimates the output gap and standalone inflation rate's coefficients for the Taylor Rule. The coefficients this paper suggests are shown in equation (2). In the nonlinear method, this paper uses a machine learning system in which the two inputs are the inflation rate and the output gap and the output is the federal funds rate. This system utilizes gradient descent error minimization to create a model that minimizes the error between the estimated federal funds rate and the actual previously implemented federal funds rate. Since the machine learning system allows the model to capture the more realistic nonlinear relationship between the variables, it significantly increases the estimation accuracy as a result. The actual and estimated federal funds rates are almost identical besides three recessions caused by bubble bursts, which the paper addresses in the concluding remarks. Overall, the first method provides theoretical insight while the second suggests a model with improved applicability.
    Date: 2023–02
  7. By: Desogus, Marco; Venturi, Beatrice
    Abstract: Here, we discuss a three-dimensional continuous-time Lotka–Volterra dynamical system, which describes the role of government in interactions with banks and small enterprises. In Italy, during the COVID-19 emergency, the main objective of government economic intervention was to maintain the proper operation of the bank–enterprise system. We also review the effectiveness of measures introduced in response to the COVID-19 pandemic lockdowns to avoid a further credit crunch. By applying bifurcation theory to the system, we were able to produce evidence of the existence of Hopf and zero-Hopf bifurcating periodic solutions from a saddle focus in a special region of the parameter space, and we performed a numerical analysis.
    Keywords: Credit crunch; simulation; credit big data; nonlinear analysis; periodic solutions; stability; dynamical system; zero-Hopf bifurcation
    JEL: C62 C63 E32 E51 G21 G28
    Date: 2023–03–03
  8. By: Eduardo Dávila; Andreas Schaab
    Abstract: This paper characterizes optimal monetary policy in a canonical heterogeneous-agent New Keynesian (HANK) model with wage rigidity. Under discretion, a utilitarian planner faces the incentive to redistribute towards indebted, high marginal utility households, which is a new source of inflationary bias. With commitment, i) zero inflation is the optimal long-run policy, ii) time-consistent policy requires both inflation and distributional penalties, and iii) the planner trades off aggregate stabilization against distributional considerations, so Divine Coincidence fails. We compute optimal stabilization policy in response to productivity, demand, and cost-push shocks using sequence-space methods, which we extend to Ramsey problems and welfare analysis.
    JEL: E52 E61
    Date: 2023–02
  9. By: Steven Hamilton (George Washington University); Geoffrey Liu (Harvard University); Tristram Sainsbury (Australian National University)
    Abstract: During the COVID-19 pandemic, the Australian government allowed eligible individuals to withdraw up to A$20, 000 (around half median annual wage income) across two tranches from their retirement accounts, ordinarily inaccessible until retirement. Based on historical returns, the modal withdrawal by the modal-aged withdrawer can be expected to reduce their balance at retirement by more than $120, 000 in today's dollars. One in six working-age people withdrew a total of $38 billion (on average, 51% of their balances). These transfers represented a liquidity shock and were much larger than those considered in the literature to date. Using administrative and weekly bank transactions data, we find a high marginal propensity to spend (MPX) given the size of the transfers of at least 0.43 within eight weeks, spread broadly across categories (including around half or more on non-durables) and across withdrawers. The response to the second withdrawal, which two-thirds returned for and which occurred after activity had recovered, was even larger at 0.48. Withdrawal and spending are predicted strongly by numerous measures of poor financial health, high pre-withdrawal rates of cash withdrawal and gambling, and younger age. The MPX of rational, forward-looking but liquidity constrained consumers can be expected to asymptote to zero as the transfer size rises, while that of present-biased consumers can be expected to remain high. Our findings overwhelmingly are consistent with the latter, suggesting roughly 80% of withdrawers were present-biased. In selecting strongly on the present-biased, the program presents a sharp trade-off between effective macroeconomic stimulus and suboptimal retirement saving policy.
    Keywords: Stimulus, retirement saving, marginal propensity to consume, present bias
    JEL: E21 E63 E71 H31 H55 J32
    Date: 2023–02
  10. By: Laura Cerami; Mr. Domenico Fanizza
    Abstract: This paper proposes a market solution to enhance the role of the financial sector in the green transition. Developing a secondary market for “brown exposures” can allow banks to dispose more quickly of stranded assets thereby increasing their capacity to finance green investments. Furthermore, newly created instruments – the brown assets backed securities (B-ABS) - can expand the diversification opportunities for specialized green investors and, thus, attract additional resources for new green investments. The experience of the secondary market for non-performing loans suggests that targeted policy and regulatory measures can simultaneously support the development of the secondary market for brown assets and green finance.
    Keywords: Green finance; financial innovation; greenium; financial sector; climate change; market solution; experience of the secondary market; green transition; policy simulation; Climate finance; Nonperforming loans; Securities markets; Climate policy; Global; Europe
    Date: 2023–01–20
  11. By: Dimmelmeier, Andreas; Egerer, Elsa
    Abstract: Against the backdrop of a simultaneous dynamization of sustainable finance and intensifying environmental and social crises, the following article carries out an analysis of the transformation potential of the sustainable finance discourse that is present in German governance discussions. The discourse is illustrated through a content analysis of the German government's Sustainable Finance Strategy and the final report of the first Sustainable Finance Advisory Council. In order to evaluate the transformation potential, a frame analysis is conducted. Subsequently, the analyzed frames are linked to the concept of institutional logics, which allows for an assessment of their transformation potential. The article comes to the conclusion that the governance discourse on sustainable finance in Germany is dominated by an integrative frame, which describes sustainable finance per se as desirable, and a frame, which emphasizes financial risks. With regard to institutional logics, a state logic that is motivated by location specific competitiveness policies and a financial market logic dominate. This is consistent with the interpretation that the mainstreaming of sustainable finance is accompanied by an increasingly financialized discourse that derives its goals largely from its own system logics, i.e. those inherent in the financial system. Based on the analysis, the article concludes that the transformation potential of the assessed governance discourse on Sustainable Finance in Germany is relatively low.
    Date: 2023–02–05
  12. By: Masahiro Enomoto (Research Institute for Economics and Business Administration, Kobe University, JAPAN); Yusuke Fukaya (College of Business Management, J. F. Oberlin University, JAPAN)
    Abstract: This study examines loan loss provisions following top executive turnovers in Japanese banks. The study differentiates between voluntary and forced turnover and inside and outside succession. The results show that incoming top executives, following forced turnover or outside succession, tend to reduce loan loss provisions in the second year of their tenure. This suggests that incoming top executives attempt to create a positive impression of their abilities by increasing earnings in the second year. This evidence differs from previous research showing "big bath" accounting in the first year. Additionally, outgoing top executives recognize greater loan loss provisions in the final year before outside succession. This study further shows that incoming top executives attempt to increase earnings following succession through gains and losses from securities sales, commissions, and fees.
    Date: 2023–03
  13. By: Rashad Ahmed; Joshua Aizenman; Jamel Saadaoui; Gazi Salah Uddin
    Abstract: This paper examines the role of foreign exchange (FX) reserves and other fundamental factors in explaining cross-country differences in foreign currency depreciation observed over the 2021-22 Federal Reserve monetary policy tightening cycle that led to a sharp appreciation of the US dollar. Using a broad cross-section of over 50 countries, we document that an additional 10 percentage points of FX reserves/GDP held ex-ante was associated with 1.5 to 2 percent less exchange rate depreciation. We also find that higher ex-ante policy rates were associated with less depreciation, especially among financially open economies. Taken together, these results support the buffering role of FX reserves and their potential to promote monetary policy independence in the presence of global spillovers.
    JEL: F32 F40 F68
    Date: 2023–02
  14. By: Joshua Bosshardt (Federal Housing Finance Agency); Ali Kakhbod (University of California, Berkeley); Amir Kermani (University of California, Berkeley)
    Abstract: We analyze the costs and benefits of financial intermediaries on access to credit using confidential regulatory data on mortgages securitized by the government-sponsored enterprises (GSEs). We find evidence of lenders pricing for observable and unobservable default risk independently from the GSEs. We explain these findings using a model of competitive mortgage lending with screening in which lenders acquire information beyond the GSEs' underwriting criteria and retain a positive loss given default. The model shows that the discretionary behavior of lenders, relative to a counterfactual in which lenders passively implement the GSEs' underwriting requirements and price competitively, benefits some borrowers with high observable risk at the expense of the majority of borrowers. Finally, the model suggests that the observed differences between banks and nonbanks are more consistent with differences in their expected loss given default rather than screening quality.
    Keywords: mortgage lenders, underwriting risk, overlays, nonbanks
    JEL: G21 G23
    Date: 2023–03
  15. By: Sebastian Doerr (Bank for International Settlements); Egemen Eren (Bank for International Settlements); Semyon Malamud (Ecole Polytechnique Federale de Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute)
    Abstract: US money market funds (MMFs) play an important role in short-term markets as large investors of Treasury bills (T-bills) and repurchase agreements (repos) with banks and the Federal Reserve, some of the world’s safest and most liquid assets. We build a theoretical model in which MMFs’ strategic interactions generate a trade-off between their market power in the repo market and their price impact in the T-bill market. Empirically, we show that MMFs’ portfolio allocation decisions between repos and T-bills have an economically significant impact on T-bill rates and market liquidity, and the liquidity premium on T-bills. Guided by our model, we devise instrumental variables to establish a causal effect. Using a granular holding-level dataset we confirm the model’s prediction that MMFs internalize their price impact in the T-bill market when they set repo rates. Moreover, when Treasury market liquidity is low, MMFs tilt their portfolios away from T-bills towards repos with the Federal Reserve. Our results have broad implications.
    Keywords: T-bills, repo, market power, price impact, liquidity premium, money market funds
    JEL: E44 G11 G12 G23
    Date: 2023–01
  16. By: Lorenzo Burlon; Carlos Montes-Galdón; Manuel A. Muñoz; Frank Smets (-)
    Abstract: We provide evidence on the estimated effects of news about the introduction of a digital euro on bank valuations and lending and find that the effects depend on the reliance on deposit funding and design features aimed at calibrating the quantity of the central bank digital currency (CBDC). Then, we develop a quantitative DSGE model that replicates such evidence and incorporates key selected mechanisms through which CBDC issuance could affect bank intermediation and the economy. Under empirically-relevant assumptions (i.e. imperfect substitutability across CBDC, cash and deposits and a number of financial constraints such as a collateral requirement for central bank funding), the issuance of CBDC yields non-trivial welfare trade-offs between, on one side, the positive expansion of liquidity services and the improved stabilization of deposit funding and lending and, on the other side, a negative bank disintermediation effect. Welfare-maximizing CBDC policy rules are effective in mitigating the risk of bank disintermediation and induce significant welfare gains. The optimal amount of CBDC in circulation for the case of the euro area lies between 15% and 45% of quarterly GDP in equilibrium.
    JEL: E42 E58 G21
    Date: 2023–02
  17. By: Federico Di Pace; Giacomo Mangiante; Riccardo Masolo (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore)
    Abstract: We study whether firms’ expectations react to the Bank of England’s monetary policy announcements by comparing the responses to the Decision Maker Panel (DMP) survey filed immediately before and after a Monetary Policy Committee (MPC) meeting. On the one hand, we find that firms’ expectations and uncertainty about their own business for the most part do not respond to high-frequency monetary policy surprises. On the other hand, announced changes in the monetary policy rate induce firms to revise their price expectations, with rate hikes resulting in a reduction in price expectations and the uncertainty surrounding them.
    Keywords: Central bank communication, firm expectations, high-frequency identification, survey data.
    JEL: D84 E52 E58
    Date: 2023–02
  18. By: Mduduzi Biyase (College of Business and Economics, School of Economics, University of Johannesburg); Talent Zwane (College of Business and Economics, School of Economics, University of Johannesburg); Precious Mncayi (North West University); Mokgadi Maleka (College of Business and Economics, School of Economics, University of Johannesburg)
    Abstract: While technological innovation and financial development are broadly credited as important drivers of economic growth of developed nations, its impact on inequality (especially in emerging economies) remains understudied. This study employs panel Dynamic Ordinary Least Squares (PDOLS) and panel Fully Modified Ordinary Least Squares (PFMOLS) with annual data sourced from the Standardized World Income Inequality Database, IMF and World Bank (1990-2017) to investigate the impact of technological innovation and financial development on income inequality in BRICS countries. The results suggest that technological innovation increases income inequality in the BRICS nations, while financial development has income reducing effect on inequality. Our results are robust, using alternative estimation with various sub-indicators of financial development (such as financial markets, financial institution), including other measures proxied by access to credit provided by commercial bank.
    Keywords: BRICS, PFMOLS, PDOLS, technological innovation, inequality.
    Date: 2023
  19. By: Paweł Sakowski (University of Warsaw, Faculty of Economic Sciences, Department of Quantitative Finance, Quantitative Finance Research Group); Rafał Sieradzki (New York University Stern School of Business; Cracow University of Economics); Robert Ślepaczuk (University of Warsaw, Faculty of Economic Sciences, Department of Quantitative Finance, Quantitative Finance Research Group)
    Abstract: We propose a new measure of systemic risk to analyze the impact of the major financial market turmoils in the stock markets from 2000 to 2021 in the USA, Europe, Brazil, and Japan. Our Implied Volatility Realized Volatility Systemic Risk Indicator (IVRVSRI) shows that the reaction of stock markets varies across different geographical locations and the persistence of the shocks depends on the historical volatility and long-term average volatility level in a given market. The methodology applied is based on the logic “the simpler is always better than the more complex, if it leads to the same results”. Such an approach significantly limits the model risk and substantially decreases computational burden. Robustness checks show that IVRVSRI is a precise measure of the current systemic risk in the stock markets. Moreover, IVRVSRI seems to be a valid indication of current systemic risk in equity markets and it can be used for other types of assets and high-frequency data.
    Keywords: systemic risk, implied volatility, realized volatility, volatility indices, equity index options, market volatility
    JEL: G14 G15 C61 C22
    Date: 2023
  20. By: Michal Franta
    Abstract: The paper demonstrates the benefits of multiple-output quantile regression for macroeconomic analysis. The domestic financial cycle, which is characterized by the co-movement of credit and property prices, is a natural subject of such methodology. More precisely, I examine the tails of the joint distribution of US house price growth and household credit growth since the late 1970s to shed some light on the evolution of systemic risk and its links to various economic and financial factors. The analysis finds that the crucial indicators include the banking sector's exposure to household credit, household leverage, house price misalignment and financial market volatility. This contrasts with the negligible role of real-economy factors. In addition, it is shown that the multiple-output quantile regression framework is a useful tool for forecasting and tracking systemic risk over time. The sustainable growth of house prices and credit can be distinguished from their growth accompanied by the rise in systemic risk to guide policymakers on an appropriate response.
    Keywords: Domestic financial cycle, multiple-output quantile regression, systemic risk
    JEL: C32 E44 G10
    Date: 2023–03
  21. By: Miho Sunaga
    Abstract: We develop a macroeconomic model with a moral hazard problem between financial intermediaries and households, which causes inefficient resource allocation, to make us reconsider the financial regulation according to financial development, and individual and aggregate economic activities in the short and long runs. First, we show that in an economy where financial market has not developed, raising minimum capital requirements improves resource allocation and welfare in the long run, while it reduces welfare in an economy where financial market has developed. Second, our study reveals that an economy with a minimum capital adequacy ratio of 8% has a larger drop in aggregate net worth, consumption, and output when a negative capital quality shock occurs. However, during the financial crisis, the economy recovers faster than an economy with a higher minimum capital ratio (about 10%).These results indicate that tighter bank requirements temporally mitigate crises in economies with a developed financial market; however, they do not promote their activity in the long run.
    Date: 2023–02
  22. By: Kristy Jansen
    Abstract: I use detailed data on bond and swap positions of pension funds and insurance companies (P&Is) in the Netherlands to study demand shifts and their causal effect on government bond yields. In particular, I exploit a reform in the regulatory discount curve that makes liabilities more sensitive to changes in the 20-year interest rate but less so to longer maturity rates. Following the reform, P&Is reduced their longest maturity holdings but increased those with maturities close to 20 years. The aggregate demand shift caused a substantial steepening of the long-end of the yield curve. Using the regulatory reform as an exogenous shock to estimate the demand elasticities of various investors in the government bond market, I show that the banking sector is most price elastic and primarily responsible for absorbing demand shocks. My findings indicate that the regulatory framework of long-term investors spills over to other sectors and directly affects the governments’ cost of borrowing.
    Keywords: demand shifts; insurance companies; pension funds; price elasticity of demand; regulatory constraints; yield curve
    JEL: G12 G18 G22 G23 G28
    Date: 2023–03
  23. By: Stefano Fiorin; Joseph Hall; Martin Kanz
    Abstract: Debt moratoria that allow borrowers to postpone loan payments are a frequently used tool intended to soften the impact of economic crises. We conduct a nationwide experiment with a large consumer lender in India to study how debt forbearance offers affect loan repayment and banking relationships. In the experiment, borrowers receive forbearance offers that are presented either as an initiative of their lender or the result of government regulation. We find that delinquent borrowers who are offered a debt moratorium by their lender are 4 percentage points (7 percent) less likely to default on their loan, while forbearance has no effect on repayment if it is granted by the regulator. Borrowers who are offered forbearance by their lender also have higher demand for future interactions with the lender: in a follow-up experiment conducted several months after the main intervention, demand for a non-credit product offered by the lender is 10 percentage points (27 percent) higher among customers who were offered rep ayment flexibility by the lender than among customers who received a moratorium offer presented as an initiative of the regulator. Overall, our results suggest that, rather than generating moral hazard, debt forbearance can improve loan repayment and support the creation of longer-term banking relationships not only for liquidity but also for relational contracting reasons. This provides a rationale for offering repayment flexibility even in settings where lenders are not required to provide forbearance. JEL: G2, G5, O12 Keywords: Debt forbearance, moral hazard, relational contracting
    Date: 2023
  24. By: Otaviano Canuto
    Abstract: Three significant changes to the macroeconomic policy regime in advanced economies, compared to the post-global financial crisis period, have unfolded in the last two years. First, fears of a chronic insufficiency of aggregate demand as a growth deterrent prevailing after the 2008 global financial crisis, have been superseded by supply-side shocks and inflation. Second, as a result of the first change, the era of abundant and cheap liquidity provided by central banks has given way to higher interest rates and liquidity squeezes. Finally, because of the previous changes, there was a strong devaluation of financial assets in 2022. There are now fears about multiple possibilities of financial shocks ahead.
    Date: 2023–01
  25. By: Ana P. Fernandes (Department of Economics, University of Exeter); Jing-Lin Duanmu (Department of Economics, University of Exeter)
    Abstract: This paper investigates how banking integration affects export dynamics. To estimate the causal link, we exploit the phased liberalization of the Chinese banking industry to foreign competition across cities, based on WTO accession commitments, and use transaction-level data for all Chinese exporters. Following deregulation of foreign banks' local-currency lending, the increased local presence of foreign banks from the importing country raises export entry and initial sales to the same country for firms in the city, but has no effect on survival or growth. The effects are significantly more pronounced for firms in industries with less collateralizable assets and those exporting riskier goods. The results uncover particular channels for banking integration to facilitate exports, and are consistent with foreign banks having an informational advantage in screening export projects, relying less on collateral for their lending decisions, and in reducing export risk for firms exporting to the banks' country.
    Keywords: banking deregulation, exports, export dynamics, export risk, financial constraints, financial globalization, foreign banks, knowledge spillover, local-currency lending, uncertainty
    JEL: F10 F14 F36 G20 G28 G32
    Date: 2023–03–14
  26. By: Bruno Pires Tiberto; Helder Ferreira de Mendonça
    Abstract: Emerging Market and Developing Economies (EMDE) countries are the leading destinations of Foreign Direct Investment (FDI). We investigate whether sustainable monetary and fiscal policy through indicators that reflect the expectations concerning the central bank’s commitment to a target and the sustainability of government finance affects FDI inflows. Based on a large sample of 75 EMDE countries from 1990 to 2019, we provide empirical evidence through panel data analysis that sustainable macroeconomic policies are an essential driver of FDI inflows. The findings show EMDE countries should increase the central bank credibility, decrease the fiscal imbalance, and adopt inflation targeting to enhance FDI inflows.
    Date: 2023–02
  27. By: Ravi Kashyap
    Abstract: We discuss numerous justifications for why crypto-currencies would be highly conducive for the smooth functioning of today's society. We provide several comparisons between cryptocurrencies issued by blockchain projects, crypto, and conventional government issued currencies, cash or fiat. We summarize seven fundamental innovations that would be required for participants to have greater confidence in decentralized finance (DeFi) and to obtain wealth appreciation coupled with better risk management. The conceptual ideas we discuss outline an approach to: 1) Strengthened Security Blueprint; 2) Rebalancing and Trade Execution Suited for Blockchain Nuances 3) Volatility and Variance Adjusted Weight Calculation 4) Accommodating Investor Preferences and Risk Parity Construction; 5) Profit Sharing and Investor Protection; 6) Concentration Risk Indicator and Performance Metrics; 7) Multi-chain expansion and Select Strategic Initiatives including the notion of a Decentralized Autonomous Organization (DAO). Incorporating these concepts into several projects would also facilitate the growth of the overall blockchain eco-system so that this technology can, have wider mainstream adoption and, fulfill its potential in transforming all aspects of human interactions.
    Date: 2023–02
  28. By: Antzelos Kyriazis; Iason Ofeidis; Georgios Palaiokrassas; Leandros Tassiulas
    Abstract: This paper studies the effects of unexpected changes in US monetary policy on digital asset returns. We use event study regressions and find that monetary policy surprises negatively affect BTC and ETH, the two largest digital assets, but do not significantly affect the rest of the market. Second, we use high-frequency price data to examine the effect of the FOMC statements release and Minutes release on the prices of the assets with the higher collateral usage on the Ethereum Blockchain Decentralized Finance (DeFi) ecosystem. The FOMC statement release strongly affects the volatility of digital asset returns, while the effect of the Minutes release is weaker. The volatility effect strengthened after December 2021, when the Federal Reserve changed its policy to fight inflation. We also show that some borrowing interest rates in the Ethereum DeFi ecosystem are affected positively by unexpected changes in monetary policy. In contrast, the debt outstanding and the total value locked are negatively affected. Finally, we utilize a local Ethereum Blockchain node to record the activity history of primary DeFi functions, such as depositing, borrowing, and liquidating, and study how these are influenced by the FOMC announcements over time.
    Date: 2023–02
  29. By: Hafez Ghanem
    Abstract: Humanity is losing the climate battle, and existing international institutions are not delivering on climate change. Hence, there is a need for a new international institution that would be a repository for global knowledge on climate change, and would advise governments on climate policies, develop green projects across the Global South, mobilize financing for those projects, and support project implementation. The proposed Green Bank would be different from existing multilateral development banks: (1) it would include private shareholders as well as governments; (2) voting rights would be organized so that countries of the Global South would have the same voice as countries of the Global North and private shareholders; and (3) it would only finance green projects which could be national, regional, or global. The Green Bank would primarily support private green investments through equity contributions, loans, and guarantees. It could also support public investments by using grants to buy-down the interest on other multilateral development bank loans that finance projects that support adaptation to climate change. The Loss and Damage Fund agreed at COP27 could be the source of those grants. This proposal builds on the Bridgetown Initiative, with the aim of mobilizing private funding, in addition to the public trust fund that the initiative proposes. The Green Bank would partner with other institutions and complement the work of existing multilateral development banks, and of specialized funds.
    Date: 2023–02

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