nep-ban New Economics Papers
on Banking
Issue of 2023‒04‒10
28 papers chosen by
Sergio Castellanos-Gamboa, , Pontificia Universidad Javeriana

  1. Know your (holding) limits: CBDC, financial stability and central bank reliance By Barbara Meller; Oscar Soons
  2. Monetary Tightening and U.S. Bank Fragility in 2023: Mark-to-Market Losses and Uninsured Depositor Runs? By Erica Xuewei Jiang; Gregor Matvos; Tomasz Piskorski; Amit Seru
  3. Modeling Determinants of Private Banks Profitability in Ethiopia By mohammed, habib
  4. The Implementation of Central Bank Policy in China: The Roles of Commercial Bank Ownership and CEO Faction Membership By Michel Antoine Habib; Yushi Peng; Yanjie Wang; Zexi Wang
  5. Who Pays for Your Rewards? Redistribution of the Credit Card Market By Mr. Andrea F Presbitero; Sumit Agarwal; Andre Silva; Carlo Wix
  6. Imperfect bank competition, borrower adverse selection, and the transmission of monetary policy By Miguel Cantillo
  7. Euro area consumers' payment behaviour and banking digitalisation By Justus Meyer; Federica Teppa
  8. Interaction between Ownership Structure and Systemic Risk in the European financial sector By Carlo Bellavite Pellegrini; Rachele Camacci; Laura Pellegrini; Andrea Roncella
  9. Crypto Assets and CBDCs in Latin America and the Caribbean: Opportunities and Risks By Ms. Sandra Marcelino; Weicheng Lian; Ms. Nan Geng; Mr. Yorbol Yakhshilikov; Mr. Takuji Komatsuzaki; Maximiliano Appendino; Olga Bespalova; Jean François Clevy; Justin Lesniak; Ms. Rina Bhattacharya; Mr. Mauricio Villafuerte
  10. Interdependence between assets and liabilities in the banking system: changes in the last two decades By Valentina Michelangeli; Fabio Massimo Piersanti
  11. Partial Ownership, Financial Constraint, and FDI By ITO Tadashi; Michael RYAN; TANAKA Ayumu
  12. The Last Mile of Monetary Policy: Inattention, Reminders, and the Refinancing Channel By Shane Byrne; Kenneth Devine; Michael King; Yvonne McCarthy; Christopher Palmer
  13. Derivative margin calls: a new driver of MMF flows By Ghio, Maddalena; Rousová, Linda; Salakhova, Dilyara; Bauer, Germán Villegas
  14. Fragility of Secured Credit Chains By Piero Gottardi; Vincent Maurin; Cyril Monnet
  15. The Heterogeneous Effects of U.S. Monetary Policy on Non-Bank Finance By Miss Anke Weber; Andrew Hodge
  16. Climate change, financial intermediation, and monetary policy By Eisei Ohtaki
  17. Invoice discounting using kelly criterion by automated market makers-like implementations By Peplluis R. Esteva; Alberto Ballesteros Rodr\'iguez
  18. The Macroeconomics of Trade Credit By Luigi Bocola; Gideon Bornstein
  19. A study on Non-Performing Assets Cases and Cryptocurrency in Japan By Burina Fujiwara
  20. Beyond the Headline: How Personal Inflation Exposure Shapes Households’ Financial Choices By Christoph Basten; Merike Kukk; Jan Toczynski
  21. Robust portfolio selection under Recovery Average Value at Risk By Cosimo Munari; Justin Pl\"uckebaum; Stefan Weber
  22. Reverse Mortgages and Financial Literacy By Ismael Choinière-Crèvecoeur; Pierre-Carl Michaud
  23. The 2020-2022 Inflation Surge Across Europe: A Phillips-Curve-Based Dissection By Petia Topalova; Chikako Baba; Mr. Romain A Duval; Ting Lan
  24. Monetary Policy and Inequality: A Two-way Relation By Luzie Thiel
  25. Quantum Monte Carlo simulations for financial risk analytics: scenario generation for equity, rate, and credit risk factors By Titos Matsakos; Stuart Nield
  26. Do Capital Controls Limit Inflow Surges? By Annamaria Kokenyne; Romain Bouis; Umang Rawat; Apoorv Bhargava; Manuel Perez-Archila; Ms. Ratna Sahay
  27. Taxing Financial Transactions: A Mirrleesian Approach By Rochet, Jean-Charles; Biais, Bruno
  28. Identifying Optimal Indicators and Lag Terms for Nowcasting Models By Jing Xie

  1. By: Barbara Meller; Oscar Soons
    Abstract: How would a central bank digital currency impact the balance sheets of the central bank and commercial banks? To tackle this question empirically, we propose a constraint optimisation model that allows individual banks to choose how to respond to deposit outflows, minimizing their costs subject to bank-specific and system-wide reserve and collateral availability and different liquidity risk preferences. We simulate the impact of a fictitious digital euro introduction in Q3-2021 using data from over 2, 000 euro area banks. The simulated impact depends on i) the amount of deposits that are withdraw and the speed at which this occurs, ii) the available liquidity in the banking system at the time of a potential digital euro introduction, iii) markets’ and supervisors’ liquidity risk preferences, iv) the bank’s business model, and v) the functioning of the interbank market. For the case of the digital euro, Bindseil (2020) and Bindseil and Panetta (2020) have suggested a €3, 000 digital euro holding limit per person. We illustrate that with such a limit, even in extremely pessimistic scenarios, the impact on banks’ liquidity risk and funding structure and on the Eurosystem balance sheet would have been contained.
    Keywords: digital currency; financial intermediation; financial stability; liquidity risk; euro area
    JEL: E52 E58 G21
    Date: 2023–03
  2. By: Erica Xuewei Jiang; Gregor Matvos; Tomasz Piskorski; Amit Seru
    Abstract: We analyze U.S. banks’ asset exposure to a recent rise in the interest rates with implications for financial stability. The U.S. banking system’s market value of assets is $2 trillion lower than suggested by their book value of assets accounting for loan portfolios held to maturity. Marked-to-market bank assets have declined by an average of 10% across all the banks, with the bottom 5th percentile experiencing a decline of 20%. We illustrate that uninsured leverage (i.e., Uninsured Debt/Assets) is the key to understanding whether these losses would lead to some banks in the U.S. becoming insolvent-- unlike insured depositors, uninsured depositors stand to lose a part of their deposits if the bank fails, potentially giving them incentives to run. A case study of the recently failed Silicon Valley Bank (SVB) is illustrative. 10 percent of banks have larger unrecognized losses than those at SVB. Nor was SVB the worst capitalized bank, with 10 percent of banks having lower capitalization than SVB. On the other hand, SVB had a disproportional share of uninsured funding: only 1 percent of banks had higher uninsured leverage. Combined, losses and uninsured leverage provide incentives for an SVB uninsured depositor run. We compute similar incentives for the sample of all U.S. banks. Even if only half of uninsured depositors decide to withdraw, almost 190 banks are at a potential risk of impairment to insured depositors, with potentially $300 billion of insured deposits at risk. If uninsured deposit withdrawals cause even small fire sales, substantially more banks are at risk. Overall, these calculations suggest that recent declines in bank asset values very significantly increased the fragility of the US banking system to uninsured depositor runs.
    JEL: G2 L5
    Date: 2023–03
  3. By: mohammed, habib
    Abstract: Profitability of financial institutions play a vital role in determining the effectiveness and efficiency of the financial system globally and it is dominated by the banking industry. These banks generates profits that results panel data that requires panel model to analyze and explore determinant factors associated with its profitability. The aim of this article to model determinants of private banks profitability in Ethiopia during 2012–2021 considering its dynamic nature. Return on assets, return on equity, and net interest margin were used as profitability indicators and analyzed using dynamic panel model estimation methods based on system generalized moment estimation techniques. The exploratory data analysis result showed the profitability; return on asset was seems stable while return on equity was decreased and net interest margin was increased with decreasing rate. The model specification result showed one-step system generalized moment method estimation was an appropriate estimation technique as model estimation result directs lagged profitability, capital adequacy, asset quality and branch of banks have positive significant effect on private banks profitability. Similarly inflation rate and economic growth rate have positively determine private banks profitability on macroeconomic side. Despite to this results liquidity was significant negative bank specific determinant of private banks profitability in Ethiopia. The study result recommends consideration on capital adequacy, asset quality, liquidity, branch of banks for the private banks profitability. In addition, this study will call upcoming research to include other financial determinants suggests such as credit risk and non-performing loan with improving the estimation method of panel autoregressive distributed lag models for modeling private banks profitability in Ethiopia.
    Keywords: Dynamic Panel Model, Ethiopia, Generalized Moment Method, Panel Data, Private Banks, Profitability
    JEL: C10
    Date: 2023–03–16
  4. By: Michel Antoine Habib (University of Zurich; Centre for Economic Policy Research (CEPR)); Yushi Peng (London School of Economics and Political Science); Yanjie Wang (University of Zurich); Zexi Wang (Lancaster University Management School)
    Abstract: We examine the roles of bank ownership and CEO political faction membership in facilitating or hindering the implementation of central bank policy in China. Specifically, we examine the response of China’s commercial banks to People’s Bank of China (PBC) guidelines intended to decrease mortgage lending and to slow down the rise in residential property prices. We find that both bank ownership and faction membership matter. Central government-owned banks whose CEOs are members of the specialist finance faction within the Chinese Communist Party (CCP) respond most strongly to PBC guidance, whereas provincial or city government-owned banks whose CEOs are members of a generalist faction respond least strongly. The implementation of PBC policy has real effects: in those cities where central government-owned banks with specialist CEOs constitute a larger percentage of total bank branches, house prices grew more slowly, as did the number of residential real estate transactions and the number of new listings.Where in contrast provincial and city government-owned banks with generalist CEOs dominate, the number of transactions grew faster; the rate of house price appreciation and the number of listings were however unaffected. We conclude that China’s different levels of government and the CCP’s different factions enjoy some discretion in responding to PBC guidance and that they exploit the discretion they are afforded to vary the strength of their response.
    Keywords: Government bank ownership, CEO political faction membership, Central bank policy, Window guidance, Mortgage lending, Real estate markets
    JEL: E58 G21 R30
    Date: 2023–02
  5. By: Mr. Andrea F Presbitero; Sumit Agarwal; Andre 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
    Date: 2023–03–10
  6. By: Miguel Cantillo (Universidad de Costa Rica)
    Abstract: This paper studies bank competition with borrower adverse selection. In the model, expected non-performing loan costs are high when credit is granted in booms, when risk free rates are low, or when competition is strong. I prove that full competition is suboptimal due to this last effect; that more competition improves the transmission of monetary policy, and that lending rates are always pro-cyclical. The paper examines the relative plausibility of sequential and simultaneous bank competition. I show that with asymmetric costs, bank market shares are always inversely related to their efficiency, and that bank entry does not always lower lending rates.
    Keywords: Bank competition, transmission of monetary policy, Cournot competition, adverse selection in credit markets.
    Date: 2023–03
  7. By: Justus Meyer; Federica Teppa
    Abstract: This paper contributes to understanding consumers' payment behaviour and digitalisation in personal finances. We study individuals' payment choices, the availability of cashless payments in everyday situations and the use of banking apps in the euro area. Using the European Central Bank (ECB) Consumer Expectations Survey (CES), we find that most people prefer to use only one payment instrument, mostly cash, partly due to supply constraints in accepting non-cash payments. We also find substantial cross-country heterogeneity. Our results highlight the prominent role of demographic factors in choosing non-cash payment options and app-based tools in managing personal finances. While mobile banking is already popular among euro area consumers, using smart (device) payment methods remains very limited.
    Keywords: Consumer Payment Behaviour; Banking Digitalisation; Consumer Expectations Survey (CES)
    JEL: D12 C13 O33
    Date: 2023–03
  8. By: Carlo Bellavite Pellegrini (Dipartimento di Politica Economica, DISCE, & Centro Studi Economia Applicata (CSEA), Università Cattolica del Sacro Cuore, Milano, Italy); Rachele Camacci (Centro Studi Economia Applicata (CSEA), Università Cattolica del Sacro Cuore, Milano, Italy); Laura Pellegrini (Dipartimento di Scienze Aziendali, Università di Bergamo, Bergamo, Italy - Centro Studi Economia Applicata (CSEA), Università Cattolica del Sacro Cuore, Milano, Italy); Andrea Roncella (Centro Studi Economia Applicata (CSEA), Università Cattolica del Sacro Cuore, Milano, Italy)
    Abstract: This paper aims to empirically test the interaction between systemic risk and corporate governance factors in the European banking framework on a balance panel data of 96 listed banks from 19 countries during the period 2011-2020. The purpose is to understand the role of a corporate governance’s specific issue for the systemic risk, throughtout a period that saw Europe been signed by financial turmoil’s long tail and the ‘whatever it takes’ recovery. Among the available possible governance features we focus on the ownership structure, as the literature shows that it affects the performance of the firm, both on profitability and risk. We choose the European context since its eterogeneity and the presence of a high level of institutional ownership. To measure systemic risk, we will adopt the CoVaR approach (Adrian and Brunnermeier, 2016). Our results show that ownership concentration decreases systemic risk over the period analized, meanwhile institutional investors’ high presence increases it.
    Keywords: Corporate Governance, Ownerhsip Structure, Institutional Investors, Systemic Risk
    JEL: G10 G21 G32
    Date: 2023–02
  9. By: Ms. Sandra Marcelino; Weicheng Lian; Ms. Nan Geng; Mr. Yorbol Yakhshilikov; Mr. Takuji Komatsuzaki; Maximiliano Appendino; Olga Bespalova; Jean François Clevy; Justin Lesniak; Ms. Rina Bhattacharya; Mr. Mauricio Villafuerte
    Abstract: After providing a general overview of the nature, pros, and cons of crypto assets and CBDCs, this paper focuses on documenting their recent experience in LAC. The region records a high interest in unbacked crypto assets and stablecoins and its authorities’ policy responses have varied substantially, ranging from the introduction of Bitcoin as legal tender in El Salvador to their prohibition in many other countries worried about their impact on financial stability, currency/asset substitution, tax evasion, corruption, and money laundering. This paper also describes briefly the results of a survey on CBDCs’ introduction plans and crypto assets regulation. Finally, this paper presents some general lessons and policy recommendations for the region on the regulation of cypto assets, digital currencies and cross-border payments, and on the potential introduction of CBDCs.
    Keywords: crypto assets regulation; asset substitution; CBDCs in Latin America and the Caribbean; Policy recommendation; cypto assets; IMF working paper 23/37; Virtual currencies; Central Bank digital currencies; Digital currencies; Payment systems; Currencies; Caribbean; Central America; South America; Global
    Date: 2023–02–17
  10. By: Valentina Michelangeli (Bank of Italy); Fabio Massimo Piersanti (Bank of Italy)
    Abstract: Asset and liability management deals with the joint evaluation of assets and liabilities in a bank’s balance sheet; it is a traditional tool used by intermediaries to limit financial risks. Building on a measure of the extent of asset-liability management practices, which we name interdependence index, we show that the intensity of asset-liability linkages decreased between the beginning of the century and the onset of the COVID-19 pandemic for all three main classes of Italian banks (larger, smaller, and BCCs). The monetary policy operations introduced in the wake of the sovereign debt crisis, the 2012 reform of the tax treatment of bank bond yields and the protracted low interest rate environment meant there was less need for banks to closely link assets and liabilities in their balance sheets, thus fostering greater independence between investing and financing decisions.
    Keywords: asset-liability management, banks, interdependence index
    JEL: G21 G32
    Date: 2023–03
  11. By: ITO Tadashi; Michael RYAN; TANAKA Ayumu
    Abstract: Using matched firm-bank-FDI data, this study explores the possibility that firms with stricter financial constraints tend to choose joint ventures with a lower ownership ratio for their foreign subsidiaries. In addition, this study tests the hypothesis that parent firms with banks as their largest shareholders have a lower stake in their foreign subsidiaries because banks are risk averse. The empirical analysis confirms that foreign subsidiary ownership ratios are negatively associated with parent firms' debt ratios. Moreover, this study finds that the greater the degree to which the parent firm has bank shareholders, the lower the parent firm's ownership share in its subsidiaries. However, this tendency weakens when a bank has an overseas subsidiary in the host country, presumably because the information asymmetry is mitigated.
    Date: 2023–03
  12. By: Shane Byrne; Kenneth Devine; Michael King; Yvonne McCarthy; Christopher Palmer
    Abstract: Under-refinancing limits the transmission of accommodative monetary policy to the household sector and costs mortgage holders in many countries a significant fraction of income annually. We test whether targeted communication can reduce the attention frictions that inhibit transmission by partnering with a large bank to analyze a field experiment testing messages sent to 12, 000 Irish households. While we find only small effects of disclosure design improvements, a reminder letter increases refinancing by 76%, from 8.9% to 15.7%. To interpret this reminder effect, we extend and estimate a mixture model of inattentive financial decision-making to allow for disclosure treatment effects on attention. We find that reminders increase the likelihood mortgage holders are attentive by over 60%, from 24% to 39%. A conservative back-of-the-envelope cost-effectiveness calculation implies that the average reminder letter generated €42 of mortgagor consumption (€605 per refinancing household). Our results illustrate that targeted central bank communication such as refinancing reminders could have a larger effect on refinancing than a standard policy rate cut. Reminders could further strengthen the refinancing channel and stimulate local consumption even when policy rates are at the zero-lower bound or set in a monetary union.
    JEL: D83 E58 G21 G28 G51
    Date: 2023–03
  13. By: Ghio, Maddalena; Rousová, Linda; Salakhova, Dilyara; Bauer, Germán Villegas
    Abstract: During the March 2020 market turmoil, euro area money-market funds (MMFs) expe-rienced significant outflows, reaching almost 8% of assets under management. This paper investigates whether the volatility in MMF flows was driven by investors’ liquidity needs re-lated to derivative margin payments. We combine three highly granular unique data sources (EMIR data for derivatives, SHSS data for investor holdings of MMFs and Refinitiv Lip-per data for daily MMF flows) to construct a daily fund-level panel dataset spanning from February to April 2020. We estimate the effects of variation margin paid and received by the largest holders of EUR-denominated MMFs on flows of these MMFs. The main findings suggest that variation margin payments faced by some investors holding MMFs were an im-portant driver of the flows of EUR-denominated MMFs domiciled in euro area. JEL Classification: G13, G15, G23
    Keywords: big data, interconnectedness, liquidity risk, money market funds, non-bank financial intermediaries
    Date: 2023–03
  14. By: Piero Gottardi (University of Essex); Vincent Maurin (Stockholm School of Economics); Cyril Monnet (University of Bern, Study Center Gerzensee)
    Abstract: We present a model of secured credit chains in which assets generated from intermediation activity and pledged as collateral create fragility. A dealer stands between a borrower and a financier. The dealer borrows from the financier to fund her project, subject to a moral hazard problem, In addition, the dealer can intermediate between the financier and the borrower, forming a credit chain. Intermediation profits can thus act as collateral for the loan to fund the dealer’s own project. When these profits are risky, however, using them as collateral may undermine the dealer’s incentives, generating fragility in the chain. The arrival of news about the value of the revenue of the intermediation activity further increases fragility. This fragility channel generates a premium for safe or opaque collateral. The environment considered in our model applies to various situations, such as trade credit chains, securitization and repo markets.
    Date: 2023–03
  15. By: Miss Anke Weber; Andrew Hodge
    Abstract: Using flow of funds and high frequency data from the Investment Company Institute, we study the effects of monetary policy shocks on the size of non-bank assets as well as on flows into long-term mutual funds and returns on their assets. Consolidating chains of non-bank intermediation to avoid double counting, we find that contractionary monetary policy shocks shrink the assets of non-banks reliant on long-term funding, while increasing those of nonbanks reliant on short-term funding. Contractionary shocks also cause sustained outflows from long-term mutual funds and reduce their returns. Using a Markov-Switching VAR, we find these effects to be more prevalent after the Global Financial Crisis, and show that monetary policy shocks had the opposite effects in some earlier periods. Policymakers will thus have to contend with a complex and heterogeneous transmission of monetary policy to financial and macroeconomic outcomes through the non-banks.
    Keywords: Non-bank market-based finance; mutual fund performance and flows; monetary policy shocks
    Date: 2023–03–10
  16. By: Eisei Ohtaki
    Abstract: Motivated by recent climate actions of central banks and supervisors, this study aims to explore implications of climate change in an economy with financial intermediaries. For this aim, this study develops an overlapping generations model of the environment and financial intermediation. In that model, reactions of financial intermediaries, the monetary steady state, and optimal monetary policy against climate change are studied. Especially, it is demonstrated that the level of the optimal money growth rate depends on how "green" agents are.
    Date: 2023–03
  17. By: Peplluis R. Esteva; Alberto Ballesteros Rodr\'iguez
    Abstract: There is a persistent lack of funding, especially for SMEs, that cyclically worsens. The factoring and invoice discounting market appears to address delays in paying commercial invoices: sellers bring still-to-be-paid invoices to financial organizations, intermediaries, typically banks that provide an advance payment. This article contains research on novel decentralized approaches to said lending services without intermediaries by using liquidity pools and its associated heuristics, creating an Automated Market Maker. In our approach, the contributed collateral and the invoice trades with risk is measured with a formula: The Kelly criterion is used to calculate the optimal premium to be contributed to a liquidity pool in the funding of the said invoices. The behavior of the algorithm is studied in several scenarios of streams of invoices with representative amounts, collaterals, payment delays, and nonpayments rates or mora. We completed the study with hack scenarios with bogus, nonpayable invoices. As a result, we have created a resilient solution that performs the best with partially collateralized invoices. The outcome is decentralized market developed with the Kelly criterion that is reasonably resilient to a wide variety of the invoicing cases that provides sound profit to liquidity providers, and several premium distribution policies were checked that contributed with extra resilience to the performance of the algorithm.
    Date: 2023–01
  18. By: Luigi Bocola; Gideon Bornstein
    Abstract: In most countries, suppliers of intermediate goods and services are also the main providers of short-term financing to firms. This paper studies the macroeconomic implications of these financial links. In our model, trade credit is the outcome of a long-term contract between firms linked in the production process, and it is sustained in equilibrium by reputation forces as customers lose the relationship with their suppliers in case of a default. These financial links give rise to a credit multiplier: suppliers can enforce repayment of these IOUs, and they can discount these bills with banks to obtain liquidity. This process can either dampen or amplify the output effects of financial shocks, depending on the borrowing capacity of suppliers. Using Italian data, we find that the credit multiplier is sizable and show that trade credit amplified the output costs of the Great Recession by 45%.
    JEL: E44 G01 G30
    Date: 2023–03
  19. By: Burina Fujiwara
    Abstract: The economic bubble bursting resulted in a large number of non-performing loans in Japanese financial institutions, which weakened their functions and prevented them from extending credit for normal economic activities. However, cryptocurrency operations are thriving in Japan. In this way, this paper focuses on non-performing assets and cryptocurrencies. The goal is to use literature analysis methods to summarise the development process, types of issuance, mechanisms, evaluation models, application scenarios, and trends in how cryptocurrencies are supervised.
    Date: 2023–02
  20. By: Christoph Basten (University of Zurich; Swiss Finance Institute; CESifo (Center for Economic Studies and Ifo Institute)); Merike Kukk (Tallinn University of Technology (TUT) - Department of Finance and Economics); Jan Toczynski (University of Zurich and Swiss Finance Institute)
    Abstract: Using unique account-level data from a high inflation period in Estonia in 2005-11 and interactive fixed effect estimation, we find individual consumption to depend on personal beyond national headline inflation. Foreign shocks to selected goods’ inflation affect disproportionately households with greater consumption basket weights on these goods and make them increase consumption by an extra 1.3% per percentage point of higher inflation exposure, financed with more net borrowing. Indebted households respond stronger, consistent with a debt depreciation effect. Resulting extra demand for goods with higher inflation can reinforce inflation, letting future inflation depend on its current distribution.
    Keywords: inflation heterogeneity, personal inflation exposure, consumption, borrowing, interactive fixed effects, intertemporal choices.
    JEL: D14 D15 E21 E31
    Date: 2023–02
  21. By: Cosimo Munari; Justin Pl\"uckebaum; Stefan Weber
    Abstract: We study mean-risk optimal portfolio problems where risk is measured by Recovery Average Value at Risk, a prominent example in the class of recovery risk measures. We establish existence results in the situation where the joint distribution of portfolio assets is known as well as in the situation where it is uncertain and only assumed to belong to a set of mixtures of benchmark distributions (mixture uncertainty) or to a cloud around a benchmark distribution (box uncertainty). The comparison with the classical Average Value at Risk shows that portfolio selection under its recovery version enables financial institutions to exert better control on the recovery on liabilities while still allowing for tractable computations.
    Date: 2023–03
  22. By: Ismael Choinière-Crèvecoeur; Pierre-Carl Michaud
    Abstract: Few retirees use reverse mortgages. In this paper, we investigate how financial literacy and prior knowledge of the product influence take-up by conducting a stated-preference experiment. We exogenously manipulate characteristics of reverse mortgages to tease out how consumers value them and investigate differences by financial literacy and prior knowledge of reverse mortgages. We find that those with higher financial knowledge are more likely to know about reverse mortgages, not more likely to purchase them at any cost but are more sensitive to the interest rate and the insurance value of these products in terms of the non-negative equity guarantee.
    Keywords: reverse mortgages; savings; retirement planning; insurance
    JEL: G53 G21 R21
    Date: 2023
  23. By: Petia Topalova; Chikako Baba; Mr. Romain A Duval; Ting Lan
    Abstract: In 2021-22, inflation in Europe soared to multidecade highs, consistently exceeding policymakers’ forecasts and surprising with its wide cross-country dispersion. This paper analyzes the key drivers of the inflation surge in Europe and its variation across countries. The analysis highlights significant differences in Phillips curve parameters across Europe’s economies. Inflation is more sensitive to domestic slack and external price pressures in emerging European economies compared to their advanced counterparts, which contributed to a greater passthrough of global commodity price shocks into domestic prices, and, consequently, to larger increases in inflation rates. Across Europe, inflation also appears to have become increasingly backward looking and more sensitive to commodity price shocks since the onset of the COVID-19 pandemic. This finding helps explain why conventional (Phillips curve) inflation models consistently underpredicted the 2021-2022 inflation surge, although it remains too early to conclude there has been a structural break in the inflation process.
    Keywords: inflation; Phillips curve; slack; external price; backward-looking; inflation surge; benchmark Phillips Curve estimation; inflation model; inflation dynamics; inflation development; Energy prices; Food prices; Inflation persistence; COVID-19; Europe; Global
    Date: 2023–02–10
  24. By: Luzie Thiel (University of Kassel)
    Abstract: We study the transmission of monetary policy in the presence of heterogeneous households and examine the implications when the share of constrained households is a function of monetary policy. We build an analytically tractable heterogeneous agent New Keynesian model (THANK) with an endogenous share of hand-to-mouth households. The transmission of monetary policy on aggregate demand is amplified in this setup by inequality between saver and hand-to-mouth households. The amplification effect depends on monopolistic rents (enhancing) and redistribution (mitigating). Unlike most THANK models, we refrain from the assumption of a full insurance steady state.
    Keywords: Monetary Policy, Heterogeneous Households, Inequality, Aggregate Demand, Complementarity, Financial Conditions, Imperfect Insurance
    JEL: E12 E21 E44 E52 E58
    Date: 2023
  25. By: Titos Matsakos; Stuart Nield
    Abstract: Monte Carlo (MC) simulations are widely used in financial risk management, from estimating value-at-risk (VaR) to pricing over-the-counter derivatives. However, they come at a significant computational cost due to the number of scenarios required for convergence. Quantum MC (QMC) algorithms are a promising alternative: they provide a quadratic speed-up as compared to their classical counterparts. Recent studies have explored the calculation of common risk measures and the optimisation of QMC algorithms by initialising the input quantum states with pre-computed probability distributions. In this paper, we focus on incorporating scenario generation into the quantum computation by simulating the evolution of risk factors over time. Specifically, we assemble quantum circuits that implement stochastic models for equity (geometric Brownian motion), interest rate (mean-reversion models), and credit (structural and reduced-form credit models) risk factors. We then feed these scenarios to QMC simulations to provide end-to-end examples for both market and credit risk use cases.
    Date: 2023–03
  26. By: Annamaria Kokenyne; Romain Bouis; Umang Rawat; Apoorv Bhargava; Manuel Perez-Archila; Ms. Ratna Sahay
    Abstract: With rising financial integration, the magnitude and swings in capital flows have increased in the past two decades, intensifying the policy debate on how best to deal with these flows. This paper assesses the use and effectiveness of capital controls in limiting inflow surges. Using a novel dataset on capital control changes across 40 advanced and emerging market and developing economies over 1995-2018, we find that the tightening of capital controls reduces the probability of future surges both at the aggregate and the asset flow levels. The results are robust to various definitions of surges and are stronger when controls are matched to the asset class they target. Finally, we also find significant multilateral spillovers from capital control actions, pointing towards the need for international cooperation in the use of these policies.
    Keywords: Capital controls; capital inflows; surges
    Date: 2023–03–10
  27. By: Rochet, Jean-Charles; Biais, Bruno
    Abstract: Taxing financial transactions is often advocated for Pigouvian reasons, when financial speculation is supposed to generate inefficiencies. We adopt instead a Mirrleesian approach, and study the optimal taxation of financial transactions when financial markets are efficient, but the tax system is imperfect, due to asymmetric information. In our model, financial transactions are used by entrepreneurs to hedge shocks on their skills, in line with the New Dynamic Public Finance literature. Entrepreneurs privately observe their skills, but trades in financial markets are publicly observable. The optimal mechanism maximizes a convex combination of utilitarian welfare and Rawlsian criterion, subject to feasibility and incentive constraints. Entrepreneurial projects are subject to liquidity shocks, which can be smoothed by conducting financial transactions. Better skilled entrepreneurs’ projects have larger expected profits, but also larger shocks. Trades therefore signal skills, implying it is optimal to tax financial transactions, in addition to capital income and wealth.
    Date: 2023–03–03
  28. By: Jing Xie
    Abstract: Many central banks and government agencies use nowcasting techniques to obtain policy relevant information about the business cycle. Existing nowcasting methods, however, have two critical shortcomings for this purpose. First, in contrast to machine-learning models, they do not provide much if any guidance on selecting the best explantory variables (both high- and low-frequency indicators) from the (typically) larger set of variables available to the nowcaster. Second, in addition to the selection of explanatory variables, the order of the autoregression and moving average terms to use in the baseline nowcasting regression is often set arbitrarily. This paper proposes a simple procedure that simultaneously selects the optimal indicators and ARIMA(p, q) terms for the baseline nowcasting regression. The proposed AS-ARIMAX (Adjusted Stepwise Autoregressive Moving Average methods with exogenous variables) approach significantly reduces out-of-sample root mean square error for nowcasts of real GDP of six countries, including India, Argentina, Australia, South Africa, the United Kingdom, and the United States.
    Keywords: Nowcasting; Mixed Frequency; Forecasting; Business Cycles; selection procedure; Annex I. AS-ARIMAX procedure; nowcasting method; evaluation comparison; baseline model; Global
    Date: 2023–03–03

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