nep-ban New Economics Papers
on Banking
Issue of 2023‒05‒22
thirty papers chosen by
Sergio Castellanos-Gamboa, Tecnológico de Monterrey

  1. Less Bank Regulation, More Non-Bank Lending By Mary Chen; Seung Jung Lee; Daniel Neuhann; Farzad Saidi
  2. Imperfect Banking Competition and the Propagation of Uncertainty Shocks By Tommaso Gasparini
  3. FinTech Lending with LowTech Pricing By Mark J. Johnson; Itzhak Ben-David; Jason Lee; Vincent Yao
  4. Does Monetary Policy in India Anchor Inflation Expectation? By Bhattacharya, Rudrani
  5. The Global Financial Cycle and Country Risk in Emerging Markets During Stress Episodes: A Copula-CoVaR Approach By Melo-Velandia, Luis Fernando; Romero-Chamorro, José Vicente; Ramírez-González, Mahicol Stiben
  6. Derisking Real Estate in China’s Hybrid Economy By Wei Xiong
  7. Assessing biodiversity-related financial risks: Navigating the landscape of existing approaches By OECD
  8. UK monetary and fiscal policy since the Great Recession- an evaluation By Le, Vo Phuong Mai; Meenagh, David; Minford, Patrick; Wang, Ziqing
  9. Fiscal Transfers and Common Debt in a Monetary Union: A Multi-Country Agent Based-Stock Flow Consistent Model By Alessandro Caiani; Ermanno Catullo
  10. Sovereign risk and bank lending: evidence from 1999 Turkish earthquake By Yusuf Soner Başkaya; Bryan Hardy; Sebnem Kalemli-Ozcan; Vivian Yue
  11. Mobile payments and interoperability: Insights from the academic literature By Milo Bianchi; Matthieu Bouvard; Renato Gomes; Andrew Rhodes; Vatsala Shreeti
  12. Are Digital and Traditional Financial Services Taxed the Same? A Comprehensive Assessment of Tax Policies in Nine African Countries By Niesten, Hannelore
  13. Improving the effectiveness of financial education programs. A targeting approach By Ginevra Buratti; Alessio D'Ignazio
  14. Error Spotting with Gradient Boosting: A Machine Learning-Based Application for Central Bank Data Quality By Csaba Burger; Mihály Berndt
  15. The strange case of Romania’s Nicolae Ceaușescu: when the liquidation of sovereign debt results in country total damaging By Georgescu, George
  16. Application of Machine Learning to a Credit Rating Classification Model: Techniques for Improving the Explainability of Machine Learning By Ryuichiro Hashimoto; Kakeru Miura; Yasunori Yoshizaki
  17. The taxation of Financial Transactions: An estimate of Global Tax Revenues By Gunther Capelle-Blancard
  18. A Review of the Bank of Canada’s Support of Key Financial Markets During the COVID-19 Crisis By Joshua Fernandes; Michael Mueller
  19. Do Banks Hedge Using Interest Rate Swaps? By Lihong McPhail; Philipp Schnabl; Bruce Tuckman
  20. Trade Shocks and Credit Reallocation By Stefano Federico; Fadi Hassan; Veronica Rappoport
  21. Long-term debt propagation and real reversals By Mathias Drehmann; Mikael Juselius; Anton Korinek
  22. Collateral Advantage: Exchange Rates, Capital Flows and Global Cycles By Michael B. Devereux; Charles Engel; Steve Pak Yeung Wu
  23. Helicopter Drops and Liquidity Traps By Manuel Amador; Javier Bianchi
  24. Tackling the fiscal policy-financial stability nexus By Claudio Borio; Marc Farag; Fabrizio Zampolli
  25. Dollar Dominance in Cross-border Bank Loans and Its Response to Uncertainties By ITO Hiroyuki; XU Ying
  26. Financial Literacy, Human Capital and Long-Run Economic Growth By Alberto Bucci; Riccardo Calcagno; Simone Marsiglio; Tiago Miguel Guterres Neves Sequeira
  27. Bank accounts, bank concentration and mobile money innovations By Asongu, Simplice A; Odhiambo, Nicholas M
  28. How Banks Create Gridlock to Save Liquidity in Canada's Large Value Payment System By Rodney J. Garratt; Zhentong Lu; Phoebe Tian
  29. On the drivers of financial literacy: the role of intergenerational mobility By Sara Lamboglia; Massimiliano Stacchini
  30. Does Monetary Policy Matter? The Narrative Approach after 35 Years By Christina D. Romer; David H. Romer

  1. By: Mary Chen; Seung Jung Lee; Daniel Neuhann; Farzad Saidi
    Abstract: Bank deregulation in the form of the repeal of the Glass-Steagall Act facilitated the entry of non-bank lenders into the market for syndicated loans during the pre-2008 credit boom. Institutional investors disproportionately purchase tranches of loans originated by universal banks able to cross-sell loans and underwriting services to firms (as permitted by the repeal). A shock to cross-selling intensity increases loan liquidity at origination and over time. The mechanism is that non-loan exposures ensure monitoring even when banks retain small loan shares. Our findings complement the conventional view that regulatory arbitrage caused the rise of non-bank lenders.
    Keywords: Non-bank lending, bank deregulation, credit supply, loan liquidity, industrial organization of financial markets
    JEL: G20 G21 G23 G28
    Date: 2023–04
  2. By: Tommaso Gasparini
    Abstract: Uncertainty shocks play a crucial role in driving business cycle fluctuations. This paper investigates the impact of changes in banking competition on the propagation of uncertainty shocks. Using a panel dataset of 44 countries, I show that lower banking competition amplifies the negative impact of uncertainty on output growth. I further explore this relationship through a dynamic stochastic general equilibrium model featuring imperfect banking competition and financial frictions. The model shows that lower banking competition leads to higher borrowing rates and increased risk-taking by entrepreneurs. As a result, when the number of competitors is lower, uncertainty shocks have a stronger negative impact on defaults, investment and output due to increased risk-taking.
    Keywords: Financial Frictions, Financial Intermediaries, Heterogeneous Agents, Market Power, Uncertainty
    JEL: E32 E44 G21 L13
    Date: 2023–04
  3. By: Mark J. Johnson; Itzhak Ben-David; Jason Lee; Vincent Yao
    Abstract: FinTech lending—known for using big data and advanced technologies—promised to break away from the traditional credit scoring and pricing models. Using a comprehensive dataset of FinTech personal loans, our study shows that loan rates continue to rely heavily on conventional credit scores, including 45% higher rates for nonprime borrowers. Other known default predictors are often neglected. Within each segment (prime/nonprime) loan rates are not very responsive to default risk, resulting in realized loan-level returns decreasing with risk. The pricing distortions result in substantial transfers from nonprime to prime borrowers and from low- to high-risk borrowers within segment.
    JEL: G21 G23 G50
    Date: 2023–04
  4. By: Bhattacharya, Rudrani (National Institute of Public Finance and Policy)
    Abstract: India has entered into the Inflation Targeting (IT) monetary policy regime in 2015. Under this rule-based monetary policy regime, changes in the policy rate transmits to the economic activities and current inflation rate by altering the inflation expectation of the rational economic agents. This study empirically investigates whether monetary policy can anchor ination expectation of economic agents in India. In our analysis, the survey based measure of households' inflation expectation published by the Reserve Bank of India (RBI) captures inflation expectation of private agents. Using a co-integrated Vector Auto Regression (VAR) model, we find moderate but significant monetary policy transmission in India via interest rate channel. However, inflation expectation seems to be unanchored by monetary policy conduct in the country. Our finding is found to be robust under alternative modeling frameworks.
    Keywords: Inflation expectation ; Monetary policy ; Co-integrated VAR ; India
    JEL: C32 C5 E31 E52 E58
    Date: 2023–04
  5. By: Melo-Velandia, Luis Fernando; Romero-Chamorro, José Vicente; Ramírez-González, Mahicol Stiben
    Abstract: In this paper, we analyze the tail-dependence structure of credit default swaps (CDS) and the global financial cycle for a group of eleven emerging markets. Using a Copula-CoVaR model, we provide evidence that there is a significant taildependence between variables related with the global financial cycle, such as the VIX, and emerging market CDS. These results are particularly important in the context of distressed global financial markets (right tail of the distributions of the VIX) because they provide international investors with relevant information on how to rebalance their portfolios and a more suitable metric to analyze sovereign risk that goes beyond the traditional CoVaR. Additionally, we present further evidence supporting the importance of the global financial cycle in sovereign risk dynamics.
    Keywords: Global financial cycle; Country risk; CDS; Copula-CoVaR
    JEL: G15 G17 C58
    Date: 2023–05
  6. By: Wei Xiong
    Abstract: This article examines the risks faced by China's real estate sector within its distinct hybrid economy, which combines market mechanisms with comprehensive state planning and government intervention. The real estate sector holds particular importance as land sale revenues are a crucial source of funding for local governments, enabling them to finance infrastructure projects and stimulate economic growth. Banks are highly exposed to debt secured by real estate properties, not only involving real estate firms and households but also extending to local governments and affiliated companies. The hybrid structure gives the government a strong commitment and the ability to delay a real estate crisis. However, China’s real estate risk is ultimately tied to the country’s overall economic growth and remains susceptible to policy-related risks.
    JEL: O18 O2 R0
    Date: 2023–04
  7. By: OECD
    Abstract: Although measurements of biodiversity-related financial risks are in their infancy, several metrics and indicators are available to assess their impacts and dependencies in the financial system, and approaches are emerging to translate biodiversity risks into financial risks. This mapping paper provides a comprehensive catalogue and literature review of existing and emerging definitions, key metrics and indicators, measurement approaches, tools and practices for central banks, financial supervisors, and financial market participants to measure biodiversity-related financial risks.
    Keywords: biodiversity, biodiversity loss, central banks, ecosystem services, ecosystems, financial risk, financial system, nature
    Date: 2023–04–27
  8. By: Le, Vo Phuong Mai (Cardiff Business School); Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School); Wang, Ziqing (Sheffield Hallam University, Sheffield, United Kingdom)
    Abstract: This paper explores the economic impacts of the Bank of England’s quantitative easing policy, implemented as a response to the global financial crisis. Using an open economy Dynamic Stochastic General Equilibrium (DSGE) model, we demonstrate that monetary policy can remain effective even when nominal interest rates have reached the zero lower bound. We estimate and test the model using the indirect inference method, and our simulations indicate that a nominal GDP targeting rule implemented through money supply could be the most effective monetary policy regime. Additionally, our analysis suggests that a robust, active fiscal policy regime with nominal GDP targeting could significantly enhance economic stabilization efforts.
    Keywords: Quantitative easing, Financial friction, SOE-DSGE, Indirect inference, Zero bound
    JEL: E44 E52 E58 C51
    Date: 2023–04
  9. By: Alessandro Caiani; Ermanno Catullo
    Abstract: Using a refined version of the multi-country AB-SFC model of a Monetary Union already presented in Caiani et al. (2018a, 2019) the paper aims at providing a tentative assessment of the economic effects of transforming the European Monetary Union into an Intergovernmental Fiscal Transfer Union (IFTU) with its own fiscal capacity. Countries contribute proportionally to their GDP whereas funds are redistributed according to a mechanism that gives more funds to countries performing worse than the average of the Union in cyclical terms. Our simulations show that an IFTU inspired by such a redistribution principle acts as a stabilizer of international trade, allowing to stabilize and improve the Union GDP performance without affecting the stability of public finances. When the Union is allowed to borrow on capital markets, i.e. in a Fully-Fledged Fiscal Transfer Union (FFFTU), these effects are enhanced and a part of the public debt burden shifts from the national to the Union level, leaving the total burden almost stable. An interesting result to assess the political acceptability of the proposal is that 'core' countries eventually benefit the most from the introduction of this mechanism, despite being more frequently net contributors. Finally, we show that an FFFTU with common debt might help to soften the impact of an exogenous demand shock while, because of the fact that it mainly operates as a stabilizer of aggregate demand, it does not seem to provide beneficial effects when facing a supply shock to production.
    Keywords: Fiscal Transfer Union; Union Bonds; European Integration; Agent Based Macroeconomics; Stock Flow Consistent Models.
    Date: 2023–05–05
  10. By: Yusuf Soner Başkaya; Bryan Hardy; Sebnem Kalemli-Ozcan; Vivian Yue
    Abstract: We use an exogenous fiscal shock to identify the transmission of government risk to bank lending due to banks holding government bonds. We illustrate with a theoretical model that for banks with higher exposure to government bonds, a higher sovereign default risk implies lower bank net worth and less lending. Our empirical estimates confirm the model's predictions. The exogenous change in sovereign default risk of Turkish government debt as a result of the 1999 Earthquake impacts banks whose balance sheets were exposed more to government bonds. The resulting lower bank net worth translates into lower credit supply. We rule out alternative explanations. Our estimates suggest this channel can explain half of the decline in bank lending following the earthquake. This underlines the importance of the bank balance-sheet channel in transmitting a higher sovereign default risk to reduced real economic activity.
    Keywords: banking crisis, bank balance sheets, lending channel, public debt, credit supply, sovereign-bank nexus
    JEL: E32 F15 F36 O16
    Date: 2023–04
  11. By: Milo Bianchi; Matthieu Bouvard; Renato Gomes; Andrew Rhodes; Vatsala Shreeti
    Abstract: We connect various streams of academic literature to analyze how alternative competition and regulatory policies may affect the development of digital financial services, and particularly of mobile payments. Our main objective is to highlight the extent to which existing models, often coming from related industries (such as telecom, payments, and banking) can be applied to study the effects of mobile money interoperability. We focus on four dimensions of interoperability. First, we consider mobile network interoperability (whether clients of one telecom can access another telecom's payment services) in connection with the IO literature on tying. Second, we discuss platform level interoperability (the ability to send money off-network) in light of the literature on compatibility. We also build on the behavioral IO literature to suggest how the effects of interoperability may be very heterogeneous across various types of firms and consumers, or even backfire. Third, we consider interoperability in the cash-in-cash-out agent network, in light of the literature on co-investment in network industries, and of more specific studies on ATMs' interoperability. Fourth, we discuss how the literature in banking and on data ownership can be used to understand interoperability of data. We conclude with some broader remarks on policy implications and on possible directions for future research.
    Keywords: mobile payments, interoperability, financial inclusion, competition policy
    JEL: L51 L96 G23 G28 O16
    Date: 2023–04
  12. By: Niesten, Hannelore
    Abstract: Several African countries have introduced taxes on digital financial services (DFS) during the past decade. Given the size and rapid growth of the telecom and DFS sector, DFS taxation is considered an opportunity to broaden the government’s revenue base. These recent developments need to be considered alongside the framework for taxation of traditional financial services (TFS) delivered by banks and other formal financial institutions – such as credit unions, insurance companies and microfinance institutions. The working paper analyses key legislative, tax and regulatory policy instruments, comparing the tax framework in nine countries in Africa: Burundi, Côte d’Ivoire, Ghana, Kenya, Rwanda, South Sudan, Tanzania, Uganda and Zimbabwe. Summary of Working Paper 162 by Hannelore Niesten.
    Keywords: Finance,
    Date: 2023
  13. By: Ginevra Buratti (Bank of Italy); Alessio D'Ignazio (Bank of Italy)
    Abstract: We investigate whether targeting algorithms can improve the effectiveness of financial education programs by identifying the most appropriate recipients in advance. To this end, we use micro-data from approximately 3, 800 individuals who recently participated in a financial education campaign conducted in Italy. Firstly, we employ machine learning (ML) tools to devise a targeting rule that identifies the individuals who should be targeted primarily by a financial education campaign based on easily observable characteristics. Secondly, we simulate a policy scenario and show that pairing a financial education campaign with an ML-based targeting rule enhances its effectiveness. Finally, we discuss a number of conditions that must be met for ML-based targeting to be effectively implemented by policymakers.
    Keywords: financial education, machine learning, policy targeting, randomized controlled trials
    JEL: C38 I21 G5
    Date: 2023–04
  14. By: Csaba Burger (Magyar Nemzeti Bank (the Central Bank of Hungary)); Mihály Berndt (Clarity Consulting Kft)
    Abstract: Supervised machine learning methods, in which no error labels are present, are increasingly popular methods for identifying potential data errors. Such algorithms rely on the tenet of a ‘ground truth’ in the data, which in other words assumes correctness in the majority of the cases. Points deviating from such relationships, outliers, are flagged as potential data errors. This paper implements an outlier-based error-spotting algorithm using gradient boosting, and presents a blueprint for the modelling pipeline. More specifically, it underpins three main modelling hypotheses with empirical evidence, which are related to (1) missing value imputation, (2) the loss-function choice and (3) the location of the error. By doing so, it uses a cross sectional view on the loan-to-value and its related columns of the Credit Registry (Hitelregiszter) of the Central Bank of Hungary (MNB), and introduces a set of synthetic error types to test its hypotheses. The paper shows that gradient boosting is not materially impacted by the choice of the imputation method, hence, replacement with a constant, the computationally most efficient, is recommended. Second, the Huber-loss function, which is piecewise quadratic up until the Huber-slope parameter and linear above it, is better suited to cope with outlier values; it is therefore better in capturing data errors. Finally, errors in the target variable are captured best, while errors in the predictors are hardly found at all. These empirical results may generalize to other cases, depending on data specificities, and the modelling pipeline described underscores significant modelling decisions.
    Keywords: data quality, machine learning, gradient boosting, central banking, loss functions, missing values
    JEL: C5 C81 E58
    Date: 2023
  15. By: Georgescu, George
    Abstract: The study focuses on 1980s sovereign debt crisis in Romania under the impact of internal and external factors, intending to provide a more realistic image of this dramatic episode. The global economy faced a severe economic and financial crisis at the beginning of the 1980s, when more than 30 developing countries entered default or restructured the sovereign debt. In the case of Romania, the impact of the crisis triggered in 1981-1982 has proved extremely hard worsened by the domestic vulnerabilities accumulated in the previous decade and the external shock coming from the major changes in the global economic, financial and geopolitical context at the end of 1979. The FED monetary policy at that time (twenty percent funds rate in order to fight inflation), has led to the explosive rise in interest rates of the outstanding loans contracted from international commercial banks, to which Romania was highly indebted. The decision of simple-minded Nicolae Ceaușescu to liquidate the foreign debt and other errors concerning the crisis management had a destructive impact on the country, which degenerated in a system crisis ended with its implosion in December 1989. Some lessons from this crisis could be learned for the current indebtedness situation of Romania, amid international circumstances characterized by two-digit inflation, high interest rates and government bond yields, energy crisis, climate changes, Ukraine war, global geopolitical tensions.
    Keywords: foreign debt crisis; oil crisis shocks; IMF; FED monetary policy; inflation; interest rates; sovereign debt restructuring; Romania
    JEL: B22 E44 E62 F34 H63 N44
    Date: 2023–04
  16. By: Ryuichiro Hashimoto (Bank of Japan); Kakeru Miura (Bank of Japan); Yasunori Yoshizaki (Bank of Japan)
    Abstract: Machine learning (ML) has been used increasingly in a wide range of operations at financial institutions. In the field of credit risk management, many financial institutions are starting to apply ML to credit scoring models and default models. In this paper we apply ML to a credit rating classification model. First, we estimate classification models based on both ML and ordinal logistic regression using the same dataset to see how model structure affects the prediction accuracy of models. In addition, we measure variable importance and decompose model predictions using so-called eXplainable AI (XAI) techniques that have been widely used in recent years. The results of our analysis are twofold. First, ML captures more accurately than ordinal logit regression the nonlinear relationships between financial indicators and credit ratings, leading to a significant improvement in prediction accuracy. Second, SHAP (Shapley Additive exPlanations) and PDP (Partial Dependence Plot) show that several financial indicators such as total revenue, total assets turnover, and ICR have a significant impact on firms’ credit quality. Nonlinear relationships between financial indicators and credit rating are also observed: a decrease in ICR below about 2 lowers firms’ credit quality sharply. Our analysis suggests that using XAI while understanding its underlying assumptions improves the low explainability of ML.
    Keywords: Credit risk management; Machine learning; Explainability; eXplainable AI (XAI)
    JEL: C49 C55 G32
    Date: 2023–04–21
  17. By: Gunther Capelle-Blancard (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Perceptual confidence has been an important topic recently. However, one key limitation in current approaches is that most studies have focused on confidence judgments made for single decisions. In three experiments, we investigate how these local confidence judgments relate and contribute to global confidence judgments, by which observers summarize their performance over a series of perceptual decisions. We report two main results. First, we find that participants exhibit more overconfidence in their local than in their global judgments of performance, an observation mirroring the aggregation effect in knowledge-based decisions. We further show that this effect is specific to confidence judgments and does not reflect a calculation bias. Second, we document a novel effect by which participants' global confidence is larger for sets which are more heterogeneous in terms of difficulty, even when actual performance is controlled for. Surprisingly, we find that this effect of variability also occurs at the level of local confidence judgments, in a manner that fully explains the effect at the global level. Overall, our results indicate that global confidence is based on local confidence, although these two processes can be partially dissociated. We discuss possible theoretical accounts to relate and empirical investigations of how observers develop and use a global sense of perceptual confidence.
    Abstract: L'idée d'une taxe sur les transactions financières (TTF) est souvent présentée comme une douce utopie, impossible à mettre en pratique, à moins de représenter un « handicap insurmontable » pour les places financières. Les transactions boursières sont pourtant taxées au Royaume-Uni depuis le XVIIe siècle, sous la forme d'un droit de timbre (stamp duty) qui rapporte environ 4 milliards d'euros chaque année, sans que le développement de La City n'ait été entravé. Pratiquement tous les pays développés y ont eu recours, et encore aujourd'hui plus d'une trentaine de pays dans le monde taxent les transactions financières, parmi lesquels la Suisse, Hong Kong ou Taiwan, ainsi bien sûr que la France. La TTF présente les atouts qui font un bon impôt : la TTF est peu distorsive, les recettes fiscales sont potentiellement élevées et les frais de recouvrement minimes ; elle a en outre un effet redistributif. L'équivalent du stamp duty britannique ou de la TTF française, appliqué par les pays du G20, permettrait de lever, malgré ses très nombreuses exemptions, entre 156 et 260 milliards d'euros par an (selon que l'on retient un taux nominal de 0, 3% ou de 0, 5%). L'étendre aux instruments dérivés et aux transactions intra-journalières apporterait des recettes supplémentaires, tout en améliorant la transparence sur les marchés financiers.
    Keywords: overconfidence, confidence-frequency effect, aggregation effect, Securities Transaction Tax, Tobin tax, Innovative financing, Financial transaction tax, Taxe sur les transactions financières, taxe Tobin, financements innovants
    Date: 2023–04–27
  18. By: Joshua Fernandes; Michael Mueller
    Abstract: The COVID-19 pandemic placed unprecedented strain on the global financial system. We describe how the Bank of Canada responded to the rapidly deteriorating liquidity in core Canadian fixed-income markets. We also describe how market functioning improved after the Bank intervened. The Bank implemented several emergency facilities to ease market-wide liquidity strains, restore market functioning and support the stabilization and recovery of the Canadian economy. Over time, market functioning improved, and liquidity returned to pre-pandemic levels. The Bank’s facilities helped resolve market dysfunction and ensured that credit continued to be extended to households and businesses.
    Keywords: Coronavirus disease (COVID-19); Financial markets; Market structure and pricing; Monetary policy and uncertainty
    JEL: E44 E58 G01
    Date: 2023–04
  19. By: Lihong McPhail; Philipp Schnabl; Bruce Tuckman
    Abstract: We ask whether banks use interest rate swaps to hedge the interest rate risk of their assets, primarily loans and securities. To this end, we use regulatory data on individual swap positions for the largest 250 U.S. banks. We find that the average bank has a large notional amount of swaps-- $434 billion, or more than 10 times assets. But after accounting for the significant extent to which swap positions offset each other, the average bank has essentially no net interest rate risk from swaps: a 100-basis-point increase in rates increases the value of its swaps by 0.1% of equity. There is variation across banks, with some bank swap positions decreasing and some increasing with rates, but aggregating swap positions at the level of the banking system reveals that most swap exposures are offsetting. Therefore, as a description of prevailing practice, we conclude that swap positions are not economically significant in hedging the interest rate risk of bank assets.
    JEL: G21 G32
    Date: 2023–04
  20. By: Stefano Federico; Fadi Hassan; Veronica Rappoport
    Abstract: This paper identifies a credit-supply contraction that arises endogenously after trade liberalization. Banks with loan portfolios concentrated in sectors exposed to competition from China face an increase in non-performing loans after China’s entry into the World Trade Organization. As a result, they reduce the supply of credit to firms, irrespective of the firm’s sector of operation. This cut in credit translates into lower employment, investment, and output. Through this mechanism, the financial channel amplifies the shock to firms already hit by import competition from China and passes it on to firms in sectors expected to expand upon trade liberalization.
    JEL: F1 F60 G21
    Date: 2023–04
  21. By: Mathias Drehmann; Mikael Juselius; Anton Korinek
    Abstract: We examine a propagation mechanism that arises from households' long-term borrowing and show empirically that it has sizable real effects. The mechanism recognises that when there is long-term debt, an impulse to new borrowing generates a predictable hump-shaped path of future debt service. We confirm this pattern using a novel multi-country dataset of debt flows. Whereas new borrowing boosts output contemporaneously, debt service depresses output. Credit booms thus lead to predictable reversals in real economic activity several years later. This long-term debt propagation channel is the main reason for why indicators of credit cycles have predictive power for future economic activity.
    Keywords: new borrowing, debt service, financial cycle, financial flows and real effects
    JEL: E17 E44 G01 D14
    Date: 2023–05
  22. By: Michael B. Devereux; Charles Engel; Steve Pak Yeung Wu
    Abstract: We construct a two-country New Keynesian model in which US government debt has an advantage as a superior collateral asset in the balance sheets of banks. The model can account for the observed response of the US dollar and US bond returns to a global downturn, in particular when the downturn is associated with a global financial crisis. In our model, the U.S. enjoys an “exorbitant privilege” as its government bonds are desired by banks both in the U.S. and abroad as superior collateral. In times of global stress, the dollar appreciates and the “convenience yield” earned by U.S. government bonds increases. There is “retrenchment” - each country reduces its holdings of foreign assets - a critical determinant of which is the endogenous response of prices and returns. In addition, the model displays a U.S. real exchange rate appreciation despite that domestic absorption in the US falls relative to the rest of the world during a global downturn, thus addressing the “reserve currency paradox” highlighted by Maggiori (2017).
    JEL: F30 F40 G15
    Date: 2023–04
  23. By: Manuel Amador; Javier Bianchi
    Abstract: We show that if the central bank operates without commitment and faces constraints on its balance sheet, helicopter drops can be a useful stabilization tool during a liquidity trap. With commitment, even with balance sheet constraints, helicopter drops are, at best, irrelevant.
    Keywords: Helicopter drops; Central bank independence; Liquidity traps; Zero lower bound
    JEL: E58 E31 E61 E52 E63
    Date: 2023–04–06
  24. By: Claudio Borio; Marc Farag; Fabrizio Zampolli
    Abstract: Tackling the fiscal policy-financial stability nexus is essential to ensure financial and hence macroeconomic stability. In this paper, we review the literature on this topic and suggest how policy could best tackle the link. Doing so involves action on two fronts. First, incorporating financial stability considerations in the design of fiscal policy. This means, in particular, considering the risk of financial crises when assessing fiscal space, recognising the flattering effects of financial booms on fiscal positions and removing or reducing fiscal incentives to private debt accumulation. Second, acknowledging that domestic currency-denominated public debt is not fully risk-free in the design of the prudential regulation of financial institutions. This calls for carefully balanced risk-sensitive capital charges or other measures to limit banks' sovereign exposures with due regard to the special role of government bonds in the financial system and country-specific characteristics. That said, prudent regulation cannot substitute for fiscal prudence.
    Keywords: financial crises; doom loops; sovereign exposures; prudential policy; fiscal policy
    JEL: E6 G2 G3 H1 H3 H6 H8
    Date: 2023–04
  25. By: ITO Hiroyuki; XU Ying
    Abstract: This paper examines whether, and if so, to what extent uncertainty increases the degree of the use of U.S. dollars in cross-country loans. To this end, we investigate what factors affect the choice of currency for denomination of cross-border syndicated loans. Among them, we focus on whether external shocks and global uncertainties, such as uncertainty stemming from U.S. monetary, fiscal, and trade policies, financial instability (measured by VIX), and infectious disease risk affect the choice of international loans. The analysis uses micro firm-level data on syndicated loans agreed between borrowers located in 25 emerging market economies (EMEs) and lenders from 59, from the 1995 to 2019 period. We find that uncertainties driven by U.S. trade policy led to a higher USD share in total international loans from the borrowers’ perspective, indicating the borrowers’ inclination to avert the exchange rate risk or volatility that may arise due to the uncertainty of U.S. trade policy. A rise in the general level of U.S. economic policy and the intensity of financial instability both have a negative impact on the USD share, likely reflecting dollar shortages at the time of increasing economic policy uncertainty and financial instability. The estimation on the currency shares from the lenders’ perspective also confirms these impacts on U.S. economic uncertainties and financial instability. We also test the correlation between currency choice for international loans and the borrowers’ revenue volatility, and find that syndicated loans in the local currency are associated with less revenue volatility compared to USD-denominated loans.
    Date: 2023–04
  26. By: Alberto Bucci (Department of Economics, Management and Quantitative Methods (DEMM) - University of Milan, and ICEA (International Center for Economic Analysis, Canada); Riccardo Calcagno (Department of Management and Production Engineering, Polytechnic University of Turin); Simone Marsiglio (Department of Economics and Management, University of Pisa); Tiago Miguel Guterres Neves Sequeira (University of Coimbra, Centre for Business and Economics Research, CeBER and Faculty of Economics)
    Abstract: We extend a two-sector endogenous growth model based on human capital accumulation along two different directions. First, by postulating that individuals may invest time-resources not only in the accumulation of human capital (general knowledge) but also in the accumulation of financial literacy (specific financial knowledge). Second, we maintain that the efficiency with which savings are transferred intertemporally may improve over time, e.g. through the presence of a financial system. We use the model to analyze the relationship between financial literacy and economic growth in the long run. We show that the properties of the balanced growth path equilibrium critically depend on how human capital and financial literacy affect the efficiency of the financial system. Moreover, finance promotes long-run economic growth through two alternative channels, driven either by dynamics of financial returns or by human capital accumulation, respectively. By calibrating the model to the US economy over the 1950-2019 period, we quantitatively assess the effect of financial literacy on long-term growth and the relative magnitude of the two channels.
    Keywords: Economic Growth, Financial Literacy, Financial Return, Human Capital.
    Date: 2023–12
  27. By: Asongu, Simplice A; Odhiambo, Nicholas M
    Abstract: The present study investigates how increasing bank accounts and bank concentration affect mobile money innovations in 148 countries. It builds on scholarly and policy concerns in the literature that increasing bank accounts may not be having the desired effects on financial inclusion on the one hand and on the other, that bank concentration which is a proxy for market power is a relevant mobile money innovation demand factor. The empirical evidence is based on Tobit regressions. From the findings, it is apparent that boosting bank accounts is positively related to the three mobile money innovations (i.e. mobile bank accounts and the mobile phone used to send money). Moreover, some critical levels of bank account penetration require complementary policies in order to maintain the positive relationship between boosting bank accounts and positive outcomes in terms of money mobile innovations. Conversely, financial inclusion in terms of the three mobile money innovations is not significantly apparent upon enhancing bank concentration. Policy implications are discussed in the light of the provided thresholds for complementary policies.
    Keywords: Mobile money; technology; diffusion; financial inclusion; inclusive innovation, information asymmetry
    Date: 2023–04
  28. By: Rodney J. Garratt; Zhentong Lu; Phoebe Tian
    Abstract: Using detailed data from Canada’s new high-value payment system (HVPS), we show how participants of the system save liquidity by exploiting the new gridlock resolution arrangement. These observed behaviors are consistent with the equilibrium of a “gridlock game” that captures the key incentives that participants face in the system. The findings have important implications for the design of HVPSs and shed light on financial institutions’ liquidity preference.
    Keywords: Financial institutions; Payment clearing and settlement systems
    JEL: E42 E58 G21
    Date: 2023–05
  29. By: Sara Lamboglia (Bank of Italy); Massimiliano Stacchini (Bank of Italy)
    Abstract: Individual characteristics, such as educational background, are important but insufficient to explain variation in financial skills among people. Using repeated cross-sectional survey data on over 145, 000 individuals aged 50+ and resident in 20 European countries and Israel combined with historical country-level data, we explore the role that selected country characteristics play in stimulating financial awareness. We find a lasting effect of social mobility on financial skills: individuals who spent early adulthood in countries characterized by high intergenerational mobility proved to be more financially literate than their peers as they age. The effect is economically sizable, especially among women and individuals from disadvantaged backgrounds. The results hold in models that use country-specific cohort effects to absorb context confounders and common shocks. Our findings suggest that promoting equality of opportunities across generations is not only ethically desirable but can also enhance socially valuable spillovers such as the accumulation of skills among vulnerable citizens.
    Keywords: financial literacy, intergenerational mobility, gender gap
    JEL: G53 J62
    Date: 2023–04
  30. By: Christina D. Romer; David H. Romer
    Abstract: The narrative approach to macroeconomic identification uses qualitative sources, such as newspapers or government records, to provide information that can help establish causal relationships. This paper discusses the requirements for rigorous narrative analysis using fresh research on the impact of monetary policy as the focal application. We read the historical minutes and transcripts of Federal Reserve policymaking meetings to identify significant contractionary and expansionary changes in monetary policy not taken in response to current or prospective developments in real activity for the period 1946 to 2016. We find that such monetary shocks have large and significant effects on unemployment, output, and inflation in the expected directions. Analysis of available policy records suggests that a contractionary monetary shock likely occurred in 2022. Based on the empirical estimates of the effect of previous shocks, one would expect substantial negative impacts on real GDP and inflation in 2023 and 2024.
    JEL: E31 E52 E58 E65 N12
    Date: 2023–04

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