nep-ban New Economics Papers
on Banking
Issue of 2023‒06‒19
48 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. BigTech credit and monetary policy transmission: Micro-level evidence from China By Huang, Yiping; Li, Xiang; Qiu, Han; Yu, Changhua
  3. Will Central Bank Digital Currency Disintermediate Banks? By Whited, Toni M.; Wu, Yufeng; Xiao, Kairong
  4. The Historical Effects of Banking Distress on Economic Activity By Falk Bräuning; Viacheslav Sheremirov
  5. Effects of Government Interventions on Bank Performance By Sona Siva
  6. Retrospective wisdom: Long-term orientation and the rating downgrades of financial institutions By Huong Dieu Dang
  7. On the Essentiality of Credit and Banking at Zero Interest Rates By Paola Boel; Christopher J. Waller
  8. Are Basel III requirements up to the task? Evidence from bankruptcy prediction models By Pierre Durand; Gaëtan Le Quang; Arnold Vialfont
  9. The Rise of E-Wallets and Buy-Now-Pay-Later: Payment Competition, Credit Expansion, and Consumer Behavior By Wenlong Bian; Lin William Cong; Yang Ji
  10. Changing Forecasts - Forecasting Change: The US market for savings deposits in econometric models and the market for econometric models among depository institutions, 1960s to 1980s By Knake, Sebastian
  11. Debt Moratoria: Evidence from Student Loan Forbearance By Michael Dinerstein; Constantine Yannelis; Ching-Tse Chen
  12. "Optimal Loan Portfolio under Regulatory and Internal Constraints" By Makoto Okawara; Akihiko Takahashi
  13. Who are Central Banks? Gender, Human Resources, and Central Banking By Mariarosaria Comunale; Petra de Bruxelles; Ms. Kalpana Kochhar; Juliette Raskauskas; Ms. Filiz D Unsal
  14. Freeze! Financial Sanctions and Bank Responses By Efing, Matthias; Goldbach, Stefan; Nitsch, Volker
  15. ECB Euro Liquidity Lines By Silvia Albrizio; Iván Kataryniuk; Luis Molina; Jan Schäfer
  16. Interbank Networks and the Interregional Transmission of Financial Crises: Evidence from the Panic of 1907 By Matthew S. Jaremski; David C. Wheelock
  17. Identifying financial fragmentation: do sovereign spreads in the EMU reflect differences in fundamentals? By Jan Kakes; Jan Willem van den End
  18. The role of financial stability considerations in monetary policy and the interaction with macroprudential policy in the euro area By Policy, Monetary; Stability, Financial; Albertazzi, Ugo; Martin, Alberto; Assouan, Emmanuelle; Tristani, Oreste; Galati, Gabriele; Vlassopoulos, Thomas; Adolf, Petra; Kok, Christoffer; Altavilla, Carlo; Lewis, Vivien; Andreeva, Desislava; Lima, Diana; Brand, Claus; Musso, Alberto; Bussière, Matthieu; Nikolov, Kalin; Fahr, Stephan; Patriček, Matic; Fourel, Valère; Prieto, Esteban; Heider, Florian; Rodriguez-Moreno, Maria; Idier, Julien; Signoretti, Federico; Aban, Jorge; Busch, Ulrike; Ambrocio, Gene; Cassar, Alan; Balfoussia, Hiona; Chalamandaris, Dimitrios; Bonatti, Guido; Cuciniello, Vincenzo; Bonfim, Diana; Eller, Markus; Bouchinha, Miguel; Falagiarda, Matteo; Fernandez, Luis; Maddaloni, Angela; Garabedian, Garo; Mazelis, Falk; Geiger, Felix; Miettinen, Pavo; Grassi, Alberto; Nakov, Anton; Hristov, Nikolay; Obradovic, Goran; Ibas, Pelin; Papageorghiou, Maria; Ioannidis, Michael; Pogulis, Armands; Jan, Jansen David; Redak, Vanessa; Jovanovic, Mario; Velez, Anatoli Segura; Kakes, Jan; Tapking, Jens; Kempf, Alina; Valderrama, Maria; Klein, Melanie; Weigert, Benjamin; Licak, Marek; policy, Work stream on macroprudential
  19. Unequal access to The Global Financial Safety Net: An index for the quality of crisis finance By Zucker Marques, Marina; Mühlich, Laurissa; Fritz, Barbara
  20. Money Matters: Broad Divisia Money and the Recovery of Nominal GDP from the COVID-19 Recession By Michael D. Bordo; John V. Duca
  21. Weighing Anchor on Credit Card Debt By Benedict Guttman-Kenney; Jesse Leary; Neil Stewart
  22. Nigeria’s eNaira, One Year After By Jookyung Ree
  23. Financial Stability and Interest Rates By Ozge Akinci; Gianluca Benigno; Marco Del Negro; Ethan Nourbash; Albert Queraltó
  24. Unsecured Loans and Intangible Investment By OGURA Yoshiaki; UESUGI Iichiro; IWAKI Hiromichi
  25. Kites and Quails: Monetary Policy and Communication with Strategic Financial Markets By Giampaolo Bonomi; Ali Uppal
  26. A Financial Stress Index for a Small Open Economy: The Australian Case By Pedro Gomis-Porqueras; Romina Ruprecht; Xuan Zhou
  27. Wind-down of bank trading books By Santoni, Alessandro; Rossignol, Ghislain; Akhouen, Richard
  28. Central Bank Communication and House Price Expectations By Carola Binder; Pei Kuang; Li Tang
  29. Knockin' on H(e)aven's door. Financial crises and hidden wealth By Silvia Marchesi; Giovanna Marcolongo
  30. Forecasting banknote circulation during the COVID-19 pandemic using structural time series models By Nikolaus Bartzsch; Marco Brandi; Lucas Devigne; Raymond de Pastor; Gianluca Maddaloni; Diana Posada Restrepo; Gabriele Sene
  31. Cash IS king! – Securing liquidity in economic crisis By Warning, Hans Olaf; Grömling, Michael; Schulke, Arne
  32. Does Financial Inclusion Enhance Tax Revenue: Indian Experience By Surender Kumar; Paramjit Author-Department of Economics, Delhi School of Economics
  33. Trillion Dollar Words: A New Financial Dataset, Task & Market Analysis By Agam Shah; Suvan Paturi; Sudheer Chava
  34. Crisis Risk and Risk Management By René M. Stulz
  35. Volatility jumps and the classification of monetary policy announcements By G.M. Gallo; D. Lacava; E. Otranto
  36. Financial and Macroeconomic Data Through the Lens of a Nonlinear Dynamic Factor Model By Pablo Guerrón-Quintana; Alexey Khazanov; Molin Zhong
  37. The Federal Reserve’s Response to the Global Financial Crisis and Its Long-Term Impact: An Interrupted Time-Series Natural Experimental Analysis By KAMKOUM, Arnaud Cedric
  38. History-Dependent Monetary Regimes: A Lab Experiment and a Henk Model By Jasmina Arifovic; Isabelle Salle; Hung Truong
  39. Too Low for Too Long: Could Extended Periods of Ultra Easy Monetary Policy Have Harmful Effects? By Mr. Etibar Jafarov; Enrico Minnella
  40. What does the CDS market imply for a U.S. default? By Luca Benzoni; Christian Cabanilla; Alessandro Cocco; Cullen Kavoussi
  41. Inventory credit, a system to improve food security in sub-Saharan Africa By Tristan Le Cotty; Élodie Maître D’hôtel; Issoufou Porgo; Julie Subervie; Raphaël Soubeyran
  42. The impact of monetary policy on functional income distribution: a panel SVAR analysis (1970-2019) By Stefano Di Bucchianico; Antonino Lofaro
  43. Can We Use High-Frequency Yield Data to Better Understand the Effects of Monetary Policy and Its Communication? Yes and No! By Jonathan Hambur; Qazi Haque
  44. Credit Valuation Adjustment in Financial Networks By Irena Barja\v{s}i\'c; Stefano Battiston; Vinko Zlati\'c
  45. Gold-to-Platinum Price Ratio and the Predictability of Bubbles in Financial Markets By Riza Demirer; David Gabauer; Rangan Gupta; Joshua Nielsen
  46. Recovery of 1933 By Margaret M. Jacobson; Eric M. Leeper; Bruce Preston
  47. Zero is Not Hero Yet: Benchmarking Zero-Shot Performance of LLMs for Financial Tasks By Agam Shah; Sudheer Chava
  48. Determinants of financing demand from microcredit associations by small family farms in Morocco: The case of the Chtouka-Ait-Baha province By Mohamed Adaskou; Abdelkarim Hssoune

  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: 2023–05–05
  2. By: Huang, Yiping; Li, Xiang; Qiu, Han; Yu, Changhua
    Abstract: This paper studies monetary policy transmission through BigTech and traditional banks. By comparing business loans made by a BigTech bank with those made by traditional banks, it finds that BigTech credit amplifies monetary policy transmission mainly through the extensive margin. Specifically, the BigTech bank is more likely to grant credit to new borrowers compared with conventional banks in response to expansionary monetary policy. The BigTech bank's advantages in information, monitoring, and risk management are the potential mechanisms. In addition, monetary policy has a stronger impact on the real economy through BigTech lending.
    Keywords: Financial Technology, Bank Lending, Monetary Policy Transmission
    JEL: E52 G21 G23
    Date: 2023
  3. By: Whited, Toni M. (University of Michigan and the NBER); Wu, Yufeng (University of Illinois); Xiao, Kairong (Columbia University)
    Abstract: We estimate a dynamic banking model to quantify the impact of a central bank digital currency (CBDC) on the banking system. Our counterfactuals show that a one-dollar introduction of CBDC replaces bank deposits by around 80 cents on the margin. Bank lending falls by one-fourth of the drop in deposits because banks partially replace lost deposits with wholesale funding. This substitution raises banks’ interest-rate risk exposure and lowers their resilience to negative equity shocks. If CBDC bears interest or is intermediated through banks, it captures a greater deposit market share, amplifying the impact on lending. The effect on lending is ampliï¬ ed for small banks, for which wholesale funding is more expensive.
    Keywords: central bank digital currency, banking competition, maturity mismatch, ï¬ nancial stability
    JEL: E51 E52 G21 G28
    Date: 2023–05
  4. By: Falk Bräuning; Viacheslav Sheremirov
    Abstract: The failures of several U.S. regional banks have stimulated discussions about the macroeconomic effects of a likely credit contraction triggered by the recent banking turmoil. Drawing on historical evidence from advanced economies, this study documents a sizable and persistent decline in output and rise in unemployment following non-systemic financial distress. The effects of a systemic banking crisis are two to four times as large. High corporate leverage exacerbates banking turmoil, whereas high bank capitalization and a relatively large share of market financing in corporate debt mitigate it. These channels approximately offset one another so that the estimates tailored to the current U.S. economy are in line with the average effect.
    Keywords: banking distress; real economy; financial crises
    JEL: E44 F30 G01 G21
    Date: 2023–05–25
  5. By: Sona Siva (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: This paper evaluates the effects of government bailout policies on bank performance in the EU banking sector. Using a unique dataset of government supports, I identify banks which received state support in years 2008-2014 and corresponding control group of banks. I apply difference-in-differences method and extend it by propensity score matching and inverse probability of weighting methods to account for non-randomness of a treatment. My results suggest that aided banks overtook non-aided ones in terms of lending activity in both, the EU Core and EU Periphery, but it was accompanied by increased non-performing loans ratio (NPL) in the EU Periphery. Finally, I show these results differ from the developments in the US. TARP recipients improved their capital adequacy compared to non-intervened banks and returned to pre-crisis level in terms of NPL and profitability.
    Keywords: bailout, financial crisis, bank performance
    JEL: G21 G28
    Date: 2023–06
  6. By: Huong Dieu Dang (University of Canterbury)
    Abstract: This study examines the effects of Hofstede’s long-term orientation (LTO) on the rating changes of financial institutions (FIs) in 50 countries. The impacts of LTO on rating downgrades are stronger for the sample of speculative grade-rated FIs and more pronounced for crises sample. The significance effect of LTO on downgrades is robust to various tests and is unlikely due to endogeneity. Switching from a short term- to a long term (LT)-oriented culture lowers the downgrade risk of an FI by 47%, a speculative-grade rated FI by 56%, and an FI of a country in crisis by 58%. LT-oriented societies promote responsible borrowing and a good payment culture. A strong preference for long-term business survival motivates banks in LToriented nations to maintain a more prudent bank credit to bank deposits ratio, particularly during crises. Incorporating LTO in banking regulations may encourage banks to adopt longterm perspectives and finance long-term sustainable projects.
    Keywords: Long-term orientation; National culture; Hofstede; World Value Survey; Rating downgrades
    JEL: G24
    Date: 2023–05–01
  7. By: Paola Boel; Christopher J. Waller
    Abstract: We investigate the welfare-increasing role of credit and banking at zero interest rates in a microfounded general equilibrium monetary model. Agents differ in their opportunity costs of holding money due to heterogeneous idiosyncratic time-preference shocks. Without banks, the constrained-efficient allocation is never attainable, since impatient agents always face a positive implicit rate in equilibrium. With banks, patient agents pin down the borrowing rate and in turn enable impatient agents to borrow at no cost when the inflation rate approaches the highest discount factor. Banks can therefore improve welfare at zero rates, provided that both types of agents are included in the financial system and that the borrowing limit is sufficiently lax. The result is robust to several extensions.
    Keywords: Banking; Money; Zero Interest Rates
    JEL: E40 E50
    Date: 2023–05–23
  8. By: Pierre Durand (Université Paris Est Créteil, ERUDITE, 94010 Créteil Cedex, France); Gaëtan Le Quang (Univ Lyon, Université Lumière Lyon 2, GATE UMR 5824, F-69130 Ecully, France); Arnold Vialfont (Université Paris Est Créteil, ERUDITE, 94010 Créteil Cedex, France)
    Abstract: Using a database comprising US bank balance sheet variables covering the 2000-2018 period and the list of failed banks as provided by the FDIC, we run various models to exhibit the main determinants of bank default. Among these models, Logistic Regression, Random Forest, Histogram-based Gradient Boosting Classification and Gradient Boosting Classification perform the best. Relying on various machine learning interpretation tools, we manage to provide evidence that 1) capital is a stronger predictor of default than liquidity, 2) Basel III capital requirements are set at a too low level. More precisely, having a look at the impact of the interaction between capital ratios (the risk-weighted ratio and the simple leverage ratio) and the liquidity ratio (liquid assets over total assets) on the probability of default, we show that the influence of capital on this latter completely outweighs that of liquidity, which is in fact very limited. From a prudential perspective, this questions the recent stress put on liquidity regulation. Concerning capital requirements, we provide evidence that setting the risk-weighted ratio at 15% and the simple leverage ratio at 10% would significantly decrease the probability of default without hampering banks'activities. Overall, these results therefore call for strengthening capital requirements while at the same time releasing the regulatory pressure put on liquidity.
    Keywords: Basel III; capital requirements ; liquidity regulation ; bankruptcy prediction models ; statistical learning ; classification
    JEL: C44 G21 G28
    Date: 2023
  9. By: Wenlong Bian; Lin William Cong; Yang Ji
    Abstract: The past decade has witnessed a phenomenal rise of digital wallets, and the COVID-19 pandemic further accelerated their adoption globally. Such e-wallets provide not only a conduit to external bank accounts but also internal payment options, including the ever-popular Buy-Now-Pay-Later (BNPL). We examine, for the first time, e-wallet transactions matched with merchant and consumer information from a world-leading provider based in China, with over 1 billion users globally and a business model that other e-wallet providers quickly converge to. We document that internal payment options, especially BNPL, dominate both online and on-site transactions. BNPL has greatly expanded credit access on the extensive margin through its adoption in two-sided payment markets. While BNPL crowds out other e-wallet payment options, it expands FinTech credit to underserved consumers. Exploiting a randomized experiment, we also find that e-wallet credit through BNPL substantially boosts consumer spending. Nevertheless, users, especially those relying on e-wallets as their sole credit source, carefully moderate borrowing when incurring interest charges. The insights likely prove informative for economies transitioning from cash-heavy to cashless societies where digital payments and FinTech credit see the largest growth and market potential.
    JEL: E42 G20 G23 G51
    Date: 2023–05
  10. By: Knake, Sebastian
    Abstract: Since the late 1960s, the rising volatility of financial markets in the US has troubled econometricians and bank managers alike. Both professions have found it increasingly difficult to forecast savings deposit flows. This article explores these challenges by focusing on two developments. First, it explores the internal adjustment process among econometric models of the savings deposit market. To achieve this aim, I use the so-called FMP (MPS) macro model used by the Federal Reserve Board since 1970 and the deposit forecast model of the Philadelphia Saving Fund Society (PSFS), the oldest and largest savings bank in the US. I find that economists failed to find timeless determinants for the market for savings deposits, partly because the determinants of expectation formation of households kept changing. Instead, economists relied on a large number of time-dependent dummy variables. Second, the article shows how the conditions of the market for savings deposits shaped the demand for macroeconomic forecast models. Here, I again use PSFS as a case study. I show that the demand for econometric models in the banking industry skyrocketed in the 1970s but abated somewhat in the 1980s. While the rising volatility led bank managers to seek sophisticated tools to predict deposit flows, the deregulation of the banking industry and the accompanying change in customer behavior devalued macro models as a reliable forecast technique for individual banks. Instead, it became crucial for banks to predict the future behavior of competing institutions.
    Keywords: Savings, Deposits, Interest Expectations, Portfolio Choice, Financial History, Econometric Modeling, Stagflation Period
    JEL: B23 N22
    Date: 2023
  11. By: Michael Dinerstein; Constantine Yannelis; Ching-Tse Chen
    Abstract: We evaluate the effects of the 2020 student debt moratorium that paused payments for student loan borrowers. Using administrative credit panel data, we show that the payment pause led to a sharp drop in student loan payments and delinquencies for borrowers subject to the debt moratorium, as well as an increase in credit scores. We find a large stimulus effect, as borrowers substitute increased private debt for paused public debt. Comparing borrowers whose loans were frozen with borrowers whose loans were not frozen due to differences in whether the government owned the loans, we show that borrowers used the new liquidity to increase borrowing on credit cards, mortgages, and auto loans rather than avoid delinquencies. The effects are concentrated among borrowers without prior delinquencies, who saw no change in credit scores, and we see little effects following student loan forgiveness announcements. The results highlight an important complementarity between liquidity and credit, as liquidity increases the demand for credit even as the supply of credit is fixed.
    JEL: G51 I22
    Date: 2023–05
  12. By: Makoto Okawara (Faculty of Economics, The University of Tokyo); Akihiko Takahashi (Faculty of Economics, The University of Tokyo)
    Abstract: The environment surrounding banks is becoming increasingly severe. Particularly, to prevent the next financial crisis, Basel III requires financial institutions to prepare higher levels of capitals by January 1st, 2028, and the financial stability board (FSB) suggests the risk appetite framework (RAF) as their internal risk management. Hence, efficient usage of their own capitals for banks is more important than ever to improve profitability. Under such circumstances, this paper is the first to consider an optimization problem for a typical loan portfolio of international banks under comprehensive risk constraints with realistic profit margins and funding costs to achieve an efficient capital allocation. Concretely, after taking concentration risks on large individual obligors into account, we obtain a loan portfolio that attains the maximum profit under Basel regulatory capital and loan market constraints, as well as internal management constraints, namely risk limits on business units and industrial sectors. Moreover, we separately calculate credit risk amounts of the internal constraints in terms of regulatory and economic capitals to compare the optimized profits. In addition, considering sharp increases in default probabilities of all obligors as in the global financial crisis, we perform a stress test on the optimization results to investigate the effects of changes in risk amounts and profits. As a result, we propose to unify risk constraints on the business units and industrial sectors by using credit risk amounts in terms of economic capitals.
    Date: 2023–05
  13. By: Mariarosaria Comunale; Petra de Bruxelles; Ms. Kalpana Kochhar; Juliette Raskauskas; Ms. Filiz D Unsal
    Abstract: Central banks, as the epitome of the economics profession and the main paragon of public institutions, can reveal key insights into gender patterns. We create a novel multidimensional survey directed at eight central banks in advanced economies (G7 national central banks and the European Central Bank), covering several aspects of gender, such as women’s participation at different seniority levels, employment trends, and human resources practices. These elements are summarized in a new comprehensive index of gender equality—Human Resources Gender Index (HRGI). We show that these central banks have room for improvement in the inclusion of women in economics professions, managerial positions, and with full time contracts. Women in central banking also face a gender pay gap. In comparison, International Financial Institutions (the International Monetary Fund, the World Bank Group, and the Organization for Economic Co-operation and Development) perform better in terms of gender equality. The HRGI index, hiring and promotion of women, and their contract types are associated with output and credit gaps, thus being of macro-critical importance. In return, some country characteristics can be related to gender equality, such as women in high-level positions, government effectiveness, and corruption.
    Keywords: Central banks; gender; human resources; inequality
    Date: 2023–05–05
  14. By: Efing, Matthias; Goldbach, Stefan; Nitsch, Volker
    Abstract: Using regulatory data, we study German bank lending in countries targeted by financial sanctions. We find that domestic banks in Germany reduce lending in sanctioned countries, whereas their foreign bank affiliates outside Germany increase lending. In some cases, this is because the bank affiliates’ host countries have not imposed sanctions themselves. However, even German bank affiliates in host countries that enact sanctions like Germany increase lending if these host countries lack strong institutions and anticrime policies. These findings suggest that even universally adopted sanctions distort bank capital flows and competition if the level of their enforcement varies across bank locations.
    Date: 2023
  15. By: Silvia Albrizio; Iván Kataryniuk; Luis Molina; Jan Schäfer
    Abstract: Central bank liquidity lines have gained momentum since the global financial crisis as a crosscurrency liquidity management tool. We provide a complete timeline of the ECB liquidity line announcements and study their signalling and spillback effects. The announcement of an ECB euro liquidity line decreases the premium paid by foreign agents to borrow euros in FX markets relative to currencies not covered by these facilities by 51 basis points. Consistent with a stylized model, bank equity prices increase by around 1.75% in euro area countries highly exposed via banking linkages to countries whose currencies are targeted by liquidity lines.
    Keywords: liquidity facilities; central bank swap and repo lines; spillbacks.
    Date: 2023–05–05
  16. By: Matthew S. Jaremski; David C. Wheelock
    Abstract: This paper provides quantitative evidence on interbank transmission of financial distress in the Panic of 1907 and ensuing recession. Originating in New York City, the panic led to payment suspensions and emergency currency issuance in many cities. Data on the universe of interbank connections show that i) suspension was more likely in cities whose banks had closer ties to banks at the center of the panic, ii) banks with such links were more likely to close in the panic and recession, and iii) banks responded to the panic by rearranging their correspondent relationships, with implications for network structure.
    JEL: E44 G21 N11 N12
    Date: 2023–05
  17. By: Jan Kakes; Jan Willem van den End
    Abstract: We present a metric for financial fragmentation in the Economic and Monetary Union (EMU), based on the higher moments of the distribution of sovereign spreads relative to macro-financial fundamentals. We apply fixed parameter and rolling regressions to allow for time variation in this relationship, while controlling for market sentiment. The metric shows that the observed moments of the spread distribution occasionally overshot the fundamentals-based benchmark until 2018. Since then, the moments of observed spreads have generally not exceeded the fundamentals-based moments, also not in the most recent period, despite the increase in interest rates. The latter may be attributed to backstop facilities of the European Central Bank (ECB), such as the Transmission Protection Instrument (TPI).
    Keywords: Monetary policy; Quantitative Easing; Sovereign risk; Sovereign spreads
    JEL: E52 E58 G12
    Date: 2023–05
  18. By: Policy, Monetary; Stability, Financial; Albertazzi, Ugo; Martin, Alberto; Assouan, Emmanuelle; Tristani, Oreste; Galati, Gabriele; Vlassopoulos, Thomas; Adolf, Petra; Kok, Christoffer; Altavilla, Carlo; Lewis, Vivien; Andreeva, Desislava; Lima, Diana; Brand, Claus; Musso, Alberto; Bussière, Matthieu; Nikolov, Kalin; Fahr, Stephan; Patriček, Matic; Fourel, Valère; Prieto, Esteban; Heider, Florian; Rodriguez-Moreno, Maria; Idier, Julien; Signoretti, Federico; Aban, Jorge; Busch, Ulrike; Ambrocio, Gene; Cassar, Alan; Balfoussia, Hiona; Chalamandaris, Dimitrios; Bonatti, Guido; Cuciniello, Vincenzo; Bonfim, Diana; Eller, Markus; Bouchinha, Miguel; Falagiarda, Matteo; Fernandez, Luis; Maddaloni, Angela; Garabedian, Garo; Mazelis, Falk; Geiger, Felix; Miettinen, Pavo; Grassi, Alberto; Nakov, Anton; Hristov, Nikolay; Obradovic, Goran; Ibas, Pelin; Papageorghiou, Maria; Ioannidis, Michael; Pogulis, Armands; Jan, Jansen David; Redak, Vanessa; Jovanovic, Mario; Velez, Anatoli Segura; Kakes, Jan; Tapking, Jens; Kempf, Alina; Valderrama, Maria; Klein, Melanie; Weigert, Benjamin; Licak, Marek; policy, Work stream on macroprudential
    Abstract: Since the European Central Bank’s (ECB’s) 2003 strategy review, the importance of macro-financial amplification channels for monetary policy has increasingly gained recognition. This paper takes stock of this evolution and discusses the desirability of further incremental enhancements in the role of financial stability considerations in the ECB’s monetary policy strategy. The paper starts with the premise that macroprudential policy, along with microprudential supervision, is the first line of defence against the build-up of financial imbalances. It also recognises that the pursuit of price stability through monetary policy, and of financial stability through macroprudential policy, are to a large extent complementary. Nevertheless, macroprudential policy may not be able to ensure financial stability independently of monetary policy, because of spillovers originating from the common transmission channels through which the two policies produce their effects. For example, a low interest rate environment can create incentives to engage in more risk-taking, or can adversely impact the profitability of financial intermediaries and hence their capacity to absorb shocks. The paper argues that the existence of such spillovers creates a conceptual case for monetary policy to take financial stability considerations into account. It then goes on to discuss what this conclusion might imply in practice for the ECB. One option would be to exploit the flexible length of the medium-term horizon over which price stability is to be achieved. Longer deviations from price stability could occasionally be tolerated, if they resulted in materially lower risks for financial stability and, ultimately, for future price stability. However, model-based quantitative analysis suggests that this approach may require impractically drawn-out periods of deviation from price stability and potentially result in a de-anchoring of inflation expectations. ... JEL Classification: E3, E44, G01, G21
    Keywords: financial frictions, Monetary policy, systemic risk
    Date: 2023–05
  19. By: Zucker Marques, Marina; Mühlich, Laurissa; Fritz, Barbara
    Abstract: The Global Financial Safety Net (GFSN) - the institutions and arrangements that provide short-term crisis finance - has turned into a highly complex, uncoordinated system of global, multilateral, and bilateral instruments. The present paper elaborates on a composite index of the GFSN to analyse its preparedness for shielding countries from financial crises. This first-of-its-kind index comprises six components that measure the vulnerability and resilience of individual countries to financial crises derived from economic and political economy financial crisis literature. We apply this index to data from 192 UN member countries we collected in the GFSN tracker for the period of the COVID-19 pandemic in terms of their asses to and use of the GFSN. This index, and the use of novel forms of graphical displaying, allow us to identify a hierarchy in the access to short-term liquidity by the GFSN. At the bottom, we find low-income countries with sole access to IMF standard conditional crisis finance, while we find at the top countries with access to bilateral currency swaps, especially those provided by the US Federal Reserve. Our analysis also reveals that first, the temporary reformed unconditional access of IMF crisis finance during the pandemic has temporarily improved those countries' position in the GFSN hierarchy; second, bilateral swaps as crisis finance instruments reinforce the GFSN hierarchy. Since access to adequate emergency liquidity is decisive for a country's financial crisis prevention capacity and the ability to engage in social cohesion and climate policy, we suggest to flatten the hierarchy by keeping access to IMF unconditional finance open beyond the COVID-19 crisis, expanding regional financial arrangements, and by coordinating GFSN elements, including currency swap providing central banks.
    Keywords: Global financial safety net, financial crisis, short-term crisis finance, IMF, central bank policies, regional financial arrangements
    Date: 2023
  20. By: Michael D. Bordo; John V. Duca
    Abstract: The rise of inflation in 2021 and 2022 surprised many macroeconomists who ignored the earlier surge in money growth because past instability in the demand for simple-sum monetary aggregates had made these aggregates unreliable indicators. We find that the demand for more theoretically-based Divisia aggregates can be modeled and that their growth rates provide useful information for future nominal GDP growth. Unlike M2 and Divisia-M2, whose velocities do not internalize shifts in liabilities across commercial and shadow banks, the velocities of broader Divisia monetary aggregates are more stable and can be reasonably empirically modeled in both the short run and the long run through the COVID-19 pandemic and to date. In the long run, these velocities depend on regulatory changes and mutual fund costs that affect the substitutability of money for other financial assets. In the short run, we control for swings in mortgage activity and use vaccination rates and an index of the stringency of government pandemic restrictions to control for the unusual effects of the pandemic. The velocity of broad Divisia money temporarily declines during crises like the Great and COVID Recessions, but later rebounds. In each recession monetary policy lowered short-term interest rates to zero and engaged in quantitative easing of about $4 trillion. Nevertheless, broad money growth was more robust in the COVID Recession, likely reflecting that the banking system was less impaired and could promote rather than hinder multiple deposit creation. Partly as a result, our framework implies that nominal GDP growth and inflationary pressures rebounded much more quickly from the COVID Recession versus the Great Recession. We consider different scenarios for future Divisia money growth and the unwinding of the pandemic that have different implications for medium-term nominal GDP growth and inflationary pressures as monetary policy tightening seeks to restore low inflation.
    Keywords: Velocity; monetary services index; Divisia; liquidity; money; shadow banks; mutual funds
    JEL: E51 E41 E52 E58
    Date: 2023–05–25
  21. By: Benedict Guttman-Kenney; Jesse Leary; Neil Stewart
    Abstract: We find it is common for consumers who are not in financial distress to make credit card payments at or close to the minimum. This pattern is difficult to reconcile with economic factors but can be explained by minimum payment information presented to consumers acting as an anchor that weighs payments down. Building on Stewart (2009), we conduct a hypothetical credit card payment experiment to test an intervention to de-anchor payment choices. This intervention effectively stops consumers selecting payments at the contractual minimum. It also increases their average payments, as well as shifting the distribution of payments. By de-anchoring choices from the minimum, consumers increasingly choose the full payment amount - which potentially seems to act as a target payment for consumers. We innovate by linking the experimental responses to survey responses on financial distress and to actual credit card payment behaviours. We find that the intervention largely increases payments made by less financially-distressed consumers. We are also able to evaluate the potential external validity of our experiment and find that hypothetical responses are closely related to consumers' actual credit card payments.
    Date: 2023–05
  22. By: Jookyung Ree
    Abstract: This paper reflects on the first year of the eNaira—the first CBDC in Africa. Despite the laudable undisrupted operation for the first full year, the CBDC project has not yet moved beyond the initial wave of limited adoption. Network effects suggest the initial low adoption spell will require a coordinated policy drive to break it. The eNaira’s potential in financial inclusion requires a strategy to set the right relationship with mobile money, given the former’s potential to either complement or substitute the latter. Cost savings from integrating CBDC—as a bridge vehicle—in the remittance process may also be substantial.
    Keywords: Central Bank Digital Currency; financial inclusion; remittance; blockchain; mobile money
    Date: 2023–05–16
  23. By: Ozge Akinci; Gianluca Benigno; Marco Del Negro; Ethan Nourbash; Albert Queraltó
    Abstract: In a recent research paper we argue that interest rates have very different consequences for current versus future financial stability. In the short run, lower real rates mean higher asset prices and hence higher net worth for financial institutions. In the long run, lower real rates lead intermediaries to shift their portfolios toward risky assets, making them more vulnerable over time. In this post, we use a model to highlight the challenging trade-offs faced by policymakers in setting interest rates.
    Keywords: financial stability; monetary policy; Dynamic Stochastic General Equilibrium (DSGE) models; rates; nonlinear responses; shocks; fire sale
    JEL: E2 E5 E4 G2
    Date: 2023–05–23
  24. By: OGURA Yoshiaki; UESUGI Iichiro; IWAKI Hiromichi
    Abstract: In 2008, a government policy bank in Japan expanded its provision of unsecured loans, with many small and medium-sized enterprises subsequently switching from secured to unsecured loans. In this paper, we examine the determinants of firm choice and impacts of these unsecured loans to better understand the distortional effects of any collateral constraints that previously existed in the Japanese economy. Using propensity score matching analysis and instrumental variable regression, we reveal the following. First, younger and growing firms with fewer tangible assets use unsecured loans more intensively. Second, firms choosing unsecured loans increase their investment in intangible assets, including organizational capital. Third, unsecured loan users grew faster than secured loan users, although their credit ratings also deteriorated to some extent. Lastly, the impact of unsecured loans on firm productivity is neutral. Overall, the intrafirm asset reallocation from tangible to intangible assets among unsecured loan users highlights the distortionary effects of collateral constraints.
    Date: 2023–05
  25. By: Giampaolo Bonomi; Ali Uppal
    Abstract: We develop a simple game-theoretic model to determine the consequences of explicitly including financial market stability in the central bank objective function, when policymakers and the financial market are strategic players, and market stability is negatively affected by policy surprises. We find that the inclusion of financial sector stability among the policy objectives can induce an inefficiency, whereby market anticipation of policymakers' goals biases investment choices. When the central bank has private information about its policy intentions, the equilibrium communication is vague, because fully informative communication is not credible. The appointment of a ``kitish'' central banker, who puts little weight on market stability, reduces these inefficiencies. If interactions are repeated, communication transparency and overall efficiency can be improved if the central bank punishes any abuse of market power by withholding forward guidance. At the same time, repeated interaction also opens the doors to collusion between large investors, with uncertain welfare consequences.
    Date: 2023–05
  26. By: Pedro Gomis-Porqueras; Romina Ruprecht; Xuan Zhou
    Abstract: We construct a Financial Stress Index (FSI) for a small open economy, which aims to provide clear and timely signals of financial market strains. This can be used in developing appropriate responses to address these adverse events. To do so, we use the principal component framework and apply it to Australian monthly data on interest rates, spreads, exchange rates, house price growth and inflation expectations. Decomposing the index into foreign and domestic components, we find that the foreign factors can explain more than half (57.4%) of our Australian Financial Stress Index (AFSI). To determine the information content of our index, we run a series of Granger causality tests on several economic and financial observables. We also estimate whether including the AFSI can improve the prediction of the different economic and financial outcomes relative to a specification that uses only its own previous data. We find that including the AFSI improves the forecasts for future retail sales growth and bank credit growth. Finally, we show that financial stress can have non-linear effects on bank credit growth. In particular, an increase in financial stress affects credit growth more adversely if AFSI is high. This result further highlights the importance of an accurate and timely measure of financial stress in an economy for researchers and policy makers.
    Keywords: Financial stress index; Financial stability; Small open economies
    JEL: F30 G01 G15
    Date: 2023–05–05
  27. By: Santoni, Alessandro; Rossignol, Ghislain; Akhouen, Richard
    Abstract: This article focuses on some of the operational aspects of winding down a bank’s trading book portfolio and discusses the hidden exit costs that can sometimes exist. The article provides a deep dive on valuation principles and exit strategies currently considered by industry practitioners when designing a solvent wind-down plan. It also provides the reader with an overview of key underpinning valuation or pricing concepts, such as ‘fair value’, ‘realisable value’ and ‘solvent wind-down (SWD) value’. JEL Classification: G12, G13, G14, G15, G17, G18, G32, G33, G34
    Keywords: bank’s trading book, crisis management, fair value, market risk, realisable value, recovery plan, resolution plan, solvent wind-down, solvent wind-down value
    Date: 2023–05
  28. By: Carola Binder; Pei Kuang; Li Tang
    Abstract: We study how US consumers’ house price expectations respond to verbal and non-verbal communication about interest rate changes using several large online surveys. Verbal communication about interest rate hikes leads to little response of average house price expectations but large heterogeneity among household groups. Communication about rate hikes combined with a simple explanation of the mortgage rate channel causes large downward revisions to house price expectations. Consumers interpret heterogeneously Chair Powell’s voice tone and body language at the press conference which significantly influence their house price expectations. More negative evaluations are associated with larger upward revisions to house price expectations.
    JEL: E30 E31 E52 E7
    Date: 2023–05
  29. By: Silvia Marchesi; Giovanna Marcolongo
    Abstract: This paper investigates the link between financial crises in developing countries and variation of bank deposits in offshore financial centers. Using both a two way fixed effects and a stacked difference-in-differences estimator, we find that after three years since the beginning of the crisis bank deposits in tax havens increase by about 20 percent. The effect does not depend on taxation and seems driven by countries with more fragile institutions. We add to the literature on the effects of tax havens: they not only facilitate tax evasion and corruption in "normal times", but also absorb resources during financial crises, when most needed.
    Keywords: Sovereign debt crisis, Financial Crisis, Offshore accounts.
    JEL: D73 F34 G15 H63 P16
    Date: 2023–04
  30. By: Nikolaus Bartzsch (Deutsche Bundesbank); Marco Brandi (Banca d'Italia); Lucas Devigne (Banque de France); Raymond de Pastor (Banque de France); Gianluca Maddaloni (Banca d'Italia); Diana Posada Restrepo (Banco de España); Gabriele Sene (Banca d'Italia)
    Abstract: As part of the Eurosystem’s annual banknote production planning, the national central banks draw up forecasts estimating the volumes of national-issued banknotes in circulation for the three years ahead. As at the end of 2021, more than 80 per cent of euro banknotes in circulation (cumulated net issuance) had been issued by the national central banks of France, Germany, Italy and Spain (‘4 NCBs’). To date, the 4 NCBs have been using ARIMAX models to forecast the banknotes issued nationally in circulation by denomination (‘benchmark models’). This paper presents the structural time series models developed by the 4 NCBs as an additional forecasting tool. The forecast accuracy measures used in this study show that the structural time series models outperform the benchmark models currently in use at each of the 4 NCBs for most of the denominations. However, it should be borne in mind that the statistical informative value of this comparison is limited by the fact the projection period is only twelve months.
    Keywords: euro, demand for banknotes, forecast of banknotes in circulation, structural time series models, ARIMA models, intervention variables
    JEL: C22 E41 E47 E51
    Date: 2023–05
  31. By: Warning, Hans Olaf; Grömling, Michael; Schulke, Arne
    Abstract: The beginning of the year 2023 is marked by continued economic instability, some of it still lingering from economic ramifications of the COVID-19 pandemic, some brought on by the war in Ukraine, high energy prices and other more regional factors. For businesses of all shapes and sizes, this poses major challenges in terms of predicting demand, managing performance and supply chains, and ensuring financial stability at the same time - in an environment of steeply declining interest rates and a looming shortage of credit supply. In four parts grouped along the supply chain and the inverse chain of cash movements within a company, this paper seeks to make a case for the importance of liquidity management as a general management discipline rather than a specialized Accounting function. It promotes a broader understanding of the discipline and its rooting in a cross-functional manner in the hearts and minds of managerial staff throughout the entire organization.
    Keywords: Working capital, cash management, liquidity expansion
    JEL: M10 M19 R41
    Date: 2023
  32. By: Surender Kumar (Department of Economics, Delhi School of Economics); Paramjit Author-Department of Economics, Delhi School of Economics
    Abstract: The Government of India has taken several initiatives to enhance financial inclusion in the country. It is hypothesized that financial inclusion augments tax revenue through increased business development and private consumption. This paper uses panel data structural break methods to comprehend the effectiveness of the schemes launched in the last decade. It also estimates a causal relationship between tax revenue and financial inclusion using the dynamic Generalised Method of Moments (GMM). The study finds structural breaks in the relationship between tax revenue and deposit or credit account rates in 2014, which concurs with the launch of PMJDY. The PM MUDRA scheme was launched in 2015, and the 95% confidence level in the estimated structural breaks was in the period of [2013 2015]. These structural breaks reveal the effectiveness of the recent financial inclusion steps taken by the Indian government. Another significant finding is that all the pre-break and post-break coefficients of financial inclusion indicators are statistically significant that reflect the effectiveness of the policies in meeting the targeted objectives. The government should strengthen the ongoing measures of financial inclusion for eliminating financial untouchability and augmenting states’ fiscal capacity. Key Words: Financial inclusion, Tax-revenue-SGDP ratio, Structural breaks; PMJDY, PM MUDRA JEL Classification: C13; O16; G21; G28, G15
    Date: 2023–05
  33. By: Agam Shah; Suvan Paturi; Sudheer Chava
    Abstract: Monetary policy pronouncements by Federal Open Market Committee (FOMC) are a major driver of financial market returns. We construct the largest tokenized and annotated dataset of FOMC speeches, meeting minutes, and press conference transcripts in order to understand how monetary policy influences financial markets. In this study, we develop a novel task of hawkish-dovish classification and benchmark various pre-trained language models on the proposed dataset. Using the best-performing model (RoBERTa-large), we construct a measure of monetary policy stance for the FOMC document release days. To evaluate the constructed measure, we study its impact on the treasury market, stock market, and macroeconomic indicators. Our dataset, models, and code are publicly available on Huggingface and GitHub under CC BY-NC 4.0 license.
    Date: 2023–05
  34. By: René M. Stulz
    Abstract: This paper assesses the current state of knowledge about crisis risk and its implications for risk management. Better data that became available since the Global Financial Crisis (GFC) has improved our understanding of crisis risk. These data have been used to show that some types of crises become predictable when one accounts for interactions between risks. Specifically, a financial crisis is much more likely in the years following both high credit growth and high asset valuations. However, some other types of crises do not seem predictable. There is no evidence that the frequency of economic and financial crises is increasing. The existing data show that political crises make economic crises more likely, so that, as suggested by the concept of polycrisis, feedback between non-economic crises and economic crises can be important, but there is no comparable evidence for climate events. Strategies that increase firm operational and financial flexibility appear successful at reducing the adverse impact of crises on firms.
    JEL: G01 G21 G32
    Date: 2023–05
  35. By: G.M. Gallo; D. Lacava; E. Otranto
    Abstract: Central Banks interventions are frequent in response to any endogenous and/or exogenous exceptional events (in the last two decades, subprime mortgage crisis, the Covid-19 pandemic, and the recent high inflation), with direct implications on financial market volatility. In this paper, we propose a new model in the class of Multiplicative Error Models (MEM), the Asymmetric Jump MEM (AJM), which accounts for a specific jump component of volatility within an intradaily framework (thirty minute intervals), while preserving the flexibility and the ability of the MEM to reproduce the empirical regularities characterizing volatility. Taking the actions of the US Federal Reserve (Fed) as a reference, we introduce a new model–based classification of monetary policy announcements according to their impact on the jump component of realized volatility. Focusing on a short window following each Fed's communication, we isolate the impact of monetary announcements by excluding any contamination carried by relevant events that may occur within the same announcement day. By considering specific tickers, our classification method provides useful information for both policy makers and investors about the impact of monetary announcements on specific sectors of the market.
    Keywords: Financial markets;realized volatility;Significant jumps;Monetary policy an- nouncements;Multiplicative Error Model
    Date: 2023
  36. By: Pablo Guerrón-Quintana; Alexey Khazanov; Molin Zhong
    Abstract: Through the lens of a nonlinear dynamic factor model, we study the role of exogenous shocks and internal propagation forces in driving the fluctuations of macroeconomic and financial data. The proposed model 1) allows for nonlinear dynamics in the state and measurement equations; 2) can generate asymmetric, state-dependent, and size-dependent responses of observables to shocks; and 3) can produce time-varying volatility and asymmetric tail risks in predictive distributions. We find evidence in favor of nonlinear dynamics in two important U.S. applications. The first uses interest rate data to extract a factor allowing for an effective lower bound and nonlinear dynamics. Our estimated factor coheres well with the historical narrative of monetary policy. We find that allowing for an effective lower bound constraint is crucial. The second recovers a credit cycle. The nonlinear component of the factor boosts credit growth in boom times while hinders its recovery post-crisis. Shocks in a credit crunch period are more amplified and persist for longer compared with shocks during a credit boom.
    Keywords: Interest rates; Effective lower bound; Credit cycle; Asymmetric dynamics; Predictive distributions; Tail risk
    JEL: E51 C51 E43
    Date: 2023–05–05
  37. By: KAMKOUM, Arnaud Cedric
    Abstract: This paper examines the monetary policies the Federal Reserve implemented in response to the Global Financial Crisis. More specifically, it analyzes the Federal Reserve’s quantitative easing (QE) programs, liquidity facilities, and forward guidance operations conducted from 2007 to 2018. The essay’s detailed examination of these policies culminates in an interrupted time-series (ITS) analysis of the long-term causal effects of the QE programs on U.S. inflation and real GDP. The results of this formal design-based natural experimental approach show that the QE operations positively affected U.S. real GDP but did not significantly impact U.S. inflation. Specifically, it is found that, for the 2011Q2-2018Q4 post-QE period, real GDP per capita in the U.S. increased by an average of 231 dollars per quarter relative to how it would have changed had the QE programs not been conducted. Moreover, the results show that, in 2018Q4, ten years after the beginning of the QE programs, real GDP per capita in the U.S. was 14% higher relative to what it would have been during that quarter had there not been the QE programs. These findings contradict Williamson’s (2017) informal natural experimental evidence and confirm the conclusions of VARs and new Keynesian DSGE models that the Federal Reserve’s QE policies positively affected U.S. real GDP. The results suggest that the current U.S. and worldwide high inflation rates are likely not because of the QE programs implemented in response to the financial crisis that accompanied the COVID-19 pandemic. They are likely due to the unprecedentedly large fiscal stimulus packages used, the peculiar nature of the financial downturn itself, the negative supply shocks from the war in Ukraine, or a combination of these factors. To the best of my knowledge, this paper is the first study to measure the macroeconomic effects of QE using a design-based natural experimental approach.
    Keywords: Federal Reserve System; monetary policy; quantitative easing (QE); Global Financial Crisis; interrupted time-series (ITS) analysis; natural experiment; Great Recession; unconventional monetary policies; quasi-quantitative easing (qQE); quantitative tightening (QT); quasi-quantitative tightening (qQT); CPI inflation; Williamson (2017)
    JEL: C10 C22 E52 E58 G01
    Date: 2023–05–20
  38. By: Jasmina Arifovic (Simon Fraser University); Isabelle Salle (University of Ottawa); Hung Truong (Simon Fraser University)
    Abstract: Price-level targeting (PLT) is optimal under the fully-informed rational expectations (FIRE) benchmark but lacks empirical support. Given the hurdles to the implementation of macroeconomic field experiments, we utilize a laboratory group experiment – where expectations are elicited from human subjects – to collect data on expectations, inflation and output dynamics under a traditional inflation targeting (IT) framework and a PLT regime with both deflationary and cost-push shocks. We then emulate the subjects’ expectations with a micro-founded heterogeneous-expectation New Keynesian (HENK) model and reproduce the macroeconomic dynamics observed in the lab. Both in the lab and in the HENK model, the benefits of PLT over an IT regime obtained under the FIRE assumption are not observed: both human subjects and HENK agents are unable to learn the underlying implications of PLT, which results in excess macroeconomic volatility. However, once augmented with an inflation guidance from the CB consistent with closing the price gap, the stabilizing benefits of PLT materialize both in the lab and in the model.
    Keywords: heterogeneous expectations, learning, central bank communication, lab experiments
    JEL: E7 E52 E42 C92
    Date: 2023–05–12
  39. By: Mr. Etibar Jafarov; Enrico Minnella
    Abstract: Extended periods of ultra-easy monetary policy in advanced economies have rekindled debates about the zombification of weak companies and its impact on resource allocation, economic growth, inflation, and financial stability. Using both firm-level and macroeconomic data, we find that recessions are a critical factor in the rapid increase in the number of zombie firms. Expansionary monetary policy can help reduce zombification when interest rates are at the zero lower bound (ZBL), but a too-accommodative monetary policy for extended periods is associated with a higher probability of zombification. Small and medium enterprises are more likely to become zombie firms. This raises concerns about the sustainability of too-easy monetary policy implementation, especially in countries where growth is lackluster. Our findings imply a tradeoff between conducting a countercyclical monetary policy, which also helps contain the increase in the number of zombie firms in cyclical downturns, and using an expansionary monetary policy for long periods, which may lead to a combination of low interest rates, low growth, and high financial vulnerability. Such a tradeoff is not a concern currently when most countries are tightening their monetary policy stance, but policymakers should be mindful of it during future recessions.
    Keywords: Too Low for Too Long; Zombie Firms; Financial Stability
    Date: 2023–05–19
  40. By: Luca Benzoni; Christian Cabanilla; Alessandro Cocco; Cullen Kavoussi
    Abstract: As the debt ceiling episode unfolds, we highlight a sharp increase in trading activity and liquidity in the U.S. credit default swaps (CDS) market, as well as a spike in U.S. CDS premiums. Compared with the periods leading up to the 2011 and 2013 debt ceiling episodes, we show that elevated CDS spreads in the current environment are partially explained by the cheapening of deliverable Treasury collateral to CDS contracts. We infer the likelihood of a U.S. default from these CDS premiums, and estimate an increase in the market-implied default probability from about 0.3–0.4% in 2022, to around 4% in April 2023, which is lower than it was in July 2011 and about where it was in October 2013. Finally, we document changes in Treasury bills trading activity as market participant update their expectations for a U.S. default.
    JEL: E32 E43 E44 G10 G12 G18 G28
    Date: 2023–05–17
  41. By: Tristan Le Cotty (CIRED - Centre International de Recherche sur l'Environnement et le Développement - Cirad - Centre de Coopération Internationale en Recherche Agronomique pour le Développement - EHESS - École des hautes études en sciences sociales - AgroParisTech - ENPC - École des Ponts ParisTech - Université Paris-Saclay - CNRS - Centre National de la Recherche Scientifique); Élodie Maître D’hôtel (UMR MoISA - Montpellier Interdisciplinary center on Sustainable Agri-food systems (Social and nutritional sciences) - Cirad - Centre de Coopération Internationale en Recherche Agronomique pour le Développement - IRD - Institut de Recherche pour le Développement - CIHEAM-IAMM - Centre International de Hautes Etudes Agronomiques Méditerranéennes - Institut Agronomique Méditerranéen de Montpellier - CIHEAM - Centre International de Hautes Études Agronomiques Méditerranéennes - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - Institut Agro Montpellier - Institut Agro - Institut national d'enseignement supérieur pour l'agriculture, l'alimentation et l'environnement, Cirad-ES - Département Environnements et Sociétés - Cirad - Centre de Coopération Internationale en Recherche Agronomique pour le Développement); Issoufou Porgo (MRA - Ministère des Ressources Animales); Julie Subervie (CEE-M - Centre d'Economie de l'Environnement - Montpellier - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - Institut Agro Montpellier - Institut Agro - Institut national d'enseignement supérieur pour l'agriculture, l'alimentation et l'environnement - UM - Université de Montpellier); Raphaël Soubeyran (CEE-M - Centre d'Economie de l'Environnement - Montpellier - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - Institut Agro Montpellier - Institut Agro - Institut national d'enseignement supérieur pour l'agriculture, l'alimentation et l'environnement - UM - Université de Montpellier)
    Abstract: Inventory credit is being developed in several Sahelian countries. This device is implemented by a farmers' organisation and a financial institution. It consists in storing a portion of harvested grain in a warehouse for several months in exchange for an individual loan. Without this loan, farmers tend to sell their grain immediately after harvesting in order to pay off their debts or to meet their needs. The consequence is that families subsequently struggle to get through the lean season – the transition period between the depletion of food stocks and the new harvest – and to invest in their agricultural production systems. An impact assessment study conducted in western Burkina Faso shows that inventory credit increases food availability in the lean season and boosts agricultural investment and production. To accelerate its development, three conditions must be met: providing access to suitable storage facilities; ensuring the quality of products stored; and building trust between financial institutions, producers' organisations and traders. The latter condition is undermined by the expansion of armed conflicts in the Sahel.
    Date: 2023
  42. By: Stefano Di Bucchianico; Antonino Lofaro
    Abstract: In most countries, recurrent crises episodes due to financial disorder, the pandemic, and the recent war have increased income and wealth inequality. Moreover, since the 2008 crisis, major central banks have adopted highly expansionary conventional and unconventional monetary policies. Thus, attention towards the connection between monetary policy and inequality is surging. However, first, there is no consensus in the empirical literature on what the impact of monetary policy shocks on inequality is. Second, the literature is mainly focused on the effects of monetary policy on personal rather than functional income distribution. Third, the conventional hypothesis is for monetary policy to have at most an impact over the cycle but not in the long-run. Therefore, our work grounds on three objectives. First, we tackle the role of monetary policy in shaping functional income distribution by looking at the long-run behavior of real wages and the labor share of income. Second, we employ for the first time a panel SVAR methodology to a new panel dataset of 15 advanced economies during the 1970-2019 period. Third, differently from extant literature, we pose special attention to the so called ‘cost’ and ‘labor market’ channels of monetary policy. According to our results, a contractionary monetary policy shocks generates long-run adverse effects on the level of real wages. While the labor share initially rises because of the fall in GDP, the subsequent pronounced fall in real wages lets the labor share fall back to the pre-shock level.
    Keywords: Monetary policy; functional income distribution; Panel SVAR; labor share; income inequality
    JEL: E24 E52 E58
    Date: 2023–05
  43. By: Jonathan Hambur; Qazi Haque
    Abstract: We examine the effects of three facets of monetary policy in Australia using high-frequency yield changes around RBA announcements: current policy; signalling/forward guidance; and changes in premia. Shocks to current policy have similar effects to those identified using conventional approaches, but the effects of signalling and premia shocks are imprecisely estimated. Still, the approach provides evidence that: forward guidance shocks raised future rate expectations in the mid-2010s as the RBA highlighted housing risks; Covid-era policy mainly affected term premia, unlike pre-COVID policy; shocks to the expected path of rates are predictable, suggesting markets misunderstand the RBA’s reaction to data.
    Keywords: high-frequency data, affine term structure model, multidimensional policy shocks, monetary policy transmission
    JEL: E43 E52 E58 C58
    Date: 2023–06
  44. By: Irena Barja\v{s}i\'c; Stefano Battiston; Vinko Zlati\'c
    Abstract: Credit Valuation Adjustment captures the difference in the value of derivative contracts when the counterparty default probability is taken into account. However, in the context of a network of contracts, the default probability of a direct counterparty can depend substantially on the default probabilities of indirect counterparties. We develop a model to clarify when and how these network effects matter for CVA, in particular in the presence of correlation among counterparties defaults. We provide an approximate analytical solution for the default probabilities. This solution allows for identifying conditions on key parameters such as network degree, leverage and correlation, where network effects yield large differences in CVA (e.g. above 50%), and thus relevant for practical applications. Moreover, we find evidence that network effects induce a multi-modal distribution of CVA values.
    Date: 2023–05
  45. By: Riza Demirer (Department of Economics & Finance, Southern Illinois University Edwardsville, Alumni Hall 3145, Edwardsville IL, 62026-1102, USA); David Gabauer (Data Analysis Systems, Software Competence Center Hagenberg, Hagenberg, Austria); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Joshua Nielsen (Boulder Investment Technologies, LLC, 1942 Broadway Suite 314C, Boulder, CO, 80302, USA)
    Abstract: This paper examines the predictability of bubbles across global stock markets and whether or not synchronicity in bubble formation across markets can be predicted via metrics of market risk that are readily available. Utilizing the gold to platinum price ratio (LGP) as an easy to implement risk metric and the Log-Periodic Power Law Singularity (LPPLS) model to detect positive and negative bubble formation at different time scales, we document evidence of synchronized boom and bust cycles of the seven developed equity markets in the G7 bloc. More importantly, our analysis shows that bubbles and their comovements are predictable by the gold to platinum price ratio although the predictive relationship is only detectible via models that account for non-linearities in the data. We find that predictability is generally stronger for negative bubbles than their positive counterparts and the predictive impact of LGP is strongest for the long-term for negative bubbles, while it is strongest in the short-run for positive bubbles, meaning that the gold to platinum price ratio serves as a more robust predictor of deeper downward accelerating price formations followed by a rally. The predictability results for the U.S. also carries over to bubble formation in the remaining stock markets of the G7 bloc, to the extent that the gold to platinum price ratio also helps to explain the synchronicity of bubbles across the G7. Our findings provide a valuable opening for market regulators as the results show that readily available metrics of market risk can be used to model and monitor the occurrence of bubbles in financial markets as well as the connectedness of bubbles across the global markets.
    Keywords: Multi-Scale Positive and Negative Bubbles, Gold-to-Platinum Price-Ratio, Nonparametric Causality-in-Quantiles Test, G7
    JEL: C22 G15 Q02
    Date: 2023–05
  46. By: Margaret M. Jacobson; Eric M. Leeper; Bruce Preston
    Abstract: When Roosevelt abandoned the gold standard in April 1933, he converted government debt from a tax-backed claim to gold to a claim to dollars, opening the door to unbacked fiscal expansion. Roosevelt followed a state-contingent fiscal rule that ran nominal-debt-financed primary deficits until the price level rose and economic activity recovered. Theory suggests that government spending multipliers can be substantially larger when fiscal expansions are unbacked than when they are tax-backed. VAR estimates using data on "emergency" unbacked spending and "ordinary" backed spending confirm this prediction and find that primary deficits made quantitatively important contributions to raising both the price level and real GNP after 1933. VAR evidence does not support the conventional monetary explanation that gold revaluation and gold inflows, which raised the monetary base, drove the recovery independently of fiscal actions.
    Keywords: Great depression; Monetary-fiscal interactions; Monetary policy; Fiscal policy; Government debt
    JEL: E31 E52 E62 E63 N12
    Date: 2023–05–12
  47. By: Agam Shah; Sudheer Chava
    Abstract: Recently large language models (LLMs) like ChatGPT have shown impressive performance on many natural language processing tasks with zero-shot. In this paper, we investigate the effectiveness of zero-shot LLMs in the financial domain. We compare the performance of ChatGPT along with some open-source generative LLMs in zero-shot mode with RoBERTa fine-tuned on annotated data. We address three inter-related research questions on data annotation, performance gaps, and the feasibility of employing generative models in the finance domain. Our findings demonstrate that ChatGPT performs well even without labeled data but fine-tuned models generally outperform it. Our research also highlights how annotating with generative models can be time-intensive. Our codebase is publicly available on GitHub under CC BY-NC 4.0 license.
    Date: 2023–05
  48. By: Mohamed Adaskou (FSJES - Faculté des sciences juridiques économiques et sociales d’Agadir); Abdelkarim Hssoune (FSJES - Faculté des sciences juridiques économiques et sociales d’Agadir)
    Abstract: This article examines the determinants of demand for microcredit by small family farms in the Chtouka-Ait-Baha province of Morocco. The study was conducted with 296 farmers using a stratified sampling method.The data was analyzed using Logit model. The results show that socioeconomic characteristics such as income, facing usury interest and proximity to microcredit association (MCA) have a negative and significant relationship with the probability of microcredit demand. However, credit information and engagement in non-agricultural activities have a positive and significant relationship with the probability of microcredit demand. With regard to the intrinsic characteristics of small family farms, the study shows a negative relationship between the number of cattle and the available surface area with the probability of microcredit demand, and a positive relationship between the cultivated area and microcredit demand. This article recommends the implementation of financial products that are better suited to the needs of small family farms and a better structuring of the agricultural sector to improve access to financing and encourage diversification of activities. These recommendations can strengthen the role of microcredit associations in financing small family farms in Morocco and contribute to the economic and social development of rural areas.
    Abstract: Cet article examine les déterminants de la demande de microcrédit par les petits exploitants agricoles familiaux dans la province Chtouka-Ait-Baha au Maroc. L'étude a été menée auprès de 296 exploitants agricoles en utilisant une méthode de sondage stratifiée. Les données ont été analysées à l'aide d'un modèle Logit. Les résultats montrent que les caractéristiques socioéconomiques telles que le revenu, la confrontation de l'intérêt à l'usure et la proximité de l'Association de microcrédit (AMC) ont une relation négative et significative avec la probabilité de demande de microcrédit. Cependant, l'information sur le crédit et l'exercice d'une activité non agricole ont une relation positive et significative avec la probabilité de demande de microcrédit. En ce qui concerne les caractéristiques intrinsèques des petites exploitations agricoles familiales, l'étude montre une relation négative entre le nombre de bovins et la superficie disponible avec la probabilité de demande de microcrédit, et une relation positive entre la superficie cultivée et la demande de microcrédit. L'article recommande la mise en place de produits financiers plus adaptés aux besoins des petites exploitations familiales et une meilleure structuration du secteur agricole pour améliorer l'accès aux financements et encourager la diversification des activités. Ces recommandations peuvent renforcer le rôle des associations de microcrédit dans le financement des petites exploitations agricoles familiales au Maroc et contribuer ainsi au développement économique et social des zones rurales.
    Keywords: Chtouka-Ait-Baha, determinant, logit model, microcredit, small family farm, déterminant, microcrédit, modèle logit, petite exploitation familiale
    Date: 2023–04–16

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