nep-ban New Economics Papers
on Banking
Issue of 2023‒06‒26
forty-one papers chosen by
Sergio Castellanos-Gamboa, Tecnológico de Monterrey

  1. The monetary and macroprudential policy framework in Colombia in the last 30 years: the lessons learnt and the challenges for the future By Javier G. Gómez-Pineda; Andrés Murcia; Wilmar Alexander Cabrera-Rodríguez; Hernando Vargas-Herrera; Leonardo Villar-Gómez
  2. Female access to finance: A survey of literature By Pavlova, Elitsa; Gvetadze, Salome
  3. Bank private information in CDS markets By Bilan, Andrada; Ongena, Steven; Pancaro, Cosimo
  4. Asset prices, collateral and bank lending: the case of Covid-19 and real estate By Horan, Aoife; Jarmulska, Barbara; Ryan, Ellen
  5. From Policy to Regime: the changing posture of the ECB between liquidity and collateral through the lens of Monetary Regime By Giordano, Matteo; Goghie, Alexandru-Stefan
  6. What Is “Outlook-at-Risk?” By Nina Boyarchenko; Richard K. Crump; Leonardo Elias; Ignacio Lopez Gaffney
  7. Destabilizing digital "bank walks" By Koont, Naz; Santos, Tano; Zingales, Luigi
  8. Financial Vulnerability and Macroeconomic Fragility By Ozge Akinci; Gianluca Benigno; Marco Del Negro; Ethan Nourbash; Albert Queraltó
  9. Network Topology in Decentralized Finance By Saengchote, K; Castro-Iragorri, C
  10. EOn the Effectiveness of Foreign Exchange Reserves during the 2021-22 U.S. Monetary Tightening Cycle. By Rashad Ahmed; Joshua Aizenman; Jamel Saadaoui; Gazi Salah Uddin
  11. Primary agricultural cooperatives in Malawi: Structure, conduct, and performance By Davis, Kristin; Kazembe, Cynthia; Benson, Todd; De Weerdt, Joachim; Duchoslav, Jan
  12. Long-term debt propagation and real reversals By Drehmann, Mathias; Juselius, Mikael; Korinek, Anton
  13. Competition and risk taking in local bank markets: evidence from the business loans segment By Canta, Chiara; Nilsen, Øivind A.; Ulsaker, Simen A.
  14. Central bank communication and trust: an experimental study on the European Central Bank and the general public By Mochhoury, Sarah
  15. Decomposing the Monetary Policy Multiplier By Pietro Alessandrini; Òscar Jordà; Fabrizio Venditti
  16. Banks’ Balance-Sheet Costs and ON RRP Investment By Gara Afonso; Catherine Huang; Marco Cipriani; Gabriele La Spada
  17. Should inequality factor into central banks’ decisions? By Niels-Jakob H. Hansen; Alessandro Lin; Rui C. Mano
  18. The digital euro: A precautionary device, not a deus ex machina By Angeloni, Ignazio
  19. A Monetary Equilibrium with the Lender of Last Resort By Tarishi Matsuoka; Makoto Watanabe
  20. Post-COVID Inflation & the Monetary Policy Dilemma: An Agent-Based Scenario Analysis By Max Sina Knicker; Karl Naumann-Woleske; Jean-Philippe Bouchaud; Francesco Zamponi
  21. Money and output asymmetry: The Unintended consequences of central banks' obsession with inflation By Taniya Ghosh; Abhishek Gorsi
  22. The Credit Suisse CoCo Wipeout: Facts, Misperceptions, and Lessons for Financial Regulation By Patrick Bolton; Wei Jiang; Anastasia V. Kartasheva
  23. Swiss National Bank: Is the recent loss a threat to monetary policy? A research note By Kämpf, Vanessa; Stadtmann, Georg; Zimmermann, Lilli
  24. What Drove Racial Disparities in the Paycheck Protection Program? By Sergey V. Chernenko; Nathan Kaplan; Asani Sarkar; David Scharfstein
  25. Stablecoins: Adoption and Fragility By Bertsch, Christoph
  26. Targeted Reserve Requirements for Macroeconomic Stabilization By Zheng Liu; Mark M. Spiegel; Jingyi Zhang
  27. Media Treatment of Monetary Policy Surprises and Their Impact on Firms’ and Consumers’ Expectations By Julien Pinter; Evžen Kocenda
  28. Fed Communication, News, Twitter, and Echo Chambers By Bennett Schmanski; Chiara Scotti; Clara Vega
  29. Determinants of Inflation Targeting: A Survey of Empirical Literature By Petrevski, Goran
  30. Has the reaction function of the European Central Bank changed over time? By Tatar, Balint
  31. Effectiveness of the Interest Rate Channel of Monetary Policy Transmission Mechanism in Sierra Leone By Jackson, Emerson Abraham; Barrie, Mohamed Samba; Tamuke, Edmund
  32. Decentralized finance – How triple-entry accounting and distributed ledger technology is revolutionizing the world of financial services from a business perspective By Schuldt, Lennart T.; Peskes, Markus
  33. Study on Intelligent Forecasting of Credit Bond Default Risk By Kai Ren
  34. Climate-related disclosure commitment of the lenders, credit rationing, and borrower environmental performance By Hasan, Iftekhar; Lee, Haekwon; Qiu, Buhui; Saunders, Anthony
  35. Crowdfunding and Risk By David Cimon
  36. Mind Your Language: Market Responses to Central Bank Speeches By Maximilian Ahrens; Deniz Erdemlioglu; Michael McMahon; Christopher J. Neely; Xiye Yang
  37. Financing first home ownership: modelling policy impacts at market and individual levels By Ong, Rachel; Graham, James; Cigdem, Melek; Phelps, Christopher; Whelan, Stephen
  38. Climate-induced liquidity crises: interbank exposures and macroprudential implications By Paola D'Orazio; Jessica Reale; Anh Duy Pham
  39. Super-efficiency of Listed Banks in China and Determinants Analysis (2006-2021) By Yun Liao; Ruihui Xu
  40. CBDC: Lesson from a Historical Experience By Grodecka-Messi, Anna; Zhang, Xin
  41. Integrating China into multilateral debt relief: Progress and problems in the G20 DSSI By Bräutigam, Deborah A.; Huang, Yufan

  1. By: Javier G. Gómez-Pineda; Andrés Murcia; Wilmar Alexander Cabrera-Rodríguez; Hernando Vargas-Herrera; Leonardo Villar-Gómez
    Abstract: Over the past 30 years, monetary and macroprudential policy in Colombia evolved towards the pursuit of a low and credible inflation target and a stable financial system. The protracted inflation that began in the early seventies was defeated at the turn of the century with the help of the new framework for monetary policy formulation, inflation targeting. In the field of macroprudential policy, the financial crisis of the late nineties led to important institutional developments in the formulation and coordination of macroprudential policy, as well as in the assessment of systemic risk. Along with these developments, important lessons have been learnt. One is that, to preserve macroeconomic stability, the price stability objective must be complemented with the financial stability objective, as well as with macroprudential policy. Another lesson is that the new institutional framework for monetary policy formulation helped Banco de la República overcome 25 years of inflation, then called moderate inflation. The challenges for the future include to continue preserving price and financial stability, strengthening the role of the Banco de la República in macroprudential policy, and to continue strengthening the channels of international coordination and cooperation in macroprudential policy. **** RESUMEN: En los últimos 30 años la política monetaria y macroprudencial de Colombia transitó hacia la búsqueda de un objetivo de inflación bajo y creíble, así como de un sistema financiero estable. La prolongada inflación que comenzó a comienzo de los años setenta fue superada a comienzo del nuevo siglo con la ayuda del nuevo régimen para la formulación de la política monetaria, de meta de inflación. En el ámbito de la política macroprudencial, la crisis financiera de finales de los años noventa llevó a importantes avances institucionales para la coordinación de la política macroprudencial y para la evaluación del riesgo sistémico. A lo largo de estos desarrollos importantes lecciones han sido aprendidas. Una de ellas es que, para preservar la estabilidad macroeconómica, el objetivo de estabilidad de precios debe ser complementado con el de estabilidad financiera, así como con la política macroprudencial. Otra lección es que el nuevo marco institucional para la formulación de la política monetaria ayudó al Banco de la República a superar 25 años de inflación, entonces llamada inflación moderada. Entre los retos están continuar preservando la estabilidad de precios y la estabilidad financiera, reforzar el papel del Banco de la República en la política macroprudencial y continuar fortaleciendo los canales de coordinación y cooperación internacional en la política macroprudencial.
    Keywords: Macroprudential policy, Monetary policy, Inflation targeting, Foreign exchange market intervention, Financial stability, Política macroprudencial, Política monetaria, Régimen de meta de inflación, Intervención en el mercado cambiario, Estabilidad financiera
    JEL: E5 E52 E44 E58 E61 G01 G18 G21 G28
    Date: 2023–06
  2. By: Pavlova, Elitsa; Gvetadze, Salome
    Abstract: This working paper examines the current academic literature on access to finance for female entrepreneurs and female-led enterprises. It covers two main financing markets: credit and venture capital (VC). The paper finds wide consensus in the academic field that gender-related credit and VC gaps exist in Europe. It also collects some of the most prominent empirical findings with respect to the gender imbalance in the European credit and VC markets during the last decade. This suggests an important role for gender-smart policy interventions at EU-level through the use of both equity and debt financing instruments.
    Keywords: Finance, Gender bias, small businesses
    Date: 2023
  3. By: Bilan, Andrada; Ongena, Steven; Pancaro, Cosimo
    Abstract: Can banks trade credit default swaps (CDSs) referenced on their current corporate clients at competitive prices, or are banks penalized for potentially holding private information? To answer this question we merge CDS trades reported under the European Market Infrastructure Regulation (EMIR) with syndicated loans from DealScan, and compare the prices on similar CDSs that the same dealer offers to banks and to other investors. We find that banks lending to a corporation purchase CDSs on this corporation at lower prices, and that, after trading with banks, dealers can earn higher margins on these CDSs when trading with other investors. Our findings suggest that banks hold valuable private information which is shared in their trades with dealers. Dealers then disseminate this information to financial markets. JEL Classification: G14, G21, G23
    Keywords: banks, credit derivatives, EMIR, price discovery, syndicated loans
    Date: 2023–05
  4. By: Horan, Aoife; Jarmulska, Barbara; Ryan, Ellen
    Abstract: Our paper uses credit registry data for the euro area to examine how the banking system transmits asset price shocks to credit via revaluation of collateral and subsequent lending decisions. Specifically we examine banks’ treatment of real estate collateral during the Covid-19 crisis. First we find evidence of significant frictions in the trans-mission of asset price dynamics to collateral values. Despite this we find that lending relationships reliant on real estate collateral received one third less credit following the outbreak of the pandemic and that firms experiencing downward revaluations of their collateral were significantly less likely to be given new loans. Our findings confirm that the collateral channel does create an economically significant link between real estate values and credit but suggest that the banking system’s role in transmission may be more complex than traditional economic theory would imply. JEL Classification: G21, R3, C55
    Keywords: banking, collateral channel, financial accelerator, microdata, real estate
    Date: 2023–06
  5. By: Giordano, Matteo; Goghie, Alexandru-Stefan
    Abstract: The evolution of the European Central Bank (ECB) and of the forms of monetary policy implemented in the Eurozone since its inception outline a more radical shift in the posture of the ECB rather than the simple recourse to new instruments of monetary policy. This paper explores the concept of monetary regime to understand under a systemic lens the changes occurred in the conventional and unconventional monetary policy operations, and how they have shaped the position of the ECB within the increasingly market-based financial system. We argue that the features of a monetary regime affect the processes of de- and re-politicization of the ECB. To do so, we explore three key but under-studied changes in the operations of the ECB: the shift from a corridor to a floor system with the fixed-rate full allotment (FRFA) procedure for its refinancing operations in 2008, the implementation of Securities Lending in the second half of the 2010s, and the introduction of the Transmission Protection Mechanism in 2022. These events, in turn, hinge on the evolving dynamics between liquidity and collateral, which not only define the frame of the monetary regime, but also allow for the central bank’s operations to have significant, though involuntary and indirect, fiscal consequences. Ultimately, this paper highlights the shift from monetary and fiscal concerns to financial ones, thus arguing that macroeconomic policies have become subordinated to financial logics that imply an increasing blurring of the separations between monetary and fiscal spheres.
    Date: 2023–05–26
  6. By: Nina Boyarchenko; Richard K. Crump; Leonardo Elias; Ignacio Lopez Gaffney
    Abstract: The timely characterization of risks to the economic outlook plays an important role in both economic policy and private sector decisions. In a February 2023 Liberty Street Economics post, we introduced the concept of “Outlook-at-Risk”—that is, the downside risk to real activity and two-sided risks to inflation. Today we are launching Outlook-at-Risk as a regularly updated data product, with new readings for the conditional distributions of real GDP growth, the unemployment rate, and inflation to be published each month. In this post, we use the data on conditional distributions to investigate how two-sided risks to inflation and downside risks to real activity have evolved over the current and previous five monetary policy tightening cycles.
    Keywords: Outlook-at-Risk; monetary policy tightening
    JEL: E2 G1
    Date: 2023–05–17
  7. By: Koont, Naz; Santos, Tano; Zingales, Luigi
    Abstract: We study the impact of digital banking on the value of the deposit franchise and the stability of the banking sector. Using the classification of digital banking in Koont (2023), we find that when the Fed funds rate increases deposits flow out faster and the cost of deposits increases more in banks with a digital platform. The results are similar for insured and non-insured deposits. Using the model of Drechsler et al. (2023c), we find that correcting for digital betas and deposit outflows results in a deposit franchise value that is 40% lower for digital-broker banks relative to a traditional bank without digital platform. We apply this analysis to Silicon Valley Bank (SVB) and find that the reduced value of the deposit franchise explains why SVB was insolvent in early March 2023, even before the bank run occurred.
    Date: 2023
  8. By: Ozge Akinci; Gianluca Benigno; Marco Del Negro; Ethan Nourbash; Albert Queraltó
    Abstract: What is the effect of a hike in interest rates on the economy? Building on recent research, we argue in this post that the answer to this question very much depends on how vulnerable the financial system is. We measure financial vulnerability using a novel concept—the financial stability interest rate r** (or “r-double-star”)—and show that, empirically, the economy is more sensitive to shocks when the gap between r** and current real rates is small or negative.
    Keywords: financial crises; nonlinear dynamics; shocks; financial stability
    JEL: G21 E52 G2 E51
    Date: 2023–05–22
  9. By: Saengchote, K; Castro-Iragorri, C
    Abstract: The composability and anonymity of participants in Decentralized Finance pose significant challenges in understanding their interactions and the buildup of risk within the network. We map the interconnections among decentralized finance protocols using transactions among contracts and addresses, explore singlelayer and multiplex network properties and quantify the financial exposure of the most critical nodes. We observe scale-free properties similar to traditional financial networks, but the inclusion of user interactions and the influence of externally owned accounts yield distinct network characteristics. Furthermore, centrality measures and high-frequency metrics provide insights into systemically important participants and at-risk protocols, necessitating further research to develop robust risk measures. By identifying potential vulnerabilities and developing appropriate risk management strategies, the stakeholders can help ensure the stability and safety of decentralized finance as a viable alternative to traditional financial systems.
    Keywords: Blockchain; composability; networks
    JEL: G20 D85 D53 L14
    Date: 2023–06–07
  10. By: Rashad Ahmed; Joshua Aizenman; Jamel Saadaoui; Gazi Salah Uddin
    Abstract: This paper examines whether levels of foreign exchange (FX) reserves and other fundamental factors explain cross-country differences in foreign currency depreciation observed over the 2021- 22 Federal Reserve monetary policy tightening that led to a sharp appreciation of the US dollar. Considering a broad cross-section of countries, we document that an additional 10 percentage points of FX reserves/GDP held ex-ante were associated with 1.5 to 2 percent less exchange rate depreciation and this buffer effect was larger among less financially developed economies. Higher ex-ante policy rates were also associated with less depreciation, especially among financially open economies. Taken together, these results support the buffering role of FX reserves and their potential to promote monetary policy independence in the presence of international spillovers.
    Keywords: International Reserves, Trilemma, Global Financial Cycle, Currency Risk, Spillovers
    JEL: F3 F31 F32 F36
    Date: 2023
  11. By: Davis, Kristin; Kazembe, Cynthia; Benson, Todd; De Weerdt, Joachim; Duchoslav, Jan
    Abstract: Primary agricultural cooperatives in Malawi, in contrast to other farmer-level organizations, have legal status and can own assets, borrow money for their operations, and sign contracts, making it easier for them to do business for the profit of their members. Conceptually, such cooperatives enable their member-farmers to achieve economies of scale for their commercial activities. By joining together in a cooperative, members can obtain commercial inputs at lower prices closer to wholesale prices than if they purchased the inputs as individuals. In selling their output, by aggregating their crops and other products into larger lots that the cooperative then negotiates to sell on their behalf, buyers can achieve greater efficiency in buying from them and can be expected to offer a premium over the prices that they would offer farmers selling those products individually. Cooperatives can also serve farmers in providing an important channel for obtaining information and advice to increase their productivity and the profitability of their farming. Moreover, by joining together to achieve common objectives in primary agricultural cooperatives, member-farmers can exercise greater influence on local and national policy issues of concern to them, while also building social cohesion, solidarity, and trust within their communities.
    Keywords: MALAWI; SOUTHERN AFRICA; AFRICA SOUTH OF SAHARA; AFRICA; agricultural cooperatives; finance; inputs; prices; information; productivity; farmers; development
    Date: 2023
  12. By: Drehmann, Mathias; Juselius, Mikael; Korinek, Anton
    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
  13. By: Canta, Chiara (TBS Business School); Nilsen, Øivind A. (Dept. of Economics, Norwegian School of Economics and Business Administration); Ulsaker, Simen A. (Telenor Research)
    Abstract: This paper studies empirically the relationship between competition and risk taking in banking markets. We exploit an unique dataset providing information about all bank loans to Norwegian firms over several years. Rather than relying on observed market shares, we use the distance between bank branches and firms to measure the competitiveness of local markets. The cross-sectional and longitudinal variation in competition in local markets are used to identify the relationship between competition and risk taking, which we measure by the non-performing loans and loss provision rates of the individual banks. We find that more competition leads to more risk taking. We also examine the effects of bank competition on the availability of loans. More competition leads to lower interest rates and higher loan volumes, but also makes it more difficult for small and newly established firms to obtain a loan.
    Keywords: Competition; risk
    JEL: G21 L11 L13
    Date: 2023–05–18
  14. By: Mochhoury, Sarah
    Abstract: While it has become clear that communication is a monetary policy tool for central banks, and extensive research has been conducted on central bank communication with financial markets, little is known so far on central bank communication with the general public. My research provides new insights into this field, confirming that the efforts of central banks to connect with a wider public are not in vain. In a randomised controlled trial, I focus on the determinants of trust in the European Central Bank (ECB) and on understanding of its communication about the Pandemic Emergency Purchase Programme, which was set up as part of the ECB’s response to the COVID-19 crisis. I find that the ECB’s simplified and relatable communication leads to greater trust in the central bank among the general public, as it has a positive impact on perceptions of the ECB among laypeople. The simplified content also proves to contribute to increased understanding of the central bank’s messages among the wider public. JEL Classification: C83, C93, D83, E52, E58
    Keywords: Behavioural economics, Central bank communication, European Central Bank, Experimental economics, Trust
    Date: 2023–06
  15. By: Pietro Alessandrini; Òscar Jordà; Fabrizio Venditti
    Abstract: Financial markets play an important role in generating monetary policy transmission asymmetries in the US. Credit spreads only adjust to unexpected increases in interest rates, causing output and prices to respond more to a monetary tightening than to an expansion. At a one year horizon, the ‘financial multiplier’ of monetary policy—defined as the ratio between the cumulative responses of employment and credit spreads—is zero for a monetary expansion, -2 for a monetary tightening, and -4 for a monetary tightening that takes place under strained credit market conditions. These results have important policy implications: the central bank may inadvertently over-tighten in times of financial uncertainty.
    Keywords: monetary policy; credit spreads; local projections; Kitagawa decomposition
    JEL: C13 C32 E32 E52
    Date: 2023–05–24
  16. By: Gara Afonso; Catherine Huang; Marco Cipriani; Gabriele La Spada
    Abstract: Daily investment at the Federal Reserve’s Overnight Reverse Repo (ON RRP) facility increased from a few billion dollars in March 2021 to more than $2.3 trillion in June 2022 and has stayed above $2 trillion since then. In this post, which is based on a recent staff report, we discuss two channels—a deposit channel and a wholesale short-term debt channel—through which banks’ balance-sheet costs have increased investment by money market mutual funds (MMFs) in the ON RRP facility.
    Keywords: overnight reverse repo (ON RRP); balance sheet constraints; money market funds (MMFs)
    JEL: G2 G1
    Date: 2023–05–18
  17. By: Niels-Jakob H. Hansen (International Monetary Fund); Alessandro Lin (Bank of Italy); Rui C. Mano (International Monetary Fund)
    Abstract: Inequality is increasingly a policy concern. It is well known that fiscal and structural policies can mitigate inequality. However, less is known about the potential role of monetary policy. This paper investigates how inequality matters for the conduct of monetary policy within a tractable Two-Agent New Keynesian model. We find some support for making consumption inequality an explicit target for monetary policy, particularly if central banks follow standard Taylor rules. Given the importance of labor income at the lower end of the income distribution, we also consider augmented Taylor rules targeting the labor share. We find that such a rule is preferable to targeting consumption inequality directly. However, under optimal monetary policy the gains from targeting inequality are smaller.
    Keywords: inequality, optimal monetary policy, Taylor rules
    JEL: E21 E32 E52
    Date: 2023–04
  18. By: Angeloni, Ignazio
    Abstract: There is much discussion today about a possible digital euro (PDE). Is this attention exaggerated? Are "central bank digital currencies" (CBDCs) "a solution in search of a problem", as some have argued? This article summarizes the main facts about the PDE and concludes that, if the decision on adoption had to be taken today, the arguments against would outweigh those in favor. However, there may be future circumstances in which having a CBDC ready for use can indeed be useful. Therefore, preparing is a good thing, even if the odds of its usefulness in normal conditions are slim.
    Keywords: Digital, Euro, Financial Stability, Monetary Policy, Central Bank, CBDC, Banks
    Date: 2023
  19. By: Tarishi Matsuoka; Makoto Watanabe
    Abstract: This paper studies the role of a lender of last resort (LLR) in a monetary model where a shortage of a bank’s monetary reserves (a liquidity crisis) occurs endogenously. We show that discount window lending by the LLR is welfare-improving but reduces banks’ ex-ante incentive to hold monetary reserves, which increases the probability of a liquidity crisis, and can cause moral hazard in capital investment. We also analyze the combined effects of monetary and extensive LLR policies, such as a nominal interest rate, a lending rate, and a haircut.
    Keywords: monetary equilibrium, liquidity crisis, lender of last resort, moral hazard
    JEL: E40
    Date: 2023
  20. By: Max Sina Knicker; Karl Naumann-Woleske; Jean-Philippe Bouchaud; Francesco Zamponi
    Abstract: The economic shocks that followed the COVID-19 pandemic have brought to light the difficulty, both for academics and policy makers, of describing and predicting the dynamics of inflation. This paper offers an alternative modelling approach. We study the 2020-2023 period within the well-studied Mark-0 Agent-Based Model, in which economic agents act and react according to plausible behavioural rules. We include in particular a mechanism through which trust of economic agents in the Central Bank can de-anchor. We investigate the influence of regulatory policies on inflationary dynamics resulting from three exogenous shocks, calibrated on those that followed the COVID-19 pandemic: a production/consumption shock due to COVID-related lockdowns, a supply-chain shock, and an energy price shock exacerbated by the Russian invasion of Ukraine. By exploring the impact of these shocks under different assumptions about monetary policy efficacy and transmission channels, we review various explanations for the resurgence of inflation in the United States, including demand-pull, cost-push, and profit-driven factors. Our main results are four-fold: (i)~without appropriate policy, the shocked economy can take years to recover, or even tip over into a deep recession; (ii)~the response to policy is non-monotonic, leading to a narrow window of ``optimal'' policy responses due to the trade-off between inflation and unemployment; (iii)~the success of monetary policy in curbing inflation is primarily due to expectation anchoring, rather than to direct impact of interest rate hikes; (iv)~the two most sensitive model parameters are those describing wage and price indexation. The results of our study have implications for Central Bank decision-making, and offers an easy-to-use tool that may help anticipate the consequences of different monetary and fiscal policies.
    Date: 2023–06
  21. By: Taniya Ghosh (Indira Gandhi Institute of Development Research); Abhishek Gorsi (Indira Gandhi Institute of Development Research)
    Abstract: The study reexamines the relationship between money and output for the US, UK, and the Euro Area using quarterly data up to 2022. Modern central banks are focused on controlling inflation, and adjust their monetary policy and liquidity accordingly. However, it is common practise to overlook the precise effects of those actions on other variables. Unlike prior research, which has mainly focused on the linear relationship, this paper examines the asymmetric impact of money on output. The results show that a decrease in the amount of money has a much more adverse impact on output than an increase. Globally, during COVID-19, there was an infusion of liquidity that might have been useful in the short term, but the withdrawal of that excess liquidity, as been done currently by some major economies, may have long-term effects on those economies' output.
    Keywords: Monetarism, Monetary Aggregates, Monetary Policy, Money, Money-Income-Output, NARDL, Non-Linear Granger Causality
    JEL: E42 E52 E58 E64
    Date: 2023–05
  22. By: Patrick Bolton (Imperial College); Wei Jiang (Emory University); Anastasia V. Kartasheva (University of St. Gallen; Swiss Finance Institute)
    Abstract: On March 19, 2023, the Swiss Financial Market Supervisory Authority (FINMA) announced that, as part of the Credit Suisse emergency package, the contingent convertible bonds that were part of the Credit Suisse Additional Tier 1 (AT1) regulatory capital, had been written off. We review the CoCo design and economic rationales, explaining why the Credit Suisse AT1 CoCo bondholders faced losses before shareholders were wiped out. Also we analyze the reasons for the divergent view of regulators outside of Switzerland in the aftermath of the conversion. We argue that FINMA’s decision creates a healthy precedent: restoring financial discipline in AT1 bond markets by reminding investors that their investment is exposed to credit risk and that due diligence is advised before investing in these products. Credit Suisse AT1 CoCo conversion offers lessons for the effectiveness of post-GFC too-big-to-fail reforms, emphasizing that CoCo conversion that saved Swiss taxpayers USD17 Billion is a more reliable and cost-efficient policy than government-sponsored bailouts and resolution which is inherently uncertain and prone to contagion.
    Keywords: Contingent convertible capital securities, bank fragility, recapitalization, too-big-to-fail, AT1
    JEL: G01 G21 G28
    Date: 2023–05
  23. By: Kämpf, Vanessa; Stadtmann, Georg; Zimmermann, Lilli
    Abstract: The Swiss National Bank (SNB) announced to refrain from profit distribution in 2022 owing to the accumulation of a huge financial loss. In this note we examine the key determinants of the SNB's loss and shed light on its implications to conduct monetary policy. In particular, we show that different accounting principles yield different results concerning the equity position of a central bank's balance sheet, yet not affecting the ability to run monetary policy.
    Keywords: Swiss National Bank, central bank, monetary policy
    JEL: E5 G15
    Date: 2023
  24. By: Sergey V. Chernenko; Nathan Kaplan; Asani Sarkar; David Scharfstein
    Abstract: Numerous studies of the Paycheck Protection Program (PPP), which provided loans to small businesses during the COVID-19 pandemic, have documented racial disparities in the program. Because publicly available PPP data only include information on approved loans, prior work has largely been unable to assess whether these disparities were driven by borrower application behavior or by lender approval decisions. In this post, which is based on a related Staff Report and NBER working paper, we use the Federal Reserve’s 2020 Small Business Credit Survey to examine PPP application behavior and approval decisions and to study the strengths and limitations of fintech lenders in enhancing access to credit for Black-owned businesses.
    Keywords: discrimination; racial disparities; Paycheck Protection Program (PPP); bank lending; FinTech Lending; administrative burden; inequality
    JEL: G01 G21 G23 G28
    Date: 2023–06–01
  25. By: Bertsch, Christoph (Research Department, Central Bank of Sweden)
    Abstract: Stablecoins promise a stable and secure way to park funds in the crypto universe. However, stablecoin issuers are vulnerable to runs triggered by negative information about the quality and liquidity of their reserves, as well as custodial, operational, and technological risks. I propose a framework for analyzing the factors influencing stablecoin adoption and fragility, which offers insights for risk assessment and appropriate regulation, as well as new testable implications. Under the premise that payment preferences are heterogeneous across potential stablecoin holders, a wider adoption of stablecoins is associated with a destabilizing composition effect. Positive network effects mitigate the destabilizing composition effect, but they may also undermine the role of bank deposits as a means of payment. The marginal stablecoin adopter does not internalize these effects. Consequently, adoption is likely to be excessive. Factors that increase the issuer’s income from fees and seigniorage promote stability, as do congestion effects. A stablecoin lending market promotes both stability and adoption, if it is not undermined by speculation. The introduction of a moral hazard problem provides additional insights into reserve management and disclosure.
    Keywords: Stablecoins; money; payment preferences; financial stability; global games
    JEL: D83 E40 G01 G28
    Date: 2023–05–01
  26. By: Zheng Liu; Mark M. Spiegel; Jingyi Zhang
    Abstract: We study the effectiveness of targeted reserve requirements (RR) as a policy tool for macroeconomic stabilization. Targeted RR adjustments were implemented in China during both the 2008-09 global financial crisis and the recent COVID-19 pandemic. We develop a model in which firms with idiosyncratic productivity can borrow from two types of banks---local or national---to finance working capital. National banks provide liquidity services, while local banks have superior monitoring technologies, such that both types coexist. Relationship banking is modeled in terms of a fixed cost of switching lenders, and banks choose to switch only under sufficiently large shocks. Reducing RR on local banks boosts leverage and aggregate output, whereas reducing RR on national banks has an ambiguous output effect. Following a large recessionary shock, a targeted RR policy that reduces RR for local banks relative to national banks can lower costs of switching lenders, stabilizing macroeconomic fluctuations. However, targeting RR in that manner also boosts local bank leverage, increasing risks of default and related liquidation losses. Our model's mechanism is supported by bank-level empirical evidence.
    Keywords: reserve requirements; macroeconomic stabilization; bank sizes
    JEL: E32 E52 E21
    Date: 2023–05–08
  27. By: Julien Pinter; Evžen Kocenda
    Abstract: Do firms’ and consumers’ expectations react to central bank announcements? Past literature has come to divergent conclusions, but it has systematically ignored how media treat the announcements. This paper investigates the link between monetary policy announcements and expectations by taking into account their media treatment. We initially rely on the standard monetary policy surprise measures in the euro area to identify exogenous changes in monetary policy stances. We then analyze how the main general newspapers in France report on announcements. 85 % of the monetary policy surprises are either not associated with the newspapers reporting a change in the monetary policy stance or have a sign that is inconsistent with the media report. Only when we consider media-consistent monetary policy surprises do we find that consumers and firms respond to monetary policy announcements. We then build our own measure of media monetary policy surprises and confirm that these matter. Further analysis reveals that the tonality of the media reports on the economy drives the sign of consumers’ response.
    Keywords: firm expectations, consumer expectations, monetary policy surprises, European Central Bank, information effect
    JEL: D84 E02 E52 E31
    Date: 2023
  28. By: Bennett Schmanski; Chiara Scotti; Clara Vega
    Abstract: We estimate monetary policy surprises (sentiment) from the perspective of three different textual sources: direct central bank communication (FOMC statements and press conferences), news articles, and Twitter posts during FOMC announcement days. Textual sentiment across sources is highly correlated, but there are times when news and Twitter sentiment substantially disagree with the sentiment conveyed by the central bank. We find that sentiment estimated using news articles correlates better with daily U.S. Treasury yield changes than the sentiment extracted directly from Fed communication, and better predicts revisions in economic forecasts and FOMC decisions. Twitter sentiment is also useful, but slightly less so than news sentiment. These results suggest that news coverage and Tweets are not a simple echo chamber but they provide additional useful information. We use Sastry (2022)'s theoretical model to guide our empirical analysis and test three mechanisms that can explain what drives monetary policy surprises extracted from different sources: asymmetric information (central bank has better information than journalists and Tweeters), journalists (and Tweeters) have erroneous beliefs about the monetary policy rule, and the central bank and journalists (Tweeters) have different confidence in public information. Our empirical results suggest that the latter mechanism is the most likely mechanism.
    Keywords: Monetary policy; Public information; Price discovery
    JEL: C53 D83 E27 E37 E44 E47 E50 G10
    Date: 2023–05–26
  29. By: Petrevski, Goran
    Abstract: This paper surveys the empirical literature of dealing with the choice of inflation targeting (IT). Specifically, the paper focuses on the main institutional, macroeconomic, and technical determinants affecting the adoption of IT. The main findings from our review are the following: there is strong empirical evidence that larger and more developed countries are more likely to adopt the IT regime; similarly, the introduction of IT regime is conditional on previous disinflation, greater exchange rate flexibility, central bank independence, and higher level of financial development; however, the literature suggests that the link between various macroeconomic and institutional determinants and the likelihood of adopting IT may be rather weak, i.e., they are not to be viewed either as strict necessary or sufficient conditions.
    Keywords: inflation targeting, monetary policy, emerging markets economies
    JEL: E52 E58
    Date: 2023
  30. By: Tatar, Balint
    Abstract: I have assessed changes in the monetary policy stance in the euro area since its inception by applying a Bayesian time-varying parameter framework in conjunction with the Hamiltonian Monte Carlo algorithm. I find that the estimated policy response has varied considerably over time. Most of the results suggest that the response weakened after the onset of the financial crisis and while quantitative measures were still in place, although there are also indications that the weakening of the response to the expected inflation gap may have been less pronounced. I also find that the policy response has become more forceful over the course of the recent sharp rise in inflation. Furthermore, it is essential to model the stochastic volatility relating to deviations from the policy rule as it materially influences the results.
    Keywords: Monetary policy rules, Bayesian time-varying parameter estimation, unconventional monetary policy, Hamiltonian Monte Carlo
    JEL: E52 C11 C22 C51
    Date: 2023
  31. By: Jackson, Emerson Abraham; Barrie, Mohamed Samba; Tamuke, Edmund
    Abstract: The study investigated the effectiveness of the interest rate channel of monetary policy transmission to domestic price level in Sierra Leone using data from February 2011 to June 2022. Two VAR models are employed to analyze the relationship between the lending rate and credit to the private sector, exchange rate, money supply, and consumer price index. The results indicate that a one standard deviation shock to lending rates does not significantly affect credit to the private sector, suggesting that the lending rate channel has minimal impact. The impact of the lending rate on the exchange rate is also insignificant. However, the impact of the monetary policy rate on the lending rate is significant. Thus, while monetary policy rate is effectively transmitted to the lending rate, the lending rate does not effectively transmit to other monetary variables of interest, including credit to the private sector and the price level, implying that the role of the monetary policy rate in Sierra Leone is quite limited. Thus, there is a need for structural changes, including building financial inclusion to reduce the role of cash transactions.
    Keywords: Monetary Policy Transmission, Interest Rate Channel, Exchange Rate, Sierra Leone
    JEL: C32 E43 E52 O5
    Date: 2023–05–02
  32. By: Schuldt, Lennart T.; Peskes, Markus
    Abstract: Decentralized finance (DeFi) is a rapidly growing science that leverages distributed ledger technology (DLT) to offer peer-to-peer financial services. The DeFi ecosystem consists of decentralized applications that range from traditional financial services like decentralized stock exchanges (DEX) and lending platforms to novel services like flash loans. By eliminating the need for intermediaries and leveraging the public design of DLT networks, DeFi offers a more efficient, transparent, and accessible financial system. This results in lower transaction costs, higher control for users, and increased accessibility. The interoperable nature of DeFi applications enables the creation of new applications and financial services through the use of existing applications, which leads to a high degree of comparability and flexibility, allowing network participants to efficiently execute services. However, there are also barriers to the wider adoption of DeFi, such as the unsettled regulation in many countries, and the current user experience, which requires technical expertise and is less user-friendly than traditional centralized financial services. The strong adoption of DeFi by individuals and surveys indicating growing interest in DeFi by businesses will likely lead to these barriers being overcome as the user base grows. Despite the volatility of the crypto market, the trend of increasing adoption of DeFi applications is evident and reflected in an increasing number of users, projects, market capitalization of projects, and total value locked. Thus, DeFi is creating a decentralized financial system in parallel with the traditional centralized system, depriving it of a growing amount of resources.
    Keywords: Finance, Decentralized Finance, Controlling, DeFi, triple-entry accounting, accounting, financial services, distributed ledger technology
    JEL: G23 G2 M16 M21
    Date: 2023
  33. By: Kai Ren
    Abstract: Credit risk in the China's bond market has become increasingly evident, creating a progressively escalating risk of default for credit bond investors. Given the current incomplete and inaccurate bond information disclosure, timely tracking and forecasting the individual credit bond default risks have become essential to maintain market stability and ensure healthy development. This paper proposes an Intelligent Forecasting Framework for Default Risk that provides precise day-by-day default risk prediction. In this framework, we first summarize the factors that impact credit bond defaults and construct a risk index system. Then, we employ a combined default probability annotation method based on the evolutionary characteristics of bond default risk. The method considers the weighted average of Variational Bayesian Gaussian Mixture estimation, Market Index estimation, and Default Trend Backward estimation for daily default risk annotation of matured or defaulted bonds according to the risk index system. Moreover, to mine time-series correlation and cross-sectional index correlation features efficiently, an intelligent prediction model for Chinese credit bond default risk is designed using the ConvLSTM neural network and trained with structured feature data. The experiments demonstrate that the predicted individual bond risk is slightly higher and substantially more responsive to fluctuations than the risk indicated by authoritative ratings, thereby improving on the inadequacies of inflated and untimely bond ratings. Consequently, this study's findings offer multiple insights for regulators, issuers, and investors.
    Date: 2023–05
  34. By: Hasan, Iftekhar; Lee, Haekwon; Qiu, Buhui; Saunders, Anthony
    Abstract: Using lenders becoming members of the Task Force on Climate-Related Financial Disclosures (TCFD) as a plausible exogeneous shock, we examine whether and how lenders' commitment to transparent climate-related disclosures affects borrower firms' environmental performance. We find that client firms of TCFD-member lenders, relative to control firms, significantly improve their environmental performance after the TCFD launch. The effects are stronger for polluting firms. Moreover, TCFD-member lenders influence their borrowers' environmental performance via charging higher loan spread and reducing the number and amount of new loans issued to polluting firms. Finally, polluting clients of TCFD-member lenders experience tightened financial constraints subsequently.
    Keywords: Climate-related Disclosure Commitment, Credit Rationing, Borrower Environmental Performance
    JEL: G21 G30 Q54
    Date: 2023
  35. By: David Cimon
    Abstract: This paper examines the role of rewards-based and equity-based crowdfunding in funding new businesses. In this model, crowdfunding is a unique technology that serves as a real option for production and eliminates downside risk. It affords entrepreneurs who face uncertain consumer demand a viable means of funding new projects. Crowdfunding performs well for projects with a high variability in demand and a low probability of success. Conversely, crowdfunding does not perform well for large projects with little variability in demand or for projects where the production side is uncertain.
    Keywords: Digital currencies and fintech; Financial markets; Financial services
    JEL: G21 G24 G32
    Date: 2023–05
  36. By: Maximilian Ahrens; Deniz Erdemlioglu; Michael McMahon; Christopher J. Neely; Xiye Yang
    Abstract: Researchers have carefully studied post-meeting central bank communication and have found that it often moves markets, but they have paid less attention to the more frequent central bankers’ speeches. We create a novel dataset of US Federal Reserve speeches and use supervised multimodal natural language processing methods to identify how monetary policy news affect financial volatility and tail risk through implied changes in forecasts of GDP, inflation, and unemployment. We find that news in central bankers’ speeches can help explain volatility and tail risk in both equity and bond markets. We also find that markets attend to these signals more closely during abnormal GDP and inflation regimes. Our results challenge the conventional view that central bank communication primarily resolves uncertainty.
    Keywords: central bank communication; multimodal machine learning; natural language processing; speech analysis; high-frequency data; volatility; tail risk
    JEL: E50 E52 C45 C53 G10 G12 G14
    Date: 2023–05–31
  37. By: Ong, Rachel; Graham, James; Cigdem, Melek; Phelps, Christopher (Curtin University); Whelan, Stephen
    Abstract: This research conducted modelling experiments to examine the relationship between different housing finance conditions and people’s ability to buy a first home. The first simulated the housing market’s response to decreases in interest rates, while the second simulated the market’s response to variations in borrowing standards such as changes in financial regulations or allowing households to borrow more or less against the value of their homes. When interest rates decline, the cost of financing housing declines. The opportunity cost of investing in housing also declines due to the reduction in interest that can be earned in savings accounts. Thus, the demand for housing increases, which tends to lead to increases in house prices. The research model predicts that house prices rise by 33 per cent when interest rates decline by the magnitude observed between 1994 and 2017. The actual rise in house prices was 109 per cent, suggesting that the decline in interest rates is associated with approximately one-third of the rise in house prices over the last 25 years. The research also modelled first homebuyer assistance programs. Of the 1.6 million households who are renting in Australia that are aspiring first home buyers, 266, 500 households or 16 per cent are eligible for a mortgage guarantee scheme, while 496, 800 or 31 per cent are eligible for a shared equity scheme. Of those households who were found to be eligible, the modelling shows 22 per cent of would be assisted into home ownership by the mortgage guarantee scheme, and 41 per cent would be assisted by the shared equity scheme.
    Date: 2023–05–17
  38. By: Paola D'Orazio (Chair of Economics, Faculty of Economics and Business Administration, Technische Universitaet Chemnitz); Jessica Reale (Institute for Macroeconomics, Faculty of Economics and Management, Ruhr-Universitaet Bochum); Anh Duy Pham (Department of Computer Science, Hochschule Bonn-Rhein-Sieg)
    Abstract: Although climate-induced liquidity risks can cause significant disruptions and instabilities in the financial sector, they are frequently overlooked in current debates and policy discussions. This paper proposes a macro-financial agent-based integrated assessment model to investigate the transmission channels of climate risks to financial instability and study the emergence of liquidity crises through interbank market dynamics. Our simulations show that the financial system could experience serious funding and market liquidity shortages due to climate-induced liquidity crises. Our investigation contributes to our understanding of the impact - and possible solutions - to climate-induced liquidity crises, besides the issue of asset stranding related to transition risks usually considered in the existing studies.
    Keywords: Agent-Based Modeling, Climate Risks, Prudential Regulation, Interbank Market, Liquidity Crises
    Date: 2023–06
  39. By: Yun Liao; Ruihui Xu
    Abstract: This study employs the annual unbalanced panel data of 42 listed banks in China from 2006 to 2021, adopts the non-radial and non-oriented super-efficiency Data envelopment analysis (Super-SBM-UND-VRS based DEA) model considering NPL as undesired output. Our results show that the profitability super-efficiency of State-owned banks and Rural/City Commercial Banks is better than that of Joint-stock Banks. In terms of intermediary efficiency(deposit and loan), state-owned banks have advantage on other two type of banks. The determinants analysis shows that all type of banks significantly benefits from the decrease of ownership concentration which support reformation and IPO. Regional commercial banks significantly benefit from the decrease of customer concentration and the increase of reserves. On the other hand, State-owned banks should increase its loan to deposit ratio while joint-stock banks should do the opposite.
    Date: 2023–05
  40. By: Grodecka-Messi, Anna (Monetary Policy Department, Central Bank of Sweden); Zhang, Xin (Research Department, Central Bank of Sweden)
    Abstract: Central banks have been considering the introduction of central bank digital currencies (CBDCs). The theoretical literature indicates that this may influence private banks’ lending activity and their profitability with implications for financial stability. To provide empirical evi dence on this debate, we study the effects of the arrival of a new central-bank issued currency on commercial banks in a historical setup. We use the opening of the Bank of Canada in 1935 as a natural experiment to provide evidence that banks mostly affected by the currency competition experienced lower profitability but did not decrease their lending compared to unaffected peers.
    Keywords: Money and Banking; Central Bank Digital Currencies; Central Banks; Bank Profitability; Bank Lending; Bank of Canada; Banknote Monopoly
    JEL: E42 E50 G21 G28 N22
    Date: 2023–06–01
  41. By: Bräutigam, Deborah A.; Huang, Yufan
    Abstract: This paper provides an evaluation of China's participation in the G20's COVID-19 Debt Service Suspension Initiative (DSSI). Through analysis of available data, more than 100 interviews, and fieldwork in Angola, Kenya, and Zambia, we argue, with some caveats, that the DSSI was a success. First, the existing architecture for sovereign debt relief was badly in need of reform. The old system was based on the G7 negotiating rules for relief, which were carried out by the informal Paris Club and the IMF. With the G20 emerging as the premier forum for global economic coordination, and the rise of major new creditors like China and bondholders, new institutions, and new rules, were in order. The DSSI succeeded in providing a pathway for China, the world's largest bilateral creditor, to negotiate debt treatments together with the Paris Club in the context of IMF balance of payments assistance. Getting Chinese commitment to join was 'miraculous' as one G20 participant put it. Yet much remains to be done. Second, China fulfilled its role fairly well as a responsible G20 stakeholder implementing the DSSI in the challenging circumstances of the COVID-19 pandemic. In the 46 countries that participated in the DSSI, Chinese creditors accounted for 30 percent of all claims, and contributed 63 percent of debt service suspensions. The perception that other creditors - private and multilateral banks -- were free-riding on Chinese suspensions reinforced Chinese banks' later resistance to providing debt reductions in the Common Framework. On the other hand, Chinese disbursements dropped significantly in countries requesting DSSI relief, but remained steady for other creditors. The terms of the moratorium did not include instructions on how creditors should act in a situation that closely resembled a default. Third, the DSSI prompted China and other G20 creditors to take steps to classify their banks into 'official' and 'commercial' categories, a necessary distinction for member countries participating in the IMF's financing assurances requirement. It pushed the Chinese government to align interests among fragmented banks and bureaucracies with conflicting goals. It started an internal learning process about how debt restructuring has been done historically, and how China might safeguard its interests by participating with others in a multilateral forum. Finally, geopolitical tensions affected negotiations over debt relief and allowed Chinese stakeholders facing losses to argue that pressure from the United States was an effort to "take advantage of China".
    Date: 2023

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