nep-ban New Economics Papers
on Banking
Issue of 2023‒08‒14
34 papers chosen by
Sergio Castellanos-Gamboa, Tecnológico de Monterrey

  1. Central bank digital currency and European banks’ balance sheets By Marco Petracco Giudici; Francesca Di Girolamo
  2. The state-dependent impact of changes in bank capital requirements By Lang, Jan Hannes; Menno, Dominik
  3. Investigating Excess Reserve Accumulation and Credit Crunch in U.S. Commercial Banks Focusing on the Financial Crisis By Priyo, Asad Karim Khan
  4. Drivers of cross-border bank claims: The role of foreign-owned banks in emerging countries By Sophie Brana; Dalila Chenaf-Nicet; Delphine Lahet
  5. Bank Stability versus Financial Development: A Generous Deposit Insurer’s Dilemma By Kaelo Mpho Ntwaepelo
  6. Towards acceptance criteria for a digital euro By Krüger, Nicolai; Busche, Jan
  7. Islamic Finance in USA, Islamic Finance in Canada, Indonesia-US Economic Ties By Fitri, Rati Saktia
  8. The Anatomy of Monetary Policy Transmission in an Emerging Market By Kodjovi M. Eklou
  9. Credit Allocation and Macroeconomic Fluctuations By Karsten Müller; Emil Verner
  10. Optimal Disinflation with Delegation and Limited Credibility By Mridula Duggal; Luis Rojas
  11. Uncertainty, politics, and crises: The case for cash By Rösl, Gerhard; Seitz, Franz
  12. Density forecasts of inflation: a quantile regression forest approach By Lenza, Michele; Moutachaker, Inès; Paredes, Joan
  13. Raising Rates with a Large Balance Sheet: The Eurosystem’s Net Income and its Fiscal Implications By Nazim Belhocine; Mr. Ashok Vir Bhatia; Jan Frie
  14. Contagious McKean–Vlasov systems with heterogeneous impact and exposure By Sojmark, Andreas; Feinstein, Zachary
  15. Analysis of cashless economy, demand for money and price determination : A possibility for implementation in Nigeria By EKPEYONG, PAUL
  16. Counter-cyclical Responses: How Development Banks helped the Covid-19 Recovery, and Lessons for the Future By Stephany Griffith-Jones; Diana Barrowclough; Vaibhav Mishra
  17. Interconnected DeFi: Ripple Effects from the Terra Collapse By Anton Badev; Cy Watsky
  18. Financial Inclusion and Barriers to Funding Micro-Entrepreneurs in MENA Countries Prior and During the COVID-19 Pandemic By Imène Berguiga; Philippe Adair
  19. How Exposed Are U.S. Banks’ Loan Portfolios to Climate Transition Risks? By Hyeyoon Jung; João A. C. Santos; Lee Seltzer
  21. An Update on the Economy and Monetary Policy By Loretta J. Mester
  22. Price Level and Inflation Dynamics in Heterogeneous Agent Economies By Greg Kaplan; Georgios Nikolakoudis; Giovanni L. Violante
  23. Unobserved components model(s): output gaps and financial cycles By Guillochon, Justine; Le Roux, Julien
  24. Financial Inclusion and Hurdles to Funding Tunisian Female Entrepreneurs By Philippe Adair; Imène Berguiga
  25. Artificial Intelligence and Inflation Forecasts By Miguel Faria-e-Castro; Fernando Leibovici
  26. Runs on Stablecoins By Kenechukwu E. Anadu; Pablo D. Azar; Catherine Huang; Marco Cipriani; Thomas M. Eisenbach; Gabriele La Spada; Mattia Landoni; Marco Macchiavelli; Antoine Malfroy-Camine; J. Christina Wang
  27. Evolutionary Economic Policy and Competitiveness By Michael Peneder
  28. Implementation of Financial Resilience Against Global Recession Threat Issues By Saputra, Mohammad Fajar; Pandin, Maria Yovita R; Hastungkara, Hanif Dwi
  29. Systemic Tail Risk: High-Frequency Measurement, Evidence and Implications By Deniz Erdemlioglu; Christopher J. Neely; Xiye Yang
  30. Payments and prices By Dirk Niepelt
  31. Are Basel III requirements up to the task? Evidence from bankruptcy prediction models By Pierre Durand; Gaëtan Le Quang; Arnold Vialfont
  32. An Estimated DSGE Model for Integrated Policy Analysis By Kaili Chen; Marcin Kolasa; Jesper Lindé; Hou Wang; Pawel Zabczyk; Ms. Jianping Zhou
  33. Inflating Away the Debt: The Debt-Inflation Channel of German Hyperinflation By Markus K. Brunnermeier; Sergio A. Correia; Stephan Luck; Emil Verner; Tom Zimmermann
  34. Trilemma revisited with dollar dominance in trade and finance By Vanessa Olakemi Dovonou

  1. By: Marco Petracco Giudici (European Commission - JRC); Francesca Di Girolamo (European Commission - JRC)
    Abstract: The aim of this paper is to look at possible scenarios of demand for a retail-only euro central bank digital currency and assess their impact on bank’s balance sheets, to explore potential effects on bank’s intermediation capacity and financial stability. The European Central Bank, in the context of the Eurosystem investigative exercise, has tackled this issue by proposing a set of illustrative scenarios for the adoption of a Euro CBDC (see Adalid et al., 2022 and discussion therein). We expand their analysis to include more detailed results at country level by making use of individual banks data. For each demand scenario, we estimate the potential shock on deposits making use of MS-level data. We then apply these shocks at individual bank level and compare them to a set of alternative adjustment channels, including free reserves, wholesale funding and assets (deleveraging) to obtain a distribution of the ratio of shocks to different channels. Results show that per capita demand scenarios around 3 thousand euro do not seem to present risks for financial stability in the aggregate, though they present asymmetric impacts and could give raise to shifts in the structure of balance sheets and interbank markets.
    Keywords: finance, financial stability, central bank digital currency, digital euro, banks, banking, deposits
    Date: 2023–06
  2. By: Lang, Jan Hannes; Menno, Dominik
    Abstract: Based on a non-linear equilibrium model of the banking sector with an occasionally-binding equity issuance constraint, we show that the economic impact of changes in bank capital requirements depends on the state of the macro-financial environment. In ”normal” states where banks do not face problems to retain enough profits to satisfy higher capital requirements, the impact on bank loan supply works through a ”pricing channel” which is small: around 0.1% less loans for a 1pp increase in capital requirements. In ”bad” states where banks are not able to come up with sufficient equity to satisfy capital requirements, the impact on loan supply works through a ”quantity channel”, which acts like a financial accelerator and can be very large: up to 10% more loans for a capital requirement release of 1pp. Compared to existing DSGE models with a banking sector, which usually feature a constant lending response of around 1%, our state-dependent impact is an order of magnitude lower in ”normal” states and an order of magnitude higher in ”bad” states. Our results provide a theoretical justification for building up a positive countercyclical capital buffer in ”normal” macro-financial environments. JEL Classification: D21, E44, E51, G21, G28
    Keywords: Bank capital requirements, dynamic stochastic equilibrium model, financial accelerator, global solution methods, loan supply
    Date: 2023–07
  3. By: Priyo, Asad Karim Khan
    Abstract: This paper using bank-specific data for the period 1999-2009 investigates the excess reserve accumulation and credit crunch in the US commercial banking industry during the financial crisis of 2007-2008. During the sample period, the lending and reserve behaviors of large banks significantly differ from those of small banks. A large amount of excess reserve builds up in the large banks during the crisis whereas excess reserve of small banks remains stable at low levels. Large banks experience severe credit crunch during the crisis which the small banks are able to avert. Employing a two-stage model of the banking industry that treats large and small banks separately, I demonstrate that among other factors, differences in idiosyncratic uncertainties in the form of volatility of deposits and short-term funding and disparities in investments in risky trading securities can generate similar patterns observed in data. I also address the ongoing debate between two schools of thought, one of which attributes the buildup of excess reserves and reduction in interbank lending to liquidity hoarding due to precautionary motive, while the other ascribes these to an increase in counterparty risk. I demonstrate that counterparty risk plays a greater role over the short run whereas the impact of liquidity hoarding is more prominent over the long run.
    Keywords: excess reserves; bank loans; deposit volatility; trading securities; liquidity hoarding; counterparty risk
    JEL: G01 G21 G29
    Date: 2023–07–07
  4. By: Sophie Brana (University of Bordeaux); Dalila Chenaf-Nicet (University of Bordeaux); Delphine Lahet (University of Bordeaux)
    Abstract: Studies of the determinants of cross-border bank claims are based on the economic situations of the lending and borrowing countries – the traditional push/pull macroeconomic factors – but fail to take into account the situation of the international banks that are at the origin of these flows and the presence of their subsidiaries in emerging countries. They also fail to explain the huge decrease in cross-border bank flows after the 2008 global financial crisis. In this paper, we analyze the determinants of cross-border bank claims on a panel of 28 emerging countries for three cases and transitional countries (claims on all sectors, claims on the nonbank sector, and interbank loans) and explicitly integrate banking determinants. Thus, we account for the financial situation of international lender banks and the existence of foreign locations in emerging countries as a potential pull stabilizing factor. We show that the presence of foreign banks in emerging countries is clearly a factor of attraction for cross-border bank claims. It remains when we explicitly take into account the 2008 crisis but to a lower extent and in favor of interbank loans. This may be proof of support from the international parent banks to their affiliates. Last, the financial situation of international banks, notably their liquidity and ability to respect prudential rules, also plays a role in their financing strategies in emerging countries.
    Keywords: cross-border bank claims; subsidiaries; global banks; emerging countries; Lasso method
    JEL: G
    Date: 2023
  5. By: Kaelo Mpho Ntwaepelo
    Abstract: This study uses Brazil as a laboratory to evaluate the effect of increasing the deposit insurance coverage limit, on bank stability and financial development. It uses a unique dataset that accounts for the multidimensional nature of financial development by capturing accessibility, depth and efficiency in financial markets and institutions. The empirical analysis utilises the synthetic control method to address the ambiguity concerns of choosing a comparison unit. In addition to estimating the effect of the policy interventions, the method creates an algorithm to identify a weighted combination of countries that have similar characteristics to Brazil. The countries are used as control units to set up a simulation that is reflective of the hypothetical absence of the policy intervention. The results suggest that increasing the coverage limit induces a trade-off between bank stability and financial development. More specifically, a generous deposit insurance supports financial development at the cost of bank stability, during the non-crisis period. However, when there is an economic crisis, the stabilising effect of deposit insurance dominates the moral hazard effect.
    Keywords: deposit insurance, financial development, bank stability, synthetic control method
    JEL: G21 G28 O1
    Date: 2023–07–19
  6. By: Krüger, Nicolai; Busche, Jan
    Abstract: Alongside other central banks, the European Central Bank (ECB) is currently exploring the potential of a Central Bank Digital Currency (CBDC). Such a significant payment innovation requires compliance with the ECB's mandate based on the Treaties of the European Union, in addition to socio-technical and socioeconomic considerations. Thus, Information Systems (IS) researchers might witness and actively participate in one of the most important changes associated to currency-related fundamental rights in our time in the euro area. IS research can provide useful insights into technology acceptance criteria of a CBDC, which is a novel and unfamiliar technology for most people, and help identify requirements. Our paper provides an overview of the current state of development. Furthermore, we present a Technology Acceptance Model - based vignette study (N = 207) and derive design principles for a prospective digital euro (PDE). The results of the study show that acceptance by the German population can be assumed. However, there are significant differences depending on the final design choices.
    Keywords: Central Bank Digital Currency, European Central Bank, Digital Euro, Technology Acceptance Model, Intention to use, Cryptocurrencies
    Date: 2023
  7. By: Fitri, Rati Saktia
    Abstract: Islamic Finance in the USA, Islamic Finance in Canada, Indonesia-US Economic Ties
    Date: 2023–06–24
  8. By: Kodjovi M. Eklou
    Abstract: Monetary policy transmission in EMs has been found to be weak historically due to under-developed financial markets and heavy central bank intervention in FX markets that undermine the exchange rate channel. Against this background, this paper investigates the transmission of monetary policy, including the role of external factors, in Malaysia and highlight findings that could be relevant for other EMs. We find an important role for the credit and the exchange rate channels. Further, we also find a complementary role for policy tools including Foreign Exchange Intervention (FXI) and liquidity tools such as Statutory Reserve Requirement in shaping the transmission of monetary policy. We then explore the spillover effects of external global factors including global monetary policy and global commodity prices on monetary policy transmission in a small open economy such as Malaysia. The results show that while global commodity prices do not impair monetary policy transmission, global monetary policy tightening could complement domestic efforts to achieve price stability by inducing a global disinflation. Finally, monetary policy transmission is delayed and weakened in high inflationary environment, with the implication that more aggressive and preemptive policy actions may be needed in such cases.
    Keywords: Monetary Policy; Emerging markets; Exchange rate; Credit; Inflation; Economic activity; Global monetary policy
    Date: 2023–07–07
  9. By: Karsten Müller; Emil Verner
    Abstract: We study the relationship between credit expansions, macroeconomic fluctuations, and financial crises using a novel database on the sectoral distribution of private credit for 117 countries since 1940. We document that, during credit booms, credit flows disproportionately to the non-tradable sector. Credit expansions to the non-tradable sector, in turn, systematically predict subsequent growth slowdowns and financial crises. In contrast, credit expansions to the tradable sector are associated with sustained output and productivity growth without a higher risk of a financial crisis. To understand these patterns, we show that firms in the non-tradable sector tend to be smaller, more reliant on loans secured by real estate, and more likely to default during crises. Our findings are consistent with models in which credit booms to the non-tradable sector are driven by easy financing conditions and amplified by collateral feedbacks, contributing to increased financial fragility and a boom-bust cycle.
    JEL: E0 F30 G01 G02
    Date: 2023–06
  10. By: Mridula Duggal; Luis Rojas
    Abstract: We examine the challenge faced by a government aiming to implement a gradual reduction in inflation by entrusting monetary policy to an independent central bank with limited credibility. Expanding upon the framework established by Barro and Gordon (1983b) , we demonstrate that an optimal policy for minimizing the sacrifice ratio of disinflation involves a gradual disinflationary process coupled with the announcement of intermediate targets. The speed at which disinflation occurs strikes a balance between the objective of enhancing credibility and the associated costs of unexpected inflation. Our theoretical framework provides an explanation for the disinflationary experiences observed in Chile and Colombia during the 1990s, wherein these countries established new monetary institutions and steadily achieved single-digit inflation levels through the annual announcement of decreasing inflation targets. We argue that the use of intermediate targets played a pivotal role in their design, facilitating the establishment of credibility with lower output costs.
    Keywords: disinflation, credibility, inflation, inflation expectations
    JEL: D83 E17 E31 E52 E58
    Date: 2023–07
  11. By: Rösl, Gerhard; Seitz, Franz
    Abstract: We analyze the repercussions of different kinds of uncertainty on cash demand, including uncertainty of the digital infrastructures, confidence crises of the financial system, natural disasters, political uncertainties, and inflationary crises. Based on a comprehensive literature survey, theoretical considerations and complemented by case studies, we derive a classification scheme how cash holdings typically evolve in each of these types of uncertainty by separating between demand for domestic and international cash as well as between transaction and store of value balances. Hereby, we focus on the stabilizing macroeconomic properties of cash and recommend guidelines for cash supply by central banks and the banking system. Finally, we exemplify our analysis with five case studies from the developing world, namely Venezuela, Zimbabwe, Afghanistan, Iraq, and Libya.
    Keywords: Cash, banknotes, money, crises, stabilization, uncertainty
    JEL: E41 E51 E58 O57
    Date: 2023
  12. By: Lenza, Michele; Moutachaker, Inès; Paredes, Joan
    Abstract: Density forecasts of euro area inflation are a fundamental input for a medium-term oriented central bank, such as the European Central Bank (ECB). We show that a quantile regression forest, capturing a general non-linear relationship between euro area (headline and core) inflation and a large set of determinants, is competitive with state-of-the-art linear benchmarks and judgemental survey forecasts. The median forecasts of the quantile regression forest are very collinear with the ECB point inflation forecasts, displaying similar deviations from “linearity”. Given that the ECB modelling toolbox is overwhelmingly linear, this finding suggests that the expert judgement embedded in the ECB forecast may be characterized by some mild non-linearity. JEL Classification: C52, C53, E31, E37
    Keywords: Inflation, Non-linearity, Quantile Regression Forest
    Date: 2023–07
  13. By: Nazim Belhocine; Mr. Ashok Vir Bhatia; Jan Frie
    Abstract: The Eurosystem, having purposefully expanded its footprint in recent years, confronts a period of loss-making as rising policy rates lift the remuneration of bank reserves while assets churn more slowly. This paper projects the net income of the Eurosystem and its “top-five” national central banks over a ten-year horizon, finding that losses, while large, will be temporary and recoupable. The policy conclusions are fourfold. First, the temporary and recoupable nature of the loss-making obviates any need for capital contributions or indemnities from the state, instead allowing losses to be offset against future net income. Second, it must nonetheless be communicated that fiscal impacts will be material, with annual taxes and transfers of 0.1−0.2 percent of GDP giving way to potentially long interruptions in some cases. Third, more-conservative profit distribution policies in the future steady state could help mitigate the on-off pattern of dividends. Finally and most vitally, loss-making must remain orthogonal to monetary policy decision-making, as indeed it is at the ECB. Ultimately, credibility will rest on performance in delivering on the price stability mandate.
    Keywords: Eurosystem; balance sheet; monetary policy; profit distribution; seigniorage; central bank independence
    Date: 2023–07–07
  14. By: Sojmark, Andreas; Feinstein, Zachary
    Abstract: We introduce a particular heterogeneous formulation of a class of contagious McKean–Vlasov systems, whose inherent heterogeneity comes from asymmetric interactions with a natural and highly tractable structure. It is shown that this formulation characterises the limit points of a finite particle system, deriving from a balance-sheet-based model of solvency contagion in interbank markets, where banks have heterogeneous exposure to and impact on the distress within the system. We also provide a simple result on global uniqueness for the full problem with common noise under a smallness condition on the strength of interactions, and we show that in the problem without common noise, there is a unique differentiable solution up to an explosion time. Finally, we discuss an intuitive and consistent way of specifying how the system should jump to resolve an instability when the contagious pressures become too large. This is known to happen even in the homogeneous version of the problem, where jumps are specified by a ‘physical’ notion of solution, but no such notion currently exists for a heterogeneous formulation of the system.
    Keywords: mean-field limit; contagion; heterogeneous network; default cascades; dynamic interbank model; systemic risk; Springer deal
    JEL: G21 G32
    Date: 2023–06–26
    Abstract: This study explores the feasibility of implementing a cashless policy in Nigeria and its impact on money demand and price determination. Drawing from renowned scholars such as Keynes, Friedman, and Woodford, the analysis delves into the dynamics of monetary policy, the role of money in trade and financial markets, and factors influencing price levels. The study investigates the relationship between money demand and the implementation of a cashless policy. It emphasizes the behavior of real balances, transaction velocity, and the effects of monetary policy on trading activity and asset prices. The findings indicate that as an economy moves towards a cashless system, various factors come into play. Transaction velocity, a measure of cash efficiency, becomes critical, increasing as cash usage diminishes and the economy becomes more cashless. Additionally, the study reveals that implementing a cashless policy affects price determination. Contrary to conventional belief, even as real balances approach zero in a cashless economy, asset prices remain responsive to monetary policy. This implies that monetary equilibrium prices do not necessarily converge to their nonmonetary equilibrium counterparts when real balances vanish. Based on these findings, a viable policy recommendation emerges: the monetary authority should carefully manage the money supply per investor to control and stabilize the price level in a cashless economy. Adjusting the money supply allows the authority to achieve and maintain a desired price level, even in a cashless environment. However, the study acknowledges limitations and calls for further research. Specifically, exploring the implications and challenges of implementing a cashless policy in Nigeria is necessary. Factors such as financial inclusion, technological infrastructure, and public acceptance should be examined to assess the feasibility and potential impacts of a cashless economy on different segments of society. Overall, this study contributes valuable insights into the possibility of implementing a cashless policy, its effects on money demand and price determination, and its implications for economic stability and efficiency in Nigeria.
    Keywords: price, cashless policy, monetary policy, price determination, efficiency
    JEL: E4 E41 E42 E44
    Date: 2023–07–13
  16. By: Stephany Griffith-Jones; Diana Barrowclough; Vaibhav Mishra
    Abstract: The objective of this paper is to shed light on the crucial and varied counter-cyclical roles played by development banks across the globe during the COVID-19 pandemic, and lessons learned for future shocks. It presents empirical evidence, case-studies and findings from a large number of in-depth interviews conducted by the authors with senior officials of development banks at the national, regional and multilateral level. The paper presents new and original data, information and analysis of how these banks helped countries’ governments, firms and households cope with the shock of ‘sudden stop’ to the normal functioning of the economy. It identifies key factors determining banks’ different and various responses, including not only acuteness of clients’ need but also the degree and nature of the development bank’s capitalization, links with existing national strategies or plans, its mandate, its ability to innovate, partnerships with other banks, historical experience and degree of political support. Different modalities of responses as well as their degree can be attributed to these factors. The paper concludes that for counter-cyclical support to be most effective, development banks needed to be able to respond at speed, at scale and with flexibility. One implication from these findings includes the need for these banks to be well capitalized during good times so as to be prepared for future crises. This made the difference between banks that could scale up massively, and those that had to leave unsupported key sectors of the economy. The paper shows various means of doing this. Another is that low-income countries with limited fiscal space to respond to crises, either financial or ones like COVID, need to be supported by the international community, including through capital, credit or guarantees. Different banks and countries found varied modalities to do this. One important additional source that hopefully can be implemented soon is the channelling of a part of the SDRs that will be re-distributed from richer to poorer countries. Another pertinent lesson concerns the need for more information about non-performing loans, resulting from the Covid crisis. This has important implications for future external shocks. In conclusion, the paper finds that the large majority of development banks made a big effort to respond to the unexpected challenge thrust upon them by the pandemic; there is a need to help support those not sufficiently well place to respond.
    JEL: Q
    Date: 2023–07–03
  17. By: Anton Badev; Cy Watsky
    Abstract: The emerging world of decentralized finance (DeFi), facilitated by smart contracts operating on blockchain networks, has been notable both for its rapid growth and the high-profile collapses of several of its largest participants. In this paper, we provide a technical account of the financial mechanisms which facilitated the growth and eventual collapse of the Terra Network. From this analysis, we outline a generalizable economic theory of blockchains which aims to differentiate the economics of blockchains as programmable environments from blockchains as accounting ledgers for crypto-assets. This adds to the existing literature on crypto-assets, which largely focuses on the financial characteristics of the crypto-assets themselves rather than their underlying blockchains. We argue that DeFi is structured so as to offer consumers distinct blockchain networks as competing choices differentiated by several key characteristics. We test several implications of this theory using Terra's collapse as a natural experiment, finding evidence that bridges between programmable blockchain networks create increased risk of spillover effects to other blockchains' programmable environments in the wake of a major shock event like Terra's collapse. Specifically, blockchains suffered a time-bound loss of market share and the likelihood of this loss grew approximately 40% for each additional bridge that was deployed in common with Terra at the time of Terra's collapse.
    Keywords: DeFi; Cryptocurrencies; Stablecoins
    JEL: G23 G01 E42
    Date: 2023–06–29
  18. By: Imène Berguiga; Philippe Adair
    Date: 2023
  19. By: Hyeyoon Jung; João A. C. Santos; Lee Seltzer
    Abstract: Much of the work on climate risk has focused on the physical effects of climate change, with less attention devoted to “transition risks” related to negative economic effects of enacting climate-related policies and phasing out high-emitting technologies. Further, most of the work in this area has measured transition risks using backward-looking metrics, such as carbon emissions, which does not allow us to compare how different policy options will affect the economy. In a recent Staff Report, we capitalize on a new measure to study the extent to which banks’ loan portfolios are exposed to specific climate transition policies. The results show that while banks’ exposures are meaningful, they are manageable.
    Keywords: risk exposures; climate risk; banks; Network for Greening the Financial System (NGFS) scenarios
    JEL: G2
    Date: 2023–07–10
  20. By: Fadlia, Irma Nur; Tarihoran, Hana Damayanti; Rahayu, Cindy Septiana; Pandin, Maria Yovita R
    Abstract: This research aims to understand the role of financial technology in the financial resilience of students from the Faculty of Economics and Business at UNTAG Surabaya. A qualitative research method was employed, with interviews as the data collection technique. The respondents were students from the Faculty of Economics and Business at UNTAG Surabaya who use financial technology in managing their finances. The results indicate that financial technology plays an important role in improving the financial resilience of students. Financial technology facilitates financial access and provides flexibility in financial management. However, there are also risks that need to be considered, such as data security and addiction to the use of financial technology. Therefore, there is a need for responsible use of financial technology and efforts to enhance financial literacy among students.
    Date: 2023–06–17
  21. By: Loretta J. Mester
    Abstract: I believe a somewhat tighter policy stance will help achieve a better balance between the risks of tightening too much against the risks of tightening too little. Tightening too much would slow the economy more than necessary and entail higher costs than needed to get inflation back to our goal. Tightening too little would allow high inflation to persist, with short- and long-run consequences, and necessitate a much more costly journey back to price stability. A slightly higher policy rate would roughly equate the probabilities that the next policy move will be a tightening move versus a loosening move. This would be a good holding point as we accumulate more information about whether the economy is evolving as expected. If it is not, then we can adjust our policy rate either up or down, as appropriate. Of course, while this is my current assessment, there continues to be uncertainty about the outlook, and the economy could evolve differently than anticipated. My policy views will be informed by all of the incoming economic and financial information, not only official government statistics but also regional information gathered from our business, labor market, and community contacts; a variety of surveys on economic and banking conditions; and higher-frequency data such as credit card spending. All of this information can help determine not only where the economy is but also where it is going, and therefore, inform our policy decisions.
    Keywords: inflation
    Date: 2023–07–10
  22. By: Greg Kaplan; Georgios Nikolakoudis; Giovanni L. Violante
    Abstract: We study equilibria in a heterogeneous-agent incomplete-market economy with nominal government debt and flexible prices. Unlike in representative agent economies, steady-state equilibria exist when the government runs persistent deficits, provided that the level of deficits is not too large. In these equilibria, the real interest rate is below the growth rate of the economy. We quantify the maximum sustainable deficit for the US and show that it is lower under more redistributive tax and transfer systems. With constant primary deficits, there exist two steady-states, and the price level and inflation are not uniquely determined. We describe alternative policy settings that deliver uniqueness. We conduct quantitative experiments to illustrate how redistribution and precautionary saving amplify price level increases in response to fiscal helicopter drops, deficit expansions, and loose monetary policy. We show that rising primary deficits can account for a decline in the long-run real interest rate, leading to higher inflation for any given monetary policy. Our work highlights the role of household heterogeneity and market incompleteness in determining inflation.
    JEL: E3 E4 E5 E6 H2 H3
    Date: 2023–07
  23. By: Guillochon, Justine; Le Roux, Julien
    Abstract: The Global Financial Crisis established that policymakers should consider the stage of the financial cycle to better evaluate the cyclical position of the economy when designing monetary policy decisions. If financial variables are omitted from the estimations of the output gap, a common and unobserved indicator of the business cycle, important financial or external imbalances that may lead to future recessions may not be captured. This paper presents a suite of estimates of output gaps incorporating financial variables. The estimates are based both on small unobserved components models and a large unobserved components model that follows a production function approach. The results show that exploiting the information content of financial variables, which co-move strongly with the output cycle, can sometimes improve output gap estimates. However, these improvements are of a limited magnitude and very sensitive to the choice of the chosen financial variables. JEL Classification: C32, E32, E44, E47, E52
    Keywords: financial cycle, monetary policy, Output gap, potential output, unobserved com-ponents model
    Date: 2023–07
  24. By: Philippe Adair; Imène Berguiga
    Date: 2023
  25. By: Miguel Faria-e-Castro; Fernando Leibovici
    Abstract: We explore the ability of Large Language Models (LLMs) to produce conditional inflation forecasts during the 2019-2023 period. We use a leading LLM (Google AI's PaLM) to produce distributions of conditional forecasts at different horizons and compare these forecasts to those of a leading source, the Survey of Professional Forecasters (SPF). We find that LLM forecasts generate lower mean-squared errors overall in most years, and at almost all horizons. LLM forecasts exhibit slower reversion to the 2% inflation anchor. We argue that this method of generating forecasts is inexpensive and can be applied to other time series.
    Keywords: inflation forecasts; large language models; artificial intelligence
    JEL: E31 E37 C45 C53
    Date: 2023–07–14
  26. By: Kenechukwu E. Anadu; Pablo D. Azar; Catherine Huang; Marco Cipriani; Thomas M. Eisenbach; Gabriele La Spada; Mattia Landoni; Marco Macchiavelli; Antoine Malfroy-Camine; J. Christina Wang
    Abstract: Stablecoins are digital assets whose value is pegged to that of fiat currencies, usually the U.S. dollar, with a typical exchange rate of one dollar per unit. Their market capitalization has grown exponentially over the last couple of years, from $5 billion in 2019 to around $180 billion in 2022. Notwithstanding their name, however, stablecoins can be very unstable: between May 1 and May 16, 2022, there was a run on stablecoins, with their circulation decreasing by 15.58 billion and their market capitalization dropping by $25.63 billion (see charts below.) In this post, we describe the different types of stablecoins and how they keep their peg, compare them with money market funds—a similar but much older and more regulated financial product, and discuss the stablecoin run of May 2022.
    Keywords: cryptocurrency; stablecoins; money market mutual funds (MMF); fire sale; currency
    JEL: E42
    Date: 2023–07–12
  27. By: Michael Peneder
    Abstract: This paper advances a dynamic rationale for competitiveness policy that focuses on an economy's ability to evolve in order to achieve high real incomes along with desired qualitative changes in the socio-economic system. It highlights that the ubiquitous "rationalities of failure", either of markets, governments, or systems, are rooted in a peculiar habit of accepting hypothetical perfect states as normative benchmarks. In contrast, competitiveness policy starts from the objectives that the system wants to achieve. By combining the structuralist ontology of the micro, meso and macro levels of development with the basic system functions of evolutionary change, a general typology is developed that differentiates, organizes, and integrates various economic policies according to their respective contributions to the evolvability of the system. Among other advantages, the proposed concept of competitiveness policy allows (i) to replace the negative "logic of failure" with the active pursuit of dynamic development goals, (ii) to break the ideologically afflicted dichotomy between "vertical" and "horizontal" policies and (iii) to better align the theoretical rationale with the actual perception of the societal purpose of public interventions by most policy agents.
    Keywords: Austrian economics, Digitization, central bank digital currency (CBDC), crypto coins, currency competition, evolution of money, general ledger
    Date: 2023–07–24
  28. By: Saputra, Mohammad Fajar; Pandin, Maria Yovita R; Hastungkara, Hanif Dwi
    Abstract: The economic recession or global recession itself can be understood as a condition that explains that the economy of one country is not doing well, this can be seen from the Gross Domestic Product (GDP) which shows a negative side, rising unemployment, and economic growth which shows a positive direction. negative in two consecutive quarters. Good risk management is also important for building strength or resilience in financial institutions. Discusses the challenges in building strength or resilience in financial institutions and financial markets. Building strength or resilience in financial institutions and financial markets is critical to ensuring overall economic stability and health.
    Date: 2023–06–17
  29. By: Deniz Erdemlioglu; Christopher J. Neely; Xiye Yang
    Abstract: We develop a new framework to measure market-wide (systemic) tail risk in the cross-section of high-frequency stock returns. We estimate the time-varying jump intensities of asset prices and introduce a testing approach that identifies multi-asset tail risk based on the release times of scheduled news announcements. Using high-frequency data on individual U.S. stocks and sector-specific ETF portfolios, we find that most of the FOMC announcements create systemic left tail risk, but there is no evidence that macro announcements do so. The magnitude of the tail risk induced by Fed news varies over the business cycle, peaks during the global financial crisis and remains high over different phases of unconventional monetary policy. We use our approach to construct a Fed-induced systemic tail risk (STR) indicator. STR helps explain the pre-FOMC announcement drift and significantly increases variance risk premia, particularly for the meetings without press conferences.
    Keywords: time-varying tail risk; high-frequency data; Federal Open Market Committee (FOMC) news; monetary policy announcements; cojumps; systemic risk; jump intensity
    JEL: C12 C14 C22 C32 C58 G12 G14
    Date: 2023–07–20
  30. By: Dirk Niepelt
    Abstract: We analyze the effect of structural change in the payment sector and of monetary policy on prices. Means of payment are obtained through portfolio choices and commodity sales and "liquified" through velocity choices. Interest rates, intermediation margins, and costs of payment instrument use affect portfolios, velocities, liquidity, relative prices, and the aggregate price level. Money is neutral, interest rate policy is not. Scarcer liquidity need not drive up velocity. Payment instruments and velocities generate positive externalities. Commodity price aggregates mis-measure consumer price inflation, distinctly so over the business cycle.
    Keywords: Payments, velocity, prices, intermediation, inflation
    JEL: E31 E41 E44 E52 G11 G23
    Date: 2023
  31. By: Pierre Durand; Gaëtan Le Quang; Arnold Vialfont
    Date: 2023
  32. By: Kaili Chen; Marcin Kolasa; Jesper Lindé; Hou Wang; Pawel Zabczyk; Ms. Jianping Zhou
    Abstract: We estimate a New Keynesian small open economy model which allows for foreign exchange (FX) market frictions and a potential role for FX interventions for a large set of emerging market economies (EMEs) and some inflation targeting (IT) advanced economy (AE) countries serving as a control group. Next, we use the estimated model to examine the empirical support for the view that interest rate policy may not be sufficient to stabilize output and inflation following capital outflow shocks, and the extent to which FX interventions (FXI) can improve policy tradeoffs. Our results reveal significant structural differences between AEs and EMEs—in particular FX market depth—leading to different transmission of capital outflow shocks which justifies occasional use of FXI in some EMEs in certain situations. Our analysis also highlights the critical importance of accounting for the endogeneity of FXI behavior when assessing FX market depth and policy tradeoffs associated with volatile capital flows in past episodes.
    Keywords: Integrated Policy Framework; Emerging Markets; Monetary Policy; Foreign Exchange Intervention; Endogenous Risks; Incomplete Financial Markets; Bayesian Estimation
    Date: 2023–06–30
  33. By: Markus K. Brunnermeier; Sergio A. Correia; Stephan Luck; Emil Verner; Tom Zimmermann
    Abstract: The recent rise in price pressures around the world has reignited interest in understanding how inflation transmits to the real economy. Economists have long recognized that unexpected surges of inflation can redistribute wealth from creditors to debtors when debt contracts are written in nominal terms (see, for example, Fisher 1933). If debtors are financially constrained, this redistribution can affect real economic activity by relaxing financing constraints. This mechanism, which we call the debt-inflation channel, is well understood theoretically (for example, Gomes, Jermann, and Schmid 2016), but there is limited empirical evidence to substantiate it. In this post, we discuss new insights from one of the key events in monetary history: the Great German Inflation of 1919-23. Because this case of inflation was both surprising and extremely high, Germany’s experience helps shed light on how high inflation impacts firms’ economic activity through the erosion of their nominal debt burdens. These insights are based on a recently released research paper.
    Keywords: Hyperinflation; debt-inflation; macro-finance
    JEL: E31 E52
    Date: 2023–07–13
  34. By: Vanessa Olakemi Dovonou (University of Orleans)
    Abstract: This paper explores the impact of the US dollar dominance on monetary and exchange rate policies in 51 advanced and developing countries from 1999 to 2021. We introduce a global exposure index to measure countries’ dependence on the US dollar. Our study reveals that the dominant currency framework creates a global monetary cycle driven by the US dollar, exposing non-U.S. economies to the U.S. monetary policy. However, we show that countries can reduce their exposure to the U.S. monetary policy by accumulating reserves and intervening in foreign exchange.
    Keywords: Dominant currency, Trade invoicing, foreign currency-denominated, Trilemma.
    JEL: F
    Date: 2023

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