nep-ban New Economics Papers
on Banking
Issue of 2023‒08‒21
33 papers chosen by
Sergio Castellanos-Gamboa, Tecnológico de Monterrey

  1. 'Crime and Punishment'? How Banks Anticipate and Propagate Global Financial Sanctions By Mikhail Mamonov; Anna Pestova; Steven Ongena
  2. Is Money Essential? An Experimental Approach By Janet Hua Jiang; Peter Norman; Daniela Puzzello; Bruno Sultanum; Randall Wright
  3. Between russian Invasions: The Monetary Policy Transmission Mechanism in Ukraine in 2015-2021 By Anton Grui; Nicolas Aragon; Oleksandr Faryna; Dmytro Krukovets; Kateryna Savolchuk; Oleksii Sulimenko; Artem Vdovychenko; Oleksandr Zholud
  4. On the Preferred Creditor Status of Multilateral Development Banks By J. Atsu Amegashie
  5. DeFi liquidations: Volatility and liquidity By Iota Kaousar Nassr; Ana Sasi-Brodesky
  6. Systemically important banks - emerging risk and policy responses: An agent-based investigation By Lilit Popoyan; Mauro Napoletano; Andrea Roventini
  7. Unwinding quantitative easing: state dependency and household heterogeneity By Cantore, Cristiano; Meichtry, Pascal
  8. Mr Putin and the Chronicle of a Normalisation Foretold By Jagjit S. Chadha
  9. To use or not to use? Capital buffers and lending during a crisis By Lucas Avezum; Vítor Oliveira; Diogo Serra
  10. Bank Branch Density and Bank Runs By Efraim Benmelech; Jun Yang; Michal Zator
  11. Do bankers want their umbrellas back when it rains? Evidence from typhoons in China By Pauline Avril; Gregory Levieuge; Camelia Turcu
  12. How the fiat-backed stablecoins are manipulating US money supply By Nizam, Ahmed Mehedi
  13. The Credit Supply Channel of Monetary Policy Tightening and its Distributional Impacts By Joshua Bosshardt; Marco Di Maggio; Ali Kakhbod; Amir Kermani
  14. Approaching the terminal rate and the way forward: a model-based analysis By Anna Bartocci; Alessandro Cantelmo; Martina Cecioni; Christian Hoynck; Alessandro Notarpietro; Andrea Papetti
  15. How to green the European Auto ABS market? A literature survey By Latino, Carmelo; Pelizzon, Loriana; Riedel, Max
  16. Micro price heterogeneity and optimal inflation By Santoro, Sergio; Weber, Henning
  17. Can a Mobile-App-Based Behavioral Intervention Teach Financial Skills to Youth? Experimental Evidence from a Financial Diaries Study By Frisancho, Veronica; Herrera, Alejandro; Prina, Silvia
  18. To Lend or Not to Lend: The Bank of Japan’s ETF Purchase Program and Securities Lending By Mitsuru Katagiri; Junnosuke Shino; Koji Takahashi
  19. Bank dividend restrictions and banks' institutional investors By Mücke, Christian
  20. Evidence on IFRS 9 implementation from a sample of Italian banks and other financial intermediaries By Francesco Giovannini; Antonio Schifino
  21. Information Effects of Monetary Policy By Yusuke Tanahara; Kento Tango; Yoshiyuki Nakazono
  22. Persistent Slumps: Innovation and the Credit Channel of Monetary Policy By Beqiraj, Elton; Cao, Qingqing; Minetti, Raoul; Tarquini, Giulio
  23. Financial inclusion, growth and poverty: Evidence from Africa in COVID-19 era By Christian-Lambert Lambert Nguena; Prince Piva Asaloko
  24. Tell Me Something I Don't Already Know: Learning in Low and High-Inflation Settings By Weber, Michael; Candia, Bernardo; Ropele, Tiziano; Lluberas, Rodrigo; Frache, Serafin; Meyer, Brent; Kumar, Saten; Gorodnichenko, Yuriy; Georgarakos, Dimitris; Coibion, Olivier; Kenny, Geoff; Ponce, Jorge
  25. House Price Expectations and Inflation Expectations: Evidence from Survey Data By Vedanta Dhamija; Ricardo Nunes; Roshni Tara
  26. Inside household debt: disentangling mortgages and consumer credit, and household and bank factors. Evidence from Italy By Massimiliano Affinito; Raffaele Santioni; Luca Tomassetti
  27. Unbalanced Investments: Accra’s Informal Settlements By Robert Stewart
  28. Inflation and energy price shocks: lessons from the 1970s By Francesco Corsello; Matteo Gomellini; Dario Pellegrino
  29. Keep it Simple: Central Bank Communication and Asset Prices By Haroon Mumtaz; Jumana Saleheen; Roxane Spitznagel
  30. DNB Working Paper No. 787 - Safe Asset Scarcity and Re-use in the European Repo Market By Justus Inhoffen; Iman van Lelyveld
  31. The Financial Accelerator in the Euro Area: New Evidence Using a Mixture VAR Model By Hamza Bennani; Jan Pablo Burgard; Matthias Neuenkirch
  32. Aggregate Lending and Modern Financial Intermediation: Why Bank Balance Sheet Models are Miscalibrated By Greg Buchak; Gregor Matvos; Tomasz Piskorski; Amit Seru
  33. Systemic risk indicator based on implied and realized volatility By Pawe{\l} Sakowski; Rafa{\l} Sieradzki; Robert \'Slepaczuk

  1. By: Mikhail Mamonov (Charles University in Prague-CERGE-EI); Anna Pestova (Charles University in Prague-CERGE-EI); Steven Ongena (University of Zurich; KU Leuven; NTNU Business School; Swiss Finance Institute; and CEPR)
    Abstract: We study the impacts of global financial sanctions on banks and their corporate borrowers in Russia. Financial sanctions were imposed consecutively between 2014 and 2019, allowing targeted (but not-yet-sanctioned) banks to adapt their international and domestic exposures in advance. Using a staggered difference-in-differences approach with in-advance adaptation to anticipated treatment, we establish that targeted banks immediately reduced their foreign assets and actually increased their international borrowings after the first sanction announcement compared to other similar banks. We reveal that the added value of the next sanction announcements was rather limited. Despite considerable outflow of domestic private deposits, the government support prevented disorderly bank failures and resulted in credit reshuffling: the banks contracted corporate lending by 4% of GDP and increased household lending by almost the same magnitude, which mostly offset the total economic loss. Further, we introduce a two-stage treatment diffusion approach that flexibly addresses potential spillovers of the sanctions to private banks with political connections. Employing unique hand-collected board membership and bank location data, our approach shows that throughout this period, politically-connected banks were not all equally recognized as potential sanction targets. Finally, using syndicated loan data, we establish that the real negative effects of sanctions materialized only when sanctioned firms were borrowing from sanctioned banks. When borrowing from unsanctioned banks, sanctioned firms even gained in terms of employment and investment but still lost in terms of market sales pointing to a misallocation of government support.
    Keywords: Staggered policy implementation, Anticipation effects, Treatment diffusion, Banks, International positions, Politically-connected firms, Capital misallocation.
    JEL: F51 G41 H81 L25
    Date: 2023–07
  2. By: Janet Hua Jiang; Peter Norman; Daniela Puzzello; Bruno Sultanum; Randall Wright
    Abstract: Monetary exchange is deemed essential when better incentive-compatible outcomes can be achieved with money than without it. We study essentiality both theoretically and experimentally, using finite-horizon monetary models that are naturally suited to the lab. We also follow the mechanism design approach and study the effects of strategy recommendations, both when they are incentive-compatible and when they are not. Results show that output and welfare are significantly enhanced by fiat currency when monetary equilibrium exists. Also, recommendations help if they are incentive-compatible but not much otherwise. Sometimes money is used when it should not be and we investigate why, using surveys and measures of social preferences.
    Keywords: Central bank research; Economic models
    JEL: E4 E5 C92
    Date: 2023–07
  3. By: Anton Grui (National Bank of Ukraine); Nicolas Aragon; Oleksandr Faryna (National Bank of Ukraine; National University of Kyiv-Mohyla Academy); Dmytro Krukovets (National Bank of Ukraine); Kateryna Savolchuk (National Bank of Ukraine); Oleksii Sulimenko; Artem Vdovychenko (National Bank of Ukraine); Oleksandr Zholud (National Bank of Ukraine)
    Abstract: This report evaluates the monetary policy transmission mechanism in Ukraine during the early years of inflation targeting. It assesses both the overall strength of the policy interest rate transmission, and its channels. Furthermore, it addresses the stabilizing role of forward guidance, foreign exchange interventions, and monetary policy credibility. The National Bank of Ukraine abandoned its fixed exchange rate regime in 2014 in response to an economic crisis ignited by the initial invasion by russia. Under inflation targeting, the short-term interest rate became the main monetary policy instrument, while the exchange rate remained floating. The full-scale russian invasion in 2022 forced the National Bank of Ukraine to temporarily shelve its policy interest rate, fix the exchange rate and impose administrative restrictions. However, it remains committed to returning to conventional inflation targeting when economic conditions normalize. This report could become a point of reference for future policy decisions by the Ukrainian central bank.
    Keywords: monetary policy transmission mechanism, inflation targeting, interest rate channel, exchange rate channel, expectations channel
    JEL: E37 E43 E52
    Date: 2023–07
  4. By: J. Atsu Amegashie
    Abstract: The loans of the IMF, World Bank, and other multilateral development banks (MDBs) are excluded from debt restructuring. This is the result of their preferred creditor status. There are two justifications for the preferred creditor status of MDBs: (a) they give concessional loans, and (b) they give loans to debt-distressed countries when other lenders would not. In this note, I present a conceptual framework that quantifies the benefit in case (b), discard the preferred creditor status of MDBs, and outline a debt restructuring process that includes MDBs. I also discuss a similar approach by Diwan, Harnoys-Vannier, and Kessler (2023), which also includes MDBs in debt restructuring but quantifies the benefit in case (a).
    Keywords: concessional loan, debt restructuring, haircut, multilateral development banks
    JEL: H63 E62
    Date: 2023
  5. By: Iota Kaousar Nassr; Ana Sasi-Brodesky
    Abstract: This work delves into the liquidations mechanism inherent in Decentralised Finance (DeFi) lending protocols and the connection between liquidations and price volatility in decentralised exchanges (DEXs). The analysis employs transactional data of three of the largest DeFi lending protocols and provides evidence of a positive relation between liquidations and post-liquidations price volatility across the main DEX pools. Without directly observing the behaviour of liquidators, these findings indirectly indicate that liquidators require market liquidity to carry out large liquidations and affect market conditions while doing so.
    Keywords: decentralisation, decentralised exchanges, decentralised finance, DeFi, lending protocols, liquidity pools, liquidity providers, tokens
    JEL: G12 G14 G23 O39
    Date: 2023–07–31
  6. By: Lilit Popoyan; Mauro Napoletano; Andrea Roventini
    Abstract: We develop a macroeconomic agent-based model to study the role of systemically important banks (SIBs) in financial stability and the effectiveness of capital surcharges on SIBs as a risk management tool. The model is populated by heterogeneous firms, consumers, and banks interacting locally in different markets. In particular, banks provide credit to firms according to Basel III macro-prudential frameworks and manage their liquidity in the interbank market. The Central Bank performs monetary policy according to different types of Taylor rules. Our model endogenously generates banks with different balance sheet sizes, making some systemically important. The additional capital surcharges for SIBs prove to have a marginal effect on preventing the crisis since it points mainly to the ''too-big-to-fail'' problem with minimal importance for ''too-interconnected-to-fail'', ''too-many-to-fail'' and other issues. Moreover, we found that additional capital surcharges on SIBs do not account for the type and management strategy of the bank, leading to the ''one-size-fits-all'' problem. Finally, we found that additional loss-absorbing capacity needs to be increased to ensure total coverage of losses for failed SIBs.
    Keywords: Financial instability; monetary policy; macro-prudential policy; systemically important banks, additional loss-absorbing capacity, Basel III regulation; agent-based models.
    Date: 2023–07–28
  7. By: Cantore, Cristiano (Sapienza University of Rome); Meichtry, Pascal (University of Lausanne)
    Abstract: This paper studies the macroeconomic effect of the state dependency of central bank asset market operations and their interactions with household heterogeneity. We build a New Keynesian model with borrowers and savers in which quantitative easing and tightening operate through portfolio rebalancing between short-term and long-term government bonds. We quantify the aggregate impact of an occasionally binding zero lower bound in determining an asymmetry between the effects of asset purchases and sales. When close to the lower bound, raising the nominal interest rate prior to unwinding quantitative easing minimises the economic costs of monetary policy normalisation. Furthermore, our results imply that household heterogeneity in combination with state dependency amplifies the revealed asymmetry, while household heterogeneity alone does not amplify the aggregate effects of asset market operations.
    Keywords: Unconventional monetary policy; quantitative tightening; quantitative easing; heterogeneous agents; zero lower bound.
    JEL: E21 E32 E52 E58
    Date: 2023–07–21
  8. By: Jagjit S. Chadha
    Abstract: Major central banks have been caught in a low interest rate trap for over a decade. The temporary response to the financial crisis of 2008-9 has become something of a regime. The Federal Reserve, for example, attempted to ease quantitative easing in 2013 but this stalled following the "taper tantrum" and commenced a normalisation in the Federal Funds rate from 2015 but during Covid major central banks around the world rapidly returned policy rates to around zero. Low policy rates have been the response to tighter credit conditions, excessive global savings, low levels of investment and fiscal consolidation. But they have also played a role in propelling asset price growth and increasing levels of indebtedness. The accommodative stance in monetary policy, as well as the impetus from previous monetary and fiscal interventions seem like to have stoked inflation to a higher level that might otherwise have been the case following the shock of a war on the European continent. But may also have finally secured a normalisation in policy rates.
    Keywords: Monetary policy, Ukraine War, Normalisation, Liquidity Trap
    JEL: E43 E58 E61
    Date: 2023–08
  9. By: Lucas Avezum; Vítor Oliveira; Diogo Serra
    Abstract: In this paper, we study the effect of having a greater management capital buffer on banks’ lending during a crisis. Using loan-level data merged with detailed supervisory data on banks’ balance sheets and regulatory requirements, we find that Portuguese banks with greater headroom above the overall capital requirement lent more to firms after the Covid-19 shock than banks with lower headroom, i.e., banks used, at least to some extent, their management buffers. The introduction of public-guarantee schemes in this period mitigated this effect as banks with lower capital headroom had the incentive to lend under these schemes. Moreover, we find that the effect of management buffer on lending is stronger for banks with lower market funding and more vulnerable firms, highlighting the importance of market pressure and risk aversion, respectively.
    JEL: E51 G28 H12
    Date: 2023
  10. By: Efraim Benmelech; Jun Yang; Michal Zator
    Abstract: Bank branch density, defined as the number of bank branches to total deposits, has significantly declined over the past decade, fueled by a confluence of branch closings and the almost doubling of deposits between 2016 and 2022. During this period, banks with low branch density benefited from large deposits inflows, leading to even lower density. But the virtuous cycle of deposits growth in these banks stopped spinning when investors became wary about their financial health. Stock prices of banks with low branch density plummeted during the 2023 Banking Crisis as these banks experienced larger outflows of uninsured deposits. Our results suggest that digital banking enabled banks to grow faster and attract uninsured deposits, but those large deposits inflows took the form of “hot money” that changed its course when economic conditions worsened.
    JEL: E44 E52 G20 G21 G28
    Date: 2023–07
  11. By: Pauline Avril (University of Orleans); Gregory Levieuge (Banque de France and University of Orleans); Camelia Turcu (University of Orleans and West University of Timisoara)
    Abstract: A cataclysmic event might lead to a decrease in lending, while banks would be expected to help with recovery. This study investigates which effect dominates. In particular, our paper explores how typhoons affect the lending activities of Chinese banks. It relies on the exposure of more than 161, 000 bank branches held by 327 Chinese banks over the period from 2004 to 2019. Our difference-in-difference estimates reveal that, on average, typhoons trigger a decrease in lending that accounts for 2.8 percent of total bank assets. This decline comes from commercial banks. On the contrary, rural banks act as shock absorbers. This may be the consequence of long-term lending relationships and banks’ better knowledge of local economic and physical risks. The absence of rural banks is even found to be detrimental to local post-typhoon growth. Last, government ownership and external political pressure mitigate the relative decline in lending by typhoon-hit commercial banks.
    Keywords: Typhoons, lending, banking system, China, shock absorbers, shock transmitters
    JEL: F
    Date: 2023
  12. By: Nizam, Ahmed Mehedi
    Abstract: Fiat-backed stablecoins have been around for quite some time and yet not much have been said about its impact on US money supply. Although a few studies have qualitatively discussed that the issuance of fiat-backed dollar-pegged stablecoins might have an impact on US money supply, they are unable to quantify it. Here we have developed a detailed framework to quantify the impact of the issuance of fiat-backed US dollar-pegged stablecoins on US money supply. According to the proposed framework, the issuance of US dollar denominated stablecoins is supposed to have a contractionary effect on US money supply. The said contraction stems from the fact that the issuers of stablecoins tend to invest heavily in US treasury bills and bonds, which takes funds out of the process of fractional reserve banking and thereby stops the money multiplication process. Fitting empirical data into our proposed framework, we have shown that the top 3 issuers of stablecoins together have brought about a monetary contraction in US in the range of 1.1-1.2% of total US money supply during different months of 2022.
    Keywords: Cryptocurrencies, stablecoins, money supply
    JEL: E44 E51 E52
    Date: 2023–07–14
  13. By: Joshua Bosshardt; Marco Di Maggio; Ali Kakhbod; Amir Kermani
    Abstract: This paper studies how tightening monetary policy transmits to the economy through the mortgage market and sheds new light on the distributional consequences at both the individual and regional levels. We find that credit supply factors, specifically restrictions on the debt-to-income (DTI) ratio, account for the majority of the decline in mortgages. These effects are even more pronounced for young and middle-income borrowers who find themselves excluded from the credit market. Also, regions with historically high DTI ratios exhibited greater reductions in mortgage originations, house prices, and consumption.
    JEL: E20 E5 E52 G5 G51
    Date: 2023–07
  14. By: Anna Bartocci; Alessandro Cantelmo; Martina Cecioni; Christian Hoynck (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Andrea Papetti (Bank of Italy)
    Abstract: Using as a baseline a macroeconomic scenario consistent with the key interest rate path implied by market-based expectations, we evaluate the economic implications and risks of two alternative, illustrative tightening paths for the ECB policy rates that, as in the baseline, bring inflation toward 2 per cent by the end of 2025. We consider a prudent path (labelled 'persistent'), where policy rates are kept at current levels for a prolonged period and subsequently reduced more slowly, and a more pro-active approach ('peak') in which policy rates reach a higher terminal level, but decrease faster. Model-based simulations show that, relative to the baseline scenario, the persistent path would leave inflation and output unchanged in 2023-24, while the peak path would lower inflation at the cost of output losses. The persistent path would be preferable over the period 2023-25 according to a quadratic loss function penalizing inflation and output volatility. The risks of an excessive worsening of financing conditions and the amplification effects attached to the peak scenario are assessed to be greater than those of an upward de-anchoring of inflation expectations and of second-round effects associated with the persistent path.
    Keywords: Central banking. monetary policy
    JEL: E52 E58 E61
    Date: 2023–07
  15. By: Latino, Carmelo; Pelizzon, Loriana; Riedel, Max
    Abstract: This literature survey explores the potential avenues for the design of a green auto asset-backed security by focusing on the European auto securitization market. In this context, we examine the entire value chain of the securitization process to understand the incentives and interests involved at various stages of the transaction. We review recent regulatory developments, feasibility concerns, and potential designs of a sustainable securitization framework. Our study suggests that a Green Auto ABS should be based on both a green use of proceeds and a green collateral-based methodology.
    Keywords: Securitization, Car Loans, Sustainable Finance, Low-emission vehicles, Regulation
    JEL: G23 Q56
    Date: 2023
  16. By: Santoro, Sergio; Weber, Henning
    Abstract: This paper discusses the normative implications of the micro evidence on heterogeneity in price setting gathered by the Price-setting Microdata Analysis Network (PRISMA) for the level of inflation that central banks should target. The micro price data underlying the consumer price index are used to estimate relative price trends over the product life cycle. Minimising the welfare consequences of relative price distortions in the presence of these trends requires targeting a significantly positive inflation rate in France, Germany and Italy: the steady-state inflation rate, jointly maximising welfare in all three countries, ranges from 1.1% to 1.7%. Other considerations not taken into account in the present paper may push up optimal inflation targets further. The welfare costs of targeting an inflation rate of zero, as suggested by monetary models ignoring relative price trends, or of targeting 4%, turn out to be substantial. JEL Classification: E31, E52
    Keywords: optimal inflation target, relative price trends, welfare
    Date: 2023–07
  17. By: Frisancho, Veronica (Inter-American Development Bank); Herrera, Alejandro (Instituto de Estudios Avanzados en Desarrollo (INESAD)); Prina, Silvia (Northeastern University)
    Abstract: We study the impact of a mobile-app-based behavioral intervention on youth's financial literacy and financial behavior. To maximize the chances to reach out-of-school youth, we provided access to a user-friendly budget recording tool coupled with biweekly enumerators' visits and SMSs during a 27-week period. The bundled treatment has positive and significant effects on financial literacy and awareness of market prices. The probability of saving and savings deposits are not affected, but usage of credit increases both at the extensive and intensive margins. Average treatment effects on financial literacy and behavior are driven by youth without previous exposure to financial education, suggesting that the bundled intervention prompted specific subgroups (i.e., youth with lower levels of financial knowledge) to invest more in financial literacy.
    Keywords: financial inclusion, financial diaries, financial literacy, youth
    JEL: C93 D90 G41 G53 O12 O16
    Date: 2023–07
  18. By: Mitsuru Katagiri (Department of Business Administration, Hosei University); Junnosuke Shino (School of International Liberal Studies, Waseda University); Koji Takahashi (Monetary and Economic Department, Bank for International Settlements)
    Abstract: This study investigates the effects of the Bank of Japan’s (BOJ) exchange-traded fund (ETF) purchase program on stock returns, particularly focusing on the role of the stock lending market. Using firm-level panel data, we find that the BOJ’s purchases raised stock returns more for those stocks with limited availability in the stock lending market. Nonetheless, over the longer term, the BOJ’s accumulated purchases lowered lending fees and weakened the effects of their purchases on stock returns. This result suggests that ETF managers supply stocks that constitute ETFs held by the BOJ to the stock lending market, which weakens the policy effects of the program.
    Keywords: Large-scale asset purchase (LSAP); ETF purchase program; stock lending market; Bank of Japan
    JEL: E58 G12 G14
    Date: 2023–08
  19. By: Mücke, Christian
    Abstract: This paper studies the impact of banks' dividend restrictions on the behavior of their institutional investors. Using an identification strategy that relies on the within investor variation and a difference in difference setup, I find that funds permanently decrease their ownership shares at treated banks during the 2020 dividend restrictions in the Eurozone and even exit treated banks' stocks. Using data before the introduction of the ban reveals a positive relationship between fund ownership and banks' dividend yield, highlighting again the importance of dividends for European banks' fund investors. This reaction also has pricing implications since there is a negative relationship between the dividend restriction announcement day cumulative abnormal returns and the percentage of fund owners per bank.
    Keywords: Dividend Policy, Mutual Funds, Institutional Investors' Ownership, Banking Supervision, COVID-19 Pandemic
    JEL: G12 G21 G23 G28 G35
    Date: 2023
  20. By: Francesco Giovannini (Bank of Italy); Antonio Schifino (Bank of Italy)
    Abstract: Since its entry into force, IFRS 9 has posed significant challenges to financial institutions, partly due to its principle-based nature, which leaves room for the adoption of a wide range of practices, as confirmed by the COVID-19 experience. Given the importance of a sound IFRS 9 implementation, also for supervisory purposes, Banca d'Italia conducted a survey on a sample of banks and non-bank financial institutions to monitor the approaches adopted during the pandemic. The evidence confirms the use of diverse practices, some of which could hamper a sound implementation of IFRS 9 by leading to underestimated ECLs or delayed stage transfers. These effects would in turn have a negative impact on institutions' own funds and on the indicators used for supervisory purposes. Moreover, a sound implementation of the IFRS 9 impairment model is also key from a financial stability perspective, as the adoption of appropriate provisioning practices helps to mitigate the risk of pro-cyclical effects arising from a possible sudden increase in credit losses during an economic downturn.
    Keywords: IFRS 9, Covid-19, banks, non-bank financial institutions, accounting, overlays
    JEL: G21 G23 M41
    Date: 2023–07
  21. By: Yusuke Tanahara; Kento Tango; Yoshiyuki Nakazono
    Abstract: This study assesses two central bank announcements about monetary policy and the central bank’s assessment of the economic outlook. We examine whether these two components influence macroeconomic and financial variables under the effective lower bound (ELB) of short-term nominal interest rates in Japan. We identify two shocks: a surprise policy tightening that raises interest rates and reduces stock prices and the complementary positive central bank information shock that raises both. We find that the two shocks have different effects on the Japanese economy. In fact, a contractionary monetary policy shock decreases inflation rates, whereas a positive central bank information shock increases inflation rates. The evidence suggests that announcements conveying the central bank’s assessment of the economic outlook play a certain role in the transmission mechanism of monetary policy under the ELB. However, our study shows that the two series of shocks do not induce changes in output. This suggests that they have a limited impact on the economy.
    Date: 2023–07
  22. By: Beqiraj, Elton (University of Rome I); Cao, Qingqing (Michigan State University, Department of Economics); Minetti, Raoul (Michigan State University, Department of Economics); Tarquini, Giulio (University of Rome I)
    Abstract: What are the long-run aggregate effects of monetary shocks displaying through the credit channel of monetary policy? We address this question by investigating the transmission mechanism and estimating the dynamic behaviour of variables related to credit and innovation. Then, we develop a DSGE model featuring endogenous growth, in which credit frictions constrain the financing of innovation. Under this paradigm, recessionary shocks develop into persistent stagnation. The deterioration of the R&D process, i.e. creation and adoption of new technologies, is at the core of hysteresis effects. We show the ability of our theoretical framework to reconcile with empirical evidence, quantifying the contribution of this channel to productivity and output hysteresis observed after the Global Financial Crisis.
    Keywords: Endogenous Growth; R&D; Stagnation; Credit Frictions; Monetary Policy
    JEL: E22 E24 E32 E44 E52 G01
    Date: 2023–07–25
  23. By: Christian-Lambert Lambert Nguena (Université de Dschang, CERDI - Centre d'Études et de Recherches sur le Développement International - IRD - Institut de Recherche pour le Développement - CNRS - Centre National de la Recherche Scientifique - UCA - Université Clermont Auvergne); Prince Piva Asaloko (Université de Yaoundé II)
    Abstract: The Covid-19 pandemic threatens to undermine committed efforts to reduce poverty in Africa. Using panel data on 39 African countries covering the period 2004-2021, our analysis shows that financial inclusion, particularly access to financial services, can be an important driver of poverty reduction in African countries. in the era of Covid-19. Moreover, we have identified the reduction of inequalities as the main channel through which financial inclusion can contribute to alleviating poverty. These results are robust and consistent using different estimation methods and poverty change index. Faced with the risks of increasing extreme poverty due to Covid-19, a policy aimed at improving financial inclusion seems necessary.
    Abstract: La pandémie de Covid-19 menace de saper les efforts engagés pour réduire la pauvreté en Afrique. En utilisant des données de panel sur 39 pays africains couvrant la période 2004-2021, notre analyse montre que l'inclusion financière, en particulier l'accès aux services financiers, peut être un facteur important de la réduction de la pauvreté dans les pays africains à l'ère de la Covid-19. De plus, nous avons identifié la réduction des inégalités comme le principal canal par lequel l'inclusion financière peut contribuer à atténuer la pauvreté. Ces résultats sont robustes et cohérents en utilisant différentes méthodes d'estimation et d'indices de changement de pauvreté. Face aux risques d'accroissement de l'extrême pauvreté du fait de la Covid-19, une politique visant une amélioration de l'inclusion financière paraît nécessaire.
    Keywords: Financial inclusion, Poverty, Inequality, COVID-19, Inclusion financière, Pauvreté, Inégalité, Covid-19
    Date: 2023
  24. By: Weber, Michael (University of Chicago); Candia, Bernardo (University of California, Berkeley); Ropele, Tiziano (Bank of Italy); Lluberas, Rodrigo (Universidad de la República, Uruguay); Frache, Serafin (Universidad de Montevideo); Meyer, Brent (Federal Reserve Bank of Atlanta); Kumar, Saten (Auckland University of Technology); Gorodnichenko, Yuriy (University of California, Berkeley); Georgarakos, Dimitris (European Central Bank); Coibion, Olivier (University of Texas at Austin); Kenny, Geoff (European Central Bank); Ponce, Jorge (Central Bank of Uruguay)
    Abstract: Using randomized control trials (RCTs) applied over time in different countries, we study how the economic environment affects how agents learn from new information. We show that as inflation has recently risen in advanced economies, both households and firms have become more attentive and informed about inflation, leading them to respond less to exogenously provided information about inflation and monetary policy. We also study the effects of RCTs in countries where inflation has been consistently high (Uruguay) and low (New Zealand) as well as what happens when the same agents are repeatedly provided information in both low- and high-inflation environments (Italy). Our results broadly support models in which inattention is an endogenous outcome that depends on the economic environment.
    Keywords: inattention, RCTs, inflation expectations
    JEL: E3 E4 E5
    Date: 2023–07
  25. By: Vedanta Dhamija (University of Surrey); Ricardo Nunes (University of Surrey; Centre for International Macroeconomic Studies (CIMS); Centre for Macroeconomics (CFM)); Roshni Tara (University of Surrey)
    Abstract: We find that households tend to overweight house price expectations when forming their inflation expectations. The finding is robust across several specifications and two survey data sets for the United States. We also find that there is a significant effect of the cognitive abilities of households as more sophisticated households don’t overweight house price inflation as much. We model this household behaviour in a two-sector New Keynesian model with an overweighted and a non-overweighted sector and analytically derive a welfare loss function consistent with the micro-foundations of the model. In this setup, we show that to gauge the correct interest rate response, the central bank needs to be aware that some sectors are overweighted and that movements in expected inflation in such sectors are important for monetary policy.
    Keywords: Salience, Inflation Expectations, House Price Expectations, Monetary Policy
    JEL: D10 E12 E31 E52 E58
    Date: 2023–07
  26. By: Massimiliano Affinito (Bank of Italy); Raffaele Santioni (Bank of Italy); Luca Tomassetti (Bank of Italy)
    Abstract: This paper contributes to the understanding of lending to households in three ways: we split household debt into its two main components (residential mortgages and consumer credit) and compare the factors most strongly associated with loan types; we analyse both demand-side (household) and supply-side (bank) characteristics related to loan types; and we use micro census data on all loans granted by all banks in Italy (bank-by-bank data) to all households across the Italian territory (province-by-province data). Our results show that household debt growth is related to the characteristics of banks as well as of households, and in different ways for mortgages and consumer loans. Mortgage growth is more significantly associated with bank capital and household income unequal distribution, while consumer credit is more significantly associated with bank profit components and household income level. We find that the relationship between loan growth and accumulated debt is negative for both types of loans, which is a reassuring result as it reduces concerns about over-indebtedness risk, even if we find that the effect is much larger for mortgage loans than for consumer credit.
    Keywords: Household debt, residential mortgages, consumer credit, supply and demand factors, income level and distribution, over-indebtedness, debt accumulation.
    JEL: G01 G21
    Date: 2023–07
  27. By: Robert Stewart (The University of Toronto)
    Abstract: Canada, like other G7 countries, has set an ambitious greenhouse gas emissions reduction target for 2030, and a goal of net zero emissions by 2050. However, while other G7 countries’ emissions levels have declined over the last decade, Canada’s emissions have risen. Despite government policies and public financing to counter this trend, there remains a financing gap for low-carbon investments that support the 2030 target. Public financing is insufficient and private financing can be constrained by barriers such as policy uncertainties, undesirable financial risks, and high capital demand for project investments. Green Investment Banks (GIBs) are designed to finance low-carbon economic development by mobilizing private financial capital towards low-carbon investments. This paper describes and analyses GIBs as institutional tools capable of addressing the low-carbon financing gap in Canada. I identify the main characteristics of GIBs (governance structure, capitalization method, asset vehicles, and performance measurement) and show how GIBs are being used to catalyse low-carbon investments and build institutional capacity to support low-carbon economic development. GIBs focus on long-term financing instruments and innovative financing mechanisms to reduce the barriers between private capital and low-carbon investments. GIBs help scale up private investments and reduce dependence on limited and inconsistently available public financing. GIBs can also support institutional capacitybuilding by aiding low-carbon policy development and supporting environmental awareness and low-carbon transition education. This paper looks at four well-established GIBs – Australia’s Clean Energy Finance Corporation (CEFC), the UK Green Investment Bank (UKGIB), the Connecticut Green Bank (CTGB), and the New York Green Bank (NYGB) – and describes some of their achievements. The paper then discusses the potential for municipal GIBs in Canada, and highlights The Atmospheric Fund (TAF) in Toronto and the Low-Carbon Cities Canada (LC3) Network, which will establish institutions similar to TAF in six other Canadian cities: Vancouver, Calgary, Edmonton, Ottawa, Montréal, and Halifax. While TAF operates like a GIB, there is more focus on grantmaking than is typically observed in other notable GIBs. TAF operates as both a grant-making and an investing institution. TAF’s grants, however, are funded from investment returns on its endowment capital, protecting its capital from being eroded. In general, grants reduce capital recycling potential and limit capital growth. While capital growth may not be an intended part of TAF’s mandate, a more standard GIB approach would reduce grants in favour of commercial financing that can attract private investment. GIBs have been increasing in the United States, but are absent in Canada. The emerging LC3 Network could implement the GIB model across Canadian cities to leverage the catalytic financing capabilities that GIBs bring to low-carbon investments. To support this outcome, the LC3 Network should focus on building coalitions with financial institutions to identify barriers between the sources and destinations of financial capital, and develop effective mechanisms to reduce these barriers and accelerate private financing for low-carbon investment projects in Canadian cities. Through the GIB model, cities can also further leverage institutional capacity-building for low-carbon economic development.
    Keywords: green investment banks, infrasture, The Atmospheric Fund, municipalities, low-carbon investments, TAF, municipal green investment banks
    Date: 2023–08
  28. By: Francesco Corsello (Bank of Italy); Matteo Gomellini (Bank of Italy); Dario Pellegrino (Bank of Italy)
    Abstract: The Yom Kippur war in 1973 and the Iranian revolution in 1979 triggered large oil-price increases that fuelled high and persistent inflation in advanced countries. There is a broad consensus that a weak monetary policy response, in the form of late tightening or early loosening, was one of the main causes for the failure to keep inflation under control after the 1973 shock. This failure is crucially tied to the end of the Bretton Woods era in 1971, when the fixed exchange rate regime and the currency peg to gold were abandoned, and monetary policy lost a consolidated frame of reference. A new framework – based on the commitment by independent and credible central banks to achieve clear quantitative inflation targets – would only be established in the subsequent two decades. Monetary policy conduct alone, however, does not fully explain the persistence and heterogeneity of inflation across advanced economies. Other institutional factors played a role ‒ most importantly, the lack of central bank independence, the structural features of the labour market, and fiscal policy rules which turned out to be at odds with price stability. A structural VAR-based analysis confirms and quantifies the role these factors played in shaping inflation. Nowadays, the institutional context has evolved considerably, mitigating the risk of inflation staying high for as long as they did in the 1970s. Ensuring that the current institutional context continues to support price stability remains key in limiting inflation persistence.
    Keywords: economic history, inflation, oil shocks, monetary policy, central bank independence, wage indexation, fiscal policy.
    JEL: N10 E31 E42 E58
    Date: 2023–07
  29. By: Haroon Mumtaz (Queen Mary University of London); Jumana Saleheen (Vanguard Asset Management); Roxane Spitznagel
    Abstract: This paper studies the impact of different types and styles of Bank of England Monetary Policy Committee (MPC) communication on asset prices (stock prices, gilt yields and interest rate futures) from 1999-2023. We extend MPC communication to include MPC speeches and find MPC speeches to be an important driver of asset prices. We also show that complex and ambiguous communication leads to greater asset price volatility than simple and clear communication. Central banks that want to avoid generating volatility in financial markets should keep it simple. Our results suggest that by ignoring the type and style of monetary policy communication, the previous literature has disregarded an important source of variation in asset prices.
    Keywords: Monetary policy, central bank communication, high-frequency data
    JEL: E52 E58 G12
    Date: 2023–07–18
  30. By: Justus Inhoffen; Iman van Lelyveld
    Abstract: We construct the first measure of collateral re-use at the bank and bond level for the European repo market using a regulatory transaction dataset. We show that banks materially increase the rate of re-use in response to tightened asset scarcity induced by the Eurosystem’s asset purchase program. We find that dealers accommodate clients’ demand for safe assets rather than liquidity and profit from the repo rate spread. Yet, dealers also re-use collateral to source liquidity which exposes them to collateral runs. Our results contribute to the policy debate on trade-offs between shock absorption and financial stability risks of collateral re-use.
    Keywords: collateral re-use; safe assets; scarcity; repo market
    JEL: E4 E5 G1 G2
    Date: 2023–07
  31. By: Hamza Bennani (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - ONIRIS - École nationale vétérinaire, agroalimentaire et de l'alimentation Nantes-Atlantique - IMT Atlantique - IMT Atlantique - IMT - Institut Mines-Télécom [Paris] - Nantes Univ - IAE Nantes - Nantes Université - Institut d'Administration des Entreprises - Nantes - Nantes Université - pôle Sociétés - Nantes Univ - Nantes Université - IUML - FR 3473 Institut universitaire Mer et Littoral - UM - Le Mans Université - UA - Université d'Angers - UBS - Université de Bretagne Sud - IFREMER - Institut Français de Recherche pour l'Exploitation de la Mer - CNRS - Centre National de la Recherche Scientifique - Nantes Université - pôle Sciences et technologie - Nantes Univ - Nantes Université - Nantes Univ - ECN - École Centrale de Nantes - Nantes Univ - Nantes Université); Jan Pablo Burgard (Trier University); Matthias Neuenkirch (Trier University)
    Abstract: We estimate a logit mixture vector autoregressive model describing monetary policy transmission in the euro area with a special emphasis on credit conditions. With the help of this model, monetary policy transmission can be described as mixture of two states, using an underlying logit model determining the relative state weights over time. We show that a widening of the credit spread and a tightening of credit standards directly lead to a reduction of real GDP growth, whereas shocks to the quantity of credit are less important in explaining growth fluctuations. The credit spread and—to some extent—credit standards are also the key determinants of the underlying state of the economy; the prevalence of the crisis state is more pronounced in times of adverse credit conditions. Together with a stronger shock transmission in the crisis state, this provides further evidence for a financial accelerator in the euro area.
    Keywords: Credit growth, credit spread, credit standards, euro area, financial accelerator, mixture VAR, monetary policy transmission
    Date: 2023
  32. By: Greg Buchak; Gregor Matvos; Tomasz Piskorski; Amit Seru
    Abstract: Existing macroeconomic models focused on bank balance sheet lending are deficient because they do not account for the modern industrial organization of financial intermediation. Utilizing publicly available micro-level lending data, we investigate two increasingly significant margins of adjustment in credit markets: banks’ ability to sell loans and shadow bank activity. These adjustment margins are substantial and vary across time and regions with different incomes. We examine these margins in a parsimonious dynamic quantitative model featuring banks with balance sheet adjustment through loan sales and shadow banks. Using the calibrated model, we illustrate that these margins significantly dampen the immediate contraction following bank capital shock. Recovery is also faster, because profitable loan sales (e.g., securitization) allow banks to build capital faster and because shadow banks pick up lending slack. Failure to account for adjustment margins leads to significant errors when studying policies which rely on financial intermediation pass-through in the level of aggregate lending, its direction, and composition. Our model highlights the tension between bank balance sheet models and data. The model, which forces total lending to depend strongly on bank balance sheet health, must reconcile the weak correlation between bank capital and aggregate lending. These issues can be reconciled with now available data from bank balance sheets, overall bank lending, and aggregate lending, in conjunction with a model of modern financial intermediation.
    JEL: G01 G2 G50
    Date: 2023–07
  33. By: Pawe{\l} Sakowski; Rafa{\l} Sieradzki; Robert \'Slepaczuk
    Abstract: We propose a new measure of systemic risk to analyze the impact of the major financial market turmoils in the stock markets from 2000 to 2023 in the USA, Europe, Brazil, and Japan. Our Implied Volatility Realized Volatility Systemic Risk Indicator (IVRVSRI) shows that the reaction of stock markets varies across different geographical locations and the persistence of the shocks depends on the historical volatility and long-term average volatility level in a given market. The methodology applied is based on the logic that the simpler is always better than the more complex if it leads to the same results. Such an approach significantly limits model risk and substantially decreases computational burden. Robustness checks show that IVRVSRI is a precise and valid measure of the current systemic risk in the stock markets. Moreover, it can be used for other types of assets and high-frequency data. The forecasting ability of various SRIs (including CATFIN, CISS, IVRVSRI, SRISK, and Cleveland FED) with regard to weekly returns of S&P 500 index is evaluated based on the simple linear, quasi-quantile, and quantile regressions. We show that IVRVSRI has the strongest predicting power among them.
    Date: 2023–07

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