nep-ban New Economics Papers
on Banking
Issue of 2023‒09‒25
thirty-two papers chosen by
Sergio Castellanos-Gamboa, Tecnológico de Monterrey

  1. Did the U.S. Really Grow Out of Its World War II Debt? By Julien Acalin; Laurence M. Ball
  2. Detecting Financial Market Manipulation with Statistical Physics Tools By Haochen Li; Maria Polukarova; Carmine Ventre
  3. The Value of Intermediaries for GSE Loans By Joshua Bosshardt; Ali Kakhbod; Amir Kermani
  4. News Shocks under Financial Frictions: A comment on Görtz et al. (2022) By Ash, Thomas; Nikolaishvili, Giorgi; Struby, Ethan
  5. US Monetary Policy and the Return to Price Stability By Richard H. Clarida
  6. Designing an attack-defense game: how to increase robustness of financial transaction models via a competition By Alexey Zaytsev; Alex Natekin; Evgeni Vorsin; Valerii Smirnov; Oleg Sidorshin; Alexander Senin; Alexander Dudin; Dmitry Berestnev
  7. The ECB and the inflation monsters: strategic framing and the responsibility imperative (1998-2023) By Fontan, Clément; Goutsmedt, Aurélien
  8. Constraints to Digital Financial Inclusion of Beneficiaries of PSARA Cash Transfer Program inHaiti - A Demand-side Analysis and Recommendations By Martinez Cuellar, Cristina; Tesliuc, Cornelia M.; Jaupart, Pascal Jean Edouard; Manigat, Ailo Klara
  9. Do Corporate Bond Shocks Affect Commercial Bank Lending? By Mr. Mario Catalan; Alexander W. Hoffmaister
  10. Monetary Policy Implementation with Ample Reserves By Gara Afonso; Kyungmin Kim; Antoine Martin; Ed Nosal; Simon M. Potter; Sam Schulhofer-Wohl
  11. Learning monetary policy strategies at the effective lower bound with sudden surprises By Krane, Spencer David; Melosi, Leonardo; Rottner, Matthias
  12. Financial Inclusion and Monetary Policy: A Study on the Relationship between Financial Inclusion and Effectiveness of Monetary Policy in Developing Countries By Gautam Kumar Biswas; Faruque Ahamed
  13. Effects of the ECB's communication on government bond spreads By Camarero Garcia, Sebastian; Neugebauer, Frederik; Russnak, Jan; Zimmermann, Lilli
  14. Same old song: On the macroeconomic and distributional effects of leaving a Low Interest Rate Environment By Alberto Botta; Eugenio Caverzasi; Alberto Russo
  15. The Road to Paris: stress testing the transition towards a net-zero economy By Emambakhsh, Tina; Fuchs, Maximilian; Kördel, Simon; Kouratzoglou, Charalampos; Lelli, Chiara; Pizzeghello, Riccardo; Salleo, Carmelo; Spaggiari, Martina
  16. Forecasting inflation using disaggregates and machine learning By Gilberto Boaretto; Marcelo C. Medeiros
  17. All Aboard! Easier Transit Travel with Standardized Payments By Turner, Katherine; Chin, Staly; Nguyen, Andrea; Pike, Susan
  18. Analysis of CBDC Narrative OF Central Banks using Large Language Models By Andres Alonso-Robisco; Jose Manuel Carbo
  19. Empirical assessment of SR/CA small-dollar lending letter impact By Daniel Gorin; Sarah Gosky; Michael Suher
  20. Future of the Euro: pay everywhere and whenever you want By BELLIA Mario; DI GIROLAMO Francesca; NAI FOVINO Igor; PETRACCO GIUDICI Marco; SPORTIELLO Luigi; VESPE Michele
  21. Preaching to the agnostic: Inflation reporting can increase trust in the central bank but only among people with weak priors By Bernd Hayo; Pierre-Guillaume Méon
  22. Unveiling the Interplay between Central Bank Digital Currency and Bank Deposits By Hanfeng Chen; Maria Elena Filippin
  23. Tell Me Something I Don't Already Know: Learning in Low- and High-Inflation Settings By Bernardo Candia; Olivier Coibion; Serafin Frache; Dmitris Georgarakos; Yuriy Gorodnichenko; Geoff Kenny; Saten Kumar; Rodrigo Lluberas; Brent Meyer; Robele Tiziano; Michael Weber
  24. The Inflation Attention Threshold and Inflation Surges By Oliver Pf\"auti
  25. Dealers' Treasury Market Intermediation and the Supplementary Leverage Ratio By Paul Cochran; Sebastian Infante; Lubomir Petrasek; Zack Saravay; Mary Tian
  26. Liquidity Spirals By Farmer, J. Doyne; Wiersema, Garbrand; Kemp, Esti
  27. Complementing Business Training with Access to Finance: Evidence from SMEs in Kenya By Anik Ashraf; Elizabeth Lyons
  28. US dollar is losing it position of a reserve currency: How the BRICS development bank can ensure the soft landing By Popov, Vladimir
  29. Risk management of stock portfolios with jumps at exogenous default events By Herbertsson, Alexander
  30. Capital Structure Dynamics and Financial Performance in Indian Banks (An Analysis of Mergers and Acquisitions) By Kurada T S S Satyanarayana; Addada Narasimha Rao; Kumpatla jaya surya
  31. Non-Completion, Student Debt, and Financial Well-Being: Evidence from the Survey of Household Economics and Decisionmaking By Jacob Lockwood; Douglas A. Webber
  32. Optimal regulation of credit lines By José E. Gutiérrez

  1. By: Julien Acalin; Laurence M. Ball
    Abstract: The fall in the U.S. public debt/GDP ratio from 106% in 1946 to 23% in 1974 is often attributed to high rates of economic growth. This paper examines the roles of three other factors: primary budget surpluses, surprise inflation, and pegged interest rates before the Fed-Treasury Accord of 1951. Our central result is a simulation of the path that the debt/GDP ratio would have followed with primary budget balance and without the distortions in real interest rates caused by surprise inflation and the pre-Accord peg. In this counterfactual, debt/GDP declines only to 74% in 1974, not 23% as in actual history. Moreover, the ratio starts rising again in 1980 and in 2022 it is 84%. These findings imply that, over the last 76 years, only a small amount of debt reduction has been achieved through growth rates that exceed undistorted interest rates.
    JEL: E31 E43 E65 H60 H63
    Date: 2023–08
  2. By: Haochen Li; Maria Polukarova; Carmine Ventre
    Abstract: We take inspiration from statistical physics to develop a novel conceptual framework for the analysis of financial markets. We model the order book dynamics as a motion of particles and define the momentum measure of the system as a way to summarise and assess the state of the market. Our approach proves useful in capturing salient financial market phenomena: in particular, it helps detect the market manipulation activities called spoofing and layering. We apply our method to identify pathological order book behaviours during the flash crash of the LUNA cryptocurrency, uncovering widespread instances of spoofing and layering in the market. Furthermore, we establish that our technique outperforms the conventional Z-score-based anomaly detection method in identifying market manipulations across both LUNA and Bitcoin cryptocurrency markets.
    Date: 2023–08
  3. By: Joshua Bosshardt; Ali Kakhbod; Amir Kermani
    Abstract: We analyze the costs and benefits of intermediaries for government-sponsored enterprise (GSE) mortgages using regulatory data. We find evidence of lenders pricing for observable and unobservable default risk independently from the GSEs. These findings are explained using a model of competitive lending in which lenders have skin-in-the-game and acquire information beyond the GSEs' underwriting criteria, but also charge markups. We find that most borrowers are better off in a counterfactual in which the GSEs' underwriting criteria are implemented passively. Finally, the observed differences between banks and nonbanks are more consistent with differences in their skin-in-the-game rather than screening quality.
    JEL: G21 G23 G5
    Date: 2023–08
  4. By: Ash, Thomas; Nikolaishvili, Giorgi; Struby, Ethan
    Abstract: Görtz et al. (2022) estimate the effects of innovations to future total factor productivity (TFP) on financial markets. In a Bayesian vector autoregression, they identify a TFP news shock as one that explains the largest share of 40- quarter ahead forecast error variance (FEV) of TFP. Their estimated impulse responses functions show that a positive news shock significantly decreases credit market spreads and increases credit market supply. They also find that a shock that explains the maximum of the FEV of the "excess bond premium" (EBP) (Gilchrist and Zakrajsek 2012) causes similar responses. These results are consistent with an estimated DSGE model with financial frictions. We estimate the main IRFs of the study using the original data and a frequentist estimation approach. We obtain similar point estimates for the dynamic responses to TFP news and EBP max-share shocks. We also update their macroeconomic and financial time series, as some of the data has been revised substantially since their original estimate. We use the updated data to re-estimate the above-mentioned IRFs, and we find that the results are robust to this change in the data. Finally, we investigate the computational reproducibility of their DSGE results, and find that their provided code (consistent with warnings in their README file) does not execute in the most recent version of Dynare or Matlab. Using the version indicated in their replication files, we encounter issues estimating the posterior mode.
    Keywords: Replication, News Shocks, Financial Frictions, Excess Bond Premium
    JEL: E12 E31 E32 E44 G12 G21
    Date: 2023
  5. By: Richard H. Clarida
    Abstract: This paper assesses the proximate causes of the post pandemic surge in US inflation, the Federal Reserve's real time reaction to and interpretation of incoming data in 2021, and the pivot to raising rates and shrinking the balance sheet that commenced in 2022 and continues in 2023. Particular attention is devoted to the role, if any, that Fed's August 2020 revisions to its monetary policy framework may have played in delaying lift - off relative to counterfactuals informed by simple policy rules, including a framework - consistent "shortfalls" policy rule featured in its semi - annual Monetary Policy Reports.
    JEL: E30 E4 E5
    Date: 2023–08
  6. By: Alexey Zaytsev; Alex Natekin; Evgeni Vorsin; Valerii Smirnov; Oleg Sidorshin; Alexander Senin; Alexander Dudin; Dmitry Berestnev
    Abstract: Given the escalating risks of malicious attacks in the finance sector and the consequential severe damage, a thorough understanding of adversarial strategies and robust defense mechanisms for machine learning models is critical. The threat becomes even more severe with the increased adoption in banks more accurate, but potentially fragile neural networks. We aim to investigate the current state and dynamics of adversarial attacks and defenses for neural network models that use sequential financial data as the input. To achieve this goal, we have designed a competition that allows realistic and detailed investigation of problems in modern financial transaction data. The participants compete directly against each other, so possible attacks and defenses are examined in close-to-real-life conditions. Our main contributions are the analysis of the competition dynamics that answers the questions on how important it is to conceal a model from malicious users, how long does it take to break it, and what techniques one should use to make it more robust, and introduction additional way to attack models or increase their robustness. Our analysis continues with a meta-study on the used approaches with their power, numerical experiments, and accompanied ablations studies. We show that the developed attacks and defenses outperform existing alternatives from the literature while being practical in terms of execution, proving the validity of the competition as a tool for uncovering vulnerabilities of machine learning models and mitigating them in various domains.
    Date: 2023–08
  7. By: Fontan, Clément; Goutsmedt, Aurélien (UC Louvain - F.R.S-FNRS)
    Abstract: The recent resurgence of inflation in Europe has led the ECB to increase interest rates and phase out asset purchase programs designed to address the effects of the Great Financial Crisis. This article investigates how the ECB adjusts its logic of responsibility throughout this series of crises. Using a topic model and in-depth analysis of speeches, we examine the ECB's strategic framing of causal linkages related to inflation during three historical periods: the Central Bank Independence (CBI) era (1998-2011), the secular stagnation era (2011-2021), and the new inflation era (2021-). Our findings indicate that modifications made to the CBI's causal linkages during the secular stagnation era shaped the ECB's framing of the new inflation era in a novel way. However, despite acknowledging difficult policy tradeoffs, which they tended to obscure in the past, ECB policymakers still seek to uphold the imperative of responsibility by adapting it to varying policy contexts.
    Date: 2023–08–19
  8. By: Martinez Cuellar, Cristina; Tesliuc, Cornelia M.; Jaupart, Pascal Jean Edouard; Manigat, Ailo Klara
    Abstract: The Adaptive Social Protection for Increased Resilience project (ASPIRE or PSARA for itsacronym in French), financed by The World Bank and implemented by the government of Haiti, aims to design andimplement a cash transfer program for vulnerable households in Haiti, with a focus on increasing financial inclusion anddigitizing payments. This report analyzes the financial inclusion landscape of beneficiaries; identifies demand-sidebarriers to the uptake of Digital Financial Services (DFS); and provides recommendations for promoting the use of DFSamong beneficiaries and their communities. The findings of this report show that while access to formal financialservices is limited, there is more access and usage of mobile money and informal services through the VillageSavings and Loan Associations (VSLAs). The report recommends actions to remove barriers to DFS usage, such as creatingand promoting DFS use cases among beneficiaries, increasing trust and confidence in using e-wallets, working withpolicymakers to provide IDs for beneficiaries and with regulators to reduce Know Your Customer (KYC) on low-tieraccounts, and increasing mobile phone ownership. Additionally, the report suggests strategies to support arobust DFS ecosystem, including designing attractive products for low-income customers and building a sustainableCash-in and Cash-out agent network.
    Date: 2023–07–01
  9. By: Mr. Mario Catalan; Alexander W. Hoffmaister
    Abstract: Understanding how corporate bond market disruptions are transmitted to the rest of the financial system is essential to gauge systemic financial risk and design policy responses. In this study, we extend the vector autoregression model of Gilchrist and Zakrajšek (2012) to explicitly account for the role of commercial banks in the transmission of corporate bond credit spread shocks. We find that corporate bond market shocks can reduce commercial bank lending activity by tightening loan supply. Policies designed to contain stress in the corporate bond market can thus mitigate systemic risk by limiting contagion to the commercial banking sector.
    Keywords: excess bond premium; banks; VAR models; financial markets and the macroeconomy; systemic risk; contagion.
    Date: 2023–08–04
  10. By: Gara Afonso; Kyungmin Kim; Antoine Martin; Ed Nosal; Simon M. Potter; Sam Schulhofer-Wohl
    Abstract: We offer a parsimonious model of the reserve demand to study the tradeoffs associated with various monetary policy implementation frameworks. Prior to the 2007–09 financial crisis, many central banks supplied scarce reserves to execute their interest-rate policies. In response to the crisis, central banks undertook quantitative-easing policies that greatly expanded their balance sheets and, by extension, the amount of reserves they supplied. When the crisis and its aftereffects passed, central banks were in a position to choose a framework that has reserves that are (1) abundant—by keeping their balance sheets and reserves at the expanded level; (2) scarce—by vastly decreasing their balance sheets and reserves; or (3) somewhere in between abundant and scarce—by moderately decreasing their balance sheets and reserves. We find that the best policy implementation outcomes are realized when reserves are somewhere between scarce and abundant. This outcome is consistent with the Federal Open Market Committee’s 2019 announcement to implement monetary policy in a regime with an ample supply of reserves.
    Keywords: federal funds market; monetary policy implementation; ample reserves
    JEL: E42 E58
    Date: 2023–08–31
  11. By: Krane, Spencer David; Melosi, Leonardo; Rottner, Matthias
    Abstract: We examine how private sector agents might learn a new monetary strategy that is adopted while at the ELB. Little can be discovered until the economy improves enough that rates would be near liftoff under the old strategy. Recessionary shocks would thus delay learning while large inflationary shocks could outright stop it and so inhibit the ability of the new strategy to address future ELB episodes. The central bank can offset some of the inflation-induced learning loss by deviating from its new strategy, but this decision comes at the cost of higher near-term inflation and greater uncertainty about monetary policy.
    Keywords: New framework, central bank's communications, deflationary bias, asymmetric average inflation targeting, imperfect credibility, liftoff, Bayesian learning
    JEL: E52 C63 E31
    Date: 2023
  12. By: Gautam Kumar Biswas; Faruque Ahamed
    Abstract: The study analyzed the impact of financial inclusion on the effectiveness of monetary policy in developing countries. By using a panel data set of 10 developing countries during 2004-2020, the study revealed that the financial inclusion measured by the number of ATM per 100, 000 adults had a significant negative effect on monetary policy, whereas the other measure of financial inclusion i.e. the number of bank accounts per 100, 000 adults had a positive impact on monetary policy, which is not statistically significant. The study also revealed that foreign direct investment (FDI), lending rate and exchange rate had a positive impact on inflation, but only the effect of lending rate is statistically significant. Therefore, the governments of these countries should make necessary drives to increase the level of financial inclusion as it stabilizes the price level by reducing the inflation in the economy.
    Date: 2023–08
  13. By: Camarero Garcia, Sebastian; Neugebauer, Frederik; Russnak, Jan; Zimmermann, Lilli
    Abstract: This paper investigates the financial market effects of the ECB's communication on the Pandemic Emergency Purchase Programme (PEPP). Using data for 10 euro area countries, we first analyse the impact of different communication channels such as press releases, ECB blog contributions, speeches and interviews on changes in government bond spreads. Second, we assess whether spreads react differently to communication by specific ECB Executive Board members. Markets turn out to be sensitive to both the communication channel and the communicating ECB Executive Board member.
    Keywords: Event study, central bank communication, ECB, PEPP, sovereign yields
    JEL: E52 E58 G14
    Date: 2023
  14. By: Alberto Botta (School of Accounting, Finance and Economics, University of Greenwich, London, UK); Eugenio Caverzasi (Department of Economics, Università degli Studi dell’Insubria, Varese, Italy); Alberto Russo (Department of Economics and Social Sciences, Università Politecnica delle Marche, Ancona, Italy and Department of Economics, Universitat Jaume I, Castellón, Spain)
    Abstract: This paper analyzes the macroeconomic and distributional implications of central banks’decisions to raise interest rates after a prolonged period at near the Zero Lower Bound (ZLB). The main goal of our study is to assess the interaction between monetary policy, inequality, and financial fragility, in a financialized economic system. Financialization is here portrayed as the presence in the economy of complex financial products, i.e., assetbacked securities, produced via the securitization of banks’ loans. We do so in the context of a hybrid Agent-Based Model (ABM). We first compare the prevailing macroeconomic and financial features of a low interest rate environment (LIRE) with respect to a “Great Moderation”(GM)-like setting. As expected, we show that LIRE tends to stimulate faster growth and higher employment, and to reduce income and wealth inequality, as well as (poor) households’ indebtedness. Consistent with existing empirical literature, this comes at the cost of higher inflation and some signs of financial system’s fragility, i.e., lower banks’ profitability and Capital Adequacy Ratio (CAR), and higher “search for risk” given by credit extension to poorer households. We then show that increases in the central bank’s policy rate, as motivated by the central bank’s willingness to reduce inflation, effectively curb price dynamics and accomplish with central bank’s inflation targeting mandate. Higher interest rates also improve commercial banks’ CAR and profitability. However, they also cause a pronounced increase in non-performing loans (stronger tan what possibly observed in a GM scenario) and some worrisome macro-financial dynamics. In fact, higher interest rates give rise to higher households’ and overall economy indebtedness as allowed by wealthier households’ demand for high-yield complex financial products and mounting securitization. We finally show how financialization structurally changes the functioning of the economy and the behavior of central banks. Financialization actually contributes to create a (private sector) debt-led economy, which becomes structurally more resistant to central bank’s attempts to control inflation. Central bank’s reaction in terms of higher interest rates could likely come with perverse distributional consequences.
    Keywords: Low interest rate environment, Contractionary monetary policy, Securitization
    JEL: E24 E44 E52
    Date: 2023
  15. By: Emambakhsh, Tina; Fuchs, Maximilian; Kördel, Simon; Kouratzoglou, Charalampos; Lelli, Chiara; Pizzeghello, Riccardo; Salleo, Carmelo; Spaggiari, Martina
    Abstract: Transition to a carbon-neutral economy is necessary to limit the negative impact of climate change and has become one of the world’s most urgent priorities. This paper assesses the impact of three potential transition pathways, differing in the timing and level of ambition of emissions’ reduction, and quantifies the associated investment needs, economic costs and financial risks for corporates, households and financial institutions in the euro area. Building on the first ECB top-down, economy-wide climate stress test, this paper contributes to the field of climate stress testing by introducing three key innovations. First, the design of three short-term transition scenarios that combine the transition paths developed by the Network for Greening the Financial System (NGFS) with macroeconomic projections that allow for the latest energy-related developments. Second, the introduction of granular sectoral dynamics and energy-specific considerations by country relevant to transition risk. Finally, this paper provides a comprehensive analysis of the impact of transition risk on the euro area private sector and on the financial system, using a granular dataset that combines climate, energy-related and financial information for millions of firms with the euro area credit register and securities database and country-level data on households. By comparing different transition scenarios, the results of the exercise show that acting immediately and decisively would provide significant benefits for the euro area economy and financial system, not only by maintaining the optimal net-zero emissions path (and therefore limiting the physical impact of climate change), but also by limiting financial risk. An accelerated transition to a carbon-neutral economy would be helpful to contain risks for financial institutions and would not generate financial stability concerns for the euro area, provided that firms and households could finance their green investments in an orderly manner. However, the heterogeneous results across economic sectors and banks suggest that more careful monitoring of certain entity subsets and of credit exposures will be required during the transition process. JEL Classification: C53, C55, G21, Q47, Q54
    Keywords: climate scenarios, climate stress test, energy, transition risk
    Date: 2023–09
  16. By: Gilberto Boaretto; Marcelo C. Medeiros
    Abstract: This paper examines the effectiveness of several forecasting methods for predicting inflation, focusing on aggregating disaggregated forecasts - also known in the literature as the bottom-up approach. Taking the Brazilian case as an application, we consider different disaggregation levels for inflation and employ a range of traditional time series techniques as well as linear and nonlinear machine learning (ML) models to deal with a larger number of predictors. For many forecast horizons, the aggregation of disaggregated forecasts performs just as well survey-based expectations and models that generate forecasts using the aggregate directly. Overall, ML methods outperform traditional time series models in predictive accuracy, with outstanding performance in forecasting disaggregates. Our results reinforce the benefits of using models in a data-rich environment for inflation forecasting, including aggregating disaggregated forecasts from ML techniques, mainly during volatile periods. Starting from the COVID-19 pandemic, the random forest model based on both aggregate and disaggregated inflation achieves remarkable predictive performance at intermediate and longer horizons.
    Date: 2023–08
  17. By: Turner, Katherine; Chin, Staly; Nguyen, Andrea; Pike, Susan
    Abstract: This study explores interest in, and the challenges faced by transit agencies and operators in the adoption of open-loop payment systems. The research team focuses on the ways that agencies view passenger needs in the context of adopting open payments. Challenges with cash payments, an increasingly cashless society, and the expanding offerings of digital payment options have spurred increased interest in open-loop payments among transit operators. Paying for transit with cash can require additional time at boarding, add extra steps for passengers who must pay with exact fare, and result in service inefficiencies. It presents security concerns for drivers, and administrative burdens for agencies. While the full costs of cash handling vary per agency, the cost of handling and moving cash may be considerable. Pioneering transit agencies are adopting open payment systems that accept credit cards, debit cards, and smartphone/watch-based transactions. However, there is a huge diversity among transit agencies and as such, agencies face different challenges and to different degrees when considering the adoption of open payment systems. Challenges can include financial barriers, capacity limitations, technological challenges, the duration of existing contracts, competing needs, and a number of passenger challenges such as lack of credit cards or smartphones, or lack of familiarity with the technology. This study uses data collected from California transit agencies in the fall of 2022 that gathered information about agency perceptions of open-loop payments and the challenges with adopting open fare collection systems, and whether assistance programs would benefit transit agencies interested in adopting open-loop payments. Results of the present study indicate that the majority of agencies are considering or have considered implementing open payment systems, but agencies are not fully aware of the assistance available from the California Integrated Travel Program to help in the transition to digital and open payment systems. This study sheds light on the challenges facing small to medium transit agencies in the transition of California’s transit systems to open-loop payment systems. View the NCST Project Webpage
    Keywords: Business, Social and Behavioral Sciences, Transit payments, open-loop payment, cashless transit, California Integrated Travel Project
    Date: 2023–09–01
  18. By: Andres Alonso-Robisco (Banco de España); Jose Manuel Carbo (Banco de España)
    Abstract: Central banks are increasingly using verbal communication for policymaking, focusing not only on traditional monetary policy, but also on a broad set of topics. One such topic is central bank digital currency (CBDC), which is attracting attention from the international community. The complex nature of this project means that it must be carefully designed to avoid unintended consequences, such as financial instability. We propose the use of different Natural Language Processing (NLP) techniques to better understand central banks’ stance towards CBDC, analyzing a set of central bank discourses from 2016 to 2022. We do this using traditional techniques, such as dictionary-based methods, and two large language models (LLMs), namely Bert and ChatGPT, concluding that LLMs better reflect the stance identified by human experts. In particular, we observe that ChatGPT exhibits a higher degree of alignment because it can capture subtler information than BERT. Our study suggests that LLMs are an effective tool to improve sentiment measurements for policy-specific texts, though they are not infallible and may be subject to new risks, like higher sensitivity to the length of texts, and prompt engineering.
    Keywords: ChatGPT, BERT, CBDC, digital money
    JEL: G15 G41 E58
    Date: 2023–08
  19. By: Daniel Gorin; Sarah Gosky; Michael Suher
    Abstract: Guidance is used by bank regulators to communicate supervisory expectations to both examiners and banks. In March 2020, in response to pandemic shut-downs, financial regulators issued a joint statement encouraging small-dollar lending to meet temporary cash-flow imbalances, unexpected expenses, or income short-falls.
    Date: 2023–07–28
  20. By: BELLIA Mario (European Commission - JRC); DI GIROLAMO Francesca (European Commission - JRC); NAI FOVINO Igor (European Commission - JRC); PETRACCO GIUDICI Marco (European Commission - JRC); SPORTIELLO Luigi (European Commission - JRC); VESPE Michele (European Commission - JRC)
    Abstract: A digital euro contributes to strengthening the international role of the euro and Europe’s open strategic autonomy against other currencies, such as third country central bank digital currencies and private non-bank digital moneys. The proposal protects stability of the payment system by ensuring that the euro remains its reference point as the European economy keeps digitalizing. At the same time, introducing a digital euro could present some drawbacks that would need to be minimized by careful design options.
    Date: 2023–07
  21. By: Bernd Hayo; Pierre-Guillaume Méon
    Abstract: Using a randomized controlled trial, we study whether showing German respondents a graph plotting the European Central Bank’s inflation target alongside inflation in the euro area from 1999 to 2017 affects respondents’ trust in the ECB. The treatment has, on average, no significant effect on the level of trust in the ECB respondents report, but trust increases among respondents who report no preference for any political party. Within this group, the information about the actual development of the inflation rate, and not information about the inflation target itself, appears to be the main driving force.
    Keywords: Central bank trust; European Central Bank; Central bank communication; Monetary policy; Germany; Household survey; RCT
    JEL: E52 E58 Z10
    Date: 2023–08–31
  22. By: Hanfeng Chen; Maria Elena Filippin
    Abstract: We extend the Real Business Cycle model in Niepelt (2022) to analyze the risk to financial stability following the introduction of a central bank digital currency (CBDC). CBDC competes with commercial bank deposits as households' source of liquidity. We consider different degrees of substitutability between payment instruments and review the equivalence result in Niepelt (2022) by introducing a collateral constraint banks must respect when borrowing from the central bank. When CBDC and deposits are perfect substitutes, the central bank can offer loans to banks that render the introduction of CBDC neutral to the real economy. We show that the optimal level of the central bank's lending rate depends on the restrictiveness of the collateral constraint: the tighter it is, the lower the loan rate the central bank needs to post. However, when CBDC and deposits are imperfect substitutes, the central bank cannot make banks indifferent to the competition from CBDC. It follows that the introduction of CBDC has real effects on the economy.
    Date: 2023–08
  23. By: Bernardo Candia; Olivier Coibion; Serafin Frache; Dmitris Georgarakos; Yuriy Gorodnichenko; Geoff Kenny; Saten Kumar; Rodrigo Lluberas; Brent Meyer; Robele Tiziano; Michael Weber
    Abstract: Using randomized control trials (RCT) 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 risen in developed 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. This observation holds for both firms and households. 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 expectation
    JEL: E3 E4 E5
    Date: 2023–07–31
  24. By: Oliver Pf\"auti
    Abstract: At the outbreak of the recent inflation surge, the public's attention to inflation was low but increased rapidly once inflation started to rise. In this paper, I develop a general equilibrium monetary model where it is optimal for agents to pay little attention to inflation when inflation is low and stable, but in which they increase their attention once inflation exceeds a certain threshold. Using survey inflation expectations, I estimate the attention threshold to be at an inflation rate of 4%, with attention in the high-attention regime being twice as high as in the low-attention regime. When calibrated to match these findings, the model generates inflation and inflation expectation dynamics consistent with the recent inflation surge in the US. The attention threshold induces a state dependency: cost-push shocks become more inflationary in times of loose monetary policy. These state-dependent effects are absent in the model with constant attention or under rational expectations. Following simple Taylor rules triggers frequent and prolonged episodes of heightened attention, thereby increasing the volatility of inflation, and-due to the asymmetry of the attention threshold-also the average level of inflation, which leads to substantial welfare losses.
    Date: 2023–08
  25. By: Paul Cochran; Sebastian Infante; Lubomir Petrasek; Zack Saravay; Mary Tian
    Abstract: Treasury market intermediation by dealers, including Treasury securities market making and financing, requires regulatory capital. In particular, the six largest U.S. Treasury securities dealers are subsidiaries of large U.S. bank holding companies (BHCs), which are required to maintain a supplementary leverage ratio (SLR) of at least 5 percent at the BHC level.
    Date: 2023–08–03
  26. By: Farmer, J. Doyne; Wiersema, Garbrand; Kemp, Esti
    Abstract: We introduce a novel method for studying liquidity spirals and use this method to identify spirals before stock prices plummet and funding markets lock up. We show that liquidity spirals may be underestimated or completely overlooked when interactions between contagion channels are ignored, and find that financial stability is greatly affected by how institutions choose to respond to liquidity shocks, with some strategies yielding a \robust-yet-fragile" system. To demonstrate the method, we apply it to a highly granular data set on the South African banking sector and investment fund sector. We find that liquidity spirals are exacerbated when the liquidity positions of institutions worsen, and that central bank-provided liquidity can greatly dampen liquidity spirals. We also show that, depending on the market conditions, a liquidity spirals is sometimes caused by the banking and fund sectors' collective dynamics, but at other times by one sector's individual impact. The approach developed here can be used to formulate interventions that specifically target the sector(s) causing the liquidity spiral.
    Keywords: Liquidity Spiral, Financial Stability, Systemic Risk, Financial Contagion, Interacting Contagion Channels, Intersectoral Contagion Channels, Multiplex Networks, Stress Test, Solvency-Liquidity Nexus
    JEL: G01 G17 G18 G21 G23 G28
    Date: 2023–09
  27. By: Anik Ashraf; Elizabeth Lyons
    Abstract: This paper investigates the complementarity between business training and access to financial capital for small and medium enterprises (SMEs) in Kenya. All participants in a business training program are offered training. One-third of participants are offered loans immediately after training (Concurrent Loan group), one-third are offered loans six weeks after training (Delayed Loan group), and the remaining third are offered loans after another four weeks (Control group). While a long time lag may reduce knowledge retention and application by SMEs, concurrent access to loans and associated business spending may crowd out the entrepreneurs’ attention from improving business practices. We find evidence for the latter in both intention-to-treat and treatment-on-the-treated estimates. While SMEs in both Control and Delayed Loan groups improve their business practices, SMEs in the Concurrent Loan group who take loans do not improve their practices at all. Moreover, entrepreneurs who take loans spend less time on their businesses and their business revenue falls. Our evidence is consistent with the entrepreneurs in our study using loans to substitute for their income.
    Keywords: business training, access to finance
    JEL: O12 L26 M53
    Date: 2023
  28. By: Popov, Vladimir
    Abstract: The current process of moving away from the US dollar as a reserve currency will cause the outflow of capital from the US, leading to the depreciation of the dollar and/or increase in the interest rates that will cause costly real restructuring – reallocation of resources from less competitive to more competitive export-oriented industries accompanied by an increase in unemployment. This paper makes parallels with the decline of the British pound after the Second World War, arguing that the loss of competitiveness and the stop-go policies in Britain in the 1950s-70s can well be an indicator of what is going to happen in the US. One of the new features of the current situation, however, is the freezing of reserve assets of many developing countries (Syria, Libya, Iran, Venezuela, Afghanistan, Russia) and the danger of freezing assets of other countries (China and Saudi Arabia included) – this can make the run away from the US dollar an uncontrolled process. Whereas in the long term this process may be beneficial for the US and the world economy, short- and medium- term adjustment costs can be extremely high. To ensure a soft landing the New Development Bank of BRICS countries can issue bonds that would be sold to developing countries, whose assets have been frozen or may be frozen by the West, so that they can store their foreign exchange reserves in these bonds. The Bank will invest the proceeds from the sale of these bonds in the traditional financial instruments for storing foreign exchange reserves - US and EU treasury bills and bonds denominated in the same dollars and euros. Bonds of the Bank would be considered safe because the US and EU will not risk freezing the assets of the Bank, as this would mean a major conflict with all BRICS countries and the Global South. For the Western countries, this option is not only acceptable, but also desirable: the new Bank will transfer the current direct holding of Western securities by developing countries into the holdings of the same Western financial instruments through the Bank, ensuring the soft landing.
    Keywords: Pound and dollar as reserve currencies, outflow of capital, accumulation of foreign exchange reserves (FOREX), BRICS, New Development Bank
    JEL: F31 F32 F33 F63 N14 O19
    Date: 2023–08–20
  29. By: Herbertsson, Alexander (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: In this paper we study equity risk management of stock portfolios where the individual stock prices have downward jumps at the defaults of an exogenous group of defaultable entities. The default times can come from any type of credit portfolio model. In this setting we derive computational tractable formulas for several stock-related quantizes, such as loss distributions of equity portfolios and apply it to Value-at-Risk computations. We start with individual stock prices and then extend the setting to a portfolio framework. In the portfolio case our studies considers both small-time expansions of the loss-distribution for a heterogeneous portfolio via a linearization of the loss, but also for general time points when the stock portfolio is large and homogeneous and where we use a conditional version of the law of large numbers. Most of the derived formulas will heavily rely on the ability to efficiently compute the number of defaults distribution of the entities in the exogenous group of corporates negative affecting the stock prices in our equity portfolio. If the stock prices are unaffected by the exogenous defaults then our framework collapses into the traditional Black-Scholes model under the real probability measure. Finally, we give several numerical applications. For example, in a setting where the jumps in the stock prices are at default times which are generated by a one-factor Gaussian copula model, we study the time evolution of Value-at-Risk (i.e. VaR as function of time) for stock portfolios, both for a 20-day period and for a two-year period. We also perform similar numerical VaR-studies in a setting where the individual default intensities follow a CIR process. Our results are compared with the corresponding VaR-values in the Black-Scholes case with same drift and volatilises as in the jump models. Not surprisingly, we show that the VaR-values in stock portfolios with downward jumps at defaults of external entities, will have substantially higher VaR-values compared to the corresponding Black-Scholes cases. The numerical computations of the number of default distribution will in all our studies use fast and efficient saddlepoint methods.
    Keywords: equity portfolio risk; stock price modelling; credit portfolio risk; risk management; Value-at-Risk; intensity-based models; credit copula models; numerical methods
    JEL: C02 C63 G13 G32 G33
    Date: 2023–09
  30. By: Kurada T S S Satyanarayana; Addada Narasimha Rao; Kumpatla jaya surya
    Abstract: This research investigates the multifaceted relationship underlying capital structure dynamics along with financial performance as a result of mergers and acquisitions, or M&As, in Indian banks. In the face of increasing competition, banks have deliberately embraced M&A as a strategy of improving commercial prospects and maintaining financial stability. The primary goal of this study is to examine the changes in the capital framework and financial results of banks before and after M&A transactions. The investigation, which employs a paired t-test as a method of statistical analysis, is based on a review of annual reports from selected banks over a two-year period before and after M&A transactions. The paired t-test approach allows for a thorough statistical analysis of interconnected datasets, revealing the subtle influence of M&A attempts on both bank financial performance as well as capital structure dynamics. The study's findings have the potential to add to the current body of knowledge on organisational planning, managing finances, and capital structure optimisation. The research has practical significance for financial companies, legislators, and scholars interested in understanding the profound effects of M&A inside the arena of financial institutions that operate within fiercely competitive landscapes because it provides comprehensive insights regarding the complex consequences of banking merger and acquisition (M&A) deals on capital structure as well as financial performance. Finally, the goal of this research is to provide the banking sector with educated decision-making capabilities and strategic guidance to businesses facing heightened competition while coping with the complexities of capital structure.
    Date: 2023–08
  31. By: Jacob Lockwood; Douglas A. Webber
    Abstract: As the price of college and student loan debt has grown relative to inflation in recent decades, many have questioned the return on investment offered by a college degree. Recent research tends to highlight the importance of risk when examining the question of "is college worth the investment?" (Hendricks and Leukhina, 2018; Akers, 2021).
    Date: 2023–08–21
  32. By: José E. Gutiérrez (Banco de España)
    Abstract: This paper presents a contract-theoretic model in which banks choose pre-arranged and ex post funding to finance firms’ liquidity needs through credit lines. When liquidity needs are high, pre-arranged funding is key to sustaining lending and reducing the number of firms going into liquidation. Yet, in the presence of a pecuniary externality on firms’ liquidation values, competitive banks choose insufficient pre-funding compared with a constrained social planner. Constrained efficiency can be restored using regulatory liquidity ratios. The optimal regulatory ratio depends on the frequency of high liquidity need conditions, the value lost after a firm’s liquidation, and the premium on pre-funding.
    Keywords: credit lines, bank liquidity risk regulation, LCR, NSFR, Basel III
    JEL: G01 G21 G28 G32
    Date: 2023–08

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