nep-ban New Economics Papers
on Banking
Issue of 2023‒10‒02
29 papers chosen by
Sergio Castellanos-Gamboa, Tecnológico de Monterrey

  1. Preventing Payments Fraud in the FinTech Era: New Evidence from a Behavioural Experiment By Jesper Akesson; John Gathergood; Edika Quispe-Torreblanca
  2. Breaking the Bank with ChatGPT: Few-Shot Text Classification for Finance By Lefteris Loukas; Ilias Stogiannidis; Prodromos Malakasiotis; Stavros Vassos
  3. Latin American Natural Rates of Interest By Luciano Campos
  4. Monetary Policy Surprises Shocks under Different Fiscal Regimes: A Panel Analysis of the Euro Area By António Afonso; José Alves; Serena Ionta
  5. Integrated Intermediation and Fintech Market Power By Greg Buchak; Vera Chau; Adam Jørring
  6. Financial and real effects of pandemic credit policies: an application to Chile By Felipe Garcés; Juan Francisco Martínez; M. Udara Peiris; Dimitrios P. Tsomocos
  7. Marketplace Lending: A Resilient Alternative in the Face of Natural Disasters? By Pejman Abedifar; Hossein Doustali; Steven Ongena
  8. Paper on Economic Sanctions and the Law of Central Bank Immunity in the United States By Richard Ostrander
  9. Foreign Exchange Intervention with UIP and CIP Deviations: The Case of Small Safe Haven Economies By Philippe Bacchetta; Kenza Benhima; Brendan Berthold
  10. Profit Shifting and Firm Credit By Fotis Delis; Manthos D. Delis; Sotirios Kokas; Luc Laeven; Steven Ongena
  11. The Effect of Bank Recapitalization Policy on Credit Allocation, Investment, and Productivity: Evidence from a Banking Crisis in Japan By Hiroyuki Kasahara; Yasuyuki Sawada; Michio Suzuki
  12. An unconventional FX tail risk story By Cañon, Carlos; Gerba, Eddie; Pambira, Alberto; Stoja, Evarist
  13. Do Banks Engage in Earnings Management? The Role of Dividends and Institutional Factors By Mamiza Haq; Steven Ongena; Juying Pu; Eric K. M. Tan
  14. Forecasting Risks to the Canadian Economic Outlook at a Daily Frequency By Chinara Azizova; Bruno Feunou; James Kyeong
  15. Monetary Approach to Balance of Payments: Empirical Evidence from ECOWAS Countries By Cham, Yaya
  16. Between money and speculative asset: the role of financial literacy on the perception towards Bitcoin in Italy By Cascavilla, Alessandro
  17. Forecasting inflation and inflation expectations in small open economies: A comparison of market and survey based approaches for Jamaica By Uluc Aysun; Cardel Wright
  18. Households' Response to the Wealth Effects of Inflation By Philip Schnorpfeil; Michael Weber; Andreas Hackethal
  19. Fintech: Ask “What Next?” Not “What If?” By Patrick T. Harker
  20. Decoding Financial Crises: Analyzing Predictors and Evolution By JEONG, Young Sik; BAEK, Yaein
  21. Managing Mental Accounts: Payment Cards and Consumption Expenditures By Michael Gelman; Nikolai Roussanov
  22. By Richard Audoly; Richard K. Crump; Martín Almuzara; Davide Melcangi; Roshie Xing
  23. Monetary policy surprises shocks under different fiscal regimes: a panel analysis of the Euro Area By António Afonso; José Alves; Serena Ionta
  24. Optimal Monetary Policy and Rational Asset Bubbles By Jacopo Bonchi; Salvatore Nisticò
  25. Same old song: On the macroeconomic and distributional effects of leaving a Low Interest Rate Environment By Alberto Botta; Eugenio Caverzasi; Alberto Russo
  26. Insurers’ investment behaviour and the coronavirus (COVID-19) pandemic By Ghiselli, Angelica; Fay, Constanze
  27. Keep calm and bank on: panic-driven bank runs and the role of public communication By Damiano Sandri; Francesco Grigoli; Yuriy Gorodnichenko; Olivier Coibion
  28. Climate Transition Risks of Banks By Felix Martini; Zacharias Sautner; Sascha Steffen; Carola Theunisz
  29. Agent-based Modeling and the Sociology of Money: a Framework for the Study of Coordination and Plurality By Eduardo Ferraciolli; Tanya Araújo

  1. By: Jesper Akesson (The Behaviouralist); John Gathergood (University of Nottingham); Edika Quispe-Torreblanca (University of Leeds)
    Abstract: Innovation in financial technology has granted consumers increased access to faster, more convenient payment services. This development has, however, also given rise to Authorised Push Payment (APP) fraud, where consumers are unwittingly manipulated into authorising transactions to counterfeit parties, such as fake online sellers. The annual costs of APP fraud are growing, and for example total more than £0.5bn in the United Kingdom alone. In this paper, we present the results from an online experiment tthat tests interventions designed to reduce the likelihood that consumers fall for APP fraud. These interventions were presented to consumers within a mobile bank application, and for instance, involved presenting warnings and increasing the salience of calls-to-action. Our analysis shows that redesigned calls-to-action can dramatically reduce fraud success rates, whereas traditional behavioural and risk-based warnings have much weaker effects. Our results show how redesigning consumer journeys can potentially reduce fraud prevalence.
    Keywords: fraud; financial technology; behavioural science
    Date: 2023–08
  2. By: Lefteris Loukas; Ilias Stogiannidis; Prodromos Malakasiotis; Stavros Vassos
    Abstract: We propose the use of conversational GPT models for easy and quick few-shot text classification in the financial domain using the Banking77 dataset. Our approach involves in-context learning with GPT-3.5 and GPT-4, which minimizes the technical expertise required and eliminates the need for expensive GPU computing while yielding quick and accurate results. Additionally, we fine-tune other pre-trained, masked language models with SetFit, a recent contrastive learning technique, to achieve state-of-the-art results both in full-data and few-shot settings. Our findings show that querying GPT-3.5 and GPT-4 can outperform fine-tuned, non-generative models even with fewer examples. However, subscription fees associated with these solutions may be considered costly for small organizations. Lastly, we find that generative models perform better on the given task when shown representative samples selected by a human expert rather than when shown random ones. We conclude that a) our proposed methods offer a practical solution for few-shot tasks in datasets with limited label availability, and b) our state-of-the-art results can inspire future work in the area.
    Date: 2023–08
  3. By: Luciano Campos (CONICET/IIEP)
    Abstract: This paper estimates the natural rate of interest for the six biggest Latin American economies. Considering the fact that money velocity is the permanent component of the nominal interest rate, both the nominal and real natural rates are estimated simply by running an OLS regression. It is evidenced a downward trend in the real natural rate since the 2010s, comparable with the decline displayed by potential output once the favorable conditions of the 2000s commodity boom were over. This result has direct implications for the monetary stance evaluation in the region, which is analyzed as well in this work.
    Keywords: Natural rate of interest; money velocity; Latin America
    JEL: E58 N16
    Date: 2023–09
  4. By: António Afonso; José Alves; Serena Ionta
    Abstract: We study the effect of monetary policy surprise shocks on real output and the price level, conditioned on different fiscal stances in the period 2001Q4-2021Q4 for a panel of the 19 countries of the Euro Area. Applying local projection methodology, we find that the effect of monetary shocks depends on each country’s fiscal stance, specifically, if for output response the debt is more important in the effect of monetary policy, for prices, the “Ricardian” nature of fiscal policy appears to be far more crucial. However, regarding inflation targeting, monetary policy is most effective in the low debt regime and in the high fiscal sustainability one. Our results are robust to different specifications and models and have important policy implications notably for monetary policy, which should consider different fiscal stances when pursuing specific monetary policy objectives.
    Keywords: monetary policy surprises, public debt, fiscal sustainability, local-projection models, fiscal-monetary policy mix, Euro area
    JEL: C32 E58 E62 E63
    Date: 2023
  5. By: Greg Buchak (Stanford University); Vera Chau (University of Geneva; Swiss Finance Institute); Adam Jørring (Boston College)
    Abstract: We document that in the US residential mortgage market, the share of integrated intermediaries acting as both originator and servicer has declined dramatically. Exploiting a regulatory change, we show that borrowers with integrated servicers are more likely to refinance, and conditional on refinance, are more likely to be recaptured by their own servicer. Recaptured borrowers pay lower fees relative to other refinancers. This trend is partially offset by a rise in integrated fintech originator-servicers, who recapture at higher frequency but at worse terms. We build and calibrate a dynamic structural model to interpret these facts and quantify their impact on equilibrium outcomes. Our model suggests that integreated intermediaries enjoy a marginal cost advantage when refinancing recaptured borrowers, and fully disintegrating them would reduce refinancing frequencies and increase fees. Fintechs use technology to reacquire customers and reduce borrower inertia against refinancing. This endogenously creates market power, which fintechs exploit through higher fees. Despite worse terms ex-post, fintechs increase consumer welfare ex-ante by increasing refinancing frequencies. Taken together, our results highlight the importance of intermediaries’ scope in consumer financial outcomes and highlight a novel, quantitatively important application of fintech: customer acquisition.
    Keywords: Financial intermediation, disintermediation, mortgage servicing, refinancing, fintech
    JEL: G21 G23 E44 L12 L42 O16 O33
    Date: 2023–08
  6. By: Felipe Garcés; Juan Francisco Martínez; M. Udara Peiris; Dimitrios P. Tsomocos
    Abstract: The economic disruption of the COVID-19 pandemic triggered the deployment of a plethora of conventional and unconventional policies. Whilst the policies, in general, are believed to have prevented a more calamatous economic decline, it has been difficult to disentangle the effects of policies from the counterfactual path of the economy. In this paper we estimate a medium scale DSGE model, with a banking sector, and use observed policy responses to extract the underlying shocks characterising the economic effects of the COVID-19 pandemic in Chile. We find that GDP contracted by 10% less because of the pandemic policies while credit policies helped to boost the commercial portfolio by an additional 14% and 12% of accumulated annual growth, for big and small banks respectively, with a limited increase in non-performing loans in the first group of banks. We argue that this and other findings relative to heterogeneity are useful when designing policies transmitted through the banking sector.
    Date: 2023–08
  7. By: Pejman Abedifar (University of St Andrews; Khatam University); Hossein Doustali (Khatam University); Steven Ongena (University of Zurich; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR))
    Abstract: What is the role played by marketplace lending after natural disasters? Analyzing a sample of more than one and a half million observations from Lending Club around the 33 worst natural disasters that occurred between 2013 and 2017, we find that there is an increase in the demand for marketplace loans by almost 10%. Yet, the platform does not restrict lending to individuals in the affected areas, nor do we observe an increase in interest rates. Interestingly, the performance of borrowers who receive loans after a natural disaster is not significantly different from the borrowers during normal times, indicating that the platform is competent at efficiently meeting the extra loan demand.
    Keywords: Marketplace Lending, FinTech, Natural Disasters, Access to Finance, Credit Risk Assessment
    JEL: D14 E51 G2 Q54
    Date: 2023–09
  8. By: Richard Ostrander
    Abstract: Paper prepared for Panel Discussion on Central Bank Immunities and International Sanctions, ECB Legal Conference 2023, Frankfurt am Main, Germany.
    Keywords: economic sanctions; central bank
    Date: 2023–09–05
  9. By: Philippe Bacchetta (University of Lausanne; Swiss Finance Institute; Centre for Economic Policy Research (CEPR)); Kenza Benhima (University of Lausanne; Centre for Economic Policy Research (CEPR)); Brendan Berthold (University of Lausanne)
    Abstract: We examine the welfare-based opportunity cost of foreign exchange (FX) intervention when both CIP and UIP deviations are present. We consider a small open economy that receives international capital flows through constrained international financial intermediaries. Deviations from CIP come from limited arbitrage or through a convenience yield, while UIP deviations are also affected by risk. We show that the sign of CIP and UIP deviations may differ for safe haven countries. We find that there may be a benefit, rather than a cost, of FX reserves if international intermediaries value the safe haven properties of a currency more than domestic households. We show that this has been the case for the Swiss franc and the Japanese Yen. We examine the optimal policy of a constrained central bank planner in this context.
    Date: 2023–08
  10. By: Fotis Delis (European Commission Joint Research Centre); Manthos D. Delis (Audencia Business School); Sotirios Kokas (University of Essex); Luc Laeven (European Central Bank (ECB); Centre for Economic Policy Research (CEPR)); Steven Ongena (University of Zurich; KU Leuven; Swiss Finance Institute; NTNU Business School; Centre for Economic Policy Research (CEPR))
    Abstract: Profit shifting by multinational enterprises (MNEs) generates earnings but also carries risks. We examine how banks perceive this tradeoff in their credit decisions, mainly credit costs. Using novel profit shifting estimates for each MNE-year, we show that banks, on average, give favorable credit spreads and larger loan amounts to profit-shifting MNEs. This is in stark contrast to other tax evasion practices that yield the opposite results. However, the introduction of OECD’s Base Erosion and Profit Shifting (BEPS) introduced significant risk to profit-shifting, yielding increasing credit spreads and lowering loan amounts, especially where banks are less able to collect information.
    Keywords: Corporate taxes; Profit shifting; Bank credit; Loan Spreads; Taxation policy
    JEL: G21 H25 H26 F23 F42
    Date: 2023–08
  11. By: Hiroyuki Kasahara; Yasuyuki Sawada; Michio Suzuki
    Abstract: This paper examines the ramification of government capital injections into financially distressed banks during the 1997 Japanese banking crisis. By leveraging a unique dataset merging firm-level financial statements and bank balance sheets, the study aims to examine whether the capital injections primarily benefited high-productivity firms or were misallocated to struggling “zombie” firms. The empirical results suggest that banks, post-injection, increased lending to both high-productivity non-zombie firms and low-productivity zombie firms. While the former is in line with conventional theories that prioritize high-productivity firms for investment and productivity enhancement, the latter suggests credit misallocation towards struggling firms mainly for debt servicing. Intriguingly, the study finds no evidence that these injections promoted investments among firms, irrespective of their productivity or financial health status. In particular, we provide suggestive evidence that zombie firms even reduced investments, especially in infrastructure, while high-productivity non-zombie firms did not exhibit a significant investment boost despite receiving more loans. However, these high-productivity firms displayed positive growth in labor productivity and total factor productivity, potentially driven by sales growth and increased advertisement expenses rather than employment and wage adjustments.
    Keywords: capital injection, bank regulation, banking crisis, total factor productivity, Zombie
    JEL: E22 G21 G28
    Date: 2023
  12. By: Cañon, Carlos; Gerba, Eddie; Pambira, Alberto; Stoja, Evarist
    Abstract: We examine how the tail risk of currency returns over the past 20 years were impacted by central bank (monetary and liquidity) measures across the globe with an original and unique dataset that we make publicly available. Using a standard factor model, we derive theoretical measures of tail risks of currency returns which we then relate to the various policy instruments employed by central banks. We find empirical evidence for the existence of a cross-border transmission channel of central bank policy through the FX market. The tail impact is particularly sizeable for asset purchases and swap lines. The effects last for up to 1 month, and are proportionally higher for joint QE actions. This cross-border source of tail risk is largely undiversifiable, even after controlling for the U.S. dollar dominance and the effects of its own monetary policy stance.
    Keywords: unconventional and conventional monetary policy; liquidity measures; currency tail risk; systematic and idiosyncratic components of tail risk
    JEL: E44 G12 G15 E52
    Date: 2023
  13. By: Mamiza Haq (University of Huddersfield); Steven Ongena (University of Zurich; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)); Juying Pu (University of Queensland); Eric K. M. Tan (University of Queensland)
    Abstract: We investigate the impact of dividend policy on earnings quality and opportunistic earnings management for individual banks across 45 developed and developing countries between 1996 to 2019. Our estimates show that high dividend payments reduce earnings management, hence mitigate agency problems. This mitigation is especially prevalent among well-capitalised or non- listed banks. Greater investor protection and government regulation appear to strengthen the negative association between dividend policy and earnings management. Our results hold robustly across many different specifications.
    Keywords: dividend payout; opportunistic earnings management; earnings quality; bank capital, investor protection
    JEL: G02 G20
    Date: 2023–09
  14. By: Chinara Azizova; Bruno Feunou; James Kyeong
    Abstract: In this paper, we estimate the distribution of future inflation and growth in real gross domestic product (GDP) for the Canadian economy at a daily frequency. To do this, we model the conditional moments (mean, variance, skewness and kurtosis) of inflation and GDP growth as moving averages of economic and financial conditions. Then, we translate the conditional moments into conditional distributions using a flexible parametric distribution known as the skewed generalized error distribution. We show that the probabilities of inflation and GDP growth derived from the conditional distributions accurately reflect realized outcomes during the sample period from 2002 to 2022. Our methodology offers daily-frequency forecasts with flexible forecasting horizons. This is highly useful in an environment of elevated uncertainty surrounding the inflation and growth outlook.
    Keywords: Econometric and statistical methods; Business fluctuations and cycles
    JEL: C32 C58 E44 G17
    Date: 2023–09
  15. By: Cham, Yaya
    Abstract: The study primarily presents a critical and imperative analytical framework, accentuating the intricate interplay between the demand for money and the supply of money in shaping the economic equilibrium of the balance of payments (BOP). The focal point of this paper involves a meticulous examination of the monetary perspective regarding the BOP within the ECOWAS countries spanning the temporal domain from 2005 to 2019. This investigation is accomplished through the adept utilization of the second-generation unit root tests, namely the Common Augmented Dickey-Fuller (CADF) test and the Cross-sectional Augmented IPS (CIPS) test, alongside the comprehensive Westerlund cointegration test to ascertain the enduring nexus existing within the examined series. By adopting the dynamic homogeneous panel estimator, this study conducts an exhaustive scrutiny of both the short-term and long-term dynamics. The empirical findings, gleaned from the Pooled Mean Group analysis, unveil the pivotal role of monetary variables in determining BOP. In the medium and extended temporal spectra, ameliorations in domestic credit within the ECOWAS region are juxtaposed with a concomitant decline in net foreign assets, thus manifestly contributing to the deterioration of the BOP milieu in the aforementioned zones. Furthermore, a parallel analysis divulges a counteractive relationship between economic growth and inflation with net foreign assets in the short run, while this association transforms a synergistic correlation over the long haul. Conversely, the money supply engenders a positive and consequential influence on net foreign assets, evinced across both the transient and enduring periods. Essentially, the research findings substantiate the veracity of the monetary approach within the purview of the zones under contemplation. Consequently, monetary variables wield substantial and pronounced impacts on the BOP, with an escalating BOP, forth as a harbinger of enhanced equilibrium within the zones' balance of payments framework. Concerning policy implications, the underlying study underscores the monetary approach as an adept and fitting strategy, elucidating the notion that an outsized BOP deficit could potentially foster an environment conducive to the propagation of excessive domestic credit. Knowledge obtained from this research will go a long way in helping policy formulation and will also help the region in ensuring smooth developments in the external sector especially during the implementation of monetary policy.
    Keywords: Yaya Cham Monetary Approach Balance of Payments West African Monetary Institute Central Bank of The Gambia ARDL ECOWAS Crossectional
    JEL: E5 E51 E52 E58 O55 O57 Y40 Y50
    Date: 2023–08
  16. By: Cascavilla, Alessandro
    Abstract: With Bitcoin at the forefront, cryptocurrencies are gaining traction as an alternative asset investment, particularly among young investors. Although most of the empirical evidence has shown that it could not be defined as a currency, some Bitcoin users argue the opposite. This paper analyzes the factors influencing the perception of Bitcoin, i.e., whether it is a currency or an asset, with a focus on financial literacy among a subject pool of university students in Italy. The results show that, after controlling for several individual characteristics such as behavioral biases, personal attitudes, psychological traits, and socio-demographic information, this cryptocurrency is considered more than just an asset, and thus it could replace currency, among subjects with lower financial literacy, higher knowledge of Bitcoin, and those who do not trust the banking system. In contrast, Bitcoin is considered a speculative asset among those individuals with higher financial literacy. In line with the recent evidence that cryptocurrencies are mostly owned by young investors, results indicate the importance of increasing the level of financial education among them.
    Keywords: Bitcoin, Financial education, Financial literacy, Behavioral bias
    JEL: D14 D91 E41 O33
    Date: 2023
  17. By: Uluc Aysun (University of Central Florida, Orlando, FL); Cardel Wright (Bank of Jamaica, Kingston, Jamaica)
    Abstract: This paper builds a dynamic factor model to obtain both in-sample and out-of-sample forecasts of inflation in Jamaica. The model is estimated with both survey and market data. For the latter, a global latent factor is first extracted from international financial data and then included as an exogenous variable in the estimations with Jamaican data. The results indicate that the estimations with market data provide a much better fit for in-sample and out-of-sample values of inflation and inflation expectations. The dynamic factor, under a parsimonious representation, also outperforms univariate models, Bank of Jamaica's in-house forecasts of inflation and those obtained from an estimated DSGE model.
    Keywords: Jamaica, inflation expectations, forecasting, dynamic factor model, survey data.
    JEL: E32 E44 F33 F44
    Date: 2023–09
  18. By: Philip Schnorpfeil; Michael Weber; Andreas Hackethal
    Abstract: We study the redistributive effects of inflation combining administrative bank data with an information provision experiment during an episode of historic inflation. On average, households are well-informed about prevailing inflation and are concerned about its impact on their wealth; yet, while many households know about inflation eroding nominal assets, most are unaware of nominal-debt erosion. Once they receive information on the debt-erosion channel, households update upwards their beliefs about nominal debt and their own real net wealth. These changes in beliefs causally affect actual consumption and hypothetical debt decisions. Our findings suggest that real wealth mediates the sensitivity of consumption to inflation once households are aware of the wealth effects of inflation.
    JEL: D12 D14 D83 D84 E21 E31 E52
    Date: 2023–09
  19. By: Patrick T. Harker
    Abstract: During welcome remarks at the Seventh Annual Fintech Conference in Philadelphia, Patrick T. Harker, president and CEO of the Philadelphia Fed, spoke to the rapidly changing concept of money. “Everyone here recognizes that fintech presents not just opportunities but also challenges, ” he said, “and that we will not ultimately succeed if we only focus on the former and ignore the latter.” With the rollout of FedNow, he said the Federal Reserve is doing its part to foster “a more nimble and responsive banking system, ” while we witness “a technological revolution through AI” and provide leadership in quantum computing, “which has the potential to revolutionize security and problem-solving methodologies throughout the banking and financial services industry.” Harker also emphasized that the Fed will also continue to provide leadership to ensure a safe, efficient, fair, and equitable U.S. payments and financial system.
    Date: 2023–09–07
    Abstract: We examine factors that predict financial crises and the evolution of financial crises using non-traditional methodologies, such as machine learning and system dynamics. Firstly, in our random forest model, the top six most important predictors among 12 indicators for the entire period (1870-2017) are the slope of the yield curve, the CPI, consumption, the debt service ratio, equity return, and public debt. Secondly, even though the manifestations of financial crises differ in each case, five common characteristics have been identified by examining various past financial crisis cases using a system dynamics approach (causal loop diagram). The first characteristic is a feedback loop that reinforces credit expansion. Next, the feedback loop leads to the buildup of financial crisis risk. Third, there is the shock that triggers the financial crisis. Fourth, there are risk-spreading factors. Lastly, individual financial crises do not end in themselves but have the common characteristic of becoming the seeds of new crises. In conclusion, two key findings emerge. First, the financial crisis is a systemic problem rather than an individual risk factor. Second, in diagnosing the recent situation, the results point to the risk of the financial crisis spreading.
    Keywords: Financial Crisis; Economic Crisis; Machine Learning; System Dynamics
    Date: 2023–08–04
  21. By: Michael Gelman; Nikolai Roussanov
    Abstract: Does mental accounting matter for total consumption expenditures? We exploit a unique setting in which individuals exogenously received a new credit card, without requesting one. Using random variation in the time of receipt we show that individuals temporarily increase total consumption expenditure by making purchases with the new card without reducing spending on the others. We do not observe a corresponding increase in indebtedness. Total consumption expenditure rises even for the least liquidity-constrained individuals. The evidence is consistent with consumers treating methods of payment as nonfungible budget categories, as suggested by models of mental accounting and narrow bracketing.
    JEL: D01 D12 D31 D91 D99 G02 G40 G41 G5 G50 G51 G53
    Date: 2023–08
  22. By: Richard Audoly; Richard K. Crump; Martín Almuzara; Davide Melcangi; Roshie Xing
    Abstract: With prices quickly going up after the COVID-19 pandemic, inflation releases have rarely been as present in the public debate as in recent years. However, since inflation estimates are frequently revised, how precise are the real-time data releases? In this Liberty Street Economics post, we investigate the size and nature of revisions to inflation. We find that inflation estimates for a given month can change substantially as subsequent data vintages are released. As an example, consider March 2009. With the economy contracting amid the Global Financial Crisis, the twelve-month inflation rate for personal consumption expenditures (PCE) excluding food and energy dropped from an initial estimate of 1.8 percent to 0.8 percent in the current series. The difference is dramatic and points to the difficulty of monitoring inflation in real time. Our results suggest that there is significant uncertainty in measuring inflation, and the key features of the recent spike and subsequent moderation of inflation may look quite different in hindsight once further revisions have taken place.
    Keywords: Inflation
    JEL: E31 E52
    Date: 2023–09–07
  23. By: António Afonso; José Alves; Serena Ionta
    Abstract: We study the effect of monetary policy surprise shocks on real output and the price level, conditioned on different fiscal stances in the period 2001Q4-2021Q4 for a panel of the 19 countries of the Euro Area. Applying local projection methodology, we find that the effect of monetary shocks depends on each country's fiscal stance, specifically, if for output response the debt is more important in the effect of monetary policy, for prices, the "Ricardian" nature of fiscal policy appears to be far more crucial. However, regarding inflation targeting, monetary policy is most effective in the low debt regime and in the high fiscal sustainability one. Our results are robust to different specifications and models and have important policy implications notably for monetary policy, which should consider different fiscal stances when pursuing specific monetary policy objectives.
    Keywords: monetary policy surprises, public debt, fiscal sustainability, localprojection models, fiscal-monetary policy mix, Euro area.
    JEL: C32 E58 E62 E63
    Date: 2023–08
  24. By: Jacopo Bonchi; Salvatore Nisticò
    Abstract: Using a New Keynesian model with stochastic asset market participation, we analyze the normative implications of bubbly fluctuations for monetary policy. We show that stochastic asset-market participation allows rational bubbles to emerge in equilibrium despite the fact that households are infinitely lived. A central bank concerned with social welfare faces an additional tradeoff implied by the effect of bubbly fluctuations on consumption dispersion across market participants, which makes, in general, strict inflation targeting a suboptimal monetary-policy regime. Deviations from inflation targeting are welfare improving in particular when the economy fluctuates around a balanced-growth path where equilibrium bubbles are small or absent, and the endogenous tradeoff is more stringent, requiring larger deviations of inflation/output gap to mitigate bubbly fluctuations in wealth and thus consumption inequality. The specific optimal monetary-policy response to bubbly fluctuations depends however on the intrinsic features of latter, and the associated effects on wealth inequality.
    Keywords: Rational bubbles, Optimal monetary policy, Stochastic Asset Market Participation, Consumption dispersion
    JEL: E21 E32 E44 E58
    Date: 2023–08
  25. By: Alberto Botta; Eugenio Caverzasi; Alberto Russo
    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., asset-backed 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 than 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: 2023–09
  26. By: Ghiselli, Angelica; Fay, Constanze
    Abstract: This research explores two aspects of European insurers’ investment behaviour related to crises. While they are often considered as financial market stabilisers and long-term investors, there is currently a lack of knowledge about insurers’ investment behaviour in crises under the regulatory Solvency II regime implemented in 2016. With assets of nearly €9 trillion and bond holdings of more than €3 trillion in Q2 2022, European insurers are important financial intermediaries and finance European economies. With an empirical study, we investigate their reaction to the asset price shock at the onset of the coronavirus (COVID-19) pandemic in the first quarter of 2020 and explore cyclical investment behaviour by replicating Timmer’s (2018) study with fixed effects panel regressions. We use a large cross-country dataset, with the novelty of exploiting cross-country heterogeneity for European countries with 458, 758 security-level observations from 2017 to 2022. Overall, our findings are very relevant from a policy perspective as they suggest active and heterogeneous cyclical investment behaviour in the European insurance market with differences across issuer and holder countries of domicile.
    Keywords: Cyclicality, Debt Capital Flows, Financial Stability, Insurance companies, Pandemic, Portfolio Allocation
    Date: 2023–09
  27. By: Damiano Sandri; Francesco Grigoli; Yuriy Gorodnichenko; Olivier Coibion
    Abstract: Using a survey with information treatments conducted in the aftermath of SVB's collapse, we study households' perspectives on bank stability, the potential for panic-driven bank runs, and the role of public communication. When informed about SVB's collapse, households become more likely to withdraw deposits, due to both a higher perceived risk of bank failure and higher expected losses on deposits in case of bank failure. Leveraging hypothetical questions and the exogenous variation in beliefs generated by the information treatments, we show that households reallocate deposit withdrawals primarily into other banks and cash, with little passthrough into spending. Information about FDIC insurance and communication about bank stability by the Federal Reserve can reassure depositors, while communication from political leaders only influences their electoral base.
    Keywords: bank runs, public communication, information treatments
    JEL: E21 E58 G21
    Date: 2023–08
  28. By: Felix Martini (Frankfurt School of Finance & Management); Zacharias Sautner (University of Zurich; Swiss Finance Institute); Sascha Steffen (Frankfurt School of Finance & Management); Carola Theunisz (Frankfurt School of Finance & Management)
    Abstract: We develop a bottom-up measure of U.S. banks' exposures to climate transition risks from the carbon footprint of their syndicated loan portfolios. The measure reveals significant variation in risk exposures across banks and over time. Bank exposures declined over time, especially since the Paris Agreement. This effect stems from a re-balancing of bank loan portfolios, with more lending to low-emission borrowers (not less lending to high-emission borrowers). Banks with higher risk exposures exhibit more climate-related disclosures in their earnings calls, but not in their Form 10-Ks. Risk exposures correlate with bank-level climate betas, which reflect the sensitivity of bank returns to the returns of a stranded asset index.
    Keywords: Climate transition risks, banking sector, syndicated loans
    JEL: G21
    Date: 2023–08
  29. By: Eduardo Ferraciolli; Tanya Araújo
    Abstract: The institution of money can be seen as a foundational social mechanism providing communities with the ability to quantify the results of economic processes and collectively regulate independent activities of production and trade – money can be said, indeed, to constitute the micro-macro link in economics. As such, investigations of money’s role in the economy can be fruitfully combined with the tools of social simulation. This paper revisits some of the main positions taken in the contested landscape of monetary theory, evaluating how they might serve as a foundation for the development of a new generation of conceptual and empirical agent-based models.We start out by presenting a comparative review of the way different intellectual traditions in mainstream economics, heterodox economics, and economic sociology attempt to specify the nature of money as an institution and clarify its role in the economy. We extract the key "concepts of money" that each approach emphasizes, paying especially close attention to the contrast between the sociology of money and the microfoundations-related traditions in economics (focusing on "money is memory" models, search-theory and mechanism design). We then review the current literature applying agent-based modeling to questions surrounding the nature of money, assessing some of the main contributions from the perspectives of generative epistemology and of the key concepts identified above. We conclude by indicating different research directions in which we believe agent-based models, in combination with the sociology of money, still have the potential to provide new answers to old questions in monetary theory: by clarifying convergence processes related to money of account, by illustrating the formation of economic structure through symbolic mediation, by constructing tools for analyses of intersubjectivity and coordination, or by providing formal generalization to the social-monetary patterns that are currently being revealed in the wealth of empirical data originating from digital complementary currencies and new histories of money.
    Keywords: monetary theory, agent-based modeling, economic sociology
    Date: 2023–08

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