nep-ban New Economics Papers
on Banking
Issue of 2023‒10‒30
37 papers chosen by
Sergio Castellanos-Gamboa, Tecnológico de Monterrey

  1. What’s the Cost of †Saving the Planet†for Banks? Assessing the Indirect Impact of Climate Transition Risks on Slovak Banks’ Loan Portfolios By Jozef Kalman; Jan Klacso; Roman Vasil; Juraj Zeman
  2. Borrower Technology Similarity and Bank Loan Contracting By Mingze Gao; Yunying Huang; Steven Ongena; Eliza Wu
  3. Enough liquidity with enough capital - And vice versa? By Gersbach, Hans; Haller, Hans; Zelzner, Sebastian
  4. The pass-through of market interest rates to bank interest rates By Sergio Mayordomo; Irene Roibás
  5. Lease Expirations and CRE Property Performance By David P. Glancy; J. Christina Wang
  6. Quantitative Easing and the Functioning of the Gilts Repo Market By Mahmoud Fatouh; Simone Giansante; Steven Ongena
  7. U.S. Monetary Policy Shocks and Bank Lending in Latin America: Evidence of an International Bank Lending Channel By Giraldo, Carlos; Giraldo, Iader; Gomez-Gonzalez, Jose E.; Uribe, Jorge M.
  8. Living Up to Expectations: Central Bank Credibility, the Effectiveness of Forward Guidance, and Inflation Dynamics Post-Global Financial Crisis By Cole, Stephen J.; Martinez-Garcia, Enrique; Sims, Eric
  9. Climate Risk and Bank Capital Structure By Bakkar, Yassine
  10. Redefining Financial Inclusion for a Digital Age: Implications for a Central Bank Digital Currency By Alexandra Sutton-Lalani; Sebastian Hernandez; John Miedema; Jiamin Dai; Badr Omrane
  11. Living Up to Expectations: Central Bank Credibility, the Effectiveness of Forward Guidance and Inflation Dynamics Post-Global Financial Crisis By Stephen J. Cole; Enrique Martinez-Garcia; Eric Sims
  12. Too Fast, Too Furious? Digital Credit Delivery Speed and Repayment Rates By Burlando, Alfredo; Kuhnk, Michael A.; Prina, Silvia
  13. Central bank communication by ??? The economics of public policy leaks By Ehrmann, Michael; Gnan, Phillipp; Rieder, Kilian
  14. Macroprudential Policies and Capital Controls Over Financial Cycles By Maria Arakelyan; Adam Gersl; Mr. Martin Schindler
  15. Estimating the Appropriate Quantity of Settlement Balances in a Floor System By Narayan Bulusu; Matthew McNeely; Kaetlynd McRae; Jonathan Witmer
  16. Three things we learned about the Lynx payment system By Nikil Chande; Zhentong Lu; Hiru Rodrigo; Phoebe Tian
  17. Who’s Borrowing and Lending in the Fed Funds Market Today? By Gara Afonso; Gonzalo Cisternas; Brian Gowen; Jason Miu; Josh Younger
  18. Mobile Effects on Two-Sided Financial Decisions: Evidence from Field Experiments on Peer-to-Peer Lending Platforms By Sihan Fang; Hyeokkoo Eric Kwon; Tian Lu; Yingjie Zhang
  19. Modeling Collateralization and Its Economic Significance By Lee, David
  20. Financial Inclusion through Mobile Money in developing countries: the case of Vietnam By Nguyen, Luan-Thanh
  21. Measuring the Effects of Unconventional Monetary Policy Tools under Adaptive Learning By Cole, Stephen J.; Huh, Sungjun;
  22. The forward guidance trap By Orphanides, Athanasios
  23. Climate-conscious monetary policy By Nakov, Anton; Thomas, Carlos
  24. The Central Bank's Dilemma: Look Through Supply Shocks or Control Inflation Expectations? By Paul Beaudry; Thomas J. Carter; Amartya Lahiri
  25. Runs and Flights to Safety: Are Stablecoins the New Money Market Funds? By Kenechukwu E. Anadu; Pablo D. Azar; Catherine Huang; Marco Cipriani; Thomas M. Eisenbach; Gabriele La Spada; Mattia Landoni; Marco Macchiavelli; Antoine Malfroy-Camine; J. Christina Wang
  26. Debt Moratorium: Theory and Evidence By Yasin Kür¸sat Önder; Mauricio Villamizar-Villegas; Jose Villegas
  27. Enhancing the Delivery of Financial Services in Pakistan By Wajhullah Fahim
  28. Options-based systemic risk, financial distress, and macroeconomic downturns By Bevilacqua, Mattia; Tunaru, Radu; Vioto, Davide
  29. Less-Cash or More-Cash? Determinants and Trends of Currency in Circulation in a Panel of 17 Economies By Kumar Chandrakamal Pramod Kumar
  30. From Linear to Nonlinear: Rethinking Inflation Dynamics in the Calvo Pricing Mechanism By Ales Marsal; Katrin Rabitsch; Lorant Kaszab
  31. Does Monetary Policy Shape the Path to Carbon Neutrality? By Döttling, Robin; Lam, Adrian
  32. Monetary transmission in Iceland - Evidence from a structural VAR model By Thorarinn G. Petursson
  33. Robust monetary policy under shock uncertainty By Mario Carceller del Arco; Jan Willem van den End
  34. Optimal monetary policy in an estimated SIR model By Benmir, Ghassane; Jaccard, Ivan; Vermandel, Gauthier
  35. Inflation news coverage, expectations and risk premium By Perico Ortiz, Daniel
  36. Impact of Export Financing Schemes on Export Performance Qualitative Approach By Uzma Zia; Fozia Tabussom
  37. Effect of Macroprudential Policies on Sovereign Bond Markets: Evidence from the ASEAN-4 Countries By Aizenman , Joshua; Uddin, Gazi Salah; Luo , Tianqi; Jayasekera , Ranadeva; Park, Donghyun

  1. By: Jozef Kalman (National Bank of Slovakia); Jan Klacso (National Bank of Slovakia); Roman Vasil (National Bank of Slovakia); Juraj Zeman (National Bank of Slovakia)
    Abstract: The ongoing trend of global warming is damaging not only human society but also economic activity. Central banks, supervisors, and macroprudential authorities are not immune to the climate-related risks in the financial sector. This study analyses how climate transition risks indirectly affect the banking sector through the credit risk channel for both households and non-financial corporations. We integrate Network for Greening the Financial System scenarios into conventional stress testing framework. The analysis focuses on a short-term horizon to reduce the impact of high modeling uncertainty on the outcomes. We find that a relatively smooth substitution of emission-intensive sectors results in relatively low indirect costs for banks. An uneven transition can, however, generate significantly higher credit losses, occasionally exceeding adverse scenario outcomes of conventional stress testing. The results are sensitive to an increase in energy prices or to higher defaults of firms in emission-intensive sectors.
    JEL: C60 E50 G32 O44 Q40 Q54
    Date: 2023–10
  2. By: Mingze Gao (University of Sydney); Yunying Huang (University of Sydney); Steven Ongena (University of Zurich; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)); Eliza Wu (University of Sydney)
    Abstract: Do banks accumulate knowledge about corporate technology, and does it matter for their lending? To answer this question, we combine corporate innovation with syndicated loan data. We find that loans to firms sharing similar technologies with banks’ prior borrowers obtain lower loan spreads. We can rule out product market competition, the value of their technology and ability to innovate, and/or numerous other firm characteristics as alternative explanations. By exploiting the adoption of intellectual property protection laws and the consummation of bank mergers and acquisitions, we can show that shocks to banks’ technology knowledge causally affect loan spreads.
    Keywords: technology similarity, loan contracting, matching model, relationship lending
    JEL: G21 G32 O33
    Date: 2023–09
  3. By: Gersbach, Hans; Haller, Hans; Zelzner, Sebastian
    Abstract: We study the interplay of capital and liquidity regulation in a general equilibrium setting by focusing on future funding risks. The model consists of a banking sector with long-term illiquid investment opportunities that need to be financed by short-term debt and by issuing equity. Reliance on refinancing long-term investment in the middle of the life-time is risky, since the next generation of potential short-term debt holders may not be willing to provide funding when the return prospects on the long-term investment turn out to be bad. For moderate return risk, equilibria with and without bank default coexist, and bank default is a self-fulfilling prophecy. Capital and liquidity regulation can prevent bank default and may implement the first-best. Yet the former is more powerful in ruling out undesirable equilibria and thus dominates liquidity regulation. Adding liquidity regulation to optimal capital regulation is redundant.
    Keywords: financial intermediation, funding risk, bank default, banking regulation, liquidity requirements, capital requirements
    JEL: G21 G33 G38
    Date: 2023
  4. By: Sergio Mayordomo (BANCO DE ESPAÑA); Irene Roibás (BANCO DE ESPAÑA)
    Abstract: The pass-through of market interest rates to the financial conditions of households and firms is an essential element in the monetary policy transmission mechanism. In this paper, we analyse how this transmission is playing out in the current hiking cycle in the euro area and in Spain, as compared to previous cycles. We find that the pass-through to the interest rates on retail time deposits is slower than in previous hiking cycles in both jurisdictions. Moreover, a slower pass-through is also observed for mortgages in Spain. We then show there is significant heterogeneity in this pass-through across euro area countries, especially for mortgages and retail time deposits. This heterogeneity is driven by both bank and country characteristics. More specifically, in the case of deposits, we find that almost half of the difference between the remuneration of retail time deposits in Spain and the euro area is driven by differences across banking sectors in the need to raise funds through deposits to supply credit.
    Keywords: monetary policy, interest rate pass-through, bank lending channel, loans, retail deposits, heterogeneity.
    JEL: E43 E47 E50 E51 E52 E58 E59 E65 G17 G21
    Date: 2023–10
  5. By: David P. Glancy; J. Christina Wang
    Abstract: This study analyzes how lease expirations affect the performance of commercial real estate (CRE) properties and how these patterns changed during the COVID-19 crisis. Even before the pandemic, lease expirations were associated with a notable increase in the downside risk to a property’s occupancy or income, particularly in weaker property markets. These risks became more pronounced during the pandemic, driven mostly by office properties. During the pandemic, the adverse effect of lease expirations on office occupancy increased more than 50 percent overall, and it doubled for offices in central business districts (CBDs). This amplified effect of office lease expirations serves as a harbinger of further deterioration as leases continue to roll over in coming years, especially among CBD offices. Across lender groups, nonbank and large bank lenders are more exposed than regional and community banks to office loans in those distressed CBDs. This pattern somewhat alleviates the concern that CRE portfolio credit risk will exacerbate the headwinds faced by this latter group of banks.
    Keywords: commercial real estate; lease expirations; COVID-19; office loans; bank loan exposure
    JEL: R30 R33 G21 G23
    Date: 2023–08–01
  6. By: Mahmoud Fatouh (University of Essex; Bank of England); Simone Giansante (University of Palermo); Steven Ongena (University of Zurich; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR))
    Abstract: We assess the impact of quantitative easing (QE) on the provisioning of liquidity and the pricing in the UK gilt repo market. We compare the behaviour of banks that received reserves injections via QE operations to other similar banks in terms of the amounts lent and pricing. We also investigate whether leverage ratio capital requirements affected the amounts of liquidity supplied by broker-dealers and the spreads they charged. We find that QE interventions can improve liquidity provision, and that their size determines how this is attained. QE can also reduce the cost of borrowing in the repo market, unless it was associated with spikes in demand for liquidity. Our findings further indicate that the leverage ratio supports the provision of liquidity during stress, as it prompts banks to become less leveraged. However, the larger capital charge repo transactions attract under the leverage ratio requirement is reflected in their spreads.
    Keywords: Monetary policy, quantitative easing, gilt repo market, leverage ratio
    JEL: G10 G21 G23
    Date: 2023–09
  7. By: Giraldo, Carlos (Latin American Reserve Fund); Giraldo, Iader (Latin American Reserve Fund); Gomez-Gonzalez, Jose E. (City University of New York – Lehman College); Uribe, Jorge M. (Universitat Oberta de Catalunya)
    Abstract: We examine the impact of U.S. monetary policy shocks on bank lending in five major Latin American countries where large U.S. banks have limited presence. Our analysis covers annual balance sheet data from 2000 to 2021 for all banks in these nations, utilizing a recently developed measure of U.S. monetary policy shocks by Bu et al. (2021). Our findings reveal the existence of an international bank lending channel, with a one-percentage-point increase in the Fed funds rate resulting in an average 80.6 basis-point reduction in domestic bank loan growth in these countries. Liquidity and solvency emerge as crucial factors driving variations in lending behavior among Latin American banks, with banks exhibiting stronger liquidity and solvency profiles experiencing higher loan supply growth rates. This international bank lending channel persists even in countries with minimal U.S. bank presence, leading to constrained cross-border lending activities.
    Keywords: International bank lending channel; U.S. monetary policy shocks; loan growth; Latin America;
    JEL: E51 E52 E59 G21
    Date: 2023–10–04
  8. By: Cole, Stephen J.; Martinez-Garcia, Enrique; Sims, Eric (Department of Economics Marquette University; Department of Economics Marquette University)
    Abstract: This paper studies the effectiveness of forward guidance when central banks have imperfect credibility. Exploiting unique survey-based measures of expected inflation, output growth, and interest rates, we estimate a small-scale New Keynesian model for the United States and other G7 countries plus Spain allowing for deviations from full information rational expectations. In our model, the key parameter that aggregates heterogeneous expectations captures the central bank's credibility and affects the over-all effectiveness of forward guidance. We find that the central banks of the U.S., the U.K., Germany, and other major advanced economies have similar levels of credibility (albeit far from full credibility); however, Japan's central bank credibility is much lower. For each country, our measure of credibility has declined over time, making forward guidance less effective. In a counterfactual analysis, we document that inflation would have been significantly higher, and the zero lower bound on short-term interest rates much less of an issue, in the wake of the Global Financial Crisis had the public perceived central bank forward guidance statements to be perfectly credible. Moreover, inflation would have declined more, and somewhat faster, with perfect credibility in the wake of the inflation surge post-COVID-19.
    Keywords: Forward guidance, central bank credibility, heterogeneous expectations
    JEL: D84 E30 E52 E58 E60 P52
    Date: 2023–10
  9. By: Bakkar, Yassine
    Abstract: We study the role of climate risk exposure in the dynamic behavior of banks' regulatory capital adjustment using a large European sample from 39 countries during the 2006-2021 period. We find that banks facing high exposure to climate risk opt for higher target (regulatory) capital adequacy ratio and make faster adjustment to their optimal capital structure, especially if they are more exposed to carbon pollution. Such banks boost their adjustment during the post Paris Agreement period. These banks move to their target capital adequacy ratio by mainly adjusting their risk-weighted assets or by reallocating them more promptly than other peers, but without necessarily altering assets, particularly, lending. This paper lends support to the importance of the climate change-related risks into prudential supervision to protect the financial system's resilience and contributes to the debate on climate-related capital requirements.
    Keywords: Dynamic capital structure, Speed of adjustment, Climate change, Paris Agreement, Balance sheet composition
    JEL: G21 G28 Q53 Q54
    Date: 2023
  10. By: Alexandra Sutton-Lalani; Sebastian Hernandez; John Miedema; Jiamin Dai; Badr Omrane
    Abstract: Digitalization—the use of data, digital platforms and advanced analytics—has quickly become widespread in today’s society. This has introduced new opportunities, but it has also created new barriers and exacerbated existing inequities. This is likewise true in the realm of payments, where issues around financial inclusion, digital inclusion and accessibility compound the challenges for users. Our work expands on that of Henry et al. (2023). We base our research on two key premises. First, we apply the social model of disability to the Canadian payments landscape to identify opportunities to remove barriers that marginalize or hinder people. Second, we investigate beyond the standard economic measures and aggregate statistics related to these topics to build a nuanced understanding of the challenges inherent in the current system. Our findings highlight important areas of research and design consideration for new digital payment products and services, specifically for central banks contemplating the introduction of a central bank digital currency. We identify barriers that rural populations, Indigenous communities, Canadians with low incomes and persons with disabilities face in using financial products. We also note a deficiency in the current research and payment offerings for those with cognitive accessibility challenges. With these findings, we aim to build awareness of the inequities and challenges present in the current payments system and motivate existing financial technology providers to move toward offering more-inclusive products and services.
    Keywords: Bank notes; Central bank research; Digital currencies and fintech; Digitalization; Financial services
    JEL: A14 E42 E50 I31 O33 O51
    Date: 2023–10
  11. By: Stephen J. Cole; Enrique Martinez-Garcia; Eric Sims
    Abstract: This paper studies the effectiveness of forward guidance when central banks have imperfect credibility. Exploiting unique survey-based measures of expected inflation, output growth and interest rates, we estimate a small-scale New Keynesian model for the United States and other G7 countries plus Spain allowing for deviations from full information rational expectations. In our model, the key parameter that aggregates heterogeneous expectations captures the central bank's credibility and affects the overall effectiveness of forward guidance. We find that the central banks of the U.S., the U.K., Germany and other major advanced economies have similar levels of credibility (albeit far from full credibility); however, Japan's central bank credibility is much lower. For each country, our measure of credibility has declined over time, making forward guidance less effective. In a counterfactual analysis, we document that inflation would have been significantly higher, and the zero lower bound on short-term interest rates much less of an issue, in the wake of the Global Financial Crisis had the public perceived central bank forward guidance statements to be perfectly credible. Moreover, inflation would have declined more, and somewhat faster, with perfect credibility in the wake of the inflation surge post-COVID-19.
    Keywords: forward guidance; central bank credibility; heterogeneous expectations
    JEL: D84 E30 E52 E58 E60 P52
    Date: 2023–09–29
  12. By: Burlando, Alfredo (University of Oregon); Kuhnk, Michael A. (University of Oregon); Prina, Silvia (Northeastern University)
    Abstract: Digital loans are a source of fast, short-term credit for millions of people. While digital credit broadens market access and reduces frictions, default rates are high. We study the role of the speed of delivery of digital loans on repayment. Our study uses unique administrative data from a digital lender in Mexico and a regression-discontinuity design. We show that reducing loan speed by doubling the delivery time from ten to twenty hours decreases the likelihood of default by 21%. Our findings suggest that selectively slowing down credit could improve lender profitability and help consumers avoid default.
    Keywords: digital credit, waiting periods, defaults, financial access
    JEL: D14 D18 G51 O16
    Date: 2023–09
  13. By: Ehrmann, Michael; Gnan, Phillipp; Rieder, Kilian
    Abstract: Leaks of confidential information emanating from public institutions have been the focus of a long-standing line of research. Yet, their determinants as well as their potential impact on public views and on policy effectiveness remain elusive. To address this gap, we study leaks from central banks because their effects are instantaneously reflected in financial markets. Based on a novel database of anonymous monetary policy leaks in the euro area as reported by newswires, we provide evidence that many of these leaks are likely placed by individual insiders with minority opinions. While we find that leaks have large effects on markets and weaken official policy announcements, our results also suggest that leaks do not lock in decision-makers, and that attributed communication can mitigate some of their effects. JEL Classification: D83, E52, E58, G14, H83
    Keywords: central bank communication, European Central Bank, leaks, media, monetary policy
    Date: 2023–09
  14. By: Maria Arakelyan; Adam Gersl; Mr. Martin Schindler
    Abstract: In this paper we assess the effectiveness of macroprudential policies and capital controls in supporting financial stability. We construct a large and granular dataset on prudential and capital flow management measures covering 53 countries during 1996-2016. Conditional on a credit boom, we study the impact of these policy measures on the probability of the credit boom ending in a bust. Our analysis suggests that macroprudential tools are effective from this perspective. If credit booms are accompanied by capital flow surges, in addition to macroprudential tools, capital controls on money market instruments including cross-border interbank lending tend to contribute to reducing the likelihood of a credit bust.
    Keywords: Macroprudential measures; capital controls; financial stability; credit cycles; capital control measure; credit bust; Net policy tightening; credit growth; boom episode; Credit booms; Macroprudential policy; Macroprudential policy instruments; Capital inflows; Global
    Date: 2023–08–25
  15. By: Narayan Bulusu; Matthew McNeely; Kaetlynd McRae; Jonathan Witmer
    Abstract: In April 2022, the Bank of Canada announced that it would continue to use a floor system to implement monetary policy by providing a sufficiently large quantity of settlement balances to enable the overnight repo rate to trade at close to the deposit rate. In contrast, the Bank’s guiding principles of prudence, transparency and neutrality, which govern the management of its balance sheet, favour maintaining settlement balances as low as possible. In this context, this paper describes two complementary approaches to estimating the appropriate quantity of settlement balances needed to effectively maintain a floor system. The first is a regression-based analysis to estimate the quantity required to maintain the overnight repo rate close to the Bank’s policy interest rate (which is equal to the deposit rate in a floor system). The second is an analysis of operational considerations in implementing a floor system in Canada. Both approaches highlight that considerable uncertainty exists in determining the demand for settlement balances. Such uncertainty emphasizes the need for the Bank to monitor money market conditions as it continues to normalize its balance sheet after undertaking quantitative easing operations related to the COVID-19 pandemic.
    Keywords: Financial institutions; Financial markets; Financial system regulation and policies; Monetary policy implementation; Payment clearing and settlement systems
    JEL: E41 E42 E52 E58 G21 G28
    Date: 2023–10
  16. By: Nikil Chande; Zhentong Lu; Hiru Rodrigo; Phoebe Tian
    Abstract: Canada transitioned to a new wholesale payment system, Lynx, in August 2021. Lynx is based on a real-time settlement model that eliminates credit risk in the system. This model can require more liquidity; however, Lynx’s design allows Canada’s wholesale payments to settle efficiently.
    Keywords: Financial institutions; Financial services; Financial system regulation and policies; Payment clearing and settlement systems
    JEL: C1 C10 E4 E42 G2 G28
    Date: 2023–10
  17. By: Gara Afonso; Gonzalo Cisternas; Brian Gowen; Jason Miu; Josh Younger
    Abstract: The Federal Open Market Committee (FOMC) communicates the stance of monetary policy through a target range for the federal funds rate, which is the rate set in the market for uncollateralized short-term lending and borrowing of central bank reserves in the U.S. Since the global financial crisis, the market for federal funds has changed markedly. In this post, we take a closer look at who is currently trading in the federal funds market, as well as the reasons for their participation.
    Keywords: fed funds; reserves; Interbank market; monetary policy; Federal Open Market Committee (FOMC)
    JEL: E5 G1 G2
    Date: 2023–10–10
  18. By: Sihan Fang (Nanyang Technological University, 50 Nanyang Avenue, 639798 Singapore); Hyeokkoo Eric Kwon (Nanyang Technological University, 50 Nanyang Avenue, 639798 Singapore); Tian Lu (Arizona State University, 400 E Lemon St, Tempe, AZ, 85281 US); Yingjie Zhang (Peking University, No.5 Yiheyuan Road, Haidian, Beijing, 100871 China)
    Abstract: We have witnessed the convenience of mobile channels and how they boost user engagement in multiple industries. Such positive effects might or might not stay with users’ financial behavior since it requires a significant cognitive effort and risk preferences could also alter the effect direction. Moreover, regarding their effects on two-sided platforms, prior studies have focused on the decision-making of one single side. This might bias our understanding of mobile channels, especially in the finance sector, where lenders’ behavior would be influenced by borrowers’ application quality and quantity. To bridge these gaps, we investigate how mobile channels shape the behaviors of both borrowers and lenders in peer-to-peer (P2P) lending platforms, as well as the corresponding impacts on credit risk management and economic return. Drawing upon the cognitive load theory, we postulate that borrowers and lenders under heavy and mild cognitive load would exhibit distinct behaviors when submitting loan applications or approving loan requests, respectively. Empirically, we collaborate with a leading P2P lending platform to launch two-sided field experiments, in which we randomly assign mobile treatments to borrowers and lenders. The results illustrate that mobile borrowers are more likely to terminate loan submissions, especially during peak commuting hours. By contrast, mobile lenders have a higher tendency to approve loan applications within a shorter period. Surprisingly, we observe no change in the quality of submitted or approved loans. Considering the improved debt collection capability of the platform, we reveal that mobile adoption brings profit enhancement. We offer multiple theoretical and managerial implications.
    Keywords: Mobile adoption; Cognitive load theory; Peer-to-peer lending; Two-sided behavior; Field experiment
    JEL: G41 M31 O17 O33
    Date: 2023–09
  19. By: Lee, David
    Abstract: ABSTRACT This article presents a new model of collateralization. We study the economic impact of collateralization on the plumbing of the financial system. The model gives an integrated view of different collateral arrangements. We show that the effect of collateral on asset prices is significant. Our study shows that a poorly designed collateral agreement can actually increase credit risk. We find evidence that collateral posting regimes that are originally designed and utilized for contracts subject to bilateral credit risk (e.g., a swap) may not work properly for contracts subject to multilateral credit risk (e.g., a CDS) in the presence of default correlations. These findings contradict the prevailing beliefs in financial markets about collateralization.
    Keywords: collateralization, collateral posting, credit support annex, credit risk modeling, the plumbing of financial system, derivatives valuation subject to credit risk.
    JEL: G12 G17 G24 O11 O16
    Date: 2023–09–23
  20. By: Nguyen, Luan-Thanh
    Abstract: The use of mobile technology services in Vietnam has surged, offering convenience and enhancing various aspects of users' lives. This shift towards wireless connectivity has also affected financial transactions and remittances, aligning with goals of a cashless society and financial inclusion. Mobile money, a widely used mobile service, is examined in this study. We focus on the determinants affecting the adoption of mobile money services, which are of interest to mobile money firms, telecom companies, banks, and developers. Factors like price, social influence, and perceived risk are explored as they influence consumer acceptance. To succeed, service providers must lower costs, emphasize benefits, and ensure seamless functionality. User-friendliness, trust, and data security are essential for sustained adoption and financial inclusion. This study provides insights into mobile money adoption in Vietnam, guiding stakeholders in the mobile technology sector to adapt and thrive in this evolving landscape.
    Keywords: Mobile money, PLS-SEM, Vietnam, UTAUT
    Date: 2023
  21. By: Cole, Stephen J.; Huh, Sungjun; (Department of Economics Marquette University; Department of Economics Marquette University)
    Abstract: We compare the economic effects of forward guidance and quantitative easing utilizing the four-equation New Keynesian model of Sims, Wu, and Zhang (2023) with agents forming expectations via an adaptive learning rule. The results indicate forward guidance can have a greater influence on macroeconomic variables compared to quantitative easing, suggesting that forward guidance may have contributed to the high inflation rate after the COVID-19 related recession. Adaptive learning agents estimate a higher effect of forward guidance on the economy leading to a greater impact on expectations, and thus, contemporaneous inflation. However, the performance gap between forward guidance and quantitative easing can change. If quantitative easing includes anticipated shocks, more households finance consumption through long-term borrowing, and the central bank provides a greater percentage of liquidity in the long-term borrowing market, the performance of quantitative easing can increase, and at times, outperform forward guidance.
    Keywords: unconvetional monetary policy, QE, LSAP, forward guidance, adaptive learning
    JEL: E32 E52 E58 D83
    Date: 2023–10
  22. By: Orphanides, Athanasios
    Abstract: This paper examines the policy experience of the Fed, ECB and BOJ during and after the Covid-19 pandemic and draws lessons for monetary policy strategy and its communication. All three central banks provided appropriate accommodation during the pandemic but two failed to unwind this accommodation in a timely manner. The Fed and ECB guided real interest rates to inappropriately negative levels as the economy recovered from the pandemic, fueling high inflation. The policy error can be traced to decisions regarding forward guidance on policy rates that delayed lift-off while the two central banks continued to expand their balance sheets. The Fed and the ECB fell into the forward guidance trap. This could have been avoided if policy were guided by a forwardlooking rule that properly adjusted the nominal interest rate with the evolution of the inflation outlook.
    Keywords: Monetary policy strategy, forward guidance, policy rules
    JEL: E52 E58 E61
    Date: 2023
  23. By: Nakov, Anton; Thomas, Carlos
    Abstract: We study the implications of climate change and the associated mitigation measures for optimal monetary policy in a canonical New Keynesian model with climate externalities. Provided they are set at their socially optimal level, carbon taxes pose no trade-offs for monetary policy: it is both feasible and optimal to fully stabilize inflation and the welfare-relevant output gap. More realistically, if carbon taxes are initially suboptimal, trade-offs arise between core and climate goals. These trade-offs however are resolved overwhelmingly in favor of price stability, even in scenarios of decades-long transition to optimal carbon taxation. This reflects the untargeted, inefficient nature of (conventional) monetary policy as a climate instrument. In a model extension with financial frictions and central bank purchases of corporate bonds, we show that green tilting of purchases is optimal and accelerates the green transition. However, its effect on CO2 emissions and global temperatures is limited by the small size of eligible bonds’ spreads. JEL Classification: E31, E32, Q54, Q58
    Keywords: climate change externalities, green QE, Pigouvian carbon taxes, Ramsey optimal monetary policy
    Date: 2023–09
  24. By: Paul Beaudry; Thomas J. Carter; Amartya Lahiri
    Abstract: When countries are hit by supply shocks, central banks often face the dilemma of either looking through such shocks or reacting to them to ensure that inflation expectations remain anchored. In this paper, we propose a tractable framework to capture this dilemma and explore optimal policy under a range of assumptions on how expectations are formed, including a form of bounded rationality involving level-k thinking (LKT). Despite modelling LKT in a way that nests both adaptive and rational expectations as special cases, we show that the optimal policy under LKT is qualitatively different and involves abrupt pivots in the policy stance. In particular, it is optimal for the central bank to initially look through supply shocks until a threshold is reached, then pivot discontinuously to a more hawkish anti-inflationary stance. We find that such pivots can, if optimally executed, be compatible with soft landings in the sense that most (or even all) of the reduction in inflation occurs through re-anchoring of expectations rather than economic slack. We also discuss risks and why policy errors in terms of tightening too late or too slowly can be especially costly in such an environment.
    JEL: E40 E50
    Date: 2023–09
  25. By: Kenechukwu E. Anadu; Pablo D. Azar; Catherine Huang; Marco Cipriani; Thomas M. Eisenbach; Gabriele La Spada; Mattia Landoni; Marco Macchiavelli; Antoine Malfroy-Camine; J. Christina Wang
    Abstract: Stablecoins and money market funds both seek to provide investors with safe, money-like assets but are vulnerable to runs in times of stress. In this paper, we investigate similarities and differences between the two, comparing investor behavior during the stablecoin runs of 2022 and 2023 to investor behavior during the money market fund runs of 2008 and 2020. We document that, similarly to money market fund investors, stablecoin investors engage in flight to safety, with net flows from riskier to safer stablecoins during run periods. However, whereas in money market funds, run risk has historically materialized only in prime funds, with stablecoins, runs occurred in different stablecoin types across the 2022 and 2023 episodes. We also show that, similar to intrafamily flows in money market funds, stablecoin flows tend to be within blockchains. Finally, for stablecoins, we estimate a discrete “break-the-buck” threshold of $0.99, below which redemptions accelerate.
    Keywords: stablecoins; money market mutual funds; financial stability; crypto assets; runs; liquidity transformation
    JEL: G10 G20 G23
    Date: 2023–09–01
  26. By: Yasin Kür¸sat Önder; Mauricio Villamizar-Villegas; Jose Villegas
    Abstract: Our study analyzes the impact of debt moratorium policies, possibly the oldest approach to addressing repayment problems. Using Colombian administrative data, we compare firms that narrowly met the criteria for moratoria (eligible firms could not exceed 60 days overdue on their loans) with those that just missed it. Our findings reveal that stressed firms accessing moratoria experience more favorable loan conditions on subsequent borrowing, characterized by higher loan amounts and lower interest rates. This credit relief, in turn, contribute to substantial increases in firm investment and employment. To delve deeper into the implications, we employ a quantitative general equilibrium model of default to assess both short- and long-term effects. While these policies effectively mitigate liquidity concerns, they concurrently elevate default risks. Notably, our research underscores larger welfare gains when debt moratorium policies incorporate interest forgiveness during periods of debt standstill by reducing default risk. **** RESUMEN: Este estudio analiza el impacto de las políticas de moratoria de deuda, también conocidas como prórrogas o periodos de gracia, y que son posiblemente el enfoque más antiguo para abordar problemas de pago. Utilizando datos administrativos de Colombia, comparamos empresas que cumplieron estrechamente con los criterios para el programa con aquellas que por poco no lo hicieron. Nuestros hallazgos revelan que las empresas estresadas (es decir, con morosidad) que acceden al programa experimentan condiciones más favorables en préstamos posteriores, caracterizadas por montos más altos y tasas de interés más bajas. Este alivio crediticio, a su vez, contribuye a aumentos en la inversión y el empleo. Para profundizar en las implicaciones, empleamos un modelo cuantitativo de equilibrio general para evaluar los efectos a corto y largo plazo. Encontramos que, si bien estas políticas mitigan riesgos de liquidez, también aumentan la probabilidad de incumplimiento. Destacamos mayores ganancias en bienestar cuando las políticas de moratoria incorporan la condonación de intereses durante los períodos de suspensión de la deuda.
    Keywords: Debt moratorium, debt management, regression discontinuity design, Moratoria de deuda, riesgo crediticio, regresión discontinua
    JEL: E44 F34 H63
    Date: 2023–10
  27. By: Wajhullah Fahim (Pakistan Institute of Development Economics)
    Abstract: A robust financial system plays a vital role in economic growth, financial stability, easy access to finance, and capital market formation. A sound financial system gives people the confidence to invest in the economy, which underpins economic growth and development. It increases external relationships by helping payment across borders. Sound financial systems help in the reallocation of resources across different segments of society, improving all welfare levels and long-term financing in the economy. So a stable financial system helps in the efficient allocation of resources, forecasting financial risks, monetary stability, and maintaining the natural rate of unemployment in the economy.
    Date: 2023
  28. By: Bevilacqua, Mattia; Tunaru, Radu; Vioto, Davide
    Abstract: We extract an option-implied measure for systemic risk, the Systemic Options Value-at-Risk (SOVaR), from put option prices that can capture the buildup stage of systemic risk in the financial sector earlier than the standard systemic risk measures (SRMs). Our measure exhibits more timely early warning signals of main events around the global financial crisis than the main SRMs. SOVaR shows significant predictive power for macroeconomic downturns as well as future recessions up to one year ahead. Our results are robust to various specifications, breakdowns of financial sectors, and controlling for other main risk measures proposed in the literature.
    Keywords: financial distress; financial stability; macro-finance; options prices; systemic risk; funding the Systemic Risk Centre is gratefully acknowledged [grant number ES/K002309/1 and ES/R009724/1
    JEL: G14 G20
    Date: 2023–09–01
  29. By: Kumar Chandrakamal Pramod Kumar (Institute of Economic Studies, Charles University, Prague, Czech Republic)
    Abstract: Digital payments are growing rapidly, and the use of cash seems to be declining, at least in advanced economies in Europe and the U.S. However, the literature on payment systems provides an interesting perspective- cash, or currency, when measured as a percentage of the gross domestic product, has not been falling as clearly as might be intuited. Contrarily, many economies face an increase in currency in circulation rates. This paper discusses this topic in literature and explores the determinants of currency in circulation in a panel of 17 countries between 2001-2022 and whether determinants from prior literature are also significant across a group of heterogeneous countries. Interest rates are found to affect the demand for cash significantly and negatively, while tax revenues have a significantly positive impact. Some measures of financial development are also considered but are found to not have any strong explanatory power. Country fixed effects regression analysis suggests that determining what type of economies may have higher or lower currency in circulation is a complex matter requiring more detailed investigation.
    Keywords: Currency in circulation, Monetary demand, Panel data, Fixed-effects regression, Interest rates, tax revenue
    JEL: E12 E41 E50 E51
    Date: 2023–10
  30. By: Ales Marsal (National Bank of Slovakia); Katrin Rabitsch (Department of Economics, Vienna University of Economics and Business); Lorant Kaszab (Magyar Nemzeti Bank)
    Abstract: Modern macroeconomics is increasingly leaning towards nonlinear solution methods. Our paper addresses the importance of nonlinearities in price setting. We demonstrate how nonlinearity in endogenous price adjustments, due to misalignments in relative prices, can trigger a price dispersion inflation spiral. This phenomenon yields globally unstable dynamics, even in instances where the model is locally stable around the non-stochastic steady state. We introduce the concept of the stability region as a nonlinear counterpart to the determinacy region. Our findings indicate that in a nonlinear world, the Taylor principle alone does not guarantee inflation stability and stable macroeconomic model moments. This new understanding not only challenges the conventional wisdom on inflation stabilization but also underscores the urgency for recalibrating monetary policy strategies in response to these dynamics.
    Keywords: Determinacy, stability, price dispersion, monetary policy, nonlinear solution methods, macro-finance
    JEL: E13 E31 E43 E44
    Date: 2023–09
  31. By: Döttling, Robin; Lam, Adrian (University of Pittsburgh)
    Abstract: This paper empirically examines the interaction between monetary policy and carbon transition risk. Using an event study design, we find that the stock prices of firms with higher carbon emissions are more responsive to monetary policy shocks identified from high-frequency movements in Fed Funds futures around Federal Open Market Committee (FOMC) announcements. Cross-sectional tests reveal that this effect is driven by firms that are more capital intensive, with lower ESG ratings, with greater climate risk exposures, or without climate abatement plans. Using instrumental-variable local projections, we find that high-emission firms reduce emissions relative to low-emission firms, but slow down these efforts when monetary policy is restrictive. Taken together, our results indicate that monetary policy shapes the path to carbon neutrality irrespective of whether central banks embrace a climate target.
    Date: 2023–09–24
  32. By: Thorarinn G. Petursson
    Abstract: This paper analysis the transmission mechanism of monetary policy in Iceland using three alternative identification schemes in a structural VAR setting. Consistent with the international literature, we find that an unexpected monetary policy tightening leads to a temporary but sizable contraction in output, a sustained appreciation of the nominal exchange rate, and a more sluggish and persistent decline in inflation. Three other structural shocks are also identified. All have plausible economic interpretation and can explain the bulk of the variation in output and inflation over our sample period. By comparison, the contribution from monetary policy shocks is relatively modest, especially to output fluctuations. Historical decomposition shows, however, that monetary policy played an important role during the disinflation of the second half of the 2010s and in offsetting a large negative demand shock following the global pandemic at the start of this decade. However, the historical decomposition also suggests that the withdrawal of the post-Covid monetary easing was too slow, thus contributing to rising inflation by the end of the sample period.
    JEL: C32 E52 F41
    Date: 2023–09
  33. By: Mario Carceller del Arco; Jan Willem van den End
    Abstract: We assess the robustness of monetary policy under shock uncertainty based on a novel empirical method. Shock uncertainty arises from the inability to observe the output gap in real time, by which the contribution of supply and demand shocks to inflation is unknown. We apply our method in a medium-scale Dynamic Stochastic General Equilibrium (DSGE) model to the recent inflation surge in the US. We find that robust monetary policy aimed at limiting extreme welfare losses under shock uncertainty should neither be too strong nor too mild, given the probability that supply shocks are a dominant driver of economic fluctuations. An overly strong response to inflation in supply driven scenarios is associated with large tail losses due to adverse output dynamics.
    Keywords: Monetary policy; Inflation; Policy-making under risk and uncertainty
    JEL: E52 E58 D81
    Date: 2023–10
  34. By: Benmir, Ghassane; Jaccard, Ivan; Vermandel, Gauthier
    Abstract: This paper studies the design of Ramsey optimal monetary policy in a Health New Keynesian (HeNK) model with Susceptible, Infected and Recovered (SIR) agents. The nonlinear model is estimated with maximum likelihood techniques on Euro Area data. Our objective is to deconstruct the mechanism by which contagion risk affects the conduct of monetary policy. If monetary policy is the only game in town, we find that the optimal policy features significant deviations from price stability to mitigate the effect of the pandemic. The best outcome is obtained when the optimal Ramsey policy is combined with a lockdown strategy of medium intensity. In this case, monetary policy can concentrate on its price stabilization objective. JEL Classification: E52, E32
    Keywords: Covid-19, HeNK, macroeconomic trade-offs, nonlinear inference, Tin-bergen principle
    Date: 2023–09
  35. By: Perico Ortiz, Daniel
    Abstract: This paper investigates the effects of inflation news coverage on market-based inflation expectations and outcomes in the inflation-protected securities market. We employ a large corpus of news headlines from top U.S. newspapers and market data on the U.S. yield curve and inflation-protected securities. Our results indicate that news coverage, particularly regarding specific topics, exerts a significant influence on inflation compensation, expectations, and risk premiums. We observe that the impact of news diminishes as the maturity increases and varies across different news topics. This study contributes to the understanding of media influence on financial markets, specifically in shaping inflation expectations.
    Keywords: Inflation, expectations, risk premium, newspapers, term structure
    JEL: C22 D83 D84 E13 E31 E65
    Date: 2023
  36. By: Uzma Zia (Pakistan Institute of Development Economics, Islamabad); Fozia Tabussom (Pakistan Institute of Development Economics, Islamabad)
    Abstract: Export financing is one of the important tools of export promotion policy in developing economies. In Pakistan, Exports financing schemes are a form of government intervention for industry and in return exports have been thought as a consistent source of foreign exchange earnings. Pakistan tries to do efforts to make its economy more competitive and the country offered certain export financing schemes to support exporting firms and enhance country’s exports. Export financing schemes are offered through FBR, SBP, TDAP, Commercial Banks and EXIM bank. The impact of export financing on exports appears to be minor as reflected by stagnant exports in the country. The study mainly compares the two main export financing schemes, one is offered by SBP through commercial banks and the other by FBR.
    Keywords: Commercial Banks, Export Financing Schemes, Exporting Firms, FBR, SBP, Stagnant Export Performance
    Date: 2023
  37. By: Aizenman , Joshua (University of Southern California); Uddin, Gazi Salah (Linköping University); Luo , Tianqi (Trinity College Dublin); Jayasekera , Ranadeva (Trinity College Dublin); Park, Donghyun (Asian Development Bank)
    Abstract: This paper examines whether prudential policies help to reduce sovereign bond vulnerability to global spillover risk in ASEAN-4 countries (Indonesia, Malaysia, the Philippines, and Thailand). We measure sovereign vulnerability within a risk connectedness network among sovereign bonds. The direct effect is that markets with tighter prudential policies have significantly smaller spillovers from the Treasury yield shocks of other regional and global economies. The sum of indirect and direct effects indicates that prudential policies reduce sovereign spillover risk in the long term. These findings suggest prudential policies have dual efficiency in sovereign risk regulation and Treasury internationalization
    Keywords: sovereign bond; prudential policy; risk networks; connectedness; ASEAN
    JEL: E52 E58 F42
    Date: 2023–10–10

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