nep-ban New Economics Papers
on Banking
Issue of 2023‒11‒06
forty-one papers chosen by
Sergio Castellanos-Gamboa, Tecnológico de Monterrey

  1. Deposit Convexity, Monetary Policy and Financial Stability By Emily Greenwald; Sam Schulhofer-Wohl; Josh Younger
  2. BEAST: A model for the assessment of system-wide risks and macroprudential policies By Budnik, Katarzyna; Groß, Johannes; Vagliano, Gianluca; Dimitrov, Ivan; Lampe, Max; Panos, Jiri; Velasco, Sofia; Boucherie, Louis; Jančoková, Martina
  3. Estimating systemic risk for non-listed euro-area banks By Engle, Robert F.; Emambakhsh, Tina; Manganelli, Simone; Parisi, Laura; Pizzeghello, Riccardo
  4. Panel Remarks: A speech at the 2023 Symposium on Indigenous Inclusion, The Central Bank Network for Indigenous Inclusion and The Reserve Bank of New Zealand—Te Pūtea Matua, Auckland, New Zealand, Sept. 27, 2023 By Michelle W. Bowman
  5. The Reserve Supply Channel of Unconventional Monetary Policy By William F. Diamond; Zhengyang Jiang; Yiming Ma
  6. Current Expected Credit Losses (CECL) Standard and Banks' Information Production By Sehwa Kim; Seil Kim; Anya V. Kleymenova; Rongchen Li
  7. Contagion Effects of the Silicon Valley Bank Run By Dong Beom Choi; Paul Goldsmith-Pinkham; Tanju Yorulmazer
  8. Regulation and information costs of sovereign distress: Evidence from corporate lending markets By Iftekhar Hasan; Suk-Joong Kim; Panagiotis N. Politsidis; Eliza Wu
  9. One question at a time! A text mining analysis of the ECB Q&A session By Angino, Siria; Robitu, Robert
  10. Collateral Shocks, Lending Relationships and Economic Dynamics By Vivek Sharma
  11. Monetary policy spillovers and the role of prudential policies in the European Union By Coman, Andra
  12. Assessing and mitigating fire sales risk under partial information By Pang, Raymond Ka-Kay; Veraart, Luitgard A. M.
  13. Living Up to Expectations: Central Bank Credibility, the Effectiveness of Forward Guidance, and Inflation Dynamics Post-Global Financial Crisis By Stephen Cole; Enrique Martinez-Garcia; Eric R. Sims
  14. Loans for the "Little Fellow:" Credit, Crisis, and Recovery in the Great Depression By Sarah Quincy
  15. Artificial Intelligence and Central Bank Communication: The Case of the ECB By Nicolas Fanta; Roman Horvath
  16. Can Central Banks Be Heard Over the Sound of Gunfire? By Ge Gao; Alex Nikolsko-Rzhevskyy; Oleksandr Talavera
  17. Decentralized finance: Innovations and challenges By Jonathan Chiu; Hanna Yu
  18. Digital Transformation and Financial Inclusion: A Strategic Imperative for Morocco's Banking Sector By Bouchtaoui Mohamed
  19. Credit Card Spending and Borrowing since the Start of the COVID-19 Pandemic By Joanna Stavins
  20. The future of DAOs in finance - in need of legal status By Naudts, Ellen
  21. Is There a Portfolio Rebalancing Channel of QE in Latvia? By Andrejs Zlobins
  22. Brief Remarks on the Economy and Monetary Policy: A speech at the Independent Community Bankers of Colorado, Golden Jubilee, Vail, Colorado, Sept. 22, 2023 By Michelle W. Bowman
  23. Climate change and carbon policy: A story of optimal green macroprudential and capital flow management By Le, Anh H.
  24. Student debt and behavioral bias: a trillion dollar problem By Praful Raj
  25. The Environmental Cost of Easy Credit: The Housing Channel By Manuel Adelino; David T. Robinson
  26. Monetary Policy: Progress Is Not Victory By Mary C. Daly
  27. Resolving a Clearing Member's Default, A Radner Equilibrium Approach By Dorinel Bastide; St\'ephane Cr\'epey; Samuel Drapeau; Mekonnen Tadese
  28. A tale of dualization: accounting for the partial marketization of regulated savings in France By Elsa Clara Massoc; Cyril Benoît
  29. Credit Supply Shocks and Firm Dynamics: Evidence from Brazil By Samuel Bazzi; Marc-Andreas Muendler; Raquel F. Oliveira; James Rauch; James E. Rauch
  30. Forward Guidance and Its Effectiveness: A Macro Finance Shadow-Rate Framework By Junko Koeda; Bin Wei
  31. Replication Report: Market-Based Monetary Policy Uncertainty By Griffa, Cristina; Oliver i Vert, Miquel; Tatlow, Benjamin; Zhong, Yaolang
  32. An estimation of the default probabilities of Spanish non-financial corporations and their application to evaluate public policies By Roberto Blanco; Elena Fernández; Miguel García-Posada; Sergio Mayordomo
  33. Firms’ Cash Holdings and Monetary Policy Transmission By Falk Bräuning; José Fillat; Gustavo Joaquim
  34. The meandering trajectories of financial innovations: commercial paper and its uses in sixteenth-century Lyon's trading networks By Matringe, Nadia
  35. Global Natural Rates in the Long Run: Postwar Macro Trends and the Market-Implied r* in 10 Advanced Economies By Josh Davis; Cristian Fuenzalida; Leon Huetsch; Benjamin Mills; Alan M. Taylor
  36. Household Liquidity and Macroeconomic Stabilization: Evidence from Mortgage Forbearance By Sean Chanwook Lee; Omeed Maghzian
  37. Labor Market Shocks and Monetary Policy By Serdar Birinci; Fatih Karahan; Yusuf Mercan; Kurt See
  38. Changing patterns of risk-sharing channels in the United States and the euro area By Cimadomo, Jacopo; Giuliodori, Massimo; Lengyel, Andras; Mumtaz, Haroon
  39. Is There Really an Inflation Tax? Not For the Middle Class and the Ultra-Wealthy By Edward N. Wolff
  40. The Shifting Reasons for Beveridge-Curve Shifts By Barlevy, Gadi; Hobijn, Bart; Faberman, Jason; Sahin, Aysegül
  41. Chronicle of a Dollarization Foretold: Inflation and Exchange Rates Dynamics By Tomás E. Caravello; Pedro Martinez-Bruera; Iván Werning

  1. By: Emily Greenwald; Sam Schulhofer-Wohl; Josh Younger
    Abstract: In principle, bank deposits can be withdrawn on demand. In practice, depositors tend to maintain stable balances for long periods, allowing banks to fund long-dated assets. Nevertheless, the cost of deposit funding influences banks’ capacity for maturity transformation. Banks and researchers conventionally model the response of deposit interest rates to market interest rates as constant, implying that deposits have nearly constant duration. Contrary to this standard assumption, we show empirically that the “beta” of deposit rates to market rates increases as market rates rise, causing the duration of deposits to fall. The amount of duration risk delivered to bank balance sheets via this channel from March 2022 to September 2023 is comparable in magnitude to the amount of duration risk absorbed by each of the several large-scale asset purchase programs the Federal Reserve has undertaken since 2008. Dynamic betas present a significant challenge to bank portfolio hedgers by introducing large and dynamic risks that are difficult to model and impractical to replicate on the asset side of the balance sheet. As a result, deposit convexity amplifies monetary policy transmission and increases financial fragility, mechanisms that recent banking stresses have highlighted.
    Keywords: banks; Depository institutions; interest rates; bank run; financial markets; central bank; monetary policy; Policy Effects
    JEL: E43 E44 E52 G12 G21
    Date: 2023–10–10
  2. By: Budnik, Katarzyna; Groß, Johannes; Vagliano, Gianluca; Dimitrov, Ivan; Lampe, Max; Panos, Jiri; Velasco, Sofia; Boucherie, Louis; Jančoková, Martina
    Abstract: The Banking Euro Area Stress Test (BEAST) is a large-scale semi-structural model developed to analyse the euro area banking system from a macroprudential perspective. The model combines the dynamics of approximately 90 of the largest euro area banks with those of individual euro area economies. It reflects the heterogeneity of banks by replicat-ing the structure of their balance sheets and profit and loss accounts. Additionally, it allows banks to adjust their assets, funding mix, pricing decisions, management buffers, and profit distribution along with individual bank conditions, including their capital and liquidity re-quirements, and other supervisory limits. The responses of banks impact credit supply con-ditions and have feedback effects on the macroeconomic environment. Stochastic solutions of the model provide a solid foundation for investigating multiple scenarios, deriving at-risk measures, and estimating model uncertainty. The model is regularly utilised to assess the resilience of the euro area banking sector, including in the biennial ECB macroprudential stress tests, as well as to analyse the effects of regulatory, macroprudential, and monetary policy changes. JEL Classification: E37, E58, G21, G28
    Keywords: banking sector deleveraging, macroprudential policy, macro stress test, real economy-financial sector feedback loop
    Date: 2023–10
  3. By: Engle, Robert F.; Emambakhsh, Tina; Manganelli, Simone; Parisi, Laura; Pizzeghello, Riccardo
    Abstract: The systemic risk measure (SRISK) by V-Lab provides a market view of the vulnerability of financial institutions to a sudden downturn in the economy. To overcome the shortcoming that it cannot be applied to non-listed banks, SRISK characteristics of listed banks are mapped on balance sheet information. Systemic risk tends to be higher for banks that are larger, less profitable and have lower equity funding. Balance sheet information provides a surprisingly good approximation of SRISK for non-listed banks, when compared with banks’ capital depletion from the EU-wide stress testing exercises in 2018 and 2021. The proposed methodology can usefully complement the more thorough overview provided by traditional stress tests, providing supervisors the option to evaluate the systemic risks of the banking system at a higher frequency and at a fraction of the costs. JEL Classification: G21, G28, G1
    Keywords: banks’ balance sheet information content, stress testing, systemic risk
    Date: 2023–10
  4. By: Michelle W. Bowman
    Date: 2023–09–27
  5. By: William F. Diamond; Zhengyang Jiang; Yiming Ma
    Abstract: We find that central bank reserves injected by QE crowd out bank lending. We estimate a structural model with cross-sectional instrumental variables for deposit and loan demand. Our results are determined by the elasticity of loan demand and the impact of reserve holdings on the cost of supplying loans. The reserves injected by QE raise loan rates by 8.2 basis points, and each dollar of reserves reduces bank lending by 8.1 cents. Our results imply that a large injection of central bank reserves has the unintended consequence of crowding out bank loans because of bank balance sheet costs.
    JEL: G20
    Date: 2023–09
  6. By: Sehwa Kim; Seil Kim; Anya V. Kleymenova; Rongchen Li
    Abstract: We examine whether the adoption of the current expected credit losses (CECL) model, which reflects forward-looking information in loan loss provisions (LLP), improves banks’ information production. Consistent with better information production, we find changes in CECL banks' financial reporting and operations. First, these banks' loan loss provisions become timelier and better reflect future local economic conditions. Second, CECL banks disclose longer, more forward-looking, and more quantitative LLP information. Lastly, they have fewer loan defaults after adopting CECL. These improvements are greater for banks that invest more in CECL-related information systems and human capital and even more salient for larger banks. Our findings suggest that banks' information production is improved under a more forward-looking accounting standard. However, these improvements are greater for banks with more resources to invest in related technology and human capital.
    Keywords: Current Expected Credit Losses (CECL); Banks; Information Production; Loan Loss Provisioning
    JEL: E32 G21 G28 M41 M48
    Date: 2023–09–29
  7. By: Dong Beom Choi; Paul Goldsmith-Pinkham; Tanju Yorulmazer
    Abstract: This paper analyzes the contagion effects associated with the failure of Silicon Valley Bank (SVB) and identifies bank-specific vulnerabilities contributing to the subsequent declines in banks’ stock returns. We find that uninsured deposits, unrealized losses in held-to-maturity securities, bank size, and cash holdings had a significant impact, while better-quality assets or holdings of liquid securities did not help mitigate the negative spillovers. Interestingly, banks whose stocks performed worse post-SVB also experienced lower returns in the previous year, following Federal Reserve interest rate hikes. Stock investors appeared to anticipate risks associated with uninsured deposit reliance, but did not foresee the realization of implied losses. While mid-sized banks experienced particular stress immediately after the SVB failure, over time negative spillovers became widespread except for the largest banks.
    JEL: G01 G21
    Date: 2023–10
  8. By: Iftekhar Hasan (Fordham University [New York]); Suk-Joong Kim (The University of Sydney); Panagiotis N. Politsidis (Audencia Business School); Eliza Wu (The University of Sydney)
    Abstract: We examine the effect of sovereign credit impairments on the pricing of syndicated loans following rating downgrades in the borrowing firms' countries of domicile. We find that the sovereign ceiling policies used by credit rating agencies create a disproportionately adverse impact on the bounded firms' borrowing costs relative to other domestic firms following their sovereign's rating downgrade. Rating-based regulatory frictions partially explain our results. On the supply-side, loans carry a higher spread when granted from low-capital banks, non-bank lenders, and banks with high market power. We further document an operating demand-side channel, contingent on borrowers' size, financial constraints, and global diversification. Our results can be attributed to the relative bargaining power between lenders and borrowers: relationship borrowers and non-bank dependent borrowers with alternative financing sources are much less affected.
    Keywords: "Credit ratings" "Sovereign ceiling" "Syndicated loan pricing" "Rating-based regulation" "Firm credit constraints" "Bank dependency" "Bargaining power"
    Date: 2023–10
  9. By: Angino, Siria; Robitu, Robert
    Abstract: News media play a fundamental role in the communication between central banks and the public. Besides stimulating institutional transparency, the reporting of the news media on a central bank’s activities is also the main source of information about the institution for most citizens. To better understand how this intermediation process works, this paper explores the Q&A session of the European Central Bank (ECB)’s press conferences, where journalists have an opportunity to set the discussion and inquire into the central bank’s thinking. Using a structural topic model on a novel dataset consisting of all questions asked at ECB press conferences since May 2012, we conduct a systematic examination of the topics the ECB is questioned about and uncover differences in the focus of outlets from different geographical areas and with different types of audiences. We find that international outlets devote more attention to technical topics, relevant for market participants, while domestic media in the European Union (EU) dedicate greater focus to national affairs and the more political dimensions of the ECB’s activities. JEL Classification: E52, E58, E59
    Keywords: Central bank communication, European Central Bank, media, Structural Topic Modelling
    Date: 2023–10
  10. By: Vivek Sharma
    Abstract: What are the effects of changing bank lending conditions in a model in which borrowers have endogenously-persistent credit relationships with lenders? This paper answers this question in a simple Two-Agent New Keynesian (TANK) setup. Fluctuations in collateral requirements, termed collateral shocks in this paper, result in a rise in spread, a drop in bank credit and amplification of macroeconomic volatility. These effects are amplified by presence of lending relationships and are greater at higher persistence and volatility of the collateral shocks. The results in this paper underscore that credit relationships matter when collateral shocks hit the economy and a model that assumes away the existence of these lending relationships, risks underestimating their effects.
    Keywords: Collateral Shocks, Lending Relationships, Economic Activity
    JEL: E32 E44
    Date: 2023–10
  11. By: Coman, Andra
    Abstract: This paper empirically examines the extent to which prudential policies can help to reduce the macro-financial spillover effects of foreign monetary policy for all 28 EU countries. Using local projection methods, I show that EU countries with tighter prudential policies face significantly smaller, and less negative spillovers to bank credit and house prices from US, UK and EA monetary policy tightening shocks. Measures of a macroprudential policy nature such as capital buffers, lending standards restrictions and limits to credit growth appear to be particularly effective at mitigating the spillover effects of US monetary policy, while measures of a microprudential nature as minimum capital requirements, risk weights and limits on large exposures prove effective in mitigating spillovers effects of UK monetary policy. Results indicate that domestic prudential policies can dampen EU countries’ exposure to foreign monetary policy and may be a useful tool in the face of spillovers coming from centre countries and within the EU. JEL Classification: E52, E58, E61, F42, F45
    Keywords: international spillovers, local projections, monetary policy, policy interactions, prudential policy
    Date: 2023–10
  12. By: Pang, Raymond Ka-Kay; Veraart, Luitgard A. M.
    Abstract: We consider the problem of assessing and mitigating fire sales risk for banks under partial information. Using data from the European Banking Authority's stress tests, we consider the matrix of asset holdings of different banks. We first analyse fire sales risk under both full and partial information using different matrix reconstruction methods. We then investigate how well some policy interventions aimed at mitigating fire sales risk perform if they are applied based on only partial information. We find that even under partial information, using suitable network reconstruction methods to decide on policy interventions can significantly mitigate risk from fire sales. Furthermore, we show that some interventions based on reconstructed networks significantly outperform ad hoc methods that decide on interventions only based on the size of an institution and do not account for overlapping portfolios.
    Keywords: Systemic risk; fire sales; stress testing; financial networks; matrix reconstruction; policy interventions; PhD Studentship; Elsevier deal
    JEL: G20 G33 G32 G28
    Date: 2023–10–01
  13. By: Stephen Cole; Enrique Martinez-Garcia; Eric R. 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.
    JEL: E0 E32 E5
    Date: 2023–10
  14. By: Sarah Quincy
    Abstract: This paper identifies how bank branching benefited local economies during the Great Depression. Using archival data and narrative evidence, I show how Bank of America's branch network in 1930s California created an internal capital market to diversify away local liquidity shortfalls, allowing it to maintain 49 percent higher credit growth from 1929 to 1933 than competing banking offices. The bank's presence caused smaller city property value contractions and stronger recoveries through 1940. Linked individual data show the bank’s proximity hastened the transition away from agricultural employment and towards human capital-intensive sectors in the 1930s, generating industrialization and higher wages.
    JEL: E44 G01 G21 N22 R23
    Date: 2023–10
  15. By: Nicolas Fanta (Institute of Economic Studies, Charles University, Prague); Roman Horvath (Institute of Economic Studies, Charles University, Prague)
    Abstract: We examine whether artificial intelligence (AI) can decipher European Central Bank´s communication. Employing 1769 inter-meeting verbal communication events of the European Central Bank´s Governing Council members, we construct an AI-based indicator evaluating whether communication is leaning towards easing, tightening or maintaining the monetary policy stance. We find that our AI-based indicator replicates well similar indicators based on human expert judgment but at much higher speed and at much lower costs. Using our AI-based indicator and a number of robustness checks, our regression results show that ECB communication matters for the future monetary policy even after controlling for financial market expectations and lagged monetary policy decisions.
    Keywords: Artificial intelligence, central bank communication, monetary policy
    JEL: E52 E58
    Date: 2023–09
  16. By: Ge Gao (Beijing Sport University); Alex Nikolsko-Rzhevskyy (Lehigh University); Oleksandr Talavera (University of Birmingham)
    Abstract: In this study, we examined the effectiveness of central bank communications during times of significant adverse shocks. Specifically, we examined how the National Bank of Ukraine (NBU) regulated foreign exchange (FX) markets during the Russo-Ukrainian War in 2022. Data collected from both the black and authorized FX markets suggested that the content of the NBU’s announcements significantly impacted FX market agents. Announcements aimed at maintaining a fixed (floating) FX rate prompted an increase (decrease) in the black market premium in cash transactions. Moreover, the NBU's announcements influenced the sale side of foreign currency more than any other aspect, an area where the black market FX traders held near monopolistic power.
    Keywords: Russia-Ukraine war, central bank communications, black market premium, forex, ChatGPT
    JEL: D83 E44 E58 F31
    Date: 2023–10
  17. By: Jonathan Chiu; Hanna Yu
    Abstract: Decentralized finance surged in popularity around 2020. We explore its value and limitations and highlight some potential regulatory concerns.
    Keywords: Digital currencies and fintech; Financial stability; Payment clearing and settlement systems
    JEL: G1 G2
    Date: 2023–10
  18. By: Bouchtaoui Mohamed (Faculty of Law, Economics and Social Sciences, Salé, Mohammed V University, Rabat, Morocco.)
    Abstract: This paper studies the current state of the Moroccan banking system in the context of digital economy development, to establish the benchmarks and needs for banking regulation, and to study the potential possibilities of digitalization of relations and transactions in the banking sector in the mechanism of implementing prudential rules. Digital transformation in the banking industry is associated with obstacles that seem to hinder the smooth implementation of digital approaches. This issue has not been adequately addressed in the current academic literature. The main purpose of this qualitative exploratory study is to identify the main perceived obstacles to digital transformation in the Moroccan commercial banking sector from a point of view and to analyse them accordingly. However, challenges such as low financial penetration and mismatches with costumer needs persists. The digitalization of financial services emerges as a promosing avenue to address these issues, significantly increasing financial access and inclusion in Morocco, in line with trends observed in other African Nations.
    Abstract: Cet article étudie l'état actuel du système bancaire marocain dans le contexte du développement de l'économie digitale, afin d'établir les repères et les besoins en matière de réglementation bancaire, et d'étudier les possibilités potentielles d'une digitalisation des relations et des transactions dans le secteur bancaire dans le cadre de la mise en œuvre des règles prudentielles. La transformation digitale dans l'industrie bancaire est associée à des obstacles qui semblent entraver la mise en œuvre fluide des approches numériques. Cette question n'a pas été adéquatement abordée dans la littérature académique actuelle. L'objectif principal de cette étude exploratoire qualitative est d'identifier les principaux obstacles perçus à la transformation digitale dans le secteur bancaire marocain d'un point de vue analytique. Cependant, des défis tels que la faible pénétration financière et les discordances avec les besoins des clients persistent. La digitalisation des services financiers émerge comme une avenue prometteuse pour résoudre ces problèmes, en augmentant significativement l'accès aux services financiers et en favorisant l'inclusion financière au Maroc, en conformité avec les tendances observées dans d'autres pays africains.
    Keywords: Moroccan banking sector, digital economy, digital transformation process, financial services., African Scientific Journal
    Date: 2023–09–26
  19. By: Joanna Stavins
    Abstract: Consumers improved their financial health early during the COVID-19 pandemic, but credit card revolving and delinquencies have been rising since 2021, in terms of both the share of accounts and average balances. Financial stress is especially high among lower-income cardholders, whose credit card revolving and delinquencies have risen faster than those of other income cohorts. This is consistent with excess savings being depleted faster among lower-income cohorts. The rising financial stress suggests a weakening in consumption as utilization rates, revolving amounts, and delinquencies all continue to rise. Balances on delinquent accounts held by lower-income consumers are approaching their credit limits. With utilization rates of 80 to 90 percent on average, these cardholders might have to cut their spending. An unemployment spell might cause further distress for these individuals and potentially others who are not currently delinquent.
    Keywords: credit card utilization; delinquencies; COVID-19
    JEL: D31 E21 G51
    Date: 2023–10–19
  20. By: Naudts, Ellen
    Abstract: Despite the crypto-market crash in the spring of 2022 and the collapse of FTX in November 2022, decentralised finance (DeFi) proponents are still predicting that DeFi may soon go mainstream. As well as the increasing involvement of regulated financial institutions in the DeFi area, the incipient presence of regulatory, supervisory and oversight frameworks may lead to more mainstream acceptance of DeFi. Many DeFi projects are structured in the form of a decentralised autonomous organisation (DAO), a virtual organisation built and run on code and blockchain technology. As this new DAO corporate structure has benefits appropriate for the era of digitalisation and decentralisation, the number of DAOs is growing. However, most countries around the globe do not yet have in place a specific legal regime for DAOs. Until now, DAOs have been operating outside of regulatory financial frameworks, even though they may perform functions that are similar to regulated financial institutions or market infrastructures. The legal characterisation of DAOs depends on national laws that may or may not apply, depending on how the DAO itself is actually set up and on court judgements. This paper introduces the DAO structure and how it relates to other methods of organisation in finance. The paper lists use cases and describes the benefits and drawbacks of the DAO structure, taking a closer look at (inter)national regulatory frameworks, guidelines and recommendations in order to discuss whether, how and to what extent DAOs might comply. A policy position on the desirability and conditions under which DAOs could bring efficient, safe and stable innovations to the financial sector depends on the specificities of the individual DAOs, the potential applicable regulatory frameworks and the continuously evolving technical developments, as well as (inter)national guidelines and recommendations. This paper proposes that the establishment of regulatory frameworks on crypto-assets and crypto-asset s JEL Classification: F38, F39, G23, G32, K22, L22, L31
    Keywords: crypto, DAO, DeFi, financing policy, international financial policy
    Date: 2023–10
  21. By: Andrejs Zlobins (Latvijas Banka)
    Abstract: Portfolio rebalancing is a key mechanism through which central bank asset purchases flatten the yield curve, thus providing additional monetary policy accommodation when conventional policy rate setting is constrained by the effective lower bound. Existing literature provides ample evidence that this channel has played a major role in compressing the long-term interest rates and provided a broad-based easing of financial conditions for firms and households in the euro area. However, this evidence originates from either aggregate euro area or its largest jurisdictions, leaving the effects of the Eurosystem's asset purchases on smaller member states, such as Latvia, unclear. Therefore, we employ a bilateral structural vector autoregression, featuring both aggregate euro area and Latvian blocks, as well as a panel structural vector autoregression with cross-sectional heterogeneity to obtain evidence from both macro-level and bank-level data in order to shed some light on the transmission of QE to the Latvian economy. Our findings suggest that QE led to a compression of sovereign borrowing costs in Latvia and boosted economic activity and prices. At the same time, we also document that the further pass-through to domestic financial conditions was weak owing to limited asset rebalancing by the domestic banking sector in response to the Eurosystem's QE. Instead, we show that Latvian yields were compressed due to direct intervention of the central bank in the bond markets and portfolio readjustment of foreign investors. Our study thus provides additional evidence that the transmission of common monetary policy to the Latvian economy is impaired via the domestic banking sector.
    Keywords: quantitative easing, portfolio rebalancing, monetary policy, euro area, Latvia
    JEL: C54 E50 E52 E58
    Date: 2023–10–23
  22. By: Michelle W. Bowman
    Date: 2023–09–22
  23. By: Le, Anh H.
    Abstract: This paper studies the macro-financial implications of using carbon prices to achieve ambitious greenhouse gas (GHG) emission reduction targets. My empirical evidence shows a 0.6% output loss and a rise of 0.3% in inflation in response to a 1% shock on carbon policy. Furthermore, I also observe financial instability and allocation effects between the clean and highly polluted energy sectors. To have a better prediction of medium and long-term impact, using a medium-large macro-financial DSGE model with environmental aspects, I show the recessionary effect of an ambitious carbon price implementation to achieve climate targets, a 40% reduction in GHG emission causes a 0.7% output loss while reaching a zero-emission economy in 30 years causes a 2.6% output loss. I document an amplified effect of the banking sector during the transition path. The paper also uncovers the beneficial role of pre-announcements of carbon policies in mitigating inflation volatility by 0.2% at its peak, and our results suggest well-communicated carbon policies from authorities and investing to expand the green sector. My findings also stress the use of optimal green monetary and financial policies in mitigating the effects of transition risk and assisting the transition to a zero-emission world. Utilizing a heterogeneous approach with macroprudential tools, I find that optimal macroprudential tools can mitigate the output loss by 0.1% and investment loss by 1%. Importantly, my work highlights the use of capital flow management in the green transition when a global cooperative solution is challenging.
    Keywords: Climate change, Environmental policy, Optimal policy, Transition risk
    JEL: Q58 E32 Q54 C11 E17 E52
    Date: 2023
  24. By: Praful Raj
    Abstract: This literature review elucidates the implications of behavioral biases, particularly those stemming from overconfidence and framing, on the intertemporal choices made by students on their underline demand preferences for student loans. A secondary objective is to understand the potential utility of social media to assist students and young borrowers with the debt repayment process and management of their loan tenures. A close examination of the literature reveals a substantial influence of these behavioral and cognitive principles on the intertemporal choices made by students towards debt repayments. This affects not only the magnitude of loans they acquire but also the anchoring of the terms of loan conditions associated with repayment. Furthermore, I establish that harnessing social media as the potential to cultivate financial literacy and enhanced understanding of loan terms to expedite the process of debt redemption. This review could serve as a valuable repository for students, scholars, and policymakers alike, in order to expound on the cognitive biases that students and consumers often face when applying and entering into loan contract.
    Date: 2023–10
  25. By: Manuel Adelino; David T. Robinson
    Abstract: Heating, cooling, and powering the residential housing stock accounts for about one-fifth of total annual greenhouse gas emissions in the US. Home size is a key determinant of energy intensity. The average newly built single-family home is 50% larger than in the 1950s. Using distinct identification strategies spanning the last four decades of banking history, we show that more abundant credit increases average new home size. It also facilitates more construction but does not produce offsetting increases in home quality or durability. These results highlight potential environmental costs associated with monetary policies that expand access to credit.
    JEL: G30 Q43 R21 R31
    Date: 2023–10
  26. By: Mary C. Daly
    Abstract: Mary C. Daly, President and Chief Executive Officer, Federal Reserve Bank of San Francisco, The Economic Club of New York, New York, NY, October 5, 2023, 12 PM EDT
    Keywords: monetary policy; growth; inflation; federal funds rate; labor market
    Date: 2023–10–05
  27. By: Dorinel Bastide (LaMME); St\'ephane Cr\'epey (LPSM); Samuel Drapeau (LPSM, CMAP); Mekonnen Tadese (LPSM, CMAP)
    Abstract: For vanilla derivatives that constitute the bulk of investment banks' hedging portfolios, central clearing through central counterparties (CCPs) has become hegemonic. A key mandate of a CCP is to provide an efficient and proper clearing member default resolution procedure. When a clearing member defaults, the CCP can hedge and auction or liquidate its positions. The counterparty credit risk cost of auctioning has been analyzed in terms of XVA metrics in Bastide, Cr{\'e}pey, Drapeau, and Tadese (2023). In this work we assess the costs of hedging or liquidating. This is done by comparing pre- and post-default market equilibria, using a Radner equilibrium approach for portfolio allocation and price discovery in each case. We show that the Radner equilibria uniquely exist and we provide both analytical and numerical solutions for the latter in elliptically distributed markets. Using such tools, a CCP could decide rationally on which market to hedge and auction or liquidate defaulted portfolios.
    Date: 2023–10
  28. By: Elsa Clara Massoc (HSG - University of St.Gallen); Cyril Benoît (CEE - Centre d'études européennes et de politique comparée (Sciences Po, CNRS) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)
    Abstract: As in other countries, regulated savings in France are intricately woven into dense regulatory frameworks driven by explicit governmental objectives. the anticipated marketization of the French economy should have eradicated them; however, a substantial portion of regulated savings has managed to evade this process. is this phenomenon attributable to the tenacious grip of the French state-led tradition? Not entirely, as another subset of these savings has indeed undergone marketization. the landscape of French regulated savings is notably distinguished by a growing dichotomy: on one side, non-marketized products offered by banks, and on the other, increasingly marketized products provided by insurers. Drawing upon process tracing, we contend that these ostensibly conflicting developments emanate from the distinct and precise institutional dependencies between state and private actors in which these products are enmeshed. the prevailing status quo within the banking sector is owed to banks' engagement in a mutually advantageous, long-term exchange of favors with state actors. Faced with the trade-off between offering less lucrative products and risking the endangerment of this relationship, banks have opted for the former. in contrast, an assertive strategy has gained traction in the insurance industry. Yet, strategies for the marketization of regulated savings aligned with state priorities have been implemented, even when insurers expressed opposition.
    Keywords: Regulated savings, marketization, dualization, insurance, banks, state capitalism
    Date: 2023
  29. By: Samuel Bazzi; Marc-Andreas Muendler; Raquel F. Oliveira; James Rauch; James E. Rauch
    Abstract: We explore how financial constraints distort the entry decisions among otherwise productive entrepreneurs and limit growth of promising young firms. A model of liquidity-constrained entrepreneurs suggests that the easing of credit constraints can induce more entry of firms with greater long-run growth potential than the easing of conventional entry barriers would bring about. We explore this growth mechanism using a large-scale program to expand the supply of credit to small and medium enterprises in Brazil. Local credit supply shocks generate greater firm entry but also greater exit with no effect on short-run employment growth in the formal sector. However, credit expansions increase average capability among entering firms, which enter at larger size, survive longer, and grow faster. These firm dynamics are more pronounced in areas with weaker credit markets ex ante and consistent with local bank branches using cheap targeted credit lines to expand lending more broadly. Our findings provide new evidence on the general equilibrium effects of credit supply expansions.
    Keywords: credit constraints, entry barriers, growth barriers, startups
    JEL: D21 D22 D92 L25 L26 M13 O12
    Date: 2023
  30. By: Junko Koeda; Bin Wei
    Abstract: Forward guidance provides monetary policy communication for an economy at the effective lower bound (ELB). In this paper, we consider both calendar- and outcome-based forward guidance about the timing of liftoff. We develop a novel macro-finance shadow rate term structure model by introducing unspanned macro factors and an outcome-based liftoff condition. We estimate the model using the maximum likelihood method with extended Kalman filter. Based on the estimation results, we show that outcome-based forward guidance is indeed effective and has significant monetary-easing effects on the real economy in both ELB periods of the global financial crisis (GFC) and the COVID-19 pandemic. In particular, we find that the overall impact on the unemployment rate is about 0.8 percent during both the GFC and the pandemic, but outcome-based forward guidance contributes more in the former than in the latter ELB period (about 0.30 percent versus 0.15 percent).
    Keywords: forward guidance; effective lower bound (ELB); liftoff; term structure; shadow rate; macro finance; unspanned macro factors
    JEL: E43 E44 E52 E58
    Date: 2023–10–16
  31. By: Griffa, Cristina; Oliver i Vert, Miquel; Tatlow, Benjamin; Zhong, Yaolang
    Abstract: This report replicates and examines Bauer et al.'s (2021) paper on monetary policy transmission to financial markets. The paper introduces novel measures of monetary policy uncertainty and analyses its drivers. It also investigates the impact of uncertainty changes on interest rates and financial asset prices. We assess reproducibility, consolidate market uncertainty measures using PCA and Factor Analysis, and rigorously test the reduction of uncertainty after Federal Market Open Committee (FOMC) announcements. Our findings support the paper's claim of reduced uncertainty on meeting days. Additionally, we explore the implications of the uncertainty channel on various financial assets, such as Gold, the Swiss Franc, European stock indexes, and Bitcoin.
    Date: 2023
  32. By: Roberto Blanco (Banco de España); Elena Fernández (Banco de España); Miguel García-Posada (Banco de España); Sergio Mayordomo (Banco de España)
    Abstract: We model the one-year ahead probability for default of Spanish non-financial corporations using data for the period 1996-2019. While most previous literature considers that a firm is in default if it files for bankruptcy, we define default as having non-performing loans during at least three months of a given year. This broader definition allows us to predict firms’ financial distress at an earlier stage that cannot generally be observed by researchers, before their financial conditions become too severe and they have to file for bankruptcy or engage in private workouts with their creditors. We estimate, by means of logistic regressions, both a general model that uses all the firms in the sample and six models for different size-sector combinations. The selected explanatory variables are five accounting ratios, which summarise firms’ creditworthiness, and the growth rate of aggregate credit to non-financial corporations, to take into account the role of credit availability in mitigating the risk of default. Finally, we carry out two applications of our prediction models: we construct credit rating transition matrices and evaluate a programme implemented by the Spanish government to provide direct aid to firms severely affected by the COVID-19 crisis.
    Keywords: default, financial distress, non-performing loans, logistic regression
    JEL: G30 G33 G21
    Date: 2023–09
  33. By: Falk Bräuning; José Fillat; Gustavo Joaquim
    Abstract: Liquidity, particularly cash holdings, may serve as an important cushion for firms to absorb macroeconomic shocks such as interest rate increases so that these shocks have only minimal effects on their operations, at least in the short term. For example, to finance their investments, firms with high levels of cash may not have to tap so deep into debt financing, the cost of which relates closely to interest rates. Understanding the role of corporate cash holdings is therefore paramount to formulating appropriate monetary policy in the current environment. This brief informs the ongoing policy debate by examining the effect of US nonfinancial corporate cash holdings on the transmission of monetary policy, both historically and in the present tightening cycle. This brief shows that in the current hiking cycle, firms have used the cash they accumulated in 2020 and 2021 to finance operations, growth, and payouts. Due to this depletion of the accumulated-cash buffer, the effects of interest rate increases to date on corporate investment will likely gain traction in the coming quarters.
    Keywords: monetary policy transmission; cash accumulation; investment
    JEL: E22 E52 G30
    Date: 2023–10–12
  34. By: Matringe, Nadia
    Abstract: This article explores the complex dynamics of financial innovation in early modern times, challenging linear models of temporal and spatial divisions that tend to shape our understanding of the evolution of financial systems. It supports the idea that innovation should be viewed as a non-linear and contextual process, involving diverse stakeholders and characterised by interactions and unexpected occurrences. The study focuses on the dissemination and trajectories of financial innovations, specifically the bill of exchange and its variation, the ricorsa, as well as the transferability and negotiability of commercial paper. It does so by investigating the interactions and exchanges between merchants and bankers from diverse backgrounds during the sixteenth-century Lyon fairs, using the archival records of one of the first Italian banks in Lyon (Salviati). The study reveals the mutual influence and acculturation among these agents and challenges the compartmentalisation of financial expertise. Through an analysis of transactions recorded in the Salviati bank's ledgers, the article highlights previously unknown uses of commercial paper by Southern merchant communities and discusses the factors that may have hindered the full-scale development of endorsement and discount in the Lyon trading networks, despite their potential benefits. The results provide insights into the intricate nature of financial innovation and the influence of structural and cultural factors on its development.
    Keywords: financial innovation; Lyon fairs; north-south divide; commercial paper; financial expertise; ricorsa; assignment; endoresement; discount; CUP deal
    JEL: N20 N80 O10 O30 P50
    Date: 2023–10–06
  35. By: Josh Davis; Cristian Fuenzalida; Leon Huetsch; Benjamin Mills; Alan M. Taylor
    Abstract: Benchmark finance and macroeconomic models appear to deliver conflicting estimates of the natural rate and bond risk premia. This natural rate puzzle applies not only in the U.S. but across many advanced economies. We use a unified no-arbitrage macro- finance model with two trend factors to estimate the natural rate r* for 10 advanced economies. We cover a longer and wider sample than previous studies and draw on new sources to construct yield curves and excess returns. The two-trend model improves the explanatory power of yield regressions and return forecasts. Most variation in yields is due to the macro trends r* and π*, and not bond risk premia. Global components of unexpected bond returns are influential, while the local components of natural rates are large. Our r* estimates covary with growth and demographic variables in a manner consistent with theory and previous findings.
    JEL: C13 C32 E43 E44 E47 G12
    Date: 2023–10
  36. By: Sean Chanwook Lee; Omeed Maghzian
    Abstract: We estimate the impact of household liquidity provision on macroeconomic stabilization using the 2020 CARES Act mortgage forbearance program. We leverage intermediation frictions in forbearance induced by mortgage servicers to identify the effect of reducing short-term payments with little change in long-term debt obligations on local labor market outcomes. Following statewide business reopenings, a 1 percentage point increase in the share of mortgages in forbearance leads to a 30 basis point increase in monthly employment growth in nontradable industries. In a model incorporating geographical heterogeneity in intermediation frictions, these responses imply a household-level marginal propensity to consume out of increased liquidity that aligns with existing estimates for direct fiscal transfers. The implied debt-financed fiscal multiplier effects of forbearance are sizable but depend on the repayment terms of deferred payments and the monetary policy stance.
    Keywords: mortgage forbearance; liquidity; debt relief; CARES Act; employment; labor market
    JEL: G21 G23 G28 G51
    Date: 2023–09–10
  37. By: Serdar Birinci; Fatih Karahan; Yusuf Mercan; Kurt See
    Abstract: We develop a heterogeneous-agent New Keynesian model featuring a frictional labor market with on-the-job search to quantitatively study the positive and normative implications of employer-to-employer (EE) transitions for inflation. We find that EE dynamics played an important role in shaping the differential inflation dynamics observed during the Great Recession and COVID-19 recoveries, with the former exhibiting subdued EE transitions and inflation despite both episodes sharing similar unemployment dynamics. The optimal monetary policy prescribes a strong positive response to EE fluctuations, implying that central banks should distinguish between recovery episodes with similar unemployment but different EE dynamics.
    Keywords: Business fluctuations and cycles; Inflation and prices; Labour markets; Monetary policy
    JEL: E12 E24 E52 J31 J64
    Date: 2023–10
  38. By: Cimadomo, Jacopo; Giuliodori, Massimo; Lengyel, Andras; Mumtaz, Haroon
    Abstract: In this paper, we assess how risk-sharing channels have evolved over time in the United States and the Euro Area, and whether they have operated as ‘complements’ or ‘substitutes’. In particular, we focus on the capital channel (income from cross-border ownership of productive assets), the credit channel (interstate or cross-country bank lending), and the fiscal channel (federal or international fiscal transfers). We offer three main contributions. First, we propose a time-varying parameter panel VAR model, with stochastic volatility, which allows us to formally quantify time variation in risk-sharing channels. Second, we develop a new test of the complementarity vs. substitutability hypothesis of the three risk-sharing channels, based on the correlation between the impulse responses of these channels to idiosyncratic output shocks. Third, for the United States, we explain time variation in the risk-sharing channels based on some key macroeconomic and financial variables. JEL Classification: C11, C33, E21, E32
    Keywords: complementarity, risk-sharing channels, substitutability, time variation
    Date: 2023–10
  39. By: Edward N. Wolff
    Abstract: One hallmark of U.S. monetary policy since the early 1980s has been moderation in inflation (at least, until recently). How has this affected household well-being? The paper first develops a new model to address this issue. The inflation tax on income is defined as the difference between the nominal and real growth in income. This term is always negative (as long as inflation is positive). The inflation gain on household wealth is the revaluation resulting from asset price changes directly linked to inflation. This term can be positive or negative. The net inflation gain is the difference between the two, which can also be positive or negative. The empirical analysis covers years 1983 to 2019 on the basis of the Federal Reserve Board’s Survey of Consumer Finances (SCF) and historical inflation rates. It also looks at the sensitivity of the results to alternative inflation rates, and considers the effects of inflation on real wealth growth, wealth inequality, and the racial wealth gap. The results show that inflation boosted the real income of the middle wealth quintile by a staggering two thirds. In contrast, the bottom two wealth quintiles got clobbered by inflation, losing almost half of their real income. Inflation also boosted mean and especially median real wealth growth, reduced wealth inequality, and lowered the racial and ethnic wealth gap. Both the income and wealth results are magnified at higher (simulated) rates of inflation.
    JEL: D31 H31 J15
    Date: 2023–10
  40. By: Barlevy, Gadi (Federal Reserve Bank of Chicago); Hobijn, Bart (Federal Reserve Bank of Chicago); Faberman, Jason (Federal Reserve Bank of Chicago); Sahin, Aysegül (University of Texas at Austin)
    Abstract: We discuss how the relative importance of factors that contribute to movements of the U.S. Beveridge curve has changed from 1960 to 2023. We review these factors in the context of a simple flow analogy used to capture the main insights of search and matching theories of the labor market. Changes in inflow rates, related to demographics, accounted for Beveridge curve shifts between 1960 and 2000. A reduction in matching efficiency, that depressed unemployment outflows, shifted the curve outwards in the wake of the Great Recession. In contrast, the most recent shifts in the Beveridge curve appear driven by changes in the eagerness of workers to switch jobs. We argue that, while the Beveridge curve is a useful tool for relating unemployment and vacancies to inflation, the link between these labor market indicators and inflation depends on whether and why the Beveridge curve shifted. Therefore, a careful examination of the factors underlying movements in the Beveridge curve is essential for drawing policy conclusions from the joint behavior of unemployment and job openings.
    Keywords: Beveridge curve, inflation, job openings, unemployment
    JEL: E52 J6 J20
    Date: 2023–10
  41. By: Tomás E. Caravello; Pedro Martinez-Bruera; Iván Werning
    Abstract: We study the effects of an anticipated dollarization, announced today but planned to be implemented at some future date, in a simple open-economy model. Motivated by the profile of countries considering dollarization we make the following assumptions. First, the government faces a scarcity of dollars to pledge for the future conversion of domestic currency. Second, without dollarization monetary policy finances a deficit via seignorage. We focus on the pre-dollarization period. Our results are as follows. First, the announcement leads to a discrete devaluation on impact. Second, after this jump the devaluation rate also rises relative to the no dollarization benchmark. Finally, the devaluation and inflation rate may rises over time.
    JEL: E0 F3 F31 F33
    Date: 2023–10

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