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on Banking |
| By: | Sebastian Infante; Kyungmin Kim; Anna Orlik; André F. Silva; Robert J. Tetlow |
| Abstract: | This paper reviews the literature examining how the introduction of a retail CBDC would affect the banking sector and financial stability. A CBDC has the potential to improve welfare by reducing financial frictions, countering market power in deposit markets and enhancing the payment system. However, a CBDC also entails noteworthy risks, including the possibility of bank disintermediation and associated contraction in bank credit, as well as potential adverse effects on financial stability. The recycling of the new CBDC liability through asset purchases or lending by the central bank plays an important role in determining the economic consequences of the introduction of a CBDC. A CBDC also raises important questions regarding the footprint of central banks in the financial system. Ultimately, the effects of a CBDC depend critically on its design features, of which remuneration is the one discussed most often in the literature. |
| Keywords: | Central bank digital currency; Bank disintermediation; Financial stability; Central bank balance sheet; Payment system |
| JEL: | E40 G20 E50 |
| Date: | 2023–11–20 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2023-72&r=ban |
| By: | Giannetti, Mariassunta; Jasova, Martina; Loumioti, Maria; Mendicino, Caterina |
| Abstract: | Using confidential information on banks’ portfolios, inaccessible to market participants, we show that banks that emphasize the environment in their disclosures extend a higher volume of credit to brown borrowers, without charging higher interest rates or shortening debt maturity. These results cannot be attributed to the financing of borrowers’ transition towards greener technologies and are robust to controlling for banks’ climate risk discussions. Examining the mechanisms behind the strategic disclosure choices, we highlight that banks are hesitant to sever ties with existing brown borrowers, especially if they exhibit financial underperformance. JEL Classification: G11, G15, G21 |
| Keywords: | credit exposure, financial institutions, strategic disclosure, sustainability reporting, zombie lending |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20232882&r=ban |
| By: | Erica Xuewei Jiang; Gregor Matvos; Tomasz Piskorski; Amit Seru |
| Abstract: | Building on the work of Jiang et al. (2023) we develop a framework to analyze the effects of credit risk on the solvency of U.S. banks in the rising interest rate environment. We focus on commercial real estate (CRE) loans that account for about quarter of assets for an average bank and about $2.7 trillion of bank assets in the aggregate. Using loan-level data we find that after recent declines in property values following higher interest rates and adoption of hybrid working patterns about 14% of all loans and 44% of office loans appear to be in a “negative equity” where their current property values are less than the outstanding loan balances. Additionally, around one-third of all loans and the majority of office loans may encounter substantial cash flow problems and refinancing challenges. A 10% (20%) default rate on CRE loans – a range close to what one saw in the Great Recession on the lower end -- would result in about $80 ($160) billion of additional bank losses. If CRE loan distress would manifest itself early in 2022 when interest rates were low, not a single bank would fail, even under our most pessimistic scenario. However, after more than $2 trillion decline in banks’ asset values following the monetary tightening of 2022, additional 231 (482) banks with aggregate assets of $1 trillion ($1.4 trillion) would have their marked to market value of assets below the face value of all their non-equity liabilities. To assess the risk of solvency bank runs induced by higher rates and credit losses, we expand the Uninsured Depositors Run Risk (UDRR) financial stability measure developed by Jiang et al. (2023) where we incorporate the impact of credit losses into the market-to-market asset calculation, along with the effects of higher interest rates. Our analysis, reflecting market conditions up to 2023:Q3, reveals that CRE distress can induce anywhere from dozens to over 300 mainly smaller regional banks joining the ranks of banks at risk of solvency runs. These findings carry significant implications for financial regulation, risk supervision, and the transmission of monetary policy. |
| JEL: | G2 L50 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31970&r=ban |
| By: | Ricardo Correa; Julian di Giovanni; Linda S. Goldberg; Camelia Minoiu |
| Abstract: | This paper uses U.S. loan-level credit register data and the 2018–2019 Trade War to test for the effects of international trade uncertainty on domestic credit supply. We exploit cross-sectional heterogeneity in banks’ ex-ante exposure to trade uncertainty and find that an increase in trade uncertainty is associated with a contraction in bank lending to all firms irrespective of the uncertainty that the firms face. This baseline result holds for lending at the intensive and extensive margins. We document two channels underlying the estimated credit supply effect: a wait-and-see channel by which exposed banks assess their borrowers as riskier and reduce the maturity of their loans and a financial frictions channel by which exposed banks facing relatively higher balance sheet constraints contract lending more. The decline in credit supply has real effects: firms that borrow from more exposed banks experience lower debt growth and investment rates. These effects are stronger for firms that are more reliant on bank finance. |
| Keywords: | Trade uncertainty; Bank loans; Trade finance; Global value chains; Trade war |
| JEL: | G21 F34 F42 |
| Date: | 2023–11–20 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1383&r=ban |
| By: | Carlevaro Emiliano A. |
| Abstract: | Capital regulation on banks aims to reduce the probability of failures. In theory, the effect of capital buffers in preventing failures could depend on the linkages among financial institutions. These linkages are nevertheless usually omitted in empirical models. I study the effectiveness of capital regulation in preventing failures using a spatial autoregressive probit model, which accommodates links among banks and feedback effects. I study the Argentinian banking crisis of 2001 for which I build the complete interbank network. By allowing linkages between banks, estimates from the spatial model show that capital regulation is 50% less effective than estimates of a model in which banks are not interconnected. |
| JEL: | E44 C21 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:aep:anales:4631&r=ban |
| By: | Di Bu (Macquarie University); Matti Keloharju (Aalto University; Research Institute of Industrial Economics; CEPR); Yin Liao (Macquarie University; Australian National University); Steven Ongena (University of Zurich; Swiss Finance Institute; KU Leuven; NTNU Business School; CEPR) |
| Abstract: | How do bankers treat green firms? Utilizing unique loan application and banker preference data from a mid-sized bank, we find that customer managers, serving as front-line bankers, provide more favorable recommendations for green firms, particularly when they hold strong green values. However, a minority of environmentally skeptical bankers counteract this trend. These brown managers fake green interests when their recommendations bear no weight, and conversely, diminish their endorsements to green firms when they do hold significance. Additionally, brown loan officers, acting as superiors to these managers, strive to offset positive green firm evaluations by downgrading them. |
| Keywords: | Green bank lending, customer managers, loan officers, values |
| JEL: | G21 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp23113&r=ban |
| By: | Jason Allen; Robert Clark; Jean-François Houde; Shaoteng Li; Anna V. Trubnikova |
| Abstract: | We study the role of brokers in selection markets. We find broker-clients in the Canadian mortgage market are observationally different from branch-clients. They finance larger loans with more leverage and longer amortization. We build and estimate a model of mortgage demand to disentangle three possible explanations for these riskier product choices: (i) selection on observables, (ii) unobserved borrower preferences for riskier loans, and (iii) a causal effect of brokers. Although we find that brokers influence product choices, the main reason borrowers choose high-leverage products is unobserved preferences. Borrowers prefer larger loans and brokers facilitate qualification for them. |
| JEL: | G21 L80 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31989&r=ban |
| By: | Mikropoulou, Christina D.; Vouldis, Angelos T. |
| Abstract: | The analysis of contagion in financial networks has primarily focused on transmission channels operating through direct linkages. This paper develops a model of financial contagion in the interbank market featuring both direct and indirect transmission mechanisms. The model is used to analyse how shocks originating from outside sectors impact the functioning of the interbank market and investigates the emergence of instability in this setting. We conduct simulations on actual interbank bilateral exposures, constructed manually from a supervisory dataset reported by the largest euro area banks. We find that while the impact of direct contagion increases gradually with the shock intensity, the effect of indirect contagion is subject to threshold effects and can increase abruptly when the threshold is exceeded. In addition, the risk posed by indirect contagion has a higher upper bound compared to direct contagion. Finally, we find that in terms of overall impact, the shocks to the value of sovereign debt and non-bank financial institutions represent the most significant risk to the functioning of the interbank market. JEL Classification: G01, G21, G23, D85 |
| Keywords: | banking sector, contagion, funding concentration risk, network analysis |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20232883&r=ban |
| By: | Anh Le; Alexander Copestake; Brandon Tan; Mr. Shanaka J Peiris; Umang Rawat |
| Abstract: | We develop a two-country New Keynesian model with endogenous currency substitution and financial frictions to examine the impact on a small developing economy of a stablecoin issued in a large foreign economy. The stablecoin provides households in the domestic economy with liquidity services and an additional hedge against domestic inflation. Its introduction amplifies currency substitution, reducing bank intermediation and weakening monetary policy transmission, worsening the impacts of recessionary shocks and increasing banking sector stress. Capital controls raise stablecoin adoption as a means of circumvention, increasing exposure to spillovers from foreign shocks. Unlike a domestic CBDC, a ban on stablecoin payments can alleviate these effects. |
| Keywords: | Cryptocurrency; Open Economy; Financial Frictions; Optimal Policy |
| Date: | 2023–12–06 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2023/249&r=ban |
| By: | Monroy-Taborda Sebastián |
| Abstract: | In this paper, I examine the relationship between income inequality and bank runs. Analyzing data for 17 countries between 1880 and 2013, I find a positive (and statistically significant) correlation between income inequality and the likelihood of bank runs. I propose a banking model to explore the mechanism underpinning this correlation. This model predicts that rising inequality increases the probability of a bank run. Furthermore, I find that income inequality increases consumption allocations in equilibrium, as they depend on the aggregate level of endowment, and the bank can redistribute between depositors, leading to a higher risk in the bank’s investment portfolio. |
| JEL: | G01 D31 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:aep:anales:4672&r=ban |
| By: | Allen N. Berger; Filippo Curti; Nika Lazaryan; Atanas Mihov; Raluca A. Roman |
| Abstract: | Using supervisory data from large U.S. bank holding companies (BHCs), we document that BHCs suffer more operational losses during episodes of extreme storms. Among different operational loss types, losses due to external fraud, BHCs’ failure to meet obligations to clients and faulty business practices, damage to physical assets, and business disruption drive this relation. Event study estimations corroborate our baseline findings. We further show that BHCs with past exposure to extreme storms reduce operational losses from future exposure to storms. Overall, our findings provide new evidence regarding U.S. banking organizations’ exposure to climate risks with implications for risk management practices and supervisory policy. |
| Keywords: | Operational Losses; Banking; Bank Holding Companies; Natural Disasters; Climate Risk; Hurricanes; Tornadoes; Severe Thunderstorms |
| JEL: | G20 G21 G32 Q54 |
| Date: | 2023–12–19 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:97489&r=ban |
| By: | Max Bruche; Ralf R. Meisenzahl; David Xiaoyu Xu |
| Abstract: | In leveraged loan deals, lead banks use bookbuilding to extract price-relevant information from syndicate participants. This paper examines the content of such information. We find that pricing adjustments during bookbuilding are highly informative, not only about investors’ required risk premium but also about borrower quality. A one-percentage-point increase in loan spread predicts a 0.8% higher excess return, a proxy for risk premium, over the first 3 months of secondary market trading. More importantly, it also predicts a 3% higher probability of subsequent default, implying that investors have private information about borrower quality that is unknown to the lead bank. Our findings suggest a new view of how information asymmetries affect syndicated lending. |
| Keywords: | syndicated loans; leveraged loans; underwriting |
| JEL: | G23 G24 G30 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:97519&r=ban |
| By: | Omer Faruk Akbal; Klakow Akepanidtaworn; Ezequiel Cabezon; Mariarosaria Comunale; Mrs. Marina Conesa Martinez; Ms. Filiz D Unsal |
| Abstract: | Central banks in Caucasus and Central Asia (CCA) have been enhancing their monetary policy frameworks in the last decade, and are at different stages of the transition to a type of inflation targeting regimes. This paper documents their progress and the current state of their monetary policy framework, utilizing the IAPOC index developed by Unsal and others (2022) covering Independence and Accountability, Policy and Operational Strategy, and Communications, as well as drawing from central banks’ laws and websites. Additionally, an analysis of press releases from CCA central banks is conducted to evaluate their features, content, and tones. The findings highlight the need for further improvements in the areas of Independence and Accountability, as well as Communications, despite some recent advancements in the latter. |
| Keywords: | Caucasus and Central Asia; Monetary Policy Frameworks; Communication. |
| Date: | 2023–12–08 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2023/251&r=ban |
| By: | TSURUTA Daisuke |
| Abstract: | In this paper, we investigate the relationship between the use of a public credit guarantee scheme for small businesses and the efficiency of credit allocation using region- and industry-level data from Japan for the period from 1968 to 2005. Studies argue that credit constraints are more severe for small businesses than for large firms. Therefore, a public credit guarantee scheme that mitigates this constraint could enhance social welfare. If credit guaranteed loans were allocated to firms with high value added, the public credit guarantee scheme would enhance the efficiency of credit allocation. Conversely, however, public credit guarantee schemes can squeeze credit allocations for small businesses. When financial institutions offer loans through credit guarantee schemes, they can offer loans to small businesses at low risk to themselves, even though small businesses are high-risk borrowers, which may reduce the incentives of the financial institutions to monitor the activity of small business borrowers. In addition, because the public credit guarantee scheme in Japan is a component of a broader set of social policies aiming to eliminate inequality, credit guaranteed loans can be offered to economically distressed firms. We identify a negative relationship between the amount of credit guaranteed and the value added. Moreover, we find that the greater the amount of credit guaranteed loans offered to firms, the larger the default rate among small businesses. We show that the public credit guarantee scheme reduced the efficiency of credit allocations, which has implications for industry and regional growth. |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:23083&r=ban |
| By: | Zhao Han; Chengcheng Jia |
| Abstract: | Is the "information effect" of monetary policy quantitatively important? We first use a simple model to show that under asymmetric information, monetary policy surprises are correlated with the unobserved state of the economy. This correlation implies that monetary policy surprises provide information about the state of the economy, and at the same time, explains why the estimation of the information effect may be biased. We then develop a New Keynesian DSGE model under asymmetric information and calibrate model parameters to match macroeconomic dynamics in the US and forecasting accuracy in the Greenbook. Under our calibration, both the central bank and the private sector initially have noisy information. Over time, the information effect of monetary policy mitigates information frictions by enhancing the two-way learning between the central bank and the private sector. |
| Keywords: | monetary policy; information frictions; asymmetric information |
| JEL: | E52 E58 D84 |
| Date: | 2023–12–18 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwq:97469&r=ban |
| By: | Mr. Serhan Cevik |
| Abstract: | Rapid advances in digital technology are revolutionizing the financial landscape. The rise of fintech has the potential to make financial systems more efficient and competitive and broaden financial inclusion. With greater technological complexity, however, fintech also poses potential systemic risks. In this paper, I use a novel dataset to trace the development of fintech (excluding cryptocurrencies) and empirically assess its impact on financial stability in a panel of 198 countries over the period 2012–2020. The analysis provides interesting insights into how fintech correlates with financial stability: (i) the impact magnitude and statistical significance of fintech depend on the type of instrument (digital lending vs. digital capital raising); (ii) the overall effect of all fintech instruments together turns out to be negative because of the overwhelming share of digital lending in total, albeit statistically insignificant; and (iii) while digital capital raising is estimated to have a positive effect on financial stability in advanced economies, its effect is negative in developing countries. Fintech is still small compared to traditional institutions, but rapidly expanding in riskier segments of the financial sector and creating new challenges for policymakers. |
| Keywords: | Fintech; financial innovation; financial stability |
| Date: | 2023–12–08 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2023/253&r=ban |
| By: | Patrick Guillaumont (FERDI - Fondation pour les Etudes et Recherches sur le Développement International) |
| Abstract: | Allocation is here understood as allocation among countries, while it is sometime taken as allocation between projects or operations. Intercountry allocation is an essential issue for concessional resources that are scarce. This note presents few remarks on the allocation of concessional resources an issue that has until now been rather neglected compared to their mobilization, although the two are interlinked. Since MDBs are the main supplier of these resources to countries, and, as multilateral, should have agreed and transparent rules of allocation, the following remarks mainly apply to them. |
| Keywords: | allocation, Vulnerability, Multilateral Development Banks |
| Date: | 2023–12–07 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04328541&r=ban |
| By: | Agostino Capponi; Garud Iyengar; Jay Sethuraman |
| Abstract: | Financial markets are undergoing an unprecedented transformation. Technological advances have brought major improvements to the operations of financial services. While these advances promote improved accessibility and convenience, traditional finance shortcomings like lack of transparency and moral hazard frictions continue to plague centralized platforms, imposing societal costs. In this paper, we argue how these shortcomings and frictions are being mitigated by the decentralized finance (DeFi) ecosystem. We delve into the workings of smart contracts, the backbone of DeFi transactions, with an emphasis on those underpinning token exchange and lending services. We highlight the pros and cons of the novel form of decentralized governance introduced via the ownership of governance tokens. Despite its potential, the current DeFi infrastructure introduces operational risks to users, which we segment into five primary categories: consensus mechanisms, protocol, oracle, frontrunning, and systemic risks. We conclude by emphasizing the need for future research to focus on the scalability of existing blockchains, the improved design and interoperability of DeFi protocols, and the rigorous auditing of smart contracts. |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2312.01018&r=ban |
| By: | Schclarek Curutchet Alfredo; Jiajun Xu |
| Abstract: | We analyze how multilateral development banks (MDBs) can lend in local currency to investment projects that are “domestic-oriented” (DOIPs), i.e., which do not generate hard currency, without incurring in currency mismatches between their assets and liabilities, which would downgrade their credit ratings. Further, we compare two funding strategies for MDBs; one that involves buying local currency and one that involves issuing local currency bonds. The main policy conclusion is that there are tradeoffs between these two funding strategies and MDBs should consider the particular exchange rate risks and balance of payments crisis risks for the real investment projects that are financed and the host countries. |
| JEL: | G01 E51 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:aep:anales:4692&r=ban |
| By: | Mr. Jiaqian Chen; Ms. Era Dabla-Norris; Carlos Goncalves; Zoltan Jakab; Jesper Lindé |
| Abstract: | This paper argues case that a tighter fiscal policy stance can meaningfully support central banks in fighting inflation in both advanced and emerging market economies. While the standard textbook result suggest that monetary policy is much more effective than fiscal policy in battling inflation in open economies due to the exchange rate channel, we show that a tighter fiscal stance is notably more effective in the current situation. This is so because when many countries currently need to tighten the policy stance simultaneously, the exchange rate channel does not provide monetary policy with an edge over fiscal policy. We also show that fiscal consolidation can be helpful in small open emerging markets and developing economies by reaffirming their commitment to price stability, and by putting the fiscal house in order which reduces risk premiums and strengthens the currency. Furthermore, we show that spillovers from major economies can be more adverse from tighter monetary policy. By applying a two-agent New Keynesian modeling framework with unconstrained and hand-to-mouth households, we show that any adverse effects of tighter fiscal policy (relative to tighter monetary policy) on consumption inequality can be handled with a combination of general spending cuts and targeted transfers to vulnerable households. |
| Keywords: | Policy Coordination; Monetary Policy; Fiscal Policy; High Inflation |
| Date: | 2023–12–15 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2023/260&r=ban |
| By: | Elliot Anenberg; Tess C. Scharlemann; Eileen van Straelen |
| Abstract: | We show that the strong negative effect of higher mortgage rates on cash-out refinancing reflects substitution into other borrowing products, not large changes in total new household borrowing. We exploit an exogenous increase in long-term rates to show that, in the cross-section of outstanding mortgage rates, changes in cash-out and alternative borrowing are offsetting. Additionally, we instrument using monetary policy surprises to show that, over the period from 2006-2021, changes in cash-out refinancing are offset by alternative borrowing. Our results suggest that debt substitution substantially weakens the cash-out refinance channel of monetary policy and reduces its path-dependence. |
| Keywords: | Equity extraction; Mortgages and credit; Cash out refinancing; Monetary policy; Refinancing |
| JEL: | G51 |
| Date: | 2023–11–21 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2023-73&r=ban |
| By: | John H Cochrane |
| Abstract: | Our central banks set interest rate targets, and do not even pretend to control money supplies. How do interest rates affect inflation? We finally have a complete theory of inflation under interest rate targets and unconstrained liquidity. Its long-run properties mirror those of monetary theory: Inflation can be stable and determinate under interest rate targets, including a peg, analogous to a k-percent rule. The zero bound era is confirmatory evidence. Uncomfortably, stability means that higher interest rates eventually raise inflation, just as higher money growth eventually raises inflation. Sticky prices generate some short-run non-neutrality as well: Higher nominal interest rates can raise real rates and lower output. A model in which higher nominal interest rates temporarily lower inflation, without a change in fiscal policy, is a harder task. I exhibit one such model, but it paints a much more limited picture than standard beliefs. We either need a model with a stronger effect, or to accept that higher interest rates have quite limited power to lower inflation. Empirical understanding of how interest rates affect inflation without fiscal help is also a wide-open question. |
| Keywords: | inflation; fiscal theory of the price level; fiscal policy and inflation; interest rate theory; adaptive expectations models |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:rba:rbaacp:acp2023-07&r=ban |
| By: | Pierpaolo Benigno |
| Abstract: | This paper provides insights into the historical inefficiencies and instabilities of the international monetary system. These inefficiencies are primarily linked to the limited supply of international liquidity and wedges in various money-market rates. The instabilities encompass both macroeconomic and financial aspects, particularly focusing on the challenges of stabilizing inflation and economic activity. Innovations stemming from the competition of cryptocurrencies and the associated blockchain technology hold the potential for improving these outcomes. |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:ube:dpvwib:dp2313&r=ban |
| By: | Mehdi El Herradi; Aurélien Leroy |
| Abstract: | Central banks have recently adjusted their communication strategies to enhance engagement with the general public, yet there is limited understanding of public sentiment regarding monetary policy announcements. This paper investigates whether monetary policy announcements influence household (subjective) well-being in Germany over the period 2002-2018 and finds that tightening surprises reduce life satisfaction. Notably, the impact of a one standard deviation monetary policy shock on well-being is equivalent to a 4% decline in household income. This effect is particularly pronounced among middle-aged individuals and those belonging to the middle-class. |
| Keywords: | Monetary policy; Subjective Well-Being; Survey data; Euro Area |
| Date: | 2023–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2023/248&r=ban |
| By: | Clemence Landers (Center for Global Development); Karen Mathiasen (Center for Global Development); Samuel Matthews (Center for Global Development) |
| Abstract: | The climate agenda has been a dominant feature of World Bank reform efforts, with President Banga aiming to both mobilize new resources and increase the proportion of total funding for climate-related projects. The stakes are high: greenhouse gas (GHG) emissions in many borrowing countries are elevated and rising, dimming prospects for meeting the 2030 Paris Agreement target to limit warming to a 1.5 degrees Celsius increase. To date, stakeholders have focused on how to mobilize new funding for climate mitigation reflecting an emphasis on the supply side (e.g., financing) of the agenda. But there has been little analysis on the demand side (or project pipeline). The assumption is that more money will generate more demand. But this does not necessarily follow. In this paper, we discuss major factors that will influence demand for climate mitigation projects, especially from the largest emitters of greenhouse gases (e.g., China, India, Brazil, Indonesia, Mexico). Our assessment is that factors like World Bank borrowing costs and access to alternative sources of finance will likely limit demand absent financial incentives, which could prove costly and difficult to resource at the scale needed to have meaningful impact. We also see a risk that these incentives could be used inefficiently absent a rigorous analysis to identify where they could have the most impact and a robust framework for assessing results. |
| Date: | 2023–12–11 |
| URL: | http://d.repec.org/n?u=RePEc:cgd:ppaper:315&r=ban |
| By: | Philippe Bacchetta (University of Lausanne Swiss Finance Institute and CEPR); J. Scott Davis (Federal Reserve Bank of Dallas); Eric van Wincoop (University of Virginia and NBER) |
| Abstract: | Since 2007, an increase in risk or risk aversion has resulted in a US dollar appreciation and greater deviations from covered interest parity (CIP). In contrast, prior to 2007, risk had no impact on the dollar, and CIP held. To explain these phenomena, we develop a two-country model featuring (i) market segmentation, (ii) limited CIP arbitrage (since 2007), (iii) global dollar dominance. During periods of heightened global financial stress, dollar shortages in the offshore market emerge, leading to increased CIP deviations and a dollar appreciation. The appreciation occurs even in the absence of global dollar demand shocks. Central bank swap lines mitigate these effects. |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp23117&r=ban |
| By: | Dario Caldara; Francesco Ferrante; Matteo Iacoviello; Andrea Prestipino; Albert Queraltó |
| Abstract: | We use historical data and a calibrated model of the world economy to study how a synchronous monetary tightening can amplify cross-border transmission of monetary policy. The empirical analysis shows that historical episodes of synchronous tightening are associated with tighter financial conditions and larger effects on economic activity than asynchronous ones. In the model, a sufficiently large synchronous tightening can disrupt intermediation of credit by global financial intermediaries causing large output losses and an increase in sacrifice ratios, that is, output lost for a given reduction in inflation. We use this framework to show that there are gains from coordination of international monetary policy. |
| Keywords: | Monetary Policy; Inflation; International Spillovers; Financial Frictions; Open Economy Macroeconomics; Panel Data Estimation |
| JEL: | C33 E32 E44 F42 |
| Date: | 2023–11–29 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1384&r=ban |
| By: | Ali, Amjad; Khokhar, Bilal; Sulehri, Fiaz Ahmad |
| Abstract: | This study explores the relationship between inflationary pressure and policy mix in developing countries over the period of 1995 to 2022. Money supply, unemployment rate, regulatory policies, currency rate, remittances, and amount of foreign debt are explanatory factors, whereas inflationary pressure is the dependent variable. To assess the influence of these factors on inflation, panel least squares, and fixed effect models are utilized. The study's findings shed light on the complicated links between financial factors and inflationary pressures in developing nations. The study demonstrates that in developing nations, the money supply has a negative and considerable influence on inflation. The study found that unemployment had a favorable but insignificant influence on inflation pressures in emerging nations. Furthermore, the research demonstrates that regulatory measures have a negative and considerable influence on inflationary pressures. The exchange rate has been proven to have a positive and considerable impact on inflationary pressures in emerging nations, highlighting the necessity of prudent exchange rate management in mitigating the inflationary implications of currency decline. Furthermore, remittances have a negative and considerable influence on inflationary pressures, implying that increasing financial inclusion and investment possibilities for remittance-receiving families might help to stabilize inflation in developing countries. Finally, the study emphasizes that the quantity of foreign debt in emerging nations has a positive and considerable influence on inflationary pressures. According to the study, careful monitoring and control of the money supply, addressing unemployment through labor market reforms and investments, implementing effective regulatory restrictions, prudent exchange rate management, promoting financial inclusion for remittance recipients, and pursuing sustainable debt levels are all important. |
| Keywords: | Money Supply, Unemployment Rate, Regulatory Policies, Currency Rate, Foreign Debt, Remittances |
| JEL: | E24 E51 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:119364&r=ban |
| By: | HATTORI Masazumi; FUJITANI Ryosuke; NAKAJIMA Jouchi; YASUDA Yukihiro |
| Abstract: | This study analyzes the real effects of cash holdings of Japanese companies. We quantitatively investigate whether differences in cash holdings immediately before a specific sample period after 2000 lead to differences in corporate behavior over the medium term. Specifically, we first investigate the period immediately after the Lehman shock in 2008 and analyze capital expenditures as real effects. The results clearly show that companies with high cash holdings immediately before the crisis make more capital investments in the post-crisis period than companies with low cash holdings. We also find that the difference is larger for tangible fixed assets than it is for intangible fixed assets. These results are similar to a preceding study in the UK that reported that differences in cash holdings create differences in companies' competitive advantage after the crisis. However, unlike in the UK, we also find that the real effects of cash holdings are almost equally apparent, regardless of the sample period chosen after 2000. Japanese companies experienced a domestic banking crisis in the late 1990s. It can be pointed out that the experience of the crisis motivated them to increase their tendency to hold cash, and that differences in the resulting cash holdings have led to differences in the real effects in Japan. |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:23084&r=ban |
| By: | Johannes Breckenfelder (European Central Bank); Pierre Collin-Dufresne (École Polytechnique Fédérale de Lausanne; Swiss Finance Institute; NBER); Stefano Corradin (European Central Bank) |
| Abstract: | We document a recurring pattern in German sovereign bond prices during the Eurosystem's Public Sector Purchase Program (PSPP): a predictable rise towards month-end, followed by a subsequent drop. We propose a sequential search-bargaining model, capturing salient elements of the PSPP's implementation, such as the commitment to transact within an explicit time horizon. The model suggests that this predictable pattern emerges as a consequence of imperfect competition among dealers who are counterparties to the Eurosystem. Predicated on the model's implications, we find that the price fluctuations are markedly accentuated: (a) for bonds specifically targeted by the PSPP, (b) during monthly intervals wherein the Eurosystem engages with a lower number of counterparties, and (c) when the Eurosystem aims for a larger purchase amount. Finally, we explore the potential consequences of our findings for the design and implementation of future asset purchase programs. |
| Keywords: | Quantitative Easing, Sequential Search-Bargaining Model, Imperfect Competition, Dealers, Financial Market Design |
| JEL: | G12 G21 E52 E58 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp23104&r=ban |
| By: | David de Villiers (Department of Economics, Stellenbosch University); Hylton Hollander (Department of Economics, Stellenbosch University); Dawie van Lill (Department of Economics, Stellenbosch University) |
| Abstract: | Against the backdrop of a proliferation of policy tools, ongoing policy uncertainty surrounds the suitability of capital flow management in mitigating systemic risk and financial disruptions. We study the effectiveness of macroprudential policies in managing extreme capital flow episodes (surges, stops, flight, and retrenchment), comparing them to capital controls and foreign exchange interventions. Using propensity score matching, based on a panel of 54 countries spanning 1990Q1 to 2020Q3, we find that macroprudential policy can reduce the likelihood of extreme capital flow episodes at least as effectively as capital controls or foreign exchange interventions. Their relative effectiveness, however, varies considerably across type of instrument, proliferation of tools, country income-development level, and type of extreme capital flow episode. |
| Keywords: | macroprudential policy, capital controls, foreign exchange interventions, extreme capital flows, financial stability |
| JEL: | E58 F3 F4 G01 G1 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:sza:wpaper:wpapers382&r=ban |
| By: | Kramer, Berber; Pattnaik, Subhransu; Ward, Patrick S.; Xu, Yingchen |
| Abstract: | Smallholder farmers often lack documented land rights to serve as collateral for formal loans, and their livelihoods are inextricably linked to increasingly variable weather conditions. Resulting credit and risk constraints prevent them from making potentially profitable investments in their farms. We implemented a randomized evaluation of the impacts of KhetScore, an innovative credit scoring methodology that uses digital technologies and in particular remote sensing to unlock credit and insurance for smallholders including landless farmers in Odisha, a state in eastern India. In our treatment group, where we offered loans and insurance based on the KhetScore methodology, farmers - and especially women - were more likely to purchase insurance, renew insurance coverage in subsequent years, and borrow from formal sources without substituting formal loans for informal loans. Despite increased borrowing, households in the treatment group faced less difficulty in repaying loans, suggesting that KhetScore loans, bundled with crop insurance, transferred risk and eased the burden of repayment. Moreover, the treatment increased agricultural revenues during the monsoon (kharif) season and reduced costs in the dry (rabi) season, enhancing profitability in both seasons. Positive and significant effects are found not only among baseline credit unconstrained farmers but also quantity rationed farmers, suggesting that KhetScore loans can help overcome supply-side credit constraints. Finally, women in the treatment group reported significantly higher levels of empowerment and mental health, manifested in increased participation in household decision-making and reduced feelings of stress, than women in the control group. In conclusion, digital technologies can contribute substantially to expansion in agricultural credit access, risk management, resilience, and wellbeing among marginalized landless farmers. |
| Keywords: | Agricultural Finance, Consumer/Household Economics, Farm Management, Financial Economics |
| Date: | 2023–12–18 |
| URL: | http://d.repec.org/n?u=RePEc:ags:assa24:339080&r=ban |
| By: | Listo, Ariel; Saberian, Soodeh; Thivierge, Vincent |
| Abstract: | De Haas and Popov (2023) estimate the effect of country-level financial sector size and structure on decarbonization to show that countries with relatively more equity versus debt financing have more emission-efficient economies. We uncover multiple coding errors that change the magnitude and the precision of the coefficients of interest. These coding errors include misreporting of standard errors, and misspecifying generalized method of moments (GMM) estimators. We further provide robustness tests of the results to (1) restricting the sample to consistent sets of countries across the country and country-byindustry samples, and (2) using a limited information maximum likelihood (LIML) estimator to address a weak-instrument problem. We find that the results from the robustness checks are qualitatively different from the original results but similar to the corrected results. |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:i4rdps:95&r=ban |
| By: | Jonathan Beynon (Center for Global Development) |
| Abstract: | The scale, source, and allocation of climate finance have been contentious aspects of the Paris Agreement and its implementation. Central to these are questions of “fair shares”: who might contribute what and whether the group of contributors should be expanded. New analysis presented here concludes that there is a case for nontraditional donors providing 20-30 percent of any total, with this finding robust to a variety of different measures of historical emissions, cut-off dates, and income. China, Russia, South Korea, Saudi Arabia, Taiwan, Poland, the United Arab Emirates, and Mexico consistently feature in the top 20. Developed countries, however, should continue to take primary responsibility, with the United States shouldering at least 40 percent of the burden in virtually all scenarios. The politics of climate finance will continue to be difficult, but it is hard to escape the conclusion that both the United States and China will need to provide more. |
| Date: | 2023–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:cgd:ppaper:311&r=ban |