|
on Banking |
| By: | Tomohiro Hirano; Joseph E. Stiglitz |
| Abstract: | This paper analyses the impact of credit expansions arising from increases in collateral values or lower interest rate policies on long-run productivity and economic growth in a two-sector endogenous growth economy with credit frictions, with the driver of growth lying in one sector (manufacturing) but not in the other (real estate). We show that it is not so much aggregate credit expansion that matters for long-run productivity and economic growth but sectoral credit expansions. Credit expansions associated mainly with relaxation of real estate financing (capital investment financing) will be productivity-and growth-retarding (enhancing). Without financial regulations, low interest rates and more expansionary monetary policy may so encourage land speculation using leverage that productive capital investment and economic growth are decreased. Unlike in standard macroeconomic models, in ours, the equilibrium price of land will be finite even if the safe rate of interest is less than the rate of output growth. |
| JEL: | E44 O11 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32479&r= |
| By: | Moloche, Guillermo |
| Abstract: | In this study, the author demonstrates that the selection of an appropriate money-demand function is crucial to ascertain the relationship between fiscal deficits and inflation. To do so, the author incorporates a Selden-Latané money-demand function into a micro-founded extension of the model introduced by Sargent, Williams, and Zha (2009). The use of this particular function results in a model that more accurately replicates Mexican money supply's past history, and furthermore, establishes a stronger historical association between fiscal and monetary policy, namely, between fiscal deficits and seigniorage. As a result, the author is able to provide more compelling evidence for the dominance of fiscal policy as the major cause of high inflation in Mexico during the last three decades of the twentieth century. |
| Keywords: | Inflation, Seigniorage, Fiscal Deficits, Monetary and Fiscal Policy Interaction |
| JEL: | E31 E41 E51 E52 E58 E63 |
| Date: | 2024–05–13 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:120925&r= |
| By: | YiLi Chien; Ashley Stewart |
| Abstract: | The Fed has been reducing its balance sheet since mid-2022, which also trims the overall level of bank reserves. What other factors might be affecting the demand for bank reserves? |
| Keywords: | bank reserves; quantitative tightening |
| Date: | 2024–04–18 |
| URL: | http://d.repec.org/n?u=RePEc:fip:l00001:98279&r= |
| By: | Nicola Amendola; Luis Araujo; Leo Ferraris |
| Abstract: | This paper compares digital and physical currency, focusing on a single intrinsic difference: digital, unlike physical, currency allows the authorities to trace the monetary flows in and out of the accounts. We show that this technological advance in record-keeping can be used to reward active balances relative to idle balances. This helps achieve efficiency in a wide range of circumstances. |
| Keywords: | Cash, Digital Currency, Optimal Monetary Policy |
| JEL: | E40 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:mib:wpaper:537&r= |
| By: | Jonathan Benchimol (Bank of Israel) |
| Abstract: | Since the Global Financial Crisis, a lively debate has emerged regarding the monetary policy rule the central bank of a small open economy (SOE) follows and should follow. By identifying the monetary policy rule that best fits historical data and minimizes central bank loss functions, this study contributes to this debate. We estimate a medium-scale micro-founded SOE model under various monetary policy rules using Israeli data from 1994 to 2019. Our results indicate that the model achieves a better fit to historical data when assuming inflation targeting (IT) compared to nominal income targeting (NGDP). Given central bank goals, shock uncertainty, and limited information, NGDP targeting rules may have been more desirable over the last three decades than IT rules. |
| Keywords: | Monetary policy rule, Central bank loss, Inflation targeting, NGDP targeting, Limited information |
| JEL: | C11 C54 E32 E52 E58 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:boi:wpaper:2024.04&r= |
| By: | David W. Berger; Konstantin Milbradt; Fabrice Tourre; Joseph S. Vavra |
| Abstract: | We build a model of optimal fixed-rate mortgage refinancing with fixed costs and inattention and derive a new sufficient statistic that can be used to measure inattention frictions from simple moments of the rate gap distribution. In the model, borrowers pay attention to rates sporadically so they often fail to refinance even when it is profitable. When paying attention, borrowers optimally choose to refinance earlier than under a perfect attention benchmark. Our model can rationalize almost all errors of “omission” (refinancing too slowly) and a large fraction of the errors of “commission” (refinancing too quickly) previously documented in the data. |
| JEL: | E4 G21 G4 G5 R2 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32447&r= |
| By: | Carlos Alberto Durigan Junior; Andr\'e Taue Saito; Daniel Reed Bergmann; Nuno Manoel Martins Dias Fouto |
| Abstract: | The main objective of this paper is to Identify which macroe conomic factors and industrial indexes influenced the total Brazilian banking spread between March 2011 and March 2015. This paper considers subclassification of industrial activities in Brazil. Monthly time series data were used in multivariate linear regression models using Eviews (7.0). Eighteen variables were considered as candidates to be determinants. Variables which positively influenced bank spread are; Default, IPIs (Industrial Production Indexes) for capital goods, intermediate goods, du rable consumer goods, semi-durable and non-durable goods, the Selic, GDP, unemployment rate and EMBI +. Variables which influence negatively are; Consumer and general consumer goods IPIs, IPCA, the balance of the loan portfolio and the retail sales index. A p-value of 05% was considered. The main conclusion of this work is that the progress of industry, job creation and consumption can reduce bank spread. Keywords: Credit. Bank spread. Macroeconomics. Industrial Production Indexes. Finance. |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2405.10655&r= |
| By: | David Aristei; Manuela Gallo; Raoul Minetti |
| Abstract: | This study provides first empirical evidence on the impact of entrepreneurs' financial knowledge on borrower discouragement. Using novel survey data on Italian micro-enterprises, we find that less financially knowledgeable entrepreneurs are more likely to be discouraged from applying for new financing, due to higher application costs and expected rejection. Our main results are robust to several sensitivity checks, including accounting for potential endogeneity. Furthermore, we show that the observed self-rationing mechanism is rather inefficient, suggesting that financial knowledge might play a key role in reducing credit market imperfections. |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2405.05891&r= |
| By: | Patrick Honohan (Peterson Institute for International Economics) |
| Abstract: | For most of the decade before the COVID-19 pandemic, undershooting rather than overshooting had been the main inflation problem of the European Central Bank (ECB). During 2020, consumer prices in the euro area were falling; by the end of that year, average inflation since the introduction of the euro two decades earlier stood at only 1.6 percent per year. Things began to snowball in 2021. The 12-month inflation rate steadily accelerated. It reached double digits in the final quarter of 2022--more than twice the level it had ever reached since the euro's introduction in 1999. Four striking features emerge from a review of the unexpected surge in European inflation since 2021: (1) The ECB's monetary policy response lagged behind that of the US Federal Reserve, reflecting the more gradual evolution of inflation in the euro area and its distinct pattern of causes; (2) the range of inflation rates across different euro area countries has been unprecedented. This largely reflects the differential impact of war-related energy shocks (especially for natural gas piped from Russia) as well as the differential fiscal response by national governments partially insulating consumers from these shocks; (3) not all households were net losers from the inflation, with some benefiting from the fact that inflation reduced the real value of their indebtedness; and (4) the speed with which inflation was returning toward target during 2023 prompted concerns that the ECB's monetary tightening might have been pushed too far, prolonging the output slowdown. |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:iie:pbrief:pb24-2&r= |
| By: | Financial System and Bank Examination Department (Bank of Japan); Strategy Development and Management Bureau (Financial Services Agency) |
| Abstract: | Securing stable foreign currency liquidity is one of the most important issues for Japanese major banks, as it is the basis of the expansion of their overseas businesses. The March 2023 banking turmoil in the United States and Switzerland shed new light on the importance of managing liquidity risk. Against this background, major banks have been enhancing their risk management through foreign currency liquidity stress testing based on more conservative and appropriate stress scenarios, early warning frameworks, and prompt and accurate liquidity data management. The Financial Services Agency and the Bank of Japan have supported these efforts through initiatives including joint surveys. As a result, major banks' resilience to foreign currency liquidity risk has steadily improved. However, there remains room for further enhancement. Going forward, banks are expected to continue their efforts to further enhance their risk management in line with changes in the risk profiles of their overseas businesses and the external environment. |
| Date: | 2024–05–22 |
| URL: | http://d.repec.org/n?u=RePEc:boj:bojrev:rev24e03&r= |
| By: | Pierre Gosselin (IF); A\"ileen Lotz |
| Abstract: | In a series of precedent papers, we have presented a comprehensive methodology, termed Field Economics, for translating a standard economic model into a statistical field-formalism framework. This formalism requires a large number of heterogeneous agents, possibly of different types. It reveals the emergence of collective states among these agents or type of agents while preserving the interactions and microeconomic features of the system at the individual level. In two prior papers, we applied this formalism to analyze the dynamics of capital allocation and accumulation in a simple microeconomic framework of investors and firms.Building upon our prior work, the present paper refines the initial model by expanding its scope. Instead of considering financial firms investing solely in real sectors, we now suppose that financial agents may also invest in other financial firms. We also introduce banks in the system that act as investors with a credit multiplier. Two types of interaction are now considered within the financial sector: financial agents can lend capital to, or choose to buy shares of, other financial firms. Capital now flows between financial agents and is only partly invested in real sectors, depending on their relative returns. We translate this framework into our formalism and study the diffusion of capital and possible defaults in the system, both at the macro and micro level.At the macro level, we find that several collective states may emerge, each characterized by a distinct level of average capital and investors per sector. These collective states depend on external parameters such as level of connections between investors or firms' productivity.The multiplicity of possible collective states is the consequence of the nature of the system composed of interconnected heterogeneous agents. Several equivalent patterns of returns and portfolio allocation may emerge. The multiple collective states induce the unstable nature of financial markets, and some of them include defaults may emerge. At the micro level, we study the propagation of returns and defaults within a given collective state. Our findings highlight the significant role of banks, which can either stabilize the system through lending activities or propagate instability through loans to investors. |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2405.10338&r= |
| By: | Yu Cheng; Qin Yang; Liyang Wang; Ao Xiang; Jingyu Zhang |
| Abstract: | In the realm of globalized financial markets, commercial banks are confronted with an escalating magnitude of credit risk, thereby imposing heightened requisites upon the security of bank assets and financial stability. This study harnesses advanced neural network techniques, notably the Backpropagation (BP) neural network, to pioneer a novel model for preempting credit risk in commercial banks. The discourse initially scrutinizes conventional financial risk preemptive models, such as ARMA, ARCH, and Logistic regression models, critically analyzing their real-world applications. Subsequently, the exposition elaborates on the construction process of the BP neural network model, encompassing network architecture design, activation function selection, parameter initialization, and objective function construction. Through comparative analysis, the superiority of neural network models in preempting credit risk in commercial banks is elucidated. The experimental segment selects specific bank data, validating the model's predictive accuracy and practicality. Research findings evince that this model efficaciously enhances the foresight and precision of credit risk management. |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2405.10762&r= |
| By: | Amberg, Niklas (Research Department, Central Bank of Sweden); Jacobson, Tor (Research Department, Central Bank of Sweden); Qi, Yingjie (Copenhagen Business School) |
| Abstract: | Buyers and suppliers have diverging interests about trade-credit maturities: buyers desire long payment periods as a source of cheap funding, while suppliers prefer swift payments to avoid locking up scarce liquidity in idle assets. A fast-growing financial product innovation—supply-chain finance (SCF)—offers to resolve these diverging interests, but its net effect on suppliers is a priori unclear. We study the effects of SCF programs on suppliers using unique invoice-level data from a large Swedish bank. We find that SCF programs relax suppliers’ liquidity constraints and thereby enable them to grow their sales, employment, and investments. |
| Keywords: | Trade credit; supply-chain finance; reverse factoring; financial constraints |
| JEL: | D22 G21 G32 |
| Date: | 2024–05–01 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:rbnkwp:0435&r= |
| By: | Ryuichiro Izumi (Department of Economics, Wesleyan University); Antonis Kotidis (Federal Reserve Board); Paul E. Soto (Federal Reserve Board) |
| Abstract: | One in five banks in the United States share a similar name. This can increase the likelihood of confusion among customers in the event of an idiosyncratic shock to a similarly named bank. We find that banks that share their name with a failed bank experience a half percent drop in transaction deposits relative to banks with similar characteristics but different name. This effect doubles for failures that are covered in media. We rationalize our findings via a model of financial contagion without fundamental linkages. Our model explains that when distinguishing banks is more costly due to similar trademarks, depositors are more likely to confuse their banks’ condition resulting in financial contagion. |
| Keywords: | Trademarks, Banking, Bank Runs, Bank Failures |
| JEL: | G21 G14 G30 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:wes:weswpa:2024-004&r= |
| By: | Ozili, Peterson K |
| Abstract: | This article presents a discussion on what a central bank digital currency (CBDC) can achieve in African countries and what a central bank digital currency may not achieve in African countries. The study shows that a central bank digital currency can achieve the following. CBDC can become a monetary policy tool; it can reduce the size of the informal economy; it can increase financial inclusion; it can increase digital financial literacy; it can reduce the circulation of counterfeit paper money; it can deepen existing payments system; it can improve social programmes and targeted welfare; it will increase transaction monitoring and surveillance; it can address tax evasion and increase tax revenue in African countries. The study also shows that a central bank digital currency may not completely replace cash in African countries; the issuance and use of CBDC won’t make African countries earn a ‘developed country’ status; CBDC adoption may not stop institutional corruption; CBDC adoption will not stop illicit activities in African countries; and CBDC adoption may not reduce the level of poverty in African countries. |
| Keywords: | central bank digital currency, CBDC, Africa, poverty, financial inclusion, monetary policy, remittance, informal economy, welfare, corruption. |
| JEL: | E52 E58 E59 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:120966&r= |
| By: | Patrick Douglass; Linda S. Goldberg; Oliver Zain Hannaoui |
| Abstract: | Global central banks and finance ministries held nearly $12 trillion of foreign exchange reserves as of the end of 2023, with nearly $7 trillion composed of U.S. dollar assets. Nevertheless, a narrative has emerged that an observed decline in the share of dollar assets in official reserve portfolios represents the leading edge of the dollar’s loss of status in the international monetary system. Some market participants have similarly linked the apparent increase in official demand for gold in recent years to a desire to diversify away from the U.S. dollar. Drawing on recent research and analytics, this post questions these narratives, arguing that these observed aggregate trends largely reflect the behavior of a small number of countries and do not represent a widespread effort by central banks to diversify away from dollars. |
| Keywords: | dollar; reserves; gold |
| JEL: | F3 F5 F6 |
| Date: | 2024–05–29 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:98313&r= |
| By: | Michael Grubb (Boston College); Darragh Kelly (Google); Jeroen Niebohr (London School of Economics); Matthew Osborne (University of Toronto); Jonathan Shaw (UK Financial Conduct Authority) |
| Abstract: | At-scale field experiments at major UK banks show that automatic enrollment into “just-in-time” text message alerts reduces unarranged overdraft and unpaid item charges 17–19% and arranged overdraft charges 4–8%, implying annual market-wide savings of £170–240 million. Incremental benefits from additional “early warning” alerts, triggered by low account balances are not statistically significant, although economically significant effects are not ruled out. Prior to the experiments, over half of overdrafting could have been avoided by using lower-cost liquidity available in savings and credit card accounts (FCA, 2018c). Alerts help consumers achieve less than half of these potential savings. |
| Keywords: | overdraft fees, early warning alerts, liquidity |
| JEL: | D14 D18 G21 G28 G51 |
| Date: | 2024–05–08 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:1073&r= |
| By: | Damane, Moeti; Ho, Sin-Yu |
| Abstract: | We examine the impact of financial inclusion of Sub-Saharan Africa (SSA) small and medium-sized enterprises (SMEs) on financial stability. Results show that financial inclusion of SMEs negatively affects stability in SSA countries, and the negative link is even stronger as levels of financial stability increase across countries. Our findings are consistent with the theory of excessive credit expansion or extreme financial inclusion theory, suggesting that to safely promote SME financial inclusion and foster financial sector stability, efforts should be directed toward improving banking sector risk mitigation efforts, financial sector supervision and strengthening coordination among regional financial sector regulators. |
| Keywords: | Sub-Saharan Africa; Financial Inclusion; Financial Stability; Small and Medium sized Enterprises, Fixed Effect Model; Quantile Regression |
| JEL: | G00 G2 G21 G28 |
| Date: | 2024–05–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:121093&r= |
| By: | Mr. Kelly Eckhold; Julia Faltermeier; Mr. Darryl King; Istvan Mak; Dmitri Petrov |
| Abstract: | This paper examines emerging market and developing economy (EMDE) central bank interventions to maintain financial stability during the COVID-19 pandemic. Through empirical analysis and case study reviews, it identifies lessons for designing future programs to address challenges faced in EMDEs, including less-developed financial markets and lower levels of institutional credibility. The focus is on the functioning of the financial markets that are key to maintaining financial stability—money, securities, and FX funding markets. Several lessons emerge, including: (i) objectives should be well-specified and communicated to facilitate eventual exit; (ii) intervention triggers should prioritize liquidity metrics over prices; (iii) actions should be sufficiently large to address market dysfunction; (iv) the risks of fiscal dominance and moral hazard should be minimized; and (v) program design should incentivize self-liquidation by appropriate pricing or through short-term operations that quickly liquidate. While interventions may increase risks to central bank balance sheets, potentially challenging policy solvency and operational independence, a well-designed framework can significantly mitigate these risks. |
| Keywords: | COVID-19 pandemic; central bank interventions; liquidity; and financial stability. |
| Date: | 2024–05–17 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/101&r= |
| By: | Yu-Ting Chiang; Mick Dueholm |
| Abstract: | Households carrying credit card balances tend to be middle income, but the ratio of credit card debt to income is highest among those who earn the least. |
| Keywords: | credit cards |
| Date: | 2024–05–20 |
| URL: | http://d.repec.org/n?u=RePEc:fip:l00001:98285&r= |
| By: | Mariam Tchanturia (Macroeconomic Research Division, National Bank of Georgia); Jared Laxton (Economist at Advanced Macro Policy Modelling (AMPM)); Douglas Laxton (NOVA School of Business and Economics, Saddle Point Research, The Better Policy Project); Shalva Mkhatrishvili (Head of Macroeconomics and Statistics Department, National Bank of Georgia) |
| Abstract: | COVID-19 was an unprecedented event that led to an extraordinary fiscal and monetary stimulus that resulted in a doubling in the S&P and over 50 percent increase in property prices in the US. These increases in asset prices combined with financial saving resulted in a 45 trillion dollar increase in US household net worth between 2020Q1 and 2023Q4, over twice the value of all goods and services produced by the US economy in 2019 (annual GDP was 21 trillion dollars in 2019). We believe this macroeconomic backdrop will play a prominent role in how the economy is going to evolve in the post-COVID-19 world. Our analysis begins with looking at the drivers of US consumption pre-COVID-19 and during COVID-19. We carry out a 2-step regression analysis by estimating the US consumption function in different periods with distinct features and incorporating different variables at each step to achieve stability in the parameters during the COVID-19 period. We use this analysis as a jumping off point for thinking about potential macro-financial risks caused by imbalances in the economy and whether monetary policy has been sufficient to reign in real economic activity. Our analysis suggests that the lower postCOVID-19 saving rate will likely persist until the economy experiences a tightening in financial conditions and large correction in equity and house prices. |
| Keywords: | Consumption Function, Monetary Policy, Neutral Rate |
| JEL: | E20 E21 E43 E52 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:aez:wpaper:2024-03&r= |
| By: | Raffi E. Garcia; Alberto Ortega |
| Abstract: | We examine the impact of local racial demonstrations, such as Black Lives Matter (BLM) protests, and the subsequent racial justice movement following the death of George Floyd on racial disparities in Paycheck Protection Program loan disbursements to small businesses. Using difference-in-differences and event-study methodologies, we find that local racial protests improved credit access for Black business owners. Additionally, the increased social media and public attention following Floyd's death affected the public perception of racial equity issues, resulting in a positive moderating effect on the loan amounts distributed to Black owners relative to other racial-ethnic groups. Our findings indicate that both implicit and explicit racial bias decreased after Floyd’s death, including finance occupations. |
| JEL: | G20 G28 G40 J15 J7 L26 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32477&r= |
| By: | Persson, Torsten (IIES, Stockholm University); Tabellini, Guido (IGIER, Bocconi University) |
| Abstract: | We revisit the optimal-contract approach to the design of monetary institutions, in the light of the Zero Lower Bound (ZLB) on interest rates and the resort to Quantitative Easing (QE) in recent years. Four of our lessons have not yet been incorporated in the practices of inflation targeting central banks. First, the optimal contract and the implied inflation-targeting regime should condition on being at the ZLB or out of it. Second – as already argued by others – the optimal inflation target should be raised to deal with the possibility of being at the ZLB, and more so the greater the risk of being there. But this qualitative lesson does not appear to warrant major quantitative changes of inflation targets. Third, the relevance of the ZLB suggests that it may be desirable to expand central-bank mandates to encompass financial stability, broadly defined, besides price and output stability. Fourth, accountability for inflation performance is a central mechanism in a successful monetary-policy framework. How exactly to change those mechanisms in practice is a new and difficult challenge, which is at least as important as the search for optimal policy rules that has attracted so much recent attention. |
| Keywords: | Inflation targets; optimal contracts; Zero lower bound |
| JEL: | D02 E31 E58 H11 |
| Date: | 2024–05–01 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:rbnkwp:0436&r= |
| By: | Stéphane Auray; Michael B. Devereux; Aurélien Eyquem |
| Abstract: | Monetary rules may have a large effect on the outcome of trade wars if central banks target the CPI inflation rate or more generally changes in the relative price of traded goods. We lay out a two-country open-economy model with sticky prices where countries engage in trade wars. In the presence of monopoly pricing markups, we show that the final level of tariffs and welfare losses from trade wars critically depend on the design of monetary policy. If central banks adopt a fixed nominal exchange rate or even better target the CPI inflation rate, trade wars are much less intense than those under PPI inflation targeting. We further show that an optimally delegated monetary rule that internalizes the formation of non-cooperative trade policy can actually completely eliminate a trade war, and even act to partly offset the welfare cost of monopoly markups. |
| JEL: | F30 F40 F41 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32451&r= |
| By: | Mr. Tobias Adrian; Christopher J. Erceg; Marcin Kolasa; Jesper Lindé; Roger McLeod; Mr. Romain M Veyrune; Pawel Zabczyk |
| Abstract: | Central banks have come under increasing criticism for large balance sheet losses associated with quantitative easing (QE), and some observers have also argued that QE helped fuel the post-COVID-19 inflation boom. In this paper, we reconsider the conditions under which QE may be warranted considering the recent high inflation experience. We emphasize that the merits of QE should be evaluated based on the macroeconomic stimulus it provides and its effects on the consolidated fiscal position, and not simply on central bank profits or losses. Using an open economy DSGE model with segmented asset markets, we show how QE can provide a sizeable boost to output and inflation in a deep recession and improve the consolidated fiscal position—even if the central bank experiences considerable losses. However, the commitment-based features of QE and the possibility that upside inflation risks are bigger than recognized pre-pandemic call for more caution in using QE closer to full employment. We then consider how central banks might modify their policies for allocating profits to the government in light of large-scale losses. In short, we suggest that a more forward-looking and risk-based approach may be desirable in helping protect central bank financial autonomy and ultimately independence. |
| Keywords: | Monetary policy; quantitative easing; central bank remittances; forward guidance |
| Date: | 2024–05–17 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/103&r= |
| By: | Mitsuhiro Osada (Bank of Japan); Takashi Nakazawa (Bank of Japan) |
| Abstract: | This article presents approaches to assessing various measures of inflation expectations in terms of their term structure and forecasting power. First, looking at inflation expectations by forecast horizon, movements in measures of short-term inflation expectations are relatively similar across different economic agents, while there is considerable heterogeneity in long-term inflation expectations. Second, in terms of the forecasting power for future inflation, while measures of longer-term inflation expectations have a larger bias, once this bias is removed, many measures have forecasting power. Moreover, composite indicators based on the term structure and forecasting power of individual measures suggest that medium- to long-term inflation expectations have risen moderately in recent years. |
| Keywords: | Monetary policy; Inflation expectations; Term structure; Forecasting |
| JEL: | E31 E37 E52 |
| URL: | http://d.repec.org/n?u=RePEc:boj:bojrev:rev24e4&r= |
| By: | Mr. Pau Rabanal; M. Belen Sbrancia |
| Abstract: | The recent increase of inflation globally has led to a renewed interest in understanding the link between inflation and wages. In Uruguay, the presence of centralized wage bargaining and indexation practices raises the question as to what extent wage growth dynamics can make the response of inflation to shocks more persistent. We use a medium-scale DSGE model which incorporates indexation in the wage setting equation to analyze the interactions between wage setting behavior and other macroeconomic variables, as well as the role of monetary policy. The analysis suggests that wage indexation increases the persistence of the response of inflation to domestic and foreign shocks, it also affects the monetary policy transmission mechanism and the severity of the trade-offs faced by the central bank. |
| Keywords: | Wage Setting; Inflation Persistence; Monetary Policy |
| Date: | 2024–05–24 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/105&r= |
| By: | Francesco Ferlaino |
| Abstract: | This study examines the redistribution effects of a conventional monetary policy shock among households in the presence of production-side financial frictions. A Heterogeneous Agents New Keynesian model featuring a financial accelerator is built after empirical evidence for consumption inequality. The results show that the presence of financial frictions significantly increases the magnitude of the Gini coefficient of wealth and other wealth inequality measures after contractionary monetary policy, compared to a scenario in which such frictions are inactive, proving that firms’ financial characteristics affect household wealth inequality. Consumption dynamics are also affected: financial frictions have a significant impact on how households consume and save after a monetary contraction, because they rely differently on labor income to smooth consumption. The relative increase in consumption inequality confirms the empirical results obtained in this study. |
| Keywords: | heterogeneous agents, financial frictions, monetary policy, New Keynesian models, inequalities, proxy-SVAR. |
| JEL: | C32 E12 E21 E44 E52 G51 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:mib:wpaper:538&r= |
| By: | Francesco D’Acunto; Evangelos Charalambakis; Dimitris Georgarakos; Geoff Kenny; Justus Meyer; Michael Weber |
| Abstract: | This paper discusses the recent wave of research that has emphasized the importance of measures of consumers’ inflation expectations. In contrast to other measures of expected inflation, such as for experts or financial market participants, consumers’ inflation expectations capture the broader distribution of societal beliefs about inflation. This research has revealed very significant deviations from traditional assumptions about rationality in consumers’ expectations formation. However, households do act on their beliefs about inflation, though in heterogeneous ways that can depart from the predictions of conventional economic models. Recent euro area experiences highlight the importance of tracking the degree of anchoring in consumers’ inflation expectations in a way that considers their inherent complexity, heterogeneity, and subjectivity. On average, consumers’ medium and longer-term expectations deviate noticeably in levels from central bank targets and, in contrast with expert expectations, often co-move more closely with shorter-term inflation news. By stepping up their engagement with the wider public, central banks may be able to influence expectations by building up greater knowledge and trust and thereby support more effective monetary transmission. Communication efforts need to be persistent because central banks must compete with many other demands on consumers’ attention. |
| JEL: | E31 E52 E58 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32488&r= |
| By: | Maideu-Morera, Gerard |
| Abstract: | The European Sovereign debt crises (2010-2012) showcased how excessive private leverage can threaten sovereign debt sustainability, making the existing fiscal rules targeting only public debt insufficient. In this paper, I study the optimal joint design of fiscal rules and macroprudential policies with sovereign default risk. I first consider a stylized two-period model of a small open economy where both the local government and a representative household borrow internationally. A central authority internal-izes externalities from sovereign default by the local government and designs fiscal rules and macroprudential policies. The model yields two insights: (i) it provides a novel rationale for macroprudential policies, and (ii) sovereign debt limits that are a function of the quantity of private debt (private-debt-dependent fiscal rules) can im-plement the optimal allocation. Then, I generalize these results to a multiperiod model with heterogeneous households, aggregate risk, and a rich asset structure. Finally, I calibrate a quantitative version of the model to compute the private-debt-dependent fiscal rules and the size of the macroprudential wedges. |
| Keywords: | Fiscal rules; macroprudential policy; sovereign default; endogenous borrowing constraints; economic unions |
| JEL: | F34 F41 F45 E44 G28 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:129336&r= |
| By: | Jaccard, Ivan |
| Abstract: | The evidence suggests that monetary policy transmission is asymmetric over the business cycle. Interacting financing frictions with a preference for liquidity provides an explanation for this fact. Our mechanism generates monetary asymmetries in a model that jointly reproduces a set of asset market and business cycle facts. Accounting for the joint dynamics of asset prices and business cycle fluctuations is key; in a variant of the model that is unable to produce realistic macro-finance implications, monetary asymmetries disappear. Our results suggest that asymmetries in the transmission mechanism critically depend on the macro-finance implications of monetary policy models, and that resorting to nonlinear techniques is not sufficient to detect monetary asymmetries. |
| Keywords: | Money Demand; Nonlinear Solution Methods; Asset Pricing in DSGE Models; Term Premium; Stochastic Discount Factor |
| JEL: | E31 E44 E58 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:cpm:dynare:081&r= |
| By: | Daniel Aromí (IIEP UBA-Conicet/FCE UBA); Daniel Heymann (IIEP UBA-Conicet/FCE UBA) |
| Abstract: | We propose a method to generate “synthetic surveys” that shed light on policymakers’ perceptions and narratives. This exercise is implemented using 80 time-stamped Large Language Models (LLMs) fine-tuned with FOMC meetings’ transcripts. Given a text input, finetuned models identify highly likely responses for the corresponding FOMC meeting. We evaluate this tool in three different tasks: sentiment analysis, evaluation of transparency in Central Bank communication and characterization of policymaking narratives. Our analysis covers the housing bubble and the subsequent Great Recession (2003-2012). For the first task, LLMs are prompted to generate phrases that describe economic conditions. The resulting output is verified to transmit policymakers’ information regarding macroeconomic and financial dynamics. To analyze transparency, we compare the content of each FOMC minutes to content generated synthetically through the corresponding fine-tuned LLM. The evaluation suggests the tone of each meeting is transmitted adequately by the corresponding minutes. In the third task, we show LLMs produce insightul depictions of evolving policymaking narratives. Thisanalysis reveals relevant narratives’ features such as goals, perceived threats, identified macroeconomic drivers, categorizations of the state of the economy and manifestations of emotional states. |
| Keywords: | Monetary policy, large language models, narratives, transparency. |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:aoz:wpaper:323&r= |
| By: | Paul Waidelich; Joscha Krug; Bjarne Steffen |
| Abstract: | Policymakers regularly rely on public financial institutions and government offices to provide loans for clean energy projects. However, both the market failures that public loan provision addresses and its role in a policy strategy that also features instruments directly addressing environmental and innovation externalities remain unclear. Here, we develop a model of banks providing loans for clean energy projects that use a novel technology. This early-stage lending builds up banks’ financing experience, which spills over to peers and hence is undersupplied by the market. In addition to this cooperation problem, bankability requirements can result in a coordination failure whereby the banking sector remains stuck in an equilibrium with no loans for the novel technology even when a preferable equilibrium with loans exists. Public provision of early-stage loans is inferior to de-risking instruments in solving this cooperation problem because it crowds out private banks’ loan provision. However, public loan provision—ideally in combination with additional de-risking measures to support banks in internalizing learning spillovers—can more effectively resolve the coordination failure by pushing the banking sector to a better equilibrium. |
| Keywords: | climate policy, credit guarantees, government loans, multiple equilibria, renewable energy, state investment bank |
| JEL: | G21 H81 Q48 Q55 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_11118&r= |
| By: | Eskelinen, Maria; Gibbs, Christopher G.; McClung, Nigel |
| Abstract: | New Keynesian models generate puzzles when confronted with the zero lower bound (ZLB) on nominal interest rates (e.g. the forward guidance puzzle or the paradox of flexibility). We show that these puzzles are absent in simple and medium-scale models when monetary policy approximates optimal policy, even loosely. The standard approach to modeling monetary policy at the ZLB does not approximate the policy a rational inflation targeting central bank would choose at the ZLB. It is this disconnect that is responsible for the puzzles. The puzzles, therefore, are best thought of as the plausible predictions of implausible monetary policy rather than implausible predictions to plausible monetary policy. We show how to write monetary policy rules that capture the same policy objective with and without the ZLB. |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bofrdp:295739&r= |
| By: | Vanya Horneff; Raimond Maurer; Olivia S. Mitchell |
| Abstract: | Almost 50 million Americans are burdened by the need to repay almost $2 trillion in student loan debt, while at the same time having to save for retirement. This article analyzes the potential impact of the 2022 SECURE 2.0 Act reform which permits employers to match contributions for student loan repayments, in 401(k) plans. Our calibrated lifecycle model measures the impact of this reform on heterogeneous households’ financial behavior and welfare. We show that, post-reform, employees will repay more loan debt but reduce own retirement plan contributions, offset by higher employer-matching contributions that take loan repayments into account. |
| JEL: | D14 D91 G11 G22 G51 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32443&r= |
| By: | Burak Deniz; Ýbrahim Yarba |
| Abstract: | This study analyzes bank loan maturity and corporate investment linkage by using novel firm-level data covering the universe of all incorporated firms in Türkiye over the last decade. The results of the panel regression model with multi-dimensional fixed effects reveal that loan maturity has a significant positive association with investment, indicating that longer debt maturity fosters corporate investment. The results reveal that the positive linkage between longer debt maturity and investment is more pronounced for small and medium-sized enterprises (SMEs). This is also the case for young firms and firms with high growth opportunities. Considering the evidence provided in the literature that bank lending conditions, including maturity structure, are highly cyclical and vulnerable to financial conditions and economic policy uncertainties, our findings highlight the importance of reducing the policy uncertainties as well as the importance of policies that make equity financing more attractive and deepen the capital markets. |
| Keywords: | Bank loans, Corporate investment, Debt maturity structure |
| JEL: | C23 D22 E22 G31 G32 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:2405&r= |
| By: | David Reifschneider (former Federal Reserve) |
| Abstract: | Federal Reserve policy in the wake of the COVID pandemic has been widely criticized as responding too slowly to surging inflation and an overheated labor market, thereby exacerbating the inflation problem and impairing macroeconomic performance more generally. This paper challenges this view by exploring the likely effects of a markedly more restrictive counterfactual monetary policy starting in early 2021. Under this policy, the Federal Open Market Committee (FOMC) would have strictly followed the prescriptions of a benchmark policy rule with labor utilization gauged using the ratio of vacancies to unemployment, thereby causing the federal funds rate to rise faster and by much more than it actually did. In addition, consistent with the alternative rule-based strategy, the FOMC would have provided less accommodative forward guidance than what it implicitly provided over time, based on the post-COVID evolution of the economic projections made by FOMC participants and major financial institutions. Finally, the Fed would have ended its large-scale asset purchases earlier and begun shrinking its balance sheet sooner. Because of uncertainty about inflation dynamics, simulations of the effects of the counterfactual policy are run using different specifications of the Phillips curve drawn from recent studies, with each in turn embedded in a large-scale model of the US economy that provides a detailed treatment of the monetary transmission mechanism. Using a range of assumptions for expectations formation and the interest sensitivity of aggregate spending, the various model simulations suggest that a more restrictive strategy on the part of the FOMC would have done little to check inflation in 2021 and 2022, although it probably would have sped its return to 2 percent thereafter. Because the modest reductions in inflation suggested by these simulations would have come at a cost of higher unemployment and lower real wages, the net social benefit of a more restrictive policy response on the part of the FOMC seems doubtful; the paper also questions the wisdom of a more rapid and pronounced tightening on risk-management grounds. |
| Keywords: | Inflation, monetary policy |
| JEL: | E17 E37 E58 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:iie:wpaper:wp24-13&r= |
| By: | António Afonso; Jorge Braga Ferreira |
| Abstract: | Using a panel data approach with bank-fixed effects, we study the impact of Targeted Longer-Term Refinancing Operations (TLTRO) on banks’ risk, given by their distance to default (DtD). The study aims to determine if the liquidity from TLTROs influences banks’ risk-taking behaviour. For the period from 2012:Q1 to 2018:Q4, covering 90 listed banks from 16 Eurozone countries, our findings show that TLTRO is associated with an increase in banks’ default risk. However, banks that participated in TLTRO experienced a positive effect on their default risk, indicating that they may have used liquidity to strengthen their financial position. Furthermore, we found no evidence that TLTRO liquidity encouraged banks to significantly increase lending or invest in riskier assets. Finally, our results also suggest that TLTRO’s impact is consistent across banks of different sizes and that the competition within the banking sector does not influence how banks utilize TLTRO liquidity. |
| Keywords: | ECB, TLTRO, unconventional monetary policy, bank risk, moral hazard, risk-taking channel |
| JEL: | C23 E52 E58 G21 G32 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_11116&r= |
| By: | Xiaodan Ding; Mr. Dimitrios Laliotis; Ms. Priscilla Toffano |
| Abstract: | We developed a novel Systemwide Liquidity (SWL) framework to identify liquidity stress in the system that goes beyond banks and to assess the role played by non-bank financial institutions (NBFIs) in episodes of liquidity stress. The framework, which complements standard liquidity and interconnectedness analyses, traces the flow of liquidity among various agents in the economy and explores possible transmission channels and amplification mechanisms of correlated liquidity shocks. The framework uses unique balance sheet and asset encumbrance data to demonstrate the importance of assessing liquidity at the system level by allowing for (i) analyses of each agent’s contribution to liquidity stress, (ii) analyses of the impact of different behavioral assumptions (e.g., pecking order of collateral utilization, negative externalities of fire-sales and margin positions), and (iii) policy simulations. Since this framework covers a comprehensive set of financial instruments and transactions, it paves the way for harmonization of systemwide liquidity analysis across countries. We applied this general framework to Mexico in the context of the FSAP. Results for Mexico show that commercial banks safeguard the resiliency of the financial system by backstopping the liquidity needs of other agents. Moreover, certain sectors appear more vulnerable when binding regulatory liquidity constraints trigger risk-averse behavioral responses. |
| Keywords: | Systemwide liquidity analysis; liquidity at risk; nonbank financial institution; liquidity stress testing; haircut; asset encumberance; margin calls; repurchase agreement; fire-sales; derivative positions |
| Date: | 2024–05–17 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/104&r= |
| By: | Carlos Madeira |
| Abstract: | This paper analyses the causal impact of macroprudential policies on growth, using industry-level data for 89 countries for the period 1990 to 2021. The small industry size creates an exogenous identification and avoids reverse-causality. I find that macroprudential tightening measures have a negative impact on manufacturing growth, but only for industries with high external finance dependence. This effect is stronger during banking crises, periods of higher output growth and for advanced economies. The effect is weaker during period of high private credit growth. Growth effects on externally dependent industries are economically sizeable and can persist over three years. |
| Keywords: | macroprudential policy, financial development, growth, external finance dependence, credit frictions |
| JEL: | E44 G28 O10 O16 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1191&r= |
| By: | Qing Guo; Siyu Chen; Xiangquan Zeng |
| Abstract: | The proliferation of internet technology has catalyzed the rapid development of digital finance, significantly impacting the optimization of resource allocation in China and exerting a substantial and enduring influence on the structure of employment and income distribution. This research utilizes data sourced from the Chinese General Social Survey and the Digital Financial Inclusion Index to scrutinize the influence of digital finance on the gender wage disparity in China. The findings reveal that digital finance reduces the gender wage gap, and this conclusion remains robust after addressing endogeneity problem using instrumental variable methods. Further analysis of the underlying mechanisms indicates that digital finance facilitates female entrepreneurship by lowering financing barriers, thereby promoting employment opportunities for women and also empowering them to negotiate higher wages. Specially, digital finance enhances women's bargaining power within domestic settings, therefore exerts a positive influence on the wages of women. Sub-sample regressions demonstrate that women from economically disadvantaged backgrounds, with lower human capital, benefit more from digital finance, underscoring its inclusive nature. This study provides policy evidence for empowering vulnerable groups to increase their wages and addressing the persistent issue of gender income disparity in the labor market. |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2405.15486&r= |
| By: | Masataka Mori; Juan M. Sanchez |
| Abstract: | An analysis examines the continuing rise in U.S. credit card delinquency through the share of people late on their payments and the share of debt that’s past due. |
| Keywords: | credit card delinquencies |
| Date: | 2024–05–14 |
| URL: | http://d.repec.org/n?u=RePEc:fip:l00001:98284&r= |