|
on Banking |
| By: | Viral V. Acharya; Nicola Cetorelli; Bruce Tuckman |
| Abstract: | Nonbank financial institutions (NBFIs) are growing, but banks support that growth via funding and liquidity insurance. The transformation of activities and risks from banks to a bank-NBFI nexus may have benefits in normal states of the world, as it may result in overall growth in (especially, credit) markets and widen access to a wide range of financial services, but the system may be disproportionately exposed to financial and economic instability when aggregate tail risk materializes. In this post, we consider the systemic implications of the observed build-up of bank-NBFI connections associated with the growth of NBFIs. |
| Keywords: | nonbank financial institutions (NBFIs); non-bank financial intermediaries; nonbanks; systemic risk; spillovers; bank regulation |
| JEL: | G01 G21 G23 G28 |
| Date: | 2024–06–20 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:98461 |
| By: | Viral V. Acharya; Nicola Cetorelli; Bruce Tuckman |
| Abstract: | In our previous post, we documented the significant growth of nonbank financial institutions (NBFIs) over the past decade, but also argued for and showed evidence of NBFIs’ dependence on banks for funding and liquidity support. In this post, we explain that the observed growth of NBFIs reflects banks optimally changing their business models in response to factors such as regulation, rather than banks stepping away from lending and risky activities and being substituted by NBFIs. The enduring bank-NBFI nexus is best understood as an ever-evolving transformation of risks that were hitherto with banks but are now being repackaged between banks and NBFIs. |
| Keywords: | non-bank financial intermediaries; nonbanks; shadow banking; bank regulation; macroprudential regulations; regulatory arbitrage; systemic risk |
| JEL: | G01 G21 G23 G28 |
| Date: | 2024–06–18 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:98396 |
| By: | Viral V. Acharya; Nicola Cetorelli; Bruce Tuckman |
| Abstract: | Traditional approaches to financial sector regulation view banks and nonbank financial institutions (NBFIs) as substitutes, one inside and the other outside the perimeter of prudential regulation, with the growth of one implying the shrinking of the other. In this post, we argue instead that banks and NBFIs are better described as intimately interconnected, with NBFIs being especially dependent on banks both for term loans and lines of credit. |
| Keywords: | non-bank financial intermediaries; funding; credit lines |
| JEL: | G01 G21 G23 G28 |
| Date: | 2024–06–17 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:98393 |
| By: | David P. Glancy; Felicia Ionescu; Elizabeth C. Klee; Antonis Kotidis; Michael Siemer; Andrei Zlate |
| Abstract: | We use high-frequency data to examine the effectiveness of the Bank Term Funding Program (BTFP) in supporting the liquidity positions of vulnerable banks during the March 2023 banking turmoil. We uncover three key findings. First, our high-frequency data confirm that banks with high reliance on uninsured deposits and large unrealized losses on securities holdings suffered larger deposit outflows at the onset of the episode. Second, the BTFP played an outsized role in meeting these outflows at banks with larger securities losses, reflecting the at-par valuation of securities collateral at the BTFP (banks at the 90th percentile in securities losses replaced 26 cents of every dollar of outflows with BTFP borrowing, compared to only 7 cents on average). Third, in addition to funding loan growth and deposit outflows, banks used the BTFP to build cash holdings, indicating that the program enabled banks to position themselves against potential future funding needs. Overall, we demonstrate that the BTFP enabled banks to meet funding needs and preserve liquidity during the period of stress. |
| Keywords: | 2023 banking turmoil; Deposit outflows; Uninsured deposits; Securities losses; Bank Term Funding Program (BTFP); Emergency liquidity facilities |
| JEL: | E52 E58 G01 G21 |
| Date: | 2024–06–14 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2024-45 |
| By: | Ryuichiro Izumi; Antonis Kotidis; Paul E. Soto |
| 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: | 2024–06–14 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2024-44 |
| By: | Siema Hashemi (CEMFI, Centro de Estudios Monetarios y Financieros) |
| Abstract: | This paper investigates the impact of supervisory resolution tools, specifically bail-ins versus bailouts, on the ex-ante banks’ portfolio composition and resulting ex-post default probabilities in the presence of both idiosyncratic and systematic shocks. Banks make decisions regarding short-term versus long-term risky investments while considering the expected resolution policy. I find that both types of shocks can generate financial instability, which the two resolution tools address through distinct channels. With only idiosyncratic shocks, creditor bailouts, acting as debt insurance, eliminate the equilibrium with bank defaults, while bail-ins induce banks to invest less in the risky short-term asset, which may also prevent defaults. In the presence of both shocks, creditor bailouts can prevent systemic defaults, while bail-ins are less effective in preventing them and could even contribute to systemic risk. |
| Keywords: | Bailouts, bail-ins, bank resolution, systemic risk, bank portfolio allocation, fire sales. |
| JEL: | G21 G28 G33 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:cmf:wpaper:wp2024_2410 |
| By: | Hilpert, Hanns Günther |
| Abstract: | In China, money, currency and payment transactions are manifestations of state sovereignty and political power. The primary objective of Chinese monetary policy is to maintain domestic stability, expand the scope of its own influence internationally, and reshape the global financial and monetary system to make it more compatible with the structures of the Chinese one-party state. China is pursuing the internationalisation of the renminbi on several tracks in small persistent steps and with a long-term perspective, but it has so far shied away from the decisive transition to convertibility. For the time being, the renminbi does not play a significant role on the global financial and currency markets. However, it is gaining ground as a trading, credit and reserve currency in Asia and the Global South. China is a pioneer in the development and introduction of digital central bank money. It is striving to play a leading role in the digitalisation of international payment transactions. Prospectively, the technology and infrastructure developed in China and the standards set for cross-border payments using blockchain and real-time transactions could replace the current international banking and clearing system in a cost-effective manner. The Chinese leadership believes that digital central bank money offers great potential: In terms of domestic policy, it creates further opportunities for surveillance and repression. Internationally, it would become easier for China and third countries to circumvent Western financial sanctions. In response to China's currency campaign, the European Union and the European Central Bank should step up their own efforts to internationalise and digitise the euro. Europe should avoid dependence on China when it comes to the future critical infrastructure of an interoperable system for international payments with digital central bank money. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:swprps:298842 |
| By: | Christopher Henry; Matthew Shimoda; Doina Rusu |
| Abstract: | We present key results from the 2023 Methods-of-Payment (MOP) Survey, including updated payment shares based on a three-day shopping diary. Results show that measures of cash management and use have remained fairly stable since 2020, along with the estimated share of payments made online. In 2023, Canadians increased their adoption of payment alternatives such as mobile apps and Interac e-Transfer. New questions were introduced into the MOP survey instrument in 2023 to measure perceived access to cash from automated banking machines and banks. |
| Keywords: | Bank notes; Digital currencies and fintech; Financial services |
| JEL: | D83 E41 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocadp:24-08 |
| By: | Francisco Jesús Guerrero López (Universidad de San Andrés); Paula Margaretic (Universidad de Chile); Lucía Quesada (Universidad de San Andrés); Federico Sturzenegger (Universidad de San Andrés) |
| Abstract: | In recent years, traditional banks have faced increasing competition from digital banks, fintechs, and big tech companies. This paper builds a framework to discuss optimal regulation within this more complex competitive landscape. To achieve this, we establish a model where banks compete with a single fintech. All players choose the degree of specialization. Banks hold a geographical advantage for some customers, while the fintech reaches all customers equally. Due to fixed costs, the market operates under imperfect competition, leading to parameter values where the regulator may seek to exclude non-bank intermediaries and others where the regulator may prefer to exclude banks, shifting intermediation exclusively to big tech companies. These distinct patterns align with observed competition in financial markets, where competition with big tech companies is intense in the customer business and less so in corporate lending. Our model contributes to the argument that, for certain types of lending, banking regulation tends to be overly restrictive towards non-bank intermediaries, resulting in significant welfare losses. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:aoz:wpaper:327 |
| By: | Sulehri, Fiaz Ahmad; Ali, Amjad |
| Abstract: | Financial inclusion, ensuring access to affordable financial products and services, is vital for economic development and poverty reduction. This study investigates the relationship between bank concentration, policy mix, and financial inclusion dynamics in developed and developing nations across 2014, 2017, and 2021. Utilizing financial inclusion as the dependent variable, factors such as bank concentration, fiscal freedom, monetary freedom, globalization, education, and urbanization are examined as independent determinants. Separate analyses for each country group enable cross-country comparisons and policy insights. The findings reveal a consistent hindrance to financial inclusion due to high bank concentration across all years and in both developing and developed countries, highlighting the critical need to diversify financial institutions for enhanced access. The impact of fiscal freedom shows shaded patterns, with a modestly negative effect in 2017 for developing nations, underscoring the necessity for tailored fiscal policies to actively promote inclusion. Monetary freedom positively influences financial inclusion in 2014 and 2017, diminishing by 2021. Globalization consistently fosters financial inclusion, though its significance fades in developed countries in 2021. Education emerges as a key driver, displaying a robust positive relationship across all years and countries. Urbanization's impact varies, with significant positive effects in 2017 but diminishing significance by 2021. Policymakers are urged to diversify financial institutions, tailor fiscal policies, and ensure monetary stability. Fostering globalization and strategic investments in education are identified as effective strategies for enhancing financial inclusion, with a call for adaptable, context-specific approaches to ensure inclusive economic growth. |
| Keywords: | Financial Inclusion, Bank Concentration, Monetary and Fiscal Freedom, Globalization |
| JEL: | E44 G21 O15 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121284 |
| By: | Gökhan Ider; Alexander Kriwoluzky; Frederik Kurcz; Ben Schumann |
| Abstract: | This paper first shows that, contrary to conventional wisdom, the European Central Bank (ECB) can influence global energy prices. Second, through Lucas critique-robust counterfactual analysis, we uncover that the ECB’s ability to affect fast-moving energy prices plays an important role in the transmission of monetary policy. Third, we empirically document that, to optimally fulfill its primary mandate, the ECB should swiftly tighten policy in response to an increase in energy prices. Crucially, the tightening required depends on the ECB’s ability to influence global energy prices. Finally, we find this policy strategy could have largely prevented the post-pandemic inflation episode. |
| Keywords: | Inflation, energy prices, monetary policy transmission mechanism |
| JEL: | C22 E31 E52 Q43 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:diw:diwwpp:dp2089 |
| By: | Carole Roan Gresenz; Jean M Mitchell; Belicia Rodriguez; R. Scott Turner; Wilbert Van der Klaauw |
| Abstract: | We examine the effect of undiagnosed memory disorders on credit outcomes using nationally representative credit reporting data merged with Medicare data. Years prior to eventual diagnosis, average credit scores begin to weaken and payment delinquency begins to increase, overall and for mortgage and credit card accounts specifically. Credit outcomes consistently deteriorate over the quarters leading up to diagnosis. The harmful financial effects of undiagnosed memory disorders exacerbate the already substantial financial pressure households face upon diagnosis of a memory disorder. Our findings substantiate the possible utility of credit reporting data for facilitating early identification of those at risk for memory disorders. |
| Keywords: | Debt repayment; memory disorders; credit cards; mortgages |
| JEL: | I1 G41 G51 |
| Date: | 2024–05–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:98386 |
| By: | Charles M. Kahn; Ahyan Panjwani; João A. C. Santos |
| Abstract: | In this paper, we introduce a model to study the interaction between insurance and banking. We build on the Federal Crop Insurance Act of 1980, which significantly expanded and restructured the decades-old federal crop insurance program and adverse weather shocks – over-exposure of crops to heat and acute weather events – to investigate some insights from our model. Banks increased lending to the agricultural sector in counties with higher insurance coverage after 1980, even when affected by adverse weather shocks. Further, while they increased risky lending, they were sufficiently compensated by insurance such that their overall risk did not increase meaningfully. We discuss the implications of our results in the light of potential changes to insurance availability as a consequence of global warming. |
| Keywords: | climate risks; insurance; bank lending; financial stability |
| JEL: | Q54 G22 G21 G28 |
| Date: | 2024–05–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:98387 |
| By: | Demekas, Dimitri G.; Grippa, Pierpaolo |
| Abstract: | In ‘Embracing the Brave New World: A Response to Demekas and Grippa’, a response to our article ‘Walking a Tightrope: Financial Regulation, Climate Change, and the Transition to a Low-Carbon Economy’, both published in the Journal of Financial Regulation, Gruenewald, Knijp, Schoenmaker, and van Tilburg claim that climate risk is a clear and present danger to financial stability that justifies imposing higher capital requirements on supervised firms. Until the current prudential risk framework is revised to fully capture climate risk, they advocate ad hoc measures, such as adjustments to risk weights, which, they believe, would have the desired effect. In this article, we argue that these claims are misguided. Given the nature of climate risk, risk assessment models cannot provide a reliable basis for calibrating capital requirements. On the basis of the evidence, prudential tools would have only a negligible impact on the transition. And the idea of adjusting risk weights for climate exposures has been abandoned—for good reasons. Ultimately, there is nothing financial regulation can do about the energy transition that an appropriately designed carbon tax cannot do better. Central banks and financial regulators should resist the pressure to take on additional responsibilities that are essentially political and that they cannot properly discharge. |
| Keywords: | financial stability; financial regulation; climate change; central banking; OUP deal |
| JEL: | F3 G3 |
| Date: | 2024–06–11 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:123012 |
| By: | Jessica N. Flagg; Simona Hannon; Cisil Sarisoy; Mark Wicks |
| Abstract: | In this note, we estimate the size of an understudied segment of the consumer credit market—retail credit. Retail credit consists of the amounts owed to retail stores by their customers for purchases made on credit extended in partnership with a financial institution. Although retail credit is included in the consumer credit totals in Federal Reserve Statistical Release G.19, "Consumer Credit, " a principal economic indicator providing the official estimate for consumer credit holdings in the U.S., it is not separately categorized on the release. |
| Date: | 2024–06–21 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:2024-06-21 |
| By: | Vellore Arthi; Gary Richardson; Mark Van Orden |
| Abstract: | The failure of the Freedman's Savings Bank (FSB), one of the only Black-serving banks in the early post-bellum South, was an economic catastrophe and one of the great episodes of racial exploitation in post-Emancipation history. It was also most Black Americans' first experience of banking. Can events like these permanently alter financial preferences and behavior? To test this, we examine the impact of FSB collapse on life insurance-holding, an accessible alternative savings vehicle over the late 19th and early 20th centuries. We document a sharp and persistent increase in insurance demand in affected counties following the shock, driven disproportionately by Black customers. We also use FSB migrant flows to disentangle place-based and cohort-based effects, thus identifying psychological and cultural scarring as a distinct mechanism underlying the shift in financial behavior induced by the bank's collapse. Horizontal and intergenerational transmission of preferences help explain the shock’s persistent effects on financial behavior. |
| JEL: | D63 G21 G22 G51 G52 I30 N21 N22 N31 N32 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32576 |
| By: | Tony Chernis; Gary Koop; Emily Tallman; Mike West |
| Abstract: | The macroeconomy is a sophisticated dynamic system involving significant uncertainties that complicate modelling. In response, decision makers consider multiple models that provide different predictions and policy recommendations which are then synthesized into a policy decision. In this setting, we introduce and develop Bayesian predictive decision synthesis (BPDS) to formalize monetary policy decision processes. BPDS draws on recent developments in model combination and statistical decision theory that yield new opportunities in combining multiple models, emphasizing the integration of decision goals, expectations and outcomes into the model synthesis process. Our case study concerns central bank policy decisions about target interest rates with a focus on implications for multi-step macroeconomic forecasting. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2406.03321 |
| By: | Christian Moser; Farzad Saidi; Benjamin Wirth; Stefanie Wolter |
| Abstract: | We study the distributional consequences of monetary policy-induced credit supply in the German labor market. Firms in relationships with banks that are more exposed to the introduction of negative interest rates in 2014 experience a relative contraction in credit supply, associated with lower average wages and employment. Within firms, initially lower-paid workers are more likely to leave employment, while initially higher-paid workers see a relative decline in wages. Between firms, wages fall by more at initially higher-paying employers. Our results suggest that credit affects the distribution of pay and employment both within and between firms. |
| Keywords: | Wages, Employment, Worker and Firm Heterogeneity, Credit Supply, Monetary Policy |
| JEL: | J31 E24 J23 E51 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_558 |
| By: | Bilbiie, F. O.; Monacelli, T.; Perotti, R. |
| Abstract: | Stabilization and redistribution are intertwined in a model with heterogeneity, imperfect insurance, and nominal rigidity-making fiscal and monetary policy inextricably linked for aggregate-demand management. Movements in inequality induced by fiscal transfers make the flexible-price equilibrium suboptimal, thus triggering a stabilization vs redistribution tradeoff. Likewise, changes in government spending that are associated with changes in the distribution of taxes (progressive vs. regressive) induce a tradeoff for monetary policy: the central bank cannot stabilize real activity at its efficient level (including insurance) and simultaneously avoid inflation. Fiscal policy can be used in conjunction to monetary policy to strike the optimal balance between stabilization and insurance (redistribution) motives. |
| Keywords: | Inequality, Redistribution, Aggregate Demand, Fiscal Transfers, Optimal Monetary-Fiscal Policy, TANK |
| JEL: | D91 E21 E62 |
| Date: | 2024–06–17 |
| URL: | https://d.repec.org/n?u=RePEc:cam:camdae:2436 |
| By: | Bilbiie, F. O. |
| Abstract: | THANK is a tractable heterogeneous-agent New-Keynesian model that captures analytically core micro heterogeneity channels of quantitative-HANK: cyclical inequality and risk; self-insurance, pre-cautionary saving, and realistic intertemporal marginal propensities to consume. I use it to elucidate key transmission mechanisms and dynamic properties of HANK models. Countercyclical inequality yields aggregate-demand amplification and makes determinacy with Taylor rules more stringent; but solving the forward guidance puzzle requires procyclical inequality: a Catch-22. Solutions include combining inequality with a distinct risk channel, with compensating cyclicalities; I provide evidence that disposable income inequality was procyclical in the last two, Great and COVID recessions, while risk is countercyclical. Alternative policy rules also solve the Catch-22, e.g. price-level-targeting or, in the model version with liquidity, setting nominal public debt. Optimal policy with heterogeneity features a novel inequality-stabilization motive generating higher inflation volatility—but is unaffected by risk, insofar as the target efficient equilibrium entails no inequality. |
| Keywords: | Determinacy, Forward Guidance Puzzle, Heterogeneity, Inequality, Interest Rate Rules, Liquidity, Multipliers, Optimal Monetary Policy, Risk |
| JEL: | E21 E31 E40 E44 E50 E52 E58 E60 E62 |
| Date: | 2024–06–13 |
| URL: | https://d.repec.org/n?u=RePEc:cam:camdae:2432 |
| By: | David Andrews (Center for Global Development) |
| Abstract: | The IMF was not included in the recent review of multilateral development banks’ capital adequacy frameworks that proposed reforms to allow them to expand their lending to developing countries. The paper considers whether this review contained lessons for the IMF despite its distinct role and financial structure. It begins with a detailed summary of the IMF’s financial structure, including the trusts which provide support to low-income countries (the PRGT) and for climate finance (the RST). Although this financial structure is very different from an MDB’s, the paper argues that the IMF’s gold holdings pay a role that is analogous to an MDB’s callable capital. Drawing upon one of the related recommendations of the review, the paper’s main conclusion is that explicit recognition of the high value of the IMF’s gold holdings could pave the way for the more efficient use of reserves on its main balance sheet to support the severely depleted lending capacity of the PRGT. |
| Date: | 2024–06–10 |
| URL: | https://d.repec.org/n?u=RePEc:cgd:wpaper:696 |
| By: | Bustos, Emil (Research Institute of Industrial Economics (IFN)); Engist, Oliver (Department of Economics) |
| Abstract: | We study how financing constraints affect the cash holdings of small and medium-sized enterprises. There has been little empirical work on this topic, even though these firms often face financial constraints. We contribute by using detailed data on credit ratings in Sweden as a measure of financial constraints. We then use panel regressions and a regression-discontinuity analysis to estimate the relationship between access to credit and cash holdings. Our analysis finds no causal effect of credit ratings on cash holdings. |
| Keywords: | Financial Constraints; Cash; Private Firm; Credit Score |
| JEL: | D22 D25 G32 |
| Date: | 2024–06–25 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:iuiwop:1493 |
| By: | Riccardo Boffo; Hugh Miller; Gabriel Santos Carneiro; Gürcan Zeren Gülersoy |
| Abstract: | This paper presents a technical assessment of nature-related risks within the Hungarian economy and financial system. The study draws upon the OECD Supervisory Framework to (i) prioritise various nature-related risks by conducting an impact and dependency assessment, identifying key economic sectors, and pinpointing the critical natural capital assets that are most crucial to the financial system; (ii) assess the direct and indirect economic impact of three exploratory scenarios on possible acute nature-related shocks using input-output analysis; (iii) explore the different financial risk channels through which economic risks stemming from nature-related losses may be transmitted within the Hungarian financial system; and (iv) provide supervisory recommendations based on the results. |
| Keywords: | biodiversity, economics, finance and investment, financial materiality, nature, nature-related risks |
| JEL: | C67 E44 E58 G14 G21 H63 Q20 |
| Date: | 2024–06–30 |
| URL: | https://d.repec.org/n?u=RePEc:oec:envaaa:243-en |
| By: | Stefano Gnocchi; Fanny McKellips; Rodrigo Sekkel; Laure Simon; Yinxi Xie; Yang Zhang |
| Abstract: | We explain how the Bank of Canada’s policy models capture the trade-off between output and inflation in Canada. We start by briefly revisiting the determinants of the New Keynesian Phillips curve. Next, we provide an overview of the Phillips curves that are currently embedded in the two main policy models the Bank uses for macroeconomic projections and analysis, known for short as ToTEM and LENS. We then discuss the challenges in identifying the trade-off between output and inflation and provide new estimates of the trade-off using recently proposed methods. Finally, we contrast these estimates with the ones in the Bank’s policy models. |
| Keywords: | Business fluctuations and cycles; Econometric and statistical methods; Inflation and prices; Monetary policy transmission |
| JEL: | E3 E31 E5 E52 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocadp:24-07 |
| By: | Nie, George Y. (Concordia University) |
| Abstract: | This study argues that a future payment’s risk approaches zero as maturity approaches zero. We employ two factors to model the risk-free rate (which is captured by the central bank’s short-term interest rate) that the market expects the current monetary policy to move towards the neutral level over a certain period. Our 3-factor final model thus splits recent US and Canada T-bill yields into the risk and risk-free rate, explaining 97% of the yields, providing a gateway to bond risk. |
| Date: | 2024–06–25 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:2dazg |
| By: | Mahmood Alaghmandan; Olga Streltchenko |
| Abstract: | In this paper, we discuss aspects of model risk management in financial institutions which could be adopted by academic institutions to improve the process of conducting academic research, identify and mitigate existing limitations, decrease the possibility of erroneous results, and prevent fraudulent activities. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2406.14776 |
| By: | Schmitz, Martin; Dietrich, Andreas; Brisson, Rémy |
| Abstract: | The nominal effective exchange rate (EER) of a currency is an index of the trade-weighted average of its bilateral exchange rates vis-à-vis the currencies of selected trading partners, while the real EER is derived by adjusting the nominal index for relative prices or costs. The nominal EER provides a summary measure of a currency’s external value, while the real EER is the most commonly used indicator of the international price and cost competitiveness of an economy. Additionally, for all individual euro area countries, harmonised competitiveness indicators (HCIs) are published by the European Central Bank (ECB) based on the same methodology as the euro EERs. This paper describes how the calculation of the ECB’s EERs and HCIs has been enhanced to take into account in the underlying trade weights the evolution of international trade linkages and, in particular, the growing importance of trade in services. The paper includes an in-depth description of the methodology used to calculate these enhanced EERs and HCIs. In particular, it presents how to overcome the challenges arising from the inclusion of services trade, foremost in terms of data availability, with imputation and estimation techniques. Importantly, the ECB’s well-established methodology – which in particular accounts for competition faced by euro area exporters in third markets – did not have to be changed with the inclusion of services trade. Finally, the paper provides some evidence on the usefulness of the enhanced indicators for policymakers, economic analysts and the public at large. JEL Classification: C82, F10, F17, F30, F31, F40 |
| Keywords: | competitiveness, effective exchange rate (EER), gravity model, harmonised competitiveness indicator (HCI), nominal effective exchange rate (NEER), real effective exchange rate (REER), services trade, trade weights |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbsps:202449 |
| By: | Masuda, Kazuto (Bank of Japan) |
| Abstract: | We introduce the quantity theory of money into the Harrod–Balassa–Samuelson effect model. Our policy rule specifies the impossibility of perfect exchange rate stability with monetary policy, as Friedman (1953) suggests. We discover the importance of inflation to technological progress, while the rent-seeking behaviors in firms foster their productivity slowdowns and disinflations. Their forward-looking behaviors, like animal spirit (Keynes, 1936/1997), control outputs under the marginal productivity hypothesis with the Cobb-Douglus production function. Baumol’s (1959) sales revenue maximization hypothesis explains full employment and deflations but breaks the marginal productivity hypothesis. We briefly argue the downward stickiness of nominal wages (incomes). |
| Date: | 2024–07–03 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:nxshd |
| By: | Lukas Hack; Klodiana Istrefi; Matthias Meier |
| Abstract: | Conventional strategies to identify monetary policy shocks rest on the implicit assumption that systematic monetary policy is constant over time. We formally show that these strategies do not isolate monetary policy shocks in an environment with time-varying systematic monetary policy. Instead, they are contaminated by systematic monetary policy and macroeconomic variables, leading to contamination bias in estimated impulse responses. Empirically, we show that Romer and Romer (2004) monetary policy shocks are indeed predictable by fluctuations in systematic monetary policy. Instead, we propose a new monetary policy shock that is orthogonal to systematic monetary policy. Our shock suggests U.S. monetary policy has shorter lags and stronger effects on inflation and output. |
| Keywords: | Systematic monetary policy, monetary policy shocks, identification |
| JEL: | E32 E43 E52 E58 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_557 |
| By: | Lee, Neil; Pardy, Martina; Mcneil, Andrew |
| Abstract: | The early 2020s saw a spike in inflation across much of the advanced world, with pervasive economic consequences. There is strong evidence that economic shocks generally have political consequences, but few studies have specifically focused on inflation. In this paper, we address this gap using an original, pre-registered survey experiment in the United Kingdom, a country which saw the highest consumer price inflation in 40 years and a major cost of living crisis. First, we describe how individuals, on average, are only neutral in their confidence in the Bank of England’s and economists’ ability to tackle inflation. The population is even more pessimistic regarding the government’s abilities. Second, using an experimental survey vignette, we causally identify the effect of reminding and/or informing participants about the high levels of inflation. While our treatment shifts inflation expectations, we find no evidence that it reduces trust in government, the bank of England, nor economists more generally. Instead, we find weak evidence that respondents blame corporations. Inflation also makes citizens less likely to support public sector pay rises although we find no effect on authoritarianism, redistribution attitudes, attitudes towards overseas trade, or optimism towards the future. |
| Keywords: | inflation; political attitudes; political trust; authoritarianism; survey experiment |
| JEL: | N0 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:123926 |
| By: | Zuzanna Kostecka (University of Warsaw, Faculty of Economic Sciences, Quantitative Finance Research Group); Robert Ślepaczuk (University of Warsaw, Faculty of Economic Sciences, Quantitative Finance Research Group, Department of Quantitative Finance and Machine Learning) |
| Abstract: | The scope for the accurate calculation of the Loss Given Default (LGD) parameter is comprehensive in terms of financial data. In this research, we aim to explore methods for improving the approximation of realized LGD in conditions of limited access to the cash-flow data. We enhance the performance of the method which relies on the differences between exposure values (delta outstanding approach) by employing the machine learning (ML) techniques. The research utilizes the data from the mortgage portfolio of one of the European countries and assumes the close resemblance for similar economic contexts. It incorporates non-financial variables and macroeconomic data related to the housing market, improving the accuracy of loss severity approximation. The proposed methodology attempts to mitigate the country-specific (related to the local legal) or portfolio-specific factors in aim to show the general advantage of applying ML techniques, rather than case-specific relation. We developed an XGBoost model that does not rely on cash-flow data yet enhances the accuracy of realized LGD estimation compared to results obtained with the delta outstanding approach. A novel aspect of our work is the detailed exploration of the delta outstanding approach and the methodology for addressing conditions of limited access to cash-flow data through machine learning models. |
| Keywords: | LGD, Credit risk, Outstanding, Machine Learning, Missing data, Mortgage loan, financial statements, macroeconomic data |
| JEL: | C4 C45 C55 C65 G11 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:war:wpaper:2024-12 |
| By: | Ryota Nakano |
| Abstract: | The decision of whether and how much to borrow from the credit market in order to finance education costs depends crucially on parental investment in education. This study constructs a simple two-period overlapping generations model incorporating both educational investment from parents and educational borrowing. The analysis shows that in the case where educational investment from parents and educational borrowing are substitutive, the relaxation of the borrowing constraint improves intergenerational mobility. In the complementary case, the relaxation of the borrowing constraint may impair intergenerational mobility. Implications differ depending on whether the relationship between parental investments and borrowings is substitutive or complementary. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:dpr:wpaper:1248 |
| By: | A K M Zakaria (Department of Business Economics and Management, School of Business Administration, Silesian University) |
| Abstract: | Marketing and Customer Relationship Management (CRM) are leading departments within an organization, contributing significantly to achieving industrial success. In the microfinance industry, CRM plays a crucial role in building customer trust and understanding their needs better. When serving refugee entrepreneurs, microfinance organizations face additional challenges due to diverse languages and cultures. However, they also have substantial opportunities to expand their business among refugee entrepreneurs. The aim of this working paper is to highlight the importance of CRM in the microfinance industry when serving refugee entrepreneurs in Europe. The study will analyse the challenges and opportunities of microfinance institutions (MFIs) in caring to this specific customer segment. The findings will assist microfinance institutes' marketing and CRM departments in satisfying refugee customers and achieving organizational objectives. |
| Keywords: | CRM, refugee entrepreneurs, CRM on microfinance, MFIs, marketing |
| JEL: | L26 L31 M31 |
| Date: | 2023–07–06 |
| URL: | https://d.repec.org/n?u=RePEc:opa:wpaper:0075 |
| By: | Bruze, Gustaf (Karolinska Institutet); Hilsløv, Alexander Kjær (Aarhus University); Maibom, Jonas (Aarhus University) |
| Abstract: | Individuals with extensive debt may be granted debt relief in court. We provide a comprehensive evaluation of the Danish debt relief program with data from court records linked to nationwide register data. Using event-study methods and quasi-random assignment of applicants to court trustees with varying admission rates, we show that debt relief leads to a large increase in earned income, employment, assets, real estate, secured debt, home ownership, and wealth that persists for more than 25 years after a court ruling. The net transition of workers into employment accounts for two thirds of the increase in earned income. |
| Keywords: | debt relief, personal bankruptcy, household finance |
| JEL: | D14 D31 K35 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17047 |