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on Banking |
| By: | Mervyn A. King |
| Abstract: | Inflation targets were introduced well ahead of the development of the theory of inflation targeting. The practice was successful because it comprised a new set of procedures and institutions for setting monetary policy in a transparent and accountable fashion – “constrained discretion”; the later theory was less useful because it purported to be a theory of the determination of the price level. But inflation targeting does not constitute a new theory of the monetary transmission mechanism. The belief that it does led to the replacement of Milton Friedman’s dictum that “inflation is always and everywhere a monetary phenomenon” by the new dictum that “inflation is always and everywhere a transitory phenomenon”. This had unfortunate consequences during the recent inflation. The paper concludes with a discussion of the challenges facing inflation targets in the future. |
| JEL: | E42 E43 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32594 |
| By: | Fares Bounajm; Jean Garry Junior Roc; Yang Zhang |
| Abstract: | We explore the drivers of the surge in inflation in Canada during the COVID-19 pandemic. This work is part of a joint effort by 11 central banks using the model developed by Bernanke and Blanchard (2023) to identify similarities and differences across economies. |
| Keywords: | Economic models; Inflation and prices; Labour markets |
| JEL: | E2 E24 E3 E31 E37 E5 E52 E6 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsan:24-13 |
| By: | Mr. Philip Barrett; Josef Platzer |
| Abstract: | Activity and inflation responded slowly to the Federal Reserve’s rate hikes in 2022. Was this because the transmission of monetary policy had changed? Or did other shocks offset tighter policy? We use pre-pandemic data to estimate a VAR with monetary policy shocks identified from high-frequency data, and use it as a filter to back out the sequence of monetary policy shocks consistent with data since 2022. We compare these implied shocks to the actual shocks and find the difference statistically significant during February-July 2022. These differences imply that monetary transmission was around 25 percent weaker than normal. Our method accounts for other shocks; allowing them to change to match the post-COVID covariance of the data produces similar results but in a shorter period. We decompose changes in the uncertainty of our estimate and find that colinearity of shocks is generally more important than uncertainty over model parameters. We extend our analysis to central bank information shocks and find Federal Reserve communication was less powerful than usual during 2021. |
| Keywords: | Monetary Policy; Semi-structural Identification; VAR; Filtering |
| Date: | 2024–06–21 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/129 |
| By: | Naz Koont; Tano Santos; Luigi Zingales |
| Abstract: | We study the impact of digital banking on the value of the deposit franchise and the stability of the banking sector. Using the classification of digital banking in Koont (2023), we find that when the Fed funds rate increases, deposits flow out faster, and the cost of deposits increases more in banks that offer a mobile app and brokerage services. Using the model of Drechsler et al. (2023b), we find that correcting for digital betas and deposit outflows results in a deposit franchise value that is 14-22% lower for digital-broker banks relative to traditional banks. Moreover, we find that digital-broker banks’ deposit franchise values increase by less when interest rates rise, serving as less of a hedge. We apply this analysis to the case of Silicon Valley Bank (SVB) and find that the reduced value of the deposit franchise can explain why SVB was insolvent in early March 2023, even before the bank run occurred. |
| JEL: | G21 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32601 |
| By: | Mr. Serhan Cevik |
| Abstract: | The emergence of financial technologies—fintech—has become an engine of change, promising to expand access to financial services and give a boost to financial inclusion. The ownership of accounts in formal financial institutions increased from 51 percent of the world’s adult population in 2011 to 76 percent in 2021, but there is still significant variation across countries. So has the rapid growth of fintech delivered the promise of broadening financial services to the under-served populations? In this paper, I use a comprehensive dataset to investigate the relationship between fintech and financial inclusion in a panel of 84 countries over the period 2012–2020 and obtain interesting empirical insights. First, the magnitude and statistical significance of fintech on financial inclusion varies according to the type of instrument. While digital lending has a significant negative effect on financial inclusion, digital capital raising is statistically insignificant. Second, the overall impact of fintech is also statistically insignificant for the full sample, but becomes positive and statistically highly significant in developing countries. Policymakers need to develop an adequate regulatory framework that balances fostering innovation and ensuring equitable treatment of individuals and groups. This requires better financial education, strong regulatory institutions, and well-calibrated prudential regulations for a level playing field and effective supervision. |
| Keywords: | Fintech; financial innovation; financial inclusion |
| Date: | 2024–06–28 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/131 |
| By: | Victor Musa; Bertrand Gilles Umba; Lewis Mambo; Jonas Kibala; Josephine Mushiya; Yannick Luvezo; Jules Nsunda; Grégoire Lumbala; Yves Siasi; Serge Mfumukanda; Lubaki Ange; Kabata Olivier; Luc Shindano; Dyna Heng; Diego Rodriguez Guzman; Barna Szabo |
| Abstract: | The paper introduces a semi-structural Quarterly Projection Model (QPM) tailored for the Democratic Republic of the Congo (DRC), highlighting its resource richness and high degree of dollarization. We provide an overview of the model's specifications to elucidate key features of the DRC economy and present its properties, evaluating its alignment with DRC data and assessing its goodness of fit. Additionally, the paper demonstrates the QPM's practical application through a counterfactual scenario, comparing policy recommendations with the actual policy responses of the Central Bank of the Republic of Congo to observed exchange rate and inflation pressures in 2023. Beyond the QPM, the paper showcases supplementary tools that enhance its utility for generating medium-term forecasts and developiong narratives in support of monetary policymaking. Specifically, we introduce the Nowcasting and Near-Term Forecast models, designed to assess the economy in real-time and predict short-term inflationary trends. |
| Keywords: | Resource-rich; Dollarization; Monetary policy; Inflation; Exchange Rate Policies |
| Date: | 2024–06–21 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/126 |
| By: | Panagiotis Bouras; Joaquín Saldain; Xing Guo; Thomas Michael Pugh; Maria teNyenhuis |
| Abstract: | We assess how much the recent rate-hike cycle has and will affect mortgage borrowers' consumption through its impacts on mortgage payments. Our analysis provides insights into the effects of changes in monetary policy on the consumption of mortgage borrowers. |
| Keywords: | Interest rates; Monetary policy; Recent economic and financial developments |
| JEL: | D1 D13 E2 E21 G5 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsan:24-14 |
| By: | R\"udiger Frey; Theresa Traxler |
| Abstract: | We study the impact of regulatory capital constraints on fire sales and financial stability in a large banking system using a mean field game model. In our model banks adjust their holdings of a risky asset via trading strategies with finite trading rate in order to maximize expected profits. Moreover, a bank is liquidated if it violates a stylized regulatory capital constraint. We assume that the drift of the asset value is affected by the average change in the position of the banks in the system. This creates strategic interaction between the trading behavior of banks and thus leads to a game. The equilibria of this game are characterized by a system of coupled PDEs. We solve this system explicitly for a test case without regulatory constraints and numerically for the regulated case. We find that capital constraints can lead to a systemic crisis where a substantial proportion of the banking system defaults simultaneously. Moreover, we discuss proposals from the literature on macroprudential regulation. In particular, we show that in our setup a systemic crisis does not arise if the banking system is sufficiently well capitalized or if improved mechanisms for the resolution of banks violating the risk capital constraints are in place. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2406.17528 |
| By: | Michaelis, Henrike |
| Abstract: | This paper uses a time-varying vector autoregressive (VAR) model for the euro area to explore the changes in the interest rate pass-through to bank retail rates following conventional and unconventional monetary policy shocks. The median estimate of the impulse responses shows a considerably higher pass-through during crisis periods, especially the financial crisis and the coronavirus pandemic. From mid-2013 to 2015-16, the monetary policy pass-through to the bank lending rate becomes slightly stronger. In the remainder of 2016, the pass-through weakens. From then until the end of 2019, it hovers at a lower level. However, the credible intervals reveal a large uncertainty concerning the pass-through over the entire sample. Therefore, a constant and complete pass-through is clearly within the realms of possibility. Since the standard deviation of monetary policy shocks grows substantially since the onset of unconventional measures in 2011, changes in bank retail rates seem to be driven mainly by such shocks in this period. |
| Keywords: | Euro area, interest rate pass-through, time-varying vector autoregressive model, sign restrictions |
| JEL: | C11 E40 E43 E52 G21 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:299243 |
| By: | Marco Del Negro; Keshav Dogra; Pranay Gundam; Donggyu Lee; Brian Pacula |
| Abstract: | This post discusses the distributional consequences of an aggressive policy response to inflation using a Heterogeneous Agent New Keynesian (HANK) model. We find that, when facing demand shocks, stabilizing inflation and real activity go hand in hand, with very large benefits for households at the bottom of the wealth distribution. The converse is true however when facing supply shocks: stabilizing inflation makes real outcomes more volatile, especially for poorer households. We conclude that distributional considerations make it much more important for policy to take into account the tradeoffs between stabilizing inflation and economic activity. This is because the optimal policy response depends very strongly on whether these tradeoffs are present (that is, when the economy is facing supply shocks) or absent (when the economy is facing demand shocks). |
| Keywords: | HANK model; heterogeneous-agent New Keynesian (HANK); monetary policy; inflation; inequality |
| JEL: | E12 E31 E52 D31 |
| Date: | 2024–07–03 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:98472 |
| By: | Zachary Feinstein; Grzegorz Halaj; Andreas Sojmark |
| Abstract: | We build a balance sheet-based model to capture run risk, i.e., a reduced potential to raise capital from liquidity buffers under stress, driven by depositor scrutiny and further fueled by fire sales in response to withdrawals. The setup is inspired by the Silicon Valley Bank (SVB) meltdown in March 2023 and our model may serve as a supervisory analysis tool to monitor build-up of balance sheet vulnerabilities. Specifically, we analyze which characteristics of the balance sheet are critical in order for banking system regulators to adequately assess run risk and resilience. By bringing a time series of SVB's balance sheet data to our model, we are able to demonstrate how changes in the funding and respective asset composition made SVB prone to run risk, as they were increasingly relying on held-to-maturity, aka hidden-to-maturity, accounting standards, masking revaluation losses in securities portfolios. Finally, we formulate a tractable optimisation problem to address the designation of held-to-maturity assets and quantify banks' ability to hold these assets without resorting to remarking. By calibrating this to SVB's balance sheet data, we shed light on the bank's funding risk and implied risk tolerance in the years 2020--22 leading up to its collapse. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2407.03285 |
| By: | Michael T. Kiley |
| Abstract: | I assess monetary policy strategies to foster price stability and labor market strength. The assessment incorporates a range of challenges, including uncertainty regarding the equilibrium real interest rate, mismeasurement of economic potential, and balancing the costs and benefits associated with employment shortfalls and labor market strength. I find that the ELB remains a significant constraint, hindering achievement of the inflation objective and worsening employment shortfalls. Symmetric policy reaction functions mitigate the most adverse effects of employment shortfalls by contributing to economic stability. Make-up strategies address ELB risks. These strategies call for policy to accommodate some period of inflation above its long-run objective following an ELB episode. I also consider an asymmetric shortfalls approach to policy. This approach provides accommodation in response to weak activity while foregoing tightening in response to strong activity. While the approach can, in principle, address ELB risks by raising inflation, it performs poorly. The shortfalls approach exacerbates economic volatility, worsens employment shortfalls, and creates excess inflationary pressures. Mismeasurement is not sufficient to limit the importance of strong responses to measured slack. Overall, monetary policy can promote price stability and labor market strength by focusing on economic stability, with a strategy targeted to address ELB risks. |
| Keywords: | Monetary policy; Rules and discretion; Effective lower bound; Symmetric loss function; Asymmetric loss function |
| JEL: | E52 E58 E37 |
| Date: | 2024–05–28 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2024-33 |
| By: | William F. Diamond; Tim Landvoigt; Germán Sánchez Sánchez |
| Abstract: | We analyze the impact of fiscal and monetary stimulus in an economy with mortgage debt, where inflation redistributes from savers to borrowers. We show theoretically that fiscal transfers without future tax increases cause a surge in inflation, increasing consumption demand and house prices. The power of fiscal stimulus grows when borrowers are more indebted. We then show quantitatively that transfers followed by easy monetary policy cause a surge in inflation which helps explain features of the post-Covid boom, including a boom in output and house prices. This boom comes with a longer-term contraction, since redistribution reduces borrower labor supply. |
| JEL: | E44 E52 E63 G51 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32573 |
| By: | Ochenge, Rogers |
| Abstract: | This paper examines the effect of board gender diversity on bank risk. The empirical analysis is conducted using 21 sample Kenyan commercial banks during the period 2010-2022 in a panel regression framework. Two key results are documented: first, that the share of women in Kenyan bank boards is low (sample average of about 19%), although it has made progress, rising from about 13% in 2010 to about 26% by end of 2022. Second, the paper provides evidence that increasing women directors in banks' boards, curtails excessive bank risk-taking and promotes bank stability. Thus, regulators may consider imposing gender quotas in bank boards as a way of mitigating bank risk. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:kbawps:297988 |
| By: | Marco Del Negro; Keshav Dogra; Pranay Gundam; Donggyu Lee; Brian Pacula |
| Abstract: | This post and the next discuss the distributional effects of inflation and inflation stabilization through the lenses of a theoretical model—a Heterogeneous Agent New Keynesian (HANK) model. This model combines the features of New Keynesian models that have been the workhorse for monetary policy analysis since the work of Woodford (2003) with inequality in wealth and income at the household level following the seminal contribution of Kaplan, Moll, and Violante (2018). We find that while inflation hurts everyone, it hurts the poor in particular. When the source of inflation is a supply shock, fighting inflation aggressively hurts the poor even more, however, while the opposite is true for demand shocks, as discussed in the companion post. |
| Keywords: | HANK model; heterogenous agent New Keynesian (HANK); monetary policy; inflation; inequality |
| JEL: | E12 E31 E52 D31 |
| Date: | 2024–07–02 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:98471 |
| By: | Paul Castillo; Mr. Ruy Lama; Juan Pablo Medina |
| Abstract: | Financial dollarization is considered a source of macroeconomic instability in many emerging economies. Dollarization constrains the ability of central banks to stimulate output during economic downturns. In contrast to the conventional monetary transmission mechanism, a monetary policy loosening in a dollarized economy leads to a currency depreciation, adverse balance sheet effects, and a contraction in investment and output growth. In this paper we evaluate the role of foreign exchange reserves in facilitating macroeconomic stabilization in a financially dollarized economy. We first show empirically that foreign exchange intervention in response to capital outflows can largely reduce the volatility of output and the real exchange rate in dollarized economies. We then develop a small open economy model with foreign currency debt and balance sheets effects. Our quantitative model shows that an active foreign exchange intervention policy is sufficient for offsetting the output volatility associated with financial dollarization. These results can explain the prevalence of low macroeconomic volatility in some dollarized economies (Christiano et al., 2021) and they highlight the role of foreign exchange reserves in reducing the welfare costs of dollarization. |
| Keywords: | Foreign Exchange Intervention; Global Financial Cycle; Financial Dollarization; Balance Sheet Effects; Emerging Economies. |
| Date: | 2024–06–21 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/127 |
| By: | Han, Seoni (KOREA INSTITUTE FOR INTERNATIONAL ECONOMIC POLICY (KIEP)) |
| Abstract: | Digital technology is gaining attention as a game changer to reshape the landscape of Africa’s financial industry. This widespread adoption of mobile money has significantly broadened financial accessibility and reduced the proportion of the financially excluded population. The transformation of the financial industry was further accelerated by the COVID-19 pandemic with a surge in online payments and increased fintech activities. Digital finance has arisen as a solution to address the economic and non-economic constraints in the financial market, such as transaction costs, information asymmetry between financial institutions and customers, and uncertainty in outcomes of financial services. Digital finance strengthens economic resilience of individuals and households by offering a broader spectrum of strategies for risk mitigation and risk sharing. In Kenya, mobile money penetration has facilitated financial management for low-income groups, increased women’s labor market participation, and reduced poverty rates. The access to finance of small and medium-sized enterprises is especially crucial in developing countries. Limited access to financial services poses significant challenges for SMEs, obstructing their ability to operate seamlessly, increase sales, and boost exports. In Sub-Saharan Africa, only about one-fifth of SMEs can gain access to loans through traditional financial institutions. Han et al. (2023) conducts on an empirical analysis of Kenyan firms and finds that the firms’ use of mobile money is positively correlated with their financial accessibility, and their investment activities in both tangible assets (fixed assets) and intangible assets (R&D expenditure). Korea has the potential to strengthen its cooperation with Africa in digital finance and the financial sector by actively participating in international initiatives for financial inclusion, promoting more private investments into the financial sector or fintech industry in Africa, enhancing Africa's digital competitiveness in digital infrastructure and skilled workforce, and finally supporting digital transformation in the context of regional integration. |
| Keywords: | Africa; Digital technology; Digital Finance; Financial Inclusion |
| Date: | 2024–05–31 |
| URL: | https://d.repec.org/n?u=RePEc:ris:kiepwe:2024_015 |
| By: | Malcolm Fisher; Alan Walsh |
| Abstract: | We share insights from Canadian data from 2002 to 2022 that the Bank of Canada collected. The Bank submits these data each year to the Financial Stability Board for inclusion in its Global Monitoring Report on Non-Bank Financial Intermediation. |
| Keywords: | Financial institutions; Sectoral balance sheet |
| JEL: | G2 G21 G22 G23 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsan:24-15 |
| By: | Lahcen Bounader; Mr. Selim A Elekdag |
| Abstract: | We develop a model with diagnostic expectations (DE) and a financial accelerator (FA) that generates mutually reinforcing shock amplification, especially in the case of demand shocks. However, supply shocks can be dampened via a debt deflation channel, which is strengthened amid DE. Importantly, the model results in a worsening of the inflation-output volatility trade-off confronting policymakers. In contrast to most of the literature—which argues against targeting the level of asset prices—our financial accelerator model with DE suggests that targeting house price growth may result in welfare gains. |
| Keywords: | Financial Accelerator; Diagnostic Expectations; Optimal monetary policy; Instrument rules |
| Date: | 2024–06–28 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/132 |
| By: | Michael T. Kiley |
| Abstract: | Activity shortfalls are more costly than strong activity. I consider optimal monetary policy under discretion with an asymmetric (activity shortfalls) loss function. The model satisfies the natural rate hypothesis. The asymmetric loss function and resulting optimal monetary policy exacerbates shortfalls in activity. The additional frequency of activity shortfalls arises from the adjustment of expectations implied by the natural rate hypothesis. The shortfalls asymmetry leads to an inflationary bias, similar to results in the time-consistency literature. Mandating a central bank objective with greater symmetry than the social loss function improves outcomes. Greater symmetry lowers the magnitude of activity shortfalls. Greater symmetry also reduces inflation bias. The model also implies that an optimal monetary policy does not accommodate fluctuations from aggregate demand shocks, as is standard in such models. As a result, the analysis implies that monetary accommodation of strength in economic activity likely requires justifications other than asymmetric costs of shortfalls. |
| Keywords: | Monetary Policy; Rules; Discretion; Symmetric loss function; Asymmetric loss function |
| JEL: | E52 E58 E37 |
| Date: | 2024–05–28 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2024-32 |
| By: | Emina Milišić (Central Bank of Bosnia and Herzegovina); Emina Žunić Dželihodžić (Central Bank of Bosnia and Herzegovina) |
| Abstract: | This paper examines the pass-through of European Central Bank (ECB) monetary policy to deposit rates in Bosnia and Herzegovina (B&H). We use aggregate and bank-level data to study interest rate pass-through by bank size and ownership for the period 2012-2023. In extensions, we also study pass-through by counterparty and maturity of deposit contracts. Our results suggest that average pass-through is slow and incomplete. We document that pass-through is faster and more complete for banks which are small and foreign-owned, as compared to banks which are large (and foreign-owned), or banks which are small and domestic. This finding suggests that pass-through depends both on domestic market power of banks as well as their access to foreign money markets. |
| Keywords: | monetary policy; transmission mechanism; deposit rates; currency board |
| JEL: | E42 E52 E58 E60 |
| Date: | 2024–07–04 |
| URL: | https://d.repec.org/n?u=RePEc:gii:giihei:heidwp10-2024 |
| By: | Victor Aguirregabiria; Robert Clark; Hui Wang |
| Abstract: | Geographic dispersion of depositors, borrowers, and banks may prevent funding from flowing to high loan demand areas, limiting credit access. Using bank-county-year level data, we provide evidence of the geographic imbalance of deposits and loans and develop a methodology for investigating the contribution to this imbalance of branch networks, market power, and scope economies. Results are based on a novel measure of imbalance and estimation of a structural model of bank competition that admits interconnections across locations and between deposit and loan markets. Counterfactual experiments show branch networks and competition contribute importantly to credit flow but benefit more affluent markets. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2407.03517 |
| By: | Bangyu He; Phil Johnston; Agustin Velasquez |
| Abstract: | This paper explores the catalytic impact of IMF lending to Low-Income Countries on Official Development Assistance (ODA) during 1990-2019. It disentangles the effect on the amounts of ODA on countries’ participation in IMF programs (“extensive margin”) and the size of the IMF-supported program (“intensive margin”). To address selection biases, we rely on the interaction of past IMF program participation and IMF liquidity as an instrument for program participation and employ the review of access limits as an instrument for the size of disbursements. We document that a one percentage point (pp) of GDP increase in IMF disbursements catalyzes additional ODA of 2.7 pp of GDP. In addition, we find that IMF disbursements catalyze ODA mostly from multilateral donors (1.3 pp of GDP) and to lesser extent from traditional bilateral donors (0.6 pp of GDP). Among multilateral donors, the strongest effect is on World Bank disbursements, followed by the EU. Finally, we document that catalytic effects on ODA have decreasing returns to large IMF disbursement amounts. |
| Keywords: | International Monetary Fund (IMF); catalysis; official development assistance (ODA) |
| Date: | 2024–06–28 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/134 |