|
on Banking |
| By: | Lara Coulier; Cosimo Pancaro; Alessio Reghezza (-) |
| Abstract: | We match granular supervisory and credit register data to assess the implications of banks’ exposure to interest rate risk on the monetary policy transmission to bank lending supply in the euro area. We exploit the largest and swiftest increase in interest rates since the creation of the euro and find that banks with a higher exposure to interest rate risk, i.e., with a larger duration gap after accounting for hedging, curtailed corporate lending more than their peers. Ceteris paribus, greater interest rate risk entails closer supervisory scrutiny and potential capital surcharges in the short term, and lower expected profitability and capital accumulation in the medium to long term. We then proceed to dissect banks’ credit allocation and find that banks with higher net duration reshuffled their loan portfolio away from long-term loans in an attempt to limit the increase in interest rate risk and targeted their lending contraction to small and micro firms. Firms exposed to banks with a larger exposure to interest rate risk were unable to fully rebalance their borrowing needs with other lenders, thus experiencing a relatively larger decrease in total borrowing during the monetary tightening episode. |
| Keywords: | Interest rate risk, Duration gap, Bank lending channel, Financial Stability |
| JEL: | E51 E52 G21 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:rug:rugwps:24/1091 |
| By: | Pierre Monnin; Ayanda Sikhosana; Kerschyl Singh |
| Abstract: | By signing the Paris Agreement, South Africa committed to transform its economy to contribute to keeping global temperature rises well below 2C. This transformation will inevitably impact financial institutions and could represent a systemic risk for the financial sector. According to central bank and academic research, an orderly transition should not jeopardise financial stability but understanding transition risks for the banking sector, monitoring them and, when necessary, implementing macroprudential measures is necessary to ensure this stability. This paper is a step towards achieving this outcome. It presents the main transition risks for the South African banking sector, highlighting that the coal value chain is central to these risks. It assesses the banking systems exposure to transition risks in the corporate sector, showing that they are material and widespread. It concludes by suggesting some macroprudential policy options that could address these risks. |
| Date: | 2024–07–22 |
| URL: | https://d.repec.org/n?u=RePEc:rbz:wpaper:11065 |
| By: | Domenico Delli Gatti; Tommaso Ferraresi; Filippo Gusella; Lilit Popoyan; Giorgio Ricchiuti; Andrea Roventini |
| Abstract: | We present a multi-country, multi-sector agent-based model that extends Dosi et al. (2019) and incorporates the exchange market and its interaction with the real economy. The exchange rate is influenced not only by trade flows but also by the heterogeneous demand for foreign currencies from financial traders. In this respect, the dual nature of the exchange rate is highlighted, acting both as a transmission channel of endogenous shocks and as a source of shocks. Indeed, differing beliefs bring about real-financial non-linear patterns with feedback mechanisms. Simulations show that the introduction of speculative sentiment behaviour reflects important stylised facts of bilateral exchange rate series. Furthermore, the findings indicate that trend-following behaviour substantially increases financial turbulence and contributes to real economic fluctuations. Finally, we highlight the power and limitations of the central bank as an actor in the exchange rate market, showing that while the central bank's interventions can effectively curb boom-bust cycles, their outcomes differ substantially. |
| Keywords: | agent-based model, exchange rate dynamics, endogenous cycles, heterogeneous traders, central bank interventions. |
| JEL: | E3 F41 O4 O41 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:frz:wpaper:wp2024_10.rdf |
| By: | Sangyup Choi (Yonsei University); Kimoon Jeong (University of Virginia); Jiseob Kim (Yonsei University) |
| Abstract: | This paper examines how the call option-like mortgage refinancing structure can generate sign-dependent effects of monetary policy shocks on consumption. Utilizing European data, we confirm that consumption declines more significantly with a higher share of adjustable-rate mortgages (ARMs) in response to contractionary monetary policy shocks. However, we uncover that consumption does not necessarily increase more in response to expansionary shocks in the same countries, resulting in asymmetry. Both household-level microdata and model-based quantitative analysis indicate that refinancing in response to a decline in the interest rate—akin to exercising call options—is the key to rationalizing the asymmetric responses between monetary tightening and easing. Since the incentive to refinance heavily depends on its exercising cost, this mechanism is ineffective in economies where the refinancing cost is high. |
| Keywords: | Adjustable-rate mortgages; Refinancing; Monetary policy; Consumption; Call option. |
| JEL: | E21 E32 E44 E52 G21 G51 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:yon:wpaper:2024rwp-228 |
| By: | Daniyal Khan (Department of Economics, Mushtaq Ahmad Gurmani School of Humanities and Social Sciences, Lahore University of Management Sciences, Pakistan) |
| Abstract: | This paper interprets Pakistan’s monetary system through the lens of a Post Keynesian endogenous money model and argues that the 2022 amendment to the State Bank of Pakistan Act, 1956 has embedded the position of the State Bank of Pakistan (SBP) as an unusually and necessarily accommodationist central bank. On the one hand, this has practical implications. The inability of the Pakistani government to borrow from the SBP has robbed it of a key money creation mechanism and flooded the banking sector with sovereign risk. On the other hand, the replacement of the private sector by the government as the dominant source of credit demand presents an interesting theoretical case in which public credit demand becomes the source of endogenous money creation. |
| Keywords: | Money supply, central banking, financial fragility, State Bank of Pakistan, endogenous money |
| JEL: | E42 E51 E58 B52 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:new:wpaper:2411 |
| By: | Girstmair, Stefan |
| Abstract: | This paper examines determinacy properties in a multi-country open economy framework, focusing on the impacts of dominant currency pricing (DCP), producer currency pricing (PCP), and local currency pricing (LCP) on monetary policy effectiveness. Utilizing a New Keynesian model with three symmetric economies, each guided by Taylor rules, the study extends the framework of Gopinath et al. (2020) to analyze how these pricing paradigms interact with central bank policies to achieve economic stability. The investigation highlights that higher economic openness amplifies interactions among central banks’ policies, complicating the attainment of determinacy. DCP significantly constrains policy parameters ensuring determinacy, particularly in open economies. Conversely, PCP and LCP offer relatively larger determinacy regions, allowing for greater domestic policy control. The findings emphasize the critical role of pricing paradigms and economic openness in formulating effective monetary policies. This study provides essential insights for central banks and policymakers in enhancing global economic stability through tailored policy recommendations based on the chosen pricing paradigm. |
| Keywords: | Determinacy; Taylor rule; Three-country new Keynesian model; Pricing paradigms; Openness |
| JEL: | E31 E52 E58 F33 F4 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:cpm:dynare:082 |
| By: | Christoph Boehm; T. Niklas Kroner |
| Abstract: | Existing high-frequency monetary policy shocks explain surprisingly little variation in stock prices and exchange rates around FOMC announcements. Further, both of these asset classes display heightened volatility relative to non-announcement times. We use a heteroskedasticity-based procedure to estimate a “Fed non-yield shock”, which is orthogonal to yield changes and is identified from excess volatility in the S&P 500 and various dollar exchange rates. A positive non-yield shock raises stock prices in the U.S. and around the globe, and depreciates the dollar against all major currencies. The non-yield shock is essentially uncorrelated with previous monetary policy shocks and its effects are large in comparison. Its strong effects on the VIX and other risk-related measures point towards a dominant risk premium channel. We show that the non-yield shock can be related to Fed communications and that its existence has implications for the identification of structural monetary policy shocks. |
| JEL: | E43 E44 E52 E58 F31 G10 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32636 |
| By: | James R. Hines Jr.; Emily Horton |
| Abstract: | Interest paid by U.S. state and local bonds is tax-exempt, making these bonds attractive to investors – though a tax rule limits arbitrage opportunities by restricting associated interest expense deductions. Prior to 1986, U.S. banks were not subject to the interest deduction limitation, making banks preferred holders of tax-exempt debt. U.S. banks used tax-exempt debt to reduce their tax liabilities by roughly 20% in the 1950s and 45% in the 1960s, rising to as much as 80% by the early 1980s. Despite their special exemption, and in part because of their widespread holdings, banks did not benefit from investing in tax-exempt bonds, as competition between banks reduced bond yields to the point of investor indifference. The absence of a tax benefit from arbitrage appears not only in observed bond yields, but also in banks’ considerable unused potential for further tax reductions. After the Tax Reform Act of 1986 removed their special tax exemption, banks significantly reduced their holdings of tax-exempt debt, particularly among banks most severely impacted by the rule change. |
| JEL: | G21 H25 H74 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32647 |
| By: | Charles de Beauffort (Economics and Research Department, National Bank of Belgium); Boris Chafwehé (Bank of England); Rigas Oikonomou (UCLouvain and University of Surrey) |
| Abstract: | When taxes do not sufficiently adjust to government debt levels, the Fiscal Theory of the Price Level predicts that other variables, such as inflation and output gap, must adjust to ensure the solvency of public finances. We study the role of optimal debt maturity portfolios in this context, using a New Keynesian model with both demand and supply-side shocks. Our paper offers new analytical insights into the mechanisms through which debt maturity composition affects the trade-off between inflation and output gap: The Persistence, Discounting and Hedging channels. Our findings, based on a rich prior predictive analysis indicate that the key driving force behind optimal portfolio decisions is the Hedging channel. Moreover, the optimal maturity composition of debt is driven primarily by the supply side shocks, rather than by demand shocks. Finally, our results indicate that optimal debt management is a significant margin to complement monetary policy in stabilizing inflation when debt solvency is an important constraint |
| Keywords: | Monetary and fiscal policy, Government debt management, Fiscal theory. |
| JEL: | E31 E52 E58 E62 C11 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbb:reswpp:202407-450 |
| By: | Christoph Basten (University of Zurich; Swiss Finance Institute; CESifo (Center for Economic Studies and Ifo Institute)); Ragnar Juelsrud (Norges Bank) |
| Abstract: | We show theoretically and empirically how banks' opportunities to crosssell their depositors loans later affect monetary policy transmission. Expected later lending profits motivate banks to set lower deposit spreads to onboard and retain depositors, more the lower policy rates and the greater a bank's cross-selling opportunities. With data on every Norwegian bank household relationship, we exploit that loan cross-sales vary with demographics and so across municipalities. Comparing bank-municipality cells within each bank-year to control for refinancing needs, we find that banks with more cross-selling potential cut deposit spreads more following policy rate cuts and exhibit higher deposit and loan growth. |
| Keywords: | deposit pricing, deposit spread, deposit channel of monetary policy, cross-selling, multi-product banking, multi-period banking, loan spread |
| JEL: | D14 D43 E52 G21 G51 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp2436 |
| By: | Halil Ýbrahim Aydin; Cagatay Bircan; Ralph De Haas |
| Abstract: | Blended finance programs combine public and private funding to ease credit constraints of specific firm segments. While rapidly gaining popularity, little evidence exists on their economic impact. To address this gap, we match credit registry data with firm level tax records to trace out the impacts of a blended finance program for female entrepreneurs in Türkiye. Using a synthetic difference-in-differences estimator, we show that participating banks durably increase lending to women-both in absolute terms and relative to male entrepreneurs. The average treatment effect on treated banks' share of lending to female entrepreneurs is 22 per cent. Banks expand credit to existing borrowers, poach clients from competitors, and crowd in first-time borrowers. Female clients of treated banks increase net borrowing and investment, especially those with higher capital productivity. Beneficiary firms grow their sales and profits, diversify suppliers, and exit less. There are no discernible impacts on aggregate firm populations at the district level, reflecting the program's relatively modest scale. Implications for program design are discussed. |
| Keywords: | Blended finance; Credit access; Female entrepreneurship; Misallocation |
| JEL: | D22 G21 G32 H81 J16 L26 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:tcb:wpaper:2408 |
| By: | Peter N. Ireland (Boston College) |
| Abstract: | From the very start of its fifty-year history, the Shadow Open Market Committee advocated for a monetary policy strategy focused on controlling inflation. With time, the rationale for price stability as the principal focus of monetary policy came to be accepted more widely by academic economists and Federal Reserve officials as well. The SOMC also consistently favored an operational approach involving the use of the monetary base as the policy instrument and a broader monetary aggregate as an intermediate target. These features of SOMC strategy, by contrast, have never gained widespread support among academics or at the Fed. This paper outlines the SOMC’s preferred approach, focusing on how the Committee’s money- based strategy and arguments for it evolved over time. It then shows that these arguments still apply with force today. |
| Keywords: | Inflation, Money Growth, Monetary Policy, Monetarism, Shadow Open Market Committee |
| JEL: | B22 B31 E31 E51 E52 E58 |
| Date: | 2024–07–01 |
| URL: | https://d.repec.org/n?u=RePEc:boc:bocoec:1078 |
| By: | Kohei Hasui (Aichi University); Tomohiro Sugo (Bank of Japan.); Yuki Teranishi (Keio University) |
| Abstract: | This paper shows that the Fed’s exit strategy works as optimal monetary policy in a liquidity trap. We use the conventional new Keynesian model including a recent inflation persistence and confirm several similarities between optimal monetary policy and the Fed’s monetary policy. The zero interest rate policy continues even after inflation rates are sufficiently accelerated over the 2 percent target and hit a peak. Under optimal monetary policy, the zero interest rate policy continues until the second quarter of 2022 and the Fed terminates it one quarter earlier. Eventually, inflation rates exceed the target rate for over three years until the latest quarter. The policy rates continue to overshoot the long-run level to suppress high inflation rates. Furthermore, high inflation rates under optimal monetary policy can explain about 70 percent of the inflation data for 2021 and 2022 years. However, these are still lower than the inflation data. This is because optimal monetary policy raises the policy rates faster than the Fed does. The remaining 30 percent of inflation rates can be constrained by the Fed’s more aggressive monetary policy tightening after the zero interest rate policy. |
| Keywords: | liquidity trap; optimal monetary policy; inflation persistence; forward guidance |
| JEL: | E31 E52 E58 E61 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:upd:utmpwp:051 |
| By: | Baki Cem Sahin |
| Abstract: | [EN] The debates surrounding zombie firms have been reinvigorated by the implementation of support programs to mitigate the effects of the COVID-19 pandemic. Zombie lending poses threats to the economy by distorting the efficient allocation of resources and diminishing overall production capacity. Furthermore, zombie lending raises financial stability risks. This study delves into zombie lending, with particular interest in how it evolves and its effects in Turkiye. The findings reveal important outcomes. Firstly, the ratio of zombie firms in Turkiye has decreased after the COVID-19 pandemic subsequent to reaching its peak in 2020. Secondly, main creditor banks have been less inclined to cut credit lines to financially distressed firms, and this may have contributed to zombification. Lastly, zombie firms exert negative spillover to other firms. These findings emphasize that the challenges posed by zombie lending should be addressed to ensure the efficient allocation of resources, strengthen production, and safeguard financial stability. [TR] COViD-19 pandemisinin etkilerini azaltmaya yonelik destek programlariyla zombi firmalara iliskin tartismalar yeniden canlanmistir. Zombi krediler kaynaklarin verimli dagilimini bozarak ve ekonomideki uretim kapasitesini azaltarak ekonomiye tehdit olusturmaktadir. Ayrica zombi krediler finansal istikrara yonelik riskleri artirmaktadir. Bu calisma, zombi kredileri Turkiye'deki gelisimi ve etkileri ozelinde incelemektedir. Bulgular onemli sonuclar ortaya koymaktadir. Oncelikle, Turkiye'deki zombi firmalarin orani COVID-19 pandemisi sonrasinda 2020'de zirveye ulastiktan sonra azalmistir. Ikinci olarak, ana bankalar mali sikinti icindeki firmalara kredi kisitlamasini daha az uygulamis ve bu zombilesmeye katkida bulunmus olabilir. Son olarak, zombi firmalar diger firmalar uzerinde olumsuz etkiye sahiptir. Bu bulgular, kaynaklarin etkin dagilimini saglamak, uretimi artirmak ve finansal istikrari korumak icin zombi kredilerin ortaya cikardigi zorluklarin ele alinmasi gerektigini vurgulamaktadir. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:tcb:econot:2410 |
| By: | Paavola, Aleksi; Voutilainen, Ville |
| Abstract: | We study the effect of collateral eligibility of corporate loans on the pricing of these loans by banks in Finland. Speciftcally, we investigate whether loans that are pledgeable as collateral for central bank borrowing have lower liquidity premia and thus lower interest rates. For identiftcation, we utilize two unanticipated changes in the collateral framework of the Bank of Finland after the COVID-19 pandemic in 2020 and loanlevel corporate credit data from the Finnish implementation of Anacredit. Our main result is that we do not ftnd evidence that collateral pool expansions by the central bank signiftcantly affected interest rates paid by borrowers. The result contrasts with recent ftndings that imply signiftcant effects of similar collateral pool expansions on credit supply. We hypothesize that differences in the institutional setting and economic environment between countries may explain the contradictory results. Our ftndings show that collateral policies may not have similar effects on credit pricing in all circumstances. |
| Keywords: | monetary policy, collateral framework, credit pricing, interest rates, eligibility |
| JEL: | E43 E52 G21 G28 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofrdp:300517 |
| By: | Iones Kelanemer Holban |
| Abstract: | We investigate the presence of sign and size non-linearities in the impact of the European Central Bank\textquotesingle s Anti-Fragmentation Policy on non-ERM II, EU countries. After identifying three orthogonal monetary policy shock using the method of Fanelli and Marsi [2022], we then select an optimal specification and estimate both linear and non linear impulse response functions using local projections (Dufour and Renault [1998], Goncalves et al. [2021]). The choice of non-linear transformations to separate sign and size effects is based on Caravello and Martinez-Bruera [Working Paper, 2024]. Lastly we compare the linear model to the non-linear ones using a battery of Wald tests and find significant evidence of sign non-linearities in the international spillovers of ECB policy. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2406.19938 |
| By: | Yu Zhang; Mostafa Chegeni; Claudio Tessone |
| Abstract: | The measurement of the velocity of money is still a significant topic. In this paper, we proposed a method to calculate the velocity of money by combining the holding-time distribution and lifespan distribution. By derivation, the velocity of money equals the holding-time distribution's value at zero. When we have much holding-time data, this problem can be converted to a regression problem. After a numeric simulation, we find that the calculating accuracy is high even if we used only a small part of the holding time data, which implies a potential application in measuring the velocity of money in reality, such as digital money. We also tested the methods on Cardano and found that the method can also provide a reasonable estimation of velocity in some cases. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2406.16587 |
| By: | Yannis Dafermos (Department of Economics, SOAS University of London) |
| Abstract: | The European Central Bank (ECB) has recently incorporated climate considerations into its operations. In this paper, I assess whether the ECB’s approach is consistent with the challenges of the climate crisis era. I first identify three transformative implications of the climate crisis for central banking. These are that central banks (i) are becoming less able to control inflation via monetary policy tools, (ii) can no longer ignore their responsibility to support decarbonisation, and (iii) cannot rely on traditional risk exposure approaches to prevent financial instability that stems from physical risks. I then analyse to what extent these implications are reflected in the ECB climate actions and plans, showing that there is a very significant gap between the ECB’s 'tinkering around the edges' approach and the central banking challenges posed by the climate crisis. Using post-Keynesian, critical macro-finance and political economy perspectives, I develop the theoretical underpinnings of a climate-aligned central banking paradigm and analyse the implications of this paradigm for the ECB policy toolbox and mandate. I also identify the ideological and political economy factors that prevent the ECB from undergoing a climate paradigm shift. |
| Keywords: | European Central Bank; monetary policy; financial stability; inflation; climate crisis |
| JEL: | E58 Q54 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:soa:wpaper:264 |
| By: | Luca Barbaglia (European Commission, Joint Research Centre (JRC), Ispra (VA), Italy); Serena Fatica (European Commission, Joint Research Centre (JRC), Ispra (VA), Italy, Money and Finance Research Group); Caterina Rho (European Commission, Joint Research Centre (JRC), Ispra (VA), Italy) |
| Abstract: | We document that banks charge higher interest rates on loans granted to European small and medium-sized firms located in areas at high risk of flooding. The risk premium, at 6.4 basis points on average, rises with loan duration, and in the case of smaller borrowers and local specialised banks. By contrast, at-risk firms that rely heavily on intangible and movable assets do not face a higher cost of credit, reflecting lower vulnerability to physical risk. Realised flood risk increases SMEs’ financial vulnerability, as firms in flooded counties are more likely to default on their loans than non-disaster borrowers. |
| Keywords: | climate change, loan default, loan pricing, natural disasters |
| JEL: | G24 F21 D81 E22 E44 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:anc:wmofir:186 |
| By: | Samuel Ligonnière (Bureau d'Économie Théorique et Appliquée); Salima Ouerk (National Bank of Belgium) |
| Abstract: | Is current monetary policy making the distribution of credit more unequal? Using French household-level data, we document credit volumes along the income distribution. Our analysis centers on assessing the impact of surprises in monetary policy on credit volumes at different income levels. Expansionary monetary policy surprises lead to a surge in mortgage credit exclusively for households within the top 20% income bracket. Monetary policy then does not impact mortgage credit volume for 80% of households, whereas its effect on consumer credit exists and remains consistent across the income distribution. This result is notably associated with the engagement of this particular income group in rental investments. Controlling for bank decision factors and city dynamics, we attribute these results to individual demand factors. Mechanisms related to intertemporal substitution and affordability drive the impact of monetary policy surprises. They manifest through the policy's influence on collaterals and a larger down payment. |
| Date: | 2024–06–29 |
| URL: | https://d.repec.org/n?u=RePEc:boc:fsug24:08 |
| By: | Jose Aurazo; Farid Gasmi |
| Abstract: | Low financial inclusion and high labor informality are two major challenges in developing countries. Using Peruvian survey data from 2015-18, we explore the dynamic relationship between these two variables by examining how labor informality and movements between formal and informal jobs may affect the transition probabilities of financial inclusion. First, we find that becoming informally employed reduces the probability of entering the formal financial system by 8 percentage points (pp) and increases the likelihood of exiting from it by 9.3 pp. Relative to persistently informal workers, those who stay in formal jobs have a 9 pp higher probability of gaining access to bank accounts, and 12 pp lower probability of losing access. Workers who move into formal jobs are more likely to enter the formal financial system by 9.7 pp and less likely to exit from it by 7.1 pp. These results underscore the complementarity of formalizing the informal sector and expanding access to financial services. |
| Keywords: | financial inclusion, labor informality, transition probabilities, dynamic random-effect panel probit |
| JEL: | C23 D14 E26 I31 O17 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1200 |
| By: | Shigenori Shiratsuka |
| Abstract: | This paper examines the recent experience of the Bank of Japan (BOJ) in implementing the yield curve control (YCC) in the Japanese Government Bond (JGB) market. The YCC policy started in September 2016 with targets on two interest rates with different maturity: overnight policy interest rates at -0.1% and the longer-term 10-year JGB yields at zero percent with the fixed but adjustable fluctuation allowance range. The YCC policy had been highly effective in stabilizing interest rates from short to long term at low levels, at least up to early 2022. This paper addresses the question of what the YCC policy did through the lens of the yield curve dynamics in the JGB market and the overnight index swap (OIS) market, with due consideration of practical details of the BOJ's JGB market operations. Empirical evidence shows two points. First, the BOJ's JGB market interventions amplify the fluctuations of the overall yield curves, in stark contrast to its stated policy purpose of fostering the smooth formation of a mild upward-sloping shape of the JGB yield curve. Second, the BOJ's outright JGB purchases in high-stress times are seemingly aggressive but actually reactive to counter the market pressure on the YCC cap. These findings indicate that the YCC policy was carried out to sustain the YCC policy framework without exerting effective easing effects but with significant side effects. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:tcr:wpaper:e208 |
| By: | Evan Herrnstadt; Byoung Hark Yoo |
| Abstract: | This paper uses data on mortgages and expected flood damage for each residential property in the United States to examine how much flood damage is expected to increase the cost of federally backed mortgages (referred to as the subsidy cost). The Congressional Budget Office uses its estimate of the subsidy cost to determine the budgetary effects of mortgages guaranteed directly by the federal government and through entities such as Fannie Mae and Freddie Mac. The analysis focuses only on costs to the federal mortgage programs and does not consider any costs borne by |
| JEL: | G21 H60 H81 Q54 |
| Date: | 2024–07–08 |
| URL: | https://d.repec.org/n?u=RePEc:cbo:wpaper:60167 |
| By: | María del Carmen Dircio Palacios Macedo (Department of Economics, Universitat Jaume I, Castellón, Spain); Paula Cruz-García (Department of Economic Analysis, Universitat de Valencia, Spain); Fausto Hernández-Trillo (Center for Research and Teaching in Economics (CIDE), Mexico); Emili Tortosa-Ausina (IVIE, Valencia and IIDL and Department of Economics, Universitat Jaume I, Castellón, Spain) |
| Abstract: | Access to financial services is unequal around the world. In many countries, les than half of the population has an account at a financial institution, and this lack of access to finance is often a critical reason behind income inequality and uneven growth. This is the case of Mexico, where financial exclusion affects large shares of the population mainly in rural and poorer localities. This is an ongoing concern for policymakers, since it undermines socioeconomic opportunities for families and businesses alike, hampering economic growth and development. However, assessing the relevance of this issue requires a careful measurement of financial inclusion which, to date, has only been achieved to a limited extent. We contribute to the literature in this context by proposing a multivariate index of financial inclusion for Mexico, at the municipal level, for the period 2013–2021. This index covers several dimensions, including access, and usage. The results corroborate that a large proportion of the population is still unbanked, although it is unevenly distributed across the country. |
| Keywords: | composite indicator, financial inclusion, Mexican municipalities, Mexico |
| JEL: | G21 G23 G30 O16 R51 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:jau:wpaper:2024/06 |
| By: | Helmut Wasserbacher; Martin Spindler |
| Abstract: | Why do companies choose particular capital structures? A compelling answer to this question remains elusive despite extensive research. In this article, we use double machine learning to examine the heterogeneous causal effect of credit ratings on leverage. Taking advantage of the flexibility of random forests within the double machine learning framework, we model the relationship between variables associated with leverage and credit ratings without imposing strong assumptions about their functional form. This approach also allows for data-driven variable selection from a large set of individual company characteristics, supporting valid causal inference. We report three findings: First, credit ratings causally affect the leverage ratio. Having a rating, as opposed to having none, increases leverage by approximately 7 to 9 percentage points, or 30\% to 40\% relative to the sample mean leverage. However, this result comes with an important caveat, captured in our second finding: the effect is highly heterogeneous and varies depending on the specific rating. For AAA and AA ratings, the effect is negative, reducing leverage by about 5 percentage points. For A and BBB ratings, the effect is approximately zero. From BB ratings onwards, the effect becomes positive, exceeding 10 percentage points. Third, contrary to what the second finding might imply at first glance, the change from no effect to a positive effect does not occur abruptly at the boundary between investment and speculative grade ratings. Rather, it is gradual, taking place across the granular rating notches ("+/-") within the BBB and BB categories. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2406.18936 |
| By: | Nobuhiro Abe (Bank of Japan); Naohisa Hirakata (Bank of Japan); Yuto Ishikuro (Bank of Japan); Yosuke Koike (Bank of Japan); Yuki Konaka (Bank of Japan); Yutaro Takano (Bank of Japan) |
| Abstract: | In this paper, we use a counterfactual simulation to analyze the effect on the function of financial intermediation in Japan of the decline in interest rates due to large-scale monetary easing. The results show that the decline in interest rates due to large-scale monetary easing put downward pressure on interest margins on loans and securities investments of banks. However, capital adequacy ratios were not necessarily pushed down significantly, because the decline in interest rates boosted the price of stocks and bonds and reduced credit risk. On the other hand, the improving real economy and lower lending interest rates increased demand from the corporate sector, leading to an increase in loans outstanding. In addition, the improvement in corporate finances due to an improved real economy, lower lending interest rates, and rising land and other asset prices, reduced credit risk in lending and contributed to an increase in loans outstanding. The results of the counterfactual simulation suggest that the decline in interest rates due to large-scale monetary easing contributed to the facilitation of financial intermediation. |
| Keywords: | Unconventional monetary policy; financial system |
| JEL: | E44 E59 G21 G28 |
| Date: | 2024–07–18 |
| URL: | https://d.repec.org/n?u=RePEc:boj:bojwps:wp24e08 |
| By: | Shangshang Li |
| Abstract: | This paper evaluates gains from international monetary policy cooperation between the financial center and periphery countries in a two-country open economy model consistent with global financial cycles. Compared to the non-cooperative Nash equilibrium, the optimal cooperative equilibrium robustly fails to benefit both countries simultaneously. The financial periphery is more likely to gain from cooperation if it raises less foreign currency debt or is relatively small. These results also hold when considering the transitional gains and losses of moving from non-cooperation to cooperation. The uneven distribution of gains from cooperation persists when both countries adopt implementable policy rules with and without cooperation. Nevertheless, both countries gain when transitioning from the Nash to the cooperative implementable rules. Regardless of the financial center's policy, rules responding to the exchange rate dominate over purely inward-looking rules for the financial periphery. |
| Keywords: | policy cooperation, global financial cycle, currency mismatch |
| JEL: | F34 E52 F42 E44 E58 E61 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:wsr:wpaper:y:2024:m:07:i:199 |
| By: | Kohei Hasui (Aichi University); Yuki Teranishi (Keio University) |
| Abstract: | This paper shows that the Bank of Japan’s monetary policy shares several common points with optimal monetary policy in a liquidity trap to large negative shocks by the recent pandemic. The zero interest rate policy continues even after inflation rates sufficiently exceed the 2 percent and hit the peak. Optimal monetary policy keeps the zero interest rate policy until the second quarter of 2024 and the Bank of Japan continues the zero interest rate at least until the second quarter of 2024. Recent high inflation rates can be explained by a prolonged zero interest rate policy. Average inflation rates from 2021 to 2023 years are 2.2 percent and 2.1 percent in the data and the simulation, respectively. According to scenarios for anchored inflation expectations and long-run natural interest rates, the optimal timing to terminate the zero interest rate policy and a speed of the monetary tightening after the zero interest rate policy change. As anchored inflation expectations and natural interest rates decline, the zero interest rate policy continues longer. |
| Keywords: | liquidity trap; optimal monetary policy; inflation persistence; forward guidance |
| JEL: | E31 E52 E58 E61 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:upd:utmpwp:050 |
| By: | Fisher, Jack; Gavazza, Alessandro; Liu, Lu; Ramadorai, Tarun; Tripathy, Jagdish |
| Abstract: | In household finance markets, inactive households can implicitly cross-subsidize active households who promptly respond to financial incentives. We assess the magnitude and distribution of cross-subsidies in the mortgage market. To do so, we build a structural model of household mortgage refinancing and estimate it on rich administrative data covering the stock of outstanding mortgages in the UK. We estimate sizeable cross-subsidies that flow from relatively poorer households and those located in less-wealthy areas towards richer households and those located in wealthier areas. Our work highlights how the design of household finance markets can contribute to wealth inequality. |
| Keywords: | mortages; refinancing; cross-subsidies; wealth inequality; household inaction and inertia; household finance |
| JEL: | G21 G00 N20 R21 R31 L51 |
| Date: | 2024–08–01 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:123686 |
| By: | Miguel Faria-e-Castro; Samuel Jordan-Wood; Julian Kozlowski |
| Abstract: | We examine borrowing costs for firms using a security-level database with bank loans and corporate bonds issued by U.S. companies. We find significant within-firm dispersion in borrowing rates, even after controlling for security and firm observable characteristics. Obtaining a bank loan is 132 basis points cheaper than issuing a bond, after accounting for observable factors. Changes in borrowing costs have persistent negative impacts on firm-level outcomes, such as investment and borrowing, and these effects vary across sectors. These findings contribute to our understanding of borrowing costs and their implications for corporate policies and performance. |
| Keywords: | credit spreads; bonds; loans; macro-finance |
| JEL: | E6 G1 H0 |
| Date: | 2024–07–15 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedlwp:98542 |
| By: | Sergio Cesaratto; Eladio Febrero; George Pantelopoulos |
| Abstract: | National Central Banks (NCBs) of the Eurosystem pool profits and losses related to monetary policy operations to form the Eurosystem's so-called 'monetary income'. This is then redistributed - i.e. allocated - among NCBs according to respective capital keys (the participation shares of each NCB to the ECB's capital). Monetary income has relevance for current debates such as that concerning the high fiscal costs of an ample reserve regime as a result of the abundant reserves banks hold in the deposit facility of their respective NCBs. These costs are in fact redistributed through the allocation of monetary income. Nonetheless, exactly how monetary income is pooled and subsequently allocated between Eurosystem NCBs remains rather enigmatic. The aim of this paper is to explore how monetary income is both pooled and allocated. This seems a useful task beyond the aforementioned debate to dissipate other puzzling issues like the costs of TARGET2 imbalances. A more detailed dissemination from the relevant authorities as to the process by which profits/losses are pooled and subsequently allocated is however in our view warranted. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:imk:fmmpap:104-2024 |
| By: | Eleonora Brandimarti; Giacomo De Giorgi; Jeremy Laurent-Lucchetti |
| Abstract: | There is a tight connection between credit access and voting. We show that uncertainty in access to credit pushes voters toward more conservative candidates in US elections. Using a 1% sample of the US population with valid credit reports, we relate access to credit to voting outcomes in all county-by-congressional districts over the period 2004-2016. Specifically, we construct exogenous measures of uncertainty to credit access, i.e. credit score values around which individual total credit amount jumps the most (e.g. around which uncertainty on access to credit is the highest). We then show that a 10pp increase in the share of marginal voters located just around these thresholds increases republican votes by 2.7pp, and reduces that of democrats by 2.6pp. Furthermore, winning candidates in more uncertain constituencies tend to follow a more conservative rhetoric. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2407.06808 |
| By: | Luigi Bocola; Alessandro Dovis; Kasper Jørgensen; Rishabh Kirpalani |
| Abstract: | This paper uses high frequency data to detect shifts in financial markets' perception of the Federal Reserve stance on inflation. We construct daily revisions to expectations of future nominal interest rates and inflation that are priced into nominal and inflation-protected bonds, and find that the relation between these two variables-positive and stable for over twenty years-has weakened substantially over the 2020-2022 period. In the context of canonical monetary reaction functions considered in the literature, these results are indicative of a monetary authority that places less weight on inflation stabilization. We augment a standard New Keynesian model with regime shifts in the monetary policy rule, calibrate it to match our findings, and use it as a laboratory to understand the drivers of U.S. inflation post 2020. We find that the shift in the monetary policy stance accounts for half of the observed increase in inflation. |
| JEL: | E58 G13 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32620 |
| By: | S. Borağan Aruoba; Thomas Drechsel |
| Abstract: | We study how monetary policy affects subcomponents of the Personal Consumption Expenditures Price Index (PCEPI) using local projections. Following a monetary policy contraction, the response of aggregate PCEPI turns significantly negative after over three years. There are stark differences in the timing and magnitude of the responses across price categories, including some prices that show an initially positive response. We discuss theoretical interpretations of our findings and point to useful directions for future theoretical research. We also show how to re-aggregate our cross-sectional estimates and their standard errors, taking into account dependence between different prices using a Seemingly Unrelated Regression approach. Re-aggregation exercises show that changes in expenditure behavior have not accelerated the long-lagged response of inflation to monetary policy. |
| JEL: | C10 E31 E52 E58 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32623 |
| By: | Selien De Schryder; Nikolaos Koutounidis; Koen Schoors; Johannes Weytjens (-) |
| Abstract: | The transmission of the pandemic shock to the macroeconomy through the prism of consumer heterogeneity is the focal point of this paper. Based on a rich bank account and transactions micro dataset, we assess the roles of local COVID-19 severity, government measures against the spread of the virus, and vaccination rates for households’ consumption behavior in Belgium. We induce that households living in areas that experienced high COVID-19 positivity rates and more stringent containment measures, decreased their consumption more. The relevance of these effects, however, shifted over the course of the pandemic. Higher local vaccination rates significantly counteracted these negative impacts on household consumption. Furthermore, our study highlights that the impact of these factors on consumption varied distinctly across households with different income, liquid wealth, and age characteristics. |
| Keywords: | COVID-19, pandemic, lockdown, consumption, income, transactions data, heterogeneity |
| JEL: | D12 E21 E65 G51 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:rug:rugwps:24/1090 |
| By: | Violeta A. Gutkowski |
| Abstract: | This paper focuses on the significant growth of domestic credit once the debt is restructured and shows that is not correlated with the size of the haircut. Second, it performs an event study around Ecuador’s sovereign default and restructuring of 2008-2009 to study changes in domestic bank lending behavior. After external debt restructuring, private lending increased the most for banks highly exposed to public debt. Finally, it provides a simple model were uncertainty about the return on government external debt during default has spillover effects on the domestic economy by creating dispersion in beliefs across domestic banks, which leads to a misallocation of credit. External debt restructuring eliminates domestic belief heterogeneity by making the return on bonds observable to everyone. This simple framing is not only consistent with the substantial growth in domestic credit upon debt restructuring but also with its independence from the haircut size observed in the data. |
| Keywords: | banks; beliefs; sovereign debt restructuring; uncertainty |
| JEL: | D8 E44 H63 |
| Date: | 2024–07–08 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedlwp:98514 |