|
on Banking |
| By: | Leonardo Gambacorta; Byeungchun Kwon; Taejin Park; Pietro Patelli; Sonya Zhu |
| Abstract: | We introduce central bank language models (CB-LMs) - specialised encoder-only language models retrained on a comprehensive corpus of central bank speeches, policy documents and research papers. We show that CB-LMs outperform their foundational models in predicting masked words in central bank idioms. Some CB-LMs not only outperform their foundational models, but also surpass state-of-the-art generative Large Language Models (LLMs) in classifying monetary policy stance from Federal Open Market Committee (FOMC) statements. In more complex scenarios, requiring sentiment classification of extensive news related to the US monetary policy, we find that the largest LLMs outperform the domain-adapted encoder-only models. However, deploying such large LLMs presents substantial challenges for central banks in terms of confidentiality, transparency, replicability and cost-efficiency. |
| Keywords: | large language models, gen AI, central banks, monetary policy analysis |
| JEL: | E58 C55 C63 G17 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1215 |
| By: | Andrew Powell (Center for Global Development; Distinguished Visiting Professor, Williams College) |
| Abstract: | World leaders are calling on the multilateral development banks (MDBs) to greatly increase development and climate finance for developing countries using their capital more efficiently. MDBs hold large amounts of liquidity on their balance sheets as well as capital. The International Bank for Reconstruction and Development (IBRD) and the four main regional development banks manage more than US$200 billion of high credit-quality, liquid assets principally from the world’s leading economies. This paper describes how a liquidity line from major central banks backed by SDRs, a natural liquidity instrument, could save MDBs money. A US$50 billion line, about 8 percent of the top 20 central banks’ SDR holdings, could boost MDB net income between US$413 million and US$792 million per year under normal market conditions. This would deploy unused SDRs, assist G20 countries comply with their SDR rechanneling commitments, be a step forward towards a more coherent and integrated MDB system, as recommended by various G20 committees, and promote international financial stability. If the savings were retained as additional MDB capital, it could drive between US$31.3 billion to US$60.4 billion of additional development lending over 20 years, complementing other reforms to enhance balance sheet efficiency. |
| Date: | 2024–09–30 |
| URL: | https://d.repec.org/n?u=RePEc:cgd:ppaper:340 |
| By: | Carlos Madeira |
| Abstract: | This work shows the impact of financial crises across industries and the total manufacturing sector. I find both a direct impact of financial crises on all manufacturing growth and an additional effect through an external finance dependence channel. Externally dependent industries experience lower growth during banking and currency crises, especially in emerging markets and developing economies. Banking, currency and sovereign debt crises cause an average reduction in total manufacturing growth of 2.7%, 6% and 1%, respectively, with the direct effect being the most significant component. Finally, I show that macroprudential policies adopted after the Great Financial Crisis attenuated the fall in growth caused by banking crises. |
| Keywords: | financial crises, banking crises, growth, external finance dependence, credit frictions |
| JEL: | E44 G01 O10 O16 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1214 |
| By: | Matthew S. Jaremski; David C. Wheelock |
| Abstract: | The Federal Reserve Act was the outcome of compromises among competing economic and political interests. Numerous studies examine how the act came together but largely take the makeup of Congress and the Administration as given rather than considering the unique circumstances that led to that political distribution. This paper examines how the election of 1912 changed the makeup of Congress and increased the likelihood of central banking legislation and shaped the act. The decision of Theodore Roosevelt and other Progressives to run as third-party candidates split the Republican Party and enabled Democrats to capture the White House and Congress. We show that the election produced a less polarized Congress and that newly-elected members were more likely to vote for the act. Absent their interparty split, Republicans would likely have held the White House and Congress, and any legislation to establish a central bank almost certainly would have been quite different. |
| JEL: | G28 N42 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32987 |
| By: | Andres Fernandez; Martin Hiti; Asani Sarkar |
| Abstract: | Recent events have heightened awareness of systemic risk stemming from nonbank financial sectors. For example, during the COVID-19 pandemic, liquidity demand from nonbank financial entities caused a “dash for cash” in financial markets that required government support. In this post, we provide a quantitative assessment of systemic risk in the nonbank sectors. Even though these sectors have heterogeneous business models, ranging from insurance to trading and asset management, we find that their systemic risk has common variation, and this commonality has increased over time. Moreover, nonbank sectors tend to become more systemic when banking sector systemic risk increases. |
| Keywords: | nonbank financial institutions (NBFIs); nonbanks; banks; systemic risk; Interconnections |
| JEL: | G01 G21 G22 G23 G24 |
| Date: | 2024–10–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:98893 |
| By: | Stefania Albanesi; Domonkos F. Vamossy |
| Abstract: | Credit scores are critical for allocating consumer debt in the United States, yet little evidence is available on their performance. We benchmark a widely used credit score against a machine learning model of consumer default and find significant misclassification of borrowers, especially those with low scores. Our model improves predictive accuracy for young, low-income, and minority groups due to its superior performance with low quality data, resulting in a gain in standing for these populations. Our findings suggest that improving credit scoring performance could lead to more equitable access to credit. |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2409.00296 |
| By: | Nicola Cetorelli; Saketh Prazad |
| Abstract: | U.S. bank holding companies (BHCs) have developed a very significant nonbank footprint over the years, adding thousands of specialty lenders, brokers and dealers, asset management, and insurance subsidiaries to their organizations. These nonbank subsidiaries represent a sizeable share of aggregate BHC assets and a significant component of the entire U.S. nonbank industry. We argue that liquidity management synergies are an important driver of the coexistence of commercial banks and nonbank subsidiaries within BHCs. Using unique data on BHC organizational structure and financial reports, we show that in the unrestricted pre-crisis regulatory environment, commercial banks within BHCs with a large nonbank footprint hold fewer liquid assets and more loans on their balance sheet. We show that our results are driven by explicit and implicit intracompany funding arrangements between affiliated banks and nonbanks. Post-GFC banking regulation, like resolution planning and liquidity regulation, has disrupted liquidity synergies and has caused BHCs to scale back their nonbank footprint. |
| Keywords: | banking firm; bank holding companies; firm boundaries; nonbank financial institutions; liquidity synergies; bank regulation |
| JEL: | G01 G21 G23 G28 |
| Date: | 2024–09–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:98819 |
| By: | Antoinette Schoar; Yang Sun |
| Abstract: | Using a randomized controlled trial we test how retail investors assess and update their priors based on different types of financial advice, which either aligns with their priors or goes against it. We compare advice that emphasizes either the benefits of passive investment strategies (such as diversification and low fees) or active strategies (such as stock picking and market timing). We find that participants rate advice significantly higher when it aligns with their priors rather than contradicts them. But people update their beliefs about investment strategies in the direction of the advice they receive, independent of their priors. At the same time, there is significant heterogeneity based on the subjects’ financial literacy. Financially more literate subjects positively update in response to seeing passive advice, but most do not update (and rate the advice negatively) when exposed to active advice. In contrast, financially less literate subjects are strongly influenced by both types of advice. Finally, subjects rate the advice lower if the advisor is perceived to have misaligned incentives compared to when they are more aligned. |
| JEL: | G5 G53 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33001 |
| By: | Dvoskin, Ariel (CONICET – University of San Martín, EIDAES); Libman, Emiliano (CONICET – Center for the Study of State and Society) |
| Abstract: | Following Aspromourgos’ (2007) steps, in this paper we examine the role of the interest rate as a “conventional” variable under different assumptions regarding price and quanti-ty determination, that aim to characterize the reaction functions of Central Banks, repre-sented in standard New Consensus models. More specifically, we lay out a minimal model and suggest a taxonomy that helps examining under which conditions prices and quantities can be determined independently of each other, and whether there is or there is not a unique natural rate of interest consistent with the equilibrium level of output. We argue that the natural rate of interest need not exist even if, as the New Consensus ar-gues, we allow prices and quantities to be somehow connected. |
| Keywords: | Inflation Targeting; Interest Rates; Monetary Theory of Distribution; New Consensus Model |
| JEL: | E31 E52 E58 |
| Date: | 2024–09–26 |
| URL: | https://d.repec.org/n?u=RePEc:ris:sraffa:0068 |
| By: | Claes Bäckman; Patrick Moran; Peter van Santen |
| Abstract: | How does the design of debt repayment schedules affect household borrowing? To answer this question, we exploit a Swedish policy reform that eliminated interest-only mortgages for loan-to-value ratios above 50%. We document substantial bunching at the threshold, leading to 5% less borrowing. Wealthy borrowers drive the results, challenging credit constraints as the primary explanation. We develop a model to evaluate the mechanisms driving household behavior and find that much of the effect comes from households experiencing ongoing flow disutility to amortization payments. Our results indicate that new mortgage contracts with low initial payments substantially increase household borrowing and lifetime interest costs. |
| Keywords: | Mortgage design; Amortization payments; Macroprudential policy; Bunching |
| JEL: | G51 G21 E21 E60 |
| Date: | 2024–09–20 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2024-77 |
| By: | Ratcliff, Ryan D. |
| Abstract: | Badinger and Schiman (2023) use a narrative high-frequency analysis of news and financial markets to develop a small set of restrictions on the structural shocks of a VAR of the Euro area. Their approach does not uniquely identify a structural representation, so their results are based on the distribution of a randomly generated set of parameters that satisfies the restrictions. Their method generates impulse responses that are consistent with macroeconomic theory, but that differ from previous studies that use alternative highfrequency identification strategies. They use this difference to argue that, unlike previous studies, their method is able to separate monetary policy surprises from confounding central bank information shocks - an important new contribution to the literature. I conducted two replication studies of their work on behalf of the Institute for Replication (I4R). First, I used the code provided in their replication package to replicate all of their main results, aside from the small variations expected in replicating a Monte Carlo study. Second, I attempted to use their original data to recreate their results using a different statistical software (Eviews 13). I was unable to replicate their results for two reasons. First, my program is unable to exactly replicate the custom prior they used to generate their reduced-form results. Second, my models routinely generated nonstationary VARs that nevertheless satisfied the identification restrictions. This differs from the author's results, but is not surprising given the ambiguous stationarity of the underlying macro variables. |
| Keywords: | Structural VAR, Residual Sign Restrictions, Replication |
| JEL: | C32 E43 E44 E52 E58 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:i4rdps:160 |
| By: | Ekaterina Pirozhkova (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Giovanni Ricco (CREST, Ecole Polytechnique, 5 Av. Le Chatelier, 91120 Palaiseau, France); Nicola Viegi (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa) |
| Abstract: | Four factors drive the high-frequency impact of monetary policy announcements in South Africa: affecting short-, mid-, and long-term yield curve, as well as country risk. Controlling for information effects, we build IVs to study the transmission of conventional monetary policy, forward guidance, term premia, country risk and information shocks. Our findings reveal textbook contractionary effects of conventional monetary policy. Policy communication, particularly forward guidance, has persistent effects on output and prices. Country risk is a novel and powerful channel of monetary policy communication in emerging markets. By defending its independence, re-stating its inflation target objective, and addressing external shocks, the central bank can mitigate country risk and generate strong expansionary effects. |
| Keywords: | Monetary policy, Small Open Economy, Inflation Targeting, Exchange Rates. |
| JEL: | E5 F3 F4 C3 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:pre:wpaper:202442 |
| By: | Hugo Spring-Ragain (HEIP) |
| Abstract: | This article examines the economic effects of an increase in the duration of home loans on households, focusing on the French real estate market. It highlights trends in the property market, existing loan systems in other countries (such as bullet loans in Sweden and Japanese home loans), the current state of the property market in France, the potential effects of an increase in the amortization period of home loans, and the financial implications for households.The article points out that increasing the repayment period on home loans could reduce the amount of monthly instalments to be repaid, thereby facilitating access to credit for the most modest households. However, this measure also raises concerns about overall credit costs, financial stability and the impact on property prices. In addition, it highlights the differences between existing lending systems in other countries, such as the bullet loan in Sweden and Japanese home loans, and the current characteristics of home loans in France, notably interest rates and house price trends. The article proposes a model of the potential effects of an increase in the amortization period of home loans on housing demand, housing supply, property prices and the associated financial risks.In conclusion, the article highlights the crucial importance of household debt for individual and economic financial stability. It highlights the distortion between supply and demand for home loans as amortization periods increase, and the significant rise in overall loan costs for households. It also underlines the need to address structural issues such as the sustainable reduction in interest rates, the stabilization of banks' equity capital and the development of a regulatory framework for intergenerational lending to ensure a properly functioning market. |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2409.14748 |
| By: | Ángelo Gutiérrez-Daza |
| Abstract: | Empirical evidence suggests consumers rely on their shopping experiences to form beliefs about inflation. In other words, they "learn by shopping". I introduce this empirical observation as an informational friction in the New Keynesian model and use it to study its consequences for the transmission of aggregate shocks and the design of monetary policy. Learning by shopping anchors households' beliefs about inflation to its past, causing disagreement with firms over the value of the real wage. The discrepancy allows nominal shocks to have real effects and makes the slope of the Phillips curve a function of the monetary policy stance. As a result, a more hawkish monetary policy reduces the volatility and persistence of inflation, increases the degree of anchoring of households' inflation expectations, and flattens the slope of the Phillips curve of the economy. |
| Keywords: | Inflation;Inflation Expectations;Monetary Policy;Business Cycle;Informational Frictions |
| JEL: | D84 E31 E32 E52 E58 E70 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:bdm:wpaper:2024-12 |
| By: | Bryan, Gharad; Karlan, Dean; Osman, Adam |
| Abstract: | We experimentally study the impact of relatively large enterprise loans in Egypt. Larger loans generate small average impacts, but machine learning using psychometric data reveals "top performers" (those with the highest predicted treatment effects) substantially increase profits, while profits drop for poor performers. The large differences imply that lender credit allocation decisions matter for aggregate income, yet we find existing practice leads to substantial misallocation. We argue that some entrepreneurs are overoptimistic and squander the opportunities presented by larger loans by taking on too much risk, and show the promise of allocations based on entrepreneurial type relative to firm characteristics. |
| Keywords: | entrepreneurship; enterprise credit; heterogenous treatment effects; psychometric data; small and medium enterprises |
| JEL: | D24 M21 O12 O16 |
| Date: | 2024–09–20 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:120637 |
| By: | Sebastian Hernandez; Alexandra Sutton-Lalani; John Miedema; Virginie Cobigo; Fatoumata Bah; Munazza Tahir; Danika Lévesque; Badr Omrane |
| Abstract: | We explore how digital payments, which dominate the payment landscape in Canada, can be made more cognitively accessible. In particular, we are focused on removing cognitive barriers present in many digital interfaces and products. We propose an inclusive approach since involving people with cognitive disabilities in design, testing, and refinement is crucial. The proposed framework centers on system learnability and user workload as the two key measures of cognitive accessibility in digital payment and banking interfaces. System learnability is determined by measuring first use learnability, steepness of the learning curve and efficiency of the ultimate plateau. Workload is determined by the sub-measures mental demand, temporal demand, frustration and performance. The framework is broadly applicable to digital and electronic payment methods. We develop and test a prototype interface for voice payments, which successfully demonstrates that the framework provides an effective iterative design approach to enhance cognitive accessibility and usability. The Bank of Canada can use this framework to create guidelines for more cognitively accessible electronic payment products, including a potential Digital Canadian Dollar. While the framework facilitates efficient evaluation, further validation is still needed. This framework should also be used with broader holistic usability and accessibility testing, recognizing that cognitive accessibility is just one aspect of the user experience. |
| Keywords: | Accessibility; Bank notes; Central bank research; Digital currencies and fintech; Digitalization; Financial services |
| JEL: | A14 C90 D83 O33 Y80 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocadp:24-15 |
| By: | Bhattacharjee, Arnab; Holly, Sean; Wasseja, Mustapha |
| Abstract: | Transcripts from the US Federal Open Markets Committee provide, albeit with a lag, valuable information on the monetary policymaking process at the Federal Reserve Bank. We use the data compiled by Chappell et al. (2005b) on preferred interest rates (not votes) of individual FOMC members. Together with information on which monetary policy decisions are based, we use these preferred rates to understand decision making in the FOMC, focussing both on cross-member heterogeneity and interaction among the members of the committee. Our contribution is to provide a method of unearthing otherwise unobservable interactions between the members of the FOMC. We find substantial heterogeneity in the policy reaction function across members. Further, we identify significant interactions between individuals on the committee. The nature of these interdependencies tell us something about information sharing and strategic interactions within the FOMC and provide interesting comparisons with the Bank of England's Monetary Policy Committee. |
| Keywords: | Monetary policy, Interest rates, FOMC decision making, Spatial Weights Matrix, Spatial Lag Model |
| JEL: | E42 E43 E50 E58 C31 C34 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:hwuaef:303042 |
| By: | Arpan Chakraborty |
| Abstract: | Modern macroeconomic models, particularly those grounded in Rational Expectation Dynamic Stochastic General Equilibrium (DSGE), operate under the assumption of fully rational decision-making. This paper examines the impact of behavioral factors, particularly 'animal spirits' (emotional and psychological influences on economic decisions) and 'inflation extrapolators', on the communication index/sentiment index of the US Federal Reserve. Utilizing simulations from a behavioral New Keynesian model alongside real-world data derived from Federal Reserve speeches, the study employs an Auto-Regressive Distributed Lag (ARDL) technique to analyze the interplay between these factors. The findings indicate that while the fraction of inflation extrapolators do not significantly affect the Fed's sentiment index, various aspects of animal spirits exert a notable impact. This suggests that not only is the US output gap influenced by animal spirits, but the Federal Reserve's communication is also substantially shaped by these behavioral factors. This highlights the limitations of rational expectation DSGE models and underscores the importance of incorporating behavioral insights to achieve a more nuanced understanding of economic dynamics and central bank communication. |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2409.10938 |
| By: | Laudenbach, Christine; Siegel, Stephan |
| Abstract: | We examine the effect of personal, two-way communication on the payment behavior of delinquent borrowers. Borrowers who speak with a randomly assigned bank agent are significantly more likely to successfully resolve the delinquency relative to borrowers who do not speak with a bank agent. Call characteristics related to the human touch of the call, such as the likeability of the agent's voice, significantly affect payment behavior. Borrowers who speak with a bank agent are also significantly less likely to become delinquent again. Our findings highlight the value of a human element in interactions between financial institutions and their customers. |
| Keywords: | Personal Communication, Consumer Finance, Loan Repayment, Promise Keeping, Social Distance |
| JEL: | D14 G11 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:safewp:303038 |
| By: | Valentin Burban (Banque de France and Aix-Marseille University, Aix-Marseille School of Economics); Andreaa Liliana Vladu (European Central Bank); Bruno De Backer (National Bank of Belgium, Economics and Research Department) |
| Abstract: | This article measures the degree of potential de-anchoring of inflation expectations in the euro area vis-à-vis the inflation objective of the European Central Bank (ECB). A no-arbitrage term structure model that allows for a time-varying long-term mean of inflation expectations, πt*, is applied to inflation-linked swap (ILS) rates, while taking into account survey-based inflation forecasts. Estimates of πt* have been close to 2 % since the mid-2000s, indicating that long-term inflation expectations have overall remained well anchored to the ECB’s inflation objective. As this objective is however related to the "medium term", expectations components of various forward ILS rates are extracted: they appear to have been broadly anchored, with tentative signs of de-anchoring up to the two-year horizon. Using backcasted ILS rates, estimates of πt* are much above 2 % in the early 1990s, but they converge to levels below 2 % by the end of the decade when the ECB was established. |
| Keywords: | Inflation-linked swap rates, surveys, no-arbitrage, shifting endpoint, inflation expectations |
| JEL: | E31 E43 E47 E58 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbb:reswpp:202409-457 |
| By: | Viral V. Acharya; Nicola Cetorelli; Bruce Tuckman |
| Abstract: | In recent years, assets of nonbank financial intermediaries (NBFIs) have grown significantly relative to those of banks. These two sectors are commonly viewed either as operating in parallel, performing different activities, or as substitutes, performing substantially similar activities, with banks inside and NBFIs outside the perimeter of banking regulation. We argue instead that NBFI and bank businesses and risks are so interwoven that they are better described as having transformed over time, rather than as having migrated from banks to NBFIs. These transformations are at least in part a response to regulation and are such that banks remain special as both routine and emergency liquidity providers to NBFIs. We support this perspective as follows: (i) the new and enhanced financial accounts data for the United States (“From Whom to Whom”) show that banks and NBFIs finance each other, with NBFIs especially dependent on banks; (ii) case studies and regulatory data show that banks remain exposed to credit and funding risks, which at first glance seem to have moved to NBFIs, and also to contingent liquidity risk from the provision of credit lines to NBFIs; and (iii) empirical work confirms bank-NBFI linkages through the correlation of their abnormal equity returns and market-based measures of systemic risk. We discuss some potential regulatory responses, including treating the two sectors holistically, recognizing the implications for risk propagation and amplification, and exploring new ways to internalize the costs of systemic risk. |
| Keywords: | nonbank financial intermediaries; nonbanks; shadow banking; bank regulation; regulatory arbitrage; systemic risk; credit lines; derivatives margin |
| JEL: | G01 G21 G23 G28 |
| Date: | 2024–09–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:98820 |
| By: | Tom Akana; Will Daniel; Amber Lee |
| Abstract: | Survey after survey indicates that building savings and reducing debt are among the top financial goals for many Americans. However, because of limited resources and inherent trade-offs, achieving these two goals can be challenging and often requires prioritizing one goal over the other. We conduct two survey experiments with national samples of U.S. adults to understand how individuals balance saving and paying off debt, while taking into account survey context and question effects that might influence self-reports of behaviors. Both studies find a significant question order effect, in which respondents provide different answers about their preferred financial choice depending on the placement of questions within the survey. Specifically, when asked how to allocate their discretionary income between savings and debt payments, respondents generally indicate a greater preference for savings; however, when asked about their personal financial values before the allocation question, they are more willing to allocate a larger portion toward debt payments. These findings highlight the importance of considering survey context and question content when interpreting survey responses about personal finances. |
| Keywords: | personal finance; financial decision-making; savings and debt; survey experiments; survey methodology; question order effects; wording effects |
| JEL: | D14 C83 |
| Date: | 2024–10–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedpwp:98891 |
| By: | Worrawoot Jumlongnark |
| Abstract: | This article explores the challenges and opportunities faced by the Bank for Agriculture and Agricultural Cooperatives (BAAC) in Thailand from a microfinance perspective. It examines the role of BAAC as a specialized financial institution in assisting underprivileged households and small businesses in accessing financial services. The study highlights the political exploitation of BAAC for populist strategies and the negative impact of corruption on the effectiveness of its operations. Additionally, it discusses the rice-pledging policy in Thailand, which was driven by political motivations and resulted in significant losses for the government. The article emphasizes the need for sustainable development strategies and decreased political interference to enhance the performance of BAAC and effectively support farmers and the poor in Thailand. |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2409.03157 |
| By: | Omar Barbiero; Falk Bräuning; Gustavo Joaquim; Hillary Stein |
| Abstract: | We leverage supervisory microdata to uncover the role of global banks' risk limits in driving exchange rate dynamics. Consistent with a model of currency intermediation under risk constraints, shocks to dealers’ risk limits lead to price and quantity adjustments in the foreign exchange market. We show that dealers adjust their net position and increase the bid–ask spread in response to granularly identified limit shocks, leading to lower turnover and an adjustment in currency returns. These shocks exacerbate the effects of net currency demand on exchange rate movements, as predicted by theory, and trigger deviations from covered interest parity. |
| Keywords: | exchange rates; currency returns; market making; risk constraints; financial intermediation |
| JEL: | F31 G15 G21 |
| Date: | 2024–08–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedbwp:98847 |
| By: | Adrien Auclert; Matthew Rognlie; Ludwig Straub |
| Abstract: | In the past decade, a new paradigm for fiscal and monetary policy analysis has emerged, combining the canonical macro model of income and wealth inequality with the New Keynesian model. These Heterogeneous-Agent New Keynesian (“HANK”) models feature new transmission channels and allow for the joint study of aggregate and distributional effects. We review key developments in this literature through the lens of a unified “canonical HANK model”. Monetary and balanced-budget fiscal policy have similar aggregate effects as in the standard new Keynesian model, while deficit-financed fiscal policy is much more expansionary. We discuss the split between direct and indirect effects of policy, and also the implications of cyclical income risk, maturity structure, nominal assets, behavioral frictions, and many other extensions to the model. Throughout, we highlight the benefits of using sequence-space methods to solve and analyze this class of models. |
| JEL: | D1 E21 E31 E32 E43 E52 E62 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32991 |
| By: | Gonzalo Cisternas; Aaron Kolb |
| Abstract: | Expectations can play a significant role in driving economic outcomes, with central banks factoring market sentiment into policy decisions and market participants forming their own assumptions about monetary policy. But how well do central banks understand the expectations of market participants—and vice versa? Our model, developed in a recent paper, features a dynamic game between (i) a monetary authority that cannot commit to an inflation target and (ii) a set of market participants that understand the incentives created by that credibility problem. In this post, we describe the game, a type of Keynesian beauty contest: its main novelty is that each side attempts, with varying degrees of accuracy, to forecast the other’s beliefs, resulting in new findings regarding the levels and trajectories of inflation. |
| Keywords: | central banks; credibility; forecasts |
| JEL: | D82 E5 |
| Date: | 2024–09–30 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:98892 |
| By: | Andre, Jennifer (Urban Institute); Braga, Breno (Urban Institute); Martinchek, Kassandra (Urban Institute); McKernan, Signe-Mary (Urban Institute) |
| Abstract: | To protect financially distressed families during the COVID-19 pandemic, states implemented emergency measures such as moratoria on evictions and utility shutoffs. These policies prevented utility companies from disconnecting families' energy and water and landlords from obtaining court-ordered evictions for non-payment. Without these protections, consumers might have turned more often to high-cost alternative financial service (AFS) loans – such as payday loans - to pay their utility bills and rent. Using a random sample of 5 million consumers, we investigate whether moratoria on evictions and utility shutoffs impacted consumers' AFS use. Adults in states with an eviction or utility shutoff moratorium were less likely to borrow from high-cost non-banking institutions. Residents of high-poverty and Hispanic neighborhoods benefited the most from these protections. These results suggest that with such protections, families did not have to turn as often to high-cost loans to ensure access to housing and energy during financial distress. |
| Keywords: | consumer protection policies, household finance, alternative financial services |
| JEL: | D14 D18 G51 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17248 |
| By: | Rajeswari Sengupta (Indira Gandhi Institute of Development Research); Harsh Vardhan; Akhilesh Verma (ESRI & Trinity College) |
| Abstract: | This paper explores the role of bank capital in monetary policy transmission within the Indian economy, where the banking sector is the primary channel for financial intermediation. Using a panel dataset of 18 commercial banks from 2002 to 2018, we assess how varying levels of bank capital influence monetary policy transmission. Our findings reveal that though monetary contractions reduce credit growth, yet banks holding higher capital show significantly lower sensitivity to monetary policy changes compared to those with lower capital. This effect is stronger in well-capitalized private sector banks. Our results suggest that bank capital helps mitigate the adverse impact of higher interest rates on credit supply, thereby weakening the overall effectiveness of monetary transmission. However, the buffering effect of bank capital on credit growth diminishes during periods of high nonperforming assets (NPAs). These results highlight the Reserve Bank of India's challenge in balancing financial stability with effective monetary policy implementation. |
| Keywords: | Bank capital, Monetary transmission, Balance sheet channel, Non-performing assets, Public-sector banks |
| JEL: | E4 E5 G2 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:ind:igiwpp:2024-019 |
| By: | Ester Faia; Karen K. Lewis; Haonan Zhou |
| Abstract: | We re-examine monetary policy spillovers to Emerging Market Economies (EME) in the form of capital flow reversals, using sectoral-level securities holdings data for Euro Area investors. In response to a surprise monetary tightening, active investors such as investment funds re-balance their portfolios away from EME, while more passive, long term investors such as insurance funds and banks exhibit no significant reaction on average. For active investors, the reallocation out of EME appears stronger under synchronized monetary tightening between the Fed and the ECB. However, these investors may even inject more capital to EME securities when the monetary tightening surprises contain positive news about the Euro Area economy. Issuers' monetary-fiscal stability may explain the heterogeneous impact of these spillovers. |
| JEL: | E44 F32 F33 G15 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32986 |
| By: | Steve Agnew (University of Canterbury); Patrick Roger; Tristan Roger |
| Abstract: | This study aims to develop a peer financial modelling scale to ascertain any correlations between the role modelling of peers and the financial literacy of adolescents. The theoretical foundation for this aim lies in Social Learning Theory. The study also examines the reliability of the recently developed short and minimal versions of the Parent Financial Socialisation Scale. Using a survey administered through Qualtrics, data were collected from a sample of 382 fifteen to nineteen-year-olds. Confirmatory factor analysis was used to measure model fit of any proposed scale, with Cronbach’s alpha calculated to test for internal consistency reliability. An ordinary least squares regression was then run to assess any correlation between the scale developed and financial literacy, incorporating control variables for gender and socioeconomic status. A Peer Financial Modelling Scale is developed and found to be negatively correlated with financial literacy levels. Adolescents with lower financial literacy are more likely to view their peers as good financial role models. All three versions of the Parent Financial Socialisation Scale were found to be positively correlated with financial literacy knowledge. |
| Keywords: | Adolescent financial literacy, Peer financial modelling, Social learning theory, Financial socialization, Financial education |
| JEL: | I20 D14 Z13 |
| Date: | 2024–10–01 |
| URL: | https://d.repec.org/n?u=RePEc:cbt:econwp:24/14 |
| By: | Carlos Alba; Julio A. Carrillo; Raúl Ibarra |
| Abstract: | This paper analyzes, using a VAR model, the effects of US central bank monetary policy announcements, and information shocks from this authority regarding its economic outlook on Mexican financial and macroeconomic variables. Shocks are identified by combining a high-frequency strategy with sign restrictions, which exploits the co-movement between the policy rate and the stock market in the US around FOMC announcements. A restrictive monetary policy shock in the US is identified by an increase in the interest rate and a drop in stock prices, while a positive information shock is identified when both variables rise simultaneously. The results show that positive information shocks from the US central bank improve financial conditions in Mexico, appreciate the peso/dollar exchange rate, lower the sovereign risk premium and forex volatility, and increase stock prices, real activity and prices in Mexico. In contrast, restrictive US monetary policy shocks tighten financial conditions, and reduce real activity and prices in Mexico. |
| Keywords: | Monetary policy;international policy transmission;high-frequency identification;central bank information;VAR model |
| JEL: | E43 E52 E58 F42 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:bdm:wpaper:2024-14 |
| By: | Luca Benati, Juan-Pablo Nicolini |
| Abstract: | We revisit the estimation of the welfare costs of inflation originating from lack of liquidity satiation for 11 low-inflation and 5 high-inflation countries, and for Weimar Republic’s hyperinflation. Our evidence suggests that, contrary to the implicit assumption in much of the literature, these costs are far from negligible. For the U.S. our point estimates are equal to about one-third of those computed by Lucas (2000), and an order of magnitude larger than those obtained by Ireland (2009). Crucially, the most empirically plausible moneydemand functional form points towards sizeable ‘upward risks’ for these costs, with the 90% confidence interval associated with a 4% nominal interest rate stretching beyond 0.5 per cent of GDP. The welfare costs of inflation in the Euro area are about twice as large as in the U.S., thus suggesting that, ceteris paribus, the inflation target should be materially lower. At the peak of the inflation episodes, welfare costs had ranged between 0.3 and 1.9 per cent of GDP for low-inflation countries; between 4 and nearly 7 per cent for highinflation ones; and between 26 and 36 per cent for Weimar’s hyperinflation. |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:ube:dpvwib:dp2408 |
| By: | Taniya Ghosh (Indira Gandhi Institute of Development Research); Abhishek Gorsi (Indira Gandhi Institute of Development Research) |
| Abstract: | This study examines how relative income factors and social comparisons affect Indian households' inflation expectations. The study uses a one-time primary survey conducted in Nahan, Himachal Pradesh, India, covering 200 households, followed by repeated crosssectional data from the Reserve Bank of India's Consumer Confidence Survey, covering 5000 households, for further generalization. The results suggest that households that are relatively worse off and find it difficult to maintain their relative position tend to report higher inflation expectations. Furthermore, a measure of households aspirations is constructed based on the reference group's consumption and income outlook, which the households attempt to match. The findings suggest that as reference group's consumption and income rise, households report higher inflation expectations. Moreover, when the households experience an increase in personal income, they are more likely to report higher inflation expectations with an increase in the reference group's consumption and income outlook. However, the relative factors do not impact their inflation expectations when they experience a decrease in personal income. The study thus contributes to a better understanding of the behavioral factors that influence inflation expectations, the heterogeneity in household responses, and the upward bias in inflation expectations among Indian households. |
| Keywords: | Consumption Outlook, Income Outlook, Inflation, Inflation Expectations, Reference Group, Social Comparisons |
| JEL: | E31 E71 D12 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:ind:igiwpp:2024-018 |
| By: | Laudenbach, Christine; Malmendier, Ulrike; Niessen-Ruenzi, Alexandra |
| Abstract: | We show that exposure to anti-capitalist ideology can exert a lasting influence on attitudes towards capital markets and stock-market participation. Utilizing novel survey, bank, and broker data, we document that, decades after Germany's reunification, East Germans invest significantly less in stocks and hold more negative views on capital markets. Effects vary by personal experience under communism. Results are strongest for individuals remembering life in the German Democratic Republic positively, e. g., because of local Olympic champions or living in a "showcase city". Results reverse for those with negative experiences like religious oppression, environmental pollution, or lack of Western TV entertainment. |
| Keywords: | Capital markets, Anti-capitalist Ideology, Life-time Experiences, Stockmarket Participation |
| JEL: | D14 D83 D91 G41 P10 P26 P34 P36 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:safewp:303039 |
| By: | Ekaterina Pirozhkova (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Nicola Viegi (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa) |
| Abstract: | This paper studies the bank lending channel of monetary policy transmission in South Africa in a context where the bank-loan level data, typically used for this type of analysis, are unavailable. Supply-side changes in credit provision are measured with data on composition of homeloan supply by banks versus nonbanks. High-frequency surprises in forward rate agreements are used to instrument for exogenous shifts in monetary policy in a proxy-SVAR model. The bank lending channel is found to be operative, as banks reduce the supply of homeloans following monetary tightening with a negative effect on housing market. The effectiveness of the deposits channel is shown: banks widen the deposit spread after monetary tightening, and the volume of deposits shrinks. As retail deposits provide a unique stable source of funding for banks, the deposits channel underlies the operativeness of the bank lending channel in South Africa consistent with theory. |
| Keywords: | monetary policy transmission, bank lending channel, credit channel, nonbank financial institutions, housing finance |
| JEL: | E52 G21 G23 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:pre:wpaper:202443 |
| By: | Dr. Terhi Jokipii; Dr. Jayson Danton |
| Abstract: | We analyse the impact of interest rates on Swiss banks' profitability. Our assessment is based on annual data on individual bank balance sheets and income statements in a standard panel regression setting for a sample of domestically focused commercial banks. We find that net interest rate margins (NIM) and return on assets (ROA) exhibit different sensitivities to market interest rate levels and highlight the non-linear effect of compressed liability margins on NIM. In addition, we show that initial bank characteristics affect the link between falling interest rates and profitability. However, bank characteristics that amplify/alleviate NIM pressure from falling interest rates differ from those that affect ROA pressure. Furthermore, banks have taken measures to safeguard profitability: (i) with respect to risk-taking, all banks increased their exposure to rising interest rates by increasing their asset durations. Moreover, banks that started with lower mortgage ratios increased these ratios considerably, particularly during the second half of the sample period (2015-2019); and (ii) Some banks actively worked to curb deposit growth when other sources of funding became relatively cheaper. Overall, these adjustments have helped alleviate the downward pressure of falling interest rates on bank profitability. |
| Keywords: | Bank profitability, Net interest margin, Low interest rates, Liability margin |
| JEL: | E43 E52 G21 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:snb:snbwpa:2024-10 |
| By: | Hans Degryse (KU Leuven and CEPR); Olivier De Jonghe (National Bank of Belgium, Economics and Research Department, European Central Bank, Tilburg University and Ghent University); Leonardo Gambacorta (Bank for International Settlements and CEPR); Cédric Huylebroek (KU Leuven and FWO) |
| Abstract: | Theory offers conflicting predictions on whether and how lenders’ sectoral specialization would affect firms’ innovation activities. We show that the sign and magnitude of this effect vary with the degree of “asset overhang” across sectors, which is the risk that a new technology has negative spillovers on the value of a bank’s legacy loan portfolio. Using both patent data and micro-level innovation survey data, we find that lenders’ sectoral specialization improves innovation for firms operating in sectors with low asset overhang, but impedes innovation for firms operating in sectors with high asset overhang. These results hold for two distinct measures of asset overhang and using bank mergers as a source of exogenous variation in bank specialization. We further show that these heterogeneous effects arise through financial contracting. Overall, our findings provide novel insights into the dual facets of bank specialization and, more broadly, the link between banking and innovation |
| Keywords: | Bank specialization, Bank lending, Corporate innovation, Asset overhang, Financial frictions |
| JEL: | G20 O30 L20 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbb:reswpp:202410-458 |
| By: | Joosen, Bart; Pulgar Ezquerra, Juana; Tröger, Tobias |
| Abstract: | Banking Union is crucial for European integration, ensuring financial stability in the single market for financial services. The Court of Justice of the European Union (CJEU) plays an essential role in interpreting and enforcing the legal framework of the Banking Union, especially regarding the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM). This in-depth analysis scrutinises the pertinent CJEU case law and highlights its implications for the Banking Union and the EU legal order. This document was provided/prepared by the Economic Governance and EMU Scrutiny Unit at the request of the ECON Committee. |
| Keywords: | Banking Union, European integration, Legal framework, EU Legal Order |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:safewh:303047 |