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on Banking |
| By: | Marco Cipriani; Thomas M. Eisenbach; Anna Kovner |
| Abstract: | We use high-frequency interbank payments data to trace deposit flows in March 2023 and identify twenty-two banks that suffered a run, significantly more than the two that failed but fewer than the number that experienced large negative stock returns. The runs were driven by large (institutional) depositors, rather than many small (retail) depositors. While the runs were related to weak fundamentals, we find evidence for the importance of coordination because run banks were disproportionately publicly traded and many banks with similarly bad fundamentals did not suffer a run. Banks that survived a run did so by borrowing new funds and then raising deposit rates, not by selling liquid securities. |
| Keywords: | bank runs; payments; coordination; public signals |
| JEL: | E41 E58 G01 G21 G28 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedrwp:98842 |
| By: | Gebauer, Stefan; Pool, Sebastiaan; Schumacher, Julian |
| Abstract: | This paper examines the impact of rising interest rates on central bank profitability. Using a stylized income model, we demonstrate that changes in interest rates in combination with expansive balance sheet policies introduce a cyclical component into the central bank’s profit and loss statement. Ourfindings reveal, however, that while the interplay of such policies may dampen short-term profitability if interest rates rise, they do not undermine a central bank’s financial strength, because higher interest rates also raise the value of future seigniorage income. Using data for the euro area, we quantify the consequences for inflation of setting interest rates aimed at mitigating financial losses, showing that such a strategy would lead to substantially higher inflation rates. Overall, our findings confirm that a central bank’s willingness to accept temporary losses reflects a commitment to price stability, rather than a hindrance. JEL Classification: E31, E43, E52, E58, E63 |
| Keywords: | central bank independence, central bank profitability, monetary policy |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242985 |
| By: | Sandra Eickmeier; Luba Petersen |
| Abstract: | Central banks, including the European Central Bank (ECB), are increasingly involved in climate-related initiatives. This study uses a June 2023 survey of German households to gauge public support for the ECB’s climate engagement. Our findings reveal that 69% of households report increased trust in the ECB due to its climate actions, with most noting a mild boost in trust. These households primarily value the ECB’s broader scope and concern. A minority, comprising 17% and 20% respectively of all households, express concerns about potential compromises to price stability or independence. In contrast, a larger group (23% of all households) believes that the ECB’s climate efforts help the institution better achieve its core objectives. Additionally, our analysis of an information intervention reveals that the ECB’s climate actions have minimal effect on overall household inflation expectations. Finally, an internal survey of central bankers reveals that while they accurately gauge the ECB’s climate activities’ effect on households’ trust, they tend to overestimate their impact on inflation expectations. In sum, our results indicate public endorsement of the ECB’s climate-related endeavors. |
| Keywords: | central bank trust, central bank credibility, inflation expectations, cli-mate change, green policies, survey, central bank communication, uncertainty |
| JEL: | E7 E59 C93 D84 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2024-62 |
| By: | Koki Kanazawa (Digital Research Assistant, RONIN International); Kyosuke Kurita (School of Economics, Kwansei Gakuin University) |
| Abstract: | Using unique data on the amount of money held by the Indonesian three largest banks in each district and firm-level data of Indonesian micro enterprises in 2013 and 2014, we examine effects of four types of partnership with a private company, NPO/NGO, bank, and the government on access to finance of micro enterprises. Previous studies consider social capital as unofficial connection with other organizations. However, we newly examine an effect of official contracts as partnership and contribute to the literature by investigating many types of partnerships which have never considered and considering effect of supplier's side by utilizing data on bank's money in our estimation. It is found that firms with partnership with NPO/NGO are more likely to obtain loaned money as well as that with a bank. However, indicators of firms' performance and ability, such as ROA, entrepreneurs' education, and firms' size are statistically insignificant for loan approval. In addition, the amount of banks' money does not have statistically significant effect on loan approval. Therefore, it becomes explicit that Indonesian banks cannot effectively allocate loans to private sector because of corruption between specific private companies and public institutions and a simple policy like increasing money holdings of banks has no effect on distributing corporate loans to enterprises. |
| Keywords: | Partnership, SMEs, Bank loan, Indonesia, Microeconometrics |
| JEL: | G21 L14 O16 Z13 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:kgu:wpaper:279 |
| By: | Lee Braine; Shreepad Shukla; Piyush Agrawal |
| Abstract: | In the UK, the Bank of England and HM Treasury are exploring a potential UK retail CBDC, the digital pound, with one of their motivations being the potential role of the digital pound as an anchor for monetary and financial stability. In this paper, we explore three elements for anchoring money (singleness of money, official currency as the unit of account, and safety and soundness of financial institutions and payment systems) that maintain public trust and confidence in private UK retail digital money and the financial system. We also identify core capabilities (comprising on-demand interoperability across issuers and forms of private money, settlement finality in wholesale central bank money, and access to physical cash) and appropriate measures (comprising customer funds protection, robust regulation, effective supervision, safe innovation in money and payments, and the central bank as the lender of last resort) that together provide the foundations for the three elements for anchoring money. Our preliminary analysis concludes that anchoring private UK retail digital money is supported by these elements, capabilities and measures. Further work could include public-private collaboration to explore anchoring all forms of UK retail digital money. |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2409.18532 |
| By: | Nina Boyarchenko; Domenico Giannone; Anna Kovner |
| Abstract: | We find evidence that bank capital matters for the distribution of future GDP growth but not its central tendency. Growth in the aggregate bank capital ratio compresses the tails of expected GDP growth, a relationship that is particularly robust in reducing the probability of the worst GDP outcomes. These results suggest a role for regulation to mitigate financial crises, with an additional 100 basis points of bank capital reducing the probability of negative GDP growth by 10 percent at the one-year horizon, even controlling for credit growth and financial conditions, and without a significant drag on expected GDP growth. |
| Keywords: | capital ratios; growth-at-risk; quantile regressions; threshold regressions |
| JEL: | E32 G21 C22 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedrwp:98840 |
| By: | Teng Liu |
| Abstract: | The agricultural sector is particularly susceptible to the impact of climate change. In this paper, I investigate how vulnerability to climate change affects U.S. farms' credit access, and demonstrates that such impact is unequally distributed across farms. I first construct a theoretical framework of bank lending to farms faced with climate risks, and the model helps discipline ensuing empirical analyses that use novel panel datasets at county and at bank levels. I find that higher exposure to climate change, measured by temperature anomaly, reduces bank lending to farms. Such impact is persistent, nonlinear, and heterogeneous. Small and medium farms almost always experience loss of loan access. In comparison, large farms see less severe credit contraction, and in some cases may even see improvement in funding. While small banks carry the burden of continuing to lend to small farms, their limited market share cannot compensate for the reduction of lending from medium and large banks. These results suggest that factors such as farm size and bank type can amplify the financial impact of climate change. |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2409.19463 |
| By: | Guerrazzi, Marco |
| Abstract: | In this note, I evaluate the private and the social welfare gains that in the Diamond-Dybvig model of bank runs characterize the switch from a decentralized to a centralized equilibrium that may hold even in an atomistic environment with banking intermediation. Specifically, relying on logarithmic preferences, I show that such a social welfare gain is an increasing function of the discount rate of more patient agents. Moreover, I show that for each level of the discount rate of patient agents, there is an optimal value of the proportion of these agents in the economy that maximizes the social welfare gain. |
| Keywords: | Bank runs; Private and social welfare gains; Banking intermediation; Bernoulli distribution |
| JEL: | D02 E02 E44 G21 |
| Date: | 2024–09–16 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122102 |
| By: | Brigitte Desroches; Sharon Kozicki; Laure Simon |
| Abstract: | Monetary policy governance—how monetary policy objectives are determined, how decisions are made and who makes them—determines the quality and effectiveness of monetary policy decisions. In this paper, we examine some desirable and some adverse outcomes associated with different governance structures. We discuss the roles of legislation, institutional features, and processes and practices in establishing various aspects of governance. We highlight the importance of the domestic context in determining what governance structure works best for a given central bank. Finally, we provide an update on monetary policy governance at the Bank of Canada and how it has evolved over time. |
| Keywords: | Credibility; Monetary policy communications; Monetary policy framework |
| JEL: | E02 E5 E58 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocadp:24-14 |
| By: | Witte, Niklas |
| Abstract: | The results of this paper provide empirical evidence that regulatory capital ratios drive bank Credit Default Swaps (CDS) and that markets react more to changes in capital requirements if implemented via direct adjustments to Pillar 1 risk weights than imposed as a percentage of Risk-Weighted Assets (RWAs) under Pillar 2. In other words, market discipline on bank capital adequacy is sensitive to the composition of the capital requirement stack. Therefore, this paper contributes novel insights to existing research on the market relevance of regulatory capital ratios, on the functioning of the Basel framework, and on market discipline along with its relationship with Pillar 1 and Pillar 2 capital requirements. The findings are relevant in light of the continuous discussions around the capital regulation for Interest Rate Risk in the Banking Book (IRRBB) and other Pillar 2 risks because they suggest that risks are more disciplined by markets if they are reflected in regulatory capital ratios via RWAs. Moreover, the results suggest that further regulatory alignment within the EU can impact the comparability of regulatory capital ratios and affect pricing decisions. In the first empirical step, the research investigates the drivers of CDS and identifies a significant relationship between CDS spreads and regulatory capital ratios. In the second step, the paper researches a quasi-natural experiment based on an event in the EU banking sector. In 2018, the Swedish supervisory authority changed the implementation approach of a risk weight floor on Swedish mortgages by shifting it from Pillar 2 to Pillar 1 while keeping total capital requirements stable. To assess if this merely technical regulatory adjustment triggered an unexpected reaction by markets, a two-step system Generalised Method of Moments (GMM) regression is applied to a sample of CDS spreads of 21 European banks between 2014 and 2020. JEL Classification: F36, G12, G21, G28 |
| Keywords: | bank default risk, banking regulation, capital requirements, European integration, funding costs, IRRBB, market discipline |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242988 |
| By: | Laurence Scialom; Gaëtan Le Quang; Thomas Lagoarde Segot |
| Abstract: | This paper explores the implications of ecosystemic macroprudential regulations on sustainability in an ecological PK-SFC framework. We first discuss the link between banks and global warming; and present the case for connecting prudential regulation with planetary boundaries. We then report a set of simulations suggesting that in the short run, such ecosystemic prudential regulations could effectively green banks’ balance sheets, credit flows, and curtail brown investment, at the cost, however, of significant short-run losses. In the longer run, the induced green transition appears to set the economy on a more sustainable pathway, to decrease inflationary pressures, and to maintain real GDP at the baseline level, with distributional effects favourable to wage-earners. These results highlight the relevance of ecosystemic prudential regulation to tackle climate change and call for adopting a holistic approach to sustainability policies. |
| Keywords: | ecological finance, SFC modelling |
| JEL: | G00 G28 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:drm:wpaper:2024-28 |
| By: | Aldasoro, Iñaki; Ferrari Minesso, Massimo; Gambacorta, Leonardo; Habib, Maurizio Michael; Cornelli, Giulio |
| Abstract: | Using a new series of crypto shocks, we document that money market funds’ (MMF) assets under management, and traditional financial market variables more broadly, do not react to crypto shocks, whereas stablecoin market capitalization does. U.S. monetary policy shocks, in contrast, drive developments in both crypto and traditional markets. Crucially, the reaction of MMF assets and stablecoin market capitalization to monetary policy shocks is different: while prime-MMF assets rise after a monetary policy tightening, stablecoin market capitalization declines. In assessing the state of the stablecoin market, the risk-taking environment as dictated by monetary policy is much more consequential than flight-to-quality dynamics observed within stablecoins and MMFs. JEL Classification: E50, F30 |
| Keywords: | Bitcoin, crypto, monetary policy shocks, money market funds, stablecoins |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242987 |
| By: | Pascal K\"undig; Fabio Sigrist |
| Abstract: | We introduce a novel machine learning model for credit risk by combining tree-boosting with a latent spatio-temporal Gaussian process model accounting for frailty correlation. This allows for modeling non-linearities and interactions among predictor variables in a flexible data-driven manner and for accounting for spatio-temporal variation that is not explained by observable predictor variables. We also show how estimation and prediction can be done in a computationally efficient manner. In an application to a large U.S. mortgage credit risk data set, we find that both predictive default probabilities for individual loans and predictive loan portfolio loss distributions obtained with our novel approach are more accurate compared to conventional independent linear hazard models and also linear spatio-temporal models. Using interpretability tools for machine learning models, we find that the likely reasons for this outperformance are strong interaction and non-linear effects in the predictor variables and the presence of large spatio-temporal frailty effects. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.02846 |
| By: | Fichtner, Jan (University of Amsterdam); Petry, Johannes |
| Abstract: | Global finance can be seen as a complex international network of portfolio investments, loans and financial transactions shaped by various private but also by public actors. The vast profit-seeking activities of private financial actors influence capital flows, market stability, and the allocation of financial resources have an impact on corporations, markets, and governments worldwide. In other words, global finance is not a ‘neutral’ tool for price-discovery or a ‘pass-through’ segment that merely provides capital to its most efficient use in the real economy – global finance is much more than that, it is about (re)shaping politico-economic power relations in the contemporary international political economy. Before the global financial crisis of 2007-2008, private commercial and investment banks arguably constituted the core of global finance and exerted an outsized influence. However, the crisis initiated a shift in the power distribution and actors’ constellations within global finance. This new era was arguably marked by a relative decline of big banking groups – and the concomitant rise of large asset management firms (e.g., BlackRock) and other emerging influential actors such as index providers (e.g., MSCI). In parallel, the traditional center of gravity of global finance, which revolved around the axis between New York and London, was complemented and also partly challenged by the ascent of new actors such as sovereign wealth funds and financial markets from the Global South, above all China. These new actors often follow a somewhat different logic than the frequently short-term oriented and primarily profit-driven financial market actors from the Anglo-American core, since they are often permeated by government interests and consequently aimed at incorporating long-term strategic goals. |
| Date: | 2024–09–24 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:asx7t |
| By: | Rik Ghosh (Chainrisk); Samrat Gupta (Chainrisk); Arka Datta (Chainrisk); Abhimanyu Nag (Chainrisk); Sudipan Sinha (Chainrisk) |
| Abstract: | Compound Finance is a decentralized lending protocol that enables the secure and efficient borrowing and lending of cryptocurrencies, utilizing smart contracts and dynamic interest rates based on supply and demand to facilitate transactions. The protocol enables users to supply different crypto assets and accrue interest, while borrowers can avail themselves of loans secured by collateralized assets. Our collaboration with Compound Finance focuses on harnessing the power of the Chainrisk simulation engine to optimize risk parameters of the Compound V3 (Comet) protocol. This report delineates a comprehensive methodology aimed at calculating key risk metrics of the protocol. This optimization framework is pivotal for mitigating systemic risks and enhancing the overall stability of the protocol. By leveraging Chainrisk's Cloud Platform, we conduct millions of simulations to evaluate the protocol's Value at Risk (VaR) and Liquidations at Risk (LaR), ultimately providing recommendations for parameter adjustments. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.04085 |
| By: | Sebastián Horn (Banco Mundial); David Mihaly (Banco Mundial); Philipp Nickol (UDE-RGS); César Sosa-Padilla (University of Notre Dame) |
| Abstract: | How reliable are public debt statistics? This paper quantifies the magnitude, characteristics, and timing of hidden debt by tracking ex post data revisions across a comprehensive new database of more than 50 vintages of World Bank debt statistics. In a sample of debt data covering 146 countries and 53 years, we establish three new stylized facts: (i) debt statistics are systematically under-reported; (ii) hidden debt accumulates in boom years and tends to be revealed in bad times, often during IMF programs and sovereign defaults; and (iii) in debt restructurings, higher hidden debt is associated with larger creditor losses. We use our novel data to numerically discipline a quantitative sovereign debt model with hidden debt accumulation and an endogenous monitoring decision that triggers revelations. Our model simulations show that hidden debt has adverse effects on default risk, debt-carrying capacity and asset prices. While overall welfare costs of hidden debt are large, only countries in comparatively strong financial positions benefit from greater debt transparency. |
| Keywords: | hidden debt, sovereign debt, sovereign default |
| JEL: | F34 H63 G01 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:aoz:wpaper:338 |
| By: | Solikin M. Juhro; Denny Lie |
| Abstract: | Should macroprudential policy be countercyclical or procyclical? Using an estimated medium-scale DSGE model with a wide array of shocks, we show that the optimal macroprudential (capital-requirement) response could be procyclical, in contrast to the standard recommendation of a countercyclical response. This finding is due to the existence of many shocks in the economy that imply a trade-off between achieving macroeconomic stability and financial stability. Our main, general finding on the possible desirability of a procyclical macroprudential policy response applies to any economy, even though the model for the analysis is fitted to the Indonesian economy. The only requirements are that there exists a shock that induces a trade-off between the two stability measures and that the objective of the policymakers is to maximize the welfare of economic agents. Under the scenario, the welfare loss from adopting a conventional, countercyclical macroprudential response could be sizeable. |
| Keywords: | monetary policy, macroprudential policy, policy mix, financial system procyclicality, capital requirement, countercyclical or procyclical policy, |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:syd:wpaper:2024-22 |
| By: | Shogo Nakano (Bank of Japan); Yu Sugioka (Bank of Japan); Hiroki Yamamoto (Bank of Japan) |
| Abstract: | The natural rate of interest (r*) is the real interest rate that is neutral to the economy and prices, and is one of the benchmarks for evaluating the stance of monetary policy. r* cannot be observed directly and must be estimated based on some assumptions. In this paper, we survey various methods that have been developed for estimating r*, summarize their characteristics, and apply them to the Japanese economy. We confirm all estimates of r* showed a downward trend in the long run. However, the estimated results of r* vary widely, depending on the method used, and current estimates can alter when new data are added to the estimation. Therefore, it is necessary to consider estimation uncertainties when conducting monetary policy. |
| Keywords: | Natural rate of interest; Equilibrium real interest rate; Equilibrium yield curve; Term-structure |
| JEL: | C32 E43 E52 |
| Date: | 2024–10–11 |
| URL: | https://d.repec.org/n?u=RePEc:boj:bojwps:wp24e12 |
| By: | Ojasvita Bahl; Chetan Ghate; Debdulal Mallick |
| Abstract: | Governments in EMDEs routinely intervene in agriculture markets to stabilize food prices in the wake of adverse shocks. Such interventions involve a large increase in the procurement and redistribution of agriculture output, which we refer to as a redistributive policy shock. What is the impact of a redistributive policy shock on inflation and the distribution of consumption amongst rich and poor households? We build a two-sector-two-agent NK-DSGE model (2S-TANK) to address these questions. Using Indian data, we estimate the model using a Bayesian approach. We characterize optimal monetary policy. We show that the welfare costs of redistributive policy shocks are substantially higher when non-optimized rules are used to set monetary policy in response to such shocks. |
| Keywords: | TANK models, inflation targeting, emerging market and developing economies, procurement and redistribution, NK-DSGE, welfare costs |
| JEL: | E31 E32 E44 E52 E63 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2024-59 |
| By: | Thorarinn Petursson |
| Abstract: | The yield spread between a conventional nominal bond and a corresponding inflation-indexed bond – the so-called breakeven inflation rate – is a common measure of investors’ inflation expectations. But the spread also includes two risk premia that can distort the breakeven rate as a measure of inflation expectations. I use a signal-extraction approach is used to jointly estimate underlying inflation expectations and the inflation and liquidity risk premia from Icelandic data on 2-year breakeven inflation rates. The estimated 2-year inflation expectations are much smoother than the breakeven rate and remain above the official 2.5% inflation target for most of the sample period. The two risk premia are found to be large and time-varying, highlighting the need for caution when interpreting the breakeven rate as a direct measure of inflation expectations. Finally, I find that the three subcomponents of the breakeven rate react differently to an unanticipated monetary tightening. The tightening leads to a gradual and persistent decline in inflation expectations and the inflation risk premium partly offset by a temporary increase in the liquidity premium, consistent with the “risk-taking” channel of monetary policy. |
| JEL: | C32 E31 E43 E44 G12 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:ice:wpaper:wp97 |
| By: | Pablo Aguilar Perez |
| Abstract: | This paper examines the global spillovers of US monetary policy through the remittance channel. We use Jordà (2005) local projections to assess the effects of a US monetary policy tightening on 8 major remittance-sending countries and 41 recipient countries over the period from January 1997 to December 2017. Our findings reveal that such monetary tightening significantly impacts not only the US economy but also key remittance-sending nations, resulting in a global contractionary effect. The impact on recipient countries varies based on their reliance on remittances, underscoring the dual role of these personal transfers as both an amplifier and a mitigator of the global business cycle. Specifically, countries with high dependency on remittances experience heightened pro-cyclicality, leading to declines in both output and inflation, while those with moderate or low reliance exhibit counter-cyclical behavior. |
| Keywords: | Global spillovers, Remittances, US monetary policy |
| JEL: | F24 E52 F41 F44 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:drm:wpaper:2024-27 |
| By: | Chris Murphy |
| Abstract: | The health policies the government introduced in March 2020 to contain the COVID-19 pandemic led to recession in the restricted industries. This recession was treated with a very large expansion of fiscal policy and the monetary policy interest rate was reduced to its assessed effective lower bound (ELB). This paper evaluates this macro policy response from the three related perspectives of pandemic macro policy principles, scenario analysis and optimal control of unemployment and inflation. Using scenario analysis, we find that the macro policy response was successful initially, reducing the peak rate of unemployment in mid-2020 by 2.0% points. However, the stimulus lingered for too long, in the end providing $2 of compensation for every $1 of private income lost to COVID. Under the macro policy principles for a pandemic, a shorter stimulus scenario is developed in which fiscal stimulus provides $1 for $1 compensation for income lost to COVID and the policy interest rate begins rising a year earlier, in May 2021. This reduces the peak inflation rate during 2022 by a simulated 2.1% points. Using optimal control, we find that the macro policy stimulus continued for too long irrespective of whether we place a high or low weight on controlling unemployment relative to inflation. In future pandemics, fiscal policy should compensate, but not over-compensate, economic agents for income losses due to restrictions and should not stimulate aggregate demand. The monetary authorities should focus on inflation in the industries not subject to restrictions. |
| Keywords: | monetary policy, fiscal policy, COVID, econometric modelling |
| JEL: | E37 E52 E62 E63 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2024-58 |
| By: | Joseph H. Haslag (Department of Economics, University of Missouri-Columbia); Dong Ho Kang (Center for Macroeconomic Research, University of Cologne, Germany) |
| Abstract: | Over the past decade, researchers have identified monetary policy surprises using highfrequency movements in futures contract prices. Based on this identification strategy, the evidence suggests that contractionary monetary policy surprises are significantly related to decreases in output and the price level. In other words, monetary policy is relevant. With more than a decade of data with nominal rates at or near the zero lower bound and interest on reserves, the open question is whether this relevance depends on the opportunity cost of holding money. We test this hypothesis, reporting impulse responses that are relevant when opportunity costs are greater than zero, but irrelevant when opportunity costs are close to zero. Hence, we conclude that monetary policy is conditionally relevant. |
| Keywords: | high-frequency, monetary policy surprises, interest on reserves, conditional relevanc |
| JEL: | E32 E44 E52 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:umc:wpaper:2410 |
| By: | Roth, Felix |
| Abstract: | This paper starts with brief introductory remarks, providing the underpinning of the academic argument and a summary statement of its main findings. It then elaborates on the evolution of existing cryptocurrencies' market capitalization from 2009 until 2022. Third, the paper investigates the economic nature of cryptocurrencies and discusses whether they are money. Fourth, it will discuss the direct and indirect impact of cryptocurrencies on financial markets and global trade. Fifth, the paper offers two main conclusions. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:uhhhdp:17 |
| By: | Yu-Ting Chiang; Ezra Karger |
| Abstract: | We document a liquidity channel through which unexpected inflation generates substantial welfare losses. Household balance sheets are nominal maturity mismatched: nominal liabilities have a longer duration than nominal assets. Due to this mismatch, losses from unexpected inflation are concentrated over short time horizons, while gains are spread out over the longer run. This has negative effects on liquidity-constrained households, who cannot easily borrow against their future gains. We quantify the importance of the liquidity channel and show that, for households in the lower half of the wealth distribution, the recent 2021–2022 unexpected inflation shock caused welfare losses valued at 0.5% of lifetime wealth: a monetary loss equal in size to 15% of current- year consumption. More than 75% of that loss is due to the liquidity channel, with the remainder coming from the more commonly studied wealth channel. |
| Keywords: | inflation; household illiquidity; household balance sheet; nominal rigidity |
| JEL: | E2 E3 G5 |
| Date: | 2024–09–30 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedlwp:98882 |
| By: | Enrique Martínez García; Yixiang Zhang |
| Abstract: | We find empirical evidence of a possible structural break in the relationship between the foreign holdings of U.S. Treasury securities and the U.S. long-term interest rate occurring at the time when U.S. monetary policy became constrained at the zero-lower bound (ZLB). The estimated marginal effect of the foreign holdings ratio on the U.S. long-term interest rate, particularly its long-run effect, appears to have become stronger during the ZLB regime than it was before. We argue that the leading explanation of this apparent break is the nonlinearity introduced by the ZLB. Motivated by theory, we propose a flexible nonlinear specification to deal with the ZLB—a threshold single-equation error-correction model splitting the sample in two regimes, pre-ZLB and ZLB, which replaces the observed Fed Funds rate with a shadow Fed Funds rate derived from a Tobit-IV model to incorporate a broader measure of the stance of monetary policy. With this setup, we find no significant structural break in the relationship between foreign holdings and long-term rates at the ZLB. Therefore, we argue that the ZLB is a leading cause of the apparent shift in the empirical relationship. We also show that the estimated effects are not just statistically significant, but also economically significant. Through counterfactual analysis, we show that changes in China’s holdings of U.S. Treasury securities played an important role in explaining the 2004-2006 interest rate conundrum period and kept the long-term interest rate from going even lower in the recent ZLB period. |
| Keywords: | long-term interest rates; foreign holdings; expectations hypothesis; structural breaks; zero lower bound |
| JEL: | C24 E43 E58 F21 |
| Date: | 2024–09–25 |
| URL: | https://d.repec.org/n?u=RePEc:fip:feddgw:98916 |
| By: | Bingyao Liu; Iris Li; Jianhua Yao; Yuan Chen; Guanming Huang; Jiajing Wang |
| Abstract: | This paper takes the graph neural network as the technical framework, integrates the intrinsic connections between enterprise financial indicators, and proposes a model for enterprise credit risk assessment. The main research work includes: Firstly, based on the experience of predecessors, we selected 29 enterprise financial data indicators, abstracted each indicator as a vertex, deeply analyzed the relationships between the indicators, constructed a similarity matrix of indicators, and used the maximum spanning tree algorithm to achieve the graph structure mapping of enterprises; secondly, in the representation learning phase of the mapped graph, a graph neural network model was built to obtain its embedded representation. The feature vector of each node was expanded to 32 dimensions, and three GraphSAGE operations were performed on the graph, with the results pooled using the Pool operation, and the final output of three feature vectors was averaged to obtain the graph's embedded representation; finally, a classifier was constructed using a two-layer fully connected network to complete the prediction task. Experimental results on real enterprise data show that the model proposed in this paper can well complete the multi-level credit level estimation of enterprises. Furthermore, the tree-structured graph mapping deeply portrays the intrinsic connections of various indicator data of the company, and according to the ROC and other evaluation criteria, the model's classification effect is significant and has good "robustness". |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2409.17909 |
| By: | Karen L. Pulido-Mahecha; Sergio Restrepo-Ángel; Franky Juliano Galeano-Ramírez |
| Abstract: | This paper evaluates seven output gap models for real-time estimates, based on three criteria: stability of estimations on new observations, data revisions and/or methodological changes; inflation forecasting accuracy; and potential output response to structural economic shocks. Results confirm no single model outperforms across all criteria. Structural VARs exhibit superior inflation forecasts but show high instability, while semi-structural models produce more theoretically consistent potential output responses. To overcome this trade-off, we propose a novel clustering approach to pool models based on their real-time performance, yielding improved estimates. Our findings highlight the value of this method for enhancing real-time output gap measurement and informing monetary policy decisions. **** RESUMEN: Este artículo evalúa siete modelos de brecha de producto para estimaciones en tiempo-real, con base en tres criterios: estabilidad de las estimaciones ante nuevas observaciones, revisiones de datos y/o cambios metodológicos; precisión en el pronóstico de inflación y la respuesta del producto potencial ante choques económicos estructurales. Los resultados confirman que ningún modelo lidera en todos los criterios. Los VAR estructurales exhiben los mejores pronósticos de inflación, pero muestran una alta inestabilidad, mientras que los modelos semiestructurales producen respuestas de producto potencial teóricamente más consistentes. Para superar este trade-off, proponemos un nuevo enfoque de agrupación para construir conjuntos de modelos en función de su rendimiento en tiempo-real con el fin de obtener mejores estimaciones. Nuestros hallazgos resaltan el valor de este método para mejorar la medición de la brecha del producto en tiempo real e informar mejor las decisiones de política monetaria. |
| Keywords: | output gaps, real-time estimation, business cycles, brecha del producto, estimación en tiempo real, ciclos reales |
| JEL: | J61 J64 R12 R14 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:bdr:borrec:1284 |
| By: | Andrea Ajello; Giovanni Favara; Greg Marchal; Bálint Szőke |
| Abstract: | Financial conditions have swung considerably over the past two and half years. They moved from very accommodative levels in late 2021 to providing a significant drag on economic activity in 2022 and 2023. Since early this year, they eased moderately amid monetary policy communications signaling that the federal funds rate had likely reached its peak for this monetary policy tightening cycle. |
| Date: | 2024–09–20 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:2024-09-20-1 |
| By: | Majlesi, Kaveh; Molin, Elin; Roth, Paula |
| Abstract: | We examine the effect of fatal and nonfatal health shocks on household debt defaults. Fatal shocks significantly cause defaults, especially among surviving spouses lacking sufficient resources, namely housing wealth. Our findings suggest that this behavior is not due to inattention. These shocks also have intergenerational consequences, as children of resource-poor surviving spouses become more likely to face debt collection. These findings in a country with a relatively generous welfare system manifest the graveness of background risks among poorer households and suggest the potential for improving social insurance programs. Nonfatal health shocks lead to an immediate but temporary increase in default likelihood. |
| Keywords: | financial distress, health shocks, household debt, household saving, JEL classification: I12, G51, G22 |
| Date: | 2024–10–08 |
| URL: | https://d.repec.org/n?u=RePEc:ajt:wcinch:82497 |
| By: | Jascha Alexander; Christian Laudag\'e; J\"orn Sass |
| Abstract: | We address the problem that classical risk measures may not detect the tail risk adequately. This can occur for instance due to the averaging process when computing Expected Shortfall. The current literature proposes a solution, the so-called adjusted Expected Shortfall. This risk measure is the supremum of Expected Shortfalls for all possible levels, adjusted with a function $g$, the so-called target risk profile. We generalize this idea by using other risk measures instead of Expected Shortfall. Therefore, we introduce the concept of general adjusted risk measures. For these the realization of the adjusted risk measure quantifies the minimal amount of capital that has to be raised and injected in a financial position $X$ to ensure that the risk measure is always smaller or equal to the adjustment function $g(p)$ for all levels $p\in[0, 1]$. We discuss a variety of assumptions such that desirable properties for risk measures are satisfied in this setup. From a theoretical point of view, our main contribution is the analysis of equivalent assumptions such that a general adjusted risk measure is positive homogeneous and subadditive. Furthermore, we show that these conditions hold for a bunch of new risk measures, beyond the adjusted Expected Shortfall. For these risk measures, we derive their dual representations. Finally, we test the performance of these new risk measures in a case study based on the S$\&$P $500$. |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2409.17676 |
| By: | Tibi Didier Zoungrana (UTS - Université Thomas Sankara); Aguima Aimé Bernard Lompo (CERDI - Centre d'Études et de Recherches sur le Développement International - IRD - Institut de Recherche pour le Développement - CNRS - Centre National de la Recherche Scientifique - UCA - Université Clermont Auvergne); Daouda Lawa Tan Toé (UTS - Université Thomas Sankara) |
| Abstract: | Climate finance is an increasingly sought-after instrument for reducing greenhouse gas emissions by financing adaptation and mitigation measures. There is a global commitment to achieve the Sustainable Development Goals (SDGs), particularly with regard to tackling climate change. The mobilization and use of climate finance could influence environmental quality. This paper focuses on analyzing the impact of climate finance on environmental quality in 111 countries worldwide over the period 2000-2019. This study uses the generalized method of moments (GMM) in panel data. The main results indicate a positive effect of climate finance on environmental quality, reflecting the theory of financial ecology. More specifically, climate finance targeting climate change mitigation measures has a significant effect on environmental quality. Member countries of the United Nations Framework Convention on Climate Change (UNFCCC) and private sector actors should implement strategies to monetize climate finance and invest heavily in mitigation and adaptation measures to improve environmental quality. |
| Keywords: | Climate finance, CO2 emissions, ecological footprint, GMM, World |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04691240 |
| By: | Elton Beqiraj; Stefano Di Bucchianico; Mario Di Serio; Michele Raitano |
| Abstract: | This study examines the impact of monetary policy on wage inequality in Italy from 1999m1 to 2018m12, using a newly assembled dataset based on high-frequency administrative data on private-sector employees from the Italian Social Security Institute (INPS). By applying the Smooth Local Projection (SLP) method, we derive the impulse responses to exogenous monetary policy shocks of average wages and of the Gini index of wage inequality and other indicators of the wage distribution. Our findings show that expansionary monetary policy significantly reduces wage inequality while stimulating economic activity. Furthermore, distinguishing workers’ subgroups according to sector of activity, occupation and firm’s size, we find that expansionary monetary policy decreases wage inequality both 'between' and 'within' subgroups |
| Keywords: | Monetary policy shocks, Wage inequality, Italian data, Earnings heterogeneity, Labour market |
| JEL: | D63 E50 E52 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:usi:wpaper:912 |