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on Banking |
| By: | Juan J. Ospina-Tejeiro; José Vicente Romero |
| Abstract: | Transparency is often emphasized as a key element for central bank independence and the effectiveness of monetary policy. Between 2018 and 2019, the Central Bank of Colombia (Banco de la República) undertook a significant overhaul of its monetary decision-making process, which led to significant changes in how the bank works to design its monetary policy and communicate its outlook on the economy and its interest rate decisions to the public. This paper assesses how these changes may have impacted monetary transparency over time. To this end, we compute the Dincer-Eichengreen-Geraats (DEG) Transparency Index (Dinçer et al., 2019) and the Central Bank Transparency-Inflation Targeting (CBT-IT) Index (Al-Mashat et al., 2018) and find that the implemented changes led to an increase in monetary policy transparency, which, to a large degree, closed the gap with respect to the leading central banks with IT regimes and highest transparency ratings. RESUMEN: La transparencia es un elemento clave para la independencia de la banca central y la efectividad de la política monetaria. Entre 2018 y 2019, el Banco de la República emprendió una revisión significativa de su proceso de toma de decisiones monetarias, lo que condujo a cambios importantes en cómo se trabaja para diseñar la política monetaria y la forma en que se comunica y explica las perspectivas de la economía y las decisiones sobre las tasas de interés al público. Este documento evalúa cómo estos cambios han impactado la transparencia monetaria a lo largo del tiempo. Para ello, calculamos el Índice de Transparencia de Dincer-Eichengreen-Geraats (DEG) ( Dinçer et al., 2019) y el Índice de Transparencia para Bancos Centrales con Inflación Objetivo (CBT-IT) (Al-Mashat et al., 2018) y encontramos que los cambios implementados llevaron a un aumento en la transparencia de la política monetaria, que, en gran medida, cerró la brecha con respecto a los bancos centrales líderes con regímenes de inflación objetivo y las calificaciones más altas de transparencia. |
| Keywords: | Monetary policy, Inflation targeting, Central bank transparency, Política monetaria, inflación objetivo, transparencia de la banca central |
| JEL: | E0 E4 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:bdr:borrec:1285 |
| By: | Inaki Aldasoro; Giulio Cornelli; Massimo Ferrari Minesso; Leonardo Gambacorta; Maurizio Michael Habib |
| 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. |
| Keywords: | stablecoins, crypto, Bitcoin, monetary policy shocks, money market funds |
| JEL: | E50 F30 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1219 |
| By: | Rodolfo G. Campos (BANCO DE ESPAÑA); Jesús Fernández-Villaverde (UNIVERSITY OF PENNSYLVANIA, NBER, CEPR); Galo Nuño (BIS, BANCO DE ESPAÑA, CEPR, CEMFI); Peter Paz (BANCO DE ESPAÑA) |
| Abstract: | We study a new type of monetary-fiscal interaction in a heterogeneous-agent New Keynesian model with a fiscal block. Due to household heterogeneity, the stock of public debt affects the natural interest rate, forcing the central bank to adapt its monetary policy rule to the fiscal stance to guarantee that inflation remains at its target. There is, however, a minimum level of debt below which steady-state inflation deviates from its target due to the zero lower bound on nominal rates. We analyze the response to a debt-financed fiscal expansion and quantify the impact of different timings in the adaptation of the monetary policy rule, as well as the performance of alternative monetary policy rules that do not require an assessment of natural rates. We validate our findings with a series of empirical estimates. |
| Keywords: | HANK models, natural rates, fiscal shocks |
| JEL: | E32 E58 E63 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2439 |
| By: | Drydakis, Nick |
| Abstract: | This study utilised longitudinal data from Black History Month events in London from 2021 to 2023. Novel findings revealed that increased inflation and Bank Rates, related to the cost-of-living crisis, were associated with greater discrimination and deteriorations in both general and mental health for Black individuals. Moreover, it was found that during the cost-of-living crisis period, i.e., 2022-2023, discrimination was more adversely related to general and mental health deterioration compared to the period before the cost-of-living crisis, i.e., 2021. In addition, women, non-native individuals, non-heterosexual individuals, the unemployed, economically inactive individuals, those with lower educational attainment, and older individuals experienced higher levels of discrimination and reduced general and mental health compared to reference groups. The findings of the study contribute to the literature by demonstrating the intertwined associations of macroeconomic deteriorations and discrimination with the health of the Black community, and its subgroup differences, providing a basis for targeted policies. |
| Keywords: | Black Community, Health, Mental Health, Discrimination, Cost-of-Living Crisis, Inflation Rate, Bank Rate |
| JEL: | E31 E32 E43 I14 J71 J15 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:glodps:1500 |
| By: | Robert M. Adams; Vitaly M. Bord; Haja Sannoh |
| Abstract: | Delinquency rates on auto loans rose substantially to above pre-pandemic levels by the end of 2023, after falling to historical lows during the COVID-19 pandemic. Because auto loans are an important sector in consumer credit, accounting for about 25 percent of nonmortgage consumer credit, a deeper analysis of the increase in delinquencies can give insights into the financial health of borrowers in consumer credit markets and overall household financial well-being. |
| Date: | 2024–09–26 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:2024-09-26 |
| By: | Jonathan Chiu; Cyril Monnet |
| Abstract: | This paper explores the implications of introducing digital public and private monies (e.g. tokenized central bank digital currency [CBDC] or tokenized deposits) for stablecoins and illicit crypto transactions. When they pay a high interest rate and guarantee a high degree of anonymity, these tokenized currencies crowd out stablecoins as payment methods in the crypto space. Conversely, with low anonymity and low interest rates, tokenized currencies become collateral, promoting the development of stablecoins. CBDCs dominate tokenized deposits because a central bank can better economize on scarce collateral assets and internalize the social costs of crypto activities. Prohibiting tokenized deposits may be necessary to implement the optimal CBDC design. |
| Keywords: | Digital currencies and fintech; Financial stability; Monetary policy |
| JEL: | E50 E58 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:24-35 |
| By: | Daniel Dejuan-Bitria (BANCO DE ESPAÑA); Wayne R. Landsman (BANCO DE ESPAÑA); Sergio Mayordomo (KENAN-FLAGLER BUSINESS SCHOOL, UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL); Irene Roibás (BANCO DE ESPAÑA) |
| Abstract: | This paper analyses the effect of the expected credit loss model under IFRS 9 on relationship lending in Spain. We document that relationship exclusivity between a bank and a firm has a positive effect on the growth of credit. However, this positive effect is significantly reduced after implementation of IFRS 9. We estimate that in 2018 the negative impact of IFRS 9 on relationship lending led to a reduction in credit to Spanish non-financial firms of 2.8% of their total outstanding credit, suggesting a sizeable effect on the availability of credit. For borrowers with Stage 1 loans, we show that the new regulation has a negative impact on relationship lending at firms with a higher probability of default and whose credit quality has deteriorated. Our findings are consistent with a change in the incentives that underpin relationship lending. |
| Keywords: | relationship lending, IFRS 9, credit, probability of default |
| JEL: | D82 G21 G28 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2437 |
| By: | Siyu Bie (City University of Hong Kong); Francis X. Diebold (University of Pennsylvania); Jingyu He (City University of Hong Kong); Junye Li (Fudan University) |
| Abstract: | We explore tree-based macroeconomic regime-switching in the context of the dynamic Nelson-Siegel (DNS) yield-curve model. In particular, we customize the treegrowing algorithm to partition macroeconomic variables based on the DNS model’s marginal likelihood, thereby identifying regime-shifting patterns in the yield curve. Compared to traditional Markov-switching models, our model offers clear economic interpretation via macroeconomic linkages and ensures computational simplicity. In an empirical application to U.S. Treasury bond yields, we find (1) important yield curve regime switching, and (2) evidence that macroeconomic variables have predictive power for the yield curve when the short rate is high, but not in other regimes, thereby refining the notion of yield curve “macro-spanning”. |
| Keywords: | Decision Tree; Macro-Finance; Term Structure; Regime Switching; Dynamic Nelson-Siegel Model; Bayesian Estimation |
| JEL: | C11 E43 G12 |
| Date: | 2024–10–08 |
| URL: | https://d.repec.org/n?u=RePEc:pen:papers:24-028 |
| By: | Itamar Caspi; Nadav Eshel; Nimrod Segev |
| Abstract: | This study investigates the impact of increased debt servicing costs on household consumption resulting from monetary policy tightening. It utilizes observational panel microdata on all mortgage holders in Israel and leverages quasi-exogenous variation in exposure to adjustable-rate mortgages (ARMs) due to a regulatory shift. Our analysis indicates that when monetary policy became more restrictive, consumers with a higher ratio of ARMs experienced a more marked reduction in their consumption patterns. This effect is predominantly observed in mid- to lower-income households and those with a higher ratio of mortgage payments to total spending. These findings highlight the substantial role of the mortgage cash-flow channel in monetary policy transmission, emphasizing its implications for economic stability and inequality. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.02445 |
| By: | Georgarakos, Dimitris (European Central Bank); Gorodnichenko, Yuriy (University of California, Berkeley); Coibion, Olivier (University of Texas at Austin); Kenny, Geoff (European Central Bank) |
| Abstract: | We implement a survey-based randomized information treatment that generates independent variation in the inflation expectations and the uncertainty about future inflation of European households. This variation allows us to assess how both first and second moments of inflation expectations separately affect subsequent household decisions. We document several key findings. First, higher inflation uncertainty leads households to reduce their subsequent durable goods purchases for several months, while a higher expected level of inflation increases them. Second, an increase in uncertainty about inflation induces households to tilt their portfolios towards safe and away from riskier asset holdings. Third, higher inflation uncertainty encourages household job search, leading to higher subsequent employment among the unemployed and less under-employment among the employed. Finally, we document that the level of inflation expectations has a different effect from uncertainty in inflation expectations and thus it is crucial to take into account both to measure their separate effects on decisions. |
| Keywords: | inflation uncertainty, consumption, household finance, labor supply, consumer expectations survey |
| JEL: | E31 C83 D84 G51 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17317 |
| By: | Antonio Diez de los Rios |
| Abstract: | I propose a novel dynamic portfolio-balance model of the yield curve for Government of Canada bonds to evaluate the portfolio-balance effects of the Bank of Canada’s Government of Canada Bond Purchase Program. My results suggest that this program, launched on March 27, 2020, in response to the COVID-19 pandemic, lowered the weighted average maturity of the Government of Canada’s debt by approximately 1.4 years. This in turn reduced Canadian 10-year and 5-year zero-coupon yields by 84 and 52 basis points, respectively |
| Keywords: | Asset pricing; Central bank research; Coronavirus disease (COVID-19); Interest rates; Monetary policy |
| JEL: | E43 E52 G12 H63 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:24-34 |
| By: | Ahmed Hefnaoui (Faculté des Sciences Juridiques Economiques et Sociales Mohammedia, Université Hassan II de Casablanca); Ibnouzahir Youssef (Faculté des Sciences Juridiques Economiques et Sociales Mohammedia, Université Hassan II de Casablanca) |
| Abstract: | This study assesses the effectiveness of Morocco's monetary policy following the adoption of inflation targeting in 2006. The objective is to evaluate whether this strategy has stabilized inflation and supported economic growth. The methodology is based on a VAR model using quarterly data from 2007 to 2023, with Granger causality tests and impulse response functions to capture the simultaneous effects between monetary variables. The results indicate that inflation in Morocco is driven by shocks to the exchange rate and money supply, while the effect of the policy rate remains limited. Although monetary interventions have short-term effectiveness, their moderate impact suggests the need for structural reforms to enhance inflation targeting efficiency. |
| Abstract: | Cette étude examine l'efficacité de la politique monétaire au Maroc après l'adoption du ciblage d'inflation en 2006. L'objectif est d'évaluer si cette stratégie a permis de stabiliser l'inflation et de soutenir la croissance économique. La méthodologie adoptée repose sur un modèle VAR avec des données trimestrielles de 2007 à 2023, incluant des tests de causalité de Granger et des fonctions de réponses impulsionnelles pour mesurer l'effet simultané entre les variables monétaires. Les résultats montrent que l'inflation au Maroc est influencée par les chocs sur le taux de change et la masse monétaire, mais que l'impact du taux directeur reste limité. Les interventions monétaires, bien qu'efficaces à court terme, ont un effet modéré, ce qui suggère la nécessité de réformes structurelles pour renforcer l'efficacité du ciblage d'inflation. |
| Keywords: | Inflation, Inflation targeting, Monetary policy, VAR model, Policy rate, Ciblage d'inflation, Politique monétaire, Modèle VAR, Taux directeur |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04737587 |
| By: | Mendelson Haim; Zhu Mingxi |
| Abstract: | Online lending has garnered significant attention in IS literature, particularly platform lending, but direct (balance sheet) lending is increasingly critical. This paper explores optimal information acquisition strategies for direct online lenders, addressing the broader question: Should a decision-maker rely on multiple lean experiments or opt for a single grand experiment? We first examine a model where an online lender issuing unsecured loans maximizes its expected NPV at an exogenous interest rate, finding that a lean experimentation strategy is optimal. However, when the interest rate is endogenous, the choice between lean and grand experimentation depends on the demand elasticity. If elasticity is increasing or constant, the lender prefers a grand experiment, offering the same loan terms in each period. We also analyze consumer segmentation and demonstrate how higher income variability benefits the lender through more effective experimentation. In addition, we investigate hybrid information architectures that combine dynamic experimentation with traditional static models. Our results show that the hybrid architecture enhances lender profitability, offering a flexible approach that integrates sequential learning with static information. The study contributes to understanding how different information architectures affect lending strategies, experimentation, and profitability in online lending. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.05539 |
| By: | Bandoni, Emil (Central Bank of Ireland); Pratap Singh, Anuj (Central Bank of Ireland) |
| Abstract: | We examine loan-level data to compare the characteristics of Help to Buy scheme participants in Ireland with other first-time buyers. The profile of Help to Buy users broadly reflects the recent composition of new housing supply, especially in terms of location. Our estimates show that Help to Buy users are typically one year younger, higher income borrowers who purchase larger, more expensive homes. The average house price differential is likely connected to the nature of Help to Buy properties, which are newly built, larger, and with higher energy ratings. |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:cbi:fsnote:6/fs/24 |
| By: | Duraj, Kamila; Grunow, Daniela; Chaliasos, Michael; Laudenbach, Christine; Siegel, Stephan |
| Abstract: | We revisit the limited stock market participation puzzle leveraging a qualitative research approach that is commonly used in many social sciences, but much less so in finance or economics. We conduct in-depth interviews of stock market participants and non-participants in Germany, a high-income country with a low stock market participation rate. Differently from a survey using preset questions based on theory, we elicit views in an open-ended discussion, which starts with a general question about "money", is not flagged as regarding stock market participation, and allows for probing and follow-up questions. Many of the factors proposed by the literature are mentioned by interviewees. However, non-investors perceive surprisingly high entry and participation costs due to a fundamental misunderstanding of the potential for selecting "good" stocks and avoiding "bad" ones and for market timing through frequent trading. Surprisingly, the investors we interview often share these views. However, they find a way to overcome these costs with the help of family, friends, or financial advisors they trust. While the insights from our qualitative interviews are based on a small number of interviewees, we find consistent evidence in a population-wide survey of investors and non-investors. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:imfswp:304392 |
| By: | Nigar Karimova |
| Abstract: | The research investigates how the application of a machine-learning random forest model improves the accuracy and precision of a Delphi model. The context of the research is Azerbaijani SMEs and the data for the study has been obtained from a financial institution which had gathered it from the enterprises (as there is no public data on local SMEs, it was not practical to verify the data independently). The research used accuracy, precision, recall and F-1 scores for both models to compare them and run the algorithms in Python. The findings showed that accuracy, precision, recall and F- 1 all improve considerably (from 0.69 to 0.83, from 0.65 to 0.81, from 0.56 to 0.77 and from 0.58 to 0.79, respectively). The implications are that by applying AI models in credit risk modeling, financial institutions can improve the accuracy of identifying potential defaulters which would reduce their credit risk. In addition, an unfair rejection of credit access for SMEs would also go down having a significant contribution to an economic growth in the economy. Finally, such ethical issues as transparency of algorithms and biases in historical data should be taken on board while making decisions based on AI algorithms in order to reduce mechanical dependence on algorithms that cannot be justified in practice. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.05330 |
| By: | Hempell, Hannah S.; Silva, Fatima; Scalone, Valerio; Cornacchia, Wanda; Di Virgilio, Domenica; Palligkinis, Spyros; Velez, Anatoli Segura; Borkó, Tamás; Espic, Aurélien; Garcia, Salomón; Heires, Marcel; Herrera, Luis; Kärkkäinen, Samu; Kent, Luke; Kerbl, Stefan; Löhe, Sebastian; Oliveira, Vitor; Steikūné, Paulina |
| Abstract: | In recent years, monetary policy and inflation considerations have been playing an increasingly important role for macroprudential authorities in their policy setting. This paper aims to assess the implications of high inflation and rising interest rates for macroprudential policy stance. The conceptual discussions and model-based analyses included in this paper reflect on the appropriate direction and impact of macroprudential policies at the different stages of financial and business cycles, given cross-country and banking system heterogeneities. In this context, a key objective of the paper is to assess to what extent the interaction between macroprudential and monetary policies differs, given the heterogeneity across euro area countries exposed to a homogenous monetary policy. While both policies are to a large extent complementary, monetary policy may generate relevant spillovers due to its impact on the financial cycle and, potentially, on financial stability. The paper argues that the recent focus of macroprudential policy on resilience, when banking sector conditions ensure no unwarranted procyclical effects of macroprudential tightening, suggests an expansion of the notion of “complementarity” with monetary policy. Specifically, with the build-up of resilience, macroprudential policy acts de facto countercyclically, supporting monetary policy in its pursuit of price stability. In this regard, the paper stresses that the source of the inflationary shock (supply versus demand side) and the monetary environment primarily affect the intensity, speed and extent of buffer build-up or release within each stage of the financial cycle while affecting borrower-based measures in their bindingness. JEL Classification: E52, G21, G28 |
| Keywords: | banks, borrower-based measures, capital buffers, financial stability, macroprudential policy, monetary policy |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbops:2024358 |
| By: | Miroslav Gabrovski; Ioannis Kospentaris; Lucie Lebeau |
| Abstract: | An increasing share of corporate loans, a critical source of firm credit, are sold off banks’ balance sheets and actively traded in a secondary over-the-counter market. We develop a microfounded equilibrium search-theoretic model with labor, credit and financial markets to explore how this secondary loan market affects the real economy, highlighting a trade-off: while the market reduces the steady-state level of unemployment by 0.6pp, it amplifies its response to a 1% productivity drop from 3.6% to 4.3%. Secondary market frictions matter significantly: eliminating them would not only reduce unemployment by 1.2pp, but also dampen its volatility down to 2.7%. |
| Keywords: | search frictions; labor market; credit markets; financial linkages; secondary loan markets; over-the-counter markets |
| JEL: | E24 E44 E51 G11 G12 G21 J64 |
| Date: | 2024–10–22 |
| URL: | https://d.repec.org/n?u=RePEc:fip:feddwp:99019 |
| By: | Borchert, Lea; de Haas, Ralph; Kirschenmann, Karolin; Schultz, Alison |
| Abstract: | We study how terminated correspondent banking relationships affect international trade. Drawing on firm-level export data from emerging Europe, we show that when local banks lose access to correspondent services, their corporate clients experience significant export declines. This trade contraction occurs on both the extensive margin, with fewer firms exporting, and the intensive margin, with existing exporters shipping lower values. Firms only partially offset lost exports with higher domestic sales, resulting in lower total revenues and employment. Other firms cease operations entirely. These firmlevel impacts aggregate to lower industry-level exports in countries more exposed to correspondent bank retrenchment. |
| Keywords: | Correspondent banking, trade finance, de-risking, global banks, international trade, anti-money laundering |
| JEL: | F14 F15 F36 G21 G28 L14 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofitp:304397 |
| By: | Simionescu, Mihaela; Schneider, Nicolas; Gavurova, Beata |
| Abstract: | Transmission channels from monetary shocks might be identified by studying the features of the production network. The main aim of this paper is to provide insights about the role of production network into the propagation of monetary policy shocks in G7 economies. Time-varying Bayesian vector-autoregressions were built to compute impulse response functions of output to monetary policy shocks in these countries. Panel Auto-Regressive Distributed Lag Bound Approach based on Mean-Group estimator was used to assess the long and short-run connections between production network structure and various shocks associated to monetary policy in the period 2000–2018 and during the Great Recession (2007–2009). The results show that upstreamness is more significant than downstremness in the period 2000–2018, while the financial sector significantly contributed to the spread of various monetary shocks during the Great Recession. |
| Keywords: | Bayesian VAR model; monetary policy shocks; panel ARDL model; production network |
| JEL: | C51 C53 |
| Date: | 2024–09–16 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:125580 |
| By: | Alicia Aguilar (BANCO DE ESPAÑA); Ricardo Gimeno (BANCO DE ESPAÑA) |
| Abstract: | We apply discrete probability forecasts to the expectations of monetary policy rate changes, both in the United States and in the euro area. By using binomial trees from options theory, forecast distributions are derived from the instantaneous forward yield curve, based on interest rate swaps. We then use a non-randomised discrete probability forecast evaluation that confirms the presence of a systematic upward bias, consistent with the presence of a term premium. Consequently, we propose a bias-correction methodology to increase the accuracy of the density forecasts regarding monetary policy expectations. This research provides pivotal insights into understanding and improving predictive tools in monetary policy forecasting. |
| Keywords: | discrete probability forecast, monetary policy decisions, interest rate expectations, binomial tree |
| JEL: | C53 C58 G12 G17 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2438 |
| By: | Federico Daniel Forte |
| Abstract: | This paper examines the performance of Random Forest models in forecasting short-term monthly inflation in Argentina, based on a database of monthly indicators since 1962. It is found that these models achieve forecast accuracy that is statistically comparable to the consensus of market analysts' expectations surveyed by the Central Bank of Argentina (BCRA) and to traditional econometric models. One advantage of Random Forest models is that, as they are non-parametric, they allow for the exploration of nonlinear effects in the predictive power of certain macroeconomic variables on inflation. Among other findings, the relative importance of the exchange rate gap in forecasting inflation increases when the gap between the parallel and official exchange rates exceeds 60%. The predictive power of the exchange rate on inflation rises when the BCRA's net international reserves are negative or close to zero (specifically, below USD 2 billion). The relative importance of inflation inertia and the nominal interest rate in forecasting the following month's inflation increases when the nominal levels of inflation and/or interest rates rise. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.01175 |
| By: | Marijn A. Bolhuis; Sonali Das; Bella Yao |
| Abstract: | This paper presents a new dataset of monetary policy shocks for 21 advanced economies and 8 emerging markets from 2000-2022. We use daily changes in interest rate swap rates around central bank announcements to identify unexpected shocks to the path of monetary policy. The resulting series can be used to examine cross-country heterogeneity in the impact of monetary policy shocks. We establish a new empirical fact on monetary policy spillovers across countries: the monetary policy decisions of small open economy central banks, and not just major central banks, have substantial spillover effects on swap rates and bond yields in other countries. |
| Keywords: | monetary policy surprises; monetary policy shocks; central banks; central bank information effect; emerging markets; high-frequency method; spillovers; monetary policy spillovers |
| Date: | 2024–10–11 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/224 |
| By: | Jing Cynthia Wu; Yinxi Xie; Ji Zhang |
| Abstract: | We assess whether unconventional monetary and fiscal policy implemented in response to the COVID-19 pandemic in the U.S. contribute to the 2021-2023 inflation surge through the lens of several different empirical methodologies—event studies, vector autoregressions, and regional panel regressions using granular data—and establish a null result. The key economic mechanism works through a disinflationary channel in the Phillips curve while monetary and fiscal stimuli put positive pressure on inflation through the usual demand channel. We illustrate this negative supply-side channel both theoretically and empirically. |
| Keywords: | Inflation and prices; Monetary policy; Fiscal policy; Business fluctuations and cycles; Central bank research |
| JEL: | E31 E52 E63 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:24-38 |
| By: | Felipe Alves; Giovanni L. Violante |
| Abstract: | We develop a Heterogeneous Agent New Keynesian model with a three-state frictional labour market that is consistent with the empirical evidence that (i) low-skilled workers are more exposed to the business cycle, (ii) displacement leads to long-lasting earnings losses, and (iii) unemployment is a stepping stone toward exit from the labor force. In this environment, a transient contractionary monetary policy shock induces a very persistent reduction in labour force participation and labour productivity, especially among workers at the bottom of the skill distribution. Despite the negative hysteresis on output, the model does not give rise to protracted deflation. |
| Keywords: | Monetary Policy Transmission; Labour Markets |
| JEL: | E21 E24 E31 E32 E52 J24 J64 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:24-39 |
| By: | Ana Aguilar; Rafael Guerra; Berenice Martinez |
| Abstract: | This work studies the impact of global inflation on surveyed inflation expectations of private analysts in emerging market economies (EMEs), and the role central banks can play to lessen this impact. Our study uses quarterly data for 22 EMEs from 2000–23, focusing on the mean and dispersion of forecasted inflation expectations. We find three key results. Firstly, the global inflation component can affect the mean and, to a lesser extent, the dispersion of inflation expectations. For the mean of short-term inflation expectations, this effect increased in late 2021. Secondly, while the global inflation component does matter for short-term inflation expectations, the idiosyncratic inflation component (all the inflation variation that is not explained by the global component) has a stronger influence on longer-term inflation expectations. Finally, we find that monetary policy can help reduce the transmission of global inflation to inflation expectations in both the short and long term and on the dispersion of forecasters. This underscores that EME central banks have room to shape inflation expectations, even when global factors are the main cause of inflation. |
| Keywords: | global inflation, inflation expectations, monetary policy |
| JEL: | E31 E37 E52 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1217 |
| By: | Harald Hau; Tim-Ole Radach; Marcel Thum |
| Abstract: | The downfall of Credit Suisse should serve as a lesson that supervisory board competence determines the long-term risk of a bank. In a much-cited study, we investigated the relationship between competent board supervision and the performance of German banks during the 2008/2009 financial crisis. This policy brief summarizes the results of our updated study, which shows that despite legislative efforts, there is still a long way to go. Key Messages The downfall of Credit Suisse should serve as a lesson that supervisory board competence determines the long-term risk of a bank. The relationship between competent board supervision and bank performance has been confirmed for many countries since our much-cited study of German banks during the 2008/2009 financial crisis. However, our updated study shows that despite legislative efforts, board competence in Germany has improved only slightly. In particular, public banks are lagging behind. We recommend that bank supervisors systematically measure, track, and report bank board competence. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:econpb:_64 |
| By: | William Barnett (Department of Economics, University of Kansas, Lawrence, KS 66045, USA and Center for Financial Stability, New York City); JoonSoo Lee (Department of Economics, University of Kansas, Lawrence, KS 66045, USA Author-Name: Naowar Mohiuddin; Department of Economics, University of Kansas, Lawrence, KS 66045, USA) |
| Abstract: | This study constructs Divisia monetary aggregates for the “Asian Tigers†—Hong Kong (1999–2024), South Korea (2009–2024), Singapore (1991–2021), and Taiwan (2005–2024)—and assesses whether Divisia monetary aggregates explain nominal GDP better than simple-sum money. Our findings demonstrate that Divisia indices respond more sensitively to economic shocks. For Hong Kong and Taiwan, narrow Divisia money provides the best explanations for fluctuations in nominal GDP. Our results suggest that Divisia monetary aggregates can be beneficial for monetary policy analysis in these countries and underscore the importance of further research into the empirical performance of Divisia monetary aggregates in macroeconomic prediction. |
| Keywords: | divisia index; divisia monetary aggregates; vector error-correction model |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:kan:wpaper:202413 |
| By: | Alejandro Casado (BANCO DE ESPAÑA); David Martínez-Miera (UNIVERSIDAD CARLOS III DE MADRID AND CEPR) |
| Abstract: | We provide evidence that bank loan supply reactions to monetary policy changes are market-specific, emphasizing the importance of banks’ local specialization. We analyze the U.S. mortgage market and find that when monetary policy eases, banks increase new mortgage lending growth more in markets in which they are geographically specialized relative to other markets and banks. This holds after controlling for local lending opportunities and (unobservable) bank differences. Further empirical findings, supported by a simple model, suggest that banks face market-specific differences in lending advantages, related to market-specific information, leading them to exhibit different reactions to monetary policy changes. We document the aggregate effects of this geographical specialization channel both at the county (regional) level on mortgage supply and house price growth, as well as at the bank level on average specialization growth. Our study underscores the relevance of banks’ local specialization in shaping the transmission of monetary policy. |
| Keywords: | bank lending, federal funds rate, geographical specialization, information, monetary policy, mortgage market |
| JEL: | D82 E52 E58 G21 G23 L10 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2440 |
| By: | Angeloni, Ignazio; Haselmann, Rainer; Heider, Florian; Pelizzon, Loriana; Schlegel, Jonas; Tröger, Tobias |
| Abstract: | Over the past decade, the Single Supervisory Mechanism focused on making banks safer, resulting in stronger banks but limited euro area cross-border integration. We argue that overbanking hinders both cross-border integration for the EU and the development and integration of capital markets. In addition to a common supervisory authority and to attain the strong and integrated financial system Europe needs going forward, the Banking Union and Capital Markets Union need to coexist and complement each other. This document was provided/prepared by the Economic Governance and EMU Scrutiny Unit at the request of the ECON Committee. |
| Keywords: | Banking Union, Capital Markets Union, Market Integration, Overbanking |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:safewh:304307 |
| By: | Qian, Jing; Vreeland, James R; Zhao, Jianzhi J |
| Abstract: | We examine, in the context of international relations, the hypothesis from social psychology that punishment for defiance is more likely for in-group than out-group members. The United States publicly opposed the founding of the Asian Infrastructure Investment Bank (AIIB) and pressured countries not to join the Chinese-led institution. Nevertheless, 57 countries became founding members of this new development bank, which is viewed as a potential competitor of the U.S.-led World Bank. To test whether the United States punished in-group rather than out-group countries for their defiance, we consider a unique dataset on the voting behavior of the World Bank’s U.S. executive director on new project proposals. We find that the United States is more likely to oppose or abstain from supporting new projects only for AIIB founding members that are closer to the United States, with no punishment for the more distant founders. Considering that almost all proposals are approved regardless of U.S. support, the punishment appears merely gestural, making it even more surprising that the United States imposes it so judiciously. We suspect the action serves as a signal of discontent specifically direct toward in-group countries. |
| Keywords: | Social and Behavioral Sciences, Asian Infrastructure Investment Bank, AIIB, World Bank, multilateral development banks, international institutions, in-group punishment |
| Date: | 2024–10–28 |
| URL: | https://d.repec.org/n?u=RePEc:cdl:globco:qt3b86x9v6 |
| By: | Zachary Bethune; Joaquín Saldain; Eric R. Young |
| Abstract: | We investigate the welfare consequences of consumer credit regulation in a dynamic, heterogeneous-agent model with endogenous lender market power. We incorporate a decentralized credit market with search and incomplete information frictions into an off-the-shelf Eaton–Gersovitz model of consumer credit and default. Lenders post credit offers and borrowers apply for credit. Some borrowers are informed and direct their application toward the lowest offers while others are uninformed and apply randomly. Equilibrium features price dispersion — controlling for a borrower’s default risk, both high- and low-cost lending exist. Importantly, the distribution of loan prices and the extent of lenders’ market power are disciplined by borrowers’ outside options. We calibrate the model to match characteristics of the unsecured consumer credit market, including high-cost options such as payday loans. We use the calibrated model to evaluate interest rate ceilings. In a model with a competitive financial market, ceilings can only harm borrower welfare. In contrast, with lender market power, interest rate ceilings can raise borrower welfare by reducing markups, but that requires households to have some degree of financial illiteracy (lack of information about interest rates). |
| Keywords: | Interest rates; Credit and credit aggregates; Financial markets |
| JEL: | D15 D43 D60 D83 E21 G51 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:24-36 |
| By: | Romain Bouis; Mr. Gaston Gelos; Fumitaka Nakamura; Mr. Paavo A Miettinen; Erlend Nier; Gabriel Soderberg |
| Abstract: | This paper offers a comprehensive analysis of the implications for financial stability of a central bank issuing a digital currency to the public at large. We start with a systematic analysis of balance sheet changes that arise from the new liability for the central bank and the banking system, and examine how they depend on preconditions, central bank choices, and banking system responses. Based on this, we discuss the range of implications for financial stability that may arise in steady state, in the context of adoption, and in crisis times. Threats to financial intermediation in steady state arise mainly in situations where the central bank balance sheet expands, and triggers adjustment mechanisms that lead to more costly or less stable funding of the banking system, while in crisis times run risk may increase. Our analysis of policy choices to control these effects considers macroprudential policy, and an expansion of central bank lending to commercial banks, but finds that a main contribution needs to come from a design of the CBDC that encourages its use as a means of payment rather than a store of value. |
| Keywords: | Central Bank Digital Currency; Financial Stability; Balance Sheets; Disintermediation; Bank Runs |
| Date: | 2024–10–11 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/226 |
| By: | Yasin Kürsat Önder; Jose Villagas (-) |
| Abstract: | We evaluate the impact of Belgium’s 2020 Public Credit Guarantee Scheme (CGS) using administrative data. The CGS applied to all firms, with those employing fewer than 50 workers benefiting from a 25 basis point reduction in interest rates. Leveraging this policy-induced discontinuity, we compare firms around the employment threshold. Firms receiving the lower interest rates experienced increases in employment and investment, along with a reduction in firm exit rates. The scheme helped address the debt overhang problem by easing pricerelated credit constraints: for every €1 of guaranteed debt at a 25 basis points lower rate, non-guaranteed debt decreased by €0.13. |
| Keywords: | Credit guarantees, credit frictions, regression discontinuity design, debt overhang squares, efficiency, robustness |
| JEL: | E32 G21 H81 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:rug:rugwps:24/1097 |
| By: | Montes-Galdón, Carlos; Ajevskis, Viktors; Brázdik, František; Garcia, Pablo; Gatt, William; Lima, Diana; Mavromatis, Kostas; Ortega, Eva; Papadopoulou, Niki; De Lorenzo, Ivan; Kolb, Benedikt |
| Abstract: | Understanding asymmetric risks in macroeconomic variables is challenging. Most structural models used for policy analysis are linearised and therefore cannot generate asymmetries such as those documented in the empirical growth-at-risk (GaR) literature. This report examines how structural models can incorporate non-linearities to generate tail risks. The first part reviews the various extensions to dynamic stochastic general equilibrium (DSGE) models and the computational challenges involved in accounting for risk distributions. This includes the use of occasionally binding constraints and more recent developments, such as deep learning, to solve non-linear versions of DSGEs. The second part shows how the New Keynesian DSGE model, augmented with the vulnerability channel as proposed by Adrian et al. (2020a, b), satisfactorily replicates key empirical facts from the GaR literature for the euro area. Furthermore, introducing a vulnerability channel into an open-economy set-up and a medium-sized DSGE highlights the importance of foreign financial shocks and financial frictions, respectively. Other non-linearities arising from financial frictions are also addressed, such as borrowing constraints that are conditional on an asset’s value, and the way macroprudential policies acting against those constraints can help stabilise the economy and generate positive spillovers to monetary policy. Finally, the report examines how other types of tail risk beyond financial frictions – such as the recent asymmetric supply-side shocks – can be incorporated into macroeconomic models used for policy analysis. JEL Classification: E70, D50, G10, G12, E52 |
| Keywords: | asymmetric shocks, DSGE, macroprudential policies, non-linearities, structural models, tail risks, vulnerability channel |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbops:2024357 |
| By: | Iustina Alina Boitan (Faculty of Finance and Banking, Bucharest University of Economic Studies); Wafaa Shabban (Doctoral School of Finance, Bucharest University of Economic Studies) |
| Abstract: | The study investigates the presence of unilateral or bilateral causality relationship between country-level environmental indicators (as a component of the ESG) and main banking system indicators represented by profitability, solvency, liquidity, efficiency, credit quality and savings ratio, as well as bank concentration. Five indicators belonging to the environmental dimension of the ESG are considered, related to food security, carbon emissions and pollution, and respectively energy sources and energy security. In line with the warnings issued by European authorities regarding the potential of environmental risks to be exacerbated by the physical adverse effects of climate change, we conducted the statistical analysis with an exclusive focus on European Union countries that exhibit a temperate climate profile. Granger causality test is employed in a country-by-country approach to assess the relationship between banking system and environmental indicators, in terms of a cause ? effect framework. Findings outline a significant relationship in terms of causality between country-level environmental indicators and banking system indicators. Interestingly, two out of the five environmental indicators (agriculture, forestry, and fishing value added, and respectively CO2 emissions) are always included in at least one causal relationship with banking system indicators, for every country in the sample. The influence of environmental indicators on banking activity (unidirectional) is most pronounced and precedes banking changes especially in Spain and Portugal, with Italy positioning at the bottom of the ranking. Another result points that banking indicators in most countries considered are particularly sensitive to previous changes in the carbon emissions level, in the production of electricity and energy consumption from polluting sources such as coal or fossil fuels. In terms of bilateral causality occurrence, Greece, Portugal and Spain witness most of them. The variables most often included in the causal interplay are related on one hand to CO2 emissions and agriculture, forestry, and fishing value added, and on the other hand to bank credit to bank deposits (a proxy for bank liquidity) and bank cost to income ratio (a proxy of the operational efficiency). |
| Keywords: | Environment; CO2 emissions; Renewable energy; Fossil fuel energy, Electricity production from coal; Agriculture, Forestry, and fishing; Banking system; Granger causality |
| JEL: | G21 Q20 Q59 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:sek:iefpro:14516428 |
| By: | Valentin Burban; Bruno De Backer; Andreea Liliana Vladu |
| 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, pt*, is applied to inflation-linked swap (ILS) rates, while taking into account survey-based inflation forecasts. Estimates of pt* 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 pt* 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: | G10 G32 Q54 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:965 |
| By: | Yang Liu; Ran Pan; Rui Xu |
| Abstract: | Forecasting inflation has become a major challenge for central banks since 2020, due to supply chain disruptions and economic uncertainty post-pandemic. Machine learning models can improve forecasting performance by incorporating a wider range of variables, allowing for non-linear relationships, and focusing on out-of-sample performance. In this paper, we apply machine learning (ML) models to forecast near-term core inflation in Japan post-pandemic. Japan is a challenging case, because inflation had been muted until 2022 and has now risen to a level not seen in four decades. Four machine learning models are applied to a large set of predictors alongside two benchmark models. For 2023, the two penalized regression models systematically outperform the benchmark models, with LASSO providing the most accurate forecast. Useful predictors of inflation post-2022 include household inflation expectations, inbound tourism, exchange rates, and the output gap. |
| Keywords: | Core inflation; forecasting; machine learning models; LASSO; Japan |
| Date: | 2024–09–27 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/206 |
| By: | Jorge Abad (BANCO DE ESPAÑA); David Martínez-Miera (UC3M AND CEPR); Javier Suárez (CEMFI AND CEPR) |
| Abstract: | We study banks’ systemic risk-taking decisions in a dynamic general equilibrium model, highlighting the macroprudential role of bank capital requirements. Banks decide on their unobservable exposure to systemic shocks by balancing risk-shifting gains against the value of preserving their capital after such shocks. Capital requirements reduce systemic risk taking, but at the cost of reducing credit and output in calm times, generating welfare trade-offs. We find that systemic risk taking is maximal after long periods of calm and may worsen if capital requirements are countercyclically adjusted. Removing deposit insurance introduces market discipline but increases the bank capital necessary to support credit, implies lower (though far from zero) optimal capital requirements and has nuanced social welfare effects. |
| Keywords: | capital requirements, risk shifting, deposit insurance, systemic risk, financial crises, macroprudential policies |
| JEL: | G01 G21 G28 E44 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2441 |
| By: | Tomas Sestorad (Institute of Economic Studies of the Faculty of Social Sciences, Charles University & The Czech National Bank, Monetary Department, Prague, Czech Republic); Natalie Dvorakova (Institute of Economic Studies of the Faculty of Social Sciences, Charles University; Prague, Czech Republic) |
| Abstract: | This paper examines the drivers of the post-pandemic surge in inflation in four small open economies: Czechia, Hungary, Poland, and Slovakia. For this purpose, a Bayesian structural vector autoregressive model with sign-zero restrictions and block exogeneity is employed. The results show that both foreign demand and foreign supply shocks have contributed significantly to inflation in the post-2020 period across countries, alongside notable contributions from domestic factors explaining differences among economies. Specifically, supply-side shocks are identified as the primary domestic factor across all countries, whereas domestic demand shocks were much less influential. Exchange rate shocks were pronounced in Hungary only, while monetary policy shocks have had a minimal impact on inflation since 2022 in all the countries considered. Additionally, we provide decompositions of core inflation, highlighting the predominance of domestic factors. |
| Keywords: | Bayesian VAR, extraordinary events, inflation, sign-zero restrictions, small open economies |
| JEL: | C32 E31 E32 E52 F41 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:fau:wpaper:wp2024_36 |
| By: | Jingyi TIAN; Jun NAGAYASU |
| Abstract: | As artificial intelligence (AI) emerges as a key driver of Industry 4.0, nations are vying for a competitive edge in AI advancements, innovation, and applications. This study investigates AI’s role in the financial system by delving into the intricate relationship between AI and financial systemic risk (FSR) across diverse contexts. The results show that, first, AI investment is generally associated with increased FSR. Second, global risk spillover is observed in the FSR of various countries. Extreme events can lead to a sharp and simultaneous increase in FSR across nations. In addition, after removing global risk spillover, the FSR dynamics of countries do not strictly conform to geographical proximity. Third, mechanism analysis reveals that AI increases FSR by enhancing the interconnectedness between entities and raising unemployment. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:toh:tupdaa:55 |
| By: | Sylvain Catherine; Mehran Ebrahimian; Constantine Yannelis |
| Abstract: | The rapid rise in student loan balances has raised concerns among economists and policymakers. Using administrative credit bureau data, we find that nearly half of the increase in balances from 2010 to 2020 is due to deferred payments, largely driven by the expansion of income-driven repayment (IDR) plans, which link payments to income. These plans help borrowers by smoothing consumption, insuring against labor income risk, and reducing the present value of future payments. We build a life-cycle model to quantify the welfare gains from this payment deferment and the channels through which borrower welfare increases. New, more generous IDR rules increase this transfers from taxpayers to borrowers without yielding net welfare gains. By lowering the average marginal cost of undergraduate debt to less than 50 cents per dollar, these rules may also incentivize excessive borrowing. We demonstrate that an optimally calibrated IDR plan can achieve similar welfare gains for borrowers at a much lower cost to taxpayers, and without encouraging additional borrowing, primarily through maturity extension. |
| JEL: | G50 H52 I20 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33059 |