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on Banking |
| By: | Hugo E. Caceres; Ben Moews |
| Abstract: | Financial regulators such as central banks collect vast amounts of data, but access to the resulting fine-grained banking microdata is severely restricted by banking secrecy laws. Recent developments have resulted in mechanisms that generate faithful synthetic data, but current evaluation frameworks lack a focus on the specific challenges of banking institutions and microdata. We develop a framework that considers the utility and privacy requirements of regulators, and apply this to financial usage indices, term deposit yield curves, and credit card transition matrices. Using the Central Bank of Paraguay's data, we provide the first implementation of synthetic banking microdata using a central bank's collected information, with the resulting synthetic datasets for all three domain applications being publicly available and featuring information not yet released in statistical disclosure. We find that applications less susceptible to post-processing information loss, which are based on frequency tables, are particularly suited for this approach, and that marginal-based inference mechanisms to outperform generative adversarial network models for these applications. Our results demonstrate that synthetic data generation is a promising privacy-enhancing technology for financial regulators seeking to complement their statistical disclosure, while highlighting the crucial role of evaluating such endeavors in terms of utility and privacy requirements. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.22519 |
| By: | E Philip Davis; Dilruba Karim; Dennison Noel |
| Abstract: | Macroprudential policies have become crucial tools for maintaining financial stability, but their effect on banks' noninterest income has not yet been examined. This is a paradox in light of results in the literature linking noninterest income to bank performance indicators such as risk and profitability. Using a global sample of 7, 368 banks over 1990-2022, we find macroprudential policies have a significant positive effect on noninterest income. Similar results are found for disaggregated samples by type of noninterest income, country development, bank size and pre and post the Global Financial Crisis, and in three robustness checks. However, the extent to which such positive effects feed through to overall profitability depends on the type of noninterest income. Furthermore, stimulus from macroprudential policies to noninterest income, and especially its nonfee component, is found to affect bank risk adversely. Our findings have important implications for central bankers, regulators and commercial bank management. |
| Keywords: | Macroprudential policy, bank profitability, noninterest income, bank risk |
| JEL: | E44 E58 G21 G28 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nsr:niesrd:561 |
| By: | E Philip Davis; Dilruba Karim; Dennison Noel |
| Abstract: | The advent of macroprudential policy alongside monetary policy raises the issue whether macroprudential policy has an additional effect on bank interest rate margins to that of monetary policy, and if so, whether it accentuates or offsets the interest rate effect. In light of this, we estimate combined effects of macroprudential policies and monetary policies on bank interest margins for up to 3, 723 banks from 35 advanced countries over 1990-2018. In the short run, tightening of both types of policy tends to narrow the margin, while in the long run, monetary policy typically widens the margin while effects of macroprudential policies are mostly zero or positive, suggestive of countervailing action by banks. There are also significant interactions between macroprudential and monetary policy for several macroprudential policies; a tighter monetary stance is widely found to offset the negative effect of macroprudential policies on margins while a loose monetary policy leaves the negative effects intact, with potential consequences for financial stability. These results are of considerable relevance to policymakers, regulators and bank managers, not least when monetary policies are tight to reduce inflationary pressures. |
| Keywords: | Macroprudential policy, monetary policy, short-term interest rate, yield curve, bank interest margin |
| JEL: | E44 E52 E58 G21 G28 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nsr:niesrd:560 |
| By: | Hilpert, Hanns Günther; Tokarski, Paweł |
| Abstract: | The number of digital currencies has increased significantly in recent years. So-called central bank digital currencies (CBDCs), created by central banks, are at the forefront of this development. Combining the advantages of an electronic means of payment - namely the speed and efficiency of transactions - with the stability and confidence that central banks enjoy, CBDCs will surely have a significant influence on the development of international payment systems in the coming years. Work on this topic has accelerated significantly in many parts of the world following the imposition of sanctions against Russia by the G7. The European Union (EU) and China are also engaged in planning and shaping their own CBDCs, but there are significant differences in the motivations, pace of progress and ambitions associated with these projects. |
| Keywords: | Central Bank, money, digitalisation, digital currencies, central bank digital currencies (CBDCs), sanctions against Russia, G7, European Union (EU), China, eurozone, blockchain technologies, People's Bank of China (PBoC), e-CNY, European Central Bank (ECB) |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:swpcom:305241 |
| By: | Victor Le Coz; Michael Benzaquen; Damien Challet |
| Abstract: | We propose a minimal model of the secured interbank network able to shed light on recent money markets puzzles. We find that excess liquidity emerges due to the interactions between the reserves and liquidity ratio constraints; the appearance of evergreen repurchase agreements and collateral re-use emerges as a simple answer to banks' counterparty risk and liquidity ratio regulation. In line with prevailing theories, re-use increases with collateral scarcity. In our agent-based model, banks create money endogenously to meet the funding requests of economic agents. The latter generate payment shocks to the banking system by reallocating their deposits. Banks absorbs these shocks thanks to repurchase agreements, while respecting reserves, liquidity, and leverage constraints. The resulting network is denser and more robust to stress scenarios than an unsecured one; in addition, the stable bank trading relationships network exhibits a core-periphery structure. Finally, we show how this model can be used as a tool for stress testing and monetary policy design. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.18145 |
| By: | Xiaoming Li; Zheng Liu; Yuchao Peng; Zhiwei Xu |
| Abstract: | We study how changes in the composition of Chinese local government debt influenced bank risk taking, credit allocation, and local productivity. Using confidential loan-level data and a difference-in-difference identification approach, we show that a debt-to-bond swap program for local governments implemented in 2015 significantly increased bank risk taking through a risk-weighting channel under Basel III capital regulations. The debt swap program converted bank holdings of municipal corporate debt to local government bonds, reducing banks’ risk-weighted assets. Banks responded by lowering credit spreads on loans to privately owned firms (POEs) relative to state-owned enterprises (SOEs), with significantly larger reductions in POE credit spreads in provinces with more outstanding government debt. Furthermore, the credit reallocation toward more productive private firms—a crowding in effect of the debt swap—significantly raised local productivity. |
| Keywords: | Local Government Debt; credit allocation; Bank Risk Taking; misallocation |
| JEL: | E52 G21 G28 |
| Date: | 2024–11–08 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:99080 |
| By: | Victor Le Coz; Nolwenn Allaire; Michael Benzaquen; Damien Challet |
| Abstract: | Using the secured transactions recorded within the Money Markets Statistical Reporting database of the European Central Bank, we test several stylized facts regarding interbank market of the 47 largest banks in the eurozone. We observe that the surge in the volume of traded evergreen repurchase agreements followed the introduction of the LCR regulation and we measure a rate of collateral re-use consistent with the literature. Regarding the topology of the interbank network, we confirm the high level of network stability but observe a higher density and a higher in- and out-degree symmetry than what is reported for unsecured markets. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.16021 |
| By: | Djedjiga KACHENOURA,; David CHETBOUN,; Marine LAGARDE,; Laurent MÉLÈRE,; Damien SERRA |
| Abstract: | In 2015, in the run-up to COP16 in Paris, the speech by Mark Carney, then Governor of the Bank of England and mandated by the G20's Financial Stability Board, made history. He warned of the importance of financial climate risks for the stability of financial institutions and the financial system as a whole. The political burden of transition was left to governments, provided it was orderly, while the responsibility for stability fell to regulators and central banks. Finance”, informed by extra-financial disclosure regimes, would drive demand as a provider of capital. These disclosure regimes were to be initiated by private players and supported by regulators. Mr. Carney feared, however, that they would lack coherence, comparability and clarity. Since then, these schemes have proliferated, covering both risks and the alignment of financial flows with the Paris Agreement. Nevertheless, this “theory of change” and the division of responsibilities between players remain unclear and ambiguous. Financial regulators need to work together to make these different regimes interoperable and clarify their objectives. What's more, compliance costs and the disconnection of certain frameworks from national realities are holding back the mobilization of funding, and may lead to the exclusion of the most vulnerable entities, a subject that has received little attention. |
| JEL: | Q |
| Date: | 2024–11–08 |
| URL: | https://d.repec.org/n?u=RePEc:avg:wpaper:en17553 |
| By: | Sandra Eickmeier; Luba Petersen |
| Abstract: | As central banks, including the European Central Bank (ECB), adopt climate-related responsibilities, gauging public support becomes essential. Drawing on a June 2023 Bundesbank household survey, we find that 69% of households report increased trust in the ECB due to its climate actions, valuing the institution's broader scope and concern. While 17% and 20% of households express concerns over risks to price stability or independence, 23% believe climate engagement reinforces the ECB's core objectives. An information intervention indicates minimal impact on household inflation expectations, suggesting a disconnect between institutional trust and inflation outlooks. An internal survey reveals that central bankers accurately gauge trust impacts but tend to overestimate effects on inflation expectations. Overall, our findings indicate broad public support for the ECB’s climate initiatives. |
| JEL: | C93 D84 E59 E7 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33103 |
| By: | L. Deidda; E. Panetti |
| Abstract: | We study how regulation shapes the interaction between financial fragility and bank liquidity management, and propose a rationale for the complementarity between bank recovery and resolution planning. To this end, we analyze an economy in which a benevolent resolution authority sets a bank resolution plan to suspend deposit withdrawals and create a "good bank" at a cost in the event of a depositors' run. In such a framework, banks maximize expected welfare if deciding ex ante how to manage liquidity during runs. However, this choice is time inconsistent. Therefore, regulators need to force banks to commit to it through recovery planning. |
| Keywords: | banks;Liquidity;financial fragility;financial regulation;resolution |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:cns:cnscwp:202420 |
| By: | Rapetti, Martin; Libman, Emiliano; Carrera, Gonzalo |
| Abstract: | By the mid-2000s, Latin American countries had achieved macroeconomic stability: inflation was low, fiscal results were balanced, and external accounts were on a sustainable path, far from the frequent threat of currency crises. Although the trajectories that had brought them there had broadly been similar, from that point onwards they began to diverge. Brazil, Chile, Colombia, Mexico, Paraguay, Peru, and Uruguay managed to maintain macroeconomic stability by gradually adopting macroeconomic schemes of “good practices” based on four pillars: 1) monetary policy frameworks based on inflation targeting, managed by independent and largely technocratic Central Banks; 2) exchange rate policies of managed floating and foreign exchange reserves accumulation; 3) institutional fiscal policies that seek to maintain a countercyclical bias and the sustainability of public debt; and 4) full integration with the international capital markets. On the other hand, Argentina, Bolivia, Ecuador, and Venezuela followed a different path, with more erratic macroeconomic policy strategies that favored short-term goals and relegated macroeconomic stability to the background. The evidence presented in this article suggests that countries that did not adopt the “good practices” framework experienced higher macroeconomic instability, lower growth, and less poverty reduction. |
| Keywords: | Latin America, Inflation Targets, Fiscal Rules, Central Bank Independence |
| JEL: | F40 N16 O54 |
| Date: | 2024–10–04 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122482 |
| By: | Sonnleitner, Benedikt; Stapf, Jelena; Wulff, Kai |
| Abstract: | Among the most important tasks of central banks is to ensure the availability of cash to credit institutions and retailers. Forecasting the demand for cash on a granular level is crucial in the process to keep logistics costs low, while being resilient to demand or supply shocks. Whereas to date, cash forecasts with central banks mostly comprise structural models to define banknote production for the coming years, our contribution is to combine features of macro level forecasting with more granular and short term regional forecasts methods. We show in an inventory simulation, that elaborate forecasting methods on granular level can substantially improve inventory performance for this use-case. To guide the implementation of a forecasting process at the Bundesbank, we benchmark statistical and machine learning methods on demand and supply of cash, using anonymized data on transactions of six regional branches of Deutsche Bundesbank. We use a pseudo out of sample predictive performance framework to evaluate the accuracy of our forecasts and perform an inventory cost simulation. We find that (i) DeepAR outperforms the other benchmarks substantially on all data sets. (ii) ETS, ARIMA, and DeepAR clearly outperform the naive benchmark in terms of accuracy across all data sets, and inventory performance. |
| Keywords: | Global learning, Forecasting, Machine Learning |
| JEL: | E31 G21 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:305276 |
| By: | Anna Burova (Bank of Russia, Russian Federation); Tatiana Grishina (Bank of Russia, Russian Federation); Natalia Makhankova (Bank of Russia, Russian Federation) |
| Abstract: | Currently newly issued loans with fixed rates, excluding loans to affiliates, are used to calculate Russian loan aggregates of interest rates on loans to non-financial organisations, which is generally in line with international practice. The structure of loans is evolving over times, the share of loans with floating interest rates is increasing. Data on the volumes and rates of such loans can be valuable for analysing and forecasting economic trends. This paper looks at approaches to calculating weighted average interest rates on loans to Russian companies with the division of loans for analytical purposes into separate lending segments: by rate type (fixed and floating), affiliation type, and the time of rate-setting relative to the moment of disbursement of funds. We assess the amplitude of variation between the rates calculated using different approaches. The use of a wider range of aggregates can be used for analytical and research purposes to assess changes in certain types of interest rates, as well as to clarify the effect of the interest rate channel of the monetary policy transmission mechanism. |
| Keywords: | loan rates, non-financial organisations, floating rate, prolongations, quarterly projection model, error correction model |
| JEL: | E43 E44 G21 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:bkr:wpaper:wps137 |
| By: | Renzhi, Nuobu (Capital University of Economics and Business); Beirne, John (Asian Development Bank) |
| Abstract: | This paper empirically investigates how the level of peer-to-peer (P2P) lending affects monetary policy transmission in the People’s Republic of China (PRC). Using state-dependent local projection methods, we find that the macroeconomic effects of unanticipated changes in monetary policy are dampened during the boom phase of the P2P lending market. The impulse responses of industrial production and inflation are significantly negative in the non-boom state. In contrast, the responses of industrial production and inflation are muted in the boom state. Set against the context of stricter regulation on P2P lending since 2017, our results indicate that the significant scaling back of P2P lending activity and its gradual decline in the PRC could enhance the effectiveness of monetary policy transmission. Our paper also suggests that further work is needed to study the interaction between financial innovation and monetary policy |
| Keywords: | peer-to-peer lending; monetary policy transmission; fintech |
| JEL: | E44 E52 F33 F42 |
| Date: | 2024–11–05 |
| URL: | https://d.repec.org/n?u=RePEc:ris:adbewp:0749 |
| By: | Amer Ahmed (The World Bank); Esther Bartl (Department of Economics(PHD), University of Sussex, Falmer BN19RH , The World Bank) |
| Abstract: | Bangladeshi migrant workers face extremely high migrations costs, and often finance their migration episodes by incurring substantial debt. These costs have been found to be associated with persistent indebtedness, even after return. Individuals from poorer households have been found to prefer loans provided by a bank or money lender. At the same time, older individuals who not qualify for formal loans prefer borrowing from family and friends. The size of migration costs and time since return are major determinants of loan repayment. A one percentage point increase in migration costs may reduce the likelihood for full loan repayment by 12.9 percentage points. Early return may reduce the probability of full loan repayment by 7.32 percentage points compared to planned return. Presence of collateral may reduce the already repaid loan amount by around 30 percentage points, but implies that indebted households are putting their productive assets at risk |
| Keywords: | labor migration, migration cost, migration loan, Bangladesh |
| JEL: | F22 O15 D14 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:sus:susewp:0824 |
| By: | Neepa Gaekad (Department of Economics, State University of New York, Fredonia, NY 14063, USA); William A. Barnett (Department of Economics, University of Kansas, Lawrence, KS 66045, USA and Center for Financial Stability, New York City) |
| Abstract: | Keywords: In light of the "two-pillar strategy" of the European Central Bank, good measures of aggregated money across countries in the Euro area are policy relevant. The objective of this paper is to focus on the multilateral Divisia monetary aggregates for the Euro area. Based on theory developed in Barnett (2007), this paper produced the multilateral Divisia monetary aggregates for the economic union of all the 19 Euro area countries, EMU-19, (and the Divisia monetary aggregates for the individual 19 Euro area countries), which is a theoretically consistent measure of monetary services for the Euro area monetary union. The multilateral Divisia monetary aggregate indices for EMU-19 is found to provide a better signal of recession, when compared to the corresponding simple sum monetary aggregates. |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:kan:wpaper:202416 |
| By: | G. Atzeni; L. Deidda; P. Arca |
| Abstract: | Using the BEEPS dataset on Eastern European and Central Asian firms, we investigate how the collateral requirements and the cost of credit expected by firms might discourage them from applying for credit. Based on the data we identify four reported discouragement reasons - (A) high probability of rejection, (B) high cost of credit, (C) high cost of application, (D) and other reasons. We develop a simple statistical model to derive the following set of predictions about the impact of expected collateral requirements and cost of credit on discouragement. First, collateral requirements and cost of credit should induce discouragement across all reported reasons. Second, higher expected collateral requirements and cost of credit should have a lower effect when the reported reason is (A). If the firm already fears rejection, a higher collateral requirement or a higher cost of credit should play little role. Third, collateral requirements should have a larger impact when the reported reason is (B). If the firm is discouraged by the high cost of credit rather than the fear of rejection, an increase in the expected collateral requirements becomes more significant as it may add the risk of rejection as an additional concern for the firm. We test these predictions using a multinomial logit model and we find robust evidence that supports all of them. |
| Keywords: | multinomial logit;loans to collateral value;discouraged;denied;Credit rationing;cost of application |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:cns:cnscwp:202417 |
| By: | Daube, Carl Heinz |
| Abstract: | This article analyses the potential impact of a takeover of Commerzbank by the Italian bank UniCredit on the European banking landscape and the development of the Capital Markets Union. It discusses the potential for increased profitability, structural efficiency and stability of the European banking sector as well as the challenges associated with the consolidation of banks. Finally, it examines how this takeover could contribute to achieving the objectives of the Capital Markets Union by improving the framework conditions for financing, particularly for SMEs. |
| Abstract: | Dieser Artikel analysiert die möglichen Auswirkungen einer Übernahme der Commerzbank durch die italienische Bank UniCredit auf die europäische Bankenlandschaft und die Entwicklung der Kapitalmarktunion. Er erörtert das Potenzial für eine höhere Rentabilität, strukturelle Effizienz und Stabilität des europäischen Bankensektors sowie die mit der Konsolidierung von Banken verbundenen Herausforderungen. Schließlich wird untersucht, wie diese Übernahme zur Erreichung der Ziele der Kapitalmarktunion beitragen könnte, indem sie die Rahmenbedingungen für die Finanzierung, insbesondere von KMU, verbessert. |
| Keywords: | UniCredit, Commerzbank, EU Capital Market Union, Next CMU |
| JEL: | G01 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:esprep:305808 |
| By: | Brzoza-Brzezina, Michał; Kolasa, Marcin; Makarski, Krzysztof; Jabłońska, Julia |
| Abstract: | During the COVID-19 pandemic, governments in the euro area sharply increased spending while the European Central Bank eased financing conditions. We use this episode to assess how such a concerted monetary-fiscal stimulus redistributes welfare between various age cohorts. Our assessment involves not only the income side of household balance sheets (mainly direct effects of transfers) but also the more obscure financing side that, to a substantial degree, occurred via indirect effects (with a prominent role of the inflation tax). Using a quantitative life-cycle model, and assuming that the deficit was partly unfunded by future taxes, we document that young households benefited from the stimulus, while middle-aged and older agents mainly paid the bill. Crucially, most welfare redistribution was due to indirect effects related to macroeconomic adjustment that resulted from the stimulus. As a consequence, even though all age cohorts received significant transfers, the welfare of some actually decreased. JEL Classification: E31, E51, E52, H5, J11 |
| Keywords: | COVID-19, fiscal expansion, monetary policy, redistribution |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242998 |
| By: | Kalliyil, Muneer (Indian Institute of Management Bangalore); Sahoo, Soham (Loughborough University) |
| Abstract: | This study examines how restricted access to microfinance by households affects children's learning outcomes, utilizing a unique natural experiment that halted all microfinance operations in Andhra Pradesh (AP), India, in 2010. The analysis exploits quasi-random variation in district-level exposure to the shock in states other than AP, as the regulation affected lenders' liquidity nationwide. Using difference-in-differences and event study designs, we find a significant and persistent decline in children's learning outcomes. The restoration of credit access does not fully reverse these effects, highlighting the long-term consequences of short-term financial disruptions. As plausible mechanisms, we find a shift in enrollment from private to government schools, lower household spending on education, reduced food expenditure impacting nutrition, and a decline in mothers' employment. Heterogeneity analysis reveals that the adverse effects were more prominent for girls and younger children. By focusing on the effects of regulatory restrictions rather than micro-finance service provision, this study complements existing literature and provides a more comprehensive understanding of the socioeconomic impacts of microfinance. |
| Keywords: | microfinance regulation, credit constraint, learning outcomes, schooling, education, India |
| JEL: | E51 G21 G28 I2 J16 R51 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17404 |
| By: | Alicia Aguilar (National Bank of Slovakia) |
| Abstract: | This paper provides a novel and high-frequency index of sovereign fragmentation in the euro area. The proposed methodology offers a decomposition of sovereign yields into the common trend, market conditions, and fundamentals-based divergence, which are uncorrelated to fragmentation. Therefore, the fragmentation index constitutes a bottom-line indicator for euro area Central Banks, as measuring disorderly market dynamics in sovereign markets not warranted by fundamentals. In that sense, this paper provides relevant conclusions about the effectiveness of monetary policy interventions, pointing to a significant effect of market stabilization announcements, such as TPI, in reducing sovereign fragmentation. I contribute to the literature as estimating the uncorrelated drivers of euro area yields divergence using a Restricted Principal Components Analysis. The estimated factors are later used to assess the effect of fragmentation, market and fundamentals on country's yields through several economic regimes, pointing to differences across countries and time. |
| JEL: | C38 E52 E58 H63 G01 G12 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:svk:wpaper:1113 |
| By: | HA, JONGRIM; Kim, Dohan; Kose, Ayhan M. |
| Abstract: | Conventional empirical models of monetary policy transmission in emerging market economies produce puzzling results: monetary tightening often leads to an increase in prices (the price puzzle) and depreciation of the currency (the FX puzzle). We show that incorporating forward-looking expectations into standard open economy structural VAR models resolves these puzzles. Specifically, we augment the models with novel survey-based measures of expectations based on consumer, business, and professional forecasts. We find that the rise in prices following monetary tightening is related to currency depreciation, so eliminating the FX puzzle helps solve the price puzzle. |
| Keywords: | monetary policy; emerging market economies; prize puzzle; foreign exchange puzzle |
| JEL: | E31 E32 E43 E47 E52 E58 Q43 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122624 |
| By: | Bonciani, Dario (Sapienza University of Rome); M Masolo, Riccardo (Universitá Cattolica del Sacro Cuore, Milano); Sarpietro, Silvia (University of Bologna) |
| Abstract: | Food price changes have a strong and persistent impact on UK consumers’ inflation expectations. Over 60% of households report that their inflation perceptions are heavily influenced by food prices and display a stronger association between their inflation expectations and perceptions. We complement this finding with a Structural Vector Autoregression (SVAR) analysis, illustrating that food price shocks have a larger and more persistent effect on expectations compared to a ‘representative’ inflation shock. Finally, we augment the canonical New-Keynesian model with behavioural expectations that capture our empirical findings and show that monetary policy should respond more aggressively to food price shocks. |
| Keywords: | Inflation expectations; inflation perceptions; monetary policy |
| JEL: | D10 D84 E31 E52 E58 E61 |
| Date: | 2024–10–11 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1094 |
| By: | Cinthia de Souza |
| Abstract: | This paper examines the financial mechanisms that reflect and entrench the financial subordination of the Eurozone periphery within the monetary union. It argues that the exacerbation of financial asymmetries during the debt crisis and their relative softening during the pandemic are closely linked to the evolving Eurozone approach to government securities. It proposes a new framework centred on what is here termed the "Eurozone's contradiction", a concept that encapsulates the potential tension between the uneven discipline of finance and the monetary union`s perpetuation. When this tension becomes unsustainable, institutional changes and shifts in economic policy are required to preserve the common currency area. These developments, in turn, influence regional government debt hierarchies and shape the variegated financial subordination of the Eurozone periphery |
| Keywords: | Financial Subordination, Periphery, Eurozone, Public Debt. |
| JEL: | F33 E44 H63 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:usi:wpaper:916 |
| By: | Leo Ardon; Benjamin Patrick Evans; Deepeka Garg; Annapoorani Lakshmi Narayanan; Makada Henry-Nickie; Sumitra Ganesh |
| Abstract: | We develop a novel two-layer approach for optimising mortgage relief products through a simulated multi-agent mortgage environment. While the approach is generic, here the environment is calibrated to the US mortgage market based on publicly available census data and regulatory guidelines. Through the simulation layer, we assess the resilience of households to exogenous income shocks, while the optimisation layer explores strategies to improve the robustness of households to these shocks by making novel mortgage assistance products available to households. Households in the simulation are adaptive, learning to make mortgage-related decisions (such as product enrolment or strategic foreclosures) that maximize their utility, balancing their available liquidity and equity. We show how this novel two-layer simulation approach can successfully design novel mortgage assistance products to improve household resilience to exogenous shocks, and balance the costs of providing such products through post-hoc analysis. Previously, such analysis could only be conducted through expensive pilot studies involving real participants, demonstrating the benefit of the approach for designing and evaluating financial products. |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2411.00563 |
| By: | Hugo Spring-Ragain (HEIP) |
| Abstract: | This article examines how emerging economies use countercyclical monetary policies to manage economic crises and fluctuations in dominant currencies, such as the US dollar and the euro. Global economic cycles are marked by phases of expansion and recession, often exacerbated by major financial crises. These crises, such as those of 1997, 2008 and the disruption caused by the COVID-19 pandemic, have a particular impact on emerging economies due to their heightened vulnerability to foreign capital flows and exports.Counter-cyclical monetary policies, including interest rate adjustments, foreign exchange interventions and capital controls, are essential to stabilize these economies. These measures aim to mitigate the effects of economic shocks, maintain price stability and promote sustainable growth. This article presents a theoretical analysis of economic cycles and financial crises, highlighting the role of dominant currencies in global economic stability. Currencies such as the dollar and the euro strongly influence emerging economies, notably through exchange rate variations and international capital movements. Analysis of the monetary strategies of emerging economies, through case studies of Brazil, India and Nigeria, reveals how these countries use tools such as interest rates, foreign exchange interventions and capital controls to manage the impacts of crises and fluctuations in dominant currencies. The article also highlights the challenges and limitations faced by these countries, including structural and institutional constraints and the reactions of international financial markets.Finally, an econometric analysis using a Vector AutoRegression (VAR) model illustrates the impact of monetary policies on key economic variables, such as GDP, interest rates, inflation and exchange rates. The results show that emerging economies, although sensitive to external shocks, can adjust their policies to stabilize economic growth in the medium and long term. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.23002 |
| By: | Ha, Jongrim (World Bank); Kim, Dohan (World Bank); Kose, M. Ayhan (World Bank); Prasad, Eswar (Cornell University) |
| Abstract: | Conventional empirical models of monetary policy transmission in emerging market economies produce puzzling results: monetary tightening often leads to an increase in prices (the price puzzle) and depreciation of the currency (the FX puzzle). We show that incorporating forward-looking expectations into standard open economy structural VAR models resolves these puzzles. Specifically, we augment the models with novel survey-based measures of expectations based on consumer, business, and professional forecasts. We find that the rise in prices following monetary tightening is related to currency depreciation, so eliminating the FX puzzle helps solve the price puzzle. |
| Keywords: | monetary policy, emerging market economies, prize puzzle, foreign exchange puzzle |
| JEL: | E31 E32 Q43 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17431 |
| By: | Wenyuan Li; Pengyu Wei |
| Abstract: | This paper investigates the optimal consumption, investment, and life insurance/annuity decisions for a family in an inflationary economy under money illusion. The family can invest in a financial market that consists of nominal bonds, inflation-linked bonds, and a stock index. The breadwinner can also purchase life insurance or annuities that are available continuously. The family's objective is to maximize the expected utility of a mixture of nominal and real consumption, as they partially overlook inflation and tend to think in terms of nominal rather than real monetary values. We formulate this life-cycle problem as a random horizon utility maximization problem and derive the optimal strategy. We calibrate our model to the U.S. data and demonstrate that money illusion increases life insurance demand for young adults and reduces annuity demand for retirees. Our findings indicate that the money illusion contributes to the annuity puzzle and highlights the role of financial literacy in an inflationary environment. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.20128 |
| By: | George-Marios Angeletos; Chen Lian; Christian K. Wolf |
| Abstract: | In HANK models, fiscal deficits drive aggregate demand and thus inflation because households are non-Ricardian; in the Fiscal Theory of the Price Level (FTPL), they instead do so via equilibrium selection. Because of this difference, the mapping from deficits to inflation in HANK is robust to active monetary policy and free of the controversies surrounding the FTPL. Despite this difference, a benchmark HANK model with sufficiently slow fiscal adjustment predicts just as much inflation as the FTPL. This is true even in the simplest FTPL scenario, in which deficits are financed entirely by inflation and debt erosion. In practice, however, unfunded deficits are likely to trigger a persistent boom in real economic activity and thus the tax base, substituting for debt erosion. In our quantitative explorations, this reduces the inflationary effects of unfunded deficits by about half relative to that simple FTPL arithmetic. |
| JEL: | E3 E6 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33102 |
| By: | Leonardo Perotti; Lech A. Grzelak; Cornelis W. Oosterlee |
| Abstract: | Prepayment risk embedded in fixed-rate mortgages forms a significant fraction of a financial institution's exposure, and it receives particular attention because of the magnitude of the underlying market. The embedded prepayment option (EPO) bears the same interest rate risk as an exotic interest rate swap (IRS) with a suitable stochastic notional. We investigate the effect of relaxing the assumption of a deterministic relationship between the market interest rate incentive and the prepayment rate. A non-hedgeable risk factor is modeled to capture the uncertainty in mortgage owners' behavior, leading to an incomplete market. We prove under natural assumptions that including behavioral uncertainty reduces the exposure's value. We statically replicate the exposure resulting from the EPO with IRSs and swaptions, and we show that a replication based on swaps solely cannot easily control the right tail of the exposure distribution, while including swaptions enables that. The replication framework is flexible and focuses on different regions in the exposure distribution. Since a non-hedgeable risk factor entails the existence of multiple equivalent martingale measures, pricing and optimal replication are not unique. We investigate the effect of a market price of risk misspecification and we provide a methodology to generate robust hedging strategies. Such strategies, obtained as solutions to a saddle-point problem, allow us to bound the exposure against a misspecification of the pricing measure. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.21110 |
| By: | G. Spano |
| Abstract: | This paper examines the interplay between market power and financial frictions, highlighting the bidirectional relationship between firms' access to finance and competitive dynamics. We develop a theoretical model where firms invest in technology to enhance product quality, which increases their market power. In our model, firms with greater market power can invest more, thereby reinforcing and accumulating additional market power in subsequent periods. However, the general equilibrium effects of reducing financial frictions is not clear. Specifically, when financial frictions are relaxed, firms can invest more, enabling them to produce at higher margins. This results in an increase in aggregate average market power. On the other hand, a reduction in financial frictions could also facilitate the entry of new firms into the market, thereby increasing competitive pressure. Our results indicate that an increase in investment, driven by reduced financial frictions, does not necessarily enhance competition unless the entry of new firms accompanies it. Through empirical analysis, using data from publicly listed U.S. firms, we test that firms with more market power are subjected to less financial frictions pressures in the subsequential periods. Empirical evidence also suggests higher levels of market power in the earlier period are correlated with less financial constraints in later periods. |
| Keywords: | technology ladder;investment;financial frictions;Market power |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:cns:cnscwp:202422 |
| By: | Ackah, Charles; Hanley, Aoife; Hecker, Lars; Kodom, Michael |
| Abstract: | Our analysis of over 500 Ghanaian firms sheds light, for the first time, on how certain firms managed to extract value from mobile money. Our regressions point to the usefulness of this form of cashless payments in stabilizing sales during the COVID pandemic. Perhaps the most important message from our analysis is the recognition that the benefits from mobile money extend beyond its purpose as a tool for transacting cashless payments. We reveal that firms using these additional tools supported by MoMo (e.g. for planning or saving purposes) report higher sales resilience, all things equal. Our findings appear to echo the literature on private householders (e.g. Jack and Suri, 2014). However, while the latter report a positive effect due to remittances, our finding is more likely driven by enhanced ability of businesses to streamline their planning and sales. |
| Keywords: | Mobile Money, Africa, Firm, Urbanization |
| JEL: | G23 G21 L25 O14 O18 O33 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:ifwkwp:305274 |