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on Banking |
| By: | William M. Doerner (Federal Housing Finance Agency); Michael J. Seiler (Federal Housing Finance Agency); Vivian Wong (Federal Housing Finance Agency) |
| Abstract: | This paper examines how banks adapt to tightening regulations, evolving macroeconomic conditions, and changes in household demand. Unlike most analyses of banking regulation, we develop a general equilibrium model in which banks both borrow from and lend to households, allowing us to assess the impact of regulations in conjunction with other macroeconomic factors. The model features an often overlooked interplay between household portfolio choices and bank financial decisions, emphasizing the contribution of household preferences to the precipitous climb in cash ratios that accompanied reductions in bank leverage following the 2008 global financial crisis. Through counterfactual analysis, we find that in the absence of heightened household demand for deposits, decline in bank leverage would have been twice as steep, and the proportion of mortgage loans within total assets would have contracted by more than twice the actual post-crisis change. Our empirical analysis confirms the increase in household demand for deposits and explores how this expansion interacts with banks' capital buffers. The empirical results support our comparative static implications that banks with larger capital buffers accumulate less cash and more mortgages as a share of total assets than banks with smaller capital buffers in response to growing deposits. The mechanisms discussed in this study are pertinent for policymakers, particularly as central banks worldwide consider further interest rate reductions and U.S. regulators finalize the implementation of Basel III requirements. |
| Keywords: | banks, deposits, monetary policy, mortgages |
| JEL: | C58 D14 D53 E44 E58 G21 G28 G51 R21 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:hfa:wpaper:24-08 |
| By: | Palma Filep-Mosberger (Magyar Nemzeti Bank (Central Bank of Hungary)); Lorant Kaszab (Magyar Nemzeti Bank (Central Bank of Hungary)); Zhou Ren (Vienna Graduate School of Finance) |
| Abstract: | Local currency borrowers are statistically significantly affected by exchange rate fluctuations due to the bank lending channel. Using microdata on borrowers from Hungary, this study examines the spillover effects of foreign currency loans on local currency borrowers following an unexpected appreciation of the Swiss franc (CHF) in January 2015. CHF corporate loans are considered unhedged since the majority of the borrowers did not have income in CHF. Our analysis indicates that banks holding a larger portion of unhedged CHF corporate loans reduced their lending in local currency corporate loans after the shock. This relationship is robust across both extensive (loans terminated by a given bank and no new loans at a bank or banks different from the account holder bank or banks) and intensive (no new loans at its current bank or banks) margins. Further investigation into the mechanisms reveals that banks with more unhedged CHF corporate loans experience an increase in non†performing CHF loans post†shock, reducing their capital adequacy. Furthermore, the evidence in our paper suggests that reductions in banks’ local currency lending due to exchange rate shocks adversely affect the investment activity of small firms and increase their likelihood of default. |
| Keywords: | bank lending, exchange rate shock, currency mismatch, FX loans, credit. |
| JEL: | G15 G21 G28 G32 G33 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:mnb:wpaper:2024/2 |
| By: | Issam Samiri |
| Abstract: | I propose a general equilibrium model with endogenous defaults among producers and a Value-at-Risk rule designed to stabilise insolvency risk in the banking sector. Bank equity fluctuates with aggregate default rates, affecting banks' lending capacity. The Value-at-Risk constraint induces procyclical leverage, amplifying the impact of bank equity fluctuations on credit supply. This mechanism generates countercyclical risk premia in lending rates, thus intensifying economic shocks. Analytical exploration identifies three channels driving the dynamics of bank leverage and credit spreads: (a) the credit demand channel, (b) the bank equity channel, and (c) a risk channel that captures the interaction between default expectations and the Value-at-Risk constraint. The model is calibrated to quantitatively replicate fluctuations in banks' balance sheets, credit spreads, and real business cycle variables. |
| Keywords: | RBC, Value-at-Risk, bank leverage, Credit Spreads, Financial Frictions |
| JEL: | E13 E32 E44 G21 G32 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nsr:niesrd:562 |
| By: | Fritz, Benedikt; Krüger, Ulrich; Wong, Lui Hsian |
| Abstract: | We examine the impact of introducing a digital euro, as currently conceptualized in the proposal by the European Commission, on the liquidity situation of banks in Germany. The analyses are the basis for assessing the effects of a digital euro on banks' liquidity, as presented in the 11th Annual Report of the German Financial Stability Committee. This paper extensively addresses the technical details of the analyses and substantiates the robustness of the discussed findings. Our analysis focuses on short-term effects. In this environment, deposits are swiftly withdrawn and converted into digital euros, leaving banks with limited opportunities to adapt. We consider a scenario where users fully utilize the holding limit of the digital euro, along with additional scenarios that account for risk-mitigating factors. We employ a unique dataset that combines banking supervisory data with payment transaction information. Our analysis demonstrates that particular savings banks and cooperative banks are vulnerable to retail deposit outflows from exchanges into digital euro. However, only few banks would experience a liquidity shortfall if liquidity in the form of high-quality liquid assets could be redistributed within the banking associations (liquidity balancing). Furthermore, our analysis indicates that based on a holding limit of €3, 000 the liquidity shortfall based on the Liquidity Coverage Ratio remains relatively small in aggregate compared to the level of high-quality liquid assets of the entire banking system in all scenarios (up to 2%). |
| Keywords: | Central bank digital currency, holding limits, bank liquidity, systemic risk |
| JEL: | G21 G32 G38 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubtps:307139 |
| By: | Laurence Bristow (Reserve Bank of Australia) |
| Abstract: | The RBA controls short-term interest rates by offering to lend as many reserves as banks demand at a rate close to its target for monetary policy. At this rate, banks' demand drives the amount of reserves the RBA supplies and subsequently the size of its balance sheet. I estimate a substantial increase in Australian banks' reserve demand since the COVID-19 pandemic. I find an increase in banking system deposits explains a large part of the increase in reserve demand through an associated shift to the right in Australian banks' reserve demand curve. The link between deposits and reserve demand suggests banks are willing to pay for the convenience of holding additional reserves to manage payments between depositors, or that banks hold reserves against deposits as a precaution in case of liquidity stress. The value of collateral also shifts banks' reserve demand curve as it changes the price at which banks can fund reserves through the repo market. The role of collateral in explaining the increase in banks' reserve demand is likely small as its value is little changed since the pandemic. |
| Keywords: | monetary policy; money and interest rates; banks |
| JEL: | E49 E52 G21 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:rba:rbardp:rdp2024-08 |
| By: | A T M Omor Faruq; Md Toufiqul Huq |
| Abstract: | This paper examines the pivotal role central banks play in advancing sustainable finance, a crucial component in addressing global environmental and social challenges. As supervisors of financial stability and economic growth, central banks have dominance over the financial system to influence how a country moves towards sustainable economy. The chapter explores how central banks integrate sustainability into their monetary policies, regulatory frameworks, and financial market operations. It highlights the ways in which central banks can promote green finance through sustainable investment principles, climate risk assessments, and green bond markets. Additionally, the chapter examines the collaborative efforts between central banks, governments, and international institutions to align financial systems with sustainability goals. By investigating case studies and best practices, the chapter provides a comprehensive understanding of the strategies central banks employ to foster a resilient and sustainable financial landscape. The findings underscore the imperative for central banks to balance traditional mandates with the emerging necessity to support sustainable development, ultimately contributing to the broader agenda of achieving global sustainability targets. |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2411.13576 |
| By: | José Ramón Martínez Resano (BANCO DE ESPAÑA) |
| Abstract: | This paper explores the financial stability nexus within a monetary ecosystem that has been expanded to include a central bank digital currency (CBDC). The paper examines the new risks associated with the introduction of a CBDC, their mitigants and their potential amplification factors. Economists and academics still seem to be split on the validity of the traditional principle of separating money into two tiers of public and private money, as a structural mitigant of the risks of deposit substitution and banking disintermediation towards CBDCs. The potential amplification of the risks associated with CBDCs through credit-related second-round effects is an additional concern. The systematic study of the risks and mitigants carried out in the paper highlights the importance of partially adapting the two-tier system of money by implementing certain limits, as envisaged in CBDC plans. The endogenous mitigation of the risks through improved bank competition often attributed to CBDCs is uncertain and may be insufficient from a systemic risk perspective. The introduction of exogenous mitigants, like CBDC holding limits calibrated on the basis of a robust methodology, seems instrumental to ensure the consistency of a monetary ecosystem that includes a CBDC. Hence, the paper addresses some fundamental methodological issues related to these limits, such as the rationale for alternative targets for the limits, the influence of disintermediation speed, the time horizons involved in the limitation and adaptation process, and the role of regulatory and market frictions. An illustrative empirical analysis for the Spanish case indicates that financial stability might not be a concern for reasonable levels of CBDC take-up, although the complexity and novelty of this instrument call for a more in-depth analysis in the future. |
| Keywords: | central bank digital currency, digital money, payments, financial stability |
| JEL: | E41 E42 E51 E52 E58 G21 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:bde:opaper:2436 |
| By: | Pongsak Luangaram; Yuthana Sethapramote; Kannika Thampanishvong; Gazi Salah Uddin |
| Abstract: | Understanding the impact of climate risks on financial stability is crucial for ensuring the resilience of banking sectors, particularly in economies exposed to climate change. This paper investigates how transition and physical risks influence systemic risk in Thailand’s banking sector. Transition risks are analyzed using the Fama-French multi-factor asset pricing model to estimate the risk premium of brown industries relative to green industries, termed Brown-minus-Green (BMG). Physical risks are assessed using the Standardized Precipitation Evapotranspiration Index (SPEI), an indicator of flood and drought conditions. Systemic risk at the bank level is measured using conditional value-at-risk (CoVaR). Panel regressions are employed to examine the relationship between climate risks and systemic risk. The results reveal that transition risks, as captured by the BMG factor, significantly heighten systemic risk among Thai banks, emphasizing their critical role in financial vulnerabilities. Additionally, physical risks, particularly those associated with flood exposure, create substantial challenges for bank portfolios. These findings highlight the importance of integrating transition and physical risk indicators into regulatory monitoring frameworks to enhance financial stability. Furthermore, Thai commercial banks can apply these insights to conduct climate stress tests and develop strategies for managing climate-related risks more effectively. |
| Keywords: | climate risk; Systemic risk; Thailand; Banking sector; BMG; SPEI; CoVar |
| JEL: | C58 G12 G21 Q54 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:pui:dpaper:224 |
| By: | Lucia Quaglietti |
| Abstract: | Financing conditions have tightened sharply since 2022 across OECD countries, reflecting the rapid increase of central banks’ policy rates. Credit conditions have worsened alongside, especially in the euro area, where credit provided by banks has been expanding at the slowest pace since the euro area sovereign debt crisis. Empirical estimates obtained for Germany, France, Italy, the United Kingdom and the United States suggest that the credit deceleration reflects a combination of tighter credit supply and falling credit demand, with the latter playing a predominant role in shaping credit conditions in the euro area. Credit supply has progressively dried up in all countries, and although there have been few signs of a severe and widespread credit shortage of the type seen in the global financial crisis, the negative effect on economic activity is being felt in several countries. Bank lending rates have started to edge down, pointing to a completed pass-through of past monetary policy tightening. However, tight credit conditions could weigh on activity through 2024, due to the long lags in the transmission of credit shocks. Credit demand could also weaken further, including in the event of a sharp tightening of labour markets or a swift repricing in asset prices. |
| Keywords: | credit drivers, credit effects, labour markets, monetary policy |
| JEL: | E3 E4 E5 |
| Date: | 2024–11–29 |
| URL: | https://d.repec.org/n?u=RePEc:oec:ecoaaa:1826-en |
| By: | Florian Horky (National Bank of Slovakia) |
| Abstract: | Our aim in this study is to investigate how SMEs perceive and expect the availability of bank loans, credit lines, and trade credits. Our findings highlight that past experiences and changing demands for financing are significant drivers in shaping both past perceptions and future expectations. Behavioral factors such as loss aversion and rational inattention play a crucial role in influencing managerial decisions. We use data from the semi-annually conducted Survey on the Access to Finance of Enterprises. The data covers the time-period from April 2014 to September 2022. Insights from our findings help explain the persistent low credit dynamics observed since the financial crisis and suggest similar trends may follow the current economic disruptions. Our results underscore the importance of considering behavioral elements and past experiences in designing effective monetary policies to support SMEs’ access to finance. |
| JEL: | D22 E51 F33 G21 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:svk:wpaper:1115 |
| By: | Chuanglian Chen (Jinan University); Xiaobin Liu (Sun Yat-sen University); Jun Yu (University of Macau); Tao Zeng (Zhejiang University) |
| Abstract: | This paper investigates the time-varying asymmetric and zone-like preferences of the People’s Bank of China (PBoC) and its corresponding monetary policy reaction function. We assume that the priority given to different policy objectives in the loss function of the PBoC can evolve over time. Based on this assumption and the economic system, the central bank minimizes losses and derives an optimal forward-looking monetary policy rule with time-varying parameters. The paper explores four distinct types of loss related to inflation, output, and leverage, resulting in a total of 64 distinct models. Leveraging a modified maximum likelihood estimation approach, we estimate these models and utilize the Akaike information criterion (AIC) to identify the most suitable model. Based on the data from 1996 to 2022, we find that: (1) the PBoC’s reaction to inflation differentials exhibits slight asymmetry, featuring a no-intervention zone between -1% and 1%. The monetary authority intervenes when inflation diverges by more than 1% from the target, otherwise relying on market self-regulation; (2) regarding output gaps, the PBoC asymmetrically intervenes, displaying a stronger inclination towards averting overheating compared to downturns; (3) in response to credit leverage differentials, policy reactions follow a linear pattern. The empirical results underscore the central bank’s adaptability and responsiveness to economic fluctuations and strongly demonstrate the flexibility and advantages of our framework. |
| Keywords: | Time-varying parameter model, forward-looking monetary policy rule, leverage, asymmetric and zone-like preference |
| JEL: | E5 C32 C51 C52 E52 E58 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:boa:wpaper:202421 |
| By: | Yuval Boneh; Ethan Jones |
| Abstract: | This paper delves into the spectrum of credit risks associated with decentralized stablecoin issuance, ranging from overcollateralized lending to business-to-business credit. It examines the mechanisms, risks, and mitigation strategies at each layer, highlighting the potential for scaling decentralized stablecoins while ensuring systemic health. |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2411.13762 |
| By: | Federico Di Pace; Giacomo Mangiante; Riccardo Masolo (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore) |
| Abstract: | We study the market-perceived monetary policy rule of the Bank of England (BoE) using financial market data and macroeconomic surprises. Leveraging exogenous variations in inflation and industrial production (IP) surprises around Office for National Statistics releases, we estimate gilt yield responsiveness to inflation and real activity, revealing how markets expect the BoE to react to macroeconomic changes. Markets generally understand the UK flexible inflation-targeting regime, revising both inflation expectations and short-term rates upward after inflation surprises. We identify two key nonlinearities. First, perceived responsiveness changes over time, with short-term rates responding when away from their lower bound, and medium-term rates responding during periods of unconventional monetary policy. Second, financial markets expect a weaker response to inflation when it originates from supply shocks. This, however, does not translate into a risk of de-anchored expectations. |
| Keywords: | Market Perceptions, Financial Markets’ expectations, Inflation, Yields, Monetary Policy Rule. |
| JEL: | C10 E50 E58 G10 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:ctc:serie1:def137 |
| By: | Suyash Rai (xKDR Forum) |
| Abstract: | The digital public infrastructure (DPI) approach has gained prominence in digital transformation, with India's Aadhaar often cited as a success story for accelerating financial inclusion. This paper critically evaluates India's progress on financial inclusion from 2011 to 2021, revealing a paradox: while account ownership surged, account usage remained low. The paper highlights that government and Reserve Bank of India (RBI) mandates drove rapid account opening, with Aadhaar enabling account opening mainly as a physical ID and an authentication tool for transactions. The financial inclusion efforts focused on expanding account ownership for direct benefit transfers, often at the expense of service quality. Banks, pressured to meet political targets, faced weak commercial incentives due to restrictive pricing regulations and mismatched service delivery models. These constraints hampered sustainable account usage. The paper explores whether alternative policy designs could have balanced electoral and economic goals more effectively. Demand-side constraints, shaped by socioeconomic conditions, and supply-side path dependencies influenced government choices. However, the analysis suggests room for greater political creativity in defining the policy objectives, liberalizing regulations liberalization to enhance financial inclusion, and leveraging the public sector banks. Finally, the paper discusses implications of this analysis for institutional reforms, including redesigning welfare schemes, revisiting public sector bank ownership, and rethinking top-down financial mandates. It also situates India's experience within the broader debate on the state's role in DPIs, challenging the notion that state-led DPI initiatives inherently maximize public value. |
| JEL: | G28 H53 L86 O33 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:anf:wpaper:35 |
| By: | Shiyun Cao (Institute for Economic and Social Research, Jinan University); Jennifer T. Lai (School of Finance, Guangdong University of Foreign Studies); Paul D. McNelis (Boston College) |
| Abstract: | This paper assesses the network connectedness of risks in China’s stock market, focusing on how shocks in the real estate sector impact financial institutions. We analyze the effect of financial instability in real estate firms on the stability of the broader financial system. To measure the transmission of these risks, we use two key methods: generalized forecast error variance decomposition and the ∆CoVaR approach.Our findings reveal that banks often serve as net receivers of risk, while non-bank financial institutions amplify the transmission of real estate-related risks. This highlights the critical role of non-banks in propagating risk throughout the financial system and underscores the importance of robust systemic risk monitoring across financial networks. |
| Keywords: | financial contagion, China, real estate, regulation |
| JEL: | G21 G22 G23 G28 |
| Date: | 2024–11–26 |
| URL: | https://d.repec.org/n?u=RePEc:boc:bocoec:1083 |
| By: | Aliaksandr Zaretski (University of Surrey) |
| Abstract: | I characterize optimal government policy in a sticky-price economy with different types of consumers and endogenous financial constraints in the banking and entrepreneurial sectors. The competitive equilibrium allocation is constrained inefficient due to a pecuniary externality implicit in the collateral constraint and other externalities arising from consumer type heterogeneity. These externalities can be corrected with appropriate fiscal instruments. Independently of the availability of such instruments, optimal monetary policy aims to achieve price stability in the long run and approximate price stability in the short run, as in the conventional New Keynesian environment. Compared to the competitive equilibrium, the constrained efficient allocation significantly improves between-agent risk sharing, approaching the unconstrained Pareto optimum and leading to sizable welfare gains. Such an allocation has lower leverage in the banking and entrepreneurial sectors and is less prone to the boom-bust financial crises and zero-lower-bound episodes observed occasionally in the decentralized economy. |
| JEL: | E32 E44 E52 E63 G28 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:sur:surrec:0624 |
| By: | Patrick Hendy (Reserve Bank of Australia); Benjamin Beckers (Reserve Bank of Australia) |
| Abstract: | Foreign or global economic and financial shocks can be significant drivers of economic outcomes in small open economies such as Australia, and are therefore a considerable source of uncertainty to the Australian economic outlook. Examining the extent to which global shocks affect the Australian financial system and economy and the channels through which these shocks operated over the 1990–2019 period, we find that global shocks drive considerable variation in the exchange rate and the cash rate, but a smaller proportion of variation in economic variables like real GDP. This suggests that, over our sample, the exchange rate and domestic monetary policy have effectively buffered the Australian economy from global shocks. Unlike some other recent literature on global spillovers, we do not find the Australian banking system to be a substantial channel of financial and economic spillovers to Australia. |
| Keywords: | global spillovers; global financial cycle; banks |
| JEL: | C38 F36 F42 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:rba:rbardp:rdp2024-10 |
| By: | Patrick Gruning (Latvijas Banka); Zeynep Kantur (Baskent University) |
| Abstract: | This paper introduces financial intermediaries, who engage in lending to firms for investments and buying public bonds issued by the government, and unconventional monetary policy in the form of quantitative easing or tightening into a rich New- Keynesian multi-sector E-DSGE model with production and investment networks. Due to the strong input-output linkages between sectors, almost all policies are found to be not effective in facilitating a green transition. The policies considered are sector-specific bank regulation policies, unconventional monetary policies, various carbon tax revenue recycling schemes, public green capital investment, and sector- specific investment tax/subsidy policies. Only if carbon tax revenues are used to build public green capital, thereby boosting productivity of the green sectors, the trade-off between achieving positive economic growth and reducing carbon emissions is fully resolved. |
| Keywords: | Production network, Investment network, Climate change, Financial intermediation, Financial stability, Stranded assets, Monetary policy |
| JEL: | E22 E32 E52 G21 L14 Q50 |
| Date: | 2024–11–14 |
| URL: | https://d.repec.org/n?u=RePEc:ltv:wpaper:202406 |
| By: | Anttonen, Jetro; Laine, Olli-Matti |
| Abstract: | According to the efficient-market hypothesis, forecasts derived from efficient market prices should be unbeatable. However, numerous institutions, including the European Central Bank, regularly publish forecasts for future inflation that deviate from market expectations. We investigate the relative predictive accuracy of the ECB's short-term inflation projections against predictions derived from the market prices of short-term inflation-linked swaps (fixings) in 2018-2023. We show that the predictive accuracy of fixings and the ECB projections have been very comparable during times of low and stable inflation, but during recent times of economic volatility the market prices of fixings have provided significantly more accurate predictions. We find that the efficiency of financial markets to process new information may result in more accurate short-term inflation forecasts than produced by Eurosystem insiders, and that risk premia and market inefficiencies do not seem to play a significant role in the context of short-term inflation-linked swaps. Overall, our findings suggest that making use of the information in the market prices for fixings could potentially improve the accuracy of the ECB's short-term inflation projections. |
| Keywords: | Inflation, fixings, swaps, financial market, forecasting |
| JEL: | E31 G14 G17 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofecr:306300 |
| By: | Karlheinz Walch; Benjamin Weigert |
| Abstract: | AbstractThe idea of a Banking Union emerged in the aftermath of the global financial crisis. Ten years on, two of its three pillars, the Single Supervisory Mechanism and the Single Resolution Mechanism, have proven to be a success with regard to financial integration and stability. In this Policy Brief, experts from the Deutsche Bundesbank explain why, in times of structural change, it is crucial to complete the Banking Union and advance the Capital Markets Union.Key MessagesIn times of structural change and periods of upheaval, a resilient financial system plays a key role in the successful transformation of the economy.Two of the three pillars of the still unfinished Banking Union have proven to be important elements of financial integration and stability.To realize the full potential of the European financial system, the EU should complete the Banking Union and progress the Capital Markets Union.The Commission’s proposals to strengthen the existing EU bank crisis management are a step in the right direction. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:econpb:_67 |
| By: | Mamdouh Abdelkader; Lilia Karnizova (Department of Economics, University of Ottawa, Canada) |
| Abstract: | As climate change risks escalate, central banks are increasingly called upon to address this global challenge. Yet, estimates of the environmental impact of monetary policy are limited, leaving a significant gap in understanding how monetary policy interacts with climate change. In this paper, we aim to fill this gap by providing new evidence based on U.S. data. We identify monetary policy shocks using the recursiveness assumption and estimate their effects on domestic carbon dioxide emissions. Three key findings emerge from our analysis. First, an unexpected monetary policy tightening produces a persistent yet transitory negative effect on total CO2 emissions. This finding holds consistently across different model specifications, periods, and monetary policy indicators, underscoring its robustness. Second, the effects of monetary policy vary significantly across major polluter types. Emissions in the industrial sector, closely tied to production activities, show the strongest response. In contrast, emissions in the residential and commercial sectors are weakly affected, likely due to the essential nature of energy services. Finally, the contribution of U.S. monetary policy shocks to explaining domestic CO2 emissions fluctuations has been modest. Since central banks have limited capacity to directly influence environmental outcomes, monetary policy should be viewed as complementary to fiscal policy and environmental regulation in addressing climate change. |
| Keywords: | CO2 emissions, Carbon emissions, Monetary policy shocks, Climate change, Environmental policy, Recursive VAR. |
| JEL: | E52 E58 Q50 Q51 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ott:wpaper:2406e |
| By: | Nina Boyarchenko; Leonardo Elias |
| Abstract: | We study the determinants of active debt management through issuance and refinancing decisions for firms around the world. We leverage instrument-level data to create a comprehensive picture of the maturity, currency, and security type composition of firms' debt for a large cross-section of countries. At the instrument level, we estimate a predictive model of prepayment as a function of interest costs savings and maturity lengthening motives. We document that there is substantial heterogeneity in prepayment across bonds and loans and across firms, depending on their reliance on bank lending. While debt prepayment is generally successful at extending average maturities and lowering interest rate costs at the firm level, these benefits appear smaller for issuers in emerging market economies. Tight global credit conditions reduce both the ability to prepay debt early and the effectiveness of debt refinancing in reducing interest costs and rollover risk. Put together, our results show that the impact of global credit conditions on firms' debt structure can be traced back to how instrument-level prepayment incentives change over the global credit cycle. |
| Keywords: | debt structure; active debt management; global credit; prepayment |
| JEL: | G32 G15 F30 F44 |
| Date: | 2024–12–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:99238 |
| By: | Viktors Ajevskis (Latvijas Banka) |
| Abstract: | This paper investigates how different parametrisation of the monetary policy reaction function and different mechanisms of expectations formation shape the macroeconomic outcomes in the Smets-Wouters type DSGE model. The initial macroeconomic conditions of the simulations correspond to the high inflation environment of early 2022. The simulation results show that under the hybrid expectations the terminal monetary policy rate is significantly higher than under the rational expectations for all Taylor rule parametrisations. Under the hybrid expectations, the inflation rate is much more persistent than under the rational expectations; three years is not enough to reach the inflation target of two per cent even for quite hawkish calibration of the Taylor rule. In the modelled economy, a relatively fast inflation stabilization for the hawkish Taylor rule has its own price in form of the cumulative output loss when compared with the dovish Taylor rule. Simulations are also performed for the case where the central bank misspecifies expectations formation mechanism in the DSGE model and follows an interest rate path implied by a false model. The results show that the hawkish reaction is preferable for both rightly and wrongly specified models. |
| Keywords: | DSGE, Monetary policy, Expectations, High inflation, Loss function |
| JEL: | C62 C63 D9 D58 |
| Date: | 2024–12–03 |
| URL: | https://d.repec.org/n?u=RePEc:ltv:wpaper:202407 |
| By: | Daeha Cho (Hanyang University); Eunseong Ma (Yonsei University) |
| Abstract: | This study quantitatively assesses both the aggregate and disaggregate effects of inflation-indexed loan contracts using a heterogeneous agentNewKeynesian (HANK) model with an occasionally binding zero lower bound (ZLB). Substituting real for nominal government bonds reduces the volatility of output and inflation and decreases the frequency of ZLB events. Real loans sever the link between real interest rates and inflation, preventing a rise in real interest rates at the ZLB. Accordingly, ZLB events become less costly, weakening precautionary savings against aggregate risk. This leads to higher average nominal rates and a reduced frequency of ZLB occurrences, further reducing aggregate volatility. Although inflation indexation improves aggregate welfare, at the disaggregate level, the wealthy lose while the poor gain. Inflation indexation outperforms suggested policies aimed at providing more room for monetary policy, such as increasing the inflation target and implementing an asymmetric Taylor rule. |
| Keywords: | Zero lower bound, HANK model, Inflation indexation, Welfare |
| JEL: | D31 E31 E32 E52 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:yon:wpaper:2024rwp-233 |
| By: | Lakdawala, Aeimit (Wake Forest University, Economics Department); Moreland, Timothy (University of North Carolina Greensboro); Fang, Min (University of Florida) |
| Abstract: | We show that the role of leverage in explaining firm-level responses to monetary policy changed around the financial crisis of 2007-09. Stock prices of firms with high leverage were less responsive to monetary policy shocks in the pre-crisis period but have become more responsive since the crisis. Using expected volatility measures from firm-level options, we further document that financial markets have been aware of this change. To explain this, we consider a model where firms borrow using both short-term and long-term debt. The reversal relies on the relative strength of two competing channels of monetary transmission through the existing level of debt: debt dilution and debt overhang. Before the crisis, the debt overhang channel dominated, so firms with high leverage were less responsive. Since the crisis, unconventional monetary policy has had an outsized effect on long-term interest rates, strengthening the debt dilution channel that benefits firms with high leverage more. Additional firm-level evidence supports this mechanism. |
| Keywords: | Monetary policy transmission; leverage; debt maturity; firm heterogeneity |
| JEL: | E22 E43 E44 E52 |
| Date: | 2024–12–19 |
| URL: | https://d.repec.org/n?u=RePEc:ris:wfuewp:0120 |
| By: | Dario Bonciani; Riccardo Masolo (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore); Sara Sarpietro |
| Abstract: | We show that food price changes have a 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. In other words, households emphasising the importance of food prices tend to have more backward-looking inflation expectations. 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 |
| URL: | https://d.repec.org/n?u=RePEc:ctc:serie1:def135 |
| By: | Claudia Biancotti; Carolina Camassa; Andrea Coletta; Oliver Giudice; Aldo Glielmo |
| Abstract: | Advancements in large language models (LLMs) have renewed concerns about AI alignment - the consistency between human and AI goals and values. As various jurisdictions enact legislation on AI safety, the concept of alignment must be defined and measured across different domains. This paper proposes an experimental framework to assess whether LLMs adhere to ethical and legal standards in the relatively unexplored context of finance. We prompt nine LLMs to impersonate the CEO of a financial institution and test their willingness to misuse customer assets to repay outstanding corporate debt. Beginning with a baseline configuration, we adjust preferences, incentives and constraints, analyzing the impact of each adjustment with logistic regression. Our findings reveal significant heterogeneity in the baseline propensity for unethical behavior of LLMs. Factors such as risk aversion, profit expectations, and regulatory environment consistently influence misalignment in ways predicted by economic theory, although the magnitude of these effects varies across LLMs. This paper highlights both the benefits and limitations of simulation-based, ex post safety testing. While it can inform financial authorities and institutions aiming to ensure LLM safety, there is a clear trade-off between generality and cost. |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2411.11853 |
| By: | Khatun Mst Asma (Research Institute for Future Design, Kochi University of Technology, Japan); Md Rony Masud (College of Business, Rikkyo University, Japan); Koji Kotani (Research Institute for Future Design, Kochi University of Technology, Japan) |
| Abstract: | Agricultural financing is crucial for economic development and sustainability. However, little is known about how bankers are concerned about climate change as decision makers for agricultural financing as well as their concerns are related to the possible future performances. This study investigates a research question “how do bankers’ climate concerns and value orientation influence agricultural financing?†and the hypotheses “bankers’ climate concerns discourage agricultural financing, whereas their value orientations for future generations encourage it.†We conduct questionnaire surveys and collect data on concerns toward climate factors, prosocial attitude for future generations and sociodemographic information from 596 bankers at three areas in Bangladesh. The results reveal three main findings. First, bankers who have high climate concerns tend to be less optimistic about agricultural financing. Second, bankers who live in high climate-change areas tend to have more severe climate concerns and darker prospectives in agricultural financing than those in low climate-change areas. Third, bankers who have a high value orientation for future generations are likely to be positive over future agricultural financing. Overall, our findings suggest that agricultural financing shall be discouraged as climate change becomes severe, hitting low-land areas, such as Bangladesh, through the lens of bankers’ perceptions, unless the bankers possess high concerns for future generations. To counter such negative possibilities in agricultural financing, a new agricultural financing scheme, such as “agricultural green banking, †shall be necessary to implement. |
| Keywords: | Climate concerns, value orientation, agricultural financing, bankers, Bangladesh |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:kch:wpaper:sdes-2024-6 |
| By: | Athanasios Geromichalos; Lucas Herrenbrueck; Changhyun Lee; Sukjoon Lee (Department of Economics, University of California Davis) |
| Abstract: | We build on recent developments in the theory of money and liquidity to provide a qualitative and quantitative explanation for the well-known TIPS illiquidity vis-`a-vis noninflation- protected Treasuries. Our model does not assume exogenous differences between the markets where the two assets are traded or the investors who hold them; instead, an asset’s liquidity is endogenous and depends on the trading and market entry decisions of investors. The model offers a powerful amplification mechanism that operates upon only one difference between TIPS and Treasuries: the far greater supply of the latter. We also quantify how much the Treasury leaves on the table by issuing securities that are not as highly valued by the market as nominal Treasuries. However, the model does not necessarily imply that the Treasury should phase out TIPS, as some have suggested, only that it should seek to reduce segmentation and ensure that TIPS trade alongside nominal Treasuries in consolidated secondary markets. |
| Keywords: | Monetary-search models, OTC markets, Endogenous liquidity, Treasury securities, Treasury Inflation-Protected Securities (TIPS) |
| JEL: | E31 E43 E52 G12 |
| Date: | 2024–12–02 |
| URL: | https://d.repec.org/n?u=RePEc:cda:wpaper:364 |
| By: | Clodomiro Ferreira (BANCO DE ESPAÑA); Stefano Pica (BANK OF ITALY) |
| Abstract: | Using granular data on household subjective expectations for several countries, we uncover a robust positive reaction of inflation expectations to a contractionary monetary policy shock, a result at odds with standard equilibrium theories with nominal rigidities. We then investigate what lies behind such result. Although households disagree, their expectations are correlated in the cross-section. Two principal components account for a significant portion of the variance of all expectations. These components capture households’ perceptions of the sources of macroeconomic dynamics, with the first capturing either a supply-side view or an overall dislike for inflation, and the second component reflecting a perception about demand pressures. This structure of disagreement is stable across countries and over time and does not vary with demographic or socioeconomic characteristics. We then use these insights to identify two common factors driving expectations over time. These factors are consistent with a narrative based on perceived supply-side inflationary pressures after the invasion of Ukraine in February 2022, as well as with the overall downward inflation dynamics intensified by the reaction of the ECB. |
| Keywords: | survey, expectations, disagreement, monetary policy |
| JEL: | D1 D8 E2 E3 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2445 |