|
on Banking |
| By: | Atsuki Hirata (Bank of Japan); Yuichiro Ito (Bank of Japan); Yoshiyasu Kasai (Bank of Japan) |
| Abstract: | This paper uses financial data from individual banks to quantitatively analyze how the Bank of Japan's "Fund-Provisioning Measure to Stimulate Bank Lending, " decided for introduction in October 2012, affected banks' outstanding loans. We estimated the causal impact of the measure using propensity score matching to address the selection bias stemming from the voluntary basis of participation in this program. The results indicate a statistically significant difference in the outstanding loans between the participating and non-participating banks, suggesting that the Fund-Provisioning Measure to Stimulate Bank Lending helped increase lending. |
| Keywords: | Unconventional monetary policy; Lending facility; Bank lending; Propensity score matching |
| JEL: | E50 E51 E52 E58 G21 C23 |
| Date: | 2024–12–27 |
| URL: | https://d.repec.org/n?u=RePEc:boj:bojwps:wp24e24 |
| By: | Kristian S. Blickle; Eric Gao |
| Abstract: | Robust banks are a cornerstone of a healthy financial system. To ensure their stability, it is desirable for banks to hold a diverse portfolio of loans originating from various borrowers and sectors so that idiosyncratic shocks to any one borrower or fluctuations in a particular sector would be unlikely to cause the entire bank to go under. With this long-held wisdom in mind, how diversified are banks in reality? |
| Keywords: | banking; specialization; lending; diversification |
| JEL: | G2 G21 |
| Date: | 2024–12–03 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:99216 |
| By: | Sergio A. Correia; Stephan Luck; Emil Verner |
| Abstract: | Evidence from a 160-year-long panel of U.S. banks suggests that the ultimate cause of bank failures and banking crises is almost always a deterioration of bank fundamentals that leads to insolvency. As described in our previous post, bank failures—including those that involve bank runs—are typically preceded by a slow deterioration of bank fundamentals and are hence remarkably predictable. In this final post of our three-part series, we relate the findings discussed previously to theories of bank failures, and we discuss the policy implications of our findings. |
| Keywords: | bank runs; financial crises; deposit insurance; bank failures |
| JEL: | G01 G2 |
| Date: | 2024–11–25 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:99176 |
| By: | Allen N. Berger; Cristina Ortega; Matias Ossandon Busch; Raluca Roman |
| Abstract: | Despite surging environmental laws, how their enforcement influences banks’ management of climate risks remains underexplored. Using the Brazilian Amazon as a laboratory, we examine the impact of a shock to environmental law enforcement capacity on bank management of risks arising from deforestation — a significant but understudied climate risk. After enforcement declined, Brazilian banks significantly altered their priorities to more short-term profitability over longer-term risk concerns. Banks greatly increased lending to agribusinesses engaged in deforestation and actively shifted resources to regions with higher deforestation potential. Results suggest that without rigorous enforcement, banks may fail to fully internalize deforestation risks, despite existing environmental laws. |
| Keywords: | environmental law enforcement; climate risk; deforestation risk; banking; financial institutions; bank credit; Brazilian Amazon; sustainable finance |
| JEL: | D72 G11 G18 G21 Q50 Q54 |
| Date: | 2024–12–05 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedpwp:99234 |
| By: | Pejman Abedifar (University of St Andrews - School of Management; Khatam University - Tehran Institute for Advanced Studies; Khatam University); Soroush Kamyab (Khatam University); Steven Ongena (University of Zurich - Department Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)); Amine Tarazi (University of Limoges - Laboratoire d'Analyse et de Prospectives Économiques (LAPE); University of Limoges - Faculty of Law and Economic Science; Economic Research Forum (ERF)) |
| Abstract: | We contribute to the relationship banking literature by uncovering the impact of a prior banking relationship on borrower's incentives to avoid default. As an identification strategy we exploit a proprietary dataset comprising 149, 230 mortgage loans tracked monthly over a two-year period in a unique institutional setting that allows us to isolate the influence of borrower's incentives. Our findings indicate that a pre-existing relationship diminishes borrower's default risk by approximately 4%, exclusively attributable to the value of the relationship for the borrowers. This effect persists even during the notable surge in loan defaults during the COVID-19 pandemic. Our results also show that the impact of pre-existing banking relationships on avoiding default is stronger for wealthier, more religious, and male borrowers. |
| Keywords: | Relationship Banking, Borrower's Incentives, Mortgage Loan, COVID-19, Default Risk |
| JEL: | G20 G21 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp2485 |
| By: | Swapan-Kumar Pradhan; Előd Takáts; Judit Temesvary |
| Abstract: | We use a rarely accessed BIS database on bilateral cross-border bank claims by bank nationality to examine the interaction of monetary and fiscal policies. We find significant interactions: the transmission of the monetary policies of major currency issuers is significantly influenced by the fiscal stance of source (home) lending banking systems. Fiscal consolidation in a source country amplifies the effect of currency issuers' monetary policy on lending. For instance, a reduction in the German debt-to-GDP ratio amplifies the negative impact of US monetary policy tightening on USD-denominated cross-border bank lending outflows from German banks. The interaction effects are the strongest for US monetary policy. |
| Keywords: | Monetary policy; Government debt; Cross-border claims; Difference-in-differences |
| JEL: | E63 F34 F42 G21 G38 |
| Date: | 2024–11–25 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:1400 |
| By: | Ying Xu |
| Abstract: | Using a novel data set with bank-sector-level annual loan data from 137 commercial banks in China from 2004 to 2021 and a quantified industrial policy data set based on text analysis, this paper explores the effects of industrial policy on bank credit provision. While the paper finds no conclusive evidence that commercial banks allocate, on average, more credit to sectors promoted by the central government, it does find heterogenous sensitivities of banks to industrial policy. Rural commercial banks tend to respond most positively to industrial policy compared to other commercial banks. Banks that have lower asset quality, are smaller, have a higher liquidity ratio, and are not listed are more responsive to industrial policy. In addition, sectors dominated by state-owned enterprises (SOEs) benefit more when there is an industrial policy announcement, while policies in SOE-dominated sectors will crowd out credit to other sectors, because SOEs are less risky, both economically and politically. Therefore, banks face a trade-off between political pressure and profitability in response to industrial policy, leading to distortions of financial resource allocation in favor of SOEs. |
| Keywords: | Industrial Policy; State Ownership; Bank Credit |
| Date: | 2024–12–23 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/262 |
| By: | Peter M. DeMarzo; Arvind Krishnamurthy; Stefan Nagel |
| Abstract: | We develop a framework to estimate bank franchise value. Contrary to existing models, sticky deposits and low deposit rate betas do not imply negative duration. While operating costs could generate negative duration, they are offset by fixed interest rate spreads from lending activity. Consequently, franchise value declines as interest rates rise, further exacerbating losses on banks’ securities holdings. Banks with less responsive deposit rates tend to invest more in long-term securities, aiming to hedge cash flows rather than market value. Despite significant recent rate hike losses, most U.S. banks still retain sufficient franchise value to remain solvent, justifying forbearance. |
| JEL: | G2 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33308 |
| By: | Peter Psathas |
| Abstract: | Secured credit cards, whose limit is fully or partially collateralized by a bank deposit, serve as viable options for consumers seeking to build new credit or to repair a damaged credit history. Demonstrated repayment behavior over time can qualify secured cardholders for “graduation” to a standard unsecured credit card. This paper uses anonymized account-level data to examine how secured card borrowers perform after graduation by matching samples of graduates with similar groups of borrowers who open new unsecured cards without having graduated from a secured card program. Using a regression model, we compare the two groups’ credit usage and repayment behavior over time and assess the success of secured card graduates in establishing or rebuilding credit. Overall, we find that many secured card graduates succeed in demonstrating long-term responsible credit usage and are generally not riskier in their credit use than their comparison group. |
| Keywords: | credit cards; secured credit cards; account graduation |
| JEL: | D14 G21 |
| Date: | 2024–11–26 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedpdp:99210 |
| By: | W. Blake Marsh; David Rodziewicz; Rajdeep Sengupta |
| Abstract: | We exploit the 2014 decline in oil prices to understand how banks change contract terms for distressed firms. Using panel data on new and existing loans, we find that firms most financially affected by the 2010 oil price shock initially increased their use of credit. However, those same firms ultimately saw increased borrowing costs, smaller loan sizes, and fewer originations and renewals than less affected firms as the oil price decline persisted. We then demonstrate that credit spreads rose more than might be predicted based on changes in firm risk alone, suggesting that lending standards tightened for distressed firms. Our results suggest that bank credit can cushion the effect of transitory economic shocks while amplifying more persistent downturns. |
| Keywords: | bank credit; loan standards; financial accelerator; oil price shocks |
| JEL: | E44 G21 G28 |
| Date: | 2024–12–09 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedkrw:99295 |
| By: | Thea Kolasa (University of Zurich - Department of Finance; Swiss Finance Institute); Steven Ongena (University of Zurich); Chris Humphrey (ETH Zürich - Department of Humanities, Social and Political Sciences (GESS)) |
| Abstract: | Multilateral development banks (MDBs) play a key role in development finance. MDBs raise capital by issuing a substantial quantity of bonds, both in terms of face value and volume. We are the first to analyze the bond issuance behavior and yield spread determinants of MDBs. Our findings highlight the increase in bond issues over time, driven by new MDB establishments and an increase in bonds issued per MDB. We also observe a shift from long-term to short-term bonds post-global financial crisis. Additionally, our analysis identifies factors such as credit ratings, governance indicators, and shareholder conflict as determinants of bond yield spreads. |
| Keywords: | Development finance, bonds, multilateral development banks |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp2487 |
| By: | Walter Engert; Oleksandr Shcherbakov; André Stenzel |
| Abstract: | We simulate the impact of a central bank digital currency (CBDC) on consumer adoption, merchant acceptance and use of different payment methods. Modest frictions that deter consumer adoption of a CBDC inhibit its market penetration. Minor pricing responses by financial institutions and payment service providers further reduce the impact of a CBDC. |
| Keywords: | Bank notes; Digital currencies and fintech; Econometric and statistical methods; Financial services |
| JEL: | C51 D12 E42 L14 L52 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsan:24-27 |
| By: | Patrick Aldridge; Jabir Sandhu; Sofia Tchamova |
| Abstract: | We find that foreign central banks own a large share of Government of Canada (GoC) bonds and tend to hold their positions for longer than other types of asset managers. This buy-and-hold behaviour could offer benefits. For example, foreign central banks may be less likely than other asset managers to sell bonds and add to strains on market liquidity in periods of turmoil. However, foreign central banks’ buy-and-hold behaviour combined with their minimal lending of GoC bonds in securities-financing markets, as observed in our available data, can potentially lower liquidity because fewer GoC bonds are available for others to transact in secondary markets. Indeed, we find that higher levels of foreign central banks’ GoC bond holdings are related to lower liquidity. |
| Keywords: | Exchange rates; Financial institutions; Financial markets, Financial stability; Foreign reserves management; International financial markets; Market structure and pricing |
| JEL: | E5 E58 F3 F30 F31 G0 G01 G1 G11 G12 G15 G2 G23 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsan:24-26 |
| By: | Po-Lin Chen (Graduate School of Economics, Waseda University) |
| Abstract: | I estimate a structural model of the Japanese bank deposit market, and evaluate the welfare impact of the mega-bank mergers in the early 2000s. Banks compete for deposits through their deposit rates to achieve profit maximization, whereas depositors choose among banks with given deposit rates. The estimation results show that depositors’ demand is insensitive to the deposit rate. Moreover, I find that the demand for deposits decreases when banks experience financial distress, even with deposit insurance coverage. Furthermore, when calculating welfare, I find that most of the mega-bank mergers lead to a reduction in consumer surplus compared with the counterfactual case of no mergers. The contributions of this study are that it quantifies the welfare effect of the mergers for the deposit market in Japan, where the financial market is heavily dominated by banks, and that it is likely to encourage future research on bank consolidation in Japan, which may contribute to verifying and resolving the long-discussed problem of overbanking in the Japanese financial market. |
| Keywords: | : : Deposit market; Discrete choice; Consumer welfare; Banking; Mergers and acquisitions |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:wap:wpaper:2408 |
| By: | Camilo Bohorquez-Penuela; Joëlle Noailly; Naël Shehadeh |
| Abstract: | How is bank lending to fossil fuel firms affected when risks of stranded assets increase? Using loan-level data from the credit registry of the Colombian Superintendency of Finance, we examine how the introduction of the Paris agreement has affected lending to fossil firms, in a country highly dependent on them. We find evidence that the increased risk of stranded assets implied by the Paris agreement led to a 46\% decrease in bank credit to fossil firms. However, banks have become more selective and have prioritised lending to large and well capitalised fossil firms. Additionally, there is suggestive evidence that "brown" banks (i.e., banks with large lending to fossil fuel firms) have become more selective with their clients: they decreased the size of loans to both fossil and non-fossil clients (-87%), whilst increasing the cost of loans to all clients (via an interest rate of 2.15 percentage point higher), but keeping on lending to large fossil fuel firms (+14.8%) **** RESUMEN: ¿Cómo se ve afectado el crédito bancario hacia las empresas de combustibles fósiles cuando aumentan los riesgos de activos varados? Utilizando datos a nivel de balances del registro de créditos comerciales de la Superintendencia Financiera de Colombia, examinamos cómo la introducción del acuerdo de París ha afectado el crédito a las empresas de combustibles fósiles en un país altamente dependiente de ellos. Encontramos evidencia de que el aumento del riesgo de activos varados implícito en el acuerdo de París llevó a una disminución del 46% en el crédito bancario a las empresas de combustibles fósiles. Sin embargo, los bancos se han vuelto más selectivos y han priorizado el préstamo a empresas de combustibles fósiles grandes y bien capitalizadas. Además, los resultados sugiere que los bancos ``cafés" (i.e., aquellos con gran cantidad de préstamos a empresas de combustibles fósiles) se han vuelto más selectivos con sus clientes: disminuyeron el tamaño de los préstamos (-87%) y aumentaron el costo a través de la tasa de interés (2, 15 pp.) a todos sus clientes en relación al resto de bancos, pero continuaron prestando a las grandes empresas de combustibles fósiles (+14, 8%) relativo al resto de empresas. |
| Keywords: | Climate fnance, banks, fossil fuel frms, Paris Agreement, stranded assets, sustainable lending, Financiamiento climático, bancos, empresas de combustibles fósiles, acuerdo de París, activos varados, créditos sostenibles |
| JEL: | G21 Q56 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:bdr:borrec:1294 |
| By: | Ritsu Yano; Yoshiyuki Nakazono; Kento Tango |
| Abstract: | Following Miranda-Agrippino and Ricco (2021), we identify a monetary policy shock in Japan. We construct this shock to be orthogonal to the Bank of Japan’s macroeconomic forecasts, as well as a central bank’s information shock (Nakamura and Steinsson, 2018). Our findings indicate that a surprise policy tightening is contractionary, leading to a deterioration in output and decline in prices. There are no lagged effects of monetary policy on inflation. In response to a tightening shock, prices fall immediately. Furthermore, we demonstrate that a positive central bank information shock increases both output and prices. An unexpected positive outlook from the Bank of Japan raises stock prices and depreciates the Japanese yen. This evidence suggests that information effects play a crucial role in the Japanese economy, even under the effective lower bound. |
| Date: | 2024–11–28 |
| URL: | https://d.repec.org/n?u=RePEc:toh:tupdaa:57 |
| By: | Huixin Bi; Andrew Foerster; Nora Traum |
| Abstract: | Central bank asseUsing a two-country monetary-union framework with financial frictions, we study sovereign default and liquidity risks and quantify the efficacy of asset purchases. Default risk increases with government indebtedness and shifts in the fiscal limit perceived by investors. Liquidity risks increase when the default probability affects credit market tightness. The framework indicates that shifts in fiscal limits, more than rising government debt, played a crucial role for Italy around 2012. While both default and liquidity risks can dampen economic and financial conditions, the model suggests that the magnifying effect from liquidity risks can be more consequential. In this context, asset purchases can stabilize economic conditions especially under scenarios of elevated financial stress.t purchases can effectively stabilize economic conditions, especially in scenarios of elevated financial stress. |
| Keywords: | Monetary and fiscal policy interaction; unconventional monetary policy; Regime-Switching Models |
| JEL: | E58 E63 F45 |
| Date: | 2024–12–03 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedkrw:99294 |
| By: | Alexander Bruce; Simona Hannon |
| Abstract: | Credit-building products are secured small-dollar products that allow consumers to either establish or improve their credit scores by having lenders report their payment activity to credit bureaus. Examples include secured credit cards or loan products such as credit-builder and passbook loans. |
| Date: | 2024–12–06 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:2024-12-06-2 |
| By: | Thea Kolasa (University of Zurich - Department of Finance; Swiss Finance Institute); Steven Ongena (University of Zurich); Chris Humphrey (ETH Zürich - Department of Humanities, Social and Political Sciences (GESS)) |
| Abstract: | We show that credit rating downgrades do not consistently impact multilateral development banks (MDBs) in the same way as they do firms and sovereigns. Unlike other entities, MDBs do not experience significant market reaction in bond yield spreads following credit rating downgrades. Additionally, downgrades of shareholder countries' credit ratings do not systematically affect bond yield spreads for MDBs. The study suggests that the unique attributes of MDBs, such as preferred creditor treatment and callable capital, may account for these differences. Furthermore, MDBs' bond issuance behavior is not significantly altered by credit rating downgrades. |
| Keywords: | Development finance, bonds, multilateral development banks |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp24100 |
| By: | Barbaglia, Luca (European Commission - JRC); Bellia, Mario (European Commission - JRC); Di Girolamo, Francesca (European Commission - JRC); Rho, Caterina (European Commission - JRC) |
| Abstract: | Digital and crypto currencies are becoming an integral part of financial markets. Nevertheless, regulation of these markets seems still at an early stage and the literature evaluating the impact of policy interventions is scarce. We investigate the reaction of crypto markets in the aftermath of a policy announcement using textual information from news and sentiment analysis. Our findings are threefold. First, there is evidence of peaks in news about crypto-assets in correspondence of the date of new developments in EU legislation, in particular about Central Bank Digital currencies. Second, we find that both returns of cryptocurrencies and general stock market returns are directly proportional to the news sentiment about crypto markets. Third, our event study shows that the introduction of regulation on digital and crypto currencies is perceived as a negative shock by financial markets, especially for digital currencies. |
| Keywords: | cryptocurrencies, digital finance, text mining |
| JEL: | C55 E42 G41 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:jrs:wpaper:202407 |
| By: | Yeorim Kim; Mauro Mastrogiacomo |
| Abstract: | Mortgagors insured against negative home equity are less likely to partially prepay their mortgage debt compared to those without the insurance. We identify the effect of insurance on prepayments combining two strategies. First we use a regression discontinuity design, enabled by the acceptance criteria of the Dutch insurance which is only accessible for houses below a legislated threshold. After that we add information on (unexpected) intergenerational transfers to the borrowers. We find that insured borrowers make 22.8% lower prepayments relative to their original debt, and we propose that this could be explained by moral hazard. As this insurance was an ‘offer you cannot refuse’, this is a more likely explanation than adverse selection. |
| Keywords: | moral hazard; mortgage insurance; mortgage prepayment |
| JEL: | D14 G21 G51 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:dnb:dnbwpp:823 |
| By: | Roland Füss (Swiss Finance Institute; University of St. Gallen - School of Finance); Dominik Meyland (affiliation not provided); Stefan Morkoetter (University of St. Gallen - School of Finance; University of St.Gallen / St.Gallen Institute of Management in Asia) |
| Abstract: | This paper studies the role of households' pecking order of debt in the pricing and rating migration of U.S. consumer debt asset-backed securities (ABS). Our empirical results show that the household's delinquency on mortgage and auto loan increases spreads of ABS using these loan types as collateral. Increasing delinquency on credit card and student loans often lower spreads of ABS with other collateral. We argue that delinquencies on these types of loans in a household's loan portfolio provide liquidity to other loans. In contrast, rising delinquencies on mortgages, the first to be repaid in the pecking order, are an indicator of a severe shock spilling over to other loan types, triggering a simultaneous increase in ABS spreads. Furthermore, we find for residential mortgage-backed securities (RMBS) a lower probability of future rating downgrades in times of high mortgage delinquency. Thus, ratings are adjusted according to changes in the business cycle. |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp24102 |
| By: | Jean-Guillaume Sahuc; Frank Smets; Gauthier Vermandel |
| Abstract: | Climate change confronts central banks with two inflationary challenges: climateflation and greenflation. We investigate their implications for monetary policy by developing and estimating a tractable nonlinear New Keynesian Climate model featuring climate damages and mitigation policies for the global economy. We find that mitigation policies aligned with the Paris Agreement result in higher, more persistent inflation than laissez-faire policies. Central banks can attenuate this inflationary pressure by accounting for the rising natural rate of interest, at the cost of lower GDP during the transition. This short-term trade-off ensures long-term macroeconomic stability resulting from a net-zero emission world. |
| Keywords: | Climate change, inflation, monetary policy, E-DSGE model, Bayesian estimation, stochastic growth |
| JEL: | E32 E52 Q50 Q54 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:drm:wpaper:2025-1 |
| By: | Poloni, Paolo |
| Abstract: | Supervisory data are typically not conceived for statistical purposes or considered “official statistics”, but they are disclosed to the public, either directly by the supervised institutions or indirectly by the competent authorities. This disclosure is required under Pillar 3 of the Basel framework on banking supervision. The aim of the framework is to promote market discipline, whereby market participants monitor the risks and financial positions of banks and take action to guide, limit and price their risk-taking to safeguard financial stability. The disclosure of supervisory data is therefore a public good. In addition, supervisory data can be a reliable source for official statistics such as financial accounts. On the other hand, the nature of supervisory data differs from that of standard official statistics and its quality is subject to a robust assessment framework, with distinct particularities. The aim of this paper is to analyse the EU supervisory reporting framework from an institutional and policy perspective, in view of its potential and desirable evolution over time, including its possible integration with the statistical framework. The paper is split into three main parts. First, it describes the historical and current EU institutional settings, including the role of the European Banking Authority (EBA) reporting framework and the role of the Single Supervisory Mechanism (SSM), focusing on the data quality assessment framework and the publication of supervisory statistics. […] JEL Classification: C81, G21, G28, G38 |
| Keywords: | data integration, data quality, Pillar 3, reporting policy, supervisory reporting |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbops:2024363 |
| By: | Joachim Jungherr; Matthias Meier; Timo Reinelt; Immo Schott |
| Abstract: | We provide novel empirical evidence that firms’ investment is more responsive to monetary policy when a higher fraction of their debt matures. In a heterogeneous firm New Keynesian model with financial frictions and endogenous debt maturity, two channels explain this finding: (1.) Firms with more maturing debt have larger roll-over needs and are therefore more exposed to fluctuations in the real interest rate (roll-over risk). (2.) These firms also have higher default risk and therefore react more strongly to changes in the real burden of outstanding nominal debt (debt overhang). Unconventional monetary policy, which operates through long-term interest rates, has larger effects on debt maturity but smaller effects on output and inflation than conventional monetary policy. |
| Keywords: | Monetary policy; Investment; Corporate debt; Debt maturity |
| JEL: | E32 E44 E52 |
| Date: | 2024–12–06 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:1402 |
| By: | Andreas Hornstein; Francisco J. Ruge-Murcia; Alexander L. Wolman |
| Abstract: | Monthly U.S. inflation from 1995 through 2019 is well explained by statistics summarizing the monthly distribution of relative price changes. We document this relationship and use it to evaluate the behavior of inflation during and after the COVID-19 pandemic. In earlier periods when inflation was not stable, the relationship between inflation and the distribution of relative price changes shifts, much like the Phillips curve. We use that shifting relationship to derive a measure of underlying inflation that complements existing measures used by central banks. |
| Keywords: | inflation; monetary policy |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedrwp:99276 |
| By: | Alex Rivadeneira; Carlo Alcaraz; Nicolás Amoroso; Rodolfo Oviedo; Brenda Samaniego; Horacio Sapriza |
| Abstract: | We study the real effects of credit supply shocks during the COVID-19 pandemic in Mexico. To this end, we merge administrative micro-level data on the universe of bank loans to firms with matched employer-employee social security records. For each firm, we measure its exposure to time-varying credit supply shocks. We find that a negative credit shock of one standard deviation would have increased a firm's exit probability by 0.15 percentage points (pp) and decreased its annual employment growth by 1 pp. These effects were most pronounced among unincorporated businesses, small and young firms, and those in non-essential sectors. Negative credit supply shocks led to higher separation rates for workers with low layoff costs, like those with low tenure or temporary contracts. |
| Keywords: | Banks;credit supply shocks;employment |
| JEL: | D22 E24 E44 E51 G21 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:bdm:wpaper:2024-16 |
| By: | Madi Mangan; Mauro Mastrogiacomo; Hans Bloemen |
| Abstract: | Mortgage defaults are commonly linked to affordability and borrowers’ income; less often, to a decrease in home value. However, some studies talk about “strategic defaults†, a form of moral hazard whereby people who can afford their underwater mortgage choose not to pay. In this way, they clear their excess debt, as single recourse systems act as insurance. Our focus is on a type of mortgage insurance, available for houses with values below a certain threshold, that varies over time. We examine how this mortgage insurance affects decisions to default. We combine a quasi-natural experiment with the estimation of a structural model, more precisely an optimal stopping model. Our findings reveal that the (utility from) future value of home equity negatively influences the likelihood of default. We show that the discontinuity around the qualification threshold is linked to borrowers’ income, due to loan-to-income caps. The model indicates that while the insurance does not cause defaults in general, it does lead to more defaults for borrowers who separate from their partners, possibly indicating moral hazard. |
| Keywords: | Residual Mortgage Insurance; Non-performance; Structural model; quasi-natural experiment |
| JEL: | G11 G21 G52 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:dnb:dnbwpp:824 |
| By: | Christopher J. Erceg; Jesper Lindé; Mathias Trabandt |
| Abstract: | A salient feature of the post-COVID inflation surge is that economic activity has remained resilient despite unfavorable supply-side developments. We develop a macroeconomic model with nonlinear price and wage Phillips curves, endogenous intrinsic indexation and an unobserved components representation of a cost-push shock that is consistent with these observations. In our model, a persistent large adverse supply shock can lead to a persistent inflation surge while output expands if the central bank follows an inflation forecast-based policy rule and thus abstains from hiking policy rates for some time as it (erroneously) expects inflationary pressures to dissipate quickly. A standard linearized formulation of our model cannot account for these observations under identical assumptions. Our nonlinear framework implies that the standard prescription of "looking through" supply shocks is a good policy for small shocks when inflation is near the central bank's target, but that such a policy may be quite risky when economic activity is strong and large shocks drive inflation well above target. Moreover, our model implies that the economic costs of "going the last mile" – i.e. a tight stance aimed at returning inflation quickly to target – can be substantial. |
| Keywords: | Inflation Dynamics; New Keynesian Model; Inflation Risk; Monetary Policy; Linearized Model; Nonlinear Model; State-Dependent Pricing |
| Date: | 2024–12–20 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/260 |
| By: | Mathias Drehmann; Mikael Juselius; Sarah Quincy |
| Abstract: | This paper reviews the debt service ratio (DSR) as a theoretically well-grounded indicator of systemic risk. The DSR has the desirable feature that it fluctuates around a stable level which makes its early warning signals easy to understand and communicate. In contrast, current early warning indicators (EWIs) based on credit-developments lack clear economic interpretations and require statistical detrending, which can reduce their accuracy and usefulness for macroprudential policymakers. The review of the literature shows that the DSR provides highly accurate early warning signals for crises and future economic slowdowns, outperforming traditional credit-based indicators. By extending the measurement of the DSR back to the 1920s – a novel contribution in this paper – we demonstrate its EWI effectiveness across different historical periods and show that the DSR acts as an upper limit on benign financial deepening. The paper also outlines questions for future research. |
| JEL: | E32 E44 G01 N20 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33306 |
| By: | Azamat Abdymomunov; Zheng Duan; Anne Lundgaard Hansen; Ulas Misirli |
| Abstract: | We propose an approach for generating financial market scenarios for stress testing financial firms' market risk exposures. This approach can be used by industry practitioners and regulators for their stress scenario design. Our approach attempts to maximize risk capture with a relatively small number of scenarios. A single scenario could miss potential vulnerabilities, while stress tests using a large number of scenarios could be operationally costly. The approach has two components. First, we model relationships among market risk factors to set scenario shock magnitudes consistently across markets. Second, we use these models to generate a large number of scenarios and select those most likely to have tail-loss impacts and substantial variation across scenarios. |
| Keywords: | stress test; bank supervision; market risk |
| Date: | 2024–12–19 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedrwp:99330 |
| By: | Charles A.E. Goodhart (Financial Markets Group, London School of Economics and CEPR); M. Udara Peiris (Oberlin College); Dimitrios P. Tsomocos (Saïd Business School and St. Edmund Hall, University of Oxford); Xuan Wang (Vrije Universiteit Amsterdam and Tinbergen Institute) |
| Abstract: | We investigate how corporate legacy debt, through heterogeneous household portfolios, affects monetary policy’s ability to control inflation. We find that (1) corporate debt generates an income effect that counters the traditional substitution effect, reducing the effectiveness of rate changes on inflation; (2) higher corporate debt exacerbates the trade-off between output and inflation stabilization. The income is positive on aggregate demand and inflation despite declining output. Local projections using U.S. monetary policy shocks show that over six quarters the cumulative difference in output and inflation for high and low corporate debt-to-household asset ratios is 3 percent and 1.2 percent. |
| Keywords: | Household heterogeneity, Inflation, Monetary policy, Corporate debt, Giffen good |
| JEL: | E31 E32 E52 G11 |
| Date: | 2024–11–26 |
| URL: | https://d.repec.org/n?u=RePEc:tin:wpaper:20240071 |
| By: | Adam Copeland; R. Jay Kahn |
| Abstract: | This paper evaluates the salient forces behind a dealer-intermediary’s decision to move a bilateral repo transaction with a customer into central clearing. We provide evidence that dealers turn to sponsored repo on occasions when balance sheet space is scarce, such as when there is a large issuance of Treasury coupon securities and end-of-month dates. We also find that sponsored repo spreads tend to be affected by a range of factors, with the three largest drivers being money market fund assets, a proxy for hedge fund demand for repo funding, and end-of-month dates. |
| Keywords: | repo; sponsored services; central clearing; money markets |
| JEL: | G12 G23 |
| Date: | 2024–12–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:99298 |
| By: | Rozi Kumari (Guru Gobind Singh Indraprastha University); A. Ganesh Kumar (Indira Gandhi Institute of Development Research); Rajendra Vaidya (Indira Gandhi Institute of Development Research) |
| Abstract: | Despite impressive growth performance, empowering women and bridging gender gaps in entrepreneurship remains a key challenge for India. Given the crucial role of finance functioning of businesses, we investigate whether females face disproportionate barriers in seeking and receiving loans. Using nationally representative datasets from the World Banks's World Enterprise survey (WBES) data for 2014 and 2022, we analyse the role of manager's and owner's gender in the loan seeking behaviour and loan approval rate. On the demand side, we find that female managers are less likely to seek loans while female owners are more likely to seek loans. Particularly, female managed firms even with male owners are less likely to seek loans while male managed firms with female owners are more likely to apply for loan. On the supply side, we find that loans of female managed firms are less likely to be approved whereas female owned firms do not have significantly less chances of loan approval. Interestingly, the female owned firms with male managers do not face any significant chance of loan denial but male owned firms with female managers have higher and significant chances of loan denial. Female owned and female managed firms also have lower chances of loan approval. |
| Keywords: | Female, Entrepreneurship, Loans, Heckprobit, India, Discrimination |
| JEL: | J16 L26 G2 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:ind:igiwpp:2024-025 |
| By: | Brent Bundick; Andrew Lee Smith; Luca Van der Meer |
| Abstract: | This paper provides evidence that inflation targeting delivered well-anchored inflation expectations during the post-2020 inflation surge. Using a macroeconomic model, we first illustrate how long-term nominal interest rates respond to an unexpected burst of inflation under both anchored and unanchored inflation expectations. Then, we evaluate these predictions using high-frequency financial market data from nine advanced economies. Specifically, we examine whether inflation expectations embedded in asset prices remained anchored as inflation climbed in the aftermath of the pandemic. Our results suggest that inflation expectations were just as well, or in some countries better anchored, after the pandemic. We show that this favorable outcome was broadly accompanied by perceptions of an aggressive monetary policy response to above-target inflation. |
| Keywords: | monetary policy; inflation expectations; COVID-19 |
| JEL: | E32 E52 |
| Date: | 2024–12–20 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedkrw:99296 |
| By: | Michael D. Bauer; Eric Offner; Glenn D. Rudebusch |
| Abstract: | Policymakers and researchers worry that the low-carbon transition may be inadvertently delayed by higher global interest rates. To examine whether green investment is especially sensitive to interest rate increases, we consider the effect of unanticipated monetary policy changes on the equity prices of green and brown European firms. We find that brown firms, measured in terms of carbon emission levels or intensities, are more negatively affected than green firms by tighter monetary policy. This heterogeneity is robust to different monetary policy surprises, emission measures, econometric methods, and sample periods, and it is not explained by other firm characteristics. This evidence suggests that higher interest rates may not skew investment away from a sustainable transition. |
| Keywords: | Monetary transmission; carbon premium; ESG; climate finance |
| JEL: | E52 G14 Q54 Q58 |
| Date: | 2024–12–17 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:99301 |
| By: | Jean-Guillaume Sahuc; Loick Dubois; Gauthier Vermandel |
| Abstract: | We study the general equilibrium effects of carbon permit banking during the transition to a climate-neutral economy by 2050. To this end, we develop an environmental dynamic stochastic general equilibrium model, in which the business sector is regulated by a generic emission trading system (ETS). Firms are authorized to transfer unused permits from one period to the next (banking), but the reverse direction (borrowing) is prohibited. Allowing for positive banking gives firms the opportunity to smooth their permit demand along the business cycle. Applications inspired by recent European Union-ETS regulations underscore the critical role of permit banking in shaping policy outcomes. For example, the 2023 cap reform would result in a more significant reduction in both permit banking and carbon emissions, as well as a 40% to 50% increase in the carbon price compared to pre-reform projections, without substantial additional GDP loss by 2060. Importantly, forgetting about permit banking when assessing cap policies would lead to both a significant underestimation of the total macroeconomic effects and an inaccurate representation of the carbon emission trajectory. |
| Keywords: | Emission trading systems, cap policies, carbon permit banking, environmental real business cycle model, occasionally-binding constraints, nonlinear estimation |
| JEL: | C32 E32 Q50 Q52 Q58 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:drm:wpaper:2025-5 |
| By: | Kartik B. Athreya |
| Abstract: | Presentation for the Anderton Economic Policy Symposium, Hobart and William Smith Colleges, Geneva, New York delivered by Kartik Athreya, Director of Research and Head of the Research and Statistics Group, Federal Reserve Bank of New York. |
| Keywords: | disinflation; Inflation; monetary policy; unemployment |
| Date: | 2024–11–12 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsp:99218 |
| By: | Shunsuke Haba (Bank of Japan); Yuichiro Ito (Bank of Japan); Shogo Nakano (Bank of Japan); Takahiro Yamanaka (Bank of Japan) |
| Abstract: | The "hysteresis effect, " in which short-term economic shocks can influence long-term economic trends, has been widely recognized. This paper presents empirical analyses of the long-term impact of monetary policy on the supply side (productivity and potential GDP, etc.) of the Japanese economy. First, we identify monetary policy shocks using various methods and examine their long-term impact on potential GDP over the past 25 years through the local projection method. The results suggest that monetary easing may have had a positive impact on potential GDP through capital accumulation, but no statistically significant relationship is confirmed. Next, we examine the impact of monetary policy on productivity, using firm-level data. The results indicate that while monetary easing could enhance productivity within individual firms, it may also act to suppress productivity growth by causing distortions in resource allocation among firms. However, in the long-term, the analysis reveals no evidence of a statistically significant relationship. Thus, from the empirical analyses using currently available data, no clear conclusions about the impact of monetary easing on the supply side of the economy have been reached, either positive or negative. There are various mechanisms at work in the long-term impact of monetary policy, and these effects may vary, depending on economic conditions. Ongoing examination from a broad perspective remains essential to deepen our understanding of the long-term impact of monetary policy. |
| Keywords: | Monetary Policy, Hysteresis Effect, Productivity, Reallocation |
| JEL: | C32 C33 E22 E24 E52 O47 |
| Date: | 2024–12–27 |
| URL: | https://d.repec.org/n?u=RePEc:boj:bojwps:wp24e19 |
| By: | Kaiji Chen; Mr. Yunhui Zhao |
| Abstract: | We construct a daily Chinese Housing Market Sentiment Index by applying GPT-4o to Chinese news articles. Our method outperforms traditional models in several validation tests, including a test based on a suite of machine learning models. Applying this index to household-level data, we find that after monetary easing, an important group of homebuyers (who have a college degree and are aged between 30 and 50) in cities with more optimistic housing sentiment have lower responses in non-housing consumption, whereas for homebuyers in other age-education groups, such a pattern does not exist. This suggests that current monetary easing might be more effective in boosting non-housing consumption than in the past for China due to weaker crowding-out effects from pessimistic housing sentiment. The paper also highlights the need for complementary structural reforms to enhance monetary policy transmission in China, a lesson relevant for other similar countries. Methodologically, it offers a tool for monitoring housing sentiment and lays out some principles for applying generative AI models, adaptable to other studies globally. |
| Keywords: | Chinese Housing Market Sentiment; Generative AI; Monetary Policy Transmission; Consumption; Crowding-Out |
| Date: | 2024–12–23 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/264 |
| By: | Michell Yoonjei Dong (Green Climate Fund); Hee-Seung Yang (Yonsei University) |
| Abstract: | This paper examines the impact of an earthquake in Indonesia on children’s school and work activities and how that relationship differs by access to credit. We find that the earthquake decreases educational attainment while increasing child labor and the effect is stronger for households with access to credit. Following the 2006 Yogyakarta earthquake, years of schooling for earthquake-affected children aged 7-14 decreased by 0.5 years, but the effect was stronger for those living close to a microfinance institution. Heterogeneity in treatment effects suggests that the opportunity cost of schooling increases as households with micro-loans open up businesses. Our finding indicates the complementary effect between credit and child labor and suggests the need for policies to increase educational investment when providing micro-loans to help households affected by shocks. |
| Keywords: | natural disaster, earthquake, education, child labor, microfinance, Indonesia |
| JEL: | I20 O12 J13 H81 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:yon:wpaper:2024rwp-235 |
| By: | Knut Are Aastveit (Norges Bank); Jamie Cross (Melbourne Business School); Francesco Furlanetto (Norges Bank); Herman K van Dijk (Erasmus University Rotterdam, Tinbergen Institute, Norges Bank) |
| Abstract: | The Fed's policy rule shifts during different phases of the business cycle, particularly in relation to monetary easing and tightening phases. This finding is established through a dynamic mixture model, which estimates regime-dependent Taylor-type rules using US quarterly data from 1960 to 2021. This approach supports partitioning the data into two regimes corresponding to business cycle phases, closely linked to monetary easing and tightening. The estimated policy rule coefficients differ in two key ways between the regimes: the degree of gradualism is significantly higher during normal times than during recessions, when rates are typically cut; and the output gap coefficient is higher in the recessionary regime than in the normal regime. Notably, the estimate of the inflation coefficient satisfies the Taylor principle in both regimes. These results are further strengthened when using real-time data. |
| Keywords: | Monetary policy, Taylor rules, mixed distributions, regime-switching |
| Date: | 2024–12–12 |
| URL: | https://d.repec.org/n?u=RePEc:tin:wpaper:20240074 |