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on Banking |
| By: | Barboni, Giorgia (Warwick University); de Roux, Nicolás (Universidad de los Andes); Perez-Cardona, Santiago (University of Chicago) |
| Abstract: | We conducted a telephonic survey experiment with 2, 214 Venezuelan migrants to examine how their perceptions of Colombian’s social acceptance influence their engagement with the financial system. We find that 66% of the subjects we interviewed underestimate the extent to which natives are open towards migrants. We then show that providing accurate information reduces belief errors by 23 percentage points. This correction increases migrants’ willingness to interact with the financial system. In particular, individuals who initially underestimated Colombian’s acceptance of migrants are 15% more likely to visit a bank and request financial information in the next two months relative to the control group. These individuals also show a 12% increase in the willingness to open a digital wallet and an 18% increase in the willingness to open a savings account. These effects are concentrated among individuals who have not experienced episodes of discrimination in Colombia. We find no effects on the willingness to apply for a loan or an insurance product, consistent with the idea that supply barriers play a significant role for the financial inclusion of vulnerable populations. Using an instrumental variable strategy, we show that the increased willingness to engage with the financial system is driven by belief updating. Our findings highlight that misperceptions about native’s social acceptance of migrants can drive self-exclusion from the financial system. |
| Keywords: | Financial Inclusion; Migration; Beliefs; Social Acceptance |
| JEL: | D83 D91 F22 G51 |
| Date: | 2024–12–13 |
| URL: | https://d.repec.org/n?u=RePEc:col:000089:021278 |
| By: | Michael D. Bordo; Edward Simpson Prescott |
| Abstract: | We evaluate the decentralized structure of the Federal Reserve System as a mechanism for generating and processing new ideas on banking policy in the 1950s and 1960s. We document that demand for research and analysis was driven by banking industry developments and legal changes that required the Federal Reserve and other banking regulatory agencies to develop guidelines for bank mergers. In response to these developments, the Board and the Reserve Banks hired industrial organization economists and young economists out of graduate school who brought in the leading theory of industrial organization at the time, which was the structure, conduct, and performance (SCP) paradigm. This flow of ideas into the Federal Reserve from academia paralleled the flow that was going on in monetary policy and macroeconomics at the time and contributed to the increased professionalization of research at the Federal Reserve. We document how several Reserve Banks, particularly Boston and Chicago, innovated by creating dissertation support programs, collecting specialized data, and creating the Bank Structure Conference, which became the clearinghouse for academic work on bank structure and later for bank risk and financial stability. We interpret these examples as illustrating an advantage that a decentralized central bank has in the production of knowledge. |
| Keywords: | Federal Reserve System; banking; industrial organization; financial regulation; governance |
| JEL: | B2 E58 G2 H1 L1 |
| Date: | 2025–01–06 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedcwq:99372 |
| By: | Daniel Parra-Amado; Camilo Granados |
| Abstract: | We estimate the output gap for the Colombian economy explicitly accounting for the COVID-19 period. Our estimates reveal a significant $20$\% decline in the output gap but with a faster recovery compared to previous crises. Our empirical strategy follows a two-stage Bayesian vector autoregressive (BSVAR) model where i) a scaling factor in the reduced form of VAR is used to model extreme data, such as those observed around the COVID-19 period, and ii) permanent and transitory shocks are structurally identified. As a result, we obtain that a single structural shock explains the potential GDP, while the remaining shocks within the model are transitory in nature and thus can be used to estimate the output gap. We elaborate on the relative strengths of our method for drawing policy lessons and show that the improved approximation accuracy of our method allows for inflation forecasting gains through the use of Phillips curves, as well as for rule-based policy diagnostics that align more closely with the observed behavior of the Central Bank. **** RESUMEN: Se estima la brecha del producto para la economía colombiana modelando explícitamente el período del COVID-19. Como resultado se estimó una caída significativa del 20% en la brecha del producto, pero con una recuperación más rápida en comparación con crisis anteriores. La estrategia empírica sigue un modelo bayesiano de vectores autoregresivos (BSVAR) de dos etapas, donde i) se utiliza un factor de escala en la forma reducida del VAR para modelar datos extremos, como los observados durante el período del COVID-19, y ii) se identifican estructuralmente los choques permanentes y transitorios. Como resultado, obtenemos que un único choque estructural explica el PIB potencial, mientras que los choques restantes en el modelo son de naturaleza transitoria y, por tanto, pueden utilizarse para estimar la brecha del producto. Explicamos las fortalezas relativas de nuestro método para extraer lecciones de política y mostramos que la mayor precisión en la aproximación permite mejoras en la previsión de la inflación mediante el uso de curvas de Phillips, así como diagnósticos de política basados en reglas que se alinean más estrechamente con el comportamiento observado del Banco Central. |
| Keywords: | Bayesian methods, business cycles, potential output, output gaps, structural estimation, Métodos bayesianos, Ciclos Economicos, Brecha de producto, PIB potencial, Estimación estructural |
| JEL: | C11 C51 E3 E32 E37 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:bdr:borrec:1295 |
| By: | Fatih Altunok (Central Bank of the Republic of Turkey); Yavuz Arslan (University of Liverpool Management School); Steven Ongena (University of Zurich) |
| Abstract: | While higher interest rates increase the payments for borrowers with adjustable-rate mortgages (ARMs), cutting their disposable income, higher rates also increase lenders' interest income strengthening their balance sheets. We find, correspondingly, that-when monetary conditions tighten-banks with higher ARM shares see their stock prices increase, supply more credit, and obtain higher interest income compared to banks with lower ARM shares. Therefore, more ARM credit outstanding may weaken monetary policy transmission. And during a financial crisis, when interest income becomes critical for banks, reductions in interest rates may be challenging for those banks with very high ARM shares. |
| Keywords: | Monetary policy, Adjustable rate mortgages, Fixed-rate mortgages |
| JEL: | E50 E52 E58 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp2465 |
| By: | Mr. JaeBin Ahn; Euihyun Bae; Jing Zhou |
| Abstract: | The U.S. economy has been exceeding expectations amid one of the most aggressive monetary policy tightening cycles. This paper provides firm-level evidence showing that abundant cash holdings enable firms to benefit from higher interest rates, thereby reducing net interest payments and mitigate the adverse impact from interest rate hikes to firms' investment and employment. |
| Keywords: | Corporate cash; Monetary policy transmission; Interest income; Interest expense; Net interest payment; cash holding; tightening JaeBin Ahn; Monetary tightening; Interest payments; Income; Employment; Capital spending; North America; Global |
| Date: | 2024–11–22 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/245 |
| By: | Ding Dong; Zheng Liu; Pengfei Wang; Min Wei |
| Abstract: | We present empirical evidence that household inflation disagreement weakens the power of forward guidance and conventional monetary policy shocks. The attenuation effect is stronger when inflation forecasts are positively skewed and it is not driven by endogenous responses of inflation disagreement to contemporaneous shocks. These empirical observations can be rationalized by a model featuring heterogeneous beliefs about the central banks' inflation target. An agent who perceives higher future inflation also perceives a lower real interest rate and thus borrows more to finance consumption, subject to borrowing constraints. Higher inflation disagreement would lead to a larger share of borrowing-constrained agents, resulting in more sluggish responses of aggregate consumption to changes in current and expected future interest rates. This mechanism also provides a microeconomic foundation for Euler equation discounting that helps resolve the forward guidance puzzle. |
| Keywords: | Inflation disagreement; Inflation expectations; Heterogeneous beliefs; Borrowing constraints; Monetary policy transmission; Forward guidance puzzle |
| JEL: | E21 E31 E52 E71 |
| Date: | 2024–12–06 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2024-94 |
| By: | Alex Ilek (Bank of Israel); Nimrod Cohen (Bank of Israel); Yaakov Chen-Zion (Bank of Israel) |
| Abstract: | We develop and calibrate a micro-founded DSGE model, tailored to the Israeli economy, based on key stylized facts about the Israeli economy. The model includes the housing market, both ownership and rental, and heterogeneous households. Macroprudential policy is represented by policy regarding the Loan-to-Value (LTV) ratio, a common measure in both literature and practice. Our primary objective is to examine the effects of monetary and macroprudential policies on the housing market, especially on housing prices. Our findings suggest that contractionary monetary policy pushes home prices downward while real rent prices rise. Macroprudential policy does not undermine monetary policy’s ability to achieve its primary goals, although it introduces a slight distributional effect. Tighter macroprudential policy (lower LTV) significantly reduces debt and the ownership-to-rent ratio in the economy, but slightly increases home prices and real rent prices. This challenges the existing DSGE model literature, and we attribute this discrepancy to the absence of a rental market (and real estate investors) in those models. These insights indicate that while macroprudential tools can help manage financial stability, their effect on home prices must be carefully assessed alongside other monetary measures. |
| Keywords: | housing market, monetary policy, macroprudential policy, ownership-to-rent ratio, heterogeneous households |
| JEL: | R21 E12 E32 E52 E61 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:boi:wpaper:2024.14 |
| By: | Bernardus Van Doornik; Armando Gomes; David Schoenherr; Janis Skrastins |
| Abstract: | In this paper, we present a Savings-and-Credit Contract (SCC) design that mandates a savings period with a default penalty before providing credit. We demonstrate that SCCs mitigate adverse selection and can outperform traditional loan contracts amidst information frictions, thereby expanding access to credit. Empirical evidence from a financial product incorporating an SCC design supports our theory. While appearing riskier on observables, we observe lower realized default rates for product participants than for bank borrowers. Further consistent with the theory, a reform that reduces the default penalty during the savings period induces worse selection and higher realized default rates. |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:bcb:wpaper:610 |
| By: | Kota Ikkatai (Bank of Japan); Takuji Kawamoto (Bank of Japan); Kenichi Sakura (Bank of Japan) |
| Abstract: | This paper empirically examines the response of the nominal exchange rate (U.S. dollar-yen exchange rate) to the monetary policy changes, focusing on the effects of various unconventional monetary policy measures implemented by the Bank of Japan over the past 25 years. Specifically, applying the estimation method proposed by Inoue and Rossi (2019), we identify Japan's "monetary policy shocks" from changes in the entire yield curve and the exchange rate around policy announcements, and estimate the dynamic response of the exchange rate to them. The results show that the yen depreciated against the U.S. dollar in many cases in response to Japan's expansionary monetary policy shocks, and that non-interest rate differential channel - e.g., the shifts in future exchange rate expectations - accounts for the larger parts of such responses than conventional interest rate differential channel. Moreover, our findings suggest that the responses of the exchange rate to unconventional monetary policies have been state-dependent in the sense that they could vary significantly depending on global financial market conditions and investors' herding behavior at each point in time. |
| Keywords: | Unconventional monetary policy; Exchange rate; Functional local projection |
| JEL: | C32 E52 F31 |
| Date: | 2024–12–20 |
| URL: | https://d.repec.org/n?u=RePEc:boj:bojwps:wp24e23 |
| By: | Alberto Francesconi (University of Pavia); Alessandra Tanda (University of Pavia) |
| Abstract: | Using a set of bibliometric tools (VOSViewer and bibliometrix), we review and analyse 96 documents bibliometric items, including citations, countries, institutions, journals, authors, articles and topics. We show the co-authorship network and identify the most productive authors and countries. We also individuate research streams and future areas of research that are worth being investigated. This paper aims to survey the literature on open innovation in banking over the period 2008-2024. Overall our results show that the two streams of literature on open innovation and innovation in banking are not fully integrated, resulting in contributions in the area of banking that present interesting case studies or discussion about open innovation in banking, but with a limited reference to the theoretical underpinnings of open innovation or to the evidence provided by the literature specialised in open innovation in the field of management and organisational studies. This bibliometric review on open innovation in banking analyses previous literature and investigates two streams of studies, i.e. banking and innovation literature to advocate interdisciplinary. |
| Keywords: | open innovation, banking, bibliometric review. |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:pav:demwpp:demwp0224 |
| By: | Mehdi Mahmoudi (University of Orleans); Nicolae-Bogdan Ianc (University of Orleans & West University of Timisoara) |
| Abstract: | This paper explores the relationship between microfinance and economic development using a cross-country dataset of 60 developing countries from 2000-2018. We employ the Panel VAR model, estimated by the generalised method of moments (GMM). Microfinance institutions (MFIs) indicators are categorised into social and financial performance variables. Social performance variables include the number of clients served (NOB) and the percentage of women borrowers (PFB), while financial performance indicators consist of the portfolio at risk (PAR), operational self-sufficiency (OSS), and operating expenses (OPX). Economic development is assessed using the Human Development Index (HDI), which integrates economic indicators like Gross National Income per capita (GNI) with social indicators such as educational attainment (EDI) and life expectancy at birth (LE). We perform a Granger causality test confirming a Granger causal relationship between microfinance and economic development. Our findings indicate that shocks to social performance variables positively influence economic development, and shocks to financial performance variables significantly impact the human development index. |
| Keywords: | Microfinance, economic development, Granger causality, panel VAR, HDI |
| JEL: | F |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:inf:wpaper:2025.1 |
| By: | Yanfei Dong; Jiayin Hu; Yiping Huang; Han Qiu; Yingguang Zhang |
| Abstract: | How does information sharing affect consumers' usage of FinTech credit? Using a unique dataset of "Buy Now, Pay Later (BNPL)" users from a large digital platform and exploiting a credit reporting policy change, we document that consumers significantly reduce BNPL usage when the BNPL lender becomes subject to credit reporting regulation. This reduction is particularly pronounced among borrowers with default histories, who also show improved repayment behaviors compared to those without such records. The decrease in BNPL usage also leads to a reduction in online consumption, supporting the financial constraint hypothesis. Our findings indicate that information sharing can help mitigate overborrowing and overspending, with stronger effects seen among younger borrowers, those who previously spent more, or those with credit cards. We also highlight the synergies between BNPL lending and Big Tech platforms' ecosystems, which imperfectly substitute for formal enforcement institutions. |
| Keywords: | fintech, BNPL, consumer credit, information sharing, credit reporting, overborrowing, big tech platforms |
| JEL: | G21 G28 G51 G53 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1239 |
| By: | Allayioti, Anastasia; Gόrnicka, Lucyna; Holton, Sarah; Martínez Hernández, Catalina |
| Abstract: | We document that about 33% of the core inflation basket in the euro area is sensitive to monetary policy shocks. We assess potential theoretical mechanisms driving the sensitivity. Our results suggest that items of a discretionary nature, as reflected in a higher share in the consumption baskets of richer households, and those with larger role of credit in financing their purchase, tend to be more sensitive.Non-sensitive items are more frequently subject to administered prices and include non-discretionary items such as rents and medical services. Energy intensity does not seem to drive our results and the sensitive items are not dominated by durable goods, but are relatively evenly split between goods and services. Estimations over different samples show that the impact of monetary policy shocks on sensitive core inflation has become larger recently. JEL Classification: E30, E50, C32 |
| Keywords: | BVAR, euro area, inflation, monetary policy |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20243003 |
| By: | Mr. Kalin I Tintchev; Kady Keita |
| Abstract: | We document novel evidence that confidence in macrofinancial stability has a positive impact on financial inclusion in CCA countries and more broadly. This channel is particularly important for CCA countries, with confidence gains of 1 unit leading to 0.7 unit improvement in financial inclusion. Institutional factors such as level of governance and reliance on transparent policy rules and robust financial safety nets explain a large fraction of the variability in confidence in the region. We find that governance reforms are critical for deepening financial inclusion while the impact of inflation targeting, fiscal rules and deposit insurance schemes is positive and material only when governance levels exceed certain thresholds. |
| Keywords: | Financial inclusion; confidence; governance; inflation targeting; fiscal rules; deposit insurance |
| Date: | 2024–12–20 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/257 |
| By: | Mr. Iaroslav Miller; Daniel Baksa; Mr. Philippe D Karam; Tugrul Vehbi |
| Abstract: | This paper develops G3MOD, a semi-structural gap-trend model designed for frequent external sector forecasts crucial in macroeconomic forecasting. Focused on the G3 economies (US, Euro Area, and China) and the rest of the world, G3MOD leverages insights from central banks’ policy models, to consistently translate external forecasts such as the IMF’s World Economic Outlook into a Quarterly Projection Model format. The model offers flexible simulations and policy assessments and is structured around trade and financial linkages. G3MOD supports model-based forecasts and risk evaluations, helping central banks integrate external forecasts and scenarios into their own forecasts, thus generating timely macroeconomic projections. Its calibration ensures alignment with historical data, economic coherence, and robust predictive capability, and it has been validated against major global projection models. The complete set of codes, calibrated parameter values, and supporting programs are posted with this working paper. |
| Keywords: | Quarterly Projection Model; Forecasting and Policy Analysis; Monetary Policy; Macroeconomic Modeling |
| Date: | 2024–12–13 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/254 |
| By: | Eduardo G. C. Amaral |
| Abstract: | Rupert and Šustek (2019) showed that introducing endogenous capital into the canonical New-Keynesian model allows real interest rates to move in any direction after a positive monetary shock. According to them, this would prove that the real interest rate channel of monetary policy transmission is only observational — not structural — in that class of models, and therefore subject to the Lucas (1976) critique. In this paper, I show that such an identification problem for dynamic stochastic general equilibrium (DSGE) and vector autoregression (VAR) models can be circumvented by incorporating interest-rate smoothing — a feature as prevalent in medium-scale New-Keynesian models as capital itself — into the Taylor rule. I find that the negative association between changes in inflation and changes in the real interest rate is actually more robust than that between the former and changes in the nominal interest rate. |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:bcb:wpaper:606 |
| By: | Giang Nghiem; Lena Drager; Ami Dalloul |
| Abstract: | This paper explores communication strategies for anchoring households’ medium-term inflation expectations in a high inflation environment. We conducted a survey experiment with a representative sample of 4, 000 German households at the height of the recent inflation surge in early 2023, with information treatments including a qualitative statement by the ECB president and quantitative information about the ECB’s inflation target or projected inflation. Inflation projections are most effective, but combining information about the target with a qualitative statement also significantly improves anchoring. The treatment effects are particularly pronounced among respondents with high financial literacy and high trust in the central bank. |
| Keywords: | anchoring of inflation expectations, central bank communication, survey experiment, randomized controlled trial (RCT) |
| JEL: | E52 E31 D84 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2024-70 |
| By: | Walter Engert; Oleksandr Shcherbakov; André Stenzel |
| Abstract: | We investigate the introduction of a central bank digital currency (CBDC) into the market for payments. Focusing on the point of sale, we develop and estimate a structural model of consumer adoption, merchant acceptance and usage decisions. We counterfactually simulate the introduction of a CBDC, considering a version with debit-like characteristics and one encompassing the best of cash and debit, and characterize outcomes for a range of potential adoption frictions. We show that, in the absence of adoption frictions, CBDC has the potential for material consumer adoption and merchant acceptance, along with moderate usage at the point of sale. However, modest adoption frictions substantially reduce outcomes along all three dimensions. Incumbent responses required to restore pre-CBDC market shares are moderate to small and further reduce the market penetration of CBDC. Overall, this implies that an introduction of CBDC into the market for payments is by no means guaranteed to be successful. |
| 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:bocawp:24-52 |
| By: | Wolf Wagner; Jing Zeng |
| Abstract: | We show that the too-many-to-fail problem can be resolved through an appropriate design of the bailout regime. In our model, optimal investment balances benefits from more banks investing in high-return projects against higher systemic costs due to more banks failing simultaneously. Under a standard bailout regime, banks herd, anticipating that simultaneous failures trigger bailouts. However, a policy that prioritizes bailing out a predesignated group of banks eliminates herding and achieves the first-best. If such a policy is not feasible, its benefits can be attained by decentralizing bailout decisions to two regulators each responsible for a separate group of banks. |
| Keywords: | systemic risk, optimal investment, too-many-to-fail, time-consistency, bailouts |
| JEL: | G1 G2 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_613 |
| By: | Daniela Balutel; Walter Engert; Christopher Henry; Kim Huynh; Doina Rusu; Marcel Voia |
| Abstract: | In the rapidly evolving landscape of digital asset markets, measuring cryptoasset knowledge alongside financial knowledge enhances our understanding of individuals' decisions to purchase cryptoassets. Using microdata from the Bank of Canada’s Bitcoin Omnibus Survey, we measure familiarity with crypto concepts using a set of three questions covering basic aspects of Bitcoin. Familiarity with financial concepts is measured using a set of three questions covering basic aspects of conventional finance. We also consider gender differences across these measures. A novel aspect of this paper is an empirical joint analysis that allows us to consider the interrelationship between these two measures of crypto and financial knowledge. |
| Keywords: | Central bank research; Digital currencies and fintech; Econometric and statistical methods |
| JEL: | C81 D14 D91 G53 O51 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:24-48 |
| By: | Rakesh Arora; Han Du; Raza Ali Kazmi; Duc-Phong Le |
| Abstract: | With the rapid digitization of financial transactions, central banks have given considerable focus in recent years to the research and development of central bank digital currencies (CBDCs). While CBDCs could offer several advantages, there are concerns about end-user privacy. Traditional methods of protecting confidentiality in banking and financial systems have primarily relied on data encryption and access control techniques. However, these techniques alone are inadequate, especially in cases where data are shared across different entities because privacy in such situations is typically governed by legal frameworks. Privacy-enhancing technologies (PETs) can offer robust protection for data throughout their lifecycle, whether stored, in transit or during processing, and ensure privacy is maintained even when data are extensively shared or analyzed. This study explores the use of PETs in the design of CBDC systems, potentially paving the way for solutions that better safeguard end-user privacy and meet rigorous data protection standards. While PETs promise significant advancements in privacy protection, they present some challenges in implementation. They can introduce performance overheads and add complexity to systems, and their effectiveness and applicability are currently limited due to their early stage of development. As these technologies evolve, it is crucial for organizations to carefully consider these factors to fully leverage PET benefits while managing associated challenges. This paper provides a comprehensive overview of how PETs can transform privacy design in financial systems and the implications of their broader adoption. |
| Keywords: | Central bank research; Digital currencies and fintech; Financial system regulations and policies; Payment clearing and settlement systems |
| JEL: | E4 E42 O3 O31 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocadp:25-01 |
| By: | Fulvia Fringuellotti; Thomas Kroen |
| Abstract: | In June 2020, the Federal Reserve issued stringent payout restrictions for the largest banks in the United States as part of its policy response to the COVID-19 crisis. Similar curbs on share buybacks and dividend payments were adopted in other jurisdictions, including in the eurozone, the U.K., and Canada. Payout restrictions were aimed at enhancing banks’ resiliency amid heightened economic uncertainty and concerns about the risk of large losses. But besides being a tool to build capital buffers and preserve bank equity, payout restrictions may also prevent risk-shifting. This post, which is based on our recent research paper, attempts to answer whether and how payout restrictions reduce bank risk using the U.S. experience during the pandemic as a case study. |
| Keywords: | banking; payout restrictions; risk-shifting; prudential regulation |
| JEL: | G21 G28 G35 G38 |
| Date: | 2025–01–08 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:99404 |
| By: | Yudai Hatayama (Bank of Japan); Yuto Iwasaki (Previously Bank of Japan) |
| Abstract: | This paper introduces a novel approach for simultaneously estimating nominal and real natural yield curves in Japan. Specifically, we employ macroeconomic variables (output gap and inflation rate) as observed variables, in addition to the nominal and real yield curves, and conduct an estimation combining the representative yield curve model, the Nelson-Siegel model (Nelson and Siegel, 1987), with a VAR with common trends (Del Negro et al., 2017). The results presented in this paper indicate that since the 1990s, both nominal and real natural yield curves have exhibited downward shifts, as a consequence of a decline in the natural rate of interest. Furthermore, both curves have flattened due to a trending decline in the term premium. The results also indicate that the extent of these changes differs between the nominal and real natural yield curves. However, it should be noted that the estimation of natural yield curves is still in the process of development. Consequently, the results should be interpreted with caution. |
| Keywords: | Natural rate of interest; Natural yield curve; Term structure |
| JEL: | C32 E43 E52 |
| Date: | 2024–12–20 |
| URL: | https://d.repec.org/n?u=RePEc:boj:bojwps:wp24e17 |
| By: | Christian Friedrich; Hanno Friedrich; Nick Lawrence; Javier Cortes Orihuela; Phoebe Tian |
| Abstract: | Over the past decade, the six largest Canadian banks held an increasingly greater share of their assets and liabilities abroad, linking the Canadian banking system more closely to economic and financial developments elsewhere in the world. In 2023, the share of Canadian banks’ foreign assets and liabilities amounted to around 50%, with foreign exposures even exceeding domestic ones for some balance sheet items and calculations. Using a combination of regulatory and commercial data sources, we document Canadian banks’ foreign activities and provide an overview of potential vulnerabilities that may be associated with them. The following facts emerge: First, Canadian banks’ foreign activities differ considerably from their domestic ones. While Canadian banks engage domestically mostly with real sector entities, such as households and non-financial corporations, their most common counterparties abroad are non-bank financial institutions (NBFIs). To the extent that NBFIs or their behaviours might be less known to Canadian banks—for example, because of information asymmetries— a considerable exposure to such entities could constitute a potential vulnerability. Second, Canadian banks have sizable foreign currency and foreign country exposure to the US dollar and the United States, but also notable exposures to other currencies and countries. Third, we document the presence of an indirect foreign exposure channel for Canadian banks through lending to internationally exposed firms, even if these firms are domiciled in Canada and borrow in Canadian dollars. Lastly, we present a case study highlighting how Canadian banks have expanded internationally at times when banks of many other countries retreated. |
| Keywords: | Financial institutions; International financial markets; Financial stability; International topics |
| JEL: | F21 F23 F31 F32 G21 G23 G3 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:25-1 |
| By: | Rodrigo Barbone Gonzalez; Bernardus F. Nazar Van Doornik; João Barata R. B. Barroso |
| Abstract: | This paper estimates the impact of countercyclical reserve requirements (RRs) on credit. We explore differential bank exposure to RRs in matched bank-firm loan-level data from Brazil, where RRs have been used extensively to pursue financial stability. We find that, after tightening RRs, more exposed banks reduce credit to firms; after loosening, they expand credit supply. During booms, private domestic banks with lower capital adequacy are more responsive to a tightening of RRs and to a simultaneous tightening of the short-term policy rate. We also find that higher levels of economic policy uncertainty weaken this channel, and real effects in employment are modest |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:bcb:wpaper:607 |
| By: | Abdollah Rida |
| Abstract: | Credit Scoring is one of the problems banks and financial institutions have to solve on a daily basis. If the state-of-the-art research in Machine and Deep Learning for finance has reached interesting results about Credit Scoring models, usage of such models in a heavily regulated context such as the one in banks has never been done so far. Our work is thus a tentative to challenge the current regulatory status-quo and introduce new BASEL 2 and 3 compliant techniques, while still answering the Federal Reserve Bank and the European Central Bank requirements. With the help of Gradient Boosting Machines (mainly XGBoost) we challenge an actual model used by BANK A for scoring through the door Auto Loan applicants. We prove that the usage of such algorithms for Credit Scoring models drastically improves performance and default capture rate. Furthermore, we leverage the power of Shapley Values to prove that these relatively simple models are not as black-box as the current regulatory system thinks they are, and we attempt to explain the model outputs and Credit Scores within the BANK A Model Design and Validation framework |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2412.20225 |
| By: | Jeff Larrimore; Alicia Lloro; Zofsha Merchant; Anna Tranfaglia |
| Abstract: | Buy now, pay later (BNPL) is a fast-growing credit product that allows consumers to split payments over time. BNPL gained popularity as a new alternative credit product for online retail purchases over the past decade and has become available for in-person purchases as well as post-purchase credit card installment payment plans. |
| Date: | 2024–12–20 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:2024-12-20-4 |
| By: | Odae Al Aboud; Saarah Sheikh; Adam Su; Yang Xu |
| Abstract: | The Bank of Canada is using an enhanced dataset that tracks the stock of outstanding mortgages and home equity lines of credit held by federally regulated lenders. This paper highlights some of the new details in the dataset and how they impact the Bank’s understanding of the mortgage market. |
| Keywords: | Credit and credit aggregates; Financial institutions; Interest rates; Recent economic and financial developments |
| JEL: | D1 D12 D14 G2 G21 G28 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsan:25-1 |
| By: | Oudom Hean; Utsha Saha; Binita Saha |
| Abstract: | In recent years, Large Language Models (LLMs) have emerged as a transformative development in artificial intelligence (AI), drawing significant attention from industry and academia. Trained on vast datasets, these sophisticated AI systems exhibit impressive natural language processing and content generation capabilities. This paper explores the potential of LLMs to address key challenges in personal finance, focusing on the United States. We evaluate several leading LLMs, including OpenAI's ChatGPT, Google's Gemini, Anthropic's Claude, and Meta's Llama, to assess their effectiveness in providing accurate financial advice on topics such as mortgages, taxes, loans, and investments. Our findings show that while these models achieve an average accuracy rate of approximately 70%, they also display notable limitations in certain areas. Specifically, LLMs struggle to provide accurate responses for complex financial queries, with performance varying significantly across different topics. Despite these limitations, the analysis reveals notable improvements in newer versions of these models, highlighting their growing utility for individuals and financial advisors. As these AI systems continue to evolve, their potential for advancing AI-driven applications in personal finance becomes increasingly promising. |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2412.19784 |
| By: | Michael King (Department of Economics, Trinity College Dublin); Daniel Putman (University of Pennsylvania Center for Social Norms and Behavioral Dynamics); Shane Byrne (Department of Economics, Trinity College Dublin); Chaning Jang (Busara Center for Behavioral Economics) |
| Abstract: | The high prevalence of digital financial fraud stresses businesses' ability to distinguish between real communications from digital financial service (DFS) providers and fraudulent impersonations. Besides the financial and psychological costs to businesses, fraud may erode trust in, and usage of DFS. We test two strategies for preventing non-institutional fraud: a series of anti-fraud learning interventions and a technical solution to authenticate inbound communications from a digital platform. Using a pre-registered behavioural laboratory experiment in Nigeria, we find evidence that timely educational interventions increased trust in DFS, its likely future usage, and improved knowledge about fraud four weeks post intervention. However, when we task micro business owners with evaluating the authenticity of a series of fictionalised scenarios, we do not find evidence of improvement in fraud detection, either overall, or when considering only genuine or fraudulent scenarios. Surprisingly, we find increased self-confidence in fraud detection ability, highlighting the risk of overconfidence. |
| Keywords: | Financial Behavior; Digital Finance; Fraud; Trust; Consumer Protection; Financial Inclusion; Financial Development |
| JEL: | D18 G41 G53 O12 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:tcd:tcduee:tep1224 |
| By: | Selcuk, Cemil (Cardiff Business School) |
| Abstract: | This paper presents a competitive search model focusing on the impact of asymmetric information on credit markets. We show that limited entry by lenders results in endogenous credit rationing, which, in turn, plays a key role in managing adverse selection and prevents the credit market from collapsing. |
| Keywords: | Asymmetric Information, Credit Rationing, Directed Search |
| JEL: | D82 D43 G20 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:cdf:wpaper:2024/25 |
| By: | Bhattacharjee, A.; Holly, S.; Wasseja, M. |
| Abstract: | Transcripts from the US Federal Open Markets Committee provide, albeit with a lag, valuable information on the monetary policymaking process at the Federal Reserve Bank. We use the data compiled by Chappell et al. (2005b) on preferred interest rates (not votes) of individual FOMC members. Together with information on which monetary policy decisions are based, we use these preferred rates to understand decision making in the FOMC, focussing both on cross-member heterogeneity and interaction among the members of the committee. Our contribution is to provide a method of unearthing otherwise unobservable interactions between the members of the FOMC. We find substantial heterogeneity in the policy reaction function across members. Further, we identify significant interactions between individuals on the committee. The nature of these interdependencies tell us something about information sharing and strategic interactions within the FOMC and provide interesting comparisons with the Bank of England’s Monetary Policy Committee. |
| Keywords: | Monetary Policy, Interest Rates, FOMC Decision Making, Spatial Weights Matrix, Spatial Lag Model |
| JEL: | E42 E43 E50 E58 C31 C34 |
| Date: | 2024–12–09 |
| URL: | https://d.repec.org/n?u=RePEc:cam:camdae:2469 |
| By: | Aditya Aladangady; Jacob Krimmel; Tess C. Scharlemann |
| Abstract: | Rising interest rates in 2022 introduced large moving costs for homeowners with low, fixed-rate mortgages. Using a novel dataset linking mortgage loans, consumer credit profiles, and property sales, we examine the effects of rate hikes on household mobility and the broader economic impacts of the resulting mortgage rate lock-in. As market rates rise relative to those on borrowers’ existing loans, likelihood of moving falls with the highest elasticity among borrowers just “in the money.” Our results suggest about 44% of the decline in moves among mortgage holders between 2021 and 2022 may be attributable to the widening gap between borrower’s existing and market rates. We find limited scope for labor misallocation due to lock-in, as moves across labor market areas are rather unaffected. Instead, lock-in primarily reduces within-metro churn and moves up the housing ladder, leading to fewer real estate listings and greater house price growth. We explain lock-in-driven price increases through a housing search model: in a seller’s market, reduced churn raises market tightness, driving up prices. Consistentwith such a model, we show measures of market tightness increase in response to lock-in, with the most significant effects in markets that were already tight. |
| Keywords: | Mortgages and credit; Mobility; Housing demand; Rate lock; Housing supply |
| JEL: | G21 G51 R21 R31 |
| Date: | 2024–11–20 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2024-88 |
| By: | Ichiro Fukunaga (Bank of Japan); Yoshihiko Hogen (Bank of Japan); Yoichi Ueno (Bank of Japan) |
| Abstract: | This paper provides an overview of economic activity and prices in Japan since the 1990s, based on discussions mainly in academia as well as the survey of corporate behavior, and then discusses some issues related to the signs of change in recent years. In the 1990s, monetary policy faced a lower bound on nominal interest rates as the economy fell into stagnation and mild deflation due to various factors both on the demand and supply sides. In the 2010s, the economy recovered thanks to the effects of quantitative and qualitative monetary easing and other measures, which brought about a situation of no longer being in deflation. However, the "price stability target" of 2 percent could not be achieved while people's mindset and practices based on the assumption that wages and prices were unlikely to rise remained. After the pandemic in the 2020s, as the economic recovery and the tightening of labor markets as well as the surge in import prices have strengthened the virtuous cycle between wages and prices, it came in sight that the "price stability target" would be achieved in a sustainable and stable manner. Against this background, signs of change have been seen in the global economic landscape, labor markets, and firms' price-setting behavior. The mindset and practices based on the assumption that wages and prices were unlikely to rise, which took root during the deflation period, appear to be dissolving. |
| Keywords: | Japan's economy; Prices; Labor market; Globalization; Monetary policy |
| JEL: | E31 E32 E52 F62 J20 O53 |
| Date: | 2024–12–13 |
| URL: | https://d.repec.org/n?u=RePEc:boj:bojwps:wp24e14 |
| By: | Milutin Jesic (University of Belgrade, Serbia); Hans Manner (University of Graz, Austria) |
| Abstract: | The European Central Bank (ECB) adopted a new monetary policy strategy in July 2021 to replace the previous one that had been in place since 2003. This study implicitly analyzes the performance of the previous strategy in achieving price stability by identifying the key macroeconomic determinants that influence inflation dynamics. Methodologically, we apply the nonstationary ordered probit model, which allows the estimation of marginal effects of covariates on the probability of the inflation rate being below, in, or above the assumed targeted range. The results indicate that the crucial determinants of deviation in the inflation rate from the targeted range are fundamental macroeconomic variables, of which some are indirectly under control of the ECB. While the inflation rate has occasionally deviated from the targeted range, the overall conclusion is that the performance of the ECB in fulfilling the primary goal defined in the monetary policy strategy is still manageable to the extent that it can influence some of the factors that are identified as drivers of inflation dynamics. |
| Keywords: | ECB, monetary policy, monetary policy strategy, nonstationary ordered probit model, inflation. |
| JEL: | C25 C54 E31 E52 E58 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:grz:wpaper:2024-17 |
| By: | Marco Cipriani; Thomas M. Eisenbach; Anna Kovner |
| Abstract: | Runs have plagued the banking system for centuries and returned to prominence with the bank failures in early 2023. In a traditional run—such as depicted in classic photos from the Great Depression—depositors line up in front of a bank to withdraw their cash. This is not how modern bank runs occur: today, depositors move money from a risky to a safe bank through electronic payment systems. In a recently published staff report, we use data on wholesale and retail payments to understand the bank run of March 2023. Which banks were run on? How were they different from other banks? And how did they respond to the run? |
| Keywords: | bank runs; Sunspots; payment; data |
| JEL: | G0 G21 |
| Date: | 2024–12–20 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:99352 |
| By: | Geoffrey R. Dunbar |
| Abstract: | Household inflation can be decomposed into three terms that reflect nominal expenditure, real quantities and household preferences, using the money pump proposed by Echenique, Lee and Shum (2011). I quantify the importance of changes in household preferences on household inflation rates using 11 years of scanner data for 11, 000 US households. I then analyze the effect of monetary policy on household inflation using the monetary policy shocks from Nakamura and Steinsson (2018). I find that monetary policy news shocks affect household inflation through the expenditure and preferences channels for 12 months from the date of the shocks, and that federal funds rate shocks affect inflation through the same channels at a horizon of 13–24 months. The results suggest that changes in household preferences are an important driver of inflation dynamics at the household level. |
| Keywords: | Inflation and prices; Monetary policy transmission |
| JEL: | D12 E52 E58 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:24-45 |
| By: | Vivek Sharma |
| Abstract: | What are the effects of a bank shock – or a decline in bank loan repayments – in an economy featuring bank-firm lending relationships and what is the propagation mechanism? I answer these questions in this paper and build a dynamic general equilibrium model in which collateral-constrained entrepreneurs have endogenously-persistent credit relationships with banks. Credit relationships play a dual role of shock amplifier and stabilizer in this environment. In presence of credit relationships, a bank shock in this model drives up credit spread at impact, causing bank credit to fall and paving the way for a downturn in macroeconomic activity. Economic activity recovers later on as spread falls, resulting in a rebound in bank loans and investment. When credit relationships are turned off, the model shows prolonged fall in bank loans and a persistent slowdown in investment, consumption and output as spread remains continually elevated, making bank credit expensive. A more persistent bank shock leads to a sustained decline in output even in the presence of lending relationships while a more volatile shock causes protracted slump in output in absence of credit relationships but not when they are present. |
| Keywords: | bank shocks, lending relationships, economic activity |
| JEL: | E32 E44 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2024-76 |
| By: | Laura Alfaro (Harvard Business School); Saleem Bahaj (University College London; Bank of England); Robert Czech (Bank of England); Jonathon Hazell (London School of Economics); Ioana Neamtu (Bank of England) |
| Abstract: | This paper studies a form of liquidity risk that we call Liquidity After Solvency Hedging or “LASH” risk. Financial institutions take LASH risk when they hedge against solvency risk, using strategies that require liquidity when the solvency of the institution improves. We focus on LASH risk relating to interest rate movements. Our framework implies that institutions with longer-duration liabilities than assets — e.g. pension funds and insurers—take more LASH risk as interest rates fall. Using UK regulatory data from 2019-22 on the universe of sterling repo and swap transactions, we measure, in real time and at the institution level, LASH risk for the non-bank sector. We find that at the peak level of LASH risk, a 100bps increase in interest rates would have led to liquidity needs close to the cash holdings of the pension fund and insurance sector. Using a cross-sectional identification strategy, we find that low interest rates caused increases in LASH risk. We then find that the pre-crisis LASH risk of non-banks predicts their bond sales during the 2022 UK bond market crisis, contributing to the yield spike in the market. |
| Keywords: | Liquidity, monetary policy, financial crisis, hedging |
| JEL: | E44 F30 G10 G22 G23 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:cfm:wpaper:2443 |
| By: | Atsuki Hirata (Bank of Japan); Sohei Kaihatsu (Bank of Japan); Yoshiyasu Kasai (Bank of Japan); Hiroki Yamamoto (Bank of Japan); Jouchi Nakajima (Hitotsubashi University) |
| Abstract: | Over the past 25 years, the Bank of Japan has conducted a variety of unconventional monetary policies. This paper empirically analyzes the impact of these unconventional monetary policies on Japan's economic activity, prices, and financial sector. First, we investigate the impact of the Bank of Japan's purchase of long-term JGBs on long-term interest rates and find that it lowered the rates by lowering the term premium. Its impact was particularly pronounced following the introduction of Quantitative and Qualitative Monetary Easing (QQE) in 2013. Second, we employ a factor-augmented vector autoregression (FAVAR) and the shadow rates as a proxy of a monetary policy stance reflecting information on the entire government bond yield, and investigate the counterfactual analyses. Our estimation result indicates that the series of unconventional monetary policies had a positive effect on output and prices, and the large-scale monetary easing after the introduction of QQE contributed to fostering a non-deflationary environment in Japan. The empirical analysis also indicates that the unconventional monetary policies may have had the side effect of reducing the profitability of banks by lowering lending rates. |
| Keywords: | Monetary policy; Term structure model; Shadow rate; FAVAR; Counterfactual analysis |
| JEL: | E43 E44 E52 E58 |
| Date: | 2024–12–20 |
| URL: | https://d.repec.org/n?u=RePEc:boj:bojwps:wp24e21 |
| By: | Balana, Bedru; Olanrewaju, Opeyemi |
| Abstract: | This paper examines the effects of financial inclusion on adoption and intensity of use of agricultural inputs and household welfare indicators using data from the nationally representative Nigerian LSMS wave-3 (2015/2016) survey. For this, we constructed a financial inclusion index from four formal financial services access indicators (bank account, access to credit, insurance coverage, and digital transaction) using multiple correspondence analysis (MCA). We used Cragg’s two-step hurdle, instrumental variables for binary response variables, and a Generalized Method of Moments (GMM) models in the econometric analysis. Results show that households with access to formal financial services are more likely to adopt agricultural inputs and to apply these more intensively. These same households are less likely to experience severe food insecurity and are more likely to consume diverse food items. We also find that these effects are less for female farmers regardless of formal financial inclusion, suggesting that they may bear more non-financial constraints than their male counterparts. The results suggest a need for targeted interventions to increase access to formal financial services of farm households and gender-responsive interventions to address the differential constraints women farmers face. |
| Keywords: | farm inputs; financial inclusion; food security; households; inorganic fertilizers; seeds; Africa; Western Africa; Nigeria |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:fpr:ifprid:2293 |
| By: | Ehrmann, Michael |
| Abstract: | Trust in the central bank is an essential ingredient for a successful conduct of monetary policy. However, for many central banks trust has recently declined, for instance in the wake of the post-pandemic inflation surge, due to large errors in central banks’ inflation forecasts, or given problems when exiting from forward guidance. The rapid, substantial and persistent erosion of trust makes it clear that trust needs to be earned continuously. This paper reviews why trust is important, what determines it and how central banks can enhance it. It also argues that it is important for central banks to improve the measurement and monitoring of trust. It ends by highlighting some future challenges for maintaining trust. JEL Classification: E52, E58, G53 |
| Keywords: | central banks, credibility, inflation expectations, monetary policy, trust |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20243006 |