|
on Banking |
| By: | David L. Kelly; Christopher Paik |
| Abstract: | We assess the feasibility, optimality, and policy implications of Environmental, Social, and Corporate Governance (ESG)-linked or “green” lending in a credit market where banks incorporate such non-financial data in credit allocation decisions. We identify an asymmetric information problem: borrowers signal low financial risk to banks who are uncertain about borrower risk levels by engaging in green investments. We derive conditions under which banks segment the market into green and brown loan products and evaluate market efficiency. We find borrowers prioritize signaling over the environmental impact of green investments, and the market sustains only limited green lending, since if all borrowers make green investments, no signaling value exists. The optimal carbon tax policy replaces the signaling value of green investments with the marginal damage and outperforms a brown reserve requirement aimed at discouraging brown lending. However, both policies also can sustain only a limited amount of green investments. We conclude that while green lending by banks can enhance welfare relative to an unregulated market, the resulting market segmentation can make the social optimum infeasible, even with carbon tax regulation. |
| Keywords: | competitive screening, ESG, environmental risk, climate risk, sustainable banking, sustainable finance, stranded assets |
| JEL: | D80 D81 Q54 Q56 Q58 G21 E58 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11522 |
| By: | Leek, Lauren Caroline (European University Institute); Bischl, Simeon |
| Abstract: | Although central bank communication is a core monetary policy and accountability tool for central banks, little is known about what shapes it. This paper develops and tests a theory regarding a previously unconsidered variable: central bank independence (CBI). We argue that increases in CBI alter the pressures a central bank faces, compelling them to address these pressures to maintain their reputation. We fine-tune and validate a Large Language Model (Google's Gemini) to develop novel textual indices of policy pressures regarding monetary policy communication of central banks in speeches of 100 central banks from 1997 to 2023. Employing a staggered difference-in-differences and an instrumental variable approach, we find robust evidence that an increase in independence decreases monetary pressures and increases financial pressures discussed in monetary policy communication. These results are not, as generally is assumed, confounded by general changes in communication over time or singular events, in particular, the Global Financial Crisis. |
| Date: | 2024–11–25 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:yrhka |
| By: | Shashwat Alok; Pulak Ghosh; Nirupama Kulkarni; Manju Puri |
| Abstract: | Does the ability to generate verifiable digital financial histories, with customers having data-sharing rights, improve credit access? We answer this using India’s launch of an Open-Banking based public digital payment infrastructure (UPI). Using rarely available data on the universe of consumer loans we show credit increases by both fintechs (new entrants) and banks (incumbents), on the intensive and extensive margin, including increased credit to subprime and new-to-credit customers. We show several mechanisms at play: low-cost internet improves credit access, lenders weigh in digital histories, and digital payments with Open Banking effectively complement first-time bank accounts enabling access to formal credit. |
| JEL: | D14 G24 G28 G51 J15 R21 R23 R31 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33259 |
| By: | Michael D. Bordo; Edward S. 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. |
| JEL: | B20 E58 G2 H1 L1 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33263 |
| By: | Sanroman Graciela; Bertoletti Lucía; Borraz Fernando |
| Abstract: | This paper examines the disparity in default risk between vulnerable and non-vulnerable populations in consumer lending. We merge an exhaustive registry of loans granted in the financial system with microdata on vulnerable individuals applying for social programs. We estimate the sources of this disparity and how loan and individual characteristics influence the probability of default. We find that vulnerable individuals have a higher risk than non-vulnerable individuals. However, this difference is reduced when individual debt characteristics, particularly the interest rate, are considered. Specifically, interest rates explain at least 30 percent of the risk gap. We also find that the default probabilities faced by lending firms are higher than those faced by banks, but we show that this effect is partly due to interest rate divergences. Our study underscores the importance of considering individual characteristics, loan characteristics, and interest rates when assessing default risk. While recognizing their limitations, these results suggest the need for policy interventions to promote financial inclusion, fair interest rate practices, and financial education, especially for vulnerable populations. |
| JEL: | G21 G51 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:aep:anales:4765 |
| By: | Daniel H. Cooper; Maddie Haddix |
| Abstract: | This brief examines how the pandemic-related, 43-month moratorium on federal student loan payments and interest accruals affected borrowers’ credit card limits and balances. The pause freed up an average of $280 a month for each of the 17 million student loan holders in active repayment, and it included a provision that erased previous defaults on student loans. |
| Keywords: | student loans; payment pause; consumer behavior; credit cards |
| JEL: | G51 H81 I22 |
| Date: | 2025–01–13 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedbcq:99440 |
| By: | Arnone, Massimo; Costantiello, Alberto; Leogrande, Angelo |
| Abstract: | The paper deals only with the identification of the determinants of total risk exposure amount within the European banking system, while the importance of TREA within Basel III regulatory regimes is focused. The research provides the integration of an econometric investigation with high-end machine learning techniques for the identification of the influential financial variables of TREA. The most relevant financial determinants of TREA were identified as LCR, CRWEA, LA, and OREA. These also reflect complex interdependencies-for instance, the negative value of TREA and LCR would suggest that there were trade-offs made between risk-taking and liquidity management. Thus, the positive relationship with CRWEA, and even more so with derivatives over assets, underlines intrinsic risks from credit exposures and related to financial instruments' complexity. The report further iterates that there should be mechanisms for appropriate risk-weighting, adequate liquidity buffers, and proper operational controls so that the financial system can become significantly more stable and resilient. This work will put forward actionable recommendations to policy makers, regulators, and financial institutions on mitigating systemic vulnerabilities and further optimizing their strategies for compliance in view of an increasingly volatile financial landscape, leveraging from traditional econometric modeling insights with machine learning. |
| Keywords: | Total Risk Exposure Amount, European Banking System, Liquidity Coverage Ratio, Risk Management, Basel III Compliance. |
| JEL: | E58 G21 G28 G32 |
| Date: | 2025–01–05 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:123190 |
| By: | Arnone, Massimo; Costantiello, Alberto; Leogrande, Angelo |
| Abstract: | The article reviews the linkage of banking credit with technological innovation at global level underlining that access to finance is important for and innovation. The domestic credit percentage involving the private sector to GDP allows projects of high risk but with a very high reward, projects that are key in increasing productivity and global competitiveness significantly. This paper explores that dynamic in infrastructure, creative industries, and greening technologies. Indeed, findings from such studies do show positive correlations, such as between credit and infrastructure development or creative exports, suggesting the capability of systems of finance to transform. These findings indicate the positive relationships that exist in some contexts, such as reduced R&D investment. Taking into account the ecological bottom line, this research underlines ecosystem-based strategies of banking, green credit, and poised financial regulations for sustainable development. Synthesizing into this paper provides actionable insight into how policy makers, financial institutions, and researchers can tap into the synergy between the financial system and innovation. |
| Keywords: | Panel Data, Banking, Innovation. |
| JEL: | G00 G20 G21 G22 G23 G24 G28 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122774 |
| By: | Lars E.O. Svensson |
| Abstract: | Swedish authorities and international organizations that monitor and comment on Swedish economic policy have argued that Swedish household debt is too high and a threat to financial and macroeconomic stability (FMS). But household debt may become a threat to FMS under essentially three conditions: (1) Household debt becomes too high relative to household assets. (2) Households’ debt service becomes too high relative to incomes and payment capacity. (3) Households use home-equity withdrawals—made possible by rising housing prices—to finance an unsustainable overconsumption of macroeconomic significance. The analysis covers both the total stock of mortgages and its borrowers and the new mortgages and borrowers, not—as is common—only the new mortgages and borrowers. The total stock is much larger, its borrowers are many more, and they matter much more for FMS. Two structural features mitigate risks from the Swedish household debt. First, on a closer look, mortgages are in fact a safe cash cow for banks and contribute to financial stability. Second, the mortgage rates are not exogenous but indirectly controlled by the Riksbank and its policy rate. The Riksbank sets the policy rate to maintain macroeconomic stability and contribute to financial stability. Regarding condition (1), aggregate household assets are much larger and have grown much faster than the debt. Net wealth was twice the debt in 1985, five times the debt in 2024. LTV ratios among the borrowers of the mortgage stock are much smaller than those among the new borrowers. A full 78% of the borrowers of the stock have home equity exceeding 30%, which is more than any housing price fall during the last 50 years. Regarding condition (2), the debt service of the borrowers of the stock is not high relative to incomes, because modest LTV ratios mean that required amortization rates are modest. Regarding condition (3), there is no indication that there is any debt-financed overconsumption (undersaving) of macroeconomic significance. The HEW recorded by the Swedish FSA is not unusually high, the saving rate is at a historical high, and the share of durable consumption in total consumption expenditures is normal. Thus, none of the three conditions is present. Swedish household debt is neither too high nor a threat to financial or macroeconomic stability. |
| JEL: | E21 E52 G01 G21 G28 G51 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33222 |
| By: | Paul S. Calem; Chris Henderson; Jenna Wang |
| Abstract: | This paper conducts a detailed exploration of the factors associated with unbanked status among U.S. households and how these relationships evolved between 2015 and 2019. Biennial FDIC household survey data on bank account ownership and household characteristics, combined with state-level variables, are examined with application of both fixed effects and multilevel modeling. The analysis finds that even as rising incomes drove a decline in the unbanked percentage of the population over this period, income remained the most significant differentiator, with strong associations with race and ethnicity also persisting. Unbanked status became more concentrated among single individuals and disabled individuals and less concentrated among younger households over this period, and less strongly related to unemployment spells. New factors identified by the analysis include lack of digital access and non-citizen immigrant status, both associated with significantly higher likelihood of being unbanked. Identified state-level relationships include an association between financial literacy measures and percent unbanked. Overall, the findings suggest that continuation of recent efforts by policymakers to bridge the digital divide in rural and urban areas and to enhance financial literacy could help expand financial inclusion. Another key takeaway is that unknown structural factors still pose a challenge to explaining who is unbanked, especially regarding gaps by race and ethnicity, underscoring a need to capture more granular data on the unbanked. |
| Keywords: | unbanked; consumer banking; financial inclusion; financial literacy; multilevel modeling |
| JEL: | D14 D31 G21 G53 C81 C83 |
| Date: | 2025–01–16 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedpwp:99465 |
| By: | Korobova, Elena; Fantazzini, Dean |
| Abstract: | Stablecoins are a pivotal and debated topic within decentralized finance (DeFi), attracting significant interest from researchers, investors, and crypto-enthusiasts. These digital assets are designed to offer stability in the volatile cryptocurrency market, addressing key challenges in traditional financial systems and DeFi, such as price volatility, transparency, and transaction efficiency. This paper contributes to the existing literature by estimating the credit risk associated with stablecoins, marking the first study to focus exclusively on this market. Our findings reveal that a substantial portion of stablecoins have failed, aligning with existing literature. Using Feder et al.'s (2018) methodology, we observed that 21% of stablecoins were "abandoned" at least once, with only 36% being later "resurrected, " and just 11% maintaining their "resurrected" status. These results support the hypothesis that stablecoins rarely recover once they break their peg, often due to technical issues or loss of user trust. We also found that the time between a statistically significant break in the stablecoin's peg and its subsequent collapse or stabilization averages approximately 10 days. We estimated probabilities of default (PDs) for stablecoins based on market capitalization using various forecasting models. A robustness check further indicated that stablecoins on the Ethereum blockchain are less prone to default, likely due to Ethereum's robust ecosystem and the established presence of older stablecoins. Despite the study's limitations, including a limited dataset of 121 stablecoins and missing market capitalization data, the findings offer practical applications for investors and traders. The techniques and models applied in this research provide tools for evaluating credit risks in the stable-coins market, aiding in portfolio management and investment strategies. |
| Keywords: | stablecoins; crypto-assets; cryptocurrencies; credit risk; default probability; probability of death; ZPP; Cox Proportional Hazards Model. |
| JEL: | C32 C35 C38 C51 C53 G12 G17 G32 G33 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122951 |
| By: | Barthelemy, Jean (Banque de France); Mengus, Eric (HEC Paris); Plantin, Guillaume (Sciences Po) |
| Abstract: | Fiscal dominance refers to situations in which fiscal policy imposes restrictions on monetary policy. Large shifts in the dynamics of sovereign debts, surpluses, and central bank's balance sheets since the Great Financial Crisis have created the perception of a heightened risk of such fiscal dominance in major jurisdictions. This paper reviews the theoretical and empirical literature on fiscal dominance. We offer a simple theory in which fiscal dominance arises as the outcome of strategic interactions between the government, the central bank and the bond markets. |
| Keywords: | Fiscal dominance; game of chicken; Fiscal-Monetary Interactions |
| JEL: | E31 E52 E63 H63 |
| Date: | 2024–11–08 |
| URL: | https://d.repec.org/n?u=RePEc:ebg:heccah:1532 |
| By: | Leogrande, Angelo; Arnone, Massimo; Costantiello, Alberto |
| Abstract: | The article reviews the linkage of banking credit with technological innovation at global level underlining that access to finance is important for and innovation. The domestic credit percentage involving the private sector to GDP allows projects of high risk but with a very high reward, projects that are key in increasing productivity and global competitiveness significantly. This paper explores that dynamic in infrastructure, creative industries, and greening technologies. Indeed, findings from such studies do show positive correlations, such as between credit and infrastructure development or creative exports, suggesting the capability of systems of finance to transform. These findings indicate the positive relationships that exist in some contexts, such as reduced R&D investment. Taking into account the ecological bottom line, this research underlines ecosystem-based strategies of banking, green credit, and poised financial regulations for sustainable development. Synthesizing into this paper provides actionable insight into how policy makers, financial institutions, and researchers can tap into the synergy between the financial system and innovation. |
| Date: | 2024–11–24 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:mnd4f |
| By: | Sangyup Choi; Kimoon Jeong; Jiseob Kim |
| Abstract: | We study how the call option-like refinancing structure can affect the transmission channel of monetary policy on consumption. Utilizing European data, we find that contractionary shocks induce a larger decline in consumption in countries with a higher share of adjustable-rate mortgages (ARMs), confirming the well-known finding. In contrast, consumption responses to expansionary shocks do not depend on this share, resulting in the asymmetric mortgage channel that has not been documented. Household-level microdata and quantitative analysis indicate that refinancing in response to a decline in the interest rate—akin to exercising call options—is the key to rationalizing our findings. |
| Keywords: | adjustable-rate mortgages, refinancing, monetary policy, consumption, call option |
| JEL: | E21 E32 E44 E52 G21 G51 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2025-02 |
| By: | Wandia, Elizabeth; Muathe, Stephen Makau |
| Abstract: | Commercial banks are facing a decline in revenues, indicating a potential downward trend. Banks have experienced intensified competition leading them to tap into foreign capital and expand their market internationally. In Kenyan banks, there has been a decline in the ROE from 26.6% in 2014, 25.2% in 2015, 24.5% in 2016, 21.8% in 2019 and finally 13.9% in 2020. The study sought to establish the effect of business globalization on performance of commercial banks in Kenya. The objectives were to analyze the effects of market liberalization, technological advancements, competitive intensity, and global financial integration. Descriptive research design was employed. The target population was all 39 banks in Kenya. The units of observation were the 1226 staff. Multiple linear regression was used in analysis employed. The study found that monetary policy, interest rate liberalization, and financial system changes have significant impact on commercial banks' performance. Technological innovations, Research and development, innovation, spread of new ideas and number of patents granted contributes to the success of banks in the region. Intensity of competition, brand preferences, business aesthetics greatly and expansion of the economy greatly affect the performance banks. Banks need to establish robust liberalized markets that provide easier access to global markets. The banks management should focus on increasing investments in patenting, digital innovation, and research and development to connect with the unbanked segments of the global market. |
| Date: | 2024–12–12 |
| URL: | https://d.repec.org/n?u=RePEc:osf:osfxxx:nscq3 |
| By: | Immaculate, Nakalembe; Muathe, Stephen M. A; Maina, Samuel |
| Abstract: | Youth-owned micro, small, and medium businesses face various constraints while accessing financial services in Uganda. Various stakeholders have assisted these enterprises in accessing finance at better conditions but their non- financial performance has continued to deteriorate. This study tried to investigate the effect of access to financial services on non-financial performance of youth-owned MSMEs in Mukono district, Uganda. Specific objectives included effect of bank, branch network, financial information, loan accessibility and financial technology on non-financial performance of youth-owned micro, small and medium enterprises. The study's guiding theories were the resource-based view, dynamic capability, and innovation of entrepreneurship theories. A positivism research philosophy and explanatory research design were used. The target population was 3717 registered MSMEs. A sample size of 400 was obtained using both stratified and simple random sampling methods. Primary data was collected using questionnaires, analyzed using multiple regression analysis. The study's findings revealed that financial information, bank branch networks, loan accessibility, and financial technology had a positive and significant effect non-financial performance of youth-owned MSMEs. The study concluded that access to financial services is critical to non-financial performance of youth-owned MSMEs in Mukono district, Uganda. The study recommends that youth-owned MSMEs should first gather reliable information about operations of financial service providers to avoid being charged hefty penalties and interests, branch expansion to provide greater supply of credit in order to improve the non-financial performance of youth-owned MSMEs. The study further recommends that financial institutions should reduce collateral requirements in order to increase micro-credit loan uptake by the youth who own MSMEs. |
| Date: | 2024–12–15 |
| URL: | https://d.repec.org/n?u=RePEc:osf:osfxxx:5ek6f |
| By: | Saki Bigio; Nicolas Caramp; Dejanir Silva; Dejanir H. Silva |
| Abstract: | We append the expectation of a monetary-fiscal reform into a standard New Keynesian model. If a reform occurs, monetary policy will temporarily aid debt sustainability through a temporary burst in inflation. The anticipation of a possible reform links debt levels with inflation expectations. As a result, interest rates have two effects: they influence demand and affect expected inflation in opposite directions. The expectations effect is linked to the impact of interest rates on public debt. While lowering inflation in the short term is possible through demand control, inflation tends to rise again due to its impact on inflation expectations (sticky inflation). Optimal monetary policy may allow low real interest rates after fiscal shocks, temporarily breaking away from the Taylor principle. We assess whether the Federal Reserve’s “staying behind the curve” was the right strategy during the recent post-pandemic inflation surge. |
| Keywords: | monetary policy, monetary-fiscal coordination, inflation expectations |
| JEL: | E31 E52 E63 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11495 |
| By: | Laura Alfaro; Saleem A. Bahaj; Robert Czech; Jonathon Hazell; Ioana Neamtu |
| 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. |
| JEL: | E44 F30 G10 G22 G23 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33241 |
| By: | Bernini Federico Gastón; Donaldson Paula; Garcia-Lembergman Ezequiel; Juárez Leticia |
| Abstract: | In the past two decades, over 30 countries have implemented tax amnesty policies to encourage the declaration and repatriation of hidden assets, with the goal of increasing government tax revenues. While previous literature has primarily focused on the fiscal impact, this paper studies a new channel: the potential expansion of the financial sector resulting from these policies. We examine the macroeconomic effects of Argentina's 2016 Tax Amnesty, one of the largest programs for disclosing hidden assets, through the financial channel. This amnesty led to an influx of savings into domestic banks, primarily in dollars, equivalent to 1.4% of GDP. We leverage the heterogeneous exposure of banks and firms to this amnesty-induced financial shock to identify bank responses and the spillovers to firms in the private sector. We find that more exposed banks significantly increased their lending compared to less exposed ones. Firms connected to banks with higher exposure experienced increased borrowing, along with a boost in imports, exports and employment. Our findings reveal that tax amnesty policies can stimulate economic growth by expanding the financial sector, demonstrating effects beyond their direct fiscal impact. These results are particularly relevant for countries with underdeveloped financial systems, where the potential for growth through improved access to capital is significant. |
| JEL: | H0 L5 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:aep:anales:4710 |
| By: | Clarke, Jeanelle |
| Abstract: | Access to credit is a key component for business development. Yet, for women in Latin America and the Caribbean, there are barriers which hinder this access, hamper women’s entrepreneurship and slow economic empowerment efforts in the region. One of these barriers is risk aversion, both as supply and demand constraint. On the supply side, financial institutions may exhibit inherent gender bias by providing lower levels of financing and higher interest rates to women entrepreneurs. On the demand side, women entrepreneurs may refrain from approaching financial institutions for fear of rejection or unfavourable terms of credit. The number of women entrepreneurs has grown within the region and represents an important area of opportunity for inclusive economic development. Financial institutions have a role to play in widening access to credit to support women’s entrepreneurship. It has been found that targeted gender responsive financing programmes can be highly effective at widening access and combatting negative gender bias. In Latin America and the Caribbean, successful examples have focused on creating innovative financial products that cater to the unique characteristics of women entrepreneurs, providing financial education and training, using appropriate indicators to determine financial needs. |
| Date: | 2024–12–30 |
| URL: | https://d.repec.org/n?u=RePEc:ecr:col035:81174 |
| By: | Joanna Stavins |
| Abstract: | Credit card accounts held by New England cardholders are less likely to carry a revolving balance or be delinquent compared with accounts held by cardholders in the rest of the country. That is the case for every income group. |
| Keywords: | New England; credit cards |
| Date: | 2025–01–07 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedbrb:99396 |
| By: | Alonso, Ricardo; Zachariadis, Konstantinos E. |
| Abstract: | A regulator who designs a public stress test to avert default of a distressed bank via private investment must account for large investors' private information on the bank's state. We provide conditions for crowding-in (crowding-out) so that the regulator offers an endogenous more (less) informative signal to better-informed investors. We show that crowding-in occurs as long as investors remain responsive to public news and they are sufficiently well informed: the regulator's test perfectly reveals the state as investors' become privately perfectly informed. Investors' value from more precise private signals may come from their effect on the public test's precision. |
| Keywords: | information design; Bayesian persuasion; stress tests; financial disclosure; endogenous public signal |
| JEL: | D83 G21 G28 |
| Date: | 2024–12–31 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:126040 |
| By: | Saki Bigio; Nicolas Caramp; Dejanir Silva |
| Abstract: | We append the expectation of a monetary-fiscal reform into a standard New Keynesian model. If a reform occurs, monetary policy will temporarily aid debt sustainability through a temporary burst in inflation. The anticipation of a possible reform links debt levels with inflation expectations. As a result, interest rates have two effects: they influence demand and affect expected inflation in opposite directions. The expectations effect is linked to the impact of interest rates on public debt. While lowering inflation in the short term is possible through demand control, inflation tends to rise again due to their impact on inflation expectations (sticky inflation). Optimal monetary policy may allow negative real interest rates after fiscal shocks, temporarily breaking away from the Taylor principle. We assess whether the Federal Reserve's "staying behind the curve" was the right strategy during the recent post-Pandemic inflation surge. |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:apc:wpaper:206 |
| By: | Aromí J. Daniel; Heymann Daniel |
| Abstract: | We propose a method to generate “synthetic surveys” that reveal policymakers’ perceptions and narratives. This exercise is implemented using 80 time-stamped Large Language Models (LLMs) fine-tuned with FOMC meetings’ transcripts. Given a text input, fine-tuned models identify highly likely responses for the corresponding FOMC meeting. We demonstrate the value of this tool in three different tasks: measurement of perceived economic conditions, evaluation of transparency in Central Bank communication and extraction of policymaking narratives. Our analysis covers the housing bubble and the subsequent Great Recession (2003-2012). For the first task, LLMs are prompted to generate phrases that describe economic conditions. The resulting outputs show policymakers informational advantage. Anticipatory ability increases as models are prompted to discuss future scenarios and financial conditions. To analyze transparency, we compare the content of each FOMC meeting minutes to content generated synthetically through the corresponding fine-tuned LLM. The evaluation suggests the tone of each meeting is transmitted adequately by the corresponding minutes. In the third task, LLMs produce narratives that show policymakers’ views on their responsibilities and their understanding of main forces shaping macroeconomic dynamics. |
| JEL: | E58 E47 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:aep:anales:4707 |
| By: | Baioni Tomás |
| Abstract: | Standard macroeconomic theory shows that a contractionary monetary policy reduces inflation. However, Argentina's recent history of active contractionary monetary policy stance and increasing inflation suggests otherwise. I construct monthly monetary policy shocks, first as deviations from the Central Bank's policy rule, following Romer & Romer (2004), and secondly as daily forward premium to overcome a potential "prize puzzle", following Witheridge (2024), to estimate the dynamic responses of inflation, economic growth and bilateral exchange rate to higher interest rates. Results from a SVAR model suggest that, as opposed to standard macroeconomic theory, a 10% hike in the monetary policy rate unequivocally increases headline inflation using both approaches. Furthermore and as robustness checks, I estimate the impulse response functions with an instrumental-variables local-projections approach (IV-LP), first, and I then compare my prior estimations with a "one-step" approach, following Lloyd & Manuel (2024), and find that my original conclusions hold. I theorize that this seemingly unconventional result is consistent with standard macroeconomic theory, when one accounts for a Central Bank with increasing interest-bearing liabilities as an active policy stance. |
| JEL: | E31 E52 G15 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:aep:anales:4709 |
| By: | Miguel Acosta-Henao; Andrés Fernández; Patricia Gomez-Gonzalez; Ṣebnem Kalemli-Özcan |
| Abstract: | Using comprehensive administrative data on Chilean firms, we examine whether credit lines and government-backed credit guarantees mitigated the impact of the large sudden stop event during the pandemic—the abrupt withdrawal of international capital. Our analysis employs a regression discontinuity design to demonstrate that firms eligible for these programs increased their borrowing from domestic lenders at a relatively lower cost. By reducing the cost of domestic currency debt relative to foreign currency debt, these policies effectively lowered the relative cost of domestic capital in the short term. This reduction in borrowing costs is conditional on selection effects at both the firm and bank levels, where only policy-eligible firms benefit from the lower credit costs from the same lender that non-eligible firms also borrow from. An open economy model with heterogeneous firms and financial frictions helps explain our findings: government interventions eased the higher cost of capital during the sudden stop by relaxing firms’ domestic collateral constraints, which in turn reduced domestic financial intermediaries’ risk aversion and boosted the supply of domestic credit in the face of shrinking international capital flows. |
| JEL: | F32 F41 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33283 |
| By: | Braithwaite, Jo; Murphy, David |
| Abstract: | This article considers how to evaluate extra-territorial regulation, and it makes particular reference to the European Union’s recent proposals for the European Market Infrastructure Regulation (‘EMIR’). Extra-territorial regulatory action is inherently controversial; however it has become increasingly commonplace in the financial markets since 2008 and, especially, Brexit. The article proposes a normative framework based upon Global Administrative Law, and analyses the so-called ‘EMIR 3.0’ proposals for third country central counterparties (CCPs) accordingly. This analysis locates the ongoing debates about the EMIR 3.0 regime in a wider, scholarly context and throws light on the proportionality and efficacy of the proposals. The article also suggests a technique for the review of extra-territorial financial regulation more broadly, arguing that Global Administrative Law provides a valuable way of evaluating substance and of holding decision-makers to account. |
| JEL: | G10 F30 |
| Date: | 2024–11–27 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:126000 |
| By: | Michael D. Bauer; Eric A. 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 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11552 |
| By: | Ansgar Rannenberg (Economics and Research Department, National Bank of Belgium) |
| Abstract: | I show that in linear rational expectation models, the effect of a monetary tightening can be simulated using contemporaneous and anticipated monetary policy shocks that replicate the forward curves observed during the period of interest, normalized with the forward curve observed in the quarter before the tightening period of interest begins. In particular, the shocks in response to which the tightening occurs are irrelevant. All required information is incorporated in the normalized forward curves. I confirm this result via simulations and a formal proof. Then I use it to assess the effects of the recent monetary tightening in the Euro Area.. |
| Keywords: | : policy counterfactualsmonetary policyinterest rate expectations |
| JEL: | E52 E43 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:nbb:reswpp:202501-471 |
| By: | Gunther Schnabl; Taiki Murai |
| Abstract: | The paper examines the relationship between money and prices in Japan based on Fisher’s (1911) transactions version of the quantity theory of money. Money is defined as aggregate debt less net foreign assets. A general price index is constructed from consumer prices, real estate prices, stock prices, nominal wages and the nominal effective exchange rate. Evidence shows a high correlation between money growth and general price inflation for Japan from 1980 to 2022, supporting the view that inflation is a monetary phenomenon. The paper argues that Japan’s inflation has remained low since the 1990s because the policy mix of monetary and fiscal expansion led to the fall of private debt and the rise of government debt, resulting in a low money growth at the aggregate level. An exit from monetary and fiscal expansion would contribute to the recovery of private debt creation, which would restore the money, price and growth dynamics in Japan. |
| Keywords: | quantity theory of money, inflation, monetary policy |
| JEL: | E31 E52 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11476 |
| By: | Yu Awaya; Hiroki Fukai; Makoto Watanabe |
| Abstract: | We compare Transparency and Privacy in credit markets. A long-lived borrower, who has a risky investment opportunity, seeks loans from a sequence of short-lived lenders. Under Transparency, all the information about the past investment outcomes is shared among the future lenders, which helps the lenders learn the borrower’s type. In contrast, no information is shared under Privacy. We first show that under both Transparency and Privacy, the iterated elimination of dominated strategies leaves unique outcomes. We then show that trade stops earlier under Transparency than under Privacy. A higher social welfare is achieved under Privacy than under Transparency. |
| Keywords: | credit market, transparency, privacy, strategic experimentation |
| JEL: | C73 D83 G20 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11528 |
| By: | Lars Hornuf; Johannes Voshaar |
| Abstract: | What is an effective signal in crowd funding? We asked this question to 83 expert researchers who have published the top-notch articles in this field. They stated that, in theory, strong signals include past crowdfunding success, business experience, patent ownership, and the equity share offered. Examining 145 articles published in leading business and economics journals, we find that the empirical evidence from a meta-analysis does not accord with this perception among expert researchers. Signals that expert researchers consider to be theoretically less strong are more often statistically significant predictors of crowdfunding success and have neither larger nor smaller standardized effect sizes than strong signals. A meta-regression suggests that domain-specific signals play the most important role in crowdfunding. The findings of our literature review provide important insights for investors, platform managers, and the academic review process. |
| Keywords: | signaling, crowdfunding, crowdinvesting, peer-to-peer lending, crowdlending, meta-study |
| JEL: | G21 D82 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11501 |
| By: | Matthias Fengler; Winfried Koeniger; Stephan Minger |
| Abstract: | We analyze the transmission of monetary policy to the costs of hedging using options order book data. Monetary policy transmits to hedging costs both by changing the relevant state variables, such as the value of the underlying, its volatility and tail risk, and by affecting option market liquidity, including the bid-ask spread and market depth. Our estimates suggest that during the peak of the pandemic crisis in March 2020, monetary policy decisions resulted in substantial changes in hedging costs even within short intraday time windows around the decisions, amounting approximately to the annual expenses of a typical equity mutual fund. |
| Keywords: | liquidity, monetary policy, option order books, option markets, Covid-19 pandemic |
| JEL: | G13 G14 D52 E52 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11556 |
| By: | Natal, Arnaud (University of Bordeaux); Nordman, Christophe Jalil (IRD, DIAL, Paris-Dauphine) |
| Abstract: | The relationship between personal debt and cognition has received limited attention, especially, in developing countries. This study focuses on India and examines the relationship between Big Five personality traits, cognitive skills (math, literacy, and Raven scores), and financial decision-making, specifically debt negotiation and debt management, while considering the weight of social identity (i.e., caste and gender). Using a panel dataset built from an original household survey conducted in 2016-17 and 2020-21 in rural Tamil Nadu and employing multivariate correlation probit analysis, we find the following. Firstly, conscientiousness is an advantage in the negotiation and management of debt, particularly for non-Dalit women, suggesting that, in a rural patriarchal context, women leverage personality traits to overcome the constraints of social identity. Secondly, emotional stability is a disadvantage in both debt negotiation and management. Thirdly, the role of cognition and in particular the Raven score is ambiguous (negative correlation with debt negotiation but positive correlation with debt management). Our results suggest that training programmes designed to improve conscientiousness, when integrated into broader macroeconomic policies, could help individuals secure better loan conditions and avoid repayment difficulties. |
| Keywords: | caste, Big Five, personality traits, cognitive skills, gender, social identity |
| JEL: | D14 D91 G51 O1 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17482 |
| By: | Jyotsana Kala; Lucie Lebeau; Lu Wang |
| Abstract: | We study the dynamic interplay between monetary policy and market power in a decentralized monetary economy. Building on Choi and Rocheteau (2024), our key innovation is to model rent seeking as a process that takes time, allowing market power to evolve gradually. Our model predicts that a gradual reduction in the nominal interest rate causes a simultaneous increase in rent-seeking effort and producers’ market power, consistent with the stylized correlation observed in the U.S. over the last few decades. Producer entry can however reverse this relation in the short run, and neutralize it in the long run. Indeterminacy and hysteresis emerge when consumers benefit from valuable outside options, with short-run monetary policy shocks potentially locking the economy into high- or low-market-power equilibria in the long run. |
| Keywords: | search; money; market power; monetary policy |
| JEL: | D82 D83 E40 E50 |
| Date: | 2025–01–07 |
| URL: | https://d.repec.org/n?u=RePEc:fip:feddwp:99409 |
| By: | Lee, Munseob (University of California, San Diego); Macaluso, Claudia (Federal Reserve Bank of Richmond); Schwartzman, Felipe (Richmond Fed) |
| Abstract: | Our paper addresses the heterogeneous effects of monetary policy on households of different races. The cyclical volatility of real income differs significantly for households of different races and income levels, reflecting differential exposure to fluctuations in employment and consumer prices. All Black households are disproportionately affected by employment fluctuations, whereas price volatility is only particularly pronounced for Black households with income above the national median. The latter face 40 percent higher price volatility than both poorer households of the same race and white households of similar income. To evaluate the effects of policy, we propose a New Keynesian framework with heterogeneous exposure to employment and price volatility. We find that an accommodative monetary stance generates asymmetric outcomes within race groups. Low-income households experience unemployment stabilization benefits, while high-income ones incur real income volatility costs. Differences are especially large among Black households. Reducing the volatility of unemployment by 1 percentage point engenders a 1.17 percentage point reduction in overall income volatility for poorer Black households, but an increase of 0.6 percentage points in income volatility for richer Black households. |
| JEL: | E31 E52 J15 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17502 |
| By: | Roberto Tamborini |
| Abstract: | The public debt overhang spread across advanced countries, and the reform of the Stability and Growth Pact in the Euro Zone, have revived the polarization between those who think that debt is always good and those who think that debt is always bad. This paper presents a normative model of endogenous growth with debt-financed public capital. It is shown that no meaningful assessment of debt and its effect on growth and sustainability at any point in time is possible without reference to the whole debt trajectory and the specific state of the economy along the trajectory. An orderly and consistent analysis may be developed along two coordinates of debt: sustainability/unsustainability, and efficiency/inefficiency. "High" and "low" debt/GDP ratios may equally be efficient and sustainable. On the other hand, debt may be sustainable but inefficient (sub-optimal growth), or sustainable and efficient ex-ante but unsustainable ex-post, or inefficient and unsustainable. |
| Keywords: | public debt, debt burden, debt sustainability, economic growth, endogenous growth models |
| JEL: | E62 H63 O40 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11503 |