|
on Banking |
| By: | Makoto Fukumoto (Waseda University); Masato Shizume (Waseda University) |
| Abstract: | Following the opening of the treaty ports in 1859 and Meiji Restoration in 1868, Japan instituted a series of drastic reforms, successfully modernized, and achieved prolonged economic growth. Among other entities, national banks structured as joint stock companies according to the US model played a key role in the modernization of the country by providing the society with liquidity and integrating the national financial markets. We explore the factors that led to the success of the national banks by constructing new datasets characterizing the origins of the national banks and the viability of individual national banks. We then perform regressions with this database to explore the emergence of banking activities during the preceded period and to test whether the origins of the banks affected their viability and regional economic growth. Empirical results from econometric analysis and case studies demonstrate that commoners who engaged in commercial activities played a key role in Japan’s modernization as the founders of the national banks. |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:wap:wpaper:2415 |
| By: | Roberto Bonfatti; Adam Brzezinski; K. Kivanc Karaman; Nuno Palma |
| Abstract: | Monetary capacity refers to the maximum level of monetization attainable by a state, given scarcity of commodity money and the need to finance public expenditure by taxing money. We develop a model showing that monetary and fiscal capacity are complements in imperfectly monetized economies. A positive shock to fiscal capacity implies lower expected seignorage and thereby increases monetary capacity. Simultaneously, a positive shock to monetary capacity increases the efficiency of taxation, and hence the incentive to invest in fiscal capacity. We take this model to the data by exploiting an exogenous shock to Europe’s monetary capacity: the inflow of precious metals from the Americas (1550-1790). Our causal estimates indicate that increases in monetary capacity led to gradual and persistent increases in fiscal capacity in England, France and Spain. A historical overview of Europe and China from antiquity to the early-modern period confirms that monetary and fiscal capacity co-evolved in the long run. |
| Keywords: | monetary capacity, fiscal capacity, monetization, inflation, taxation, quantity theory of money, monetary non-neutrality |
| JEL: | E50 E60 H21 N10 O11 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:man:allwps:0007 |
| By: | Aditi Godbole; Zubin Shah; Ranjeet S. Mudholkar |
| Abstract: | This paper analyzes the 1/3 Financial Rule, a method of allocating income equally among debt repayment, savings, and living expenses. Through mathematical modeling, game theory, behavioral finance, and technological analysis, we examine the rule's potential for supporting household financial stability and reducing bankruptcy risk. The research develops theoretical foundations using utility maximization theory, demonstrating how equal allocation emerges as a solution under standard economic assumptions. The game-theoretic analysis explores the rule's effectiveness across different household structures, revealing potential strategic advantages in financial decision-making. We investigate psychological factors influencing financial choices, including cognitive biases and neurobiological mechanisms that impact economic behavior. Technological approaches, such as AI-driven personalization, blockchain tracking, and smart contract applications, are examined for their potential to support financial planning. Empirical validation using U.S. Census data and longitudinal studies assesses the rule's performance across various household types. Stress testing under different economic conditions provides insights into its adaptability and resilience. The research integrates mathematical analysis with behavioral insights and technological perspectives to develop a comprehensive approach to household financial management. |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2501.15557 |
| By: | Olena Kostyshyna; Isabelle Salle; Hung Truong |
| Abstract: | We analyze micro-level data from the Canadian Survey of Consumer Expectations through the lens of a heterogeneous-expectations model to study the state-dependent risk of inflation expectations unanchoring in low- and high-inflation environments. In our model, agents are either trend-chasing or mean-reverting forecasters of inflation. We interpret the degree of mean reversion in inflation expectations as a measure of anchoring, which varies over time with the share of agents using each approach. We find that during the post-pandemic inflation spike, trend-chasing expectations surged, resulting in a heightened risk of unanchoring expectations and entrenching above-target inflation. Furthermore, forming trend-chasing inflation expectations is associated with higher expectations for other key economic variables — such as interest rates, wages, and house prices — and a restraint in household spending. We provide additional new insights into household expectation formation, documenting that forecasting behaviors, attention, and noise in beliefs vary across socio-demographic groups and correlate with views about monetary policy. |
| Keywords: | Inflation and prices |
| JEL: | E70 E31 D84 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:25-5 |
| By: | Alper, Koray; Baskaya, Soner; Shi, Shuren |
| Abstract: | This study investigates the influence of macroprudential policies (MaPs) on corporate investment, employing firm-bank level microdata from the European Investment Bank Investment Survey (EIBIS) for the period 2015-2022. We initially document that MaP tightening, particularly through supply-based MaPs, leads to a reduction in corporate investment. We then delve into the transmission mechanism of MaPs. Our analysis suggests that MaPs affect corporate investment through bank lending decisions. MaP tightening correlates with greater reliance on internal finance and reduced use of external finance. Further, we find that both bank and firm characteristics significantly contribute to the effect of MaPs on corporate investment. Specifically, we observe that financially weaker banks are more likely to restrict credit in response to MaP tightening. Moreover, firms that are heavily reliant on external finance for investment, as well as those that are financially weaker, appear to be more adversely affected by a reduced credit supply. Lastly, we find that MaPs exert a stronger impact on tangible investments, whereas intangible investments are less sensitive to MaPs. Our finding suggests that the insignificance is due to the lower reliance of intangible investments on external finance, verifying the presence of the bank lending channel of MaP transmission. |
| Keywords: | Macroprudential policies, bank lending, tangible investments, intangible investments, financial stability |
| JEL: | D22 E22 E58 G28 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:eibwps:310332 |
| By: | Zabi Tarshi; Gitanjali Kumar |
| Abstract: | Changes in the term premium can reflect uncertainty about inflation, growth and monetary policy. Understanding the key factors that influence the term premium is important when central banks make decisions about monetary policy. In this paper, we derive the real term premium from the nominal term premium in Canada. |
| Keywords: | Financial markets; Interest rates; Econometric and statistical methods; Monetary policy and uncertainty |
| JEL: | C5 C58 E4 E43 E47 G1 G12 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsan:25-3 |
| By: | Schlicht, Haley |
| Abstract: | This paper investigates the dynamics of Western OECD syndicated bank lending to East Asian borrowers during the 1997-1998 Asian Financial Crisis (AFC), focusing on the interplay between sentiment volatility and moral hazard. Analysing loan data from Thomson-Reuters DealScan reveals that between 1993-2003 East Asian borrowers received disproportionately high loan volumes compared to other emerging market countries and this phenomenon is not full explainable by economic fundamentals. Regression analysis highlights the paradoxical role of short-term debt: while it was associated with higher loan spreads and fees, reflecting an acknowledgment of risk, it simultaneously increased lending volumes, indicating conflicting risk assessment. The study employs the novel use of GenerativeAI to construct an estimate of volatility in sentiment towards East Asia from financial news headlines, offering an original assessment of how market sentiment influenced lending behaviour. The Difference-in-Differences analysis provides compelling evidence that, in the pre-crisis period, increased sentiment volatility spurred increased lending while post-crisis that same volatility deterred lending. This shift highlights how lenders engaged in excessive lending despite appreciable risk before the AFC, only to recalibrate their behaviour in response to the post-crisis fallout. These findings indicate that the "East Asia effect" was shaped not just by regional economic factors, but also by sentiment-driven decision-making which contributed to the financial instability that characterized the AFC. This research highlights the need for further investigation into the role of sentiment in international finance, particularly its influence on financial decision-making during periods of economic growth and crisis. |
| JEL: | F34 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:wpaper:127154 |
| By: | Federico Huneeus; Joseph P. Kaboski; Mauricio Larrain; Sergio L. Schmukler; Mario Vera |
| Abstract: | This paper studies how credit guarantee and employment protection programs interact in assisting firms during crises times. The paper analyzes how these government programs influence credit allocation, indebtedness, and risk at both the micro and macro levels. The programs provide different incentives for firms. The low interest rate encourages riskier firms to demand government-backed credit, while banks tend to reject those credit applications. The credit demand outweighs this screening supply response, expanding micro-level indebtedness across the extensive and intensive margins among riskier firms. The uptake of the employment program is not associated with risk, as firms internalize the opportunity cost of reduced operations when sending workers home to qualify for assistance. The employment program mitigates the indebtedness expansion of the credit program by supporting firms and enabling banks to screen firms better. Macroeconomic risk of the credit program would increase by a third without the availability of the employment program. |
| Keywords: | banking, credit demand, credit supply, crises, Covid-19, debt, employment protection, firm risk, macroeconomic risk, public credit guarantees |
| JEL: | G21 G28 G32 G33 G38 I18 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11652 |
| By: | Hadi Elzayn; Simon Freyaldenhoven; Ryan Kobler; Minchul Shin |
| Abstract: | Black Americans are both substantially more likely to have their mortgage application rejected and substantially more likely to default on their mortgages than White Americans. We take these stark inequalities as a starting point to ask the question: How fair or unfair is the U.S. mortgage market? We show that the answer to this question crucially depends on the definition of fairness. We consider six competing and widely used definitions of fairness and find that they lead to markedly different conclusions. We then combine these six definitions into a series of stylized facts that offer a more comprehensive view of fairness in this market. To facilitate further exploration, an interactive Online Appendix allows the user to examine our fairness measurements further across both time and space. |
| Keywords: | fairness; discrimination; inequality; measurement; algorithmic decisions; HMDA |
| JEL: | D63 G21 G28 J15 R21 |
| Date: | 2025–02–04 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedpwp:99500 |
| By: | Buda, G; Carvalho, V. M.; Corsetti, G; Duarte, J. B.; Hansen, S.; Moura, A. S.; Ortiz, Ã .; Rodrigo, T.; Rodríguez Mora, J. V.; Alves da Silva, G. |
| Abstract: | We examine the transmission of monetary policy shocks to the macroeconomy at high frequency. To do this, we build daily consumption and investment aggregates using bank transaction records and leverage administrative data for measures of daily gross output and employment for Spain. We show that variables typically regarded as "slow moving", such as consumption and output, respond significantly within weeks. In contrast, the responses of aggregate employment and consumer prices are slow and peak at long lags. Disaggregating by sector, consumption category and supply-chain distance to final demand, we find that fast adjustment is led by downstream sectors tied to final consumption—in particular luxuries and durables—and that the response of upstream sectors is slower but more persistent. Finally, we find that time aggregation to the quarterly frequency alters the identification of monetary policy transmission, shifting significant responses to longer lags, whereas weekly or monthly aggregation preserves daily-frequency results. |
| Keywords: | Event-study, Monetary Policy, Economic Activity, High-Frequency Data, Local Projections |
| JEL: | E31 E43 E44 E52 E58 |
| Date: | 2025–02–11 |
| URL: | https://d.repec.org/n?u=RePEc:cam:camjip:2504 |
| By: | Hadi Elzayn; Simon Freyaldenhoven; Minchul Shin |
| Abstract: | We develop a clustering-based algorithm to detect loan applicants who submit multiple applications (“cross-applicants”) in a loan-level dataset without personal identifiers. A key innovation of our approach is a novel evaluation method that does not require labeled training data, allowing us to optimize the tuning parameters of our machine learning algorithm. By applying this methodology to Home Mortgage Disclosure Act (HMDA) data, we create a unique dataset that consolidates mortgage applications to the individual applicant level across the United States. Our preferred specification identifies cross-applicants with 93 percent precision |
| Keywords: | clustering; mortgage applications; HMDA |
| JEL: | C38 C63 C81 G21 R21 |
| Date: | 2025–02–04 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedpwp:99499 |
| By: | Jose Mauricio Gomez Julian |
| Abstract: | This research studies the relation between money and prices and its practical implications analyzing quarterly data from United States (1959-2022), Canada (1961-2022), United Kingdom (1986-2022), and Brazil (1996-2022). The historical, logical, and econometric consistency of the logical core of the two main theories of money is analyzed using objective bayesian and frequentist machine learning models, bayesian regularized artificial neural networks, and ensemble learning. It is concluded that money is not neutral at any time horizon and that, despite money is ultimately subordinated to prices, there is a reciprocal influence over time between money and prices which constitute a complex system. Non-neutrality is transmitted through aggregate demand and is based on the exchange value of money as a monetary unit. |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2501.14623 |
| By: | Andreeva, Desislava; Samarina, Anna; Faria, Lara Sousa |
| Abstract: | This paper explores the impact of the regulatory leverage ratio (LR) on banks’ demand for reserves and thus the pricing of overnight liquidity in the euro area money markets. We use daily transaction-level money market data during the period between January 2017 - February 2023 and examine the two major overnight money market segments – the unsecured and the secured one, distinguishing between over-the-counter (OTC) and CCP-cleared trades for the latter. We find a significant positive link between a bank’s LR and the spread between its money market borrowing rate and the DFR. Banks with a higher LR offer deposits at higher interest rates, thereby reducing the markdown vis-à-vis the DFR. The impact of the LR dampens during the period in which central bank reserves did not count towards the LR exposure measure (or the denominator of the ratio). It is stronger for G-SIBs, who need to comply with a G-SIB LR add-on on top of the minimum requirement applicable to all euro area banks. Moreover, the impact is weaker for CCP-cleared transactions compared to OTC trades, likely reflecting the possibility to net bilateral exposures if cleared via CCPs, which effectively allows banks to finance the respective gross money market exposures with a smaller share of Tier 1 capital. JEL Classification: G12, G21, G28 |
| Keywords: | bank balance sheet constraints, leverage ratio, money markets, €STR |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253016 |
| By: | Haselmann, Rainer; Heider, Florian; Pelizzon, Loriana; Weber, Michael |
| Abstract: | Monetary policy in the euro area faces significant challenges due to the evolving economic landscape marked by the return of inflation, financial instability risks, and the consequences of unconventional monetary policy (UMP) to the operational framework of monetary policy. This article evaluates these key challenges in the context of the European Central Bank's (ECB) mandate and its broader implications. It highlights the unprecedented resurgence of inflation, which has complicated monetary policy decisions and revealed gaps in understanding household inflation expectations. Financial stability, now integral to the ECB's mandate, is strained by trade-offs between short-term and long-term stability, particularly under high-interest rate environments. Finally, UMP has disrupted traditional financial mechanisms and increased dependency on the central bank's liquidity operations. |
| Keywords: | Monetary Policy, Inflation, Financial Stability, Balance Sheet |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:safepl:310334 |
| By: | Kelly, Paul V. |
| Abstract: | The purpose of this paper is to provide the first time series of interest rates in the Irish mortgage market of the eighteenth century.1 This time series, when combined with new data on the investment returns from land and other types of investments, sheds light on the determinants of interest rates in economies without a central bank. This paper is relevant to two key global economic history issues for the period: the influence of institutions on economic growth and the timing of the ‘Great Divergence’ between Western Europe and the rest of the world.2 However, the primary questions dealt with are how did Irish rates compare with English ones and how did they influence the development of the Irish economy? Interest rates are ‘an important index of the quality of the institutional framework’ and this paper examines the development of Irish rates and shows how they compare to other economies.3 The paper demonstrates that Irish interest rates were consistently higher than equivalent English ones and that the Irish mercantile and industrial sectors were handicapped as a result. This spread is not attributable to risk premia caused by differences in institutional effects but rather by the relative risk/return hierarchy of different investment types, notably by the exceptionally high returns on Irish land. Credit market failure was the result for much of the century as the unrealistic usury maximum caused credit rationing. There was also a sustained strong correlation between English and Irish rates.4 However, this correlation was not due to direct market integration, since the English and Irish markets were segregated, but rather the two markets were reacting in the same way to external stimuli such as wars. |
| JEL: | N13 E43 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:wpaper:127155 |
| By: | Abbassi, Puriya; Bianchi, Michele Leonardo; Della Gatta, Daniela; Gallo, Raffaele; Gohlke, Hanna; Krause, Daniel; Miglietta, Arianna; Moller, Luca; Orben, Jens; Panzarino, Onofrio; Ruzzi, Dario; Scherrieble, Willy; Schmidt, Michael |
| Abstract: | Government bond markets play a critical role in the smooth functioning of the financial system, in the conduct and transmission of monetary policy and in the economy as a whole. Maintaining resilient government bond markets is fundamental for policymakers and authorities. This note examines the German and Italian government bond markets, with a special focus on liquidity and on the role played by banks vs. non-banks. To this end, the holding and market structure of the German and Italian government bond markets are analysed at the granular sectoral level. We also look at the trading activities of various market participants in the repo and futures market. This comprehensive analysis enhances the understanding of government bond market dynamics, investor behaviour, and liquidity, providing insights for policymakers and market participants. |
| Keywords: | government bonds, repo, futures, market structure, banks, non-bank financial intermediaries, financial stability |
| JEL: | G10 G21 G23 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubtps:310318 |
| By: | Sikiru, Adeyemi Abidemi; Salisu, Afees A. |
| Abstract: | Informed by the recent run of rising and persistent inflation in Nigeria, which puts headline and food inflation at 28.2% and 32.8%, respectively, and its attendant consequences on macroeconomic performance, this study makes a case for inflation targeting as an alternative monetary policy framework to achieve the principal goal of monetary policy - price stability. We highlight from the literature and empirically explore relevant criteria that could ensure a smooth transition of the Central Bank of Nigeria to an inflation-targeting institution. First, we suggest either of the following bands for (headline) inflation targeting: 10.56-13.14%, 13.46-14.70%, or 10.90-16.47%, while the Bank can also keep a close watch on food inflation. Second, we propose some well-thought-out econometric models that the Bank can adopt to forecast inflation and determine the optimal policy rate to steer the economy. Third, we recommend legal ways of entrenching the central bank's autonomy through granting the power of appointment, dismissal, and accountability in the legislature rather than the executive to strengthen the central bank's independence. Lastly, we inform that the inflation targeting framework can be enhanced by involving the public through the periodic publication of reports, discussions at town hall meetings, and defence of the monetary policy operation with the legislature. |
| Keywords: | Inflation targeting, monetary policy, Central bank, Forecasting, Nigeria |
| JEL: | E17 E31 E52 E58 N17 |
| Date: | 2025–01–31 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:123528 |
| By: | Bambe, Bao-We-Wal |
| Abstract: | Achieving the Sustainable Development Goals (SDGs) will require significant financing and investment, particularly as growing challenges from climate events highlight the insufficiency of public funds to meet the 2030 Agenda (World Economic Forum 2024). Private capital for low- and middle-income countries (LMICs) surged in recent years, with significant commitments from multilateral development banks (MDBs). However, the financing gap to achieve the SDGs remains sizable, highlighting the need for greater effort to mobilise much larger private capital for sustainable development. In recent years, guarantees have emerged as a key leveraging mechanism. They are designed to mitigate high investment risks to support private capital mobilisation in LMICs. However, despite some progress, guarantees are used sparingly, suggesting considerable scope for increasing their scale, as highlighted by the G20 Independent Expert Group (IEG). This Policy Brief examines whether guarantees can serve as an effective leveraging mechanism for small and medium-sized enterprises (SMEs) in low- and middle-income countries (LMICs). This is especially so because SMEs remain largely hampered by poor access to finance, despite their key role in providing jobs for the local population and contributing to economic growth. Moreover, in the face of climate change, SME adaptation requires new investments in climate-resistant technologies and clean energies, highlighting the need for additional financing amid severe constraints on access to capital. Guarantees can complement other leveraging mechanisms, further easing financing constraints for SMEs in LMICs. Guarantees can absorb some of the risks associated with investment, offering financial institutions greater security. This added security can, in turn, help improve access to capital for SMEs. On the other hand, they can also help catalyse private sector investment in LMICs. Recognising both the potential benefits and short-comings of guarantees, this Policy Brief provides the following policy recommendations on how guarantees could be extended efficiently to the SME sector in LMICs. - Guarantees should be directed at financial institu-tions to mitigate portfolio risk and actively promote lending to small projects or SMEs in high-risk sectors, particularly those with the potential to generate substantial economic, environmental, or social benefits. - Complement guarantees with additional measures to improve SMEs' financial management, enhance risk assessment, and strengthen technical capacity through professional training and advisory services. - Implement partial credit guarantees to require financial institutions to retain a share of the risk, thereby reducing moral hazard and promoting rigorous analyses of borrowers' creditworthiness. Complement these guarantees with conditionalities and monitoring criteria, such as regular reporting, to ensure the incrementality and additionality of guaranteed financing. Enhance the harmonisation of guarantees with other leveraging mechanisms, improve coordination among MDBs and DFIs, and streamline guarantee frameworks to achieve greater efficiency. - Recognise that guarantees alone cannot address structural vulnerabilities and institutional weakness in LMICs; a long-term commitment from decision-makers is essential to improve institutional and economic performance. |
| Keywords: | Guarantees, Multilateral Developemnt Banks, Small and Medium-Sized Enterprises, Low- and Middle-income Countries, 2030 Agenda |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:idospb:309600 |
| By: | Kundu, Shohini; Vats, Nishant |
| Abstract: | This paper investigates the role of banking networks in the transmission of shocks across borders. Combining banking deregulation in the US with state-level idiosyncratic demand shocks, we show that geographically diversified banks reallocate funds from economies experiencing negative shocks to unaffected regions. Our findings indicate that in the presence of idiosyncratic shocks, financial integration reduces business cycle comovement and synchronizes consumption patterns. Our findings contribute to explaining the Great Moderation and provide empirical support for theories that predict that banking integration facilitates the insurance of region-specific risk and the efficient allocation of resources as markets become more complete. JEL Classification: E32, F36, G21 |
| Keywords: | business cycles, economic growth, financial integration, great moderation, idiosyncratic shocks, regional economics |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253019 |
| By: | Cyril Monnet, Dirk Niepelt, Remo Taudien |
| Abstract: | The proposed revision of the Swiss Banking Act introduces a public liquidity backstop (PLB) for distressed systemically important banks (SIBs), in part to facilitate resolution. We examine the impact of the PLB on scal balances, societal welfare, and the incentives of bank shareholders and management. A PLB, like too-big-to-fail (TBTF) status, acts as a subsidy for non-convertible bonds, which can create negative externalities. Corrective measures must be implemented before the PLB is activated to align incentives with societal interests. We conservatively estimate that Swiss SIBs' TBTF status results in funding cost reductions far greater than the proposed ex-ante compensation, with UBS Group AG alone gaining at least USD 2:9 billion in 2022. The risk for Switzerland of hosting SIBs warrants additional precautionary savings. |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:ube:dpvwib:dp2501 |
| By: | Shunsuke Haba (Bank of Japan); Yuichiro Ito (Bank of Japan); Yoshiyasu Kasai (Bank of Japan) |
| Abstract: | This paper examines the impact of the introduction of the negative interest rate policy (NIRP) on interest rate formation and lending in Japan through literature reviews and empirical analyses. Previous studies indicated that NIRP had the effect of lowering the effective lower bound on nominal interest rates and encouraging search for yield behavior among investors, pushing down not only short-term interest rates but also long-term interest rates. Analyzing data from Japan and the euro area, we find that NIRP had a significant downward effect on interest rates for longer maturities in addition to the short-term interest rates. Next, with regard to the impact on lending, previous studies suggested that the introduction of NIRP could create accommodative financial conditions and increase lending as with conventional monetary policy that guides short-term interest rates, while it could impede the financial intermediation function by deteriorating the profitability of financial institutions ("reversal interest rate" mechanism). In this regard, analyzing data on Japanese financial institutions, we find no evidence that even financial institutions with a larger amount of deposits relative to total assets, whose earnings are likely to be affected by NIRP, experienced a declining trend in lending after the introduction of the policy. This result may have been influenced by factors such as the introduction of the three-tier system for current accounts at the Bank of Japan that eased the contractionary impact on financial institutions' earnings and maintained their risk-taking capacity. |
| Keywords: | Negative interest rate policy; Yield curve; Reversal interest rate; Lending |
| JEL: | C23 E43 E44 E52 G21 |
| URL: | https://d.repec.org/n?u=RePEc:boj:bojwps:wp25e01 |
| By: | Francesco Zanetti; Masashige Hamano; Philip Schnattinger; Mototsugu Shintani; Iichiro Uesugi |
| Abstract: | We develop a framework of financial intermediation with search and matching frictions between banks and firms which explains the co-existence of bank lending to unprofitable firms with low productivity (zombie firms). The incidence of zombie firms depends on credit market tightness that encapsulates the abundance of credit provision in financial markets. An increase in credit market tightness initially increases the share of zombie firms due to the bank's incentive to forgo costly separation. In contrast, the firm's incentive to terminate an unprofitable relationship rises with an increase in credit market tightness, which decreases the share of zombie firms. These countervailing forces generate an inverted U-shaped relationship between credit market tightness and the share of zombie firms. A high firm bargaining power magnifies the firm's incentive to terminate unprofitable relationships and decreases the share of zombie firms. We test our theory by constructing measures of credit market tightness and bargaining power for 31 industries in Japan. We find that capital injections during the Japanese banking crisis of the early 2000s had stronger efficacy in reducing the share of zombie firms in sectors with high firms' bargaining power, consistent with the predictions of our theoretical framework. |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:cnn:wpaper:25-005e |
| By: | Cristiano Cantore; Edoardo Leonardi |
| Abstract: | How does the monetary and fiscal policy mix alter households' saving incentives? To answer these questions, we build a heterogenous agents New Keynesian model where three different types of agents can save in assets with different liquidity profiles to insure against idiosyncratic risk. Policy mixes affect saving incentives differently according to their effect on the liquidity premium -- the return difference between less liquid assets and public debt. We derive an intuitive analytical expression linking the liquidity premium with consumption differentials amongst different types of agents. This underscores the presence of a transmission mechanism through which the interaction of monetary and fiscal policy shapes economic stability via its effect on the portfolio choice of private agents. We call it the 'self-insurance demand channel', which moves the liquidity premium in the opposite direction to the standard 'policy-driven supply channel'. Our analysis thus reveals the presence of two competing forces driving the liquidity premium. We show that the relative strength of the two is tightly linked to the policy mix in place and the type of business cycle shock hitting the economy. This implies that to stabilize the economy, monetary policy should consider the impact of the 'self-insurance' on the liquidity premium. |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2501.17458 |
| By: | Aliaksandr Zaretski |
| Abstract: | I characterize optimal government policy in a sticky-price economy with different types of consumers and endogenous financial constraints in the banking and entrepreneurial sectors. The competitive equilibrium allocation is constrained inefficient due to a pecuniary externality implicit in the collateral constraint and other externalities arising from consumer type heterogeneity. These externalities can be corrected with appropriate fiscal instruments. Independently of the availability of such instruments, optimal monetary policy aims to achieve price stability in the long run and approximate price stability in the short run, as in the conventional New Keynesian environment. Compared to the competitive equilibrium, the constrained efficient allocation significantly improves between-agent risk sharing, approaching the unconstrained Pareto optimum and leading to sizable welfare gains. Such an allocation has lower leverage in the banking and entrepreneurial sectors and is less prone to the boom-bust financial crises and zero-lower-bound episodes observed occasionally in the decentralized economy. |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2501.16575 |
| By: | Jose J. Canals-Cerda; Brian Jonghwan Lee |
| Abstract: | We examine the contribution of different lending channels to the auto loan market in times of crisis. Specifically, we explore lending from traditional banks, credit unions, and finance companies (nonbanks) over the past two decades, with an emphasis on the Great Recession and the COVID-19 pandemic. We find that banks provided weak support during the pandemic, thus losing market share and continuing the trend that emerged following the Great Recession. Nonbank market share during this period grew most significantly for subprime borrowers and in counties with stronger bank dependence. Survey evidence suggests that a tightening in banks’ lending standards may have contributed to this trend. These findings contrast with the experience during the Great Recession, when banks contributed the most resilient credit to the auto loan market. Our paper highlights nonbanks’ increasing role in the auto loan market in times of crisis, particularly for the subprime segment. |
| Keywords: | nonbanks; auto loans; financial crisis; consumer credit |
| JEL: | G01 G21 G23 L62 |
| Date: | 2025–02–05 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedpwp:99505 |
| By: | Francesco Zanetti; Zhesheng Qiu; Yicheng Wang; Le Xu |
| Abstract: | This paper investigates the design of monetary policy in small open economies with domestic and cross-border input-output linkages and nominal rigidities. Aggregate distortions are proportional to the aggregate output gap, which can be expressed as a weighted average of sectoral markup wedges that encapsulate the inefficiency in each sector. Monetary policy can close the output gap and offset the sectoral distortions by stabilizing the aggregate index of inflation that weights inflation in each sector based on the degree of nominal rigidities and the centrality of the sector as a supplier of inputs and a net exporter of products within the international production networks. To close the output gap, monetary policy should assign larger weights to inflation in sectors with small direct or indirect (via the downstream sectors) import shares, and failing to account for the cross-border production networks overemphasizes the inflation in sectors that export intensively directly and indirectly (via the downstream sectors), generating quantitatively significant welfare losses that rise with the degree of openness of the economy. We derive the closed-form solution for the optimal monetary policy that minimizes the welfare losses up to the second-order approximation and show that the OG policy generates welfare losses quantitatively close to the optimal policy and, therefore, is nearly optimal. |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:cnn:wpaper:25-004e |
| By: | Alejandro Gurrola Luna (HSBC Mexico); Stephen McKnight (El Colegio de Mexico) |
| Abstract: | We analyze how bounded rationality affects the equilibrium determinacy properties of forecast-based interest-rate rules in a behavioural New Keynesian model with limited asset market participation (LAMP). We show that the key policy prescriptions of rational expectation models do not carry over to behavioural frameworks with myopic agents. In high participation economies, the Taylor principle is more likely to induce indeterminacy when bounded rationality is introduced following the cognitive discounting approach of Gabaix (2020). Indeterminacy arises from a discounting channel and the problem is exacerbated under flexible prices and nominal illusion. In contrast, cognitive discounting plays a stabilizing role in LAMP economies, where passive policy is no longer required to prevent indeterminacy, and determinacy can potentially be restored under the Taylor principle. We investigate how our results depend on the timing of the interest-rate rule, alternative forms of bounded rationality, and the presence of a cost-channel of monetary policy. |
| Keywords: | Bounded rationality, Cognitive discounting, Equilibrium determinacy, Limited asset markets participation, Taylor principle, Monetary policy |
| JEL: | E31 E32 E44 E52 E71 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:emx:ceedoc:2025-02 |
| By: | Liliana Rojas-Suarez (Center for Global Development) |
| Abstract: | Basel III—the international standard for banking regulation—has strengthened global financial stability but has also led to unintended consequences that may hinder progress toward key Sustainable Development Goals (SDGs). This paper examines how Basel III’s regulatory framework may restrict bank lending to SMEs (impacting SDG 10) and constrain infrastructure finance (impacting SDG 8). Addressing these challenges requires refining risk assessment methodologies while preserving Basel III’s core objective: accurate risk evaluation. For SMEs, tailoring risk weights using local credit registry data can better reflect economic conditions in emerging markets. For infrastructure, recognizing it as a distinct asset class and leveraging credit risk mitigation tools could improve financing. Greater engagement from multilateral institutions, particularly the World Bank, is essential to advancing these solutions while maintaining financial stability. |
| Keywords: | Basel III, Sustainable Development Goals, Infrastructure Finance, SME Lending |
| JEL: | G21 G28 O1 O18 |
| Date: | 2025–02–10 |
| URL: | https://d.repec.org/n?u=RePEc:cgd:ppaper:351 |
| By: | Zhesheng Qiu; Yicheng Wang; Le Xu; Francesco Zanetti |
| Abstract: | This paper studies the design of monetary policy in small open economies with domestic and cross-border production networks and nominal rigidities. The monetary policy that closes the domestic output gap is nearly optimal and is implemented by stabilizing the aggregate inflation index that weights sectoral inflation according to the sector’s roles as a supplier of inputs and a net exporter of products within the international production networks. To close the output gap, monetary policy should assign large weights to inflation in sectors with small direct or indirect (i.e., via the downstream sectors) import shares and failing to account for the cross-border production networks overemphasizes inflation in sectors that export intensively directly and indirectly (i.e., via the downstream sectors). We validate our theoretical results using the World Input-Output Database and show that the monetary policy that closes the output gap outperforms alternative policies that abstract from the openness of the economy or the input-output linkages. |
| Keywords: | production networks, small open economy, monetary policy |
| JEL: | C67 E52 F41 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11613 |
| By: | Michael Brolley; David Cimon |
| Abstract: | Non-bank financial institutions, such as principal-trading firms and hedge funds, increasingly compete with bank-owned dealers in fixed-income markets. Some market participants worry that if non-bank financial institutions push out established bank dealers, liquidity will become unreliable during times of stress. We model non-bank entry and state-dependent liquidity provision. Non-bank participants improve liquidity more during normal times than in stress, leading to a bifurcation of liquidity. In the cross-section, their entry improves liquidity for large and previously unserved small clients; however, banks may no longer provide reliable liquidity to marginal clients. Central bank lending may limit harmful bifurcation during times of stress if that lending is predictable and at sufficiently favourable terms. |
| Keywords: | Economic models; Financial institutions; Financial markets; Market structure and pricing |
| JEL: | G10 G20 G21 G23 L10 L13 L14 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:25-2 |
| By: | Thibaut Duprey; Victoria Fernandes; Kerem Tuzcuoglu; Ruhani Walia |
| Abstract: | We introduce a history of macroprudential policy (MPP) events in Canada since the 1980s. We document the short-run effects of MPP announcements on market-based measures of systemic risk and find that MPPs can influence the market’s perception of large banks’ resilience. |
| Keywords: | Financial system regulation and policies; Financial stability; Financial institutions; Econometric and statistical methods |
| JEL: | E58 G21 G28 G32 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsan:25-4 |
| By: | Joaquín Saldain |
| Abstract: | I study the welfare consequences of regulations on high-cost consumer credit in the United States. I estimate a heterogeneous-agents model with uninsurable idiosyncratic risk, risk-based pricing of loans, and preference heterogeneity including households with self-control issues. I find that one-third of high-cost borrowers suffer from self-control issues. Noncontingent regulatory borrowing limits have distributional consequences within households with self-control issues. High-income households benefit from restrictions on borrowing because they face loose price schedules from lenders that allow them to overborrow. Low-income households face tight individually targeted loan price schedules that limit households’ borrowing capacity so that borrowing restrictions cannot improve welfare over them. |
| Keywords: | Credit and Credit Aggregates; Financial markets; Interest rates |
| JEL: | E71 E2 G51 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:25-6 |
| By: | Mahirah Mahusin (Economic Research Institute for ASEAN and East Asia (ERIA)); Hilmy Prilliadi (Economic Research Institute for ASEAN and East Asia (ERIA)) |
| Abstract: | The growth of digital payment use in ASEAN has been significant, with digital payments accounting for over 50% of transactions and projected to reach US$416.60 billion by 2028. This expansion supports financial inclusion, enhances e-commerce, and bolsters micro, small, and medium-sized enterprises. However, challenges – such as interoperability, regulatory fragmentation, and data security – persist. ASEAN’s initiatives, including the Declaration on Advancing Regional Payment Connectivity and Promoting Local Currency Transaction, aim to address these issues. This policy brief emphasises the need for harmonised regulations, enhanced cross-sectoral collaboration, and robust security measures to ensure the seamless integration and sustainable growth of digital payments in the region. Latest Articles |
| URL: | https://d.repec.org/n?u=RePEc:era:wpaper:pb-2024-13 |