nep-cba New Economics Papers
on Central Banking
Issue of 2013‒11‒02
27 papers chosen by
Maria Semenova
Higher School of Economics

  1. Fragmentation and Monetary Policy in the Euro Area By A. J. Al-Eyd; Pelin Berkmen
  2. Unconventional government debt purchases as a supplement to conventional monetary policy By Martin Ellison
  3. Monetary and Macroprudential Policy in an Estimated DSGE Model of the Euro Area By Dominic Quint; Pau Rabanal
  4. Gaps in the Institutional Structure of the Euro Area By Christopher A. Sims
  5. Banks Exposure to Interest Rate Risk and The Transmission of Monetary Policy By Landier, Augustin; Sraer, David; Thesmar, David
  6. Can Monetary Policy Delay the Reallocation of Capital? By Schnell, Fabian
  7. Distortionary Fiscal Policy and Monetary Policy Goals By Adam, Klaus; Billi, Roberto M.
  8. Capital Flows and the Risk-Taking Channel of Monetary Policy By Valentina Bruno; Hyun Song Shin
  9. Asian and European Financial Crises Compared By Edwin M. Truman
  10. Financial Regulation in an Agent Based Macroeconomic Model By Riccetti, Luca; Russo, Alberto; Mauro, Gallegati
  11. Does Expansionary Monetary Policy Cause Asset Price Booms; Some Historical and Empirical Evidence By Michael D. Bordo; John Landon-Lane
  12. Inflation Dynamics: The Role of Public Debt and Policy Regimes By Woong Yong Park; Jae Won Lee; Saroj Bhattarai
  13. On the Redistributive Effects of Inflation: an International Perspective By Boel, Paola
  14. The Redistributive Effects of Financial Deregulation By Anton Korinek; Jonathan Kreamer
  15. Illiquidity and Insolvency: a Double Cascade Model of Financial Crises By Thomas R. Hurd; Davide Cellai; Huibin Cheng; Sergey Melnik; Quentin Shao
  16. Systemic Risk Identification, Modelling, Analysis, and Monitoring: An Integrated Approach By Antoaneta Sergueiva
  17. Managing Financial Crises: Lean or Clean? By Takayuki Tsuruga; Ryo Kato; Mitsuru Katagiri
  18. Inflation tax in the lab: a theoretical and experimental study of competitive search equilibrium with inflation By Nejat Anbarci; Richard Dutu; Nick Feltovich
  19. Assessing Macroprudential Policies: Case of Korea By Valentina Bruno; Hyun Song Shin
  20. On the stability of money demand By Juan Nicolini
  21. A detrimental feedback loop: deleveraging and adverse selection By Bertsch, Christoph
  22. Financialisation and Crisis in an Agent Based Macroeconomomic Model By Riccetti, Luca; Russo, Alberto; Gallegati, Mauro
  23. Beyond capital controls: the regulation of foreign currency derivatives markets in South Korea and Brazil after the global financial crisis By Barbara Fritz; Daniela Prates
  24. Financial Deregulation and Productivity of Commercial Banks in Emerging economies: A case study of Mauritius By Kheswar Jankee
  25. Monetary Policy with Heterogeneous Agents By Makoto Nakajima
  26. Is Macro Prudential Regulation Possible? By Paul Wachtel
  27. State-Owned Banks and Fiscal Discipline By Jesus Gonzalez-Garcia; Francesco Grigoli

  1. By: A. J. Al-Eyd; Pelin Berkmen
    Abstract: The ECB has taken a range of actions to address bank funding problems, eliminate excessive risk in sovereign markets, and safeguard monetary transmission. But euro area financial markets have remained fragmented, driving retail interest rates in stressed markets far above those in the core. This has impeded the flow of credit and undermined the transmission of monetary policy. Analysis presented here indicates that the credit channel of monetary policy has broken down during the crisis, particularly in stressed markets, and that SMEs in these economies appear to be most affected by elevated lending rates.Given these stresses, the ECB can undertake additional targeted policy measures, including through additional term loans, collateral policies, and private asset purchases.
    Keywords: Monetary policy;Euro Area;Capital markets;Sovereign debt;Bond issues;Banks;Interest rates;Credit risk;Monetary transmission mechanism;European Central Bank;Interest rates, fragmentation, monetary policy
    Date: 2013–10–04
  2. By: Martin Ellison
    Abstract: In response to the Great Financial Crisis, the Federal Reserve, the Bank of England and many other central banks have adopted unconventional monetary policy instruments.� We investigate if one of these, purchases of long-term government debt, could be a valuable addition to conventional short-term interest rate policy even if the main policy rate is not constrained by the zero lower bound.� To do so, we add a stylised financial sector and central bank asset purchases to an otherwise standard New Keynesian DSGE model.� Asset quantities matter for interest rates through a preferred habitat channel.� If conventional and unconventional monetary policy instruments are coordinated appropriately then the central bank is better able to stabilise both output and inflation.
    Keywords: Quantitative Easing, Large-Scale Asset Purchases, Preferred Habitat, Optimal Monetary Policy
    JEL: E40 E43 E52 E58
    Date: 2013–10–16
  3. By: Dominic Quint; Pau Rabanal
    Abstract: In this paper, we study the optimal mix of monetary and macroprudential policies in an estimated two-country model of the euro area. The model includes real, nominal and financial frictions, and hence both monetary and macroprudential policy can play a role. We find that the introduction of a macroprudential rule would help in reducing macroeconomic volatility, improve welfare, and partially substitute for the lack of national monetary policies. Macroprudential policy would always increase the welfare of savers, but their effects on borrowers depend on the shock that hits the economy. In particular, macroprudential policy may entail welfare costs for borrowers under technology shocks, by increasing the countercyclical behavior of lending spreads.
    Keywords: Monetary policy;Euro Area;European Economic and Monetary Union;Macroprudential Policy;Credit expansion;Economic models;Monetary Policy, EMU, Basel III, Financial Frictions.
    Date: 2013–10–14
  4. By: Christopher A. Sims
    Abstract: The Euro was created at a time when the conventional view was that a central bank could control inflation by controlling the money supply and that fiscal policy’s interaction with monetary policy took the form of attempts to get the central bank to finance government debt. With a sufficiently firm and independent central bank, this view considered that financial markets would force discipline on fiscal policy. By creating a strong, independent central bank at the European level, facing multiple country-level fiscal authorities, the threat of political pressures for inflationary finance would be lower than with individual country central banks.
    Keywords: central banking, European union, monetary policy
    JEL: E02 E21 F33 F34 G21
    Date: 2013–05
  5. By: Landier, Augustin; Sraer, David; Thesmar, David
    Abstract: We show empirically that banks' exposure to interest rate risk, or income gap, plays a crucial role in monetary policy transmission. In a first step, we show that banks typically retain a large exposure to interest rates that can be predicted with income gap. Secondly, we show that income gap also predicts the sensitivity of bank lending to interest rates. Quantitatively, a 100 basis point increase in the Fed funds rate leads a bank at the 75th percentile of the income gap distribution to increase lending by about 1.6 percentage points annually relative to a bank at the 25th percentile.
    Date: 2013–02
  6. By: Schnell, Fabian
    Abstract: This paper examines the medium-run effects of monetary policy and focuses its analyses on the consequences of distorted (in the sense of exogenously influenced) real interest rates that are currently observed in many industrialized countries. In our model, real interest rates that are too low hinder economic recovery because such rates allow relatively unproductive firms to remain in the market. Monetary policy should increase interest rates after a negative macroeconomic shock to force a reallocation of production factors to more productive firms. We show that there is a trade-off between the short-run and medium-run preferences of the central bank as a consequence. From a welfare perspective, the impact of monetary policy depends on the long-run interest rate relative to the welfare-maximizing interest rate because of the preference for variety in the model.
    Keywords: Monetary Policy Design, Reallocation of Capital, Structural Change, Heterogeneous Firms
    JEL: E32 E43 E50 E52
    Date: 2013–10
  7. By: Adam, Klaus (Mannheim University); Billi, Roberto M. (Monetary Policy Department, Central Bank of Sweden)
    Abstract: We reconsider the role of an inflation conservative central banker in a setting with distortionary taxation. To do so, we assume monetary and fiscal policy are decided by independent authorities that do not abide to past commitments. If the two authorities make policy decisions simultaneously, inflation conservatism causes fiscal overspending. But if fiscal policy is determined before monetary policy, inflation conservatism imposes fiscal discipline. These results clarify that in our setting the value of inflation conservatism depends crucially on the timing of policy decisions.
    Keywords: optimal policy; lack of commitment; conservative monetary policy
    JEL: E52 E62 E63
    Date: 2013–10–01
  8. By: Valentina Bruno (American University); Hyun Song Shin (Princeton University)
    Abstract: We study the dynamics linking monetary policy with bank leverage and show that adjustments in leverage act as the linchpin in the monetary transmission mechanism that works through fluctuations in risk-taking. Motivated by the evidence, we formulate a model of the risk-taking channel of monetary policy in the international context that rests on the feedback loop between increased leverage of global banks and capital flows amid currency appreciation for capital recipient economies.
    Keywords: Bank leverage, monetary policy, capital flows, risk-taking channel
    JEL: F32 F33 F34
    Date: 2013–06
  9. By: Edwin M. Truman (Peterson Institute for International Economics)
    Abstract: The European and Asian financial crises are the two most recent major regional crises. This paper compares their origins and evolution. The origins of the two sets of crises were different in some respects, but broadly similar. The two sets of crises also shared similarities in their evolution, but here the differences were more significant. The European crisis countries received more external financial support, despite the fact that they involved more solvency issues while the Asian crises involved more liquidity issues. On balance, the reform programs in the European crises were less demanding and rigorous than in the Asian crises. Partly as a consequence, the negative impacts on the global economy have been larger. Author Edwin M. Truman draws three lessons from this analysis: First, history will repeat itself; there will be other external financial crises. Second, other countries have a stake in appropriate crisis management. Third, the International Monetary Fund (IMF) and other countries were mistaken in treating the European crises as individual country crises rather than as a crisis for the euro area as a whole that demanded policy conditionality on all members of the euro area.
    Keywords: financial crises, Asian financial crises, European financial crises, International Monetary Fund, European Central Bank, crisis management, policy coordination, macroeconomic policies, banking policies
    JEL: F3 F20 F31 F32 F3 F34 F36 F42
    Date: 2013–10
  10. By: Riccetti, Luca; Russo, Alberto; Mauro, Gallegati
    Abstract: Starting from the agent-based decentralized matching macroeconomic model proposed in Riccetti et al. (2012), we explore the effects of banking regulation on macroeconomic dynamics. In particular, we study the overall credit exposure and the lending concentration towards a single counterparty, finding that the portfolio composition seems to be more relevant than the overall exposure for banking stability, even if both features are very important. We show that a too tight regulation is dangerous because it reduces credit availability. Instead, on one hand, too loose constraints could help banks to make money and to increase their net worth, thus making the constraints not binding. However, on the other hand, if bank profits are tied to higher payout ratio (as it really happened along the deregulation phase of the last 20 years), then the financial fragility increases causing a weaker economic environment (e.g., higher mean unemployment rate), a more volatile business cycle, and a higher probability of triggering financial crises. Accordingly, simulation results support the introduction of the Capital Conservation Buffer (Basel 3 reform).
    Keywords: financial regulation, agent-based macroeconomics, business cycle, crisis, unemployment, leverage
    JEL: C63 E32 G18
    Date: 2013–10
  11. By: Michael D. Bordo; John Landon-Lane
    Abstract: In this paper we investigate the relationship between loose monetary policy, low inflation, and easy bank credit with asset price booms. Using a panel of up to 18 OECD countries from 1920 to 2011 we estimate the impact that loose monetary policy, low inflation, and bank credit has on house, stock and commodity prices. We review the historical narratives on asset price booms and use a deterministic procedure to identify asset price booms for the countries in our sample. We show that “loose” monetary policy – that is having an interest rate below the target rate or having a growth rate of money above the target growth rate – does positively impact asset prices and this correspondence is heightened during periods when asset prices grew quickly and then subsequently suffered a significant correction. This result was robust across multiple asset prices and different specifications and was present even when we controlled for other alternative explanations such as low inflation or “easy” credit.
    JEL: N1
    Date: 2013–10
  12. By: Woong Yong Park (University of Hong Kong); Jae Won Lee (Rutgers University); Saroj Bhattarai (Pennsylvania State University)
    Abstract: We investigate the roles of a time-varying inflation target and monetary and fiscal policy stances on the dynamics of inflation in a DSGE model. Under an active monetary and passive fiscal policy regime, inflation closely follows the path of the inflation target and a stronger reaction of monetary policy to inflation decreases the equilibrium response of inflation to non-policy shocks. In sharp contrast, under an active fiscal and passive monetary policy regime, inflation moves in an opposite direction from the inflation target and a stronger reaction of monetary policy to inflation increases the equilibrium response of inflation to non-policy shocks. Moreover, a weaker response of fiscal policy to debt decreases the response of inflation to non-policy shocks. These results are due to variation in the value of public debt that leads to wealth effects on households. Finally, under a passive monetary and passive fiscal policy regime, both monetary and fiscal policy stances affect inflation dynamics, but because of a role for self-fulfilling beliefs due to equilibrium indeterminacy, theory provides no clear answer on the overall behavior of inflation. We characterize these results analytically in a simple model and numerically in a richer quantitative model.
    Date: 2013
  13. By: Boel, Paola (Monetary Policy Department, Central Bank of Sweden)
    Abstract: I calibrate the microfounded model in Boel and Camera (2009) to quantify the redistributive effects of inflation for a sample of OECD countries. In doing so, I address two important quantitative issues. First, using harmonized microdata from the Luxembourg Wealth Study, I provide an international comparison of the distribution of households' deposit accounts and financial assets. Second, I account for structural breaks when estimating money demand. I find that several results hold for the countries considered. First, the welfare cost of inflation changes over time, but the direction of the change varies across countries. Second, inflation acts as a regressive tax when a nominal asset other than money is held. Third, the magnitude of the redistributive effects differs across countries and it depends not only on wealth inequality, but also on the curvature and the level of the money demand curve. Last, I show that a subset of the population always prefers an inflationary policy when I extend the model to incorporate a political-economy equilibrium where agents can bargain over the inflation rate.
    Keywords: Money; Heterogeneity; Friedman Rule; Welfare Cost of Inflation; Calibration
    JEL: E40 E50
    Date: 2013–09–01
  14. By: Anton Korinek; Jonathan Kreamer
    Abstract: Financial regulation is often framed as a question of economic efficiency. This paper, by contrast, puts the distributive implications of financial regulation center stage. We develop a model in which the financial sector benefits from risk-taking by earning greater expected returns. However, risk-taking also increases the incidence of large losses that lead to credit crunches and impose negative externalities on the real economy. Assuming incomplete risk markets between the financial sector and the real economy, we describe a Pareto frontier along which different levels of risk-taking map into different levels of welfare for the two parties. A regulator has to trade off efficiency in the financial sector, which is aided by deregulation, against efficiency in the real economy, which is aided by tighter regulation and a more stable supply of credit. We also show that financial innovation, asymmetric compensation schemes, concentration in the banking system, and bailout expectations enable or encourage greater risk-taking and allocate greater surplus to the financial sector at the expense of the rest of the economy.
    JEL: E25 E44 G28 H23
    Date: 2013–10
  15. By: Thomas R. Hurd; Davide Cellai; Huibin Cheng; Sergey Melnik; Quentin Shao
    Abstract: In the aftermath of the interbank market collapse of 2007-08, the traditional idea that systemic risk is primarily the risk of cascading bank defaults has evolved into the view that it involves both cascading bank defaults as well as funding liquidity shocks, and that both types of shocks impair the functioning of the remaining undefaulted banks. In current models of systemic risk, these two facets, namely funding illiquidity and insolvency, are treated as two separate phenomena. Our paper introduces a deliberately simplified model which integrates insolvency and illiquidity in financial networks and that can provide answers to the question of how illiquidity or default of one bank can influence the overall level of liquidity stress and default in the network. First, this paper proposes a stylized model of individual bank balance sheets that builds in regulatory constraints. Secondly, three different possible states of a bank, namely the normal state, the stressed state and the insolvent state, are identified with conditions on the bank's balance sheet. Thirdly, the paper models the behavioural response of a bank when it finds itself in the stressed or insolvent states. Importantly, a stressed bank seeks to protect itself from the default of its counterparties, but creates stress in the network by forcing its debtor banks to raise cash. Versions of these proposed models can be solved by large-network asymptotic cascade formulas. Details of numerical experiments are given that verify that these asymptotic formulas yield the expected quantitative agreement with Monte Carlo results for large finite networks. These experiments illustrate clearly our main conclusion that in financial networks, the average default probability is inversely related to strength of banks' stress response and therefore to the overall level of stress in the network.
    Date: 2013–10
  16. By: Antoaneta Sergueiva
    Abstract: Research capacity is critical in understanding systemic risk and informing new regulation. Banking regulation has not kept pace with all the complexities of financial innovation. The academic literature on systemic risk is rapidly expanding. The majority of papers analyse a single source or a consolidated source of risk and its effect. A fraction of publications quantify systemic risk measures or formulate penalties for systemically important financial institutions that are of practical regulatory relevance. The challenges facing systemic risk evaluation and regulation still persist, as the definition of systemic risk is somewhat unsettled and that affects attempts to provide solutions. Our understanding of systemic risk is evolving and the awareness of data relevance is rising gradually; this challenge is reflected in the focus of major international research initiatives. There is a consensus that the direct and indirect costs of a systemic crisis are enormous as opposed to preventing it, and that without regulation the externalities will not be prevented; but there is no consensus yet on the extent and detail of regulation, and research expectations are to facilitate the regulatory process. This report outlines an integrated approach for systemic risk evaluation based on multiple types of interbank exposures through innovative modelling approaches as tensorial multilayer networks, suggests how to relate underlying economic data and how to extend the network to cover financial market information. We reason about data requirements and time scale effects, and outline a multi-model hypernetwork of systemic risk knowledge as a scenario analysis and policy support tool. The argument is that logical steps forward would incorporate the range of risk sources and their interrelated effects as contributions towards an overall systemic risk indicator, would perform an integral analysis of ...
    Date: 2013–10
  17. By: Takayuki Tsuruga (Kyoto Unviersity); Ryo Kato (Bank of Japan); Mitsuru Katagiri (Bank of Japan)
    Abstract: This paper discusses the lean vs. clean policy debate in managing financial crises based on dynamic general equilibrium models with an occasionally binding collateral constraint. We show that a full state-contingent subsidy for debtors can restore the first-best allocations by forestalling disorderly deleveraging in a crisis. While this result appears to favor the clean policy against a lean policy that achieves the second-best allocation, further assessment points to various risks associated with the clean policy from a practical viewpoint. First, the optimal clean policy is likely to call for an unrealistically large amount of fiscal resources. Second, if the clean policy is activated with an empirically realistic intervention, the less-than-optimal clean policy incentivizes debtors to take on undue risks, exposing the economy to higher crisis probabilities. Finally, the less-than-optimal clean policy may give rise to huge welfare losses due to the policy maker's misrecognition of the state of the economy.
    Date: 2013
  18. By: Nejat Anbarci; Richard Dutu; Nick Feltovich
    Abstract: How does the inflation tax impact on buyers’ and sellers’ behaviour? How strong is its effect on aggregate economic activity? To answer, we develop a model of directed search and monetary exchange with inflation. In the model, sellers post prices, which buyers observe before deciding on cash holdings that are costly due to inflation. We derive simple theoretical propositions regarding the effects of inflation in this environment. We then test the model’s predictions with a laboratory experiment that closely implements the theoretical framework. Our main finding confirms that not only is the inflation tax harmful to the economy – with cash holdings, GDP and welfare all falling as inflation rises – but also that its effect is relatively larger at low rates of inflation than at higher rates. For instance, when inflation rises from 0% to 5%, GDP falls by 2.8 percent, an effect 5 to 7 times stronger than when inflation rises from 5% to 30%. Our findings lead us to conclude that the inflation tax is a monetary policy channel of primary importance, even at low inflation rates.
    Keywords: money, inflation tax, directed search, posted prices, cash balances, welfare loss, frictions, experiment
    JEL: E31 E40 C90
    Date: 2013–10–18
  19. By: Valentina Bruno (American University); Hyun Song Shin (Princeton University)
    Abstract: This paper develops methods for assessing the sensitivity of capital flows to global financial conditions, and applies the methods in assessing the impact of macroprudential policies introduced by Korea in 2010. Relative to a comparison group of countries, we find that the sensitivity of capital flows into Korea to global conditions decreased in the period following the introduction of macroprudential policies.
    Keywords: capital flows, credit booms, macroprudential policy
    JEL: F32 F33 F34
    Date: 2013–06
  20. By: Juan Nicolini (Federal Reserve Bank of Minneapolis)
    Abstract: In this paper we consider a simple model of transactional assets management to evaluate the changes in banking regulation that passed between 1980 and 1982. The model implies that the newly created deposits in the US after the deregulation should be taken into account in the proper definition of money, in a way the model itself makes explicit. We show that once this is taken into account, the money demand equation characterized by Meltzer (1960) and Lucas (2000) remained remarkably stable.
    Date: 2013
  21. By: Bertsch, Christoph (Monetary Policy Department, Central Bank of Sweden)
    Abstract: Market distress can be the catalyst of a deleveraging wave, as in the 2007/08 financial crisis. This paper demonstrates how market distress and deleveraging can fuel each other in the presence of adverse selection problems in asset markets. At the core of the detrimental feedback loop is agents' desire to reduce their reliance on distressed asset markets by decreasing their leverage which in turn amplifies the adverse selection problem in asset markets. In the extreme case, this leads to a market breakdown. I find that adverse selection creates both an "ex-ante" inefficiency because it distorts agents' long-term leverage choices and an "interim" inefficiency because it distorts agents' short-term liquidity management. I derive important implications for central bank policy.
    Keywords: Leverage; endogenous borrowing constraints; financial crisis; liquidity; asymmetric information; central bank policy
    JEL: D82 E58 G01 G20
    Date: 2013–09–01
  22. By: Riccetti, Luca; Russo, Alberto; Gallegati, Mauro
    Abstract: In the present paper we analyse the role of dividends distributed by firms and banks, highlighting the effects of their increase on financial instability and macroeconomic dynamics. During the last decades, the financialisation of nonfinancial corporations has been characterised by a shift from a "retain and reinvest" strategy to a "downsize and distribute" strategy. We will investigate such a phenomenon by varying some of the model parameters, so simulating firms’ and banks’ behaviours under alternative settings. On the one hand, more distributed dividends increases agents’ wealth and thus consumption may rise due to a wealth-effect. On the other hand, increasing dividends reduce firms’ net worth that may result in a strong dependence of firms’ production on bank credit; at the same time, if also banks distribute more dividends, then banks’ capital decreases and this may result in credit rationing. As we will see, financialisation through increasing dividends impacts financial (in)stability and income distribution, with relevant consequences on macroeconomic dynamics.
    Keywords: agent-based macroeconomics, business cycle, leverage, payout policy, financialisation, crisis
    JEL: C63 E32 G35
    Date: 2013–10
  23. By: Barbara Fritz; Daniela Prates
    Abstract: Besides the management of capital flows, some emerging economies have been facing policy dilemmas related to foreign (nonresident) and domestic (residents) operations of Foreign Currency (FX) derivatives in the post-global crisis setting. In a context of abundant liquidity and historical low interest rates in the advanced economies, searching for yield foreign investors as well as domestic agents generally obtain huge profits, through these markets, from the interest rate differentials between advanced and emerging economies. Yet, the regulation of FX derivatives in the emerging economies has not received due attention both in the academic literature and in the international financial institutions, even though these could be crucial for the emerging economies with high degree of financial openness and liquid as well as deep FX derivatives markets, such as Brazil and South Korea. The paper aims at analyzing the Brazilian and Korean approach for FX derivatives regulation after the global financial crisis. Therefore, it seeks to contribute to the debate on financial regulation brought about by the global crisis. The two cases show the relevance of the institutional featuresof FX derivatives market for the drawing of the financial regulatory toolkit. In the case of Brazil we found that a thirdtype of financial regulation, which we have labeled as FX derivative regulation, was needed to curb the currency appreciation trend, along with capital controls and traditional prudential financial regulations.
    Keywords: working paper, daadpartnership, finance-and-trade
    Date: 2013–10
  24. By: Kheswar Jankee (Department of economics and statistics, University of Mauritius)
    Date: 2013
  25. By: Makoto Nakajima (Federal Reserve Bank of Philadelphia)
    Abstract: We build a New Keynesian model in which heterogeneous workers differ with regard to their employment status due to search and matching frictions in the labor market, their potential labor income, and their amount of savings. We use this laboratory to quantitatively assess who stands to win or lose from unanticipated monetary accommodation and who benefits most from systematic monetary stabilization policy. We find substantial redistribution effects of monetary policy shocks; a contractionary monetary policy shock increases income and welfare of the wealthiest 5 percent, while the remaining 95 percent experience lower income and welfare. Consequently, the negative effect of a contractionary monetary policy shock to social welfare is larger if heterogeneity is taken into account.
    Date: 2013
  26. By: Paul Wachtel
    Date: 2013
  27. By: Jesus Gonzalez-Garcia; Francesco Grigoli
    Abstract: State-owned banks may help to soften the financing constraints of public sector entities and consequently become a factor that hampers fiscal discipline. Using a panel dataset, we find that a larger presence of state-owned banks in the banking system is associated with more credit to the public sector, larger fiscal deficits, higher public debt ratios, and the crowding out of credit to the private sector. These results suggest that the lending practices of state-owned banks should be carefully assessed in any strategy to pursue fiscal discipline.
    Keywords: Public enterprises;Banks;Fiscal policy;Banking systems;Credit;Private sector;Public sector;Soft budget constraint; state-owned banks; fiscal discipline; crowding out.
    Date: 2013–10–03

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