nep-cba New Economics Papers
on Central Banking
Issue of 2020‒12‒07
twenty-six papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Monetary Policy Surprises, Central Bank Information Shocks, and Economic Activity in a Small Open Economy By Laséen, Stefan
  2. Macroprudential capital buffers in heterogeneous banking networks: Insights from an ABM with liquidity crises By Gurgone, Andrea; Iori, Giulia
  3. Optimal simple objectives for monetary policy when banks matter By Laureys, Lien; Meeks, Roland; Wanengkirtyo, Boromeus
  4. Liquidity and monetary transmission: a quasi-experimental approach By Miller, Sam; Wanengkirtyo, Boromeus
  5. Interest rate risk and monetary policy normalisation in the euro area By Reghezza, Alessio; Rodriguez d’Acri, Costanza; Pancotto, Livia; Molyneux, Philip
  6. Optimal quantitative easing in a monetary union By Serdar Kabaca; Renske Maas; Kostas Mavromatis; Romanos Priftis
  7. Systemic Risk and the COVID Challenge in the European Banking Sector By Nicola Borri; Giorgio Di Giorgio
  8. Banks, low interest rates, and monetary policy transmission By Wang, Olivier
  9. Sovereign default risk, macroeconomic fluctuations and monetary-fiscal stabilisation By Kirchner, Markus; Rieth, Malte
  10. Monetary Policy Challenges From Falling Natural Interest Rates By Klaus Adam
  11. Foreign exchange intervention: A new database By Fratzscher, Marcel; Heidland, Tobias; Menkhoff, Lukas; Sarno, Lucio; Schmeling, Maik
  12. Falling Natural Rates, Rising Housing Volatility and the Optimal Inflation Target By Klaus Adam; Oliver Pfäuti; Timo Reinelt
  13. Has the Inflation Process Changed? Selective Review of Recent Research on Inflation Dynamics By Oleksiy Kryvtsov; James MacGee
  14. U.S. Dollar Funding Trend in the January-March Quarter of 2020 as Indicated by the BIS International Banking Statistics By Akitaka Tsuchiya; Ayano Nojima; Takumi Horikawa; Takashi Semba; Kimiaki Shinozaki
  15. Accounting for Low Long-Term Interest Rates: Evidence from Canada By Jens H. E. Christensen; Glenn D. Rudebusch; Patrick Shultz
  16. Consistency of Banks' Internal Probability of Default Estimates By Barbora Stepankova
  17. Inflation expectation uncertainty in a New Keynesian framework By Fuest, Angela; Schmidt, Torsten
  18. The Impact of Federal Reserve's Conventional and Unconventional Monetary Policies on Equity Prices By Jayawickrema, Vishuddhi
  19. Cournot Fire Sales By Thomas M. Eisenbach; Gregory Phelan
  20. Monetary policy and regional unemployment By Shaun Markham
  21. Global financial integration and monetary policy spillovers By Dongwon Lee
  22. Policies for Transactional De-Dollarization: A Laboratory Study By Johar Arrieta; David Florián; Kristian López; Valeria Morales
  23. Four Phases in the History of Money By Luis Angeles
  24. Money, Growth, and Welfare in a Schumpeterian Model with the Spirit of Capitalism By Qinchun He; Yulei Luo; Jun Nie; Heng-fu Zou
  25. Risk Mitigating versus Risk Shifting: Evidence from Banks Security Trading in Crises By José-Luis Peydró; Andrea Polo; Enrico Sette
  26. Monetizing Privacy with Central Bank Digital Currencies By Rod Garratt; Michael Junho Lee

  1. By: Laséen, Stefan (Monetary Policy Department, Central Bank of Sweden)
    Abstract: In this paper I study the effects of monetary policy on economic activity and asset prices in Sweden, separately identifying the effects of a conventional policy change from effects of new information about economic fundamentals. Recent research has shown that high-frequency changes in policy interest rate futures prices around central bank policy announcements might not only contain monetary policy shocks but also central bank information shocks. I add to this line of research by studying a case where the central bank, in contrast to many other central banks studied in this literature, is very open and transparent about the monetary policy decision and publishes a full set of forecasts including the interest rate at the same moment as the decision is revealed. I use this information to construct an informationally-robust instrument for monetary policy shocks as the component of high-frequency market surprises triggered by policy announcements that is orthogonal to both central bank’s economic projections, including policy rate projections, and to past market surprises. I also add sign restrictions on stock market changes around the announcement to separate structural monetary policy shock from central bank information shocks. In contrast to recent work for other countries, I do not find that separating monetary policy shocks from central bank information shocks is important to measure the effects of monetary policy in Sweden.
    Keywords: Monetary Policy; External Instruments; Monetary Policy Surprises; Information Effect; Small Open Economy; Exchange Rate; Stock Prices; House Prices.
    JEL: C32 C36 D83 E31 E43 E44 E52 E58 G14
    Date: 2020–10–01
  2. By: Gurgone, Andrea; Iori, Giulia
    Abstract: To date, macroprudential policy inspired by the Basel III package is applied irrespective of the network characteristics of the banking system. We study how the implementation of macroprudential policy in the form of additional capital requirements conditional to systemic-risk measures of banks should regard the degree of heterogeneity of financial networks. We adopt a multi-agent approach describing an artificial economy with households, firms, and banks in which occasional liquidity crises emerge. We shape the configuration of the financial network to generate two polar worlds: one is characterized by few banks who lend most of the credit to the real sector while borrowing interbank liquidity. The other shows a higher degree of homogeneity. We focus on a capital buffer for SII and two buffers built on measures of systemic impact and vulnerability. The research suggests that the criteria for the identification of systemic-important banks may change with the network heterogeneity. Thus, capital buffers should be calibrated on the heterogeneity of the financial networks to stabilize the system, otherwise they may be ineffective. Therefore, we argue that prudential regulation should account for the characteristics of the banking networks and tune macroprudential tools accordingly.
    Keywords: agent-based model,capital requirements,capital buffers,,financial networks,macroprudential policy,systemic-risk
    JEL: C63 D85 E44 G01 G21
    Date: 2020
  3. By: Laureys, Lien (Bank of England); Meeks, Roland (International Monetary Fund); Wanengkirtyo, Boromeus (Bank of England)
    Abstract: We reconsider the design of welfare-optimal monetary policy when financing frictions impair the supply of bank credit, and when the objectives set for monetary policy must be simple enough to be implementable and allow for effective accountability. We show that a flexible inflation targeting approach that places weight on stabilising inflation, a measure of resource utilisation, and a financial variable produces welfare benefits that are almost indistinguishable from fully-optimal Ramsey policy. The macro-financial trade-off in our estimated model of the euro area turns out to be modest, implying that the effects of financial frictions can be ameliorated at little cost in terms of inflation. A range of different financial objectives and policy preferences lead to similar conclusions.
    Keywords: Monetary policy; simple loss function; banks; medium-scale DSGE models; euro area economy
    JEL: E17 E52 E58 G21
    Date: 2020–11–20
  4. By: Miller, Sam (Alan Turing Institute); Wanengkirtyo, Boromeus (Bank of England)
    Abstract: In the face of lower real interest rates, central bank balance sheets are likely to remain larger relative to pre-crisis levels, resulting in greater banking system liquidity. However, there is little evidence on the impact of higher liquidity on credit supply and the monetary transmission mechanism in the ‘new normal’. We exploit a novel dataset on bank liquidity positions arising from a unique regulatory regime and combine it with a highly-detailed, loan-level administrative dataset on UK mortgages. Using the design of quantitative easing auctions as an instrument for liquidity to address endogeneity, we find that more liquid banks charge slightly higher mortgage interest rates, and pass on significantly less changes in risk-free rates. We explain this through bank behaviour that attempts to preserve net interest margins in the face of holding low-yielding liquidity. Consistent with this, we find excess liquidity leads to reaching-for-yield responses in banks’ mortgage risk-taking. Additionally, the results shed light on the optimal mix between (un)conventional monetary policy tools. Policies that boost bank net interest margins are more likely to help the transmission of risk-free rates to lending rates.
    Keywords: Bank liquidity; interest rate pass-through; monetary policy
    JEL: E52 E58 G21
    Date: 2020–11–20
  5. By: Reghezza, Alessio; Rodriguez d’Acri, Costanza; Pancotto, Livia; Molyneux, Philip
    Abstract: In the current low interest rate environment in the euro area there is potential for a sudden increase in interest rates and heightened interest rate risk (IRR). By using a sample of 81 euro area banks during the period 2014Q4-2018Q1 and a confidential supervisory measure of IRR, this paper identifies which bank-specific characteristics can amplify or weaken the impact of a 200 basis points positive shock in interest rates. We find that banks reliant on core deposits, that hold more floating-interest rate loans and that diversify their lending, either by sector or geography, are less exposed to a positive change in interest rates. Interestingly, we discover that banks that did not exploit the exceptional financing provided by the European Central Bank (ECB) reveal greater IRR exposure. These findings advance the debate on the impact on euro area banking of a possible return to a normalised monetary policy. JEL Classification: E43, E44, E52, G21, F44
    Keywords: balance-sheet determinants, interest rate risk, low interest rate environment, unconventional monetary policies
    Date: 2020–11
  6. By: Serdar Kabaca; Renske Maas; Kostas Mavromatis; Romanos Priftis
    Abstract: This paper explores the optimal allocation of government bond purchases within a monetary union, using a two-region DSGE model, where regions are asymmetric with respect to economic size and portfolio characteristics: the extent of substitutability between assets of different maturity and origin, asset home bias, and steady-state levels of government debt. An optimal quantitative easing (QE) policy under commitment does not only reflect different region sizes, but is also a function of these dimensions of portfolio heterogeneity. By calibrating the model to the euro area, we show that optimal QE favors purchases from the smaller region (Periphery instead of Core), given that the former faces stronger portfolio frictions. A fully optimal policy consisting of both the short-term interest rate and QE lifts the monetary union away from the zero lower bound faster than an optimal interest rate policy alone, which entails forward guidance.
    Keywords: Optimal monetary policy; quantitative easing; monetary union; DSGE model; portfolio rebalancing; zero lower bound
    JEL: E43 E52 E58 F45
    Date: 2020–11
  7. By: Nicola Borri (LUISS University); Giorgio Di Giorgio (LUISS University)
    Abstract: This paper studies the systemic risk contribution of a set of large publicly traded European banks. Over a sample covering the last twenty years and three different crises, we find that all banks in our sample significantly contribute to systemic risk. Moreover, larger banks and banks with a business model more exposed to trading and financial market volatility, contribute more. In the shorter sample characterized by the Covid-19 shock, sovereign default risks significantly affected the systemic risk contribution of all banks. However, the ECB announcement of the Pandemic Emergency Purchasing Programme restored calm in the European banking sector.
    Keywords: CoVaR, systemic risk, Covid-19, banking regulation
    JEL: G01 G18 G21 G38
    Date: 2020–10
  8. By: Wang, Olivier
    Abstract: This paper studies how low interest rates weaken the short-run transmission of monetary policy and contract the long-run supply of bank credit. As U.S. bond rates have fallen, the pass-through of monetary shocks to loan and deposit rates has weakened while the spread on U.S. bank loans has risen. I build a model in which banks earn deposit and loan spreads, deposits compete with money, and banks’ lending capacity depends on their equity. The short-run transmission of monetary policy is dampened at low rates, because deposit spreads act as a better hedge for bank equity against unexpected monetary shocks. In the long run, persistent low rates decrease banks’ “seigniorage” revenue from deposit spreads, hence bank equity and loan supply contract, and loan spreads increase. JEL Classification: E4, E5, G21
    Keywords: deposit spread, financial intermediation, interest rate pass-through, loan spread, low interest rates
    Date: 2020–11
  9. By: Kirchner, Markus; Rieth, Malte
    Abstract: This paper examines the role of sovereign default beliefs for macroeconomic fluctuations and stabilisation policy in a small open economy where fiscal solvency is a critical problem. We set up and estimate a DSGE model on Turkish data and show that accounting for sovereign risk significantly improves the fit of the model through an endogenous amplication between default beliefs, exchange rate and inflation movements. We then use the estimated model to study the implications of sovereign risk for stability, fiscal and monetary policy, and their interaction. We find that a relatively strong fiscal feedback from deficits to taxes, some exchange rate targeting, or a monetary response to default premia are more effective and efficient stabilisation tools than hawkish inflation targeting.
    Keywords: small open economies,sovereign risk,monetary policy,exchange rates,business cycles,DSGE models
    JEL: E58 E63 F41
    Date: 2020
  10. By: Klaus Adam
    Abstract: The real interest rates consistent with stable inflation (the natural rates of interest) has displayed a sustained downward trend in advanced economies over past decades. This has considerably complicated the conduct of monetary policy, which is increasingly constrained by the inability to lower nominal rates further. Over the same time period, the volatility of housing prices and stock prices has increased considerably, generating additional challenges for monetary policy. This paper summarizes recent academic research that analyses the monetary policy implications of lower natural rates and rising asset price volatility in a setting where policy is constrained by a lower bound on nominal rates. It focuses on the implications for (1) the optimal inflation target and (2) the question how monetary policy should respond to asset price movements.
    Date: 2020–11
  11. By: Fratzscher, Marcel; Heidland, Tobias; Menkhoff, Lukas; Sarno, Lucio; Schmeling, Maik
    Abstract: We construct a novel database of monthly foreign exchange interventions for 49 countries over up to 22 years. We build on a text classification approach that extracts information about interventions from news articles and calibrate our procedure to data about actual interventions. Our new dataset allows us to document stylized facts about the use of foreign exchange interventions for countries that neither publish their data nor make them available to researchers. Moreover, we show that foreign exchange interventions are used in a complementary way with capital controls and macroprudential regulation.
    Keywords: foreign exchange intervention,capital controls,macroprudential regulation,international capital flows
    JEL: F31 F33 E58
    Date: 2020
  12. By: Klaus Adam; Oliver Pfäuti; Timo Reinelt
    Abstract: The decline in natural interest rates in advanced economies over the past decades has been accompanied by a signi cant increase in the volatility of housing prices. We show that the monetary policy implications of these macroeconomic trends depend|in the presence of a lower-bound constraint on nominal rates|on the source of increased housing price volatility. If housing price expectations are rational, increased housing price volatility re ects more volatile housing demand shocks. Under optimal monetary policy, average in ation then increases only minimally, as average natural rates fall and housing shocks become more volatile. Instead, if housing price volatility is partly due to speculative housing price beliefs, as suggested by survey data, then lower natural rates endogenously trigger larger uctuations in subjective housing price beliefs and housing prices. A belief-driven increase in housing price volatility causes also the natural rate of interest to become more volatile. This exacerbates the lower-bound problem, especially when average natural rates are low. Under optimal monetary policy, average in ation then rises much more strongly following a fall in natural rates, rationalizing larger increases in the in ation target.
    Keywords: inflation target, real estate booms, natural rate
    JEL: E31 E44
    Date: 2020–11
  13. By: Oleksiy Kryvtsov; James MacGee
    Abstract: For most of 2011–19, inflation in Canada and advanced economies registered below inflation targets. This has spurred a debate on whether “lowflation” is a temporary phenomenon or rather a sign of a fundamental change in inflation behaviour—in Canada and globally. So far, we know little. Global factors—changes in the price of oil and shifts in trade due to globalization—can only explain a portion of the fluctuations in domestic inflation. Emerging survey data are showing that inflation expectations of managers and households behave very differently from model expectations based on full information and rational behaviour. Recent surveys using randomized control trials reveal that changes in monetary or fiscal policies may lead to unexpected responses of inflation expectations and firm behaviour. Changes in the markets for consumer goods raise the need for us to rethink the methods for measuring inflation. We discuss the questions that these observations bring up for central bankers.
    Keywords: Central bank research; Inflation and prices; Monetary policy
    Date: 2020–11
  14. By: Akitaka Tsuchiya (Bank of Japan); Ayano Nojima (Bank of Japan); Takumi Horikawa (Bank of Japan); Takashi Semba (Bank of Japan); Kimiaki Shinozaki (Bank of Japan)
    Abstract: In March 2020, amid the COVID-19 pandemic, the fund supply-demand balance for the U.S. dollar became tight globally, causing changes in U.S. dollar-denominated international fund transactions conducted by financial institutions. This article provides an overview of the trend in U.S. dollar-denominated international fund transactions conducted by Japanese financial institutions during this current phase as indicated by the BIS International Banking Statistics (IBS). Data available from the statistics highlighted the following two points: (1) that Japanese banks obtained U.S. dollars from the Bank of Japan (BOJ) through U.S. dollar funds-supplying operations and transferred them to U.S. branches via the inter-office account, and (2) that in the United States: in line with this flow of funds, claims vis-a-vis official sector, including reserve deposits with the U.S. Federal Reserve Bank (FRB), and loans to business corporations (drawdown of committed credit line) increased.
    Date: 2020–11–25
  15. By: Jens H. E. Christensen; Glenn D. Rudebusch; Patrick Shultz
    Abstract: In recent decades, long-term interest rates around the world have fallen to historic lows. We examine this decline using a dynamic term structure model of Canadian nominal and real yields with adjustments for term, liquidity, and inflation risk premiums. Canada provides a useful case study that has been little examined despite its established indexed debt market, negligible distortions from monetary quantitative easing or the zero lower bound, and no sovereign credit risk. We find that since 2000, the steady-state real interest rate has fallen by more than 2 percentage points, long-term inflation expectations have edged down, and real bond and inflation risk premiums have fluctuated but shown little longer-run trend. Therefore, the drop in the equilibrium real rate appears largely to account for the lower new normal in interest rates.
    Keywords: affine arbitrage-free term structure model; liquidity risk; financial market frictions; r-star
    JEL: C32 E43 E52 G12 G17
    Date: 2020–11–24
  16. By: Barbora Stepankova (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic)
    Abstract: Some financial institutions can use internally developed credit risk models to determine their capital requirements. At the same time, the regulatory framework governing such models allows institutions to implement diverse rating systems with no specified penalty for poor model performance. To what extent the resulting model risk { potential for equivalent models to deliver inconsistent outcomes { is prevalent in the economy is largely unknown. We use a unique dataset of 4.9 million probability of default estimates provided by 28 global IRB banks, covering the January 2016 to June 2020 period, to assess the degree of variance in credit risk estimates provided by multiple banks for a single entity. In line with the prior literature, we find that there is a substantial variance in outcomes and that it decreases with the amount of available information about the assessed entity. However, we further show that the level of variance is highly dependent on the entity type, its industry and locations of the entity and contributing banks; banks report a higher deviation from the mean credit risk for foreign entities. Further, we conclude that a considerable part of the variance is systematic, especially for fund models. Finally, utilising the latest available data, we show the massive impact of the COVID-19 pandemic on dispersion of credit estimates.
    Keywords: Banking, Credit Risk, Bank Regulation
    JEL: C12 G21 G32
    Date: 2020–11
  17. By: Fuest, Angela; Schmidt, Torsten
    Abstract: For monetary policy guiding inflation expectations provides an instrument to achieve price stability. However, expectation uncertainty may undermine monetary policy's ability to stabilise the economy. This study examines the effects of inflation expectation uncertainty on inflation, inflation expectations and the output gap by means of a structural VAR with stochastic volatility in mean. Inflation expectation uncertainty negatively affects the inflation rate and the output gap, without having a distinct effect on the level of expectations. This result is replicable with a model in which uncertainty is approximated by a cross-sectional survey measure. Furthermore, simulating an uncertainty shock in a DSGE model shows that the demand channel dominates the supply channel of an inflation expectation uncertainty shock.
    Keywords: uncertainty,inflation expectations,Phillips curve,New Keynesian model
    JEL: E31 E52 C32 C63
    Date: 2020
  18. By: Jayawickrema, Vishuddhi
    Abstract: I estimate the effects of the Federal Reserve's forward guidance and large-scale asset purchases, along with the effects of interest rate changes under conventional policy, on the U.S. equity market, and assess the reasons for stock price responses. Although the overall stock market respond meaningfully to a surprise change in the federal funds rate with a high level of statistical significance, a heterogeneity in responses is observed among different sectors in the stock market. In contrast, forward guidance is found to have relatively homogeneous effects on sector-wise stock market performance. Such effects are large in magnitude and highly statistically significant. However, large-scale asset purchases exhibit minimal effects on equity price movements. The present value of future excess returns emerged as the most important channel through which the surprise changes in the federal funds rate as well as forward guidance and large-scale asset purchases affect current equity prices. The present value of future dividends and the real interest rates are found to make minor contributions the propagation of policy shocks. However, the relative contribution of future dividends, real interest rates and excess returns vary across sectors.
    Keywords: forward guidance, quantitative easing, asset purchases, zero lower bound
    JEL: E52 E58
    Date: 2020–11
  19. By: Thomas M. Eisenbach (Federal Reserve Bank of New York); Gregory Phelan (Williams College)
    Abstract: In standard Walrasian macro-finance models, pecuniary externalities due to fire sales lead to excessive borrowing and insufficient liquidity holdings. We investigate whether imperfect competition (Cournot) improves welfare through internalizing the external- ity and find that this is far from guaranteed. Cournot competition can overcorrect the inefficiently high borrowing in a standard model of levered real investment. In contrast, Cournot competition can exacerbate the inefficiently low liquidity in a standard model of financial portfolio choice. Implications for welfare and regulation are there- fore sector-specific, depending both on the nature of the shocks and the competitive- ness of the industry.
    Keywords: liquidity, fire sales, overinvesment, financial regulation, macroprudential regulation
    JEL: D43 D62 E44 G18 G21
    Date: 2020–10
  20. By: Shaun Markham (Reserve Bank of New Zealand)
    Abstract: This Analytical Note examines the effects of monetary policy on New Zealand’s regional labour markets. Unemployment rates differ between regions, which raises the question of monetary policy’s possible contribution to these differences. Our analysis suggests monetary policy has different impacts on unemployment depending on the region. Some regions, such as Waikato, Manawatu/Wanganui and the upper South Island, appear to be more sensitive to monetary policy than others. Future research will investigate the reasons driving these regional differences, which may include the mix of industry, demography or other factors.
    Date: 2020–10
  21. By: Dongwon Lee (Department of Economics, University of California Riverside)
    Date: 2020–11
  22. By: Johar Arrieta (Central Bank of Peru); David Florián (Central Bank of Peru); Kristian López (UCSC); Valeria Morales (Central Bank of Peru)
    Abstract: Partial currency substitution typically occurs in small economies amid economic crises, when the local currency loses some of its essential functions and a foreign currency, usually the US Dollar, is widely adopted. Interestingly, the coexistence of two currencies often persists after macroeconomic stability has been restored, which imposes challenges to the conduct of monetary policy. Central banks have responded by applying de-dollarization policies. This paper studies the effectiveness of three of them: (1) taxes on transactions in foreign currency among domestic agents, (2) storage costs on foreign currency holdings, and (3) information on the acceptance rate of the foreign currency among local agents. We extend the model in Matsuyama et al. (1993) to study the effects of these policies, both theoretically and experimentally. We contribute to the theoretical literature by characterizing a new circulation regime where agents use the foreign currency solely for international trade and settle domestic transactions exclusively in local currency. Our experimental evidence suggests that both taxes and storage costs reduce the overall acceptability of foreign currency in international and domestic transactions (around 40 percent in both cases). Information treatment does not have a significant impact relative to baseline.
    Keywords: Bimonetary Economy, Dollarization, Central Bank, Monetary Policy, Experiment, Money.
    JEL: E51 E52 E58 E59 C91 C92
    Date: 2020–11
  23. By: Luis Angeles
    Abstract: The history of money can be characterized into four major phases, from the earliest written records during the 3rd millennium BC to the present day. This characterization sheds light on both the nature and the evolution of money, and helps us to understand today’s monetary arrangements. Money evolves over time as the preferred means of payment shift from metal to coinage and from coinage to different forms of debt, and as the unit of account becomes more or less linked to the value of a commodity, in particular gold or silver.
    JEL: E51 E58 G21
    Date: 2020–11
  24. By: Qinchun He; Yulei Luo; Jun Nie; Heng-fu Zou
    Abstract: According to Schumpeter (1934), entrepreneurs are driven to innovate not only for the fruits of success but for success itself. This description of entrepreneurship echoes Weber’s (1958) description of the “spirit of capitalism,” which states that people enjoy the accumulation of wealth irrespective of its effect on smoothing consumption. This paper explores the implications of the spirit of capitalism on monetary policy, growth, and welfare in a Schumpeterian growth model. Different from the existing literature, we show that money is not superneutral in the long run and could promote economic growth when the spirit of capitalism is strong. Furthermore, we show that the optimal nominal interest rate decreases with the strength of the spirit of capitalism, potentially supporting a negative interest rate. Finally, our calibrated model suggests that the spirit of capitalism explains an important share (about one-third) of long-run growth in the United States.
    Keywords: Spirit of capitalism; Cash-in-advance; Schumpeterian model; Monetary policy; Growth and welfare
    JEL: E52 O42 O47
    Date: 2020–11–09
  25. By: José-Luis Peydró; Andrea Polo; Enrico Sette
    Abstract: We show that risk mitigating incentives dominate risk shifting incentives in fragile banks. Risk shifting could be particularly severe in banking since it is the most opaque industry and banks are one of the most leveraged corporations with very low skin in the game. To analyze this question, we exploit security trading by banks during financial crises, as banks can easily and quickly change their risk exposure within their security portfolio. However, in contrast with the risk shifting hypothesis, we find that less capitalized banks take relatively less risk after financial market stress shocks. We show this using the supervisory ISIN-bank-month level dataset from Italy with all securities for each bank. Our results are over and above capital regulation as we show lower reach-for-yield effects by less capitalized banks within government bonds (with zero risk weights) or within securities with the same rating and maturity in the same month (which determines regulatory capital). Effects are robust to controlling for the covariance with the existence portfolio, and less capitalized banks, if anything, reduce concentration risk. Further, effects are stronger when uncertainty is higher, despite that risk shifting motives may be then higher. Moreover, three separate tests – based on different accounting portfolios (trading book versus held to maturity), the distribution of capital and franchise value – suggest that bank own incentives, instead of supervision, are the main drivers. Results are confirmed if we consider other sources of balance sheet fragility and different measures of risk-taking. Finally, evidence from the recent COVID-19 shock corroborates findings from the Global Financial Crisis and the Euro Area Sovereign Crisis.
    Keywords: risk shifting, financial crises, securities, bank capital, interbank funding, concentration risk, uncertainty, risk weights, available for sale, held to maturity, trading book, COVID-19
    JEL: G01 G21 G28
    Date: 2020–11
  26. By: Rod Garratt; Michael Junho Lee
    Abstract: In prior research, we documented evidence suggesting that digital payment adoptions have accelerated as a result of the COVID-19 pandemic. While digitalization of payment activity improves data utilization by firms, it can also infringe upon consumers’ right to privacy. Drawing from a recent paper, this blog post explains how payment data acquired by firms impacts market structure and consumer welfare. Then, we discuss the implications of introducing a central bank digital currency (CBDC) that offers consumers a low-cost, privacy-preserving electronic means of payment—essentially, digital cash.
    Keywords: central bank digital currencies; privacy; market structure; data
    JEL: D14 G2 E5
    Date: 2020–11–23

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