nep-cba New Economics Papers
on Central Banking
Issue of 2021‒07‒19
24 papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Monetary Policy Rules By George McCandless
  2. Monetary policy strategy and inflation in Japan By Fructuoso Borrallo Egea; Pedro del Río López
  3. Media sentiment on monetary policy: determinants and relevance for inflation expectations By Matthieu PICAULT; Julien PINTER; Thomas RENAULT
  4. The impact of Covid-19 on productivity By Stephen Millard,; Margarita Rubio; Alexandra Varadi
  5. Euro area periphery countries' fiscal policy and monetary policy surprises By Hülsewig, Oliver; Rottmann, Horst
  6. Nine blind men and the PBoC By Makram El-Shagi; Yishuo Ma
  7. Alternative Monetary-Policy Instruments and Limited Credibility: An Exploration By Javier García-Cicco
  8. Macroeconomic Policy Making and Current Account Imbalances in the Euro Area By Taiki Murai; Gunther Schnabl
  9. Credibility dynamics and inflation expectations By Rumen Kostadinov; Francisco Roldán
  10. Mussa Puzzle Redux By Oleg Itskhoki; Dmitry Mukhin
  11. Unconventional Credit Policy in an Economy under Zero Lower Bound By Jorge Pozo; Youel Rojas
  12. Is Macroprudential Policy Driving Savings? By André Teixeira; Zoë Venter
  13. Nonlinear Unemployment Effects of the Inflation Tax By Mohammed Ait Lahcen; Garth Baughman; Stanislav Rabinovich; Hugo van Buggenum
  14. Does It Matter How Central Banks Accumulate Reserves? Evidence from Sovereign Spreads By César Sosa-Padilla; Federico Sturzenegger
  15. Shareholder Liability and Bank Failure By Felipe Aldunate; Dirk Jenter; Arthur Korteweg; Peter Koudijs
  16. Counterparty Choice, Bank Interconnectedness, and Systemic Risk By Andrew Ellul; Dasol Kim
  17. Role of the Media in the Inflation Expectation Formation Process By Tetiana Yukhymenko
  18. Interest Rate Skewness and Biased Beliefs By Michael D. Bauer; Mikhail Chernov
  19. A Dynamic Stock-Flow Model for the Argentine Economy By Gabriel Michelena
  20. Analysis of Banking Risk, Good Corporate Governance, Capital and Earning Influences on the Indonesia’s Commercial Bank Performances By Subhan, M. Nuruddin
  21. Falling Interest Rates and Credit Misallocation: Lessons from General Equilibrium By Vladimir Asriyan; Luc Laeven; Alberto Martin; Alejandro Van der Ghote; Victoria Vanasco
  22. Fundamentals vs. policies: can the US dollar's dominance in global trade be dented? By Georgios Georgiadis; Helena Le Mezo; Arnaud Mehl; Cédric Tille
  23. Reserves Were Not So Ample After All By Adam Copeland; Darrell Duffie; Yilin Yang
  24. State-Owned Commercial Banks By Ugo Panizza

  1. By: George McCandless (Central Bank of Argentina)
    Abstract: The object of this paper is to consider the effects on an economy of two alternative channels of monetary policy using a cash in advance model. One of the channels is simply giving money to less well of households (unskilled). The second channel is similar to central bank monetary policy, each period lump sum monetary transfers are given to or extracted from financial intermediaries by skilled and unskilled workers. Having a model with two channels of monetary policy that operate in fundamentally different ways allows one to think carefully about the effects of a monetary policy of sterilization of inflation through contraction of money on the financial side. In addition, having two groups of households, one unskilled, with lower wages and reduced opportunities for saving, and another skilled with higher wages and the ability to own and rent out capital in addition to holding bank deposits, permits a more careful consideration of the welfare effects of this type of policy. In addition, this kind of analysis helps explain why different countries, those with more or fewer unskilled workers, will choose to follow different policies with respect to a politically optimal inflation rate.
    Keywords: cash in advance models, monetary policy rules, monetary policy transmission channels, optimal inflation rate
    JEL: E17 E52 E58
    Date: 2021–05
  2. By: Fructuoso Borrallo Egea (Banco de España); Pedro del Río López (Banco de España)
    Abstract: Faced with a very prolonged period of low inflation, the Bank of Japan has been modifying its monetary policy strategy over the last two decades, pioneering the use of non-standard measures: it reduced policy interest rates to zero and, more recently, to negative levels, and has implemented several asset purchase programmes, forward guidance and, in September 2016, a yield curve control policy. Despite all these efforts, Japan has continued to experience persistently low inflation, with rates well below the central bank’s target in recent decades. This document analyses the changes in the Bank of Japan’s strategy in its struggle against low inflation, focusing in particular on the reasons that led it to adopt the interest rate control policy, describes how this policy works and its main features, and assesses the results obtained. This new strategy has allowed the Bank of Japan to control the yield curve more effectively and sustainably, reducing the volume of asset purchases and mitigating the potential adverse financial stability effects. However, empirical analysis shows that it has still not succeeded in modifying the adaptive and persistent nature of the process of formation of prices and inflation expectations in Japan.
    Keywords: monetary policy, inflation, inflation expectations, interest rates
    JEL: E31 E43 E52
    Date: 2021–06
  3. By: Matthieu PICAULT; Julien PINTER; Thomas RENAULT
    Keywords: , central bank communication, European Central Bank, textual analysis, inflation expectations
    Date: 2021
  4. By: Stephen Millard,; Margarita Rubio; Alexandra Varadi
    Abstract: We use a DSGE model with financial frictions, leverage limits on banks, loan-to-value limits and debt- service ratio (DSR) limits on mortgage borrowing, to examine: i) the effects of different macroprudential policies on key macro aggregates; ii) their interaction with each other and with monetary policy; and iii) their effects on the volatility of key macroeconomic variables and on welfare. We find that capital requirements can nullify the effects of financial frictions and reduce the effects of shocks emanating from the financial sector on the real economy. LTV limits, on their own, are not sufficient to constrain house- hold indebtedness in booms, though can be used with capital requirements to keep debt-service ratios under control. Finally, DSR limits lead to a significant decrease in the volatility of lending, consumption and inflation, since they disconnect the housing market from the real economy. Overall, DSR limits are welfare improving relative to any other macroprudential tool.
    Keywords: Macroprudential Policy, Monetary Policy, Leverage Ratio, Affordability Constraint, Col-lateral Constraint.
    Date: 2020
  5. By: Hülsewig, Oliver; Rottmann, Horst
    Abstract: In this study, we explore how fiscal policy in euro area periphery countries responds to monetary policy surprises that lower sovereign bond yields. In particular, we assess whether the disciplining effect of financial markets on public finances is undermined by the ability of monetary policy to affect the conditions of external funds. Using Jordà's (2005) local projection method we find that fiscal discipline, on average, does not wane in response to monetary policy innovations that bring down yields on sovereign bonds. The reaction of economic activity to shocks to monetary policy appears to determine the fiscal stance, rather than the adjustment of borrowing cost.
    Keywords: Euro area periphery countries,fiscal policy,market discipline,monetary policy shocks,local projections
    JEL: E52 E62 H62
    Date: 2021
  6. By: Makram El-Shagi (Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan); Yishuo Ma (Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan)
    Abstract: Over the past decade, several dozen papers have been written that identify the People’s Bank of China’s monetary policy shocks. Yet, what often seems like minor differences in measurements of monetary policy and identifying assumptions yield vastly different implied shocks. In this paper, we pitch 20 shock time series from the literature against each other in a horse race. We use a local projections framework to produce impulse responses based on all shocks for production, prices, money and interest rates and use them to assess the economic plausibility of the competing results. Our results confirm the frequently mentioned relevance of monetary aggregates for Chinese monetary policy but also point the importance of using forward looking policy reaction functions (or account for forward looking variables in a VAR framework) when identifying monetary policy shocks.
    Keywords: China, monetary policy shocks, local projections, meta study
    JEL: C83 E52
    Date: 2021–07
  7. By: Javier García-Cicco (Central Bank of Argentina)
    Abstract: We evaluate the dynamics of a small and open economy under alternative simple rules for different monetary-policy instruments, in a model with imperfectly anchored expectations. The inflation-targeting consensus is that interest-rate rules are preferred, instead of using either a monetary aggregate or the exchange rate; with arguments usually presented under rational expectations and full credibility. In contrast, we assume agents use econometric models to form inflation expectations, capturing limited credibility. In particular, we emphasize the exchange rate’s role in shaping medium- and long-term inflation forecasts. We compare the dynamics after a shock to external-borrowing costs (arguably one of the most important sources of fluctuations in emerging countries) under three policy instruments: a Taylor-type rule for the interest rate, a constant-growth-rate rule for monetary aggregates, and a fixed exchange rate. The analysis identifies relevant trade-offs in choosing among alternative instruments, showing that the relative ranking is indeed influenced by how agents form inflation-related expectations.
    Keywords: small open economy, monetary policy rules, macroeconomic models, inflation expectations
    JEL: E17 E52 E58
    Date: 2021–04
  8. By: Taiki Murai; Gunther Schnabl
    Abstract: The paper analyses the role of fiscal and monetary policy for the development of the current account imbalances in the euro area, including the most recent developments during the coronavirus crisis. Several financial transmission channels such as international bank lending, changes in TARGET2 balances, international rescue credit and government bond purchases of euro area central banks are identified. It is found that differing fiscal policy stances which have interacted differently with the ECB’s monetary policy have been at roots of first diverging and then converging current account positions in the euro area. Since the European financial and debt crisis, public financing mechanisms and the unconventional monetary of the ECB have contributed to the persistence of intra-euro area current account imbalances.
    Keywords: current account, current account imbalances, financial account, euro, EU, European Monetary Union, monetary policy, fiscal policy, TARGET2
    JEL: H62 F32 F33 F42
    Date: 2021
  9. By: Rumen Kostadinov (McMaster University); Francisco Roldán (International Monetary Fund)
    Abstract: We study the optimal design of a disinflation plan by a planner who lacks commitment and has imperfect control over inflation. The government’s reputation for being committed to the plan evolves as the public compares realized inflation to the announced targets. Reputation is valuable as it helps curb inflation expectations. At the same time, plans that are more tempting to break lead to larger expected reputational losses in the ensuing equilibrium. Taking these dynamics into consideration, the government announces a plan which balances promises of low inflation with dynamic incentives that make them credible. We find that, despite the absence of inflation inertia in the private economy, a gradual disinflation is preferred even in the zero-reputation limit.
    Keywords: Imperfect credibility, reputation, optimal monetary policy, time inconsistency
    JEL: E52 C73
    Date: 2021–06
  10. By: Oleg Itskhoki; Dmitry Mukhin
    Abstract: The Mussa (1986) puzzle is the observation of a sharp and simultaneous increase in the volatility of both nominal and real exchange rates following the end of the Bretton Woods System of pegged exchange rates in 1973. It is commonly viewed as a central piece of evidence in favor of monetary non-neutrality because it is an instance in which a change in the monetary regime caused a dramatic change in the equilibrium behavior of a real variable (the real exchange rate) and is often further interpreted as direct evidence in favor of models with nominal rigidities in price setting. This paper shows that the data do not support this latter conclusion because there was no simultaneous change in the properties of the other macro variables, nominal or real. We show that an extended set of Mussa facts equally falsifies both conventional flexible-price RBC models and sticky-price New Keynesian models as explanations for the Mussa puzzle. We present a resolution to the broader Mussa puzzle based on a model of segmented financial market — a particular type of financial friction by which the bulk of the nominal exchange rate risk is held by financial intermediaries and is not shared smoothly throughout the economy. We argue that rather than discriminating between models with sticky versus flexible prices, or monetary versus productivity shocks, the Mussa puzzle provides sharp evidence in favor of models with monetary non-neutrality arising in the financial market, suggesting the importance of monetary transmission via the risk premium channel.
    JEL: E30 E40 E50 F30 F40 G10
    Date: 2021–06
  11. By: Jorge Pozo (Central Reserve Bank of Peru); Youel Rojas (Central Reserve Bank of Peru)
    Abstract: In this paper we develop a simple two-period model that reconciles credit demand and supply frictions. In this stylized but realistic model credit and deposit markets are interlinked and credit demand and credit supply frictions amplify each other in such a way that produces in equilibrium very low levels of credit and stronger reductions of the real and nominal interest, so an economy is much closer to the ZLB. However, an unconventional credit policy, that consists on central bank loans to firms that are guaranteed by the government, can undo partially the effects of the credit frictions and prevents the economy from reaching the ZLB. Since central bank loans are not subject to the moral hazard problem between bankers and depositors and are government-guaranteed, credit market interventions rise aggregate credit supply and positively affect the aggregate credit demand, respectively. However, once the economy is at the ZLB the effect of a credit policy is reduced due to a relatively stronger inflation reduction, which in turn reduces entrepreneurs' incentives to demand bank loans.
    Keywords: Unconventional credit policy; asymmetric information; moral hazard; zero Lower bound
    JEL: G21 G28 E44 E5
    Date: 2021–07–01
  12. By: André Teixeira; Zoë Venter
    Abstract: This paper shows that the recent surge in savings is a result of tighter macroprudential policy. Using a difference-in-differences approach with staggered treatment adoption, we find that households in EU countries that adopted macroprudential policy between 2000 and 2019 increased their savings up to one third more than households in countries without macroprudential policy. Furthermore, our results indicate that the loan-to-value ratio explains most of the variation on savings. Finally, we find that a longer exposure to macroprudential policy exacerbates savings with searing consequences on growth.
    Keywords: Macroprudential policy, savings, growth, difference-in-differences
    JEL: E21 E52 O47
    Date: 2021–06
  13. By: Mohammed Ait Lahcen; Garth Baughman; Stanislav Rabinovich; Hugo van Buggenum
    Abstract: We argue that long-run inflation has nonlinear and state-dependent effects on unemployment, output, and welfare. Using panel data from the OECD, we document three correlations. First, there is a positive long-run relationship between anticipated inflation and unemployment. Second, there is also a positive correlation between anticipated inflation and unemployment volatility. Third, the long-run inflation-unemployment relationship is not only positive, but also stronger when unemployment is higher. We show that these correlations arise in a standard monetary search model with two shocks – productivity and monetary – and frictions in labor and goods markets. Inflation lowers the surplus from a worker-firm match, in turn making it sensitive to productivity shocks or to further increases in inflation. We calibrate the model to match the U.S. postwar labor market and monetary data, and show that it is consistent with observed cross-country correlations. The model implies that the welfare cost of inflation is nonlinear in the level of inflation and is amplified by the presence of aggregate shocks.
    Keywords: Money; Search; Inflation; Unemployment; Unemployment volatility; Fundamental surplus; Product-labor market interaction
    JEL: E24 E30 E40 E50
    Date: 2021–06–29
  14. By: César Sosa-Padilla; Federico Sturzenegger
    Abstract: There has been substantial research on the benefits of accumulating foreign reserves, but less on the relative merits of how these reserves are accumulated. In this paper we explore whether the form of accumulation affects country risk. We first present a model of endogenous sovereign debt defaults, where we show that reserve accumulation through the issuance of debt contingent on local output reduces spreads in a way that reserve accumulation with foreign borrowing does not. We confirm this model prediction when taking the theory to the data. These results suggest that attention should be placed on the way reserves are accumulated, a distinction that has important practical implications. In particular, our results call into question the benefits of programs of reserves strengthening through external debt such as those typically implemented by multilateral organizations.
    JEL: F32 F34 F41
    Date: 2021–06
  15. By: Felipe Aldunate; Dirk Jenter; Arthur Korteweg; Peter Koudijs
    Abstract: Does enhanced shareholder liability reduce bank failure? We compare the performance of around 4,200 state-regulated banks of similar size in neighboring U.S. states with different liability regimes during the Great Depression. The distress rate of limited liability banks was 29% higher than that of banks with enhanced liability. Results are robust to a diff-in-diff analysis incorporating nationally-regulated banks (which faced the same regulations everywhere) and are not driven by other differences in state regulations, Fed membership, local characteristics, or differential selection into state-regulated banks. Our results suggest that exposing shareholders to more downside risk can successfully reduce bank failure.
    Keywords: limited liability, bank risk taking, financial crises, Great Depression
    JEL: G21 G28 G32 N22
    Date: 2021
  16. By: Andrew Ellul (Indiana University, Office of Financial Research, Centre for Economic Policy Research, Center for Studies of Economics and Finance, European Corporate Governance Institute); Dasol Kim (Office of Financial Research)
    Abstract: We provide evidence on how banks form network connections and endogenous risk-taking in their non-bank counterparty choices in the OTC derivatives markets. We use confidential regulatory data from the Capital Assessment and Stress Testing reports that provide counterparty-level data across a wide range of OTC markets for the most systemically important U.S. banks. We show that banks are more likely toeither establish or maintain a relationship, and increase their exposures within an existing relationship, with non-bank counterparties that are already heavily connected and exposed to other banks. Banks in such densely-connected networks are more likely to connect with riskier counterparties for their most material exposures. The effects are strongest in the case of (non-bank) financial counterparties. These findings suggest moral hazard behavior in counterparty choices. Finally, we demonstrate that these exposures are strongly linked to systemic risk. Overall, the results suggest a network formation process that amplifies risk propagation through non-bank linkages in opaque financial markets.
    Keywords: counterparty risk, financial networks, bank interconnectedness, over-the-counter markets, derivatives
    Date: 2021–07–12
  17. By: Tetiana Yukhymenko (National Bank of Ukraine)
    Abstract: This research highlights the role played by the media in the inflation expectations formation process of different types of respondents in Ukraine. Using a large news corpus and machine learning techniques I constructed news-based measures transforming text into quantitative indicators, which reflect news topics relevant to inflation expectations. As such, I found evidence that the different news topics have an impact on inflation expectations and can explain part of their variance. Thus, my results can help understand inflation expectations, especially as anchoring inflation expectations remains a key challenge for central banks.
    Keywords: Inflation expectations; natural language processing; textual data; machine learning
    JEL: C55 C82 D84 E31 E58
    Date: 2021–06–30
  18. By: Michael D. Bauer; Mikhail Chernov
    Abstract: Conditional yield skewness is an important summary statistic of the state of the economy. It exhibits pronounced variation over the business cycle and with the stance of monetary policy, and a tight relationship with the slope of the yield curve. Most importantly, variation in yield skewness has substantial forecasting power for future bond excess returns, high-frequency interest rate changes around FOMC announcements, and consensus survey forecast errors for the ten-year Treasury yield. The COVID pandemic did not disrupt these relations: historically high skewness correctly anticipated the run-up in long-term Treasury yields starting in late 2020. The connection between skewness, survey forecast errors, excess returns, and departures of yields from normality is consistent with a theoretical framework where one of the agents has biased beliefs.
    JEL: E43 E44 E52 G12
    Date: 2021–06
  19. By: Gabriel Michelena (Central Bank of Argentina)
    Abstract: This document develops a Consistent Stock-Flow (SFC) model for the analysis of macroeconomic variables in Argentina. The main utility of SFC models is associated with the possibility of performing counterfactual exercises to evaluate different modifications of fiscal, tax, monetary and commercial policy. These models are characterized by the use of social accounting matrices (SAM), which allows a breakdown of the capital account and financial instruments of each institutional sector. This improves accounting consistency, since the SAM contains the main transactions of the real sector, as well as the monetary flows between the different institutions: households, companies, banks, government, central bank and the rest of the world. This model was developed with the objective of making medium-term projections on the main flows and stocks of the Argentine economy, complementing the results of other existing models in the literature.
    Keywords: monetary policy, simulations, stock-flow model
    JEL: C54 E16 E58
    Date: 2021–02
  20. By: Subhan, M. Nuruddin
    Abstract: This study aims to analyze the effect of commercial bank soundness in Indonesia based on Bank Indonesia regulation number 13/24/DPNP date 25 October 2011, which concern on the implementation guide for Bank Regulation in Indonesia number 13/1/PBI/ 2011 on assessment of bank healthy. In general, those assessments cover risks, good corporate governance (GCG), earning and capital. While, the performance of commercial bank is measured based on credit growth and profit growth. A total of 45 commercial banks listed on the Indonesia Stock Exchange are the population of the study which will be analyzed using the structural equation modeling program - partial least square (SEM-PLS). The results show that credit risk, GCG and earnings have no effect on bank’s performance in Indonesia. Market risk, liquidity risk and capital negatively affect the performance of commercial banks in Indonesia. This research is expected to contribute to the policy making of central banks and also commercial bank organization in particular to improve their performance. This research also contributes to the theory by enriching the discussion on related themes.
    Date: 2021–06–09
  21. By: Vladimir Asriyan; Luc Laeven; Alberto Martin; Alejandro Van der Ghote; Victoria Vanasco
    Abstract: What is the effect of declining interest rates on the efficiency of resource allocation and overall economic activity? We study this question in a setting in which entrepreneurs with different productivities invest in capital, subject to financial frictions. We show that a fall in the interest rate has an ambiguous effect on aggregate output. In partial equilibrium, a lower interest rate raises aggregate investment both by relaxing financial constraints and by prompting relatively less productive entrepreneurs to invest. In general equilibrium, this higher demand for capital raises its price and crowds out investment by the more productive entrepreneurs. When this crowding-out effect is strong enough, a fall in the interest rate becomes contractionary. Moreover, in a dynamic setup, such reallocation effects among entrepreneurs can interact with the classic balance-sheet channel, giving rise to a boom-bust impulse response of output to a fall in the interest rate. We provide evidence in support of our mechanism using data from the US and Spain.
    Keywords: low interest rates, financial frictions, firm heterogeneity, misallocation, credit asset prices, monetary policy
    JEL: E22 E32 E44 E52
    Date: 2021–07
  22. By: Georgios Georgiadis (European Central Bank); Helena Le Mezo (European Central Bank); Arnaud Mehl (European Central Bank); Cédric Tille (IHEID, Graduate Institute of International and Development Studies, Geneva)
    Abstract: The US dollar plays a dominant role in the invoicing of international trade, albeit not an exclusive one as more than half of global trade is invoiced in other currencies. Of particular interest are the euro, with a large role, and the renminbi, with a rising role. These two currencies are well suited to contrast the roles of economic fundamentals and policies, as European policy makers have taken a neutral stance in contrast to the promotion of the international role of the renminbi by the Chinese authorities. We assess the drivers of invoicing using the most recent and comprehensive data set for 115 countries over 1999-2019. We find that standard mechanisms that foster use of a large economy's currency predicted by theory ‒ i.e. strategic complementarities in price setting and integration in cross-border value chains ‒ underpin use of the dollar and the euro for trade with the United States and the euro area. These mechanisms also support the role of the dollar, but not the euro, in trade between non-US and non-euro area countries, making the dollar the globally dominant invoicing currency. Fundamentals and policies have played a contrasted role for the use of the renminbi. We find that China's integration into global trade has further strengthened the dominant status of the dollar at the expense of the euro. At the same time, the establishment of currency swap lines by the People's Bank of China has been associated with increases in renminbi invoicing, with an adverse effect on dollar use that is larger than for the euro.
    Keywords: International trade invoicing; dominant currency paradigm; markets vs. policies
    JEL: F14 F31 F44
    Date: 2021–07–01
  23. By: Adam Copeland; Darrell Duffie; Yilin Yang
    Abstract: The Federal Reserve's “balance-sheet normalization,” which reduced aggregate reserves between 2017 and September 2019, increased repo rate distortions, the severity of rate spikes, and intraday payment timing stresses, culminating with a significant disruption in Treasury repo markets in mid-September 2019. We show that repo rates rose above efficient-market levels when the total reserve balances held at the Federal Reserve by the largest repo-active bank holding companies declined and that repo rate spikes are strongly associated with delayed intraday payments of reserves to these large bank holding companies. Intraday payment timing stresses are magnified by early-morning settlement of Treasury security issuances. Substantially higher aggregate levels of reserves than existed in the period leading up to September 2019 would likely have eliminated most or all of these payment timing stresses and repo rate spikes.
    Keywords: repo rates; reserves; Treasuries; payments; central bank balance sheet
    JEL: G14 D47 D82
    Date: 2021–07–01
  24. By: Ugo Panizza (IHEID, Graduate Institute of International and Development Studies, Geneva)
    Abstract: This paper builds a new dataset on bank ownership and reassesses the links between state-ownership of banks and each of financial development, economic growth, financial stability, bank performance, liquidity creation, and lending cyclicality. Using panel data to estimate the short-and medium-term relationship between state-ownership and financial depth, the paper shows that there is no robust correlation between these two variables. The paper also finds no evidence of a negative correlation between state-ownership of banks and economic growth (if anything, the relationship is positive but rarely statistically significant). Looking at financial instability, the paper finds that banking crises predict increases in state-ownership but that there is no evidence that high state-ownership predicts banking crises. Focusing on bank performance, the paper shows that data for the period 1995-2009 are consistent with existing evidence that state owned banks are less profitable than their private counterparts in emerging and developing economies. However, more recent data show no difference between the profitability of private and public banks located in emerging and developing economies. The paper also corroborates the existing literature which shows that in emerging and developing economies lending by state-owned banks is less procyclical than private bank lending. Exploring the role of fiscal fundamentals, the paper does not find any difference in countercyclicality between high and low debt countries, but it finds that countercyclical lending by state-owned banks substitutes, rather than complement, countercyclical fiscal policy. It also finds that lending by state-owned banks helps smoothing production in labor intensive industries and in industries with a large share of small firms.
    Keywords: Banking; State-owned banks; Financial stability
    JEL: G21 H11 O16
    Date: 2021–07–01

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