nep-cba New Economics Papers
on Central Banking
Issue of 2021‒09‒06
29 papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Estimating Fed’s unconventional policy shocks By Jarociński, Marek
  2. The Power of Central Bank Balance Sheets By Athanasios Orphanides
  3. Banks’ internalization effect and equilibrium By Chrysanthopoulou, Xakousti
  4. Monetary policy and COVID-19 By Michał Brzoza-Brzezina; Marcin Kolasa; Krzysztof Makarski
  5. Monetary policy financial transmission and treasury liquidity premia By Maxime Phillot; Samuel Reynard
  6. Welfare Implications of Asset Pricing Facts: Should Central Banks Fill Gaps or Remove Volatility? By Pierlauro Lopez
  7. Inflation risk? By De Grauwe, Paul
  8. Growth-at-risk and macroprudential policy design JEL Classification: G01, G20, G28 By Suarez, Javier
  9. Interest Rate Cuts vs. Stimulus Payments: An Equivalence Result By Christian K. Wolf
  10. Monetary Policy over the Lifecycle By R. Anton Braun; Daisuke Ikeda
  11. Zooming in on Monetary Policy - The Labor Share and Production Dynamics of Two Million Firms By Jan Philipp Fritsche; Lea Steininger
  12. Intergenerational redistributive effects of monetary policy By Marcin Bielecki; Michał Brzoza-Brzezina; Marcin Kolasa
  13. What makes a successful scientist in a central bank? Evidence from the RePEc database By Jakub Rybacki; Dobromił Serwa
  14. Monetary and Fiscal Spillovers Across the Atlantic: The Role of Financial Markets By Luigi Bonatti; Andrea Fracasso; Roberto Tamborini
  15. A Model-Based Comparison of Macroprudential Tools By Eyno Rots; Barnabas Szekely
  16. Do Central Banks Rebalance Their Currency Shares? By Menzie D. Chinn; Hiro Ito; Robert N. McCauley
  17. Impact of e-money on money supply: Estimation and policy implication for Bangladesh By Nizam, Ahmed Mehedi
  18. A Monetary-Fiscal Theory of Sudden Inflations and Currency Crises By David S. Miller
  19. The existential trilemma of EMU in a model of fiscal target zone By Pompeo Della Posta,; Roberto Tamborini
  20. BRRD credibility and the bank-sovereign nexus By Martien Lamers; Thomas Present; Rudi Vander Vennet; Nicolas Soenen
  21. A study on the exchange rate pass-through to consumer prices in Malta By Glenn Abela; Noel Rapa
  22. "Modeling Monopoly Money: Government as the Source of the Price Level and Unemployment" By Sam Levey
  23. Global Capital, the Exchange Rate, and Policy (In)Effectiveness By Biagio Bossone
  24. Reading Keynes’s policy papers through the prism of his Treatise on Probability: information, expectations and revision of probabilities in economic policy By Rivot, Sylvie
  25. Interest Rate Rules, Rigidities and Inflation Risks in a Macro-Finance Model By Roman Horvath; Lorant Kaszab; Ales Marsal
  26. Banks and financial markets in microfounded models of money By van Buggenum, Hugo
  27. Scale effects on efficiency and profitability in the Swiss banking sector By Marc Blatter; Andreas Fuster
  28. How useful is market information for the identification of G-SIBs? By Busch, Pascal; Cappelletti, Giuseppe; Marincas, Vlad; Meller, Barbara; Wildmann, Nadya
  29. U.S. Government debts, a dangerous cocktail of borrowing, spending and inflation levels By De Koning, Kees

  1. By: Jarociński, Marek
    Abstract: Fed's monetary policy announcements convey a mix of news about different kinds of conventional and unconventional policies and about the economy. Financial market responses to these announcements are very leptokurtic: often tiny, but sometimes large. I estimate the underlying structural shocks exploiting this feature of the data. I find standard monetary policy, Odyssean forward guidance, large scale asset purchases and Delphic forward guidance, and estimate their effects. JEL Classification: E52, E58, E44
    Keywords: Asset purchases, Excess kurtosis, Forward guidance, High-frequency identification, Non-Gaussianity
    Date: 2021–08
  2. By: Athanasios Orphanides (Professor of the Practice of Global Economics and Management at the MIT Sloan School of Management (E-mail:
    Abstract: When interest rate policy is hampered by the Zero Lower Bound (ZLB), quantitative easing and other balance sheet policies become essential tools for responding to a crisis or deflationary shock. By unleashing the power of their balance sheets at the onset of the pandemic, without the hesitation observed in past encounters with the ZLB, the Federal Reserve, the European Central Bank and the Bank of Japan provided monetary easing that cushioned the economic blow, served as a backstop to government securities and private assets that prevented a financial market meltdown and facilitated the financing of an essential fiscal expansion. This paper examines how this policy success materialized, drawing on lessons learned from previous encounters with the ZLB, and discusses policy challenges after the pandemic.
    Keywords: Zero lower bound, Balance sheet policies, Quantitative easing, Eligibility, Fiscal-monetary interactions
    JEL: E52 E58 E61
    Date: 2021–08
  3. By: Chrysanthopoulou, Xakousti
    Abstract: This paper extends the standard New Keynesian model to allow for the presence of large banks, when the cost channel of monetary policy matters. It is shown that once the presence of large banks is taken into account the severity of the firms’ credit constraints, the aggressiveness of the central bank in stabilizing inflation and the degree of loan setting centralization jointly affect the steady state output. Moreover, it turns out that the indeterminacy region is not only shrunk due to the presence of a finite number of large banks but also dependent – among others - on the way in which the central bank and the macroprudential authority systematically behave.
    Keywords: Large banks; Cost channel; Indeterminacy; Countercyclical capital buffer
    JEL: E32 E44 E52
    Date: 2021–08–20
  4. By: Michał Brzoza-Brzezina; Marcin Kolasa; Krzysztof Makarski
    Abstract: We study the macroeconomic effects of the COVID-19 epidemic in a quantitative dynamic general equilibrium setup with nominal rigidities. We evaluate various containment policies and show that they allow to dramatically reduce the welfare cost of the disease. Then we investigate the role that monetary policy, in its capacity to manage aggregate demand, should play during the epidemic. We show that treating the observed output contraction as a standard recession leads to a bad policy, irrespective of the underlying containment measures. Then we check how monetary policy should solve the trade-off between stabilizing the economy and containing the epidemic. If no administrative restrictions are in place, the second motive prevails and, in spite of the deep recession, optimal monetary policy is in fact contractionary. Only if sufficient containment measures are being introduced should central bank interventions be expansionary and help stabilize economic activity.
    Keywords: COVID-19; Epidemics; Containment measures; Monetary policy
    JEL: E1 E5 E6 H5 I1 I3
    Date: 2021–07
  5. By: Maxime Phillot; Samuel Reynard
    Abstract: We quantify the effects of monetary policy shocks on the yield curve through their impact on Treasury liquidity premia. When the Fed raises interest rates, the spread between less-liquid assets and Treasuries of the same maturity and risk increases, as the liquidity value of holding Treasuries increases when the aggregate volume of banks’ customer deposits decreases. The longer the maturity is, the smaller - but still significant - the increase in the liquidity premium is, as longer-term Treasuries are less liquid. Due to this change in liquidity premia, the spread between a 10-year Treasury bond and a 3-month T-bill yield increases by approximately 5 basis points for a one-percentage-point increase in the policy rate, i.e., the Treasury yield curve steepens, ceteris paribus.
    Keywords: Treasury liquidity premia, monetary policy, yield curve, deposit channel
    JEL: E52 E43 E41
    Date: 2021
  6. By: Pierlauro Lopez
    Abstract: More than 20 years of financial market data suggest a term structure of the welfare cost of economic uncertainty that is downward-sloping on average, especially during downturns. This evidence offers guidance in selecting a model to study the benefits of macroeconomic stabilization from a structural perspective. The addition of nonlinear external habit formation to a textbook monetary model can rationalize the evidence. The model is observationally equivalent in its quantity implications to a standard New Keynesian model with CRRA utility, but the optimal policy prescription is overturned. In the model the central bank should prioritize removing consumption volatility (a targeting of risk premia) over filling the gap between consumption and its flexible-price counterpart (inflation targeting).
    Keywords: Welfare cost of business cycles; Macroeconomic priorities; Equity and bond yields; Optimal monetary policy; Financial Stability
    JEL: E32 E44 E61 G12
    Date: 2021–08–30
  7. By: De Grauwe, Paul
    Abstract: Inflation is on the rise again in the industrialised world. This has led to fears of a sustained surge in inflation. This article argues that while such fears may make sense in the US, they do not in the eurozone, where the monetary-fiscal policy mix has been much less expansionary than in the US. The fear expressed by some that the monetary overhang from the large injections of liquidity through quantitative easing might lead to inflation in the eurozone does not stand up to scrutiny either. The conclusion offers some observations on the monetary operating procedures in the ECB. It argues that in the future, when interest rates rise again, the ECB risks transferring all (and even more) of its profits to the banking system. This article proposes a way to avoid this unacceptable outcome.
    JEL: N0 F3 G3
    Date: 2021–08–05
  8. By: Suarez, Javier
    Keywords: growth-at-risk, macroprudential policy, policy stance, quantile regressions
    Date: 2021–09
  9. By: Christian K. Wolf
    Abstract: In a textbook New Keynesian model extended to allow for uninsurable household income risk, any path of inflation and output implementable via interest rate policy is similarly implementable through uniform lump-sum transfers ("stimulus checks"). A dual-mandate policymaker can thus use checks to perfectly substitute for conventional monetary policy when rates are constrained by a lower bound. In a quantitative heterogeneous-agent (HANK) model, the stimulus check policy that implements a given monetary allocation is well-characterized by a small number of measurable sufficient statistics. In the household cross-section, the transfer policy is associated with lower consumption inequality than the equivalent rate cut.
    JEL: E2 E3 E6
    Date: 2021–08
  10. By: R. Anton Braun (Federal Reserve Bank of Atlanta (E-mail:; Daisuke Ikeda (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: A tighter monetary policy is generally associated with higher real interest rates on deposits and loans, weaker performance of equities and real estate, and slower growth in employment and wages. How does a household's exposure to monetary policy vary with its age? The size and composition of both household income and asset portfolios exhibit large variation over the lifecycle in Japanese data. We formulate an overlapping generations model that reproduces these observations and use it to analyze how household responses to monetary policy shocks vary over the lifecycle. Both the signs and the magnitudes of the responses of a household's net worth, disposable income and consumption depend on its age.
    Keywords: Monetary policy, Lifecycle, Portfolio choice, Nominal government debt
    JEL: E52 E62 G51 D15
    Date: 2021–08
  11. By: Jan Philipp Fritsche; Lea Steininger
    Abstract: Conditional on a contractionary monetary policy shock, the labor share of value added is expected to decrease in the basic New Keynesian model. By providing firm-level evidence, we are first to validate this proposition. Using local projections and high dimensional fixed effects, we show that a one standard deviation contractionary monetary policy shock decreases firms' labor share by 0.4 percent, on average. However, reactions are heterogeneous along two dimensions: The labor share is most informative to discriminate firms by their response in payroll expenses, firms' leverage is most informative to discriminate by their response in value added. We inform the policy debate on transmission and redistribution effects of monetary policy.
    Keywords: Monetary policy, firm heterogeneity, labor share, financial frictions, DSGE model validatio
    JEL: D22 D31 E23 E32 C52
    Date: 2021
  12. By: Marcin Bielecki; Michał Brzoza-Brzezina; Marcin Kolasa
    Abstract: This paper investigates the distributional consequences of monetary policy across generations. We use a life-cycle model with a rich asset structure as well as nominal and real rigidities calibrated to the euro area using both macroeconomic aggregates and microeconomic evidence from the Household Finance and Consumption Survey. We show that the life-cycle profi les of income and asset accumulation decisions are important determinants of redistributive effects of monetary shocks and ignoring them can lead to highly misleading conclusions. The redistribution is mainly driven by nominal assets and labor income, less by real and housing assets. Overall, we find that a typical monetary policy easing redistributes welfare from older to younger generations.
    Keywords: monetary policy, life-cycle models, wealth redistribution
    JEL: E31 E52 J11
    Date: 2021–03
  13. By: Jakub Rybacki; Dobromił Serwa
    Abstract: This research analyzes factors affecting scientific success of central bankers. We combine data from the RePEc and EDIRC databases, which contain information about economic publications of authors from 182 central banks. We construct a dataset containing information about 3312 authors and almost 80 thousand scientific papers published between 1965 and 2020. Results from Poisson regressions of citation impact measure called h-index, on a number of research features suggest that economists from the US Federal Reserve Banks, international financial institutions, and some eurozone central banks are cited more frequently than economists with similar characteristics from central banks located in emerging markets. Researchers from some big emerging economies like Russia or Indonesia are cited particularly infrequently by the scientific community. Beyond these outcomes, we identify a significant positive relationship between research networking and publication success. Moreover, economists cooperating with highly cited scientists also obtain a high number of citations even after controlling for the size of their research networks.
    Keywords: RePEc, Scientific Success, h-index, Big data.
    JEL: E58 D02 I23
    Date: 2021–04
  14. By: Luigi Bonatti; Andrea Fracasso; Roberto Tamborini
    Abstract: We present a review of the channels through which the US fiscal and monetary post-pandemic policies may affect the euro area. US spillovers will likely be relevant and worth considering while setting the policy stance in the euro area, at a crossroad between economic global recovery and global overheating. A key role is going to be played by global financial markets, their appetite for open-ended stimulative policies and fears of hard disinflation scenarios affecting central banks' ability to keep the economies on the recovery path and inflation expectations anchored.
    Date: 2021
  15. By: Eyno Rots (Magyar Nemzeti Bank (Central Bank of Hungary)); Barnabas Szekely (Goethe University)
    Abstract: We develop a DSGE model to analyze a macroprudential policy framework. We use it to describe the Hungarian economy and the key regulatory constraints implemented there: the loan-to-value and the debt-service-to-income caps imposed on mortgage borrowers and the minimum capital requirement imposed on banks. Our model is novel in the way it treats the borrowing caps as soft constraints, which makes it easy to analyze multiple non-redundant borrowing constraints. We also show an estimation strategy that involves a variation of impulse-response matching and accounts for the lack of historical data concerning the conduct of macroprudential policy, a common problem.
    Keywords: DSGE, macroprudential, DSTI, LTV, capital requirement, Covid†19.
    JEL: E37 E44
    Date: 2021
  16. By: Menzie D. Chinn; Hiro Ito; Robert N. McCauley
    Abstract: Do central banks rebalance their currency shares? The answer matters because the dollar’s predominant role in large official reserve holdings means that widespread rebalancing requires central banks to buy (sell) a depreciating (appreciating) dollar, stabilising its value against other major currencies. We hypothesise that larger reserve holdings have led central banks to approach their investment more systematically and to make rebalancing in the face of exchange rate changes the norm. We illustrate the choice with two polar case studies: the US clearly does not rebalance its small FX reserves; Switzerland does rebalance its very large reserves, so that changes in exchange rates do not move its currency allocation. Our hypothesis finds partial support in global aggregated data. They reject both no rebalancing and full rebalancing and point to emerging market economies as the source of the aggregate result. We also test for rebalancing with panel data and find that our sample economies on average again behave in intermediate fashion, partially but not fully rebalancing. However, when observations are weighted by the size of reserves, the panel analysis finds full rebalancing. A variety of control variables and splits of the panel sample do not alter the thrust of these findings. Central banks rebalance their FX reserves extensively but not uniformly.
    JEL: F31 F42
    Date: 2021–08
  17. By: Nizam, Ahmed Mehedi
    Abstract: With the rapid proliferation of mobile telephony and the establishment of an IT-enabled payment and settlement system, Bangladesh, nowadays, is experiencing a meteoric rise in the usage of mobile financial services (MFS). As more and more people are opting to use this service, a huge number of mobile accounts are opened every day and a substantial amount of money is deposited, withdrawn and transferred frequently through the mobile network. This ever-increasing amount of mobile money flowing through the network may have a sizeable impact on the overall money supply of the country. Thus far, no systematic study has been conducted to quantify the impact of the mobile money on the conventional money supply of Bangladesh. In this study, we attempt to quantify the contribution of mobile money on the money supply which is an important quantity-based anchor of monetary policy in Bangladesh. Apart from quantifying the impact of digital (mobile) money on the money supply, we also qualitatively discuss its implication on another price-based nominal anchor of monetary policy in Bangladesh, i.e., interest rate. Moreover, in recent times, the government of Bangladesh has capped market interest rate with an intent to boost up business activities and in doing so, it (the government) has irrevocably broken the money market equilibrium which may result into dead-weight loss according to economic theory. Here, we qualitatively argue that financial inclusion through MFS has the potential to substantially reduce market interest rate without any manual intervention by significantly adding to the money supply which is supposed to be resulted into a reduced interest rate as an eventual consequence.
    Keywords: Mobile financial services; Bangladesh; financial inclusion; money supply; money multiplier; monetary policy
    JEL: E51 E52 G21 G28 O11 O33
    Date: 2021–09–02
  18. By: David S. Miller
    Abstract: Treating nominal government bonds like other bonds leads to a new theory of sudden inflations and currency crises. Holmstrom (2015) and Gorton (2017) describe bonds as having costly-to-investigate opaque backing that consumers believe is sufficient for repayment. Government bonds' nominal return is their face value, their real return is determined by the government's surplus. In normal times, consumers are confident of repayment but ignorant of the true surpluses that will fund that repayment. When consumers' belief in real repayment wavers, they investigate surpluses. If consumers learn surpluses will be insufficient to repay bonds in real terms, the price level jumps. This explains why we observe inflationary crises, but never deflationary.
    Keywords: Currency Crises; Price Level Determination; Monetary Fiscal Interaction; Fiscal Theory of the Price Level
    JEL: E31 E51 E52 E63
    Date: 2021–08–24
  19. By: Pompeo Della Posta,; Roberto Tamborini
    Abstract: The lesson of the sovereign debt crises of the 2010s, and of the outbreak of the COVID- 19 pandemic is that EMU irreversibility, if not to remain a wishful statement in the founding treaties, necessitates to be completed by carefully designed ramparts for extraordinary times beside regulations for ordinary times. In this paper we wish to contribute to this line of thought in two points. First, we highlight that when exposed to large, systemic shocks the EMU faces a trilemma: its integrity can only be saved by relaxing either monetary orthodoxy, or fiscal orthodoxy, or both. We elaborate this concept by means of a fiscal target-zone model, where EMU member governments are willing to abide with the commitment to debt stability under the no-bailout clause only up to an upper bound of their feasible fiscal effort. Second, we show that EMU completion means providing a monetary and/or fiscal emergency backstop to the irreversibility principle. Drawing on the target-zone literature, we show how these devices can be designed in a consistent manner hat minimises their extension and mitigates the moral hazard concerns. The alternative to these devices is not retaining both the EMU irreversibility and the twin orthodoxies, but reformulating the treaties with explicit and regulated exit procedures.
    Keywords: COVID-19 pandemic, Fiscal Target Zone, Public Debt, Speculative Attacks, Fiscal Orthodoxy, Monetary Orthodoxy
    JEL: E65 F34 F36
    Date: 2021
  20. By: Martien Lamers; Thomas Present; Rudi Vander Vennet; Nicolas Soenen (-)
    Abstract: We investigate the effectiveness of the Bank Recovery and Resolution Directive (BRRD) in mitigating the bank-sovereign nexus in the Euro Area. Using CDS spreads to measure bank and sovereign credit risk and a DCC-MIDAS model capturing the long-term component of bank-sovereign interconnectedness, we document that the dynamic correlation between banks and sovereigns has decreased in Euro Area countries since the introduction of the BRRD. Panel data analysis reveals that the decline in interconnectedness is not driven by the banks’ capital adequacy, size or holdings of domestic sovereign securities.
    Keywords: BRRD; Bank-sovereign nexus, CDS spread, Dynamic correlation, DCC-MIDAS
    JEL: C58 G28 G32
    Date: 2021–08
  21. By: Glenn Abela; Noel Rapa (Central Bank of Malta)
    Abstract: Exchange Rate Pass-Through (ERPT), commonly defined as the extent to which exchange rate changes are reflected in the price levels of an economy, has important implications in a number of policy-relevant areas. Despite this, estimates of ERPT in the Maltese economy are scarce and do not take into account changes in the monetary regime pertaining to the adoption of the euro. In this paper, we use local projections (LP) to estimate linear and non-linear ERPT to consumer prices in Malta after its accession to the European Monetary Union. In line with literature, results point at incomplete ERPT to headline consumer prices, peaking at around 20% by the end of the first year after the exchange rate shock. ERPT to overall HICP inflation seems to be largely driven by the goods component while ERPT to services prices is largely insignificant across the horizon considered. Allowing for non-linearities, we find evidence of asymmetric pass-through with larger changes to as well as depreciations in the nominal effective exchange rate being consistent with larger pass-through estimates
    JEL: E31 F31
    Date: 2021
  22. By: Sam Levey
    Abstract: Many of the claims put forth by Modern Monetary Theory (MMT) center around the state's monopoly over its own currency. In this paper I interrogate the plausibility of two claims: 1) MMT’s theory of the price level--that the price level is a function of prices paid by government when it spends--and 2) the claim that the cause of deficient effective demand is the state's failure to supply government liabilities so as to meet the demand for net financial assets. I do so by building a model of "monopoly money" capable of producing these two outcomes.
    Keywords: Modern Monetary Theory; Price Level; Monopoly Money; Durapoly; Deficient Effective Demand
    JEL: E4 E62 B52 D42
    Date: 2021–08
  23. By: Biagio Bossone
    Abstract: In line with JMK’s liquidity preference theory, this article holds that in a world of highly internationally financially integrated economies the exchange rate between any two currencies is determined by the financial market views as to what its value is expected to be in the future. These views are influenced by the policy credibility that markets themselves attribute to the currency-issuing countries. After briefly reviewing the established theories of the exchange rate, the article proposes a very simple, aggregate model of equilibrium exchange rate determination based on market views and discusses its basic features and policy implications. It shows that whereas macro policy shocks in highly credible countries affect mostly real output with only a moderate impact on the exchange rate, the same shocks in poorly credible countries dissipate almost entirely in exchange rate movements. The exchange rate ultimately reflects the space that markets make available to national authorities for effective macro policies.
    Keywords: Credibility; Exchange rate; Global investors and capital; Inflation; Macroeconomic policy
    JEL: F41 F62 G15
    Date: 2021–09
  24. By: Rivot, Sylvie
    Abstract: When scholars investigate the legacy of Keynes’s Treatise on Probability (1921) for the development of Keynes’s thinking, the attention usually focuses on the connections between Keynes’s probability theory, his conception of decision-making under uncertainty and the theory of the functioning of the macroeconomic system that derives from it - through the marginal efficiency of capital, the preference for liquidity and the self-referential functioning of financial markets. By contrast, the paper aims to investigate the connections between Keynes’s probability theory on the one hand, and his economic policy recommendations on the other. It concentrates on the policy recommendations defended by Keynes during the Great Depression but also after the General Theory. Keynes’s economic policy can be understood as a framework for decision-making in situations of uncertainty: fiscal policy aims to induce private agents to change their “rational” probability statements, while monetary policy aims to allow more weight to these statements.
    Date: 2021–08–24
  25. By: Roman Horvath (Charles University, Prague); Lorant Kaszab (Magyar Nemzeti Bank (Central Bank of Hungary)); Ales Marsal (National Bank of Slovakia)
    Abstract: Long-term bond yields contain a risk-premium, an important part of which is compensation for inflation risks. The substantial increase in the Fed funds rate in the mid-2000s did not raise long-term US Treasury yields due to the reduction in the term premium (so-called Greenspan conundrum) which was typically thought to be exogenous for monetary policy. We show using a New Keynesian macro-finance model that the term premium is endogenous and is greatly influenced by the specification of the Taylor rule. Finally, we extend the model with frictions (richer fiscal setup and wage rigidity) that are known to help jointly match macro and finance data and estimate the model on US data in 1961-2007 by the generalized methods of moments and simulated methods of moments.
    Keywords: zero-coupon bond, nominal term premium, inflation risk, Taylor rule, New Keynesian, labor income taxation, wage rigidity, GMM, SMM
    JEL: E13 E31 E43 E44
    Date: 2021
  26. By: van Buggenum, Hugo (Tilburg University, School of Economics and Management)
    Date: 2021
  27. By: Marc Blatter; Andreas Fuster
    Abstract: This paper analyzes efficiency and profitability in the Swiss banking sector over the period 1997-2019. We find strong evidence for scale economies: for most banks in the sample, efficiency and profitability increase with bank size. Using an instrumental variables strategy for a subset of geographically restrained banks, we find that the effect of size on efficiency and profitability is likely causal. Scale economies have been more pronounced since 2010 than in the years prior to the global financial crisis. There is little evidence for scale economies for the largest (systemically important) banks; their relatively lower efficiency and lower profitability appear driven by certain aspects of their business model. Our results further indicate that good capitalization and high efficiency and profitability are compatible.
    Keywords: Bank efficiency, profitability, economies of scale, financial regulation
    JEL: G21 G28
    Date: 2021
  28. By: Busch, Pascal; Cappelletti, Giuseppe; Marincas, Vlad; Meller, Barbara; Wildmann, Nadya
    Abstract: The Basel Committee on Banking Supervision (BCBS) framework used to identify global systemically important banks (G-SIBs) is based on banks’ balance sheet information, leaving information derived from market data untapped. Among the most widely used market-based systemic risk measures, Adrian and Brunnermeier’s (2016) Delta-Conditional Value at Risk (ΔCoVaR) best captures the system-wide loss-given-default (sLGD) and conditional impact concepts underlying the BCBS GSIB methodology. In this paper we investigate, using a global sample of the largest banks, whether a score based on ΔCoVaR could be useful for ranking G-SIBs or for calibrating an alternative G-SIB indicator weighting scheme. In our first analysis we find that the ΔCoVaR score is positively correlated with all five of the systemic importance categories of the BCBS framework. However, considerable information/noise with regard to the ΔCoVaR score remains unexplained. Before more is known about this residual, a score based on ΔCoVaR is difficult to interpret and is inappropriate for identifying G-SIBs in a policy context. Besides, we find that a ranking based on ΔCoVaR is subject to substantial variability over time and across empirical specifications. In our second analysis we use ΔCoVaR to place the current static weighting scheme for G-SIB indicators on an empirical footing. To do this we regress ΔCoVaR on factors derived from the G-SIB indicators. This approach allows us to focus on the part of ΔCoVaR which can be explained by balance sheet information which alleviates the identified issues of interpretability and variability. The derived weights are highest for the cross-jurisdictional activity (43%) and size (27%) categories. We conclude that ΔCoVaR is not suitable for use as an alternative G-SIB score but could be useful for policymakers to pursue an empirically grounded weighting scheme for the existing G-SIB indicators. JEL Classification: G20, G21, G28
    Keywords: bank regulation, global systemically important banks, systemic risk measures
    Date: 2021–08
  29. By: De Koning, Kees
    Abstract: In the U.S. and in other OECD countries, government debt levels as compared to GDP have soared since 2007. According to statistics from the Federal Reserve, the U.S. government debt level reached 62.86% of GDP by Q4 2007 and the debt level has increased to 127.52% by Q1 2021. Q4 2007 was, of course, just before the Great Recession occurred and Q1 2021 was well after the start of the Corona virus crisis. There are three questions to be answered: the first one is who bears the costs of servicing the U.S. government debt levels; the second one is about the applicable interest rates and the third one is about Quantitative Easing (QE), which did not exist in the U.S. until November 2008. Whatever politicians of all convictions claim and however they use budgetary smoke screens to make their tax take look acceptable, it is the household sector that are the ultimate pay masters in whatever country. Households pay in two ways; firstly by suffering from unemployment levels over time and secondly by being the direct and indirect payees of all taxes. A complicating factor is the level of applicable interest rates, which in the EU has gone down to the extreme level of applying negative interest rates over savings. Simple accounting rules make a distinction between assets –the monetary value of what one owns- and liabilities -the amounts one owes to others-. Each household in the U.S. may have some assets like home equity or pension savings, but may also have debts for car loans or student debts for instance. Furthermore households hand over a substantial amount of their income to companies for their products and services on top of paying taxes directly to the U.S. government. The concept that a government owns assets is based on a misunderstanding. The assets are based on savings, ultimately provided by individual households, some of who may live overseas. The aim of this paper is to illustrate that the actions of the U.S. government, including QE, do not only support economic growth levels at times, but can also create barriers to such growth. How these barriers can be turned into opportunities is the main subject of this paper.
    Keywords: U.S. Government debts; U.S. Home equity levels; U.S.Pension savings; Quantitative Easing (QE); Quantitative Easing Home Equity (QEHE); U.S. Households income and expenditure levels;
    JEL: E21 E24 E4 E44 E58 E61 E65
    Date: 2021–08–08

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