nep-cba New Economics Papers
on Central Banking
Issue of 2022‒02‒28
thirty papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Climate Risk Measurement of Assets Eligible as Collateral for Refinancing Operations – Focus on Asset Backed Securities (ABS) By Klodiana Istrefi; Florens Odendahl; Giulia Sestieri
  2. Asserting Independence: Optimal Monetary Policy When the Central Bank and Political Authority Disagree By Justin Svec; Daniel L. Tortorice
  3. Central Banks Caught Between Market Liquidity and Fiscal Disciplining: A Money View Perspective on Collateral Policy By Jakob Vestergaard; Daniela Gabor
  4. Monetary Policy Frameworks: An Index and New Evidence By Mr. Chris Papageorgiou; Hendre Garbers; D. Filiz Unsal
  5. A Medium-Scale DSGE Model for the Integrated Policy Framework By Mr. Francis Vitek; Vitor Gaspar; Mr. Tobias Adrian
  6. Revisiting the Monetary Transmission Mechanism Through an Industry-Level Differential Approach By Sangyup Choi; Tim Willems; Seung Yong Yoo
  7. Make-up Strategies with Finite Planning Horizons but Forward-Looking Asset Prices By Stéphane Dupraz; Hervé Le Bihan; Julien Matheron
  8. Money, credit and imperfect competition among banks By Allen Head; Timothy Kam; Sam Ng; Isaac Pan
  9. Macroprudential regulation and bank stability: The credit market signal By Kiemo, Samuel; Kamau, Anne; Rugiri, Irene W.; Talam, Camilla
  10. The Central Bank, the Treasury, or the Market: Which One Determines the Price Level? By Jean Barthélemy; Eric Mengus; Guillaume Plantin
  11. Do Conservative Central Bankers Weaken the Chances of Conservative Politicians? By Maxime Menuet; Hugo Oriola; Patrick Villieu
  12. Lessons from the Early Establishment of Banking Supervision in Italy (1926-1936) By Dario Pellegrino; Marco Molteni
  13. Inflation and Welfare in a Competitive Search Equilibrium with Asymmetric Information By Lorenzo Carbonari; Fabrizio Mattesini; Robert J. Waldmann
  14. Influence of Hong Kong RMB offshore market on effectiveness of structural monetary policy in the Mainland China By Qin, Weiguang; Bhattarai, Keshab
  15. Liquidity, Liquidity Everywhere, Not a Drop to Use - Why Flooding Banks with Central Bank Reserves May Not Expand Liquidity By Viral V. Acharya; Raghuram Rajan
  16. Bank capital, credit risk and financial stability in Kenya By Kiemo, Samuel; Talam, Camilla; Rugiri, Irene W.
  17. What ails bank deposit mobilization and credit creation in Kenya? By Maturu, Benjamin
  18. Impact of Interest Rate Cap Policies on the Lending Behavior of Microfinance Institutions: Evidence from Millions of Observations in the Credit Registry Database By Daiju Aiba; Sovannroeun Samreth; Sothearoath Oeur; Vanndy Vat
  19. Security Considerations for a Central Bank Digital Currency By Katya Delak; Tarik Hansen
  20. Shocks to Inflation Expectations By Jonathan J Adams; Philip Barrett
  21. When savings are not counted as savings: The missed opportunity to use home equity to stimulate the U.S. economy By De Koning, Kees
  22. Usability of Bank Capital Buffers: The Role of Market Expectations By Antonio Garcia Pascual; José Abad
  23. Is money demand really unstable? Evidence from Divisia monetary aggregates By Barnett, William A.; Ghosh, Taniya; Adil, Masudul Hasan
  24. Sovereign Debt Sustainability and Central Bank Credibility By Tim Willems; Mr. Jeromin Zettelmeyer
  25. Climate Risk Measurement of Assets Eligible as Collateral for Refinancing Operations – Focus on Asset Backed Securities (ABS) By André Loris; Grept AliceLaut Nadia; Plantier GabrielSapey-Triomphe Zako; Weber Pierre-François
  26. Cost-benefit analysis of bank regulation: Does size matter? By Mulindi, Hillary
  27. Falling Use of Cash and Demand for Retail Central Bank Digital Currency By Mr. Tanai Khiaonarong; David Humphrey
  28. Monetary Policies, US influence and other Factors Affecting Stock Prices in Japan By Allen, David; Mizuno, Hiro
  29. Contagion in the Banking Industry: a Robust-to-Endogeneity Analysis By Sophie Béreau; Nicolas Debarsy; Cyrille Dossougoin; Jean-Yves Gnabo
  30. Target Returns and Negative Interest Rates By D’Hondt, Catherine; De Winne, Rudy; Todorovic, Aleksandar

  1. By: Klodiana Istrefi; Florens Odendahl; Giulia Sestieri
    Abstract: Using an extensive dataset on public speaking events by ECB and euro area National Central Bank (NCB) officials, we show that communication outside of ECB regular monetary policy meeting days has a significant effect on daily movements in Eonia rates, market-based inflation expectations and sovereign bond rates. The remarks of ECB presidents are most important and market reactions to them are comparable in size to those on ECB meeting days. In addition, ECB presidents’ remarks given ahead of meetings with policy changes have a significant effect on Eonia rates of the same sign as the subsequent policy decision. Our results suggest that communication outside of regular meeting days contain a monetary policy signal and, thus, highlight the importance of this communication when studying the effects of monetary policy.
    Keywords: Monetary Policy, ECB, Communication, Financial Markets, Event Study
    JEL: E03 E50 E61
    Date: 2022
  2. By: Justin Svec (College of the Holy Cross); Daniel L. Tortorice (College of the Holy Cross)
    Abstract: A central bank has preferences that differ from the political authority. While the central bank is independent, i.e. it maximizes its own preferences, households do not know this. Instead, households observe the interest rate choices of the central bank and update their beliefs regarding central bank independence using Bayesian learning. We solve for the optimal interest rate policy in a New-Keynesian model where the central bank considers the effect of its policy decision on the households’ beliefs that it is independent. The model provides a theoretical measure of central bank independence and a mapping from this level of independence to expected future losses for the central bank. Because the central bank suffers large losses when it is not perceived as independent, the central bank may choose a policy that is quite distant from its rational expectations counterpart to bolster the perception of its independence. We show that productivity shocks provide greater scope for the central bank to demonstrate its independence than do demand shocks, leading the central bank to deviate more aggressively from the benchmark rational expectations policy choice for the former shock than for the latter. Finally, varying perceptions of independence over time generate time varying volatility in interest rate policy and macroeconomic outcomes.
    Keywords: Monetary Policy, Central Bank Independence, Learning
    JEL: E52 E58 D83
    Date: 2022–02
  3. By: Jakob Vestergaard (Roskilde University); Daniela Gabor (University of West England)
    Abstract: Despite much attention to unconventional monetary policies after the financial crisis, the collateral policies of central banks are rarely discussed. And when they are, the haircuts applied to assets pledged to access central bank liquidity tend not to be analyzed. An exception to these trends is the recent work by Nyborg (2017), who argues that the collateral policies adopted by the European Central Bank (ECB) aggravated the sovereign debt crisis and put the survival of the euro at risk. Taking our point of departure in the money view literature (Mehrling 2011), we argue however that Nyborg`s critique of the ECB`s crisis response is misguided and that his proposal to deepen and reinforce the ECBs role in the fiscal disciplining of member states would be procyclical and destabilizing. Through our analysis of Nyborg`s work and the ECBs crisis response, we identify core principles for countercyclical collateral policies suitable for market-based financial systems.
    Keywords: Central banks, collateral policy, fiscal disciplining, financial stability, haircuts.
    JEL: E42 E58 F45
    Date: 2021–12–01
  4. By: Mr. Chris Papageorgiou; Hendre Garbers; D. Filiz Unsal
    Abstract: We provide a multidimensional characterization of monetary policy frameworks across three pillars: Independence and Accountability, Policy and Operational Strategy, and Communications (IAPOC). We construct the IAPOC index by analyzing central banks’ laws and websites for 50 advanced economies, emerging markets, and low-income developing countries, from 2007 to 2018. Due to its scope and granularity, our index provides a holistic view of monetary policy frameworks which goes beyond existing measures of transparency or independence, as well as monetary policy or exchange rate regime classifications. Comparing the IAPOC index across countries and over time, we find that monetary policymaking is varied, fast-changing, and eclectic across the Policy and Operational Strategy and Communications pillars, especially in emerging markets and low-income developing countries.
    Keywords: Monetary Policy, Monetary Policy Regime, Exchange Rate Regime, Central Banks, Central Bank Independence, Central Bank Transparency
    Date: 2022–01–28
  5. By: Mr. Francis Vitek; Vitor Gaspar; Mr. Tobias Adrian
    Abstract: This paper jointly analyzes the optimal conduct of monetary policy, foreign exchange intervention, fiscal policy, macroprudential policy, and capital flow management. This policy analysis is based on an estimated medium-scale dynamic stochastic general equilibrium (DSGE) model of the world economy, featuring a range of nominal and real rigidities, extensive macrofinancial linkages with endogenous risk, and diverse spillover transmission channels. In the pursuit of inflation and output stabilization objectives, it is optimal to adjust all policies in response to domestic and global financial cycle upturns and downturns when feasible—including foreign exchange intervention and capital flow management under some conditions—to widely varying degrees depending on the structural characteristics of the economy. The framework is applied empirically to four small open advanced and emerging market economies.
    Keywords: Monetary Policy, Foreign Exchange Intervention, Fiscal Policy, Macroprudential Policy, Capital Flow Management, Dynamic Stochastic General Equilibrium Model, Small Open Economy
    Date: 2022–01–28
  6. By: Sangyup Choi; Tim Willems; Seung Yong Yoo
    Abstract: By combining industry-level data on output and prices with monetary policy rates for a panel of 88 countries, this paper analyzes how the effects of monetary policy vary with certain industry characteristics. Next to being interesting in their own right, our results are informative on the importance of various transmission mechanisms (as they are expected to vary systematically with the included characteristics). Rather than relying on standard monetary policy shock identification, we overcome the endogeneity problem by taking a differential approach (interacting our monetary policy measure with industry-level characteristics). Our results suggest that monetary contractions reduce output by more in industries featuring assets that are more difficult to collateralize (as predicted by the balance sheet channel) and in industries more reliant on international trade (as predicted by the exchange rate channel). Consistent with the financial accelerator mechanism, we find that the balance sheet channel becomes stronger during bad times. At the same time, we do not find evidence supporting the traditional interest rate channel of monetary policy; the same goes for the cost channel.
    Keywords: Monetary policy transmission; Industry growth; Financial frictions; Asymmetry in transmissions
    Date: 2022–01–28
  7. By: Stéphane Dupraz; Hervé Le Bihan; Julien Matheron
    Abstract: How effective make-up strategies are depends heavily on how forward-looking agents are. Workhorse monetary models, which are much forward-looking, find them so effective that they run into the so-called “forward-guidance puzzle”. Models that discount the future further find them much less effective, but imply that agents discount the very perception of future policy rates. This only evaluates make-up strategies when financial markets do not notice them, or deem them non-credible. We amend one leading solution to the forward-guidance puzzle -namely Woodford's finite planning horizons -to the assumption that financial markets have rational expectations on policy rates, and incorporate them into the long-term nominal interest rates faced by all. Agents still have a limited ability to foresee the consequences of monetary policy on output and inflation, making the model still immune to the forward-guidance puzzle. First, we find that make-up strategies that compensate for a past deficit of accommodation after an ELB episode have sizably better stabilization properties than inflation targeting. Second, we find that make-up strategies that always respond to past economic conditions, such as average inflation targeting, do too but that their stabilization benefits over IT can be reduced by the existence of the ELB.
    Keywords: Make-up Strategies, Forward-Guidance Puzzle, Finite Planning Horizons
    JEL: E31 E52 E58
    Date: 2022
  8. By: Allen Head; Timothy Kam; Sam Ng; Isaac Pan
    Abstract: Using micro-level data for the U.S., we provide new evidence - at national and state levels - of a positive (negative) relationship between the standard deviation (coefficient of variation) and the average in bank lending-rate markups. In a quantitative theory consistent with these empirical observations, banks’ lending market power is determined in equilibrium and is a novel channel of monetary policy. At low inflation, banks tend to extract higher markups from existing loan customers rather than competing for additional loans. As a result, banking activity need not be welfare-improving if inflation is sufficiently low. This result speaks to concerns regarding market power in the banking sectors of low-inflation countries. Normatively, under a given inflation target, welfare gains arise if a central bank can use additional liquidity-provision (or tax-and-transfer) instruments to offset banks’ market-power incentives.
    Keywords: Banking and Credit, Markups Dispersion, Market Power, Stabilization Policy, Liquidity
    JEL: E41 E44 E51 E63 G21
    Date: 2022–02
  9. By: Kiemo, Samuel; Kamau, Anne; Rugiri, Irene W.; Talam, Camilla
    Abstract: This paper examines the effectiveness of macroprudential regulations in promoting bank stability and credit in the Kenyan financial system. The study uses bank-level and nonbank credit data for the period 2001-2019 and applies a panel estimation methodology to achieve its objectives. The study finds that bank stability has remained high, though downward trending. The findings also reveal that capital-based and asset-side macroprudential regulations effectively promote bank stability, while the liquidity-related macroprudential regulation is ineffective. Additionally, there is evidence of dampened bank credit market and domestic leakage associated with macroprudential regulations. The paper cautions policymakers to implement macroprudential policies that balance the objectives of bank stability and credit conditions. Furthermore, policymakers should note that implementing the new macroprudential measures may cause financial intermediaries to adjust their behaviour and therefore, should be implemented systematically while observing their impact at each stage.
    Keywords: Macroprudential Regulation,Stability,Lending,Banks
    JEL: E44 E51 G21
    Date: 2021
  10. By: Jean Barthélemy; Eric Mengus; Guillaume Plantin
    Abstract: This paper studies a model in which the price level is the outcome of dynamic strategic interactions between a fiscal authority, a monetary authority, and investors in government bonds and reserves. The ''unpleasant monetarist arithmetic'' whereby aggressive fiscal expansion forces the monetary authority to chicken out and inflate away public liabilities may be contained by market forces: Monetary dominance prevails if such fiscal expansion is met with a higher real interest rate on public liabilities, due for example to the crowding out of private investment opportunities. The model delivers empirical implications regarding the joint dynamics of public liabilities and price level, and policy implications regarding the management of central banks' balance sheets.
    Keywords: Fiscal-Monetary Interactions, Game of Chicken
    JEL: E63 E50 E42 E31
    Date: 2021
  11. By: Maxime Menuet (LEO - Laboratoire d'Économie d'Orleans - UO - Université d'Orléans - UT - Université de Tours); Hugo Oriola (LEO - Laboratoire d'Économie d'Orleans - UO - Université d'Orléans - UT - Université de Tours); Patrick Villieu (LEO - Laboratoire d'Économie d'Orleans - UO - Université d'Orléans - UT - Université de Tours)
    Abstract: In this paper, we challenge the claim that an independent conservative central bank strengthens the likelihood of a conservative government. In contrast, if an election is based on the comparative advantages of the candidates, an inflation-averse central banker can deter the chances of a conservative candidate because once inflation is removed, its comparative advantage in the fight against inflation disappears. We develop a theory based on a policy-mix game with electoral competition, predicting that the chances of a conservative (i.e., inflation-averse) party is reduced in the presence of tighter monetary policy. To test this prediction, we examine monthly data of British political history between 1960 and 2015. We show that a 1 percentage point increase in the interest rate in the 10 months prior to a national election decreases the popularity of a Tory government by approximately 0.75 percentage points relative to its trend.
    Keywords: monetary policy,elections,United Kingdom,comparative advantage
    Date: 2021–12–14
  12. By: Dario Pellegrino (Bank of Italy); Marco Molteni (Pembroke College, University of Oxford)
    Abstract: In this paper we describe the establishment and assess the relevance of banking supervision in Italy between 1926 and 1936. This case is particularly interesting from the international perspective, Italy having been the first European country to assign substantial supervision to its central bank, a few years before the 1929 crisis. Notwithstanding insufficient regulation and a light touch concerning the four major mixed banks, we document considerable enforcement of the law, which went beyond the initial provisions, thanks to the rather proactive supervisory approach adopted by the Bank of Italy. We point out a significant impact on the banking system: systematic archival analysis reveals that supervision fostered capital accumulation and mitigated lending concentration. Preliminary evidence suggests that supervision information enhanced effective lending of last resort during the crisis. Our educated guess is that, in the absence of the new supervisory set-up, the severity of the financial turmoil in the early 1930s in Italy would have been much fiercer, especially for small and medium-sized banks.
    Keywords: banking supervision, capital requirements, banking history, lending of last resort
    JEL: N20 N24
    Date: 2021–10
  13. By: Lorenzo Carbonari (Università di Roma “Tor Vergata”, Italy); Fabrizio Mattesini (Università di Roma “Tor Vergata”, Italy; EIEF); Robert J. Waldmann (Università di Roma “Tor Vergata”, Italy)
    Abstract: We study an economy characterized by competitive search and asymmetric information. Money is essential. Buyers decide their cash holdings after observing the contracts posted by firms and experience match-specific preference shocks which remain unknown to sellers. Firms are allowed to post general contracts. In the baseline model with indivisible goods, we show that, when the number of potential buyers is fixed, inflation decreases markups. This, in turn, increases aggregate output and ex ante welfare. When goods are divisible the negative effect of inflation on markups holds for unconstrained agents but is ambiguous for constrained agents. Still, optimal monetary policy implies a positive nominal rate. When there is buyers' free entry, asymmetric information causes a congestion effect that can be corrected by monetary policy.
    Date: 2022–02
  14. By: Qin, Weiguang; Bhattarai, Keshab
    Abstract: We find that the monetary policy in the mainland China will underestimate the volatility of major macro variables when it fails to consider the influence of capital flows to and from the Hong Kong RMB offshore market. Analyses of SVAR model reveals that the Hong Kong RMB offshore market affects money market in the mainland China through changes in the financial flows and exchange rates. In the early stage of the implementation of structural monetary policy (SMP) for macroeconomic stability, the cross-border flows of capital occurs due to changes in arbitrage behavior from the Hong Kong RMB offshore market, which affects not only money supply but also expectations of households and firms about actual interest rate and exchange rates that often produce opposite of intended effects in the price and output. Scenario one of SVAR simulations, that ignored the Hong Kong RMB offshore market came with lower volatilities of the target macro variables but the model generated values of variables did not match well to the actual data. Scenario two of the simulation of the same SVAR model including the Hong Kong RMB offshore market, had model values of model variables closely matching to the actual data though with slightly higher volatilities of those variables.
    Keywords: RMB offshore market, monetary policy, macroeconomic volatility, exchange rate
    JEL: E58 E61 O38
    Date: 2022–01–30
  15. By: Viral V. Acharya; Raghuram Rajan
    Abstract: Central bank balance sheet expansion is financed by commercial banks. It involves not just a substitution of liquid central bank reserves for other assets held by commercial banks, but also a counterpart alteration in commercial bank liabilities, such as in short-term deposits issued to finance reserves and in off-balance-sheet encumbrances pledged against reserves, which are also claims on liquidity. In ordinary times, when these claims are not called on, central bank balance sheet expansion will typically enhance the net availability of liquidity to the system. However, in times of stress when these offsetting claims on liquidity are exercised, the demand for liquidity can be significantly more. Furthermore, liquid commercial banks, desiring to maintain unimpeachable balance sheets, may provide only limited re-intermediation of liquidity and contribute significantly to liquidity shortages. Commercial banks do not fully internalize prospective stress ex ante or take sufficient steps to avoid it. Consequently, central bank balance sheet expansion need not eliminate episodes of stress; it may even exacerbate them. This may also attenuate any positive effects of central bank balance sheet expansion on economic activity.
    JEL: E0 G0
    Date: 2022–01
  16. By: Kiemo, Samuel; Talam, Camilla; Rugiri, Irene W.
    Abstract: The paper sought to explore the role of bank capital in mitigating credit risk and promoting financial stability. To achieve this, we constructed a Financial Soundness Index to evaluate financial stability conditions. A Panel Vector Auto Regression Model was employed using annual bank-level data from 2001-2020 for 37 banks, to examine the effect of bank capital on credit risk and financial stability. Overall, financial stability index long-term trend shows banks remain resilient, despite the downward trend from 2011 and instability margins since 2016. The findings also reveal that bank capital, lowers credit risk and strengthens financial stability. The paper conclude that bank capital supports financial stability through mitigating credit risks, and recommends that authorities continue adopting and implementing appropriate capital policies to foster financial stability and promote bank lending.
    Keywords: Bank Capital,Credit Risk,Financial Stability,Panel Vector Auto Regression model
    Date: 2022
  17. By: Maturu, Benjamin
    Abstract: We estimate a proposed core financial intermediation model built upon an extended classical quantity theory using Bayesian econometric techniques. The findings suggest that the persistent deceleration in bank deposits, bank credit and domestic final output during the most of the second half of the decade ending in Dec. 2019 is due to a downward spiral (or a vicious circle) of bank deposits, bank credit and domestic final output caused by a reversal of hitherto accommodative economic and financial policies meant to revitalise the economy following the 2007 post-election disturbances and to check adverse contagion effects from the global economic and financial crises. With accommodative economic and financial policies including relaxed compliance with provisioning for non-performing bank loans, the gross non-performing bank loans accumulated to unprecedented levels thereby adversely affecting effective demand for and supply of bank credit in the private sector. This situation was aggravated by tightening monetary policy stance using the central bank rate amid tighter requirements for compliance with provisioning for non-performing loans.
    Date: 2021
  18. By: Daiju Aiba; Sovannroeun Samreth; Sothearoath Oeur; Vanndy Vat
    Abstract: In April 2017, the Cambodian central bank introduced an interest rate cap (IR cap) policy relating to lending by microfinance institutions (MFIs). There was no restriction on lending rates before the policy implementation and many of the MFIs was lending at a rate of more than 18%. Thus, there was some concern about the negative effects the IR cap policy may have on outreach efforts by MFIs. This paper explores the impact of the IR cap on MFIs, by accessing granular data from the credit registry database in Cambodia. We use 6,897,168 individual loans from all regulated financial institutions, including commercial banks, specialized banks, and microfinance institutions in the period from January 2016 to March 2019. We find that both the average size per loan and the probability of requiring collateral increased after the IR cap policy was introduced for MFIs, as small-sized loans and non-collateral loans are typically costly for microfinance institutions to extend. In addition, we found that the borrowers of small-sized loans before the IR cap were likely to be excluded from the formal financial market after the IR cap. Those findings suggest that the IR cap did have an impact on the outreach of financial systems.
    Keywords: Interest Rate Cap, Microfinance, Cambodia, Regulation, Bank Lending
    Date: 2022–01
  19. By: Katya Delak; Tarik Hansen
    Abstract: The concept of a central bank digital currency (CBDC) has gained traction in recent years, with an increasing number of central banks announcing efforts to explore CBDC use cases and designs. Institutions are in various stages of research and development, with some just beginning their research and others already entering pilot testing or even production, albeit on a limited scale.
    Date: 2022–02–03
  20. By: Jonathan J Adams (Department of Economics, University of Florida); Philip Barrett (International Monetary Fund)
    Abstract: The consensus among central bankers is that higher inflation expectations can drive up inflation today, requiring tighter policy. We assess this by devising a novel method for identifying shocks to inflation expectations: we run a structural VAR, where the expectation shock is the single dimension in the time series that causes forecasts to depart from those implied by rational expectations. We measure these shocks for inflation expectations, label them ``sentiment shocks", and study their effects on the macroeconomy. Using data on several measures of inflation expectations and other time series for the United States, we find that a positive sentiment shock causes output and interest rates to fall, but barely affects inflation. These results are a puzzle, incompatible with the standard New Keynesian model which predicts inflation and interest rates should increase.
    JEL: D84 E31 E32 E52
    Date: 2022–02
  21. By: De Koning, Kees
    Abstract: One can describe the accumulation of wealth in home equity as a benefit to the homeowners. However, in practice the release process of such equity into cash is hindered by the fact that a joint ownership of a home by a lending institution and a household turns the equity stake into a debt obligation. If a household attempts to withdraw some cash from their home equity stake, the banking system turns such equity into a new debt obligation. This is -economically speaking- a worst-case scenario for households. When households reduce their shareholdings in companies, in government debt titles or by withdrawing money from their own bank savings, the conversion into cash does not turn itself into a new debt obligation. The result of these latter economic actions “only” reduces their accumulated savings levels. In the U.S., the level of home equity reached $25.3 trillion by the end of the third quarter 2021 according to the statistics from the Federal Reserve. With an estimated nominal GDP for the U.S. of $23.2 trillion for 2021, this single savings category of $25.3 trillion has now exceeded the total U.S. GDP level, a remarkable economic development! For the E.U., the European Central Bank has published a study in 2020 called “Household Wealth and Consumption in the Euro Area”. A rough estimate of net housing stock values in the E.U. showed a net worth in housing stock of Euro 45 trillion or in U.S. dollars $40.3 trillion in 2019. The World Bank estimated the EU GDP at U.S. $15.27 trillion for 2020. The European Central Bank, just like the Fed in the U.S., has helped governments to spend more than their tax receipts with the help of Quantitative Easing exercises. What, in economic terms, seems essential is that Central Banks and their governments take steps to put home equity levels on an equal footing with other forms of accumulated savings. For most countries involved, the level of savings incorporated in home equity represents by far the largest savings category. Why and how this can be done for the U.S. is explained in this paper.
    Keywords: Home equity in the U.S.;Long term trends in home equity;Federal Reserve interest rate policy for home equity; home foreclosures;Unemployment levels.
    JEL: E2 E21 E24 E3 E31 E4 E41 E43 E44 E5 E51 E6
    Date: 2022–01–31
  22. By: Antonio Garcia Pascual; José Abad
    Abstract: Following the COVID shock, supervisors encouraged banks to use capital buffers to support the recovery. However, banks have been reluctant to do so. Provided the market expects a bank to rebuild its buffers, any draw-down will open up a capital shortfall that will weigh on its share price. Therefore, a bank will only decide to use its buffers if the value creation from a larger loan book offsets the costs associated with a capital shortfall. Using market expectations, we calibrate a framework for assessing the usability of buffers. Our results suggest that the cases in which the use of buffers make economic sense are rare in practice.
    Keywords: Capital Buffers, Basel III, Capital Regulation, Financial Institutions, Macropru
    Date: 2022–01–28
  23. By: Barnett, William A.; Ghosh, Taniya; Adil, Masudul Hasan
    Abstract: We revisit the issue of stable demand for money, using quarterly data for the European Monetary Union, India, Israel, Poland, the UK, and the US. We use a modern version of the same linear time-series macroeconometric modeling and specification approach that had previously cast doubt on money demand stability. Autoregressive distributed lag (ARDL) cointegration models are used in the study to establish a long-term relationship among real money balances, real output, interest rate, and real effective exchange rate. For all the countries analyzed, evidence of stable demand for money is found. Broad money in general is better at capturing a stable demand for money than narrow money. The stability results are especially strong, when broad Divisia money is used instead of its simple sum counterpart. Our results are consistent with the large literature on the Barnett critique, which is based on a different methodological tradition that employs microeconometric modeling of integrable consumer demand systems. That literature has never found the demand for monetary services, measured using reputable index number and aggregation theory, to be any more difficult to model or less stable than the demand for any other good or service in the economy.
    Keywords: Narrow money demand, broad money demand, simple-sum monetary aggregates, Divisia monetary aggregates, ARDL cointegration approach
    JEL: C23 E41 E52
    Date: 2022–01–03
  24. By: Tim Willems; Mr. Jeromin Zettelmeyer
    Abstract: This article surveys the literature on sovereign debt sustainability from its origins in the mid-1980s to the present, focusing on four debates. First, the shift from an “accounting based” view of debt sustainability, evaluated using government borrowing rates, to a “model based” view which uses stochastic discount rates. Second, empirical tests focusing on the relationship between primary balances to debt. Third, debt sustainability in the presence of rollover risk. And fourth, whether government borrowing costs below rates of growth (“r
    Keywords: sovereign debt, debt sustainability, fiscal policy, debt crises, fiscal-monetary interactions, central bank credibility
    Date: 2022–01–28
  25. By: André Loris; Grept AliceLaut Nadia; Plantier GabrielSapey-Triomphe Zako; Weber Pierre-François
    Abstract: This paper analyses the exposure to climate risk of ABS, an asset class frequently pledged as collateral in the European Central Bank (ECB) refinancing operations. This paper focuses on ABS backed by auto loans or loans granted to Small and Medium Enterprises (SMEs) and explores ways to measure their climate risk based on the characteristics of the underlying loans, using existing loan-level data requirements. The ultimate goal was to come up with an alignment metric, i.e. to judge whether ABS related emissions would meet the Paris Agreements objectives, a task hindered by the lack of data available. Despite these limits, we were able to come up with relevant indicators related to ABS carbon impact, enabling the computation of ABS climate related risk proxies. Without necessarily being able to measure a concrete impact, we carved a series of indicators to serve as a reference. However, we conclude that an improved and harmonized framework for the provision of non-financial information seems essential to achieve an accurate analysis and monitoring of the financial sector's exposure to climate change.
    Keywords: Collateral Framework, Asset-Backed Securities (ABS), Securitisation, Climate Change
    JEL: D81 E51 E52 E58 G21 Q51 Q54
    Date: 2022
  26. By: Mulindi, Hillary
    Abstract: This study investigates the trade-off between costs and benefits of bank regulation in Kenya. Using the Stochastic Frontier Analysis (SFA) and Annual data for the period 2003 - 2019, extracted from KBA Financial Database and KNBS macroeconomic data, the study models Industry-level and cluster level relationship between bank regulation and cost inefficiency of banks. The industry-level analysis indicates that stringent capital requirement has a positive and significant effect on the cost-efficiency of banks, while tighter liquidity requirements hurt cost efficiency. Further, the bank tier-level analysis established that the double-layered regulatory framework creates Cost inefficiencies amongst middle-tier banks. The key policy implication would be to consider reviewing, identifying, and amending the regulatory provisions that are creating inefficiencies among the listed middle-tier banks
    Keywords: Bank Regulation,Cost-Benefit Analysis,Stochastic Frontier Analysis
    JEL: G28 D61 C24
    Date: 2021
  27. By: Mr. Tanai Khiaonarong; David Humphrey
    Abstract: Cash use in most countries is falling slowly. On the margin, younger adults favor cash substitutes over cash. For older adults it is the reverse. Revealed preference tied to a changing population age structure seems to be the main influence on the demand for cash and why it is falling. Cash use may continue to fall, and card use (the main cash substitute) may fall by more, if CBDC is issued. The extent of this reduction depends on the demand for retail CBDC and the incentives (primarily transaction fees) that can play a determining role in CBDC adoption and use.
    Keywords: Cash, card payments, payment substitution, central bank digital currency
    Date: 2022–02–04
  28. By: Allen, David; Mizuno, Hiro
    Abstract: This paper explores the influence of monetary policies, US influences, and other factors affecting stock prices in Japan from the beginning of the 1980s. The data set consists of monthly time series, largely taken from the Federal Bank of St. Louis (FRED) database in the USA. A variety of modelling and statistical techniques are applied which include regression analysis (OLS), cointegration and VECM analysis, plus the application of ARDL analysis and simulations. The results suggest that the adoption of QQE policy by the Japanese monetary authorities led to an upswing in Japanese share prices in the post-GFC period, whereas no such effect was apparent in the pre-GFC period
    Keywords: QQE, Japanese Share Prices,, Cointegration, VECM, ARDL, Simulations.
    JEL: E52 G1 G12
    Date: 2021–12–24
  29. By: Sophie Béreau (CeReFiM - Center for Research in Finance and Management [UNamur] - UNamur - Université de Namur [Namur], NaXys - Namur Center for Complex Systems [Namur] - UNamur - Université de Namur [Namur]); Nicolas Debarsy (LEM - Lille économie management - UMR 9221 - UA - Université d'Artois - UCL - Université catholique de Lille - Université de Lille - CNRS - Centre National de la Recherche Scientifique); Cyrille Dossougoin; Jean-Yves Gnabo (CeReFiM - Center for Research in Finance and Management [UNamur] - UNamur - Université de Namur [Namur], NaXys - Namur Center for Complex Systems [Namur] - UNamur - Université de Namur [Namur])
    Abstract: What drives financial contagion? The empirical literature aimed at modeling financial risk spillovers in crisis periods and documenting the role of contagion channels is subject to an endogeneity issue, as the channel itself can respond to a change in the level of risk. We tackle this issue by using a novel spatial econometric estimation procedure based on a control function approach and offer "robust-toendogeneity " evidence on the role of indirect financial contagion channels in the banking industry. Our estimations, based on on 28 large US banks during the financial crisis (2007Q3-2013Q2), confirm that several channels are endogeneous. Accounting for endogeneity is proved to be important for recovering reliable estimates of transmission mechanisms. Banks similarity in fundamentals, similarity in investment strategy as well as common exposure appear as significant drivers of contagion. Based on relevant transmission's channels, we build a simple systemic risk indicator named "Interaction Based Centrality". We show that it may help forecast vulnerable institutions in times of crisis and could thereby be used for monitoring purposes by regulatory authorities.
    Keywords: banking,common asset exposures,contagion,endogeneity,Katz centrality,market-price channel,information channel,spatial econometrics,spillover
    Date: 2022–01–05
  30. By: D’Hondt, Catherine (Université catholique de Louvain, LIDAM/LFIN, Belgium); De Winne, Rudy (Université catholique de Louvain, LIDAM/LFIN, Belgium); Todorovic, Aleksandar (Université catholique de Louvain, LIDAM/LFIN, Belgium)
    Abstract: In this paper, we question whether it is the zero interest rate level or the target return that most impacts the risk-taking behavior of individuals when making investment decisions. In our experiment, we assign either a low or a high target return to participants and ask them to make independent investment decisions as the risk-free rate fluctuates around their target return and, for some of them, becomes negative. We find that the prevailing reference point is the target return, regardless of the level of the risk-free rate. This result still holds even when the risk-free rate is negative, suggesting that the target return drives risk-taking more than does a zero interest rate.
    Keywords: Negative interest rates ; Risk-taking ; Target return
    JEL: G11 G21 G40 G41 G51
    Date: 2021–11–16

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