|
on Financial Development and Growth |
| By: | Kodjovi M. Eklou |
| Abstract: | This paper examines the impact of Dollar exchange rate volatility on firm productivity in Emerging Markets economies (EMs). Using firm level data covering 16 EMs over the period 1998 -2019, the paper shows that dollar exchange rate volatility reduces firm productivity growth. Exploring channels, its finds that the results are driven by countries with low level of financial development, high dollar invoicing, high bilateral trade with the US, high collective bargaining coverage and open capital account. Exploring the role of policy, it finds that Foreign Exchange Interventions (FXI) dampen this impact on firm productivty. Further, exploiting firm level data, the paper shows that dollar exchange rate volatility operates also through the financial friction channel, reducing contemporaneous investments, especially at firms with low liquidity buffers and weak balance sheet (high leverage). The role of financial frictions is confirmed through the finding that younger firms, more likely to face financial constraints, are also found to be more vulnerable to dollar exchange rate volatility. In addition, we also find evidence of a large and persistent effect on firms with highly irreversible investment, lending support for the real option channel of uncertainty on the dollar exchange rate. These findings are robust to a battery of tests, including controlling for uncertainty, financial crises and using an instrumental variable strategy exploiting US monetary policy shocks as an exogenous source of variation in dollar exchange rate volatility. |
| Keywords: | Dollar exchange rate; volatility; Productivity growth; Investment; Firm heterogeneity and spillovers; dollar exchange rate volatility; exchange rate volatility; firm Level data; dollar invoicing; volatility shock com; Exchange rates; Productivity; Financial sector development; Total factor productivity; Employment protection; Global |
| Date: | 2023–05–26 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2023/111 |
| By: | Yang Liu |
| Abstract: | Recent literature has shown that corporate indebtedness affects firm-level investment behavior but not necessarily aggregate business cycles. I argue that interactions among heterogeneous firms play an important role in equilibrium. After a downturn, financially unconstrained firms in financially constrained industries significantly increase capital ex-penditure to substitute depressed investment by their financially constrained competitors. The increase in investment, primarily driven by small and medium firms, leads to substantial gains in future sales. Using a new empirical approach, I further show that equilibrium effects are unambiguously countercyclical because the increase in investment by unconstrained firms does not crowd out investment by financially constrained competitors. The “competitive interaction channel” underscored in this paper may play an important role in mitigating the impact of negative shocks in macroeconomic models with financial heterogeneity. |
| Keywords: | Financial constraints; investment; equilibrium effects; imperfect competition; firm interaction; investment behavior; equilibrium effect; interaction channel; product similarity; Government debt management; Productivity; Capital spending; Commodity markets; Competition; North America |
| Date: | 2023–05–26 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2023/110 |
| By: | Flavia Corneli (Bank of Italy); Fabrizio Ferriani (Bank of Italy); Andrea Gazzani (Bank of Italy) |
| Abstract: | China has become a major player in the global economy. Our new and original database of Chinese macroeconomic surprises shows the significant impact they have on equity markets worldwide. These surprises also affect commodity prices, the US nominal effective exchange rate and the VIX Index. Finally, we establish that positive Chinese macroeconomic news is associated with the expansion of global trade and industrial production. Overall, we provide evidence of the growing role of the Chinese economy as a driving force for both the real and the financial global cycle. |
| Keywords: | global financial cycle, China macroeconomic announcements, international spillovers, commodity prices |
| JEL: | E44 F21 F40 G15 |
| Date: | 2023–06 |
| URL: | https://d.repec.org/n?u=RePEc:bdi:opques:qef_772_23 |
| By: | David Hirshleifer; Dat Mai; Kuntara Pukthuanthong |
| Abstract: | A war-related factor model derived from textual analysis of media news reports explains the cross section of expected asset returns. Using a semi-supervised topic model to extract discourse topics from 7, 000, 000 New York Times stories spanning 160 years, the war factor predicts the cross section of returns across test assets derived from both traditional and machine learning construction techniques, and spanning 138 anomalies. Our findings are consistent with assets that are good hedges for war risk receiving lower risk premia, or with assets that are more positively sensitive to war prospects being more overvalued. The return premium on the war factor is incremental to standard effects. |
| JEL: | G0 G02 G1 G10 G11 G4 G41 |
| Date: | 2023–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:31348 |
| By: | Obst, Thomas |
| Abstract: | Der Zusammenbruch der Silicon Valley Bank hat zu einer drastischen Kurskorrektur an den Finanzmärkten geführt. Die Übernahme der angeschlagenen Credit Suisse durch UBS hat die Krise nach Europa gebracht. Welche konjunkturellen Folgen wären bei einer Bankenkrise in den USA und Deutschland zu erwarten? |
| Date: | 2023 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:iwkkur:252023 |
| By: | Dario Bonciani (Bank of England); David Gauthier (ENSAE); Derrick Kanngiesser (Bank of England) |
| Abstract: | Online appendix for the Review of Economic Dynamics article |
| Date: | 2023 |
| URL: | https://d.repec.org/n?u=RePEc:red:append:21-145 |
| By: | Mohamed Belkhir; Sami Ben Naceur; Bertrand Candelon; Woon Gyu Choi; Farah Mugrabi |
| Abstract: | This paper investigates macroprudential policy effects on bank systemic risk and the role of inflation targeting in such effects. Using bank-level data for 45 countries comprising various monetary and exchange rate regimes, our regime-dependent dynamic panel regression results point to complementarities between monetary and macroprudential policies. We find that the tightening of most macroprudential tools—including DSTI and LTV limits, and capital requirements—reduces bank systemic risk further under inflation targeting. Our findings lend credence to the view that inflation targeting strengthens macroprudential policy roles in mitigating financial stability risks. |
| Keywords: | Macroprudential Policies; Banks; Systemic Risk; Monetary Policy; Inflation Targeting |
| Date: | 2023–06–02 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2023/119 |
| By: | Chiara Canta; Øivind A. Nilsen; Simen A. Ulsaker; Øivind Anti Nilsen |
| Abstract: | This paper studies empirically the relationship between competition and risk taking in banking markets. We exploit an unique dataset providing information about all bank loans to Norwegian firms over several years. Rather than relying on observed market shares, we use the distance between bank branches and firms to measure the competitiveness of local markets. The cross-sectional and longitudinal variation in competition in local markets are used to identify the relationship between competition and risk taking, which we measure by the non-performing loans and loss provision rates of the individual banks. We find that more competition leads to more risk taking. We also examine the effects of bank competition on the availability of loans. More competition leads to lower interest rates and higher loan volumes, but also makes it more difficult for small and newly established firms to obtain a loan. |
| Keywords: | banking, local competition, risk taking, firm behaviour |
| JEL: | G21 L11 L13 |
| Date: | 2023 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_10448 |
| By: | Li Lian Ong; Min Wei; Christian Schmieder |
| Abstract: | Credit risk has played a significant role in many financial crises, including the great financial crisis. The COVID-19 pandemic also highlighted bank credit losses to the private sector. However, there remains a significant gap in terms of reliable economy-level credit risk data for financial stability analysis, given that such information is not readily available to the public in any systematic manner. Building upon the work of Hardy and Schmieder (2020), we derive time series of actual as well as forward-looking market- and macro-implied credit loss rates for the majority of jurisdictions around the world. Our database, intended as a public good, is available through a user-friendly interactive dashboard, which allows downloads of credit loss rate time series for the desired jurisdiction(s). Users are also able to run simple scenario analyses based on their projected GDP paths. The data series will be updated on an ongoing basis as new information is published by the original sources. |
| Keywords: | credit risk, credit loss rates, data gap, forward-looking, loss given default (LGD), macro-implied, probability of default (PD), stress test |
| JEL: | F34 E44 E52 G28 G32 P52 |
| Date: | 2023–05 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1101 |
| By: | Bruno Casella; Maria Borga; Mr. Konstantin Wacker |
| Abstract: | In a complex global production landscape, the quest for measures of economic activity by multinational enterprises (MNEs) has become more pressing. Foreign Direct Investment (FDI) statistics, which capture financing aspects of MNEs, have often been used as a proxy for multinational production given their wide availability and cross-country comparability, but concerns that multinational production occurs in different countries than where financial positions are recorded call this practice into question. This paper revisits the main objections to the use of FDI as a proxy for multinational production, explores counterarguments, and provides guidance on the use of FDI statistics to measure multinational production. |
| Keywords: | FDI; multinational production; multinational enterprises; foreign affiliates |
| Date: | 2023–06–02 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2023/113 |
| By: | Görg, Holger |
| Abstract: | When it comes to attracting foreign direct investment, Africa as a whole may be described as some-thing like the "forgotten continent". In a global comparison, the continent is fairly insignificant as a destination for the investment of foreign companies. This paper makes this point using aggregate data on world-wide FDI stocks. It then tries to explain why this is the case. It first reviews the important drivers of FDI that have been identified in the literature, and then compares the performance of African countries in terms of those determinants with that of other potential host countries. |
| Keywords: | Foreign direct investment, Sub-Sahara Africa, Drivers, Performance |
| Date: | 2023 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:kcgpps:9 |
| By: | Korsu, Robert Dauda; Tamuke, Edmund |
| Abstract: | The paper investigates the effect of bank credit to the private sector on private investment in Sierra Leone and the role of macroeconomic uncertainty in the relationship. An autoregressive distributed lag model of private investment is estimated with annual data from 1980 to 2019, using OLS in the context of Pesaran-Shin-Smith approach. The results show that there is a long run relationship between private investment and the model variables and in the long run, bank credit has a positive and significant effect on private investment in Sierra Leone, while macroeconomic uncertainty vitiates this effect. In the short run however, bank credit is not found to have a significant effect on private investment, though it contributes positively and the impact of macroeconomic uncertainty on this effect is also not significant, though it reduces the impact of bank credit. Hence, during high macroeconomic uncertainty, like the current global environment, strongly leveraging on bank credit to the private sector is useful for boosting private investment in Sierra Leone. However, there is strong need for an end to higher global uncertainty, as it is inimical to the positive impact bank credit has on private investment. |
| Keywords: | Private Investment, Macroeconomic Uncertainty, Bank Credit, Autoregressive Distributed Lag |
| JEL: | E22 E44 E51 |
| Date: | 2023–05–09 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:117624 |
| By: | Nesrine Dardouri; Abdelkader Aguir (ESPI - Ecole Supérieure des Professions Immobilières); Ramzi Farhani; Mounir Smida |
| Abstract: | This study aims to analyse the determinants of investment for developing countries, through the case of Tunisia, which is strongly affected by such a dynamic. Using the ARDL model on annual data for the period 1987 to 2020, we found evidence of a short-and long-term relationship between various social and economic variables and the investment. These findings have important policy implications for economic agents, politicians, and policymakers. This study is useful to identify the socioeconomic determinants of total investment in Tunisia. |
| Keywords: | Investment, Economic growth, Tunisia |
| Date: | 2023–05–15 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04101430 |
| By: | Alessandro Schiavone (Bank of Italy); Claudia Maurini (Bank of Italy) |
| Abstract: | This paper investigates whether IMF programmes have had a catalytic effect on flows of development aid to low-income countries (LICs) between 2002 and 2019. We use an entropy balancing methodology to obtain correct estimates, taking account of the characteristics of the countries assisted by the IMF. The findings suggest that IMF programmes catalyse development aid to LICs and, according to our baseline estimates, for each year of programme activity this catalytic effect amounts to 1.6 per cent of the GDP of assisted LICs. These findings apply to both multilateral and bilateral donors. However, the effect is significantly smaller for countries that fail to fulfil the IMF conditionality by not meeting the quantitative performance criteria subject to programme review. Official donors, especially multilateral ones, adopt a selective approach, allocating more development aid to relatively poorer, more institutionally reliable, and more politically stable countries. |
| Keywords: | International Monetary Fund, catalysis, official development assistance (ODA) |
| JEL: | F33 F35 F53 F63 O19 |
| Date: | 2023–06 |
| URL: | https://d.repec.org/n?u=RePEc:bdi:opques:qef_782_23 |
| By: | Yangtian Jiang (Institute of New Structural Economics, Peking University, Beijing, China.); Yu Zheng (School of Economics and Finance, Queen Mary University of Lon-don. Mile End Road, E1 4NS London, UK.); Lijun Zhu (Institute of New Structural Economics, Peking University, Beijing, China.) |
| Abstract: | We propose a quantitative theory of wealth creation and distribution during China’s transitional growth from the early 1990s, when barriers to setting up private businesses, trading housing, and migrating from rural to urban areas are struck down. In response to the changing economic environment, a small entrepreneurial class emerges and accumulates substantial wealth, whereas the majority working class, partly due to limited investment available from an underdeveloped financial sector, uses housing as the main vehicle of wealth accumulation over the course of a long-time housing boom. Our heterogeneous-agent dynamic equilibrium framework determines growth and equity jointly. We show a reasonably calibrated version of the model matches the rise in urban China’s wealth inequality since 1995 almost exactly. We further quantify the relative contribution of different reform measures to the rising inequality and discuss the welfare implications taking into account possible growth-equity trade-offs. |
| Keywords: | Wealth inequality, Capital accumulation, Entrepreneurship, Housing, Migration |
| JEL: | E21 O11 O16 O18 |
| URL: | https://d.repec.org/n?u=RePEc:qmw:qmwecw:955 |
| By: | Roberto Brunetti (Univ Rennes, CNRS, CREM-UMR6211, F-35000 Rennes, France); Carl Gaigné (INRAE, SMART, Rennes, France and Laval University, CREATE, Quebec, Canada); Fabien Moizeau (Univ Rennes, CNRS, CREM-UMR6211, F-35000 Rennes, France) |
| Abstract: | We examine the role of land in wealth dynamics and taxation policy by focusing on the interplay among agents’ bidding for location, mortgage market imperfections, and inheritance. We develop a model in which altruistic agents leave to their heir a financial bequest and their housing wealth. The borrowing constraint generates a housing return premium and spatial wealth sorting, which translate into persistent inequality. We derive an optimal tax schedule that combines a tax on the land share in the value of inherited housing assets and on lifetime wealth, allowing a more efficient allocation of resources and lower inequality. |
| Keywords: | Mortgage market imperfections; Spatial sorting; Wealth distribution; Wealth Taxation; Efficiency. |
| JEL: | D31 E21 H21 R14 |
| Date: | 2023–06 |
| URL: | https://d.repec.org/n?u=RePEc:tut:cremwp:2023-06 |
| By: | Milanovic, Branko |
| Abstract: | The paper uses fifty social tables, ranging from Greece in 330 BC to Mexico in 1940 to estimate the share and level of income of the top 1 percent in pre-industrial societies. The share of the top 1 percent covers a vast range from around 10 percent to more than 40 percent of society’s income and does not always move together with the estimated Gini coefficient and the Inequality Extraction Ratio. I provide a taxonomy of pre-industrial societies based on the social class and type of assets (land, control of government, merchant capital, citizenship) that are associated with the top classes as well as lack of assets associated with poverty. (Stone Center on Socio-Economic Inequality Working Paper) |
| Date: | 2023–06–12 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:dvu74 |
| By: | Baran, Katarzyna |
| Abstract: | This dissertation aims to analyse the economic growth determinants in four Central Eastern European countries (CEE-4) - Hungary, Poland, Slovakia and the Czech Republic - since their transition from centrally planned to free market economies. The time span of research encompasses the years from 1995 (when these countries passed beyond their lowest output levels since the economic transformation) till 2018. The CEE-4 countries have been chosen based on their direct geographical proximity with Western Europe, in particular with its most advanced economy - Germany, and their adoption of different approaches to conducting market reforms. The thesis closely examines the linkages between geographical location, trade and financial flows in the region prior to and after the accession to the European Union (EU), and the outcome of complex reforms for economic growth in the CEE-4. Following the introduction in Chapter 1, in order to obtain a general overview of the sources of economic growth in the CEE-4 countries the Solow growth accounting and the non-parametric approach have been presented in Chapter 2. The findings obtained from the above decomposition methods provide support for a hypothesis that technological progress together with strong capital accumulation were the dominant factors behind the economic growth and convergence process in the CEE-4 countries in the post-transition years. Chapter 3 investigates financial interlinkages of the CEE-4 with Western Europe. It provides a valuable assessment of a distinctive “development model” pursued by the CEE-4 region since the transition, of which financial integration - in the form of large capital inflows and an increasing presence of foreign banks - has been an integral part. It has allowed the CEE-4 economies to enter a growth path driven by domestic demand financed substantially by foreign savings. The study provides an assessment of the impact of the global financial crisis and European debt crisis on capital flows into the CEE-4 region. The main contribution of this chapter has been an in-depth empirical study of factors affecting credit growth in Central Eastern and South-Eastern Europe (CESEE) in the years 2012-2016 based on the Bank Lending Survey (BLS) of the European Investment Bank. It allows to account for cross-border effects, namely home-host country macroeconomic conditions and parent-subsidiary banks’ characteristics and health, while controlling systematically for the answers from the BLS. The purpose of Chapter 4 has been an analysis of the business cycles synchronisation of the CEE-4 countries with economic cycles of Germany iii and the Euro area. The analysis of the interdependencies between the business cycles is important in monitoring the effectiveness of pursued economic policies in the CEE-4 region since the transition. Studying the degree of synchronization of the CEE-4 business cycles is also vital in connection with the future introduction of the Euro in Hungary, Poland and the Czech Republic. To this end, the time series analysis methods have been introduced in this study, which focus on an analysis in the domain of both time (cross-correlation analysis) and frequency (cross-spectral analysis). This allows obtaining a more comprehensive picture of the dependencies between the business cycles of the CEE-4 countries and the economic cycle of Germany and the Euro zone. The analysis shows that fluctuations in economic activity in the CEE-4 countries have become over time, to a relatively large extent, synchronized with the business cycles of Germany and the whole Euro area. Chapter 5 examines the impact of macroeconomic and institutional factors on economic growth in the CEE-4 countries since the transition. The building of a market economy in the region required deep macroeconomic reforms and the creation of a wide range of institutions and business practices needed to support those reforms. To examine significant changes which have occurred in the last two decades in the region, a wide range of macroeconomic and demographic variables as well as key institutional indicators have been analysed. For this purpose, a new approach has been employed based on the Bayesian Model Sampling (BMS), which implements Bayesian Model Averaging for linear regression models. This comprehensive study also provides an empirical analysis of growth determinants in the CEE-4 region in comparison to the Euro area-12 group as well as within the EU-28 block. |
| Date: | 2023 |
| URL: | https://d.repec.org/n?u=RePEc:dar:wpaper:138304 |
| By: | Beck, Thorsten; Peltonen, Tuomas; Perotti, Enrico; Sánchez Serrano, Antonio; Suarez, Javier |
| Abstract: | This report presents a long-term view of the evolution of financing of EU non-financial corporations (NFCs) in recent decades. It finds a decline in NFC leverage since at least 2008, and across countries, size categories and industries. It also documents a growing role of non-bank financial intermediaries in the provision of credit to NFCs. After exploring supply and demand drivers of the observed evolution, the report considers potential general equilibrium outcomes in terms of a reallocation of credit to other sectors or assets. This could generate greater systemic risk through unsustainable valuations or exposures to more highly correlated negative shocks. The report also stresses the urgency of developing a comprehensive macroprudential framework for non-bank financial intermediaries and calls macroprudential authorities to closely monitor the NFC sector. |
| Date: | 2023–06 |
| URL: | https://d.repec.org/n?u=RePEc:srk:srkasc:202314 |
| By: | Gatti, Matteo; Gorea, Denis; Presbitero, Andrea |
| Abstract: | Does an increase in lending by multinational development banks affect the private lending activity in developing countries? We show that this is indeed the case using data on loans and investments by the European Investment Bank (EIB) in combination with data on syndicated loans. We find that a pronounced increase in EIB operations is followed by a surge in the number and volumes of syndicate loans in countries outside the European Union. Our results suggest that multinational banks can incentivize private sector lending by playing an important role in signaling to private markets that borrowers in emerging and developing countries are safe. |
| Keywords: | European Investment Bank, Financial assistance, Financial conditions, Public and private lending, Syndicated loans |
| JEL: | F21 F34 H81 |
| Date: | 2023 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:eibwps:202303 |
| By: | Mr. Tigran Poghosyan |
| Abstract: | This paper analyses how financial inclusion in the Caucasus and Central Asia (CCA) compares to peers in Central and Eastern Europe (CEE). Using individual-level survey data, it shows that the probability of being financially included, as proxied by account ownership in financial institutions, is substantially lower across gender, income groups, and education levels in all CCA countries relative to CEE comparators. Key determinants of this financial inclusion gap are lower financial and human development indices, weak rule of law, and physical access to bank branches or ATMs. This suggests that targeted policies aimed at boosting financial and human development, strengthening the rule of law, and supporting fintech solutions can broaden financial inclusion in the CCA. |
| Keywords: | Caucasus and Central Asia; financial inclusion; financial access; estimation result; CEE comparator; CCA country; IMF working paper 23/109; CEE peer; Financial sector development; Financial account; Financial sector; Income; Global; Central Asia and the Caucasus |
| Date: | 2023–05–26 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2023/109 |
| By: | Roland-Holst, David (Asian Development Bank Institute); Karymshakov, Kamalbek (Asian Development Bank Institute); Sulaimanova, Burulcha (Asian Development Bank Institute); Sultakeev, Kadyrbek (Asian Development Bank Institute) |
| Abstract: | Infrastructure has always been a fundamental driver of long-term economic growth, but in recent decades information and communication technology (ICT) has supported and accelerated the growth of the global economy in ways beyond the imagining of our ancestors. We examine the role of ICT infrastructure in facilitating labor markets' access and remittance flows for workers from the Kyrgyz Republic. Using a combination of traditional high frequency macroeconomic data and real time internet search information from Google Trends, we take a novel approach to explaining the inflow of remittances to a developing country. In the first attempt to model remittance behavior with GTI data in this context, we use a gravity model. We also attempt to account for both origin and destination labor market conditions, using Kyrgyz language search words to identify both push and pull factors affecting migrant decisions. |
| Keywords: | migration; remittances; infrastructure; internet |
| JEL: | F22 F24 L86 O18 O33 |
| Date: | 2022–12 |
| URL: | https://d.repec.org/n?u=RePEc:ris:adbiwp:1348 |
| By: | Pham Duc Son; Do Xuan Truong (GDS - Global Data, SJC, Ho Chi Minh City, Vietnam) |
| Abstract: | To implement the policy of attracting capital from foreign investors into the stock market, the Vietnamese government (2015) issued Decree 60 to allow joint-stock companies to attract indirect capital flows from foreign investors. Foreign ownership is said by some studies to increase the efficiency of the company's operations, however, there are also some studies that suggest that a too high foreign ownership rate will reduce the operating efficiency of enterprises. To determine the relationship between these two issues, we conducted a study with 100 companies listed on the Vietnamese stock market from 2015 to 2022. With the use of dynamic panel data model (GMM) , the analysis results show that foreign ownership has a nonlinear relationship with financial performance of the business. With a certain percentage of foreign ownership (0 to nearly 40%) will increase the financial efficiency of the enterprise, however this ratio exceeding the upper limit will have the opposite effect. From these results, we have made some recommendations in corporate governance related to ownership structure. |
| Date: | 2023–05–19 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04105720 |
| By: | Markus K. Brunnermeier; Sergio A. Correia; Stephan Luck; Emil Verner; Tom Zimmermann |
| Abstract: | This paper studies how a large increase in the price level is transmitted to the real economy through firm balance sheets. Using newly digitized macro- and micro-level data from the German inflation of 1919-1923, we show that inflation led to a large reduction in real debt burdens and bankruptcies. Firms with higher nominal liabilities at the onset of inflation experienced a larger decline in interest expenses, a relative increase in their equity values, and higher employment during the inflation. The results are consistent with real effects of a debt-inflation channel that operates even when prices and wages are flexible. |
| JEL: | E31 G0 G20 G30 N2 |
| Date: | 2023–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:31298 |
| By: | Nimrod Cohen (Bank of Israel) |
| Abstract: | This research examines a model of an economic-financial crisis caused by a sudden debt deleveraging in the economy. In this type of a crisis, demand is contracted, and the monetary interest rate may drop to its effective lower bound – a phenomenon called the "liquidity trap" – in such a way, that the monetary policy is restricted in its response (Eggertsson and Woodford, 2003). At the same time, there are other mechanisms that may intensify the crisis, such as the mechanism of the "financial accelerator" (Bernanke et al., 1999), and the mechanism of the "debt deflation" (Eggertsson and Krugman, 2012). Therefore, we are induced to question, what is the "contribution" of those various mechanisms to this crisis, and in particular - what is the interaction between those mechanisms. For this purpose, a general equilibrium model has been built in a Neo- Keynesian framework with two types of representative agents – a borrower and a saver – where the financial spread of the borrower depends on his or her level of leverage (the ratio of debt to the value of assets). The model is solved without linearization, emphasizing the monetary policy rule, which includes an effective lower bound on the interest rate. This is to enable an analysis of the interactions between the various mechanisms. From the analysis of the reaction of the economy to the debt deleveraging in the various situations, it was found that the interaction of the various mechanisms is extremely significant. For example, when the economy enters the "liquidity trap", the effect of the "financial accelerator" is intensifying the crisis to a great extent, much more than it occurs in a situation where the interest rate is not subject to the effective lower bound. In fact, the analysis illustrates the importance of an effective monetary policy in the course of a financial crisis, because monetary expansion is critical in this situation and prevents a crisis which is much more acute. |
| Keywords: | liquidity trap; the effective lower bound (ELB); financial friction; monetary policy; financial crisis; financial crisis; debt deleveraging; credit market; financial accelerator, debt deflation |
| Date: | 2022–09 |
| URL: | https://d.repec.org/n?u=RePEc:boi:wpaper:2022.16 |
| By: | Heon Lee |
| Abstract: | This paper develops a dynamic monetary model to study the (in)stability of the fractional reserve banking system. The model shows that the fractional reserve banking system can endanger stability in that equilibrium is more prone to exhibit endogenous cyclic, chaotic, and stochastic dynamics under lower reserve requirements, although it can increase consumption in the steady-state. Introducing endogenous unsecured credit to the baseline model does not change the main results. This paper also provides empirical evidence that is consistent with the prediction of the model. The calibrated exercise suggests that this channel could be another source of economic fluctuations. |
| Date: | 2023–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2305.14503 |
| By: | D'Andrea, Sara |
| Abstract: | This paper explores the relationship between public debt and technological innovation through panel threshold regressions on a sample of 15 industrialized countries from 2000 to 2019. It also asks what impact debt monetization (expressed as the amount of debt held at the central bank) has on this nexus. Our results show strong nonlinearities in the sense that an increase in debt above a certain threshold negatively impacts the rate of innovation, while below it has positive effects. Monetizing debt contributes positively to innovation if it is below the "debt turning point", while this becomes detrimental for debt-to-GDP ratios above the threshold. The same inverted-U-shaped relationship is found between the monetization rate and innovation rate. |
| Keywords: | Public debt, Innovation, Debt monetization, Panel threshold regression |
| JEL: | C23 E58 H60 O47 |
| Date: | 2023–06–03 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:117520 |
| By: | Shimon Kogan; Igor Makarov; Marina Niessner; Antoinette Schoar |
| Abstract: | Trading in cryptocurrencies has grown rapidly over the last decade, primarily dominated by retail investors. Using a dataset of 200, 000 retail traders from eToro, we show that they have a different model of the underlying price dynamics in cryptocurrencies relative to other assets. Retail traders in our sample are contrarian in stocks and gold, yet the same traders follow a momentum-like strategy in cryptocurrencies. Individual characteristics do not explain the differences in how people trade cryptocurrencies versus stocks, suggesting that our results are orthogonal to differences in investor composition or clientele effects. Furthermore, our findings are not explained by inattention, differences in fees, or preference for lotterylike stocks. We conjecture that retail investors hold a model of cryptocurrency prices, where price changes imply a change in the likelihood of future widespread adoption, which in turn pushes asset prices further in the same direction. |
| JEL: | G12 G14 G41 |
| Date: | 2023–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:31317 |
| By: | Bellia, Mario (European Commission); Calès, Ludovic |
| Abstract: | This paper analyzes the potential effect of a European Central Bank Digital Currency (CBDC) on banks’ profitability. We use a large sample of EU banks that span the period from 2007 to 2021 to assess the sensitivity of banks’ profits to the deposits. Using quantile regression, we estimate the conditional profit distribution of a representative bank. We then introduce a shock on the amount of deposits that would be replaced by the CBDC. Our results show that, for a large take-up of CBDC, there might be substantial challenges for the profitability of banks, especially for small banks, that mostly rely on deposits as a source of funding. |
| Keywords: | Central Bank Digital Currency, CBDC, ECB, bank deposits |
| JEL: | G18 G28 G32 |
| Date: | 2023–05 |
| URL: | https://d.repec.org/n?u=RePEc:jrs:wpaper:202306 |