nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2023‒11‒20
27 papers chosen by
Georg Man,

  1. Bank competition, cost of credit and economic activity: evidence from Brazil By Gustavo Joaquim; Bernardus Doornik; GJosé Renato Haas Ornelas
  2. Industrialisation, Finance, and Urbanisation in Africa By Oluwatosin Adeniyi; Oludele Folarin
  3. Financial Conditions in Europe: Dynamics, Drivers, and Macroeconomic Implications By Giovanni Borraccia; Mr. Raphael A Espinoza; Vincenzo Guzzo; Romain Lafarguette; Fuda Jiang; Vina Nguyen; Miguel A. Segoviano; Mr. Philippe Wingender
  4. How Are Financial Conditions Tracked? By Juan M. Sanchez
  5. What Is the Probability of a Recession? The Message from Yield Spreads By Christopher J. Neely
  6. Shocks to the Lending Standards and the Macroeconomy By Vivek Sharma
  7. Estimating the National Impact of the Financial Crisis in Indonesia by Combining a Rapid Qualitative Study with Nationally Representative Surveys By Neil Mc Culloch; Amit Grover
  8. Financial Innovations, Taxes, and the Growth of Finance By Shuhei Aoki; Makoto Nirei; Kazufumi Yamana
  9. Unit Cost of Financial Intermediation in Japan, 1954 - 2020 By GUNJI Hiroshi; ONO Arito; SHIZUME Masato; UCHIDA Hirofumi; YASUDA Yukihiro
  10. Big techs in finance By Sebastian Doerr; Jon Frost; Leonardo Gambacorta; Vatsala Shreeti
  11. The nexus between economic freedom and economic growth in the LDCs. An empirical analysis for the period 2000-2021 By António Afonso; M. Carmen Blanco-Arana
  12. Geopolitical Risk and Foreign Portfolio Investment: A Tale of Advanced and Emerging Markets By Sangyup Choi; Jiri Havel
  13. What about Japan? By YiLi Chien; Harold L. Cole; Hanno Lustig
  14. Banks’ Portfolio of Government Debt and Sovereign Risk By António Afonso; José Alves; Sofia Monteiro
  15. Are Developing Countries Facing a Possible Debt Crisis? By Amy Smaldone; Mark L. J. Wright
  16. How Does China's Household Portfolio Selection Vary with Financial Inclusion? By Yong Bian; Xiqian Wang; Qin Zhang
  17. Why net worth is the wrong concept for explaining consumption: evidence from Italy By Riccardo De Bonis; Danilo Liberati; John Muellbauer; Concetta Rondinelli
  18. Digital Financial Inclusion and Remittances: An Empirical Study on Bangladeshi Migrant Households By Kazi Abdul, Mannan; Farhana, Khandaker Mursheda
  19. Entrepreneurial Rates of Return and Wealth Inequality By Bettina Bruggemann; Zachary L. Mahone
  20. Monetary Policy Transmission Heterogeneity: Cross-Country Evidence By Mr. Pragyan Deb; Julia Estefania-Flores; Melih Firat; Davide Furceri; Siddharth Kothari
  21. One Monetary Policy and Two Bank Lending Standards: A Tale of Two Europes  By Sangyup Choi; Kimoon Jeong; Jiseob Kim
  22. Fed tapering announcements: Impact on Middle Eastern and African financial markets By Giscard Assoumou-Ella; Cécile Bastidon; Bastien Bonijoly
  23. Global Factors in Non-core Bank Funding and Exchange Rate Flexibility By Lu\'is A. V. Cat\~ao; Jan Ditzen; Daniel Marcel te Kaat
  24. Impact of foreign ownership on market power: Do regional banks behave differently in ASEAN countries? By Canan Yildirim; Adnan Kasman; Fazelina Sahul Hamid
  25. Macroeconomic Dynamics and the Causal Effect on Residential Real Estate Investment Returns in Abuja and Lagos, Nigeria By Faoziah Afolasade Gamu; Halim Yusuf Agava
  26. New Evidence on Spillovers Between Crypto Assets and Financial Markets By Roshan Iyer
  27. Assessing Macrofinancial Risks from Crypto Assets By Ms. Burcu Hacibedel; Hector Perez-Saiz

  1. By: Gustavo Joaquim; Bernardus Doornik; GJosé Renato Haas Ornelas
    Abstract: We use heterogeneous exposure to large bank mergers to estimate the effect of bank competition on both financial and real variables in local Brazilian markets. Using detailed administrative data on loans and firms, we employ a difference-in- differences empirical strategy to identify the causal effect of bank competition. Following M&A episodes, spreads increase and there is persistently less lending in exposed markets. We also find that bank competition has real effects: a 1% increase in spreads leads to a 0.2% decline in employment. We develop a tractable model of heterogeneous firms and concentration in the banking sector. In our model, the semi-elasticity of credit to lending rates is a sufficient statistic for the effect of concentration on credit and output. We estimate this elasticity and show that the observed effects in the data and predicted by the model are consistent. Among other counterfactuals, we show that if the Brazilian lending spread were to fall to the world level, output would increase by approximately 5%.
    Keywords: bank competition, mergers and acquisitions, lending, spreads, output
    JEL: G21 G34 E44
    Date: 2023–10
  2. By: Oluwatosin Adeniyi (University of Ibadan, Nigeria); Oludele Folarin (University of Ibadan, Nigeria)
    Abstract: This study investigated two key questions: what is the impact of industrialisation on urbanisation in Africa? and to what extent does financial development affect this industrialisation- urbanisation nexus? To elicit answers to these questions, data from thirty-three (33) African countries over a period of twenty-eight (28) years were analysed using a dynamic panel estimator. The findings showed that industrialisation had positive and significant effects on urbanisation. Further, the study shows that financial development had a positive effect on urbanisation, although it lowers the positive effect of industrialisation on urbanisation. Hence, industrial policies, particularly those with marked job creation possibilities, should be accompanied by well-designed urban planning policies in order to sidestep the adverse socio-economic consequences connected with the development of slums in urban areas.
    Keywords: Urbanisation, Industrialisation, Financial Development, Africa
    JEL: G2 L16 O18 N17
    Date: 2023–01
  3. By: Giovanni Borraccia; Mr. Raphael A Espinoza; Vincenzo Guzzo; Romain Lafarguette; Fuda Jiang; Vina Nguyen; Miguel A. Segoviano; Mr. Philippe Wingender
    Abstract: We develop a new measure of financial conditions (FCs) that targets the growth of financial liabilities using the partial least square methodology. We then estimate financial condition indexes (FCIs) across European economies, both at the aggregate and sectoral levels. We decompose the changes in FCs into several factors including credit availability and costs, price of risk, policy stance, and funding constraints. Our results show that FCs loosened during the pandemic thanks to policy support but started to tighten significantly since mid-2021. Using the inverse probability weighting method over the sample period from 2000 to 2023, we find that a shift from a neutral to a tight FCI regime such as the ongoing episode for most European countries will on average lower output and inflation by 2.2 percent and 0.7 percentage points respectively and increase unemployment by 0.3 percentage points over a three-year horizon.
    Keywords: Financial condition index; partial least square; funding constraints; credit availability and costs; price of risk; policy stance; inverse probability weighting; financial conditions in Europe; FCI regime; IMF working paper 2023/209; FCI indicator; measure of financial conditions; Inflation; Asset prices; Monetary tightening; Credit; Financial cycles; Europe; Global
    Date: 2023–09–29
  4. By: Juan M. Sanchez
    Abstract: Standard financial conditions indexes use financial variables, which don’t necessarily capture how easy or hard it is for households and firms to access credit. How does a new index that doesn’t rely on such variables compare?
    Keywords: financial conditions indexes
    Date: 2023–07–31
  5. By: Christopher J. Neely
    Abstract: Statistical models using yield spreads can provide estimated odds of a future contraction. How do the odds change when using real vs. nominal interest rates?
    Keywords: yield spreads; recessions; real interest rates; nominal interest rates
    Date: 2023–09–07
  6. By: Vivek Sharma
    Abstract: This paper presents a model in which firms have endogenously-persistent lending relationships with banks which compete both on interest rates and collateral requirements. The economy features an endogenously-evolving lending standard which is subject to an exogenous shock. A shock to bank lending standards in this model leads to a spike in spread, drop in bank credit and amplification of macroeconomic volatility. These effects are higher at greater intensity and persistence of the lending relationships. This work shines a spotlight on how shocks to lending standards can have wider macroeconomic implications and shows how financial shocks can affect real economy.
    Keywords: Lending Standards, Deep Habits in Banking, Macroeconomic Fluctuations
    JEL: E32 E44
    Date: 2023–10
  7. By: Neil Mc Culloch; Amit Grover
    Keywords: global financial crisis
  8. By: Shuhei Aoki (Shinshu University); Makoto Nirei (University of Tokyo); Kazufumi Yamana (Deloitte Tohmatsu Consulting LLC)
    Abstract: The U.S. economy since 1980 has experienced the growth of finance, manifested by the increases in the value-added of financial services and the value of financial assets. The growth of finance has been associated with the increase in the mutual fund share in the financial assets and the relatively stable unit cost of finance. This paper constructs an incomplete market dynamic general equilibrium model with the islands structure, which has both idiosyncratic and island-level shocks on the firm’s productivity. Financial intermediaries trade shares of individual firms and risk-free debts, as well as mutual funds which diversify away idiosyncratic shocks but can not diversify island-level shocks. This model, together with the declining transaction costs on mutual funds and personal and corporate income tax rates calibrated from data, can quantitatively account for these facts.
    Date: 2023–10
  9. By: GUNJI Hiroshi; ONO Arito; SHIZUME Masato; UCHIDA Hirofumi; YASUDA Yukihiro
    Abstract: This study estimates the unit cost of financial intermediation in Japan over the period 1954‒2020. We measure the cost as the ratio of financial intermediaries’ income (financial income) to the financial output provided to non-financial end-users by integrating hand-collected data from various sources. To measure financial income, we use semi-aggregated data to take into account several income components that are not considered in the financial industry’s value added in the current System of National Accounts. We find that the unit cost of financial intermediation in Japan exhibits a secular decline. No similar decline is observed in the United States, Germany, and United Kingdom, where the unit cost of financial intermediation has been relatively stable over time. The decrease in Japan’s unit cost is due to the stagnation of financial income, even though financial output increased. The stagnation of financial income is due to the absence of growth in asset management services and the decrease in net interest income from loans and deposits.
    Date: 2023–10
  10. By: Sebastian Doerr; Jon Frost; Leonardo Gambacorta; Vatsala Shreeti
    Abstract: The entry of big tech companies into the financial services sector can bring significant benefits in terms of efficiency and financial inclusion. Yet big techs can also quickly dominate markets, engage in discriminatory behaviour, and harm data privacy. This leads to the emergence of new trade-offs between policy goals such as financial stability, competition and privacy. Regulators, both domestically and internationally, are actively working to address these trade-offs. This paper provides an overview over the state of the literature and the policy debate.
    Keywords: big techs, financial inclusion, competition, financial stability, data privacy
    JEL: E51 G23 O31
    Date: 2023–10
  11. By: António Afonso; M. Carmen Blanco-Arana
    Abstract: Economic freedom and economic growth can be connected in most countries, but it is often necessary to specify those aspects of economic freedom that can foster economic growth. This paper examines the nexus between economic freedom and economic growth in the Least Developed Countries (LDCs) using panel data for the period 2000-2021. Results show that, in general, economic freedom positively influences economic growth in the LDCs. Moreover, most economic freedom factors raise economic growth. However, the effect of government spending, fiscal and financial freedom on economic growth is negative. Using a Principal Component Analysis for the economic freedom sub-indicators confirms the results.
    Keywords: economic freedom, economic growth, LDCs, financial development, panel data
    JEL: C23 G10 O10 O43
    Date: 2023–10
  12. By: Sangyup Choi (Yonsei University); Jiri Havel (University of Rochester)
    Abstract: We study the influence of local geopolitical risk on U.S. cross-border portfolio investment, covering the period from 1994 to 2021. We uncover significant heterogeneity between advanced and emerging market destinations, revealing that local geopolitical risk exerts a dampening effect on U.S. purchases of bonds and equities solely within emerging markets, while having no discernible impact on advanced markets. We identify poor institutional quality as the primary driver behind the heightened sensitivity of portfolio investment to geopolitical risk in emerging markets, thereby signaling potential implications for financial stability. Moreover, our analysis reveals a noteworthy phenomenon where U.S. investment in emerging market bonds experiences a considerable decline in response to the geopolitical risk within other emerging markets in close geographical proximity, displaying a robust contagion effect. However, such contagions do not manifest in cross-border equity investment. Notably, these contagion effects are observed exclusively among emerging markets, providing valuable insights into investors’ portfolio adjustments in the face of elevated geopolitical risk.
    Keywords: Geopolitical risk; Foreign portfolio investment; Emerging markets; Institutional quality; Trilemma; Contagion
    JEL: E44 F21 F51 G11
    Date: 2023–10
  13. By: YiLi Chien; Harold L. Cole; Hanno Lustig
    Abstract: As a result of the BoJ's large-scale asset purchases, the consolidated Japanese government borrows mostly at the floating rate from households and invests in longer-duration risky assets to earn an extra 3% of GDP. We quantify the impact of Japan's low-rate policies on its government and households. Because of the duration mismatch on the government balance sheet, the government's fiscal space expands when real rates decline, allowing the government to keep its promises to older Japanese households. A typical younger Japanese household does not have enough duration in its portfolio to continue to finance its spending plan and will be worse off. Low-rate policies tax younger, poorer and less financially sophisticated households.
    Keywords: fiscal policy; monetary policy; public debt sustainability; financial repression
    JEL: G12 E62
    Date: 2023–11–02
  14. By: António Afonso; José Alves; Sofia Monteiro
    Abstract: We analyze domestic, foreign, and central banks holdings of public debt for 31 countries for the period of 1989-2022, applying panel regressions and quantile analysis. We conclude that an increase in sovereign risk raises the share of domestic banks’ portfolio of public debt and reduces the percentage holdings in the case of central banks. Better sovereign ratings also increase (decrease) the share of commercial (central) banks’ holdings. Furthermore, the effects of an increment in the risk for domestic investors have increased since the 2010 financial crisis.
    Keywords: banking, sovereign debt, sovereign risk, financial crisis, ratings
    JEL: C21 E58 G24 G32 H63
    Date: 2023
  15. By: Amy Smaldone; Mark L. J. Wright
    Abstract: An analysis looks at whether developing countries are facing pressures similar to those in the 1980s, when higher interest rates helped trigger a wave of defaults in sovereign debt.
    Keywords: sovereign debt; default; developing countries
    Date: 2023–09–05
  16. By: Yong Bian; Xiqian Wang; Qin Zhang
    Abstract: Portfolio underdiversification is one of the most costly losses accumulated over a household's life cycle. We provide new evidence on the impact of financial inclusion services on households' portfolio choice and investment efficiency using 2015, 2017, and 2019 survey data for Chinese households. We hypothesize that higher financial inclusion penetration encourages households to participate in the financial market, leading to better portfolio diversification and investment efficiency. The results of the baseline model are consistent with our proposed hypothesis that higher accessibility to financial inclusion encourages households to invest in risky assets and increases investment efficiency. We further estimate a dynamic double machine learning model to quantitatively investigate the non-linear causal effects and track the dynamic change of those effects over time. We observe that the marginal effect increases over time, and those effects are more pronounced among low-asset, less-educated households and those located in non-rural areas, except for investment efficiency for high-asset households.
    Date: 2023–11
  17. By: Riccardo De Bonis; Danilo Liberati; John Muellbauer; Concetta Rondinelli
    Abstract: Most econometric policy models at central banks and elsewhere use an aggregate consumption function based on textbook theory. This assumes that the ‘representative household’ owns only an aggregate form of wealth, proxied by net worth, and never faces borrowing or liquidity constraints or transactions costs. This is inconsistent with the modern view of heterogeneous agent behaviour under uncertainty in incomplete markets. Based on data from 1980 to 2019, the conventional formulation for an aggregate consumption function for Italy is strongly rejected. The results show that the marginal propensities to consume out of household deposits and semi-liquid financial assets such as T-bills and mutual funds are greater than for less liquid assets. A significant positive effect from housing wealth is substantially offset by the negative effect of affordability measured by the house price-to-income ratio.
    Date: 2023–10–31
  18. By: Kazi Abdul, Mannan; Farhana, Khandaker Mursheda
    Abstract: Globally, large numbers of adults remain unbanked, and most of them live in rural areas of the Third World. The recent outbreak of the COVID-19 pandemic has shown us how inequalities in accessing financial services continue to affect us. However, digital financial inclusion has emerged as an effective tool used to tackle socioeconomic ills and drive economic development. In fact, due to these modern technological developments, the number of studies in this area is very limited, especially in the context of developing economies. This study examines the impacts of migrant remittances on digital financial inclusion within households in Bangladesh by using the Migration and Remittance Household Survey. To meet the research objectives of this study, a household survey was conducted and 2165 households interviewed in 2022–2023 in Bangladesh. The survey data collected was tested using univariate and multivariate estimations. This study finds that the coefficient of remittance has positive relationships with the probability of e-bank accounts and the use of mobile banking for a household’s financial transactions. However, the use of ATM cards by households for financial transactions has not been significantly affected. The article concludes that remittance flows may enhance access to and use of means of digital financial inclusion by reducing some of the barriers and costs in Bangladesh, which could greatly contribute to the country’s economic growth by creating and increasing a strong fund for investment. The findings of this study can help in taking various steps to facilitate the most powerful financial sector of Bangladesh, namely, remittance management.
    Keywords: digital financial inclusion; migration; remittance; household; rural–urban; Bangladesh
    JEL: O3 R00 R23 R29
    Date: 2023–08–01
  19. By: Bettina Bruggemann; Zachary L. Mahone
    Abstract: We investigate rates of return to business wealth and total net worth along the wealth distribution in a quantitative model of occupational choice and housing. While it has long been established that these models are very successful at replicating wealth inequality, we show that they also produce endogenous rates of return to private equity and total net worth that share important properties with their empirical counterparts. Rates of return to entrepreneurial wealth are heterogeneous, persistent, negatively correlated with net worth, and very dependent on household type. Rates of return to total net worth exhibit similar scale dependence as the data but are positively correlated with net worth.
    Keywords: Wealth Inequality; Returns to Wealth; Entrepreneurship; Housing; Type and Scale Dependence
    JEL: E21 G11 D14 D15 D31
    Date: 2023–10
  20. By: Mr. Pragyan Deb; Julia Estefania-Flores; Melih Firat; Davide Furceri; Siddharth Kothari
    Abstract: This paper revisits the transmission of monetary policy by constructing a novel dataset of monetary policy shocks for an unbalanced sample of 33 advanced and emerging market economies during the period 1991Q2-2023Q2. Our findings reveal that tightening monetary policy swiftly and negatively impacts economic activity, but the effects on inflation and inflation expectations takes time to fully materialize. Notably, there exist significant heterogeneities in the transmission of monetary policy across countries and time, depending on structural characteristics and cyclical conditions. Across countries, monetary policy is more effective in countries with flexible exchange rate regime, more developed financial systems, and credible monetary policy frameworks. In addition, we find that monetary policy transmission is stronger when uncertainty is low, financial conditions are tight and monetary policy is coordinated with fiscal policy—that is, when the stances move in the same direction.
    Keywords: Monetary policy transmission; heterogeneity; inflation; statedependence
    Date: 2023–10–17
  21. By: Sangyup Choi; Kimoon Jeong; Jiseob Kim
    Abstract: This paper underscores the underappreciated role of bank mortgage lending standards in conjunction with imbalances stemming from the common monetary policy framework as drivers of divergent economic trajectories in the euro area’s core and periphery countries. To illustrate the mechanism, we compute a country-specific monetary policy stance gap and estimate the panel VAR model of credit and macroeconomy for each group. While the widening gap—the accommodative stance of the ECB relative to individual economic conditions—induces a similar increase in the demand for mortgage credit in both regions, it is followed by markedly different responses of the supply side of mortgage credit: bank mortgage lending standards are relaxed (tightened) in periphery (core) countries, which can rationalize vastly different responses in mortgage credit, residential investment, and housing prices between the two Europes. In searching for the source of different bank lending behaviors, we find that banks in core countries, subject to tighter macroprudential policies and reduced profit margins, increase cross-border lending to periphery countries, enabling them to relax lending standards toward mortgage loans.
    Keywords: Euro area, mortgage credit, monetary policy stance gap, bank lending survey, macroprudential policy, cross-border banking flows
    JEL: E21 E32 E44 F52 G21
    Date: 2023–10
  22. By: Giscard Assoumou-Ella (LEAD - Laboratoire d'Économie Appliquée au Développement - UTLN - Université de Toulon, Université Omar Bongo [Libreville, Gabon]); Cécile Bastidon (LEAD - Laboratoire d'Économie Appliquée au Développement - UTLN - Université de Toulon); Bastien Bonijoly (LEAD - Laboratoire d'Économie Appliquée au Développement - UTLN - Université de Toulon)
    Date: 2022
  23. By: Lu\'is A. V. Cat\~ao; Jan Ditzen; Daniel Marcel te Kaat
    Abstract: We show that fluctuations in the ratio of non-core to core funding in the banking systems of advanced economies are driven by a handful of global factors of both real and financial natures, with country-specific factors playing no significant roles. Exchange rate flexibility helps insulate the non-core to core ratio from such global factors but only significantly so outside periods of major global financial disruptions, as in 2008-2009.
    Date: 2023–10
  24. By: Canan Yildirim (ESC [Rennes] - ESC Rennes School of Business); Adnan Kasman (Adnan Menderes Üniversitesi); Fazelina Sahul Hamid (USM - Universiti Sains Malaysia)
    Abstract: The change in crossborder financial intermediation and rise in regional banking have consequences for competitive conduct in emerging countries' banking markets. Using data from the Association of Southeast Asian Nations countries' banks during 2011–2018, we examine the nexus between foreign ownership and banks' market power by controlling for the heterogeneity of foreign banks concerning their countries of origin (advanced vs. emerging and regional vs. nonregional). We find that the increasing presence of foreign banks from advanced countries is associated with lower bank market power because of higher marginal costs and lower price–cost margins of the domestic banks. However, the increasing presence of emerging countries' banks is associated with higher bank market power because of lower marginal costs and prices of domestic lenders. Our findings have implications for policies regarding bank competitiveness and promoting regional banking integration because domestic banks conduct differently under increased participation levels of advanced and emerging country foreign banks.
    Keywords: Bank market power, Foreign ownership, Regional banks, ASEAN
    Date: 2021–12
  25. By: Faoziah Afolasade Gamu; Halim Yusuf Agava
    Abstract: This study evaluated the performance of residential real estate investment and the causal linkages between important macroeconomic variables and real estate investment returns in Abuja and Lagos cities in Nigeria. A survey research design was employed using questionnaire to collect real estate transaction data from 2008 to 2022 from estate surveying and valuation firms in the study areas. The macroeconomic data used were retrieved from the archives of the Central Bank of Nigeria and National Bureau of Statistics. The rental and capital value data collected were used to construct rental and capital value indices using index number model and total returns on investment using holding period return model. Granger Causality test was employed to determine the causal effect of macroeconomic factors on residential real estate returns in the study areas. The finding of this study revealed among others that there was a progressive upward movement in rental and capita values of residential real estate investment in the study areas between 2008 and 2022. On the basis of total return and risk-adjusted return performances, residential real estate performed slightly better in Lagos with an average total return of 15.28% as against 15.20% in Abuja. On the other hand, Abuja performed better in terms of risk-adjusted return. Of the six macroeconomic variables analysed, only inflation rate, unemployment rate and real GDP per capita were found to have statistically significant causal effect on residential real estate investment returns in the study areas. The study recommended that whereas it is profitable for investors to invest their money in residential real estate in the study areas due to the positive rental and capital value growth potential, the government should implement economic policies that are capable of ameliorating the high rate of inflation and unemployment in the study areas.
    Keywords: Macroeconomic variables; Modified value at risk; Performance; Real Estate Investment; risk- adjusted returns
    JEL: R3
    Date: 2023–01–01
  26. By: Roshan Iyer
    Abstract: We analyze returns and volatility spillovers among a representative set of crypto and financial assets. The magnitude of spillovers increases during periods of heightened turbulence due to negative economic-financial news, crypto market events, or exogenous shocks. There is evidence of increasing spillovers over time, with a peak during the COVID-19 pandemic, implying growing interdependence. Crypto assets predominantly transmit spillovers to financial markets, though reversals occur during periods of financial stress. The increased correlation during risk-off episodes suggests that crypto assets could serve as important conduits for financial market shocks, generating financial stability risks.
    Keywords: Cryptocurrencies; Crypto assets; Bitcoin; Spillovers; Return and Volatility Connectedness
    Date: 2023–09–29
  27. By: Ms. Burcu Hacibedel; Hector Perez-Saiz
    Abstract: Failures in the crypto space—including the fall of Terra USD and the FTX debacle—have sparked calls for strengthening countries’ policy frameworks for crypto assets, including by enhanced regulation and supervision. How have these heightened concerns about crypto assets been picked up in systemic risk assessment, and what can be done going forward? In this paper, we introduce a conceptual macrofinancial framework to understand and track systemic risks stemming from crypto assets. Specifically, we propose a country-level Crypto-Risk Assessment Matrix (C-RAM) to summarize the main vulnerabilities, useful indicators, potential triggers and potential policy responses related to the crypto sector. We also discuss how experts and officials can weave in specific vulnerabilities stemming from crypto asset activity into their assessment of systemic risk, and how they can provide policy advice and take action to help contain systemic risks when needed.
    Keywords: Crypto assets; vulnerabilities; systemic risk; macrofinancial; analyzing Macrofinancial risk; macro-prudential risk; country-level Crypto-Risk Assessment Matrix; micro-prudential risk; price fluctuation; Virtual currencies; Financial sector; Currencies; Credit risk; Blockchain and DLT; Global
    Date: 2023–09–29

This nep-fdg issue is ©2023 by Georg Man. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.