nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2024‒01‒29
24 papers chosen by
Georg Man,

  1. Does Financial Development Relieve or Exacerbate Income Inequality? A Quantile Regression Approach By Nahid Farnaz
  2. Financial development and the effectiveness of macroprudential and capital flow management measures By Yusuf Soner Baskaya; Ilhyock Shim; Philip Turner
  3. Banks and the economy: Evidence from the Irish bank strike of 1966 By Lennard, Jason; Kenny, Seán; Horgan, Emma
  4. The importance of credit demand for business cycle dynamics By von Schweinitz, Gregor
  5. Time-varying investment dynamics in the USA By Ivan Mendieta-Muñoz
  6. The 1929 Crash of the New York Stock Exchange as a Liquidity Crisis By Jean-Laurent Cadorel
  7. Financial Contagion and Financial Lockdowns By Gabriele Camera; Alessandro Gioffré
  8. Global Banks and the Transmission of Shocks across Borders By Deyan Radev
  9. Building a Financial Constraint Index for Türkiye By Hatice Gökce Karasoy Can; Evren Erdogan Cosar
  10. Foreign investor feedback trading in an emerging financial market By Ingomar Krohn; Vladyslav Sushko; Witit Synsatayakul
  11. Global political ties and the global financial cycle By Ambrocio, Gene; Hasan, Iftekhar; Li, Xiang
  12. Monetary tightening, inflation drivers and financial stress By Frederic Boissay; Fabrice Collard; Cristina Manea; Adam Shapiro
  13. Foreign institutional investors, monetary policy, and reaching for yield By Ahmed Ahmed; Boris Hofmann; Martin Schmitz
  14. Understanding and Predicting Monetary Policy Framework Choice By Sullivan, Megan
  15. Drivers of portfolio flows into Chinese debt securities amidst China's bond market development By McCully, Tuuli
  16. Constructing country-specific debt sustainability indices for developing countries By Akeem Rahaman; Scott Mark Romeo Mahadeo
  17. Negociating the debt at the inn: the leisting custom in the late medieval low countries By Jean Luc De Meulemeester; David Kusman
  18. Educational Take-off and the Role ofWealth By Michele Battisti; Antonio Francesco Gravina; Andrea Mario Lavezzi; Giuseppe Maggio; Giorgio Tortorici
  19. Access to Digital Finance: Equity Crowdfunding across Countries and Platforms By Estrin, Saul; Khavul, Susanna; Kritikos, Alexander S.; Löher, Jonas
  20. Fintech vs bank credit: How do they react to monetary policy? By Giulio Cornelli; Fiorella De Fiore; Leonardo Gambacorta; Cristina Manea
  21. Market power in banking By Carletti, Elena; Leonello, Agnese; Marquez, Robert
  22. The effect of branching deregulation on finance wage premium By Taskin, Ahmet Ali; Yaman, Firat
  23. Carbon Taxes and Tariffs, Financial Frictions, and International Spillovers By Stefano Carattini; Giseong Kim; Givi Melkadze; Aude Pommeret
  24. Discounting the distant future: What do historical bond prices imply about the long term discount rate? By J. Doyne Farmer; John Geanakoplos; Matteo G. Richiardi; Miquel Montero; Josep Perell\'o; Jaume Masoliver

  1. By: Nahid Farnaz
    Abstract: This paper probes deeper into the finance-inequality nexus to explore whether the impact of the multi-dimensional aspects of financial development on income inequality varies across countries at different stages of the inequality spectrum. Using an instrumental variable quantile regressions approach for a panel dataset of 91 countries from 1980 to 2014, the findings suggest that the impact of financial development in terms of banking and stock market development on income inequality for countries at the higher end of the inequality spectrum differs from those with lower or moderate inequality levels. Furthermore, the variation observed in the magnitude of the impact at different quantiles of the conditional distribution of income inequality depends on the specific measure used to capture a different aspect of financial development, i.e., depth, efficiency and stability of banking sector and stock market development. The results are robust to several alternative specifications and have important policy implications for countries with different inequality levels.
    Keywords: income inequality; financial development; financial systems; quantile regressions
    JEL: D63 O16 G00 P00
    Date: 2023–12
  2. By: Yusuf Soner Baskaya; Ilhyock Shim; Philip Turner
    Abstract: Using quarterly data on macroprudential policy (MaPP) measures and capital flow management measures (CFMs) taken by 39 economies in 2000–2013, we analyse how domestic credit and cross-border capital flows respond to such measures. In doing so, we take a granular approach by considering price-based and quantity-based MaPP measures and CFMs, and also examine if the level of financial development matters in explaining policy effectiveness. We find that quantity-based MaPP measures significantly affect total credit and its components such as domestic bank credit, corporate credit and housing credit, but that the effects fade away beyond a certain level of financial development, suggesting that highly developed financial markets provide opportunities to circumvent MaPP measures imposed on banks. We also find that both price- and quantity-based CFMs are effective in slowing down bank inflows with the former effective at all levels of financial development and the latter effective at relatively high levels. Finally, we find some evidence on the existence of leakage effects. For example, tighter overall MaPP measures are associated with larger bond inflows, and tighter quantity-based MaPP measures with larger bank inflows.
    Keywords: bank lending, capital flow management measures, cross-border capital flows, financial development, macroprudential policy
    JEL: F34 G15 G28
    Date: 2024–01
  3. By: Lennard, Jason; Kenny, Seán; Horgan, Emma
    Abstract: This paper studies a natural experiment in macroeconomic history: the Irish bank strike of 1966, which led to the closure of the major commercial banks for three months. We use synthetic control to estimate how the economy would have evolved had the strike not happened. We find that economic activity slowed, deviating by 6% from the counterfactual path. Narrative evidence not only supports this finding, but also depicts the struggles of households and firms managing a credit crunch, a liquidity shock, and rising transaction costs. This case study highlights the importance of banks for economic performance.
    Keywords: Banks, Ireland, macroeconomy, post-war
    JEL: E32 E44 G21 N14 N24
    Date: 2023
  4. By: von Schweinitz, Gregor
    Abstract: This paper contributes to a better understanding of the important role that credit demand plays for credit markets and aggregate macroeconomic developments as both a source and transmitter of economic shocks. I am the first to identify a structural credit demand equation together with credit supply, aggregate supply, demand and monetary policy in a Bayesian structural VAR. The model combines informative priors on structural coefficients and multiple external instruments to achieve identification. In order to improve identification of the credit demand shocks, I construct a new granular instrument from regional mortgage origination. I find that credit demand is quite elastic with respect to contemporaneous macro-economic conditions, while credit supply is relatively inelastic. I show that credit supply and demand shocks matter for aggregate fluctuations, albeit at different times: credit demand shocks mostly drove the boom prior to the financial crisis, while credit supply shocks were responsible during and after the crisis itself. In an out-of-sample exercise, I find that the Covid pandemic induced a large expansion of credit demand in 2020Q2, which pushed the US economy towards a sustained recovery and helped to avoid a stagflationary scenario in 2022.
    Keywords: Bayesian proxy SVAR, credit demand, credit-driven business cycles, granular instrument
    JEL: C32 E32 E44 G10
    Date: 2023
  5. By: Ivan Mendieta-Muñoz
    Abstract: We study the time-varying effects of Tobin’s q and cash flow on investment dynamics in the USA using a vector autoregression model with drifting parameters and stochastic volatilities estimated via Bayesian methods. We find significant variation over time of the response of investment to shocks in both variables. The time-varying sensitivity of investment to a shock in Tobin’s q (cash flow) decreased (increased) since the early 1960s through the early 1980s, increased (decreased) since the early 1980s through the early 2000s, and it has decreased (increased) importantly again since then. Our results show that, although Tobin’s q and cash flow are complementary sources of information for investment decisions, their relative importance for investment dynamics has varied considerably over time, so both variables also represent alternative sources of information for short-run fluctuations in investment.
    Keywords: Investment dynamics, Tobin’s q, cash flow, time-varying parameters, vector autoregression, stochastic volatility JEL Classification: C11, C32, E22, E32, G31
    Date: 2024
  6. By: Jean-Laurent Cadorel (EBS Paris - European Business School Paris, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, EHESS - École des hautes études en sciences sociales, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)
    Abstract: What caused the 1929 crash of the New York Stock Exchange? This paper provides a quantitative study of liquidity in the 1929 crash of the NYSE. I evidence the crash was indeed a liquidity crisis due to the liquidation of brokers' margin loans. Applying recent estimators of effective spreads and liquidity conditions from contemporary finance literature suggests a fourfold increase in spreads during the crash at the aggregate level. At the individual stock level, quoted bid-ask spreads suggest liquidity explains one-fifth of the variance in daily stock returns in the crash.
    Abstract: Quelles sont les causes immédiates du krach boursier de 1929 à la Bourse de New York ? Cet article présente une étude quantitative de la liquidité dans le krach de 1929 et prouve que le krach était bien une crise de liquidité dûe à des appels de marge sur des prêts des courtiers. En utilisant des estimateurs issus de la littérature financière moderne, cet article met en évidence la sévère détérioration des conditions de marché. Au niveau agrégé, les spreads ont été multipliés par 4. Au niveau des actions individuelles, les écarts entre la meilleure offre et la meilleure vente suggèrent que la liquidité explique un cinquième de la variance des rendements quotidiens des actions au cours de la crise. Grâce à des données intra journalières sur les 80 plus grandes actions, cet article montre que les chutes ont eu lieu aux horaires fixes d'appels de marge.
    Keywords: 1929 crash, Stock market, NYSE, Financial crisis, Liquidity crisis, Krach 1929, Marchés financiers, Crise financière, Crise de liquidité
    Date: 2023
  7. By: Gabriele Camera (Economic Science Institute, Chapman University); Alessandro Gioffré (DISEI, University of Florence)
    Abstract: Extreme financial shocks often elicit extraordinary policy interventions that preclude financial activity on a large scale, for example as the 1933 U.S. “bank holiday.†We study these interventions using a random matching framework where the financial contagion process is explicit and the diffusion of the initial shock can be analytically characterized. The study suggests that there is scope for forced closures of individual firms or even economy-wide financial lockdowns only when firms are financially vulnerable and policy institutions are not well-functioning. Here, ordinary policy alone cannot prevent or sufficiently mitigate contagion, while complementing it with a lockdown or individual closures can do so, and improve social welfare if the initial shock is severe but not widespread.
    Keywords: matching models, financial crises, contagion
    JEL: C6 D6 E5
    Date: 2023
  8. By: Deyan Radev (Sofia University, Faculty of Economics and Business Administration)
    Abstract: In this study, we explore the impact of solvency and wholesale funding shocks on the lending behavior of 84 OECD parent banks and their 375 foreign subsidiaries. Our findings indicate that solvency shocks play a more significant role than wholesale funding shocks in influencing subsidiary lending. Moreover, we observe that solvency shocks have a heightened impact on larger subsidiary banks operating in mature markets with limited growth opportunities. These results carry substantial theoretical and policy implications, contributing to a deeper understanding of how solvency and wholesale shocks traverse borders and affect the lending dynamics of global banking entities.
    Keywords: Commercial banks, global banks, wholesale shocks, solvency shocks, transmission, internal capital markets
    JEL: G01 G21 G28
    Date: 2024–01
  9. By: Hatice Gökce Karasoy Can; Evren Erdogan Cosar
    Abstract: The aim of this paper is to construct an index of financial constraints for firms in Türkiye. Traditional indices such as the KZ index, the WW index and the HP index have been constructed for advanced economies such as the United States or European countries. In this study, we take advantage of the Investment Tendency Survey sent to firms by the Central Bank of the Republic of Türkiye to extract a real indicator of financial constraints based on managers' own evaluations of their firms. The survey question on the factors that stimulate investment decisions is evaluated as a true indicator of financial constraints, and then this response is predicted with various balance sheet indicators. In this way, we construct an index of financial constraints that is specific to firms operating in the Turkish economy. We find that financial constraints can be determined with seven fundamental variables: age of the firm, size, change in size, profitability, leverage, tangibles (tangible assets to total assets) and export share. We prove the validity of the index by showing that financially constrained firms identified by this index have real difficulties in accessing bank credit in the form of lower volumes, higher interest rates and shorter loan maturities. We then show that financial constraints have a dampening effect on the firm's net worth and investment both through its own effect and through the long-term borrowing channel. Moreover, the transmission of a macro-financial shock is persistently affected by the financial constraint status. Finally, the validity of the index applies to a larger sample of companies.
    Keywords: Index of financial constraints, KZ index, Investment tendency, Turkish firms, Turkish economy
    JEL: E44 E60 G30
    Date: 2023
  10. By: Ingomar Krohn; Vladyslav Sushko; Witit Synsatayakul
    Abstract: This paper finds that trading by non-residents in an emerging financial market reinforces the existence of a momentum anomaly, in an apparent violation of an efficient market hypothesis. Using detailed order flow data in Thai foreign exchange, equity, and fixed income markets, we find that foreign investors engage in momentum trading, which amplifies positive feedback between returns and order flow across all asset classes. Innovations in foreign investor order flow are informative of future returns, but the information is not based on local macro fundamentals. Local financial investors tend to mimic foreign investor trading, reinforcing returns to momentum, while non-financial investors consistently provide liquidity. Further tests suggest that the returns to momentum trading are time-varying and are positively related to the amount of foreign capital flowing into the local financial market. Taken together, the results indicate that a significant presence of foreign investors can alter the trading behaviour of local investors and can reduce the importance of local fundamentals in driving asset prices.
    Keywords: international financial markets, heterogeneous trading, disaggregated order flow, foreign investors, emerging markets
    JEL: F30 G11 G14 G15
    Date: 2023–12
  11. By: Ambrocio, Gene; Hasan, Iftekhar; Li, Xiang
    Abstract: We study the implications of forging stronger political ties with the US on the sensitivities of stock returns around the world to a global common factor - the global financial cycle. Using voting patterns at the United Nations as a measure of political ties with the US along with various measures of the global financial cycle, we document evidence indicating that stronger political ties with the US amplify the sensitivities of stock returns in developing countries to the global financial cycle. We explore several channels and find that a deepening of financial linkages along with a reduction in information asymmetries and an amplification of sentiment are potentially important factors behind this result.
    Keywords: Political Ties, Global Financial Cycle, International Spillovers, Stock returns
    JEL: E44 F30 F50 G15
    Date: 2024
  12. By: Frederic Boissay; Fabrice Collard; Cristina Manea; Adam Shapiro
    Abstract: The paper explores the state–dependent effects of a monetary tightening on financial stress, focusing on a novel dimension: the nature of supply versus demand inflation at the time of policy rate hikes. We use local projections to estimate the effect of high frequency identified monetary policy surprises on a variety of financial stress measures, differentiating the effects based on whether inflation is supply–driven (e.g. due to adverse supply or cost–push shocks) or demand–driven (e.g. due to positive demand factors). We find that financial stress flares up after a policy rate hike when inflation is supply–driven, but it remains roughly unchanged, or even declines when inflation is demand–driven. Our findings point to a particular tension between price stability and financial stability when inflation is high and largely supply–driven.
    Keywords: supply– versus demand–driven inflation, monetary tightening, financial stress
    JEL: E1 E3 E6 G01
    Date: 2023–12
  13. By: Ahmed Ahmed; Boris Hofmann; Martin Schmitz
    Abstract: This paper uses security-level data of euro area investment funds' bond holdings to analyze their reaching for yield in the US dollar bond market. We find that they rebalance their US dollar bond portfolios toward higher yielding, riskier bonds when US monetary policy tightens, reflecting the effects of foreign exchange hedging. The effect is driven by the practice of hedging currency risk through rolling short-term hedging contracts. This gives rise to an erosion of the hedged yield earned on US dollar bonds when US monetary policy tightens and hedging costs increase, inducing reaching for yield in order to bolster portfolio returns. The hedging channel of monetary transmission is diametrically opposed to the classical risk-taking channel operating through US dollar-based investors, where a monetary tightening is associated with less reaching for yield. We further find that the US dollar bond purchases by euro area investment funds induced by their reaching for yield have meaningful effects on bond prices, implying that they affect conditions in the US dollar bond market.
    Keywords: monetary policy, foreign institutional investors, FX hedging, US dollar bond market
    JEL: E43 E52 G11 G12 G15 G23
    Date: 2023–12
  14. By: Sullivan, Megan
    Abstract: This paper investigates the determinants of countries' choice of monetary policy frameworks (MPF) for emerging and developing countries. Countries make different MPF choices and we think it is because they have different country-level characteristics (e.g. democratic strength and trade networks). By covering 87 countries from 1985-2017, we investigate the role these characteristics play in predicting MPF choice. A highlight of this paper is that it uses a tailored variable to measure the volume of trade with a network that pegs to an anchor currency. We find that a country is significantly more likely to choose an exchange rate MPF when the volume increases. The model used in this paper correctly predicts 74% of MPF choice when done via a cross-validation method. This paper enables policymakers to see which MPF countries similar to their own have chosen, and they can decide if it is suitable for them, too.
    Keywords: Inflation targeting, central bank independence, trade networks, cross-validation
    JEL: E42 E52 E58 F40
    Date: 2024
  15. By: McCully, Tuuli
    Abstract: The paper focuses on China's onshore bond market and the drivers of non-resident net portfolio flows into Chinese debt securities. Building on a theoretical model of push and pull factors as a foundation for the empirical analysis on drivers of bond flows into China, static and time-varying models are estimated to explain the importance of various push and pull factors in the context of China's bond market development. While China-specific pull factors, such as domestic economic growth prospects and asset returns, are important drivers of bond flows, the results reveal that global push factors, such as US interest rates and investor risk aversion, have recently gained significance as drivers of flows into China. This shift goes hand in hand with China's gradual bond market liberalization measures. The findings confirm China's continued bond market deepening and integration with the rest of the world.
    Keywords: capital flows, portfolio flows, push factors, pull factors, financial openness
    JEL: F32 F34 F36 F41 G11 G28
    Date: 2023
  16. By: Akeem Rahaman (University of Portsmouth); Scott Mark Romeo Mahadeo (University of Portsmouth)
    Abstract: Contemporary crises continue to keep governments in protracted periods of borrowing, increasing the stock and flow of sovereign indebtedness. Single metrics of public debt – such as the debt-to-GDP ratio – provide an incomplete profile of a nation’s debt position, which is largely determined by country-specific factors. We consolidate various indicators of public debt to construct a novel debt sustainability index and its companion debt volatility index. We demonstrate our approach, based on principal component analysis, using a natural resource-rich but relatively data-poor country – Trinidad and Tobago – where debt management is a recurring macroeconomic concern, but comprehensive debt indices remain unavailable. The movements in our indices align with historical episodes that would influence country-specific public debt levels. Our approach is straightforward to adapt and apply to developing countries, where a uniform measure of debt is either unavailable or provide an incomplete perspective of fiscal stress when such a measure exists. We further illustrate the usefulness of the constructed indices by investigating the debt- growth nexus. Consistent with economic theory of countries with relatively lower debt levels, our novel debt indices for this country provide evidence of a positive, significant, and robust impact of debt on growth when the traditional debt-to-GDP measure suggests none.
    Keywords: Debt Sustainability; Fiscal Stress Index; Principal Component Analysis; Public Debt
    JEL: C38 C43 H63
    Date: 2024–01–10
  17. By: Jean Luc De Meulemeester; David Kusman
    Abstract: We propose an in-depth analysis of a specific custom designed to ensure the recovery of debts in the late Medieval Low Countries, using personal sureties (conditional hostages) having to sojourn in an inn to guarantee the contract-enforcement, called the leisting. Its use was initially restricted to aristocratic circles as we show in our first case study concerning a (public) debt to finance territorial expansion of the count of Guelders at the end of the 13th century. We show that the leisting was not always sufficient as more possessory sureties (tolls revenues, incomes from fines and landed estates…) were added in a second loan contract. We stress also the role of Piedmontese moneylenders and how the loan was later sold to the count of Flanders who will make of political use of it. The use of social capital to access capital markets was nevertheless found in several contracts during the 14th and 15th centuries. In our second and third case studies we show how this technique developed within a more mercantile environment. We analyse the case of Kampen during the 14th century, a city that faced both a commercial and urban development. We identify an important use of the leisting technique during this phase of urban development hinting at a regulatory desire of city authorities to avoid speculation on houses and grounds. Lastly, we analyse the case of the city of Brussels during the first half of the 15th century. Here we rely on archival sources allowing us to pinpoint the social profile of those innkeepers so central in this mechanism. They were often brokers as well as hostellers and belonged to the high strata of the city. We discuss the efficiency (and the longue durée) of this practice from a neo institutional perspective.
    Keywords: Debt; Hostage; Institutions
    JEL: H63 N23 O17
    Date: 2023–12–21
  18. By: Michele Battisti; Antonio Francesco Gravina; Andrea Mario Lavezzi; Giuseppe Maggio; Giorgio Tortorici
    Abstract: What is the role of a society's wealth in influencing educational choices? Although the theoretical literature provides several possible answers, from an empirical viewpoint answering question is not straightforward. Indeed, nowadays such an issue cannot be typically inspected before starting the college, due to the compulsory public education laws in force at lower education levels in nearly all countries. We investigate this problem by employing a unique dataset covering Sicilian wealth shares and primary school enrollment in the year 1858 at municipal level. This represents an ideal setting to study our research question as, at that time, schools at the lowest grade levels were available in almost each Sicilian municipality, but their attendance was not compulsory. Our identification strategy relies on the historical heritage of seismic events in shaping mid-19th century land and property distribution, which allowed for the emergence of a class of "wealthy" households. Results of the analysis show that, even in an almost entirely agrarian society, household wealth played a decisive role in educational choices: an increase of 10
    Keywords: Wealth; Education; Long-run Development; Institutions; Human Capital
    JEL: I24 O15 N93
    Date: 2024–01–01
  19. By: Estrin, Saul (London School of Economics); Khavul, Susanna (San Jose State University); Kritikos, Alexander S. (DIW Berlin); Löher, Jonas (IfM Bonn)
    Abstract: Financing entrepreneurship spurs innovation and economic growth. Digital financial platforms that crowdfund equity for entrepreneurs have emerged globally, yet they remain poorly understood. We model equity crowdfunding in terms of the relationship between the number of investors and the amount of money raised per pitch. We examine heterogeneity in the average amount raised per pitch that is associated with differences across three countries and seven platforms. Using a novel dataset of successful fundraising on the most prominent platforms in the UK, Germany, and the USA, we find the underlying relationship between the number of investors and the amount of money raised for entrepreneurs is loglinear, with a coefficient less than one and concave to the origin. We identify significant variation in the average amount invested in each pitch across countries and platforms. Our findings have implications for market actors as well as regulators who set competitive frameworks.
    Keywords: equity crowdfunding, soft information, entrepreneurship, finance, financial access and inclusion
    JEL: D26 G23 G41 L26
    Date: 2023–12
  20. By: Giulio Cornelli; Fiorella De Fiore; Leonardo Gambacorta; Cristina Manea
    Abstract: Fintech credit, which includes peer-to-peer and marketplace lending as well as lending facilitated by major technology firms, is witnessing rapid growth worldwide. However, its responsiveness to monetary policy shifts remains largely unexplored. This study employs a novel credit dataset spanning 19 countries from 2005 to 2020 and conducts a PVAR analysis to shed some light on the different reaction of fintech and bank credit to changes in policy rates. The main result is that fintech credit shows a lower (even non-significant) sensitivity to monetary policy shocks in comparison to traditional bank credit. Given the still marginal – although fast growing – macroeconomic significance of fintech credit, its contribution in explaining the variability of real GDP is less than 2%, against around one quarter for bank credit.
    Keywords: fintech credit, monetary policy, PVAR, collateral channel
    JEL: D22 G31 R30
    Date: 2023–12
  21. By: Carletti, Elena; Leonello, Agnese; Marquez, Robert
    Abstract: Bank market power, both in the loan and deposit market, has important implications for credit provision and for financial stability. This article discusses these issues through the lens of a simple theoretical framework. On the asset side, banks choose the quality and quantity of loans. On the liability side, they may be subject to depositor runs whenever they offer demandable contracts. This structure allows us to review the literature on the role of market power for credit provision and stability and also highlight the interactions between the two sides of banks’ balance sheets. Our approach identifies relevant channels that deserve further analysis, especially given the rising importance of bank market power for monetay policy transmission and the the rise of the digital economy. JEL Classification: G01, G21, G28
    Keywords: balance sheet interactions, bank runs, credit provision, digital economy, monetary policy transmission
    Date: 2024–01
  22. By: Taskin, Ahmet Ali; Yaman, Firat
    Abstract: What is the role of financial deregulation on rising finance wage premium in the US? This study makes use of the Interstate Banking and Branching Efficiency Act of 1994 as an exogenous shift to local banking markets and investigates the effect of deregulation induced competition on relative wages in finance. We find that the finance wage premium increased significantly in deregulated states. Our estimates suggests that the deregulation explains about a quarter of the increase in finance wage premium between 1994 and 2008.
    Date: 2023
  23. By: Stefano Carattini; Giseong Kim; Givi Melkadze; Aude Pommeret
    Abstract: Ambitious climate policy, coupled with financial frictions, has the potential to create macrofinancial stability risk. Such stability risk may expand beyond the economy implementing climate policy, potentially catching other countries off guard. International spillovers may occur because of trade and financial channels. Hence, we study the design and effects of climate policies in the world economy with international trade and financial flows. We develop a two-sector, two-country, dynamic general equilibrium model with financial frictions, climate policies, including carbon tariffs, and macroprudential policies. Using the calibrated model, we evaluate spillovers from unilateral domestic carbon pricing to foreign economies and back. We also examine more ambitious climate architectures involving carbon tariffs or a global carbon price. We find that accounting for cross-border financial flows and frictions in credit markets is crucial to understand the effects of climate policies and to guide the implementation of macroprudential policies at the global scale aimed at minimizing transition risk and paving the way for ambitious climate policy.
    Keywords: financial frictions, carbon tax, carbon tariffs, open economy
    JEL: E44 E58 F38 F42 G18 Q58
    Date: 2023
  24. By: J. Doyne Farmer; John Geanakoplos; Matteo G. Richiardi; Miquel Montero; Josep Perell\'o; Jaume Masoliver
    Abstract: We present a thorough empirical study on real interest rates by also including risk aversion through the introduction of the market price of risk. With the view of complex systems science and its multidisciplinary approach, we use the theory of bond pricing to study the long term discount rate. Century-long historical records of 3 month bonds, 10 year bonds, and inflation allow us to estimate real interest rates for the UK and the US. Real interest rates are negative about a third of the time and the real yield curves are inverted more than a third of the time, sometimes by substantial amounts. This rules out most of the standard bond pricing models, which are designed for nominal rates that are assumed to be positive. We therefore use the Ornstein-Uhlenbeck model which allows negative rates and gives a good match to inversions of the yield curve. We derive the discount function using the method of Fourier transforms and fit it to the historical data. The estimated long term discount rate is $1.7$ \% for the UK and $2.2$ \% for the US. The value of $1.4$ \% used by Stern is less than a standard deviation from our estimated long run return rate for the UK, and less than two standard deviations of the estimated value for the US. All of this once more reinforces the support for immediate and substantial spending to combat climate change.
    Date: 2023–12

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