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on Financial Development and Growth |
| By: | Sommer, Christoph |
| JEL: | G10 G21 G30 O16 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:vfsc24:302340 |
| By: | Bora Durdu; Sergio Villalvazo |
| Abstract: | This paper investigates the impact of loan-to-value (LtV) borrowing constraints in models with occasionally binding credit constraints. These constraints give rise to a Fisherian debt-deflation mechanism, where exogenous shocks can trigger cascading effects resulting in significant declines in consumption, asset prices, and borrowing reversals—characteristic of financial crises. However, recent literature challenges traditional view by suggesting that collateral constraints may not always exacerbate financial disturbances but could instead foster dynamics leading to multiple equilibria. Building on this discussion, the paper explores equilibrium asset pricing models with LtV collateral constraints, identifying critical thresholds that govern asset price dynamics, consumption patterns, and current account behaviors. Our analysis uncovers that when the LtV limit is close to zero, tighter constraints induce smaller drops in consumption during crises. Conversely, when the LtV limit is close to one, we observe that tighter constraints induce larger drops in consumption during crises. The nonlinear relationship between the LtV ratio and adverse effects on macroeconomic outcomes aligns with cross-country evidence regarding the relationship between the level of financial development and the severity of consumption declines during crises. |
| Keywords: | Financial crises; Loan-to-value constraints; Debt-deflation |
| JEL: | E31 E37 E52 F41 G01 |
| Date: | 2024–09–20 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2024-81 |
| By: | Sami Ben Naceur; Bertrand Candelon; Farah Mugrabi |
| Abstract: | This study contributes to the literature by analyzing the impact of financial inclusion (FI) on various bank risk dimensions, including systemic risk, which has been underexplored. We expand on recent research by examining not only the type of financial services, but also the source of FI, particularly the role of non-commercial banks (NCB). Our findings reveal that contrary to developed countries, credit expansions are linked to lower commercial banking risks, underscoring the benefits of loan diversification in developing and emerging economies, . However, while FI in deposits generally reduces individual banking risks, its effect on systemic risk is weaker in these countries, likely due to limited asset diversification. Moreover, NCBs tend to increase systemic and idiosyncratic risks for commercial banks through competitive pressures in the loan and deposit markets. Our results suggest that coordinating macroprudential policies with credit developments further reduces systemic risk by discouraging excessive risk-taking when banks’ capital is more at stake. Banks with stronger Basel capital ratios show reduced idiosyncratic risks, yet there is evidence that banks may relax these ratios to accommodate lending demands. These insights underscore the necessity for regulators to synchronize macroprudential policies with FI developments and consider NCBs’ role in financial stability. |
| Date: | 2024–09–20 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/203 |
| By: | Knapp, Fabian |
| JEL: | D62 E32 E44 F32 F41 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:vfsc24:302415 |
| By: | Robert Wojciechowski |
| Abstract: | We identify the structural impulse responses of quantiles of the outcome variable to a shock. Our estimation strategy explicitly distinguishes treatment from control variables, allowing us to model responses of unconditional quantiles while using controls for identification. Disentangling the effect of adding control variables on identification versus interpretation brings our structural quantile impulse responses conceptually closer to structural mean impulse responses. Applying our methodology to study the impact of financial shocks on lower quantiles of output growth confirms that financial shocks have an outsized effect on growth-at-risk, but the magnitude of our estimates is more extreme than in previous studies. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.04431 |
| By: | Marian Vavra (National Bank of Slovakia) |
| Abstract: | Monitoring financial conditions can provide central banks with valuable information about risks to future GDP growth and other macroeconomic variables. In this paper, we follow the recent literature on growth-at-risk and use a linear quantile regression model to exploit the information content of the financial conditions index for tail-risk forecasting of output growth in Slovakia. |
| JEL: | C15 C22 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:svk:wpaper:1110 |
| By: | Emter, Lorenz; Setzer, Ralph; Zorell, Nico; Moura, Afonso S. |
| Abstract: | This paper analyses how country-specific institutional quality shapes the impact of monetary policy on downside risks to GDP growth in the euro area. Using identified high-frequency shocks in a growth-at-risk framework, we show that monetary policy has a higher impact on downside risks in the short term than in the medium term. However, this result for the euro area average hides significant heterogeneity across countries. In economies with weak institutional quality, medium-term growth risks increase substantially following contractionary monetary policy shocks. In contrast, these risks remain relatively stable in countries with high institutional quality. This suggests that improvements in institutional quality could significantly enhance euro area countries’ economic resilience and support the smooth transmission of monetary policy. JEL Classification: C23, E52, F45, G28, O43 |
| Keywords: | Euro area, growth-at-risk, institutional quality, monetary policy transmission |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242989 |
| By: | Eiblmeier, Sebastian |
| JEL: | C23 E51 E52 G11 G21 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:vfsc24:302432 |
| By: | Thiago Revil T. Ferreira; Nils M. Gornemann; Julio L. Ortiz |
| Abstract: | Household savings rose above trend in many developed countries after the onset of COVID-19. Given its link to aggregate consumption, the presence of these "excess savings" has raised questions about their implications for the transmission of monetary policy. Using a panel of euro-area economies and high-frequency monetary policy shocks, we document that household excess savings dampen the effects of monetary policy on economic activity and inflation, especially during the pandemic period. To rationalize our empirical findings, we build a New Keynesian model in which households use savings to self-insure against counter-cyclical unemployment and consumption risk. |
| Keywords: | Monetary Policy; Excess Savings; Precautionary Savings; Consumption Risk; Unemployment |
| JEL: | E12 E21 E24 E31 E52 |
| Date: | 2024–10–10 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:1397 |
| By: | Luis Fernando Colunga Ramos |
| Abstract: | In some advanced and emerging economies, contrary to expectations, it has been observed that increases in short-term interest rates are accompanied by increases in bank credit; a phenomenon referred to as "the loan puzzle." This study investigates, through the estimation of a structural vector autoregressive model using national and sectoral-level data, whether this phenomenon occurred in the Mexican economy between 2001 and 2019. The results suggest that, in response to a positive shock to short-term interest rates, the volume of bank credit to firms exhibits a positive and short-lived response but subsequently decreases. This response is primarily observed in sectors that had the lowest average delinquency rates during the analysis period. This suggests that banks would grant more loans to relatively safer companies, while, in response to such monetary tightening, they would reduce their investments in riskier and longer-term assets, such as consumer loans and loans to the real estate sector. |
| Keywords: | Monetary Policy;Bank Credit;Vector Autoregressive Model |
| JEL: | E51 E52 E58 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:bdm:wpaper:2024-15 |
| By: | Alberto Botta; Eugenio Caverzasi; Alberto Russo |
| Abstract: | With central banks and national governments returning to more conservative monetary and fiscal policies after Covid, the debate about the macroeconomic effects of fiscal rules has revamped. We address this topic via an extended version of the hybrid ABM-SFC model in Botta et al. (2024) that includes a Taylor-type monetary policy rule and a variety of fiscal rules aimed at reducing the public debt-to-GDP ratio. We compare spending-based fiscal rules vastly advocated by international economic institutions with wealth tax-based fiscal policies. We do this in the context of a modern financialized economy where securitization and complex financial products like Asset-Backed Securities (ABS) alter economic dynamics and the effectiveness of monetary policy in controlling inflation. We assume heterogeneous households to track how alternative fiscal strategies affect income and wealth inequality. Our findings are threefold. First, spending-based fiscal rules can reduce the debt-to-GDP ratio in the long term but at the cost of significantly higher unemployment and permanently lower real GDP. Second, wealth tax-based fiscal policies reduce public debt without harming economic performance. Third, perhaps unexpectedly, in a financialized economy, spending-based fiscal austerity may hurt the relative position of rich households in wealth distribution as much as a wealth tax does; this is due to capital losses that spending cuts may eventually induce in households’ financial wealth. In the end, wealth taxes are preferable to spending cuts, and the usual political opposition against them by the rich appears largely unfounded given their potential economic benefits compared to spending-based fiscal austerity. |
| Keywords: | Spending-based fiscal rule, Wealth tax, Securitization |
| JEL: | E44 E63 H63 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:pke:wpaper:pkwp2412 |
| By: | Vito Cormun (Santa Clara University, USA); Kim Ristolainen (Turku School of Economics, University of Turku, Finland) |
| Abstract: | Leveraging Wall Street Journal news, recent developments in textual analysis, and generative AI, we estimate a narrative decomposition of the dollar exchange rate. Our findings shed light on the connection between economic fundamentals and the exchange rate, as well as on its absence. From the late 1970s onwards, we identify six distinct narratives that explain changes in the exchange rate, each largely non-overlapping. U.S. fiscal and monetary policies play a significant role in the early part of the sample, while financial market news becomes more dominant in the second half. Notably, news on technological change predicts the exchange rate throughout the entire sample period. Finally, using text-augmented regressions, we find evidence that media coverage explains the unstable relationship between exchange rates and macroeconomic indicators. |
| Keywords: | Exchange rates, big data, textual analysis, macroeconomic news, Wall Street Journal, narrative retrieval, scapegoat |
| JEL: | C3 C5 F3 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:tkk:dpaper:dp167 |
| By: | Ahnert, Toni (European Central Bank); Bertsch, Christoph (Research Department, Central Bank of Sweden); Leonello, Agnese (European Central Bank); Marquez, Robert (University of California, Davis) |
| Abstract: | Shocks to banks’ ability to raise liquidity at short notice can lead to depositor panics, as evidenced by recent bank failures. Why don’t banks take a more active role in managing these risks? In a standard bank-run model, we show that risk management failures are most prevalent when exposures are more severe and managing risk would be particularly valuable. Bank capital and deposit insurance coverage act as substitutes for risk management on the intensive margin but as complements on its extensive margin, encouraging the adoption of risk management operations. We provide insights for the appropriate regulation of bank risk-management operations. |
| Keywords: | Banking crises; depositor withdrawals; asset valuations; risk management |
| JEL: | G01 G21 G23 |
| Date: | 2024–09–01 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:rbnkwp:0441 |
| By: | Carolina Celis (Inter-American Development Bank); Arturo Galindo (Inter-American Development Bank); Liliana Rojas-Suarez (Center for Global Development) |
| Abstract: | This paper presents findings from a comprehensive survey of 18 central banks and banking supervisor authorities in Latin America and the Caribbean, including major economies like Argentina, Brazil, Chile, Colombia, and Mexico. The survey aimed to assess the adoption of the Basel III standards across the region and revealed significant diversity in regulatory capital frameworks. Notably, while 75 percent of respondent countries have adopted Basel III for some financial intermediaries, 44 percent still maintain hybrid systems allowing for Basel I or II standards. These results highlight the region's varied approach to financial regulation, pointing to both progress in adopting international standards and the persistence of legacy regulatory regimes. The detailed findings and constructed indexes provide valuable insights into the state of financial regulation in the region, reflecting a landscape of both convergence and divergence in banking supervision practices. |
| Keywords: | Financial Regulation, Banking Supervision, Basel III Adoption |
| JEL: | E58 G21 G28 |
| Date: | 2024–10–10 |
| URL: | https://d.repec.org/n?u=RePEc:cgd:wpaper:705 |
| By: | Afees A. Salisu (Centre for Econometrics & Applied Research, Ibadan, Nigeria; Department of Economics, University of Pretoria, Pretoria, 0002, South Africa); Ahamuefula E. Ogbonna (Centre for Econometrics & Applied Research, Ibadan, Nigeria.); Elie Bouri (School of Business, Lebanese American University, Lebanon.); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa) |
| Abstract: | Using generalized autoregressive conditional heteroscedasticity-mixed data sampling (GARCH-MIDAS) model with monthly Economic Policy Uncertainty (EPU) index and daily stock volatility of 149 banks in the United States from August 2000 to August 2023, we show that EPU plays a significant role in predicting bank stock volatility. Across the groups of large, mid, and small cap banks, stock volatility tends to increase in response to EPU, suggesting that growing uncertainty induces higher volatility in bank stocks. EPU has a stronger impact on large-cap banks. The outperformance of the GARCH-MIDAS-EPU model holds in an out-of-sample analysis, regardless of market capitalization and forecast horizons. |
| Keywords: | Economic policy uncertainty (EPU), Bank-level stock returns volatility, GARCH-MIDAS model |
| JEL: | C32 C53 D80 G10 G21 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:pre:wpaper:202444 |
| By: | Meister, Lorenz; Menkhoff, Lukas; Schröder, Carsten |
| JEL: | D31 G11 G51 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:vfsc24:302335 |
| By: | Andrej Cupak (National Bank of Slovakia); Pavel Gertler (National Bank of Slovakia); Daniel Hajdiak (National Bank of Slovakia); Jan Klacso (National Bank of Slovakia); Stefan Rychtarik (National Bank of Slovakia) |
| Abstract: | This paper presents the findings from a novel survey examining awareness and interest in the future usage of the digital euro in Slovakia. Approximately 34% of the respondents have already heard or read about the digital euro. Around 26% express an intention to use this new digital currency. The likelihood of its usage depends on political preferences, trust in institutions such as the central bank, and preferences for cash payments, in addition to standard socio-economic factors. The survey also reveals that privacy and transaction security are among the top concerns for potential users. The majority of respondents plan to allocate nearly 20% of their net monthly income to digital euro holdings. These insights may provide valuable guidance for shaping the operational framework of the digital euro and informing future communication strategy. |
| JEL: | D14 E42 E51 E52 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:svk:wpaper:1111 |