|
on Financial Development and Growth |
| By: | Prince, Ehsanur Rauf |
| Abstract: | This study examines the impact of public investment on economic growth in Ethiopia, focusing on both long-run dynamics and short-run adjustments while accounting for key macroeconomic determinants. The study adopts a quantitative time-series approach using annual data from 1983 to 2024. An autoregressive distributed lag (ARDL) model is employed to estimate long-run and short-run relationships. Unit root and bounds tests are conducted to establish stationarity and cointegration, followed by an error correction model (ECM). Diagnostic and stability tests ensure model robustness, and Granger causality analysis examines directional relationships. The results confirm a long-run equilibrium relationship among the variables. Public investment has a positive and significant long-run effect on economic growth, while it remains insignificant in the short run, indicating delayed impact. Labour force and gross capital formation significantly promote growth, whereas inflation, interest rates, and external debt service exert negative effects. Foreign aid shows a weak negative influence, suggesting inefficiencies in its utilization. The error correction term indicates a moderate speed of adjustment toward equilibrium. Causality results reveal a unidirectional relationship from public investment to economic growth. The study contributes by constructing a composite index of public investment and providing updated empirical evidence for Ethiopia, offering policy-relevant insights on enhancing the efficiency of public investment for sustainable growth. |
| Keywords: | Public Investment; Economic Growth; ARDL Model; Cointegration; Ethiopia |
| JEL: | E0 E01 F1 F2 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:129433 |
| By: | Prince, Ehsanur Rauf |
| Abstract: | This paper examines the macro-econometric relationship between external sector dynamics and agricultural food production in Ethiopia. Utilizing a comprehensive structural framework, this study investigates the long-run and short-run impacts of official development assistance (ODA), foreign direct investment (FDI), trade openness, and personal remittances on the Ethiopian Food Production Index. Using annual time-series data spanning from 1990 to 2024 and employing a Vector Error Correction Model (VECM), the framework captures complex cointegrating properties and systemic feedback mechanisms. The empirical findings indicate that trade openness and macroeconomic remittances exert statistically significant positive effects on food production in the long run. Foreign direct investment demonstrates a positive but modest long-run contribution, while official development assistance exhibits a minor negative impact, highlighting potential aid-dependency distortions and structural misallocation. The error correction term is found to be -0.65, implying a robust and rapid adjustment speed toward long-run equilibrium. These insights indicate that Ethiopia can structurally optimize its food production systems by deepening regional and global trade integration, creating targeted agro-industrial investment frameworks, and formalizing diaspora resource channels. |
| Keywords: | Ethiopia, Food Production, Trade Openness, Foreign Direct Investment, Remittances, Official Development Assistance, VECM |
| JEL: | E0 F0 F1 F4 F41 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:129427 |
| By: | Bongers, Anelí; Canova, Fabio; Luintel, Kul; Torres, José Luis |
| Abstract: | We examine the macroeconomic implications of remittances in Nepal, a low-income country with a high remittance to GDP ratio and a significant trade deficit. Using a small open economy model with urban and rural households, segmented labor, incomplete financial markets, and subsistence consumption, we study exogenous and endogenous remittance variations, and remittance shocks affecting productivity. We analyze a policy forcing a share of remittance to go to capital investment. Remittances finance a trade deficit while maintaining a balanced current account. They increase income and consumption, but not necessarily domestic production. Policy implications are discussed. |
| JEL: | F22 F24 F41 E32 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21204 |
| By: | Hoekman, Bernard; Prosi, Daniel; Sanfilippo, Marco; Ticku, Rohit |
| Abstract: | This paper provides evidence of spillover effects from foreign direct investment (FDI) through forward linkages, a relatively neglected channel to enhance national competitiveness that is likely to become more important as countries seek to bolster domestic competitiveness and resilience to geo-economic shocks. Using granular information on the universe of firm-to-firm transactions and inward FDI in Rwanda, we find substantial and persistent effects on value-added, employment, and productivity of domestic firms after beginning to source from foreign-owned enterprises. These effects are more pervasive than those associated with selling to foreign-owned firms – the backward linkages emphasised in the literature. Suggestive evidence reveals that foreign-owned firms provide higher-quality intermediate inputs than domestic suppliers, particularly in specialized business and professional services that are difficult to import, and that these inputs complement rather than crowd out domestically sourced inputs. |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21298 |
| By: | Lukas Boehnert |
| Abstract: | In 1950, highly specialized U.S. regions had higher per capita incomes than those with greater industrial diversity. Since then, however, the more specialized regions have grown persistently slower. I rationalize this novel finding in a dynamic multi-industry model featuring two opposing forces. On the one hand, specialization raises productivity via agglomeration economies. On the other hand, it increases exposure to sectoral shocks. Real factor adjustment costs and financial frictions make reallocation in response to shocks costly and long-lasting. Disciplined by U.S. Census data, the model explains half of the observed relationship between initial specialization and subsequent growth, with financial frictions accounting for more than half of this adverse effect. A constrained-efficient planner allocation reveals that less specialization can raise welfare by reducing a region’s exposure to industry-specific downturns. |
| Keywords: | regional specialization, regional growth, sectoral shocks, factor reallocation, agglomeration economies, financial frictions |
| JEL: | O4 R1 N9 E1 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12798 |
| By: | Martijn Boons; Anthony M. Diercks; Petra Sinagl; Andrea Tamoni |
| Abstract: | We study how macroeconomic developments affect asset prices by analyzing the response of equity yields to a well-identified long-run growth shock. Using synthetic equity yield data from Giglio et al. (2024), we show that a positive long-run shock steepens the equity yield curve by increasing expected dividend growth while leaving discount rates largely unchanged. We examine how the investment driving this growth is financed and how yields respond across value and growth firms. Growth-firm yields respond more strongly than value-firm yields, reflecting larger changes in expected dividend growth. Ai et al. (2018)'s model, modified to separate cash dividends from total payout, best matches these responses relative to benchmark equity term structure models. |
| Keywords: | equity term structure; total factor productivity (TFP) news shock; equity yields; dividend growth; discount rates; payout policy |
| JEL: | E32 G12 O40 |
| Date: | 2026–06–23 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:103445 |
| By: | Nicolas Himounet; Francisco Serranito; Julien Vauday |
| Abstract: | When does uncertainty become expansionary? While the empirical literature generally concludes that uncertainty depresses economic activity, recent theoretical contributions suggest that some forms of uncertainty may instead stimulate investment and output. This paper argues that the macroeconomic effects of uncertainty depend jointly on its composition and the prevailing uncertainty regime. Using sixteen U.S. uncertainty indicators over the period 1990–2024, we construct two orthogonal latent factors through principal component analysis. The first captures the overall level of uncertainty, whereas the second distinguishes financial from non-financial uncertainty. An independent VARIMAX rotation validates this interpretation. We then estimate state-dependent local projections to examine how different uncertainty shocks affect industrial production and employment across low-, moderate-, and high-uncertainty regimes. We find that financial uncertainty shocks generate the conventional contractionary effects. In contrast, non-financial uncertainty shocks significantly increase economic activity when aggregate uncertainty is moderate or high, while they have no significant effect during low-uncertainty periods. These findings suggest that the composition of uncertainty is a key determinant of its macroeconomic consequences and provide new aggregate evidence supporting recent theories predicting expansionary effects of non-financial uncertainty. |
| Keywords: | Uncertainty, Financial uncertainty, Local projections, State dependence, Principal component analysis. |
| JEL: | C32 C38 E32 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:drm:wpaper:2026-15 |
| By: | Emmanuel Caiazzo (Parthenope University of Naples and MoFiR.); Pietro Panizza (University of Calabria); Alberto Zazzaro (University of Naples Federico II, CSEF and MoFiR.) |
| Abstract: | Competition between the United States and China is likely to shape the course of history in the coming years. Does foreign aid constitute an arena of confrontation? Using the OECD Creditor Reporting System and the Global Chinese Development Finance Dataset, we study the relationship between the aid-commitment strategies of Beijing and Washington. Employing an instrumental variables approach, we find that the United States increases its aid commitments in recipient countries where China commits more funds. The effect is stronger when the United States has close political or commercial ties with the recipient country and is larger in years of heightened US–China political disagreement. These findings are consistent with a framework in which the two countries compete to acquire influence over the recipient countries. |
| Keywords: | International aid, Donor coordination, US-Sino competition. |
| JEL: | F35 O19 |
| Date: | 2026–07–08 |
| URL: | https://d.repec.org/n?u=RePEc:sef:csefwp:788 |
| By: | Akey, Pat; Gupta, Nandini; Lewellen, Stefan |
| Abstract: | Rising government intervention, corporate political spending, and geopolitical rifts underscore the importance of the link between politics and finance. This review describes how politics affects firms, banks, households, and markets. Companies form political ties through board connections, lobbying, revolving-door hires, and contributions. In return, they gain access to procurement contracts, cheaper debt, bailouts, policy information, and reduced enforcement. Political ties are generally associated with increased shareholder value but can also be costly during periods of political disruption. Political factors spill over to banking, where banks favor connected firms and secure regulatory forbearance; to households, whose partisan beliefs shape investments; to asset markets, which price political risk; and to global capital markets, where investment and banking flows respond to geopolitical risks. We conclude with open questions, including which types of money matter most in politics, how politics influences relational contracts, and the need to integrate political economy factors into finance theory. |
| Keywords: | Political connections; Campaign contributions; Financial markets; Corporate finance; Lobbying |
| JEL: | G18 G28 G38 D72 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20896 |
| By: | Reis, Ricardo |
| Abstract: | Large stocks of public and external debt tempt policymakers to extract resources from their creditors. This article characterizes three broad forms of financial repression that serve this purpose. The first consists of direct taxation of the financial sector through levies on financial transactions, banks’ income, or pension-fund assets. The second is a sudden and sufficiently persistent devaluation of the currency. The third raises the demand for the non-monetary services provided by different types of government liabilities while keeping their supply scarce, thereby creating yield discounts. Reviewing historical experience, including recent years, the article concludes that each of these revenue sources can occasionally be large, but that policies designed to exploit them often fail. Financial repression is an alluring but ultimately illusory temptation: yielding to it typically generates substantial efficiency losses while producing only limited revenue. |
| JEL: | E44 E60 F30 F41 G10 H20 H60 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21072 |
| By: | Yeva Nersisyan; L. Randall Wray |
| Abstract: | This paper examines the rise of the plutonomy--an economy dominated by the new plutocrats--and compares it with the Gilded Age of the 1920s. We show how John Kenneth Galbraith’s analysis in his classic, The Great Crash, offers insights into our current predicament. The financing used by the investment trusts that pumped up the stock market then looks eerily similar to the circular finance used by today's tech firms that dominate the equity market today. The assets held by those trusts were the stocks and debts of other trusts--just as our tech firms owe and own each other today. That ensures that when liquidation of positions begins, a Fisher-type debt deflation dynamic will take hold. Furthermore, just as the economy of the late 1920s relied on the spending of the rich, today's record level of inequality means that the economy must rely excessively on the investment spending of the Magnificent Seven and consumption spending of the millionaires, billionaires, and trillionaires minted by the boom of their share prices. Galbraith explained how FDR’s New Deal reconstructed the economy so that its growth relied on mass consumption supported by greater income equality, by reigning-in finance, and by creating a bigger role for government. We warn that government is ill-prepared to deal with the coming financial crisis and we offer alternatives to the strategy adopted to deal with the Global Financial Crisis. |
| Keywords: | The Great Crash; Plutonomy; Artificial Intelligence; Magnificent Seven; financial crisis; Minsky; Money Manager Capitalism |
| JEL: | B15 B25 B26 B52 E12 E32 E44 E62 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:lev:wrkpap:wp_1122 |
| By: | Martinez, Joseba; Ozturk, Fatih; Rabanal, Pau; Unsal, Filiz |
| Abstract: | What distinguishes good credit booms from bad ones? We propose a new mechanism: collateral scarcity. When shocks raise investment demand but collateral values fail to keep pace, banks can no longer screen borrowers effectively using collateral. Banks optimally respond by relaxing lending standards, funding negative-NPV projects to sustain lending to positive-NPV ones. This is a bad credit boom. We show that bad booms are constrained inefficient because banks do not internalize the equilibrium effects on collateral supply of forming new credit relationships. Optimal policy dampens credit growth during booms and captures one-fifth of the welfare gains from eliminating asymmetric information. We find support for the theoretical prediction that collateral requirements fall disproportionately for low-productivity borrowers during bad booms in firm-level data. Exploiting regional variation in house prices, we find that this effect is stronger where collateral supply is less responsive, distinguishing our mechanism from theories based on collateral supply. |
| Keywords: | Asymmetric information; Collateral; Credit booms; Lending standards over the cycle; Macro-financial linkages |
| JEL: | E44 E32 G21 D82 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21028 |
| By: | Ana Fostel (University of Virginia); John Geanakoplos (Yale University); Gregory Phelan (Williams College) |
| Abstract: | Cross-country disparities in collateral technologies alone can account for large capital flows among mature economies, and allow the most advanced country to run a permanent trade deficit. When the collateral technology advantage is in creating negative beta (super safe) financial assets backed by positive beta assets, a Global Collateral Cycle emerges, with pro-cyclical gross and net flows and increased global asset price volatility. The supply of super safe assets is necessarily curtailed in downturns, providing a complementary (supply) channel to the flight to safety (demand) channel for explaining why US safe asset prices rise during crises. |
| Date: | 2026–04–01 |
| URL: | https://d.repec.org/n?u=RePEc:cwl:cwldpp:2521 |
| By: | Benhima, Kenza; Bolliger, Elio; Davenport, Margaret |
| Abstract: | We identify a novel channel of international financial contagion driven by investor expectations. Using a unique dataset linking investors’ cross-country GDP growth expectations to their equity mutual fund investments and to funds’ country allocations, we show that inflows into mutual funds respond strongly to fund-level expected growth, whereas funds’ country allocations react only weakly to country-specific expectations. This asymmetry generates co-ownership spillovers: negative expectations about one country propagate mechanically to other countries held in the same funds, even in the absence of changes in the country's own expected fundamentals. We develop a portfolio choice model with delegated investment and portfolio stickiness to rationalize this pattern. Because country weights in global portfolios are highly granular, these spillovers are quantitatively important, accounting for about 80% of expectation-driven capital flow reallocation. Small countries are disproportionately exposed to these spillovers, while large countries are their main sources. |
| JEL: | D84 F32 G11 G15 G23 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21134 |
| By: | Lóránth, Gyöngyi; Oláh, Zsolt; Schindele, Ibolya |
| Abstract: | We study a large-scale debt-relief intervention implemented through Hungary’s 2011 Early Repayment Scheme, which allowed repayment of foreign-currency mortgages at a fixed, below-market exchange rate. High FX-exposure banks reduced household lending by 19%, while their corporate lending remained stagnant, whereas low-exposure banks expanded lending by 40%. Loan-level evidence suggests a strong tightening of supply: approval rates at high-exposure banks declined by 17–22 percentage points, and by an even larger 26–32 points for low-income applicants, with no corresponding change at low-exposure peers. Prepayment patterns display strong selection: wealthier households were more likely to repay, while heavily indebted borrowers were less likely to do so. These findings suggest that unfunded debt relief can exacerbate inequality in both participation and access to credit. |
| Keywords: | Household debt; Foreign currency debt; Debt relief; Inequality |
| JEL: | G21 D14 E44 H31 D31 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20961 |
| By: | J. Scott Davis; Lillian Derr |
| Abstract: | This paper investigates the relationship between government debt and interest rates in advanced economies. We consider two separate, yet closely related puzzles in the data. Since the Global Financial Crisis, OECD countries have experienced a dramatic surge in government debt-to-GDP ratios, yet there was not a corresponding surge in sovereign bond yields. In addition, across countries there is no relationship between government debt levels and interest rates, and a country like Japan has the highest government debt level among advanced economies yet the lowest sovereign bond rates. To address both of these puzzles, we propose that the effect of government borrowing on interest rates depends critically on who finances that debt. We extend the work of previous studies that have estimated the effect of expected government debt or deficits on interest rates, and we add an international dimension by incorporating forecasts of the current account balance or net foreign asset position. We find that an increase in government debt financed from domestic savings has less of an effect on interest rates than an increase in government debt financed by foreign borrowing, and government debt has less of an effect on interest rates in a country that is a net international creditor than one that is a net international debtor. |
| Keywords: | government bond yields; government debt; current account |
| JEL: | E6 F3 F4 H6 |
| Date: | 2026–06–22 |
| URL: | https://d.repec.org/n?u=RePEc:fip:feddwp:103436 |
| By: | Tarek Alexander Hassan; Thomas M. Mertens; Jingye Wang; Tony Zhang |
| Abstract: | This paper develops a calibrated general-equilibrium model to study how different configurations of trade and financial policy reshape the hierarchy of global currencies—and the U.S. dollar's position at its anchor. Currency safety and anchor status arise endogenously from each economy's 'effective size'—the weight its domestic shocks carry in setting world prices. Tariffs reduce this effective size on the goods side; capital controls do the same on the financial side. A unifying result emerges: The economy that maintains the deepest integration with the global trading network retains the largest safety premium and gains anchor status. We use this framework to evaluate the effects of three policy levers for Europe that affect the effective size of the euro: internal harmonization and enlargement, trade openness, and capital-account openness. The stakes are large: In our model, shifts in currencies' safety can redirect global capital flows and alter sovereign borrowing costs by hundreds of billions of dollars annually. |
| JEL: | F13 F31 F33 F36 F38 F41 G15 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35386 |
| By: | Monnet, Eric |
| Abstract: | The Bretton Woods system is often described as freeing national monetary policies from the gold-reserve constraints of the gold standard. Breaking the “gold fetters†was essential to the embedded liberalism and economic interventionism of the postwar era. Yet gold retained a crucial role: monetary authorities backed currency with gold reserves, both de facto and de jure, frequently maintaining gold cover ratios comparable to those of the gold standard. How, then, could gold backing coexist with autonomous domestic macroeconomic policy? This article shows that the combination of two phenomena provides an answer: credit growth and currency growth became increasingly decoupled after 1945, and central banks shifted their emphasis from money toward credit. This created substantial scope to stimulate domestic economic activity through credit expansion without being constrained by the link between gold and currency in circulation. Econometric analysis for 38 countries indicates that gold reserves remained strongly correlated with currency, but not with bank credit. Changes in credit markets and central bank instruments therefore allowed gold backing to persist largely as a symbolic tie, without constraining domestic policy. Gold, however, exerted pressure on US policy and shaped international monetary relations. These findings indicate that institutional persistence does not necessarily generate similar economic effects across historical periods. |
| Keywords: | Bretton Woods |
| JEL: | D8 E5 F5 F55 M14 N1 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21215 |
| By: | Cosimo Petracchi (Tor Vergata University of Rome); Luca Riva (Central Bank of Ireland and University College Dublin); Marco Stenborg Petterson (University of Naples Federico II and CSEF.) |
| Abstract: | This paper proposes a firm-level mechanism that explains why exchange-rate regimes are largely neutral with respect to real macro variables: exporters actively adjust marginal costs and markups to absorb nominal exchange-rate fluctuations. We quantify this mechanism using micro-level data from the European car market (1970–99). We show that floating regimes are associated with limited adjustment in destination-currency prices and limited response in quantities sold. We then estimate a structural demand-and-supply system to recover product-level markups and marginal costs. At breaks from pegged to floating regimes, producer-currency markups (marginal costs) fall on impact by around 11% (10%). A two-country real business cycle model with segmented financial markets, incorporating pricing-to-market and operational hedging, rationalises these patterns. Our model underscores the role of real micro rigidities, rather than nominal rigidities, in the weak transmission of exchange-rate fluctuations to real macro variables. |
| Keywords: | European car market, exchange-rate regimes, demand estimation, pricing-to-market, variable markups, real rigidities. |
| JEL: | D22 F31 F41 F44 L11 L62 N14 |
| Date: | 2026–07–09 |
| URL: | https://d.repec.org/n?u=RePEc:sef:csefwp:789 |
| By: | Beckmann, Elisabeth; Weinel, Jette Leonie |
| Abstract: | We study the evolution of bank branch networks in ten CESEE countries between 2013 and 2021. Using a manually compiled dataset of all branches and their geocoordinates, we document a decline exceeding 30%, with substantial heterogeneity across and within countries. We show that banking market consolidation is a key driver of closures, while profitability and local economic growth mitigate them. Branches in highly urban or very rural areas close more often. Competitive effects are nonlinear: moderate clustering lowers closure risk, but intense competition increases it. These patterns differ markedly across CESEE banking systems during the entire period we analyze. JEL Classification: D53, G21, R12 |
| Keywords: | banks, consolidation, debranching, spatial distribution |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263256 |
| By: | Federico Daniel Forte |
| Abstract: | This Working Paper provides the first analysis of credit relationships between financial institutions and firms through the lens of hypergraphs. We applied empirically this approach to Credit Registry data from the Central Bank of Argentina, covering the period from Aug. 2023 to Dec. 2025 and focusing on commercial loans. This Working Paper provides the first analysis of credit relationships between financial institutions and firms through the lens of hypergraphs. We applied empirically this approach to Credit Registry data from the Central Bank of Argentina, covering the period from Aug. 2023 to Dec. 2025 and focusing on commercial loans. |
| Keywords: | Network Analysis, Análisis de redes, Credit, Crédito, Loans, Préstamos, Systemic Risk, Riesgo sistémico, Argentina, Argentina, Banks, Banca, Central Banks, Bancos Centrales, Financial Regulation, Regulación Financiera, Working Paper, Documento de Trabajo |
| JEL: | D85 G21 G28 C63 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:bbv:wpaper:2611 |
| By: | Sergio A. Correia; Stephan Luck; Emil Verner |
| Abstract: | Runs on financial institutions are one of the salient markers of financial crises. But the role of runs in crises is a topic of longstanding debate. Runs can be seen as the key turning point, whereby even small shocks can generate severe crises with widespread bank failures. Another view is that runs are mainly a symptom of deeper rot in the financial system, exacerbating crises rather than being their primary cause. Understanding this debate has first order implications for how to think about financial crises and the appropriate policy responses. In this post, we use a new database of more than 3, 000 bank runs (introduced in our companion post) to show that poor fundamentals are central to explaining both when runs occur and when they have severe economic effects. We argue that this evidence tempers the view that small shocks can have outsized real effects through self-fulfilling run dynamics. |
| Keywords: | banking; bank runs; bank failures; banking crises; financial crises; deposit insurance |
| JEL: | G01 |
| Date: | 2026–07–07 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:103502 |
| By: | Sergio A. Correia; Stephan Luck; Emil Verner |
| Abstract: | Banking crises are commonly associated with bank runs and banking panics, yet our empirical understanding of bank runs is constrained by a lack of bank-level data. In a new paper, we use large language models (LLMs) to extract information on bank runs from millions of digitized historical newspaper pages, creating the most comprehensive database of bank runs in U.S. history. Every bank run episode that we identify is documented on a companion website where users can browse and examine individual episodes, and read the original newspaper articles. In this post, we describe how we built this dataset and discuss what its basic features reveal. |
| Keywords: | bank runs; banking crises; bank failures; deposit insurance; liquidity; solvency; artificial intelligence (AI) |
| JEL: | G01 |
| Date: | 2026–07–07 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:103501 |
| By: | Fohlin, Caroline; Gehrig, Thomas |
| Abstract: | We study the Panic of 1907 to understand how opaque corporate governance and loose market regulation can render financial systems susceptible to financial crises. Using a new daily dataset for all stocks traded on the New York Stock Exchange between 1905 and 1910, we study the impact of information asymmetry during the Panic of 1907 — one of the most severe financial crises of the 20th century. We estimate that the acute liquidity freeze drove up the median spread from 0.8% to 3% during the peak of the crisis in October of that year. Spreads rose most among mining companies — the industry with the worst track record of corporate governance and the epicenter of the rumors that triggered runs on several financial institutions with links to a notorious firm in the sector. Stocks of the highly-regulated railroad firms and companies with close ties to Wall Street's “Money Trust†weathered the crisis with the greatest trading liquidity. We find other hallmarks of information-based illiquidity: trading volume dropped and price impact rose. Despite short-term cash infusions into the market, the market remained relatively illiquid for several months following the peak of the panic. Thus, our findings demonstrate how opaque systems allow idiosyncratic rumors to spread and amplify into a long-lasting, market-wide crisis. Asset pricing tests suggest that traders recognized and incorporated liquidity considerations in their pricing of market risk. |
| Keywords: | Shadow banking; Banking panics; funding illiquidity; market illiquidity; Asymmetric information |
| JEL: | E65 G00 G14 N00 N21 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20864 |
| By: | Hui He; Yao Zhao; Dayong Zhou |
| Abstract: | The paper develops a new monetarist DSGE model to examine the macroeconomic implications of fiat-money-backed stablecoins and the effectiveness of prudential policies in mitigating associated risks. The model features two segmented sectors: a centralized real economy where fiat money facilitates consumption and investment, and a decentralized virtual economy characterized by anonymous bilateral search and matching, in which transactions are exclusively conducted using stablecoins. Calibrated to the U.S. economy, the simulation results reveal that stablecoins amplify the propagation of exogenous shocks to key macroeconomic variables by weakening the effectiveness of monetary policy. However, prudential regulations—specifically those governing the backing ratio of stablecoins to fiat-denominated reserve assets, analogous to banking liquidity requirements—can serve as stabilizing instruments, dampening volatility and enhancing macroeconomic resilience in the presence of stablecoins. |
| Keywords: | Stablecoin; DSGE; Monetary Search; Currency Competition; Prudential Regulation; IMF working papers; Dayong Zhou; dampening volatility; views of the IMF; digital currency; can stablecoins; Real interest rates; Dynamic stochastic general equilibrium models; Consumption; Global |
| Date: | 2026–06–26 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/129 |
| By: | Barrios, John; Bertsch, Christoph; Schilling, Linda |
| Abstract: | Stablecoins increasingly link Treasury markets and decentralized finance, and this paper shows they do more than bridge the two: they transmit runs between them. We develop a model in which stablecoins are fully backed by Treasury bonds, pay no interest, and serve as gateway assets to DeFi lending, so that the stablecoin peg, the liquidation price of Treasury reserves, and runs on a DeFi lending protocol are jointly determined. A shock that originates inside DeFi can trigger withdrawals, stablecoin redemptions, and Treasury fire sales, turning crypto-native distress into price pressure in the U.S. Treasury market. The reverse channel is just as consequential: a shock to Treasury values can weaken the peg, strip the dollar value from stablecoin-denominated DeFi claims, and trigger a run on an otherwise sound DeFi protocol. The mechanism rests on a no-interest paradox: the fixed, non-interest-bearing design that makes a stablecoin look safe in isolation is exactly what forces it to depend on DeFi returns for its appeal, and that dependence is what lets fragility travel in both directions once the peg, reserve liquidation, and DeFi runs are solved jointly rather than fixed in advance. |
| Keywords: | Stablecoins, Decentralized Finance (DeFi), Exchange rate pegs, Treasury Mar- kets, Financial Contagion, Systemic Risk, Collateral Liquidation, Asset Fire Sales. |
| JEL: | E42 E44 G01 G21 G23 |
| Date: | 2026–06–30 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:129798 |
| By: | Canova, Fabio; Pérez Forero, Fernando J. |
| Abstract: | We investigate the transmission of US monetary policy shocks in high and low inflation regimes using a Bayesian threshold vector autoregressive model. The propagation of conventional disturbances differs: the peak response of output growth and inflation is smaller, but the effects lasts longer when inflation is high. Liquidity shocks are more expansionary when inflation is high. The reaction of financial markets to the shocks accounts for the differences. Implications for theoretical models are discussed. |
| Keywords: | Monetary policy shocks |
| JEL: | C3 E3 E5 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21339 |
| By: | Jondeau, Eric; Vallée, Lou-Salomé |
| Abstract: | This paper develops a macroeconomic framework to measure the environmental footprint of a national financial system. By combining the national financial accounts with an environmentally extended multi-regional input-output (EE-MRIO) model, we estimate the greenhouse gas (GHG) emissions and other environmental pressures indirectly financed by domestic financial institutions. The framework allows us to reconstruct "from-where-to-where" exposures across institutional sectors and asset classes, while accounting for the full chain of financial intermediation and avoiding double counting. Applying this methodology to the Swiss financial system, we find that financed emissions amount to 120 million tons of CO2e in 2022, around 2.9 times Switzerland’s territorial emissions. Although emissions per unit of assets have declined, the overall footprint remains large due to asset growth and substantial foreign exposures. Extending the analysis beyond GHGs, we show that financed pressures on land use, water use, and material resource extraction are of similar magnitude to Switzerland’s consumption-based environmental footprint. |
| Keywords: | Environmental footprint; financed emissions; financial accounts; Input-output structure |
| JEL: | G20 Q54 Q56 E44 C67 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20937 |