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on Financial Development and Growth |
| By: | Besley, Tim; Burchardi, Konrad; Ghatak, Maitreesh; Xu, Linchuan |
| Abstract: | Expanding access to credit markets can be seen as a source of empowerment when it increases economic opportunities and changes who is able to start a new business. It can also have equilibrium effects on wages so that the gains from financial development are widely shared. But others see credit market expansion as an unwelcome process of `financialization' with many of the gains being appropriated by financial institutions, pointing to the concentration in ownership of financial intermediaries, especially banks, around the world. This paper explores these issues, investigating the consequences of financial sector expansion for profits, wages and entrepreneurial activity using a calibrated general equilibrium model with financial frictions, endogenous default, and wealth inequality. A key element of the model is to examine how the surplus created in the real economy by expanding financial markets is shared between borrowers, lenders, and workers employed by firms. We show that competition in banking can be an important determinant of both equity and efficiency, and hence the gains from financial inclusion. The framework also highlights the role that different types of contractual imperfections can play in determining the distribution of gains from expanding market access. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19225 |
| By: | Megan Lang; Alpha Ly |
| Abstract: | Even as governments push to build infrastructure to achieve universal access to electricity, demand-side barriers constrain uptake where infrastructure already exists. This paper assesses the impact of the quasi-experimental introduction of mobile money on electricity adoption by households. We conduct a granular district-level analysis of 33 sub-Saharan African countries that leverages differential sub-national mobile network coverage. We find that mobile money access improves district-level power uptake by around 24% relative to similar districts without mobile money access. We provide evidence consistent with demand-side channels, specifically reduced financial frictions, driving this relationship as opposed to supply-side infrastructure expansion. Furthermore, we highlight the enabling role of mobile network coverage and the detrimental impact of mobile money taxes on electrification efforts. |
| Keywords: | mobile money, financial inclusion, electrification, demand-side factors |
| JEL: | O16 O33 Q40 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12921 |
| By: | Besley, Timothy (London School of Economics); Lambert, Peter John (London School of Economics and University of Warwick and CAGE); Michalski-Roland, Isabelle (Bank of England); Van Reenen, John (London School of Economics) |
| Abstract: | This paper examines the impact of credit frictions arising from firm-level default risk on aggregate economic performance. We build a micro-to-macro model with heterogeneous firms and sector-specific production functions, showing that perceived default risk is a sufficient statistic for credit frictions. Using UK administrative data (2004-2019) matched to S&P risk measures, counterfactual estimates reveal that relaxing frictions raises output by 25% and wages by 23%. Ignoring equilibrium wage adjustments overstates output gains, while fixed-capital misallocation approaches understate them. Most gains reflect aggregate capital accumulation. Credit frictions remain above pre-crisis levels, reshape firm size dynamics, increase misallocation across firms, and dampen productivity growth over time. |
| Keywords: | productivity, default risk, credit frictions, misallocation JEL Classification: D24, E32, L11, O47 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:cge:wacage:818 |
| By: | Vives, Xavier; Ye, Zhiqiang |
| Abstract: | We provide a spatial framework to study competition between banks and fintechs in the lending market and examine the impact on investment and welfare. Based on the key differences between banks and fintechs, we derive results consistent with the empirical evidence available. We find that fintechs with inferior monitoring efficiency can successfully enter because of their superior flexibility in pricing and that higher bank concentration leads to higher fintech loan volume. If fintechs and banks have similar funding costs, fintech borrowers pay lower loan rates and have higher default rates than bank borrowers with similar characteristics; however, the result will flip if fintechs have much higher funding costs than banks. The advantage of fintechs in offering convenience can also induce them to charge higher loan rates than banks. Fintech entry will improve welfare if fintechs have high monitoring efficiency and interfintech competition intensity is intermediate. Fintech entry may induce banks’ exit and reduce investment; however, it will increase investment if inter-fintech competition is intense enough. |
| JEL: | G21 G23 I31 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19245 |
| By: | Wenli Cheng |
| Abstract: | This paper develops a Stock-Flow Consistent (SFC) model to analyze the macroeconomic effects of investment and saving decisions. The model explicitly represents the monetary circuit: money is created when the Bank issues loans to finance production; it circulates the economy through transactions between firms and households; and is destroyed when firms repay their loans with sales revenue. The stationary state is a monetary equilibrium in which the flow of credit, income, and expenditure is synchronized with the flow of inputs, goods and services. We examine three transitional experiments. First, in a capital expansion scenario, we show that when a firm invests, real resources are redirected from consumption to capital formation, compelling households to reduce consumption and accumulate capital wealth. This is real saving. At the same time, the expenditure on capital goods generates new income that cannot be spent on consumption goods (priced at cost) and must therefore be saved. This is monetary saving. Investment thus creates both the real and monetary saving needed to finance it. Second, we investigate two variants of the Paradox of Thrift. In the first, the firm maintains its capital stock in anticipation of recovery, and the contraction proves temporary. In the second, the firm reduces its capital stock, leading to a permanent decline in output and household incomes. The results suggest a fundamental asymmetry: investment creates the saving needed to finance it, whereas households saving does not automatically convert to investment. In the absence of corresponding investment, saving can lead to reduced output and income. The findings also highlight the critical role of firm expectations in determining the long- run consequences of saving shocks. |
| Keywords: | Stock-Flow Consistent Models, Monetary Circuit, Investment-Created Savings, Paradox of Thrift, Business Cycles, Transitional Dynamic |
| JEL: | E12 E21 E22 E25 E32 |
| Date: | 2026–08–01 |
| URL: | https://d.repec.org/n?u=RePEc:mos:moswps:paper_1786924004436_190 |
| By: | Lea Best; Sebastian Link; Manuel Menkhoff |
| Abstract: | We use a large panel survey of German manufacturing firms spanning five decades of quantitative investment plans and realizations to study the persistence of investment dynamics. We proxy adverse investment shocks with large downward revisions of firms’ investment plans. Even ten years after a 50% downward revision, annual investment remains about 15% lower. Combining the survey with balance-sheet data and survey-based shock proxies, we show that financial frictions are only part of the explanation. Persistent investment declines are also closely linked to long-lived demand shocks, suggesting that they often reflect firms’ deliberate adjustment to weaker fundamentals. |
| Keywords: | investment, firm dynamics, persistence of adverse shocks, financial frictions, demand shocks. |
| JEL: | D22 D25 E22 E32 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12876 |
| By: | Gurung, Arjun |
| Abstract: | Remittance has become one of the main sources of foreign income and an important part of the Nepalese economy. It plays a significant role in reducing poverty, increasing household income, and maintaining foreign exchange reserves. The study entitled “MACROECONOMIC RELATIONSHIP OF REMITTANCE INFLOW AND OUTFLOW IN NEPAL EMPIRICAL EVIDENCE USING ARDL AND XG BOOST” has been carried out to examine the relationship of selected macroeconomic variables with remittance inflow and outflow. The main objective of this study is to examine the relationship of macroeconomic indicators real GDP, consumption, investment, and inflation on remittance inflow and outflow while specific objectives include to analyze the trend and pattern of remittance inflow and outflow, and to identify the relationship between remittance and major events. This study is based on secondary data covering the period from 1993 to 2023. Data have been collected from various authentic sources such as Nepal Rastra Bank, National Statistics Office, and World Bank database. The study has employed both descriptive, econometric and machine learning method. The Autoregressive Distributed Lag (ARDL) model has been used to estimate relationship between remittance and economic variables. While, a XG BOOST machine learning model has been applied and run to test variable importance. The findings show that remittance inflow has a positive and significant relation on household consumption and Real GDP. Remittance outflow, though relatively smaller, has increased gradually in past few years and shows an association with the inflation rate. The overall result indicates that remittance inflow supports economic growth. While, remittance outflow has a mild effect on the economy of the country. Overall, the results of ARDL and XG BOOST find similar result. For remittance inflow both models show the importance of consumption, where for remittance outflow both models show the importance of inflation rate. |
| Date: | 2026–07–25 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:na6f8_v1 |
| By: | Clement Olalekan Olaniyi (University of South Africa); N.M. Odhiambo (University of South Africa) |
| Abstract: | This study departs from earlier studies by incorporating nonlinearities, asymmetric structures, cross-sectional dependence, and policy variations across countries into the remittance-poverty causal nexus. Due to the high incidence of extreme poverty in sub-Saharan Africa (SSA) despite the persistent remittance inflows to the region, data on SSA for the periods 1981-2020 are analyzed using the Hatemi-J data decomposition procedure, a battery of second-generation estimators, and Dumitrescu-Hurlin heterogeneous panel Granger non-causality test. The findings, unlike prior studies, confirm the existence of cross-sectional dependence, as well as the need for policy diversity among SSA countries. The research outcomes also differ from previous research in that they reveal multiple features of asymmetries in the causality between remittances and poverty reduction which vary across SSA countries. Policy differences among SSA nations to address country-specific peculiarities are attested by symmetric causality. In certain countries, remittance inflows are stimulating factors that induce poverty reduction, whereas, in others, the high incidence of extreme poverty is a causal agent that pushes Africans in the diaspora to send money home to help alleviate poverty. Only a few instances of bidirectional causality have been established. Evidence of no causality is found to exist in some countries. The outcomes of nonlinear and asymmetric causalities are more diverse. All of the pairs of positive and negative components show strong evidence of asymmetric causality, which varies across SSA countries with more informative and robust policy dimensions. The imperative policy implications of the research outputs for poverty reduction are drawn and discussed. |
| Keywords: | Remittance inflows; Poverty reduction; Asymmetric causality; Sub-Saharan Africa |
| JEL: | F24 I3 |
| Date: | 2024–12–30 |
| URL: | https://d.repec.org/n?u=RePEc:afa:wpaper:wp112024 |
| By: | Karen Mathiasen (Center for Global Development); Clemence Landers (Center for Global Development); Nico Martinez (Center for Global Development) |
| Abstract: | In a resource-scarce environment coupled with high and growing demand for aid, the multilateral development banks (MDBs) need to direct grants and concessional finance to the countries that need it the most. Nowhere is this principle more important than IDA, the largest global financing facility for low-income countries. Operationalizing this principle requires that the World Bank prioritize allocating grants and concessional loans to the poorest countries whose access to alternative funding sources is extremely limited. But trends have been moving in the opposite direction. Currently, a majority of IDA countries surpass the income threshold, and many enjoy regular access to capital markets, the two criteria for IDA eligibility. These countries—many of which have exceeded IDA's income threshold for years or even decades—are consuming a disproportionate share of concessional resources, crowding out IDA-only countries with the greatest need. At the same time, IBRD funding for lower-middle-income countries has been on the decline since 2018 and IDA transfers have not kept pace with record profits. Both IDA and IBRD need to course correct. In this paper, we argue that IDA's current financing structure disadvantages the world's poorest countries because an overly flexible graduation process enables better-off countries to remain IDA-eligible for too long. We also make the case that IBRD’s creditworthiness assessments are too conservative and that it has the headroom and prudential space to bring more IDA countries onto its balance sheet. We advance three reforms to address these shortcomings. First, IDA's graduation policy should become more rules-based, with clearer milestones, facilitating transitions rather than leaving them to borrower initiative. Second, IBRD should revise its creditworthiness assessments to better reflect new credit rating agency methodologies and sovereign default and recovery rates. And third, IBRD should introduce a new semi-concessional lending instrument for lower-middle-income countries, funded through its net income, to smooth the graduation transition and expand the overall concessional envelope. Together, these reforms would rebalance burden-sharing between IDA and IBRD and help the most vulnerable countries receive the financing they need as global aid budgets contract, without putting their AAA ratings at risk. |
| Date: | 2026–07–21 |
| URL: | https://d.repec.org/n?u=RePEc:cgd:ppaper:397 |
| By: | Sumit Agarwal; Peiyi Jin; Eswar S. Prasad; Daniel Rabetti |
| Abstract: | The 2016 Panama Papers leak tightened regulatory enforcement around money laundering and offshore banking. We investigate whether the diversion of foreign aid in developing countries led to a shift to cryptocurrency as an alternative laundering platform. We develop a disbursement-timed forensic measure of cryptocurrency activity, combining on-chain Bitcoin transactions and wallet creation, off-chain exchange records, and IP-linked web traffic, and apply it to World Bank aid disbursements covering $238 billion across the 93 recipient countries in our estimation sample during 2018-2024. Exploiting the administrative timing of aid tranche arrivals, we find sharp, short-lived surges of crypto activity at the disbursement month, driven mainly by anonymous and newly created wallets on both tax-haven and mainstream exchanges. Blockchain forensics reveal patterns consistent with the placement, layering, and integration sequence of conventional money laundering. We estimate an implied leakage of 2 to 6 cents per aid dollar, which amounts to roughly 1.7 to 4.4 billion dollars of aid diversion across the tranche arrivals we study. Capture carries no funding penalty: the four sectors where we detect it, Transport, Water and Sanitation, Social Protection, and Governance, still absorb half of subsequent World Bank funding. Cryptocurrency facilitates aid diversion, but its transparent ledgers also leave forensic traces that may help detect and recover diverted funds. |
| JEL: | G15 G18 G29 K29 K42 O16 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35655 |
| By: | Nikolay Hristov; Dominik Menno |
| Abstract: | We study how long-run inflation affects systemic bank-run risk in a medium-scale New Keynesian model with banks and endogenous financial panics. In the benchmark calibration, the bank-run probability more than doubles when annual trend inflation increases from zero to six percent. Higher trend inflation makes price-setting firms more forward-looking, thereby muting expected real-rate declines and amplifying the fall in asset prices during crises. The zero lower bound raises run risk only at low long-run inflation rates. Disinflationary transitions can sharply increase short-run risk, especially if a "cold turkey" disinflation is pursued. Finally, we discuss implications for monetary and macroprudential policy trade-offs. |
| Keywords: | long-run inflation, bank runs, financial panics, crisis probability |
| JEL: | E12 E23 E31 E32 E44 E52 G01 G21 G33 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12918 |
| By: | Shigeto Kitano (Research Institute for Economics and Business Administration, Kobe University, JAPAN; Fuculty of International Studies, Hiroshima City University, JAPAN) |
| Abstract: | Using a DSGE model, we examine the effects of financial repression policies on the Lao economy. Facing a high level of external debt, the Lao government is likely to rely increasingly on domestic financing, thereby creating incentives to use financial repression. We consider two types of financial repression policies: requiring domestic banks to increase their holdings of government bonds and repressing the government's interest payments through a tax on banks' returns on government bonds. Our numerical experiments show that both policies crowd out capital investment, reduce output, and ultimately worsen the government's primary balance. These results suggest that financial repression may worsen the government's fiscal condition despite its intended purpose of easing the fiscal burden. |
| Keywords: | Financial repression; Crowding out; Emerging economies; Laos; DSGE model |
| JEL: | E32 E44 G28 H63 O29 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:kob:dpaper:dp2026-24 |
| By: | Moustafa Chatzouz |
| Abstract: | Public debt and wealth concentration have co-moved persistently across advanced economies and historical periods, defying standard theories of wealth inequality, particularly given that rising inequality has coincided with falling real interest rates in recent decades. I develop a stylized Diamond model with household heterogeneity and progressive taxation to formalize how public debt, through its tax burden, endogenously dictates tax progressivity and thereby affects the wealth distribution. In this framework, permanent debt shocks alter tax progressivity depending on the macroeconomic regime, with debt expansions increasing progressivity when interest rates are high but reducing it when interest rates are low. The resulting impact of public debt on wealth inequality is nonlinear in the overall level of the tax burden, disequalizing below a threshold and equalizing above it. Cross-country empirical evidence supports these predictions and shows that public debt is a quantitatively important, and often dominant, driver of postwar wealth inequality, with sizable effects transmitted primarily through the tax burden. These findings establish the distribution of the tax burden as a primary driver of long-run wealth inequality, and public debt as a central mediating channel through which structural shocks, such as population aging or artificial intelligence, propagate to the wealth distribution. |
| Keywords: | Tax Progressivity; Fiscal Policy; Wealth Inequality; Redistribution; Public Debt; Neoclassical Growth Model |
| Date: | 2026–08–14 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/171 |
| By: | Jeron Tan Kang |
| Abstract: | This paper compares direct-yield and factor-based approaches to U.S. Treasury yield curve forecasting using a common high-dimensional macroeconomic information set. Forecasts are evaluated on monthly zero-coupon yields over the 2015-2025 out-of-sample period. Gains over the random walk are concentrated at short maturities and in slope forecasts, and decline with the forecast horizon. Direct-yield models perform best for slope forecasts and are relatively stronger at short horizons, while factor-based models become more competitive at longer horizons. Macroeconomic predictors provide clear incremental predictive power, strongest for slope-related movements. A trading simulation reinforces that macro-augmented models perform best in slope trades. The simulation also highlights a gap between statistical and economic performance, as the random walk is a strong benchmark under statistical loss but performs poorly as a trading signal. |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2608.07536 |
| By: | Faith Achugamonu; Elena Afanasyeva; Tim Schmidt-Eisenlohr; Matthew P. Seay |
| Abstract: | Following the Global Financial Crisis (GFC), banking supervision and regulation became more stringent for largest banks, particularly systemically important institutions and those with at least $100 billion in consolidated total assets. However, the 2023 stress period following the default of the Silicon Valley Bank (SVB) highlighted that problems at regional banks, which we define as banks between $10 billion and $100 billion in assets, may also cause broader banking system stress. |
| Date: | 2026–08–04 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:103615 |
| By: | G. Charles-Cadogan |
| Abstract: | We develop a behavioural model of bank run exposure in a paycheck-to-paycheck economy with loss averse depositors. Income is received through demand deposits, and consumption ratcheting embeds reference dependence in a parsimonious asset-pricing framework. We show that sufficiently high subjective bad-state probabilities endogenously increase liquidity demand and generate equilibrium stress states supporting bank runs. These states define a Bank Run Exposure State Space and yield a martingale representation for exposure dynamics. A proof-of-concept empirical implementation using Call Report data constructs bank-level exposure proxies from funding and lending composition. A regression-weighted composite measure modestly improves fit relative to a retail-share benchmark, with stronger amplification among small banks and during the post-Silicon Valley Bank (SVB) collapse period. The framework highlights how behavioural liquidity demand alters equilibrium reserve holdings and can crowd out productive lending. |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2608.11266 |
| By: | Juan M. Morelli |
| Abstract: | Stock market participation in the U.S. has changed dramatically over the past four decades. In the mid-1980s, fewer than 30 percent of households held equity. By the early 2000s, more than half of U.S. households owned equity, either directly or through mutual funds, 401(k)s, and IRAs. As participation widened, the way stock market fluctuations passed through to household spending may have changed, with potential implications for how the broader economy behaves. An argument can be made that the rise in equity market participation has dampened the response of output to interest rate changes as stock market fluctuations are now spread across a larger share of households, moderating movements in consumer spending, asset prices, and investment spending. |
| Keywords: | Limited Participation; monetary policy; stock market; investment; business cycle |
| JEL: | E32 E44 E22 G51 |
| Date: | 2026–08–19 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:103663 |
| By: | Paul Bergin; Woo Jin Choi; Ju H. Pyun |
| Abstract: | Macroeconomics tends to view exchange rate movements as transitory. However, persistent exchange rate realignments and the associated capital flows can have long-run implications for structural change and productivity growth. We provide empirical evidence that policies of reserve accumulation and currency undervaluation have had significant effects on manufacturing productivity, as well as on manufacturing share, product varieties, and domestic orientation of production chains. We develop a dynamic two-country model with two sectors, firm dynamics, and trade hysteresis to demonstrate a novel mechanism by which exchange rate policy reorients global supply chains and industrial structure. The model identifies conditions under which such a policy raises productivity and welfare in the home country. It also identifies conditions under which the policy leads to either permanent or reversible deindustrialization in a trading partner. Findings have implications for the long-run relationship between China and the U.S. |
| JEL: | E58 F31 F41 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35609 |
| By: | Stavrakeva, Vania; Tang, Jenny |
| Abstract: | In this paper, we study how the volatility of both \textit{realized} and \textit{expected} macroeconomic variables relates to the variation in exchange rate volatility through the prism of the Great Moderation hypothesis. We find significant heterogeneity in exchange rate trend volatility across currency pairs despite decreases in the volatility of expected future interest rate differentials and of realized yields themselves. We argue that time variation in the relationship between macroeconomic variables and exchange rates has prevented the Great Moderation in realized yield volatility from translating to a decrease in exchange rate volatility. Considering a Campbell-Shiller-type decomposition of exchange rate changes into forward-looking components linked to inflation, policy rate, and currency risk premia expectations, we find that the Great Moderation in volatility of expected yield differentials cannot explain the patterns in exchange rate volatility we observe. The main drivers of these patterns were trends in the volatility of the currency risk premium component and in the covariance between the components capturing the strength of the Fama puzzle and the expected responsiveness of monetary policy to inflation. |
| Keywords: | Exchange rates; International finance; Foreign exchange volatility; Currency risk premiums; Fama puzzle |
| JEL: | E44 F31 G15 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19265 |
| By: | Vivien Czofa; Tibor Szendrei; Katalin Varga |
| Abstract: | This paper employs a Threshold Bayesian Vector Autoregression (TBVAR) to estimate the regime-dependent macroeconomic effects of capital regulation in Hungary. Using the Factor-based Index of Systemic Stress (FISS) as the threshold variable, the model identifies normal and stress regimes consistent with the occasionally binding constraints literature. The TBVAR offers a practical multivariate alternative to Growth-at-Risk for data-constrained economies. Generalised impulse responses reveal a pronounced asymmetry: releasing regulatory capital during stress raises GDP growth at the peak, with effects persisting for roughly twenty months, while the cost of accumulating capital in the normal regime is economically negligible. These findings are robust to alternative Cholesky orderings, sample periods, and credit variable definitions, providing direct empirical support for the countercyclical operation of the capital buffer. |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2608.14307 |
| By: | Ms. Hiroko Oura; Guillaume Arnould; Xiaodan Ding; Pierpaolo Grippa; Mr. Marco Gross; Mr. Dimitrios Laliotis; Mindaugas Leika; Caterina Lepore; Elisa Letizia; Ms. Laura Valderrama; Yuchen Zhang |
| Abstract: | This paper presents the IMF’s systemwide stress testing approaches, which cover multiple financial sub-sectors and their clients. Developing these tools is crucial for identifying cross-sector and cross border amplification channels and enhancing policy responses, as recognized by the international financial stability community. The paper reviews classic and modern theories and operational methods for analyzing systemic liquidity risks that impact numerous institutions simultaneously, illustrating how shocks can spread through banks, nonbank financial institutions (NBFIs), and market-based finance via runs, redemptions, margin and collateral calls, fire sales, price dynamics, and disruptions in core markets. It details two base IMF tools—an Excel-based flow-of-funds framework and investment fund liquidity analysis with fire sale and market-impact dynamics—and their application and enhancement within Financial Sector Assessment Programs (FSAPs) across various countries. |
| Keywords: | NBFI; capital flow; systemwide; stress test; financial stability; interconnectedness |
| Date: | 2026–08–14 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/170 |
| By: | Jason Roderick Donaldson; Giorgia Piacentino; Xiaobo Yu |
| Abstract: | We develop a model of interbank networks with random liquidity shocks. Networks of dilutable debt---e.g., long-term, unsecured---facilitate efficient liquidity transfers: Shocked banks pledge interbank claims as collateral for new senior debt, diluting existing debt. Unlike with non-dilutable debt, indebtedness and connectedness are sources of stability, not fragility. Dilution is thus a ``backdoor bail-in'' that reallocates losses absent a resolution authority, trigger security, or ex post renegotiation. We uncover a class of networks, ``exponential networks, '' that implement optimal contingent transfers via plain debt. Yet exponential networks are not pairwise stable, whereas some core--periphery networks are, rationalizing observed interbank structures and their under-insurance against crises. |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2608.13979 |
| By: | Haelim Anderson; Charles W. Calomiris; Jennifer S. Rhee |
| Abstract: | We study how extended stockholder liability shaped bank resolution during and after the Panic of 1893, comparing California state banks (unlimited liability) with national banks (double liability). Using newly assembled data linking California state bank presidents to census records and national bank stock ownership data from Examination Reports, we measure managers’ personal exposures to extended liability. For California state banks, traditional fundamentals predict involuntary liquidations but do not explain voluntary exits. Instead, voluntary exits are driven by managers’ liability exposure, local economic risk, and personal wealth, consistent with managers responding to unlimited liability by initiating preemptive, orderly resolutions. For national banks under double liability, voluntary and involuntary liquidations are more similar, and personal exposure plays a smaller role in risk management. These findings show that substantial personal liability exposure can operate for modern prudential tools like compensation clawbacks and living wills. However, such extended liability also magnifies credit contractions during downturns, highlighting a fundamental tradeoff between micro-stability and macroeconomic fragility in regulatory design. |
| JEL: | D82 E32 G21 N12 N22 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35598 |
| By: | Hans Gersbach; Jean-Charles Rochet; Ernst-Ludwig von Thadden |
| Abstract: | We introduce a tractable model of the two-tier monetary system with heterogeneous agents and incomplete markets. We use this model to characterize the dynamics of bank lending under general fiscal and monetary policy and derive the welfare optimal level of Central Bank reserves and the optimal interest rate on reserves. We also identify a new risk channel of monetary policy. In the model, banks have a dual role as loan providers and money creators, and cannot fully diversify credit risk. Central Bank reserves are used to settle interbank claims and serve as a safe asset, thereby buffering risks for banks. We show how the Central Bank and the Treasury can implement any desired allocation by setting interest rates, issuing a particular amount of reserves, and imposing taxes, and show that uncoordinated policy responses to shocks by the Central Bank alone may cause sub-optimal outcomes and significant instability. |
| Keywords: | Central Bank reserves, interest rate on reserves, liquidity requirements, mone tary system, incomplete markets |
| JEL: | E42 E43 E50 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2025_765 |
| By: | Pitters, Julia; Seitz, Franz |
| Abstract: | The decline of cash used for transaction purposes as well as the increase in total currency in circulation is usually discussed with respect to cost, efficiency and technological progress, i.e. digitalization. A large literature estimates the costs of cash production, distribution and handling. By contrast, the societal value of cash remains far less investigated and rarely quantified. This asymmetry matters because policy debates that monetize costs but leave benefits unconsidered may undervalue a payment instrument. The paper establishes a composite indicator capturing cash's value to society across five key dimensions: resilience, privacy, inclusion, cost control, and competition-supplemented by consumer surplus from seigniorage. We apply the methodology to Germany but the framework is designed to be replicable across countries and to support more balanced government and central-bank policy analysis. It combines a representative consumer survey, expert interviews, macro data and interdisciplinary workshops. In the base calibration, the aggregate value equals around 1.2 % of GDP. These results suggest that policy evaluations should incorporate cash's multifaceted benefits alongside costs. Recognizing cash's broader societal role can guide central banks and policymakers in fostering balanced payment ecosystems that preserve both innovation and public redundancy. |
| Keywords: | cash value, public money, payment system, inclusion, privacy, resilience |
| JEL: | D12 E41 E42 E58 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:hawdps:343057 |
| By: | Tinn, Katrin |
| Abstract: | This paper considers introducing asymmetric privacy in the design of central bank digital currencies (CBDC) and digital currencies more generally, to preserve the privacy of money spent while keeping the benefits of digital records for money received. It is shown that this feature would help minimize real distortions between consumers, firms, and financiers, while enabling tax optimization and better access to external financing. Protecting the privacy of consumers is always desirable from an aggregate standpoint as long as there exist some privacy concerns. Implementing asymmetric privacy is technologically feasible, using for instance Zero-Knowledge proofs or other privacy tools. |
| Keywords: | Central bank digital currency design; Data privacy; Learning; Real effects of privacy preferences; Verification costs |
| JEL: | C70 D18 D83 E42 E58 G21 G23 L86 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19275 |