nep-fle New Economics Papers
on Financial Literacy and Education
Issue of 2017‒07‒09
two papers chosen by

  1. Distorted Advice in Financial Markets: Evidence from the Mortgage Market By Gambacorta, Leonardo; Guiso, Luigi; Mistrulli, Paolo Emilio; Pozzi, Andrea; Tsoy, Anton
  2. Macroprudential Policy: Case Study from a Tabletop Exercise By Adrian, Tobias; de Fontnouvelle, Patrick; Yang, Emily; Zlate, Andrei

  1. By: Gambacorta, Leonardo; Guiso, Luigi; Mistrulli, Paolo Emilio; Pozzi, Andrea; Tsoy, Anton
    Abstract: Many households lack the sophistication required to make complex financial decision, which exposes them to the risk of being exploited when seeking advice from intermediares. We set up a structural model of financial advice, in which banks aim at issuing their ideal mix of fixed and adjustable rate mortgages and can achieve such goal by setting rates and providing advice to their clientele. "Sophisticated" households know the mortgage type best for them, whereas "naïve" are susceptible tobank's advice. Using the data on the universe of Italian mortgages, we recover the primitives of the model and quantify the welfare implications of distorted financial advice. The cost of the distortion is equivalent to increasing the annual mortgage payment by 1,177 euros. Losses are bigger for the naive, but sophisticated households suffer as well. However, since even distorted advice conveys information, banning advice altogether is not welfare improving and would instead result in a loss of 736 euros per year on average. A financial literacy campaign is beneficial for all, though in different degrees.
    Keywords: consumer protection; distorted financial advice; mortgage market
    JEL: D12 D18 G21
    Date: 2017–06
  2. By: Adrian, Tobias (International Monetary Fund); de Fontnouvelle, Patrick (Federal Reserve Bank of Boston); Yang, Emily (Federal Reserve Bank of New York); Zlate, Andrei (Federal Reserve Bank of Boston)
    Abstract: Since the global financial crisis of 2007-09, policy makers and academics around the world have advocated the use of prudential tools for macroprudential purposes. This paper presents a macroprudential tabletop exercise that aimed at confronting Federal Reserve Bank presidents with a plausible, albeit hypothetical, macro-financial scenario that would lend itself to macroprudential considerations. In the tabletop exercise, the primary macroprudential objective was to reduce the likelihood and severity of possible future financial disruptions associated with the hypothetical overheating scenario. The scenario provided a path for key macroeconomic and financial variables, which were assumed to be observed through 2016:Q4, as well as the corresponding hypothetical projections for the interval from 2017:Q1 to 2018:Q4. Prudential tools under consideration included capital-based tools such as leverage ratios, countercyclical capital buffers, and sectoral capital requirements; liquidity-based tools such as liquidity coverage and net stable funding ratios; credit-based tools such as caps on loan-to-value ratios and margins; capital and liquidity stress testing; as well as supervisory guidance and moral suasion. In addition, participants were asked to consider using monetary policy tools for financial stability purposes. Under the hypothetical scenario, participants found many prudential tools less attractive due to implementation lags and limited scope of application and favored those deemed to pose fewer implementation challenges, such as stress testing, margins on repo funding, and guidance. Also, monetary policy came more quickly to the fore as a financial stability tool than might have been thought before the exercise. The tabletop exercise abstracted from governance issues within the Federal Reserve System, focusing instead on economic mechanisms of alternative tools.
    Keywords: Financial stability; macroprudential policy; monetary policy; financial overheating; tabletop exercise
    JEL: E58 G01 G18
    Date: 2015–09–30

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