|
on International Finance |
| By: | Berthold, Brendan (University of Lausanne); Cesa-Bianchi, Ambrogio (Bank of England); Di Pace, Federico (Bank of England); Haberis, Alex (Bank of England) |
| Abstract: | This paper investigates the economic effects of carbon pricing policies using a panel of countries that are members of the EU Emissions Trading System. Carbon pricing shocks lead, on average across countries, to a decline in economic activity, higher inflation, and tighter financial conditions. These average responses mask a large degree of heterogeneity: the effects are larger for higher carbon-emitting countries. To sharpen identification, we exploit granular firm-level data and document that firms with higher carbon emissions are the most responsive to carbon pricing shocks. We develop a theoretical model with green and brown firms that accounts for these empirical patterns and sheds light on the transmission mechanisms at play. |
| Keywords: | Business cycles; carbon pricing shocks; heterogeneity; asset prices |
| JEL: | E32 E50 E60 H23 Q54 |
| Date: | 2024–08–05 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1076 |
| By: | Zhengyang Jiang; Robert J. Richmond |
| Abstract: | Governments tend to increase their borrowing at the same time, giving rise to a global fiscal cycle. This global fiscal cycle has a large component that is unexplained by global business cycle variables. We propose a novel explanation for the emergence of the global fiscal cycle: governments' competition over the provision of reserve assets gives rise to strategic complementarity in the issuances, even when the reserve assets are substitutes in partial equilibrium. We show our reserve-asset-competition channel explains economically significant common variation in fiscal variables, beyond the common variation induced by correlated business cycles. In doing so, our model of reserve asset demand and supply also shines light on the sources of variation in the convenience yields and seigniorage revenues earned on government debt. |
| JEL: | F30 G15 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32841 |
| By: | Mamatzakis, Emmanuel C. |
| Abstract: | This study examines the factors underlying the notably high Greek bank net interest margins compared to the euro-area average, with a particular focus on the interplay between bank competition and recapitalisations. Employing dynamic panel analysis from the early 2000s to 2021, we address potential endogeneity concerns and heterogeneity considerations. Additionally, we utilise local projections impulse response functions to account for structural shifts within the Greek banking landscape. Our findings reveal that diminished bank competition has played a significant role in driving up net interest margins in Greece. Intriguingly, the impact of Greek recapitalisations, in parallel with market conditions characterised by a low level of bank competition, has further contributed to high net interest margins. Supported by evidence from local projections impulse response functions, our study emphasises the necessity of accelerating the banking union and implementing a common regulatory framework across the euro-area. Setting caps on bank interest margins and fees could be a sensible practical recommendation. Such measures are crucial for fostering a more competitive banking environment and mitigating the persistently high net interest margins observed in the Greek banking industry. |
| Keywords: | bank competition; recapitalisations; net interest rate margin; dynamic panel analysis; local projections |
| JEL: | G21 E43 E52 D40 L10 |
| Date: | 2024–08–01 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:124476 |
| By: | Alfaro, Laura (Harvard Business School); Bahaj, Saleem (University College London); Czech, Robert (Bank of England); Hazell, Jonathon (London School of Economics); Neamțu, Ioana (Bank of England) |
| Abstract: | We introduce a framework to understand and quantify a form of liquidity risk that we dub Liquidity After Solvency Hedging or ‘LASH’ risk. Financial institutions take LASH risk when they hedge against losses, using strategies that lead to liquidity needs when the value of the hedge falls, even as solvency improves. We focus on LASH risk relating to interest rate movements. Our framework implies that institutions with longer duration liabilities than assets – eg pension funds and insurers – take more LASH risk as interest rates fall, because solvency concerns rise in a low rate environment. Using UK regulatory data from 2019–22 on the universe of sterling repo and swap transactions, we measure, in real time and at the institution level, LASH risk for the non‑bank sector. We find that at peak LASH risk, a 100 basis points increase in interest rates would have led to liquidity needs close to the cash holdings of the pension fund and insurance sector. Using a cross‑sectional identification strategy, we find that low interest rates caused increases in LASH risk. We then find that the pre‑crisis LASH risk of non‑banks predicts their bond sales during the September 2022 LDI crisis, contributing to the yield spike in the bond market. |
| Keywords: | Liquidity; monetary policy; non‑bank financial intermediaries; hedging |
| JEL: | E44 G10 G22 G23 |
| Date: | 2024–08–05 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1073 |
| By: | Beirne , John (Asian Development Bank); Renzhi, Nuobu (Capital University of Economics and Business) |
| Abstract: | This paper empirically examines the impact of public debt shocks on output and inflation in 34 emerging market economies (EMEs) using panel local projections over the period 2000 to 2022. The estimated results show that real gross domestic product (GDP) falls significantly after an unanticipated increase in public debt while inflation rises. We also examine whether fundamental characteristics across EMEs could affect the impact of public debt shocks. The results suggest that higher initial debt levels, tighter domestic financial conditions, and lower income levels amplify the negative responses of real GDP, while tighter global financial conditions dampen the negative impacts of debt shocks. For inflation, the responses vary depending on economic-specific characteristics. We also find other nonlinearities in the dynamics, with EMEs facing more severe effects during recessionary periods. |
| Keywords: | public debt; GDP; inflation; emerging market economies |
| JEL: | E62 F40 |
| Date: | 2024–08–19 |
| URL: | https://d.repec.org/n?u=RePEc:ris:adbewp:0739 |
| By: | Juan R. Hernández |
| Abstract: | The neutral band is the interval where deviations from covered interest parity (CIP) are not considered profitable arbitrage opportunities. After the great financial crisis, deviations from CIP are no longer short-lived, exposing some limitations of the previous approaches to estimate the neutral band. In this paper, I argue that the one-step-ahead forecast distribution of deviations from CIP, with a time-varying variance component, provides an intuitive estimate of the neutral band. I use data for the Pound Sterling-US Dollar cross from 2000 to 2021, and find that a stochastic volatility model outperforms several alternative models in terms of fit and forecasting capability. The model estimates neutral band that are intuitive and consistent with market dynamics, widening during financial stress periods and consistent with no arbitrage. The results are maintained when I use data from the Mexican Peso-US Dollar cross. |
| Keywords: | covered interest parity; carry trade; stochastic volatility; predictive distribution |
| JEL: | C52 C58 F31 F37 G15 G17 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1206 |
| By: | Kristin Forbes; Jongrim Ha; M. Ayhan Kose |
| Abstract: | We analyse cycles in policy interest rates in 24 advanced economies over 1970-2024, combining a new application of business cycle methodology with rich time-series decompositions of the shocks driving rate movements. “Rate cycles†have gradually evolved over time, with less frequent cyclical turning points, more moderate tightening phases, and a larger role for global shocks. Against this backdrop, the 2020-24 rate cycle has been unprecedented in many dimensions: it features the fastest pivot from active easing to a tightening phase, followed by the most globally synchronized tightening, and an unusually long period of holding rates constant. It also exhibits the largest role for global shocks— with global demand shocks still dominant, but an increased role for global supply shocks in explaining interest rate movements. Inflation and the growth in output and employment have, on average, largely returned to historical norms for this stage in a tightening phase. Any recalibration of interest rates going forward should be gradual, however, taking into account the interactions between increasingly important global factors and domestic circumstances, combined with uncertainty as to whether rate cycles have reverted to pre-2008 patterns. |
| Keywords: | monetary policy, oil prices, demand shocks, supply shocks, ECB, Federal Reserve |
| JEL: | E52 E31 E32 Q43 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2024-54 |
| By: | Elijah Broadbent; Huberto M. Ennis; Tyler Pike; Horacio Sapriza |
| Abstract: | he provision of bank credit to firms and households affects macroeconomic performance. We use survey measures of changes in bank lending standards, disaggregated by loan category, to quantify the effect of changes in banks’ attitudes toward lending on aggregate output, inflation, and interest rates. Bank lending to businesses is particularly important for macroeconomic outcomes, with peak effects on output of around half a percentage point after four quarters of the initial shock. These effects depend on the stage of the business cycle and the proximity of the short-term interest rate to its effective lower bound. The effects are larger when output is growing below trend and when the interest rate is away from its lower bound. We also find that the response of the economy to lending-standards shocks is asymmetric, with tightening shocks having larger effects on output. |
| Keywords: | Credit Supply; Macroeconomic activity; Loan Portfolio Composition |
| JEL: | E32 E44 G21 |
| Date: | 2024–08–12 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedrwp:98690 |
| By: | Sulehri, Fiaz Ahmad; Audi, Marc; Ashraf, Muhammad Saleem; Azam, Habiba; Bukhari, Syeda Ambreen Fatima; Ali, Amjad |
| Abstract: | Financial integration is important because it has the potential to enhance economic growth and stability by facilitating cross-border capital flows and reducing financial market fragmentation. This study investigates the influence of FinTech credit and banking regulations on financial integration in both developed and developing countries, spanning the period from 2013 to 2019. We consider financial integration to be the dependent variable, and we select FinTech credit, banking regulations, bank concentration, remittance volumes, state-owned enterprises, and financial development as explanatory variables. The study employs the Generalized Method of Moments (GMM) to estimate the coefficients. The findings indicate that FinTech credit, remittance volumes, and financial development all contribute positively to financial integration. In contrast, banking regulations exhibit an insignificant relationship with financial integration. Moreover, the results indicate that bank concentration and state-owned enterprises act as deterrents to financial integration among nations. The implications of the results suggest that to enhance the level of financial integration, global economies should promote FinTech credit, increase remittance volumes, and foster financial development while concurrently discouraging bank concentration and state-owned enterprises. |
| Keywords: | Financial integration, state own enterprises, financial development, FinTech credit, bank regulations, amount of remittances, bank concentration |
| JEL: | G10 G20 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121776 |
| By: | Bluwstein, Kristina (Bank of England); Patozi, Alba (Bank of England) |
| Abstract: | We construct a new data set of macroprudential policy announcements for the United Kingdom and estimate their effect on systemic risk, using a high-frequency identification approach. First, by examining a sample of the largest UK-listed banks, we identify macroprudential policy announcement shocks that were unanticipated by the financial markets. Second, we study the effects of market-based macroprudential policy surprises on systemic risk in a local projection framework. We find that tighter than expected macroprudential policy announcements contribute to a substantial reduction in perceived systemic risk in the short run, with effects persisting for several months. The reduction is mostly attributed to the reaction in equity and bond markets. |
| Keywords: | Macroprudential policy; systemic risk; high-frequency identification; policy announcements |
| JEL: | E58 G14 G18 G21 |
| Date: | 2024–08–06 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1080 |
| By: | Andres Sanchez-Jabba; Erick Villabon-Hinestroza |
| Abstract: | This study examines the effect of different measures of inflation expectations on inflation dynamics in Colombia from 2009 to 2024. We estimate New Keynesian Phillips Curves (NKPC) and Structural VAR (SVAR) models using data from economic surveys and sovereign bond yields. Our results show that survey-based expectations have a greater passthrough to inflation, with a one percentage-point increase leading to a 0.8 percentage-point rise in inflation, compared to a 0.67 percentage-point rise from market-based expectations. These differences are attributed to how economic agents form expectations, influenced by asymmetric losses, forecasting costs, and information rigidities. Our findings provide crucial insights for monetary authorities, who increasingly rely on various measures of inflation expectations for policy analysis. Understanding the distinct effects of these measures helps central banks implement policies that avoid unintended consequences, such as unnecessary contractions in economic activity. |
| Keywords: | inflation expectations, inflation dynamics, new-Keynesian Phillips curve, generalised method of moments |
| JEL: | C26 D84 E12 E31 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1205 |