nep-mon New Economics Papers
on Monetary Economics
Issue of 2020‒06‒08
25 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. COVID-19 and Financial Markets: A Panel Analysis for European Countries By Jens Klose; Peter Tillmann
  2. Shadow banking and the design of macroprudential policy in a monetary union By Philipp Kirchner; Benjamin Schwanebeck
  3. Monetary policy in DR. Congo : Learning about communication and expectations By Christian Pinshi
  4. The Federal Reserve's Liquidity Backstops to the Municipal Bond Market during the COVID-19 Pandemic By Bin Wei; Vivian Z. Yue
  5. The Effect of the Central Bank Liquidity Support during Pandemics: Evidence from the 1918 Influenza Pandemic By Haelim Anderson; Jin-Wook Chang; Adam Copeland
  6. Macroeconomic reversal rate: evidence from a nonlinear IS-curve By Jan Willem van den End; Paul Konietschke; Anna Samarina; Irina Stanga
  7. Monetary Policy at Work: Security and Credit Application Registers Evidence By Peydró, José-Luis; Polo, Andrea; Sette, Enrico
  8. ECB Monetary Policy and Commodity Prices By Shahriyar Aliyev; Evzen Kocenda
  9. Nonbanks, Banks, and Monetary Policy: U.S. Loan-Level Evidence since the 1990s By Elliott, David; Meisenzahl, Ralf; Peydró, José-Luis; Turner, Bryce C.
  10. Macroprudential and Monetary Policy: Loan-Level Evidence from Reserve Requirements By Dassatti Camors, Cecilia; Peydró, José-Luis; R.-Tous, Francesc; Vicente, Sergio
  11. Quality is our asset: the international transmission of liquidity regulation By Reinhardt, Dennis; Reynolds, Stephen; Sowerbutts, Rhiannon; van Hombeeck, Carlos
  12. Monetary Policy Uncertainty and Firm Dynamics By Stefano Fasani; Haroon Mumtaz; Lorenza Rossi
  13. Who’s afraid of euro area monetary tightening? CESEE shouldn’t By Geis, André; Moder, Isabella; Schuler, Tobias
  14. Uncertainty, monetary policy and COVID-19 By PINSHI, Christian P.
  15. Expansionary Yet Different: Credit Supply and Real Effects of Negative Interest Rate Policy By Bottero, Margherita; Minoiu, Camelia; Peydró, José-Luis; Polo, Andrea; Presbitero, Andrea; Sette, Enrico
  16. Banking Supervision, Monetary Policy and Risk-Taking: Big Data Evidence from 15 Credit Registers’ By Altavilla, Carlo; Boucinha, Miguel; Peydró, José-Luis; Smets, Frank
  17. Forecasting Inflation with the New Keynesian Phillips Curve: Frequency Matters By Manuel M. F. Martins; Fabio Verona
  18. Forecasting Inflation in a Data-Rich Environment: The Benefits of Machine Learning Methods By Marcelo Madeiros; Gabriel Vasconcelos; Álvaro Veiga; Eduardo Zilberman
  19. U.S. Monetary and Fiscal Policies - Conflict or Cooperation? By Xiaoshan Chen; Eric M. Leeper; Campbell Leith
  20. COVID-19: Monetary policy and the Irish economy By Holton, Sarah; Phelan, Gillian; Stuart, Rebecca
  21. Currency Swap Agreements and Financial Crises in Small Open Economies By Akihiko Ikeda
  22. Credit cycles and labor market slacks: predictive evidence from Markov-switching models By Lopez Buenache, German; Borsi, Mihály Tamás; Rosa-García, Alfonso
  23. On the Computation and Essence of the Nominal Convergence Criteria for Africa Currency Union: ECOWAS in Perspective By Abban, Stanley
  24. The interbank market puzzle By Allen, Franklin; Covi, Giovanni; Gu, Xian; Kowalewski, Oskar; Montagna, Mattia
  25. Negative Monetary Policy Rates and Systemic Banks’ Risk-Taking: Evidence from the Euro Area Securities Register By Bubeck, Johannes; Maddaloni, Angela; Peydró, José-Luis

  1. By: Jens Klose (THM Business School Giessen); Peter Tillmann (Justus Liebig University Giessen)
    Abstract: In order to fight the economic consequences of the COVID-19 pandemic, monetary and fiscal policy announced a large variety of support packages which are often unprecedented in size. In this paper, we provide an empirical analysis of the responses of European financial markets to these policy announcements. The key contribution is a very granular set of policy announcements, both at the national and the European level. We also differentiate between the first announcement in a series of policies and the subsequent announcements because the initial steps were often seen as bad news about the state of the economy. In a panel model we find that monetary policy, in particular through asset purchases, is effective in supporting the real economy and easing the pressure on governmental finances. Across all subsets of polices, it seems that monetary policy is more effective in supporting the stock market than national fiscal policy, though markets clearly distinguish between different types of policies.
    Keywords: event study, announcements, fiscal policy, monetary policy, European Monetary Union
    JEL: E44 E52 E62
    Date: 2020
  2. By: Philipp Kirchner (University of Kassel); Benjamin Schwanebeck (University of Hagen)
    Abstract: This paper studies the interaction of international shadow banking with monetary and macroprudential policy in a two-country currency union DSGE model. We fiÂ…nd evidence that cross-country fiÂ…nancial integration through the shadow banking system is a source of fiÂ…nancial contagion in response to idiosyncratic real and fiÂ…nancial shocks due to harmonization of fiÂ…nancial spheres. The resulting high degree of business cycle synchronization across countries, especially for Â…financial variables, makes union-wide policy tools more ffective. Nevertheless, optimal monetary policy at the union-level is too blunt an instrument to adequately stabilize business cycle downturns and needs to be accompanied by macroprudential regulation. Our welfare analysis reveals that the gains from the availability of country-speciÂ…c prudential tools vanish with the degree of fiÂ…nancial integration as union-wide macroprudential regulation is able to effectively reduce losses among the union members.
    Keywords: fiÂ…nancial frictions; shadow banking; currency union; Â…financial integration; macroprudential policy
    JEL: E32 E44 E58 F45
    Date: 2020
  3. By: Christian Pinshi (UNIKIN - University of Kinshasa)
    Abstract: This article aims to consolidate strategic importance of communication in managing expectations and stabilizing the congolese economy. We propose a reinforcement in terms of communication, on the one hand by using not only french as a language, but also the national languages, such as Lingala, and on the other hand by using a maximum of television broadcasts on dedication from the congolese central bank to stabilize the economy. These instruments could restore confidence and allow the bank central of the Congo to better manage exchange rate and inflation expectations. In addition, there are reportedly no studies in the Democratic Republic of the Congo related to the influence of central bank communication on expectations. Thus, this analysis contributes to the Central bank theoretical literature. In prospect a development of a new communication index of the Bank central of the Congo is desirable in order to reinforce the effectiveness of the monetary policy.
    Keywords: Monetary policy,communication,expectations
    Date: 2020–05–09
  4. By: Bin Wei; Vivian Z. Yue
    Abstract: The COVID-19 pandemic has caused tremendous hardship all over the world. In response, the Federal Reserve has moved quickly and aggressively to support the economy in the United States. In this article, we present some initial evidence for the effectiveness of some of the facilities in calming the municipal bond market, particularly the short-term variable-rate demand obligation (VRDO) market. We discuss the important role of liquidity backstops in mitigating runs and stabilizing financial markets in general based on insights from our study on the runs on VRDO and auction-rate securities (ARS) in 2008 during the financial crisis.
    Keywords: municipal bond; COVID-19 pandemic; liquidity backstops
    JEL: G10 G20 G21
    Date: 2020–05–28
  5. By: Haelim Anderson; Jin-Wook Chang; Adam Copeland
    Abstract: The coronavirus outbreak raises the question of how central bank liquidity support affects financial stability and promotes economic recovery. Using newly assembled data on cross-county flu mortality rates and state-charter bank balance sheets in New York State, we investigate the effects of the 1918 influenza pandemic on the banking system and the role of the Federal Reserve during the pandemic. We find that banks located in more severely affected areas experienced deposit withdrawals. Banks that were members of the Federal Reserve System were able to access central bank liquidity, enabling them to continue or even expand lending. Banks that were not System members, however, did not borrow on the interbank market, but rather curtailed lending, suggesting that there was little-to-no pass-through of central bank liquidity. Further, in the counties most affected by the 1918 pandemic, even banks with direct access to the discount window did not borrow enough to offset large deposit withdrawals and so liquidated assets, suggesting limits to the effectiveness of liquidity provision by the Federal Reserve. Finally, we show that the pandemic caused only a short-term disruption in the financial sector.
    Keywords: 1918 influenza; pandemics; financial stability; bank lending; economic recovery; COVID-19
    JEL: E32 G21 N22
    Date: 2020–05–01
  6. By: Jan Willem van den End; Paul Konietschke; Anna Samarina; Irina Stanga
    Abstract: This paper examines the link between interest rates and expenditures, known as the IS-curve. Specifically, we analyse whether the reaction of spending behaviour to monetary policy changes is different in a low compared to a normal interest rate environment. We estimate the nonlinear IS-curve for the euro area and the five largest euro area countries over the period 1999q2-2019q1 and study whether the IS-curve relationship is regime-dependent. We employ smooth-transition local projections to estimate the impulse responses of the output gap, the growth of consumption, investment, and savings to a contractionary monetary policy shock under normal and low interest rate regimes. Our results point to a possible flattening of the IS-curve, related to substitution effects becoming weaker relative to income effects in a low interest rate regime.
    Keywords: IS-curve; monetary policy; low interest rate environment
    JEL: E21 E22 E43 E52
    Date: 2020–05
  7. By: Peydró, José-Luis; Polo, Andrea; Sette, Enrico
    Abstract: Monetary policy transmission may be impaired if banks rebalance their portfolios towards securities to e.g. risk-shift or hoard liquidity. We identify the bank lending and risk-taking channels by exploiting – Italian’s unique – credit and security registers. In crisis times, with higher ECB liquidity, less capitalized banks react by increasing securities over credit supply, inducing worse firm-level real effects. However, they buy securities with lower yields and haircuts, thus reaching-for-safety and liquidity. Differently, in pre-crisis time, securities do not crowd-out credit supply. The substitution from lending to securities in crisis times helps less capitalized banks to repair their balance-sheets and then restart credit supply with a one year-lag.
    Keywords: securities,credit supply,bank capital,monetary policy,reach-for-yield,haircuts,held to maturity,available for sale,trading book,Euro Area Sovereign Debt Crisis
    JEL: G01 G21 G28 E52 E58
    Date: 2020
  8. By: Shahriyar Aliyev (Institute of Economic Studies, Charles University, Opletalova 26, 110 00 Prague, Czech Republic.); Evzen Kocenda (Institute of Economic Studies, Charles University, Opletalova 26, 110 00 Prague, Czech Republic; Institute of Information Theory and Automation of the CAS, Prague; CESifo, Munich; IOS Regensburg; and the Euro Area Business Cycle Network.)
    Abstract: We analyze the impact of the ECB monetary policies on global aggregate and sectoral commodity prices using monthly data from January 2001 till August 2019. We employ a SVAR model and assess separately period of conventional monetary policy before global financial crisis (GFC) and unconventional monetary policy during post-crisis period. Our key results indicate that contractionary monetary policy shocks have positive effects on the aggregate and sectoral commodity prices during both conventional and unconvetional monetary policy periods. The effect is statistically significant for aggregate commodity prices during post-crisis period. In terms of sectoral impact, the effect is statistically significant for food prices in both periods and for fuel prices during post-crisis period; other commodities display positive but statistically insignificant responses. Further, we demonstrate that the impact of the ECB monetary policy on commodity prices increased remarkably after the GFC. Our results also suggest that the effect of the ECB monetary policy on commodity prices does not transmit directly through market demand and supply expectations channel, but rather through the exchange rate channel that influences the European market demand directly.
    Keywords: European Central Bank, commodity prices, short-term interest rates, unconventional monetary policy, Structural Vector Autoregressive model, exchange rates.
    JEL: C54 E43 E58 F31 G15 Q02
    Date: 2020–04
  9. By: Elliott, David; Meisenzahl, Ralf; Peydró, José-Luis; Turner, Bryce C.
    Abstract: We show that credit supply effects and associated real effects of monetary policy depend on the size of nonbank presence in the respective lending market. Nonbank presence also alters how monetary policy affects the distribution of risk. For identification, we use exhaustive loan-level data since the 1990s and Gertler-Karadi (2015) monetary policy shocks. First, different from the literature showing that low monetary policy rates increase credit supply and risk-taking by banks, we find that higher monetary policy rates shifts credit supply for corporates, mortgages, and consumers shifts from regulated banks to less regulated, more fragile nonbanks. Moreover, this shift is more pronounced for ex-ante riskier borrowers. Second, nonbanks reduce the effectiveness of the bank lending channel of monetary policy at the loan-level. However, this reduction varies substantially across lending markets. Total credit and real effects are largely neutralized in consumer loans and the associated consumption, but not in corporate loans and investment.
    Keywords: nonbank lending,shadow banks,monetary policy,syndicated loans,consumer loans,mortgages
    JEL: E51 E52 G21 G23 G28
    Date: 2019
  10. By: Dassatti Camors, Cecilia; Peydró, José-Luis; R.-Tous, Francesc; Vicente, Sergio
    Abstract: We analyze the impact of reserve requirements on the supply of credit to the real sector. For identification, we exploit a tightening of reserve requirements in Uruguay during a global capital inflows boom, where the change affected more foreign liabilities, in conjunction with its credit register that follows all bank loans granted to non-financial firms. Following a difference-in-differences approach, we compare lending to the same firm before and after the policy change among banks differently affected by the policy. The results show that the tightening of the reserve requirements for banks lead to a reduction of the supply of credit to firms. Importantly, the stronger quantitative results are for the tightening of reserve requirements to bank liabilities stemming from non-residents. Moreover, more affected banks increase their exposure into riskier firms, and larger banks mitigate the tightening effects. Finally, the firm-level analysis reveals that the cut in credit supply in the loan-level analysis is binding for firms. The results have implications for global monetary and financial stability policies
    Keywords: macroprudential policy,reserve requirements
    JEL: E51 E52 F38 G21 G28
    Date: 2019
  11. By: Reinhardt, Dennis (Bank of England); Reynolds, Stephen (Bank of England); Sowerbutts, Rhiannon (Bank of England); van Hombeeck, Carlos (Bank of England)
    Abstract: We examine how banks’ cross-border lending reacts to changes in liquidity regulation using a new dataset on Individual Liquidity Guidance (ILG), which was enacted in the UK from 2000 to 2015 and is similar to the Basel III Liquidity Coverage Ratio. A one percentage point increase in liquidity requirements to total assets reduces UK resident banks’ cross-border lending growth by around 0.6 percentage points and both bank and non-bank lending are affected. But quality matters: an increase in the holdings of High Quality Liquid Asset (HQLA) qualifying sovereign debt offsets some of the reduction in total cross-border lending growth. Furthermore, the strongest reduction is driven by foreign subsidiaries from countries where sovereigns do not issue HQLA; in contrast subsidiaries from countries issuing HQLA are able to protect their lending to unrelated entities and cut their intragroup lending instead. Banks with a higher deposit share as a consequence of established retail operations, such as those headquartered in the UK, are also able to offset the effects of increases of liquidity requirement on cross-border lending.
    Keywords: Liquidity regulation; liquidity requirements; external lending; intensity of prudential regulations
    JEL: F36 G21 G28
    Date: 2020–05–21
  12. By: Stefano Fasani (Queen Mary University); Haroon Mumtaz (Queen Mary University); Lorenza Rossi (University of Pavia)
    Abstract: This paper uses a FAVAR model with external instruments to show that policy uncertainty shocks are recessionary and are associated with an increase in the exit of firms and a decrease in entry and in the stock price with total factor productivity rising in the medium run. To explain this result, we build a medium scale DSGE model featuring firm heterogeneity and endogenous firm entry and exit. These features are crucial in matching the empirical responses. Versions of the model with constant firms or constant firms' exit are unable to re-produce the FAVAR response of firms' entry and exit and suggest a much smaller effect of this shock on real activity.
    Keywords: Monetary policy uncertainty shocks, FAVAR, DSGE.
    JEL: C5 E1 E5 E6
    Date: 2020–05
  13. By: Geis, André; Moder, Isabella; Schuler, Tobias
    Abstract: After a first phasing out of the ECB’s net asset purchases at end-2018, the question of how a future tightening of the ECB’s monetary policy may affect countries located in the vicinity of the euro area has gained prominence, but has been left largely unanswered so far. Our paper aims to close this gap for the CESEE region by employing shock-specific conditional forecasts, a methodology that has been little exploited in this context. Besides demonstrating the usefulness of our framework, we obtain three key findings characterising the spillovers of ECB monetary policy to CESEE economies: first, a euro area monetary tightening does trigger sizeable spillovers to the CESEE region. Second, we show that in the context of a demand shock-induced monetary tightening, which is more realistic than the usual approach taken in the literature, CESEE countries’ output and prices actually respond positively. Third, spillovers on output and prices in CESEE countries are heterogeneous, and depend on the trajectory of euro area tightening. JEL Classification: C11, C32, E52, F42
    Keywords: BVAR, EU integration, international shock transmission, monetary policy
    Date: 2020–05
  14. By: PINSHI, Christian P.
    Abstract: The uncertainty of COVID-19 seriously disrupts the Congolese economy through various macroeconomic channels. This pandemic is influencing the management of monetary policy in its role as regulator of aggregate demand and guarantor of macroeconomic stability. We use a Bayesian VAR framework (BVAR) to provide an analysis of the COVID uncertainty shock on the economy and the monetary policy response. The analysis shows important conclusions. The uncertainty effect of COVID-19 hits unprecedented aggregate demand and the economy. In addition, it undermines the action of monetary policy to soften this fall in aggregate demand and curb inflation impacted by the exchange rate effect. We suggest a development of unconventional devices for a gradual recovery of the economy.
    Keywords: Uncertainty, COVID-19, Monetary policy, Bayesian VAR
    JEL: C32 E32 E51 E52 E58
    Date: 2020
  15. By: Bottero, Margherita; Minoiu, Camelia; Peydró, José-Luis; Polo, Andrea; Presbitero, Andrea; Sette, Enrico
    Abstract: We show that negative interest rate policy (NIRP) has expansionary effects on bank credit supply—and the real economy—through a portfolio rebalancing channel, and that, by shifting down and flattening the yield curve, NIRP differs from rate cuts just above the zero-lower-bound. For identification, we exploit ECB’s NIRP and matched administrative datasets from Italy. NIRP affects banks with higher net short-term interbank positions or, more broadly, more liquid balance-sheets. NIRPaffected banks reduce liquid assets, expand credit supply (to ex-ante riskier firms), and cut rates, inducing sizable firm-level real effects. By contrast, there is no evidence of a contractionary retail deposit channel.
    Keywords: negative interest rates,portfolio rebalancing,bank lending channel and of monetary policy,liquidity management,Eurozone crisis
    JEL: E52 E58 G01 G21 G28
    Date: 2020
  16. By: Altavilla, Carlo; Boucinha, Miguel; Peydró, José-Luis; Smets, Frank
    Abstract: We analyse the effects of supranational versus national banking supervision on credit supply, and its interactions with monetary policy. For identification, we exploit: (i) a new, proprietary dataset based on 15 European credit registers; (ii) the institutional change leading to the centralisation of European banking supervision; (iii) high-frequency monetary policy surprises; (iv) differences across euro area countries, also vis-à-vis non-euro area countries. We show that supranational supervision reduces credit supply to firms with very high ex-ante and ex-post credit risk, while stimulating credit supply to firms without loan delinquencies. Moreover, the increased risk-sensitivity of credit supply driven by centralised supervision is stronger for banks operating in stressed countries. Exploiting heterogeneity across banks, we find that the mechanism driving the results is higher quantity and quality of human resources available to the supranational supervisor rather than changes in incentives due to the reallocation of supervisory responsibility to the new institution. Finally, there are crucial complementarities between supervision and monetary policy: centralised supervision offsets excessive bank risk-taking induced by a more accommodative monetary policy stance, but does not offset more productive risk-taking. Overall, we show that using multiple credit registers – first time in the literature – is crucial for external validity.
    Keywords: supervision,banking,AnaCredit,monetary policy,Euro Area crisis
    JEL: E51 E52 E58 G01 G21 G28
    Date: 2019
  17. By: Manuel M. F. Martins (Faculty of Economics, University of Porto and CEF.UP); Fabio Verona (Bank of Finland - Monetary Policy and Research Department and University of Porto - CEF.UP)
    Abstract: We show that the New Keynesian Phillips Curve (NKPC) outperforms standard benchmarks in forecasting U.S. inflation once frequency-domain information is taken into account. We do so by decomposing the time series (of inflation and its predictors) into several frequency bands and forecasting separately each frequency component of inflation. The largest statistically significant forecasting gains are achieved with a model that forecasts the lowest frequency component of inflation (corresponding to cycles longer than 16 years) flexibly using information from all frequency components of the NKPC inflation predictors. Its performance is particularly good in the returning to recovery from the Great Recession.
    Keywords: Inflation forecasting; New Keynesian Phillips curve; Frequency domain; Wavelets
    JEL: C53 E31 E37
    Date: 2020–04
  18. By: Marcelo Madeiros; Gabriel Vasconcelos; Álvaro Veiga; Eduardo Zilberman
    Abstract: Inflation forecasting is an important but difficult task. Here, we explore advances in machine learning (ML) methods and the availability of new datasets to forecast US inflation. Despite the skepticism in the previous literature, we show that ML models with a large number of covariates are systematically more accurate than the benchmarks. The ML method that deserves more attention is the random forest model, which dominates all other models. Its good performance is due not only to its specific method of variable selection but also the potential nonlinearities between past key macroeconomic variables and inflation.
    Date: 2019–05
  19. By: Xiaoshan Chen; Eric M. Leeper; Campbell Leith
    Abstract: We estimate a model in which both fiscal and monetary policy behavior arise from the optimizing behavior of distinct monetary and fiscal authorities. Optimal time-consistent policy behavior fits U.S. time series at least as well as rules-based behavior. American policy makers have often been in conflict. After the Volcker disinflation, policies did not achieve the conventional mix of a conservative monetary policy paired with a debt-stabilizing fiscal policy. If credible, a conservative central bank that follows a time-consistent fiscal policy leader would come close to mimicking the cooperative Ramsey policy. Enhancing cooperation between policy makers without an ability to commit would be detrimental to welfare.
    Keywords: Bayesian Estimation, Monetary and Fiscal Policy Interactions, Optimal Policy, Markov Switching
    JEL: C11 E31 E63
    Date: 2019–05
  20. By: Holton, Sarah (Central Bank of Ireland); Phelan, Gillian (Central Bank of Ireland); Stuart, Rebecca (Central Bank of Ireland)
    Abstract: Policy makers and governments across the world are taking exceptional measures against the ongoing health and economic crisis resulting from the spread of COVID-19. The Central Bank has taken action within all aspects of its mandate, including through participation in monetary policy decision-making in the Eurosystem. This Letter describes the monetary policy actions taken to combat the crisis, in particular liquidity policies and asset purchases, and outlines what these measures mean for Ireland.
    Date: 2020–04
  21. By: Akihiko Ikeda (Department of Economics, Kyoto University of Advanced Science)
    Abstract: This paper studies the effects of an international currency swap agreement, or an exchange of hard currencies between countries, on the probability of financial crises. The analysis is based on a small open economy model with a financial constraint. A currency swap is described as a mutual provision of collateral goods between two countries. The results show that there are cases where a currency swap agreement can lower the probability of financial crises. Whether it can benefit both member countries depends on their difference in the size or probability of recessions, as well as the amount of collateral goods exchanged. Contracts of currency swaps should be designed in consideration of these factors.
    Keywords: Emerging economy, Financial crisis, Currency swap
    JEL: E32 F41 F44
    Date: 2020–05
  22. By: Lopez Buenache, German; Borsi, Mihály Tamás; Rosa-García, Alfonso
    Abstract: We model unemployment and credit cycle dynamics as a Markov-switching process with two states to identify labor market slacks i.e., periods of unemployment above its natural rate. Our results for the US economy between 1955 and 2015 show that credit contractions improve the identification of high unemployment states. Moreover, we find that credit cycles have a sizable out-of-sample predictive power on labor market slacks. This implies that the evolution of credit can be used as a leading indicator for economic policies.
    Keywords: credit cycle; unemployment; forecast; Markov-switching
    JEL: C32 E24 E32 E51
    Date: 2020–05–13
  23. By: Abban, Stanley
    Abstract: The ECOWAS in a quest to form a currency union prompted the set out nominal convergence criteria for member states. The study seeks to delineate the importance of the nominal convergence criteria to ensure price and exchange rate stability. In this context, the revised ECOWAS convergence criteria were elaborated to unveil the degree of convergence. Also, the study computed for the realistic nominal convergence targets supposing the union is formed and suggested ex-ante steps to fast track convergence. Additionally, the study showed the exigency for trade and institutional convergence through policy coordination. The study concludes that countries should commit to attaining the convergence criteria in the shortest possible time to aid in the realization of the policy. The study recommends that relatively exposing the large informal sector, ensuring political ramification, and encouraging savings is key to achieving the nominal convergence criteria.
    Keywords: nominal convergence criteria, currency union, large informal sector, Optimal Currency Area, inflation, public deficits, public debts, reserves.
    JEL: E5 E52 E61 E63 H2
    Date: 2020–05–06
  24. By: Allen, Franklin (Imperial College London); Covi, Giovanni (Bank of England); Gu, Xian (Wharton School of University of Pennsylvania.); Kowalewski, Oskar (IESEG School of Management); Montagna, Mattia (European Central Bank)
    Abstract: This study documents significant differences in the interbank market lending and borrowing levels across countries. We argue that the existing differences in interbank market usage can be explained by the trust of the market participants in the stability of the country’s banking sector and counterparties, proxied by the history of banking crises and failures. Specifically, banks originating from a country that has lower level of trust tend to have lower interbank borrowing. Using a proprietary dataset on bilateral exposures, we investigate the Euro Area interbank network and find the effect of trust relies on the network structure of interbank markets. Core banks acting as interbank intermediaries in the network are more significantly influenced by trust in obtaining interbank funding, while being more exposed in a community can mitigate the negative effect of low trust. Country-level institutional factors might partially substitute for the limited trust and enhance interbank activity.
    Keywords: Interbank market; trust; networks; centrality; community detection
    JEL: G01 G21 G28
    Date: 2020–05–14
  25. By: Bubeck, Johannes; Maddaloni, Angela; Peydró, José-Luis
    Abstract: We show that negative monetary policy rates induce systemic banks to reach-for-yield. For identification, we exploit the introduction of negative deposit rates by the European Central Bank in June 2014 and a novel securities register for the 26 largest euro area banking groups. Banks with more customer deposits are negatively affected by negative rates, as they do not pass negative rates to retail customers, in turn investing more in securities, especially in those yielding higher returns. Effects are stronger for less capitalized banks, private sector (financial and non-financial) securities and dollar-denominated securities. Affected banks also take higher risk in loans.
    Keywords: negative rates,non-standard monetary policy,reach-for-yield,securities,banks
    JEL: E43 E52 E58 G01 G21
    Date: 2020

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