| 12-Sep-2024
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House price responses to monetary policy surprises: evidence from US listings data |
Housing plays a significant role in the economy. It represents a large fraction of household wealth, and fluctuations in its price can impact the decisions of households to consume or save. Fluctuations in housing stock through construction are also an important driver of economic growth. To achieve their goal of price stability, central banks need to know how fast their interest rate policy decisions transmit to outcomes in the housing market and how strong this transmission channel is.
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| 11-Sep-2024
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Non-bank lending and the transmission of monetary policy |
The surge in non-bank lending in the past two decades has important implications for monetary policy. Do non-bank lenders respond to a monetary contraction differently than traditional banks? Monetary policy should affect the funding cost of all financial intermediaries who borrow short term, and therefore, non-banks should react similarly to banks to changes in policy. If non-bank lenders are financed differently than banks, they can lessen slightly the effects of tighter monetary policy on firm investment and household consumption.
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| 10-Sep-2024
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Which exchange rate matters to global investors? |
How do exchange rates affect the portfolio decisions of global investors? We examine detailed statistics to measure how bond investors respond to changes in the US dollar, the euro and the currencies of emerging markets and advanced economies. Our findings show that euro-based investors respond differently to various exchange rates and currency mismatches. To explain these findings better, we build a portfolio choice model that considers the different roles of local, foreign and reference currencies.
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| 9-Sep-2024
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Latin America's non-linear response to pandemic inflation |
Over the past 15 years, central banks in emerging market economies (EMEs), including those in Latin America, appear to have pursued more balanced monetary policies. That is, the policies respond to deviations of both economic activity from some equilibrium level and inflation from target. In the early phase of the recession following the Covid-19 pandemic, Latin American central banks appeared to have a similar countercyclical response as other EMEs, cutting policy interest rates and even employing quantitative easing. But subsequently, they tightened aggressively in response to rising inflation – to a considerably greater extent than advanced economies and many other EMEs. Had Latin American central banks abandoned their balanced approach to monetary policy in favour of a strategy that places overwhelming weight on controlling inflation? To address that question, we focus on the central banks of the five most prominent, inflation-targeting Latin American economies: Brazil, Chile, Colombia, Mexico and Peru.
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| 4-Sep-2024
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Generative AI and labour productivity: a field experiment on coding |
Generative artificial intelligence (Gen AI) tools hold significant promise for enhancing worker productivity across various fields. These AI models have demonstrated capabilities comparable to humans in areas like clinical care, education, language modelling, art, music and design. A growing body of literature explores commercial and non-commercial applications, ethical considerations, regulatory frameworks, and implications for security and education. However, empirical research on AI's impact on productivity in tasks requiring cognitive abilities remains scarce.
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| 2-Sep-2024
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The rise of generative AI: modelling exposure, substitution and inequality effects on the US labour market |
The data set provides comprehensive information on the AISA indices (AISA, AISA-core, AISA-side) for individual AI capabilities (kappa_AI) on a scale of 1 to 6 at the occupational level. It also includes data on shares of the time spent with i) computer interaction, ii) social interaction, and iii) physical labour, along with shares of skills within given AI capabilities.
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| 26-Aug-2024
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Covered interest parity: a forecasting approach to estimate the neutral band |
In international finance, the concept of covered interest parity entails that the return of two assets, each denominated in a different currency, should be equal. Investors monitor deviations from parity because, if these are large enough, they can make a riskless profit through carry trades. Policymakers can determine if liquidity is low in the foreign exchange market when deviations are large. But how large? To answer this question, investors and policymakers estimate a neutral band around deviations from covered interest parity.
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| 23-Aug-2024
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The measure matters: differences in the passthrough of inflation expectations in Colombia |
This paper was produced as part of the BIS Consultative Council for the Americas (CCA) research conference on "Growth, productivity and macro modelling in the Americas", held in Ottawa on 26–27 October 2023.
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| 22-Aug-2024
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Climate policies, labour markets and macroeconomic outcomes in emerging economies |
We study the labour market and macroeconomic effects of implementing a carbon tax and related climate policies in the energy sector in emerging market economies (EMEs). We build a macro model that captures the distinct structure of employment and firms in EMEs, with emphasis on the prevalence of self-employment. Calibrating the model to a representative EME, we analyse how a carbon tax on polluting energy production affects the labour market and macroeconomic activity in the long run and along the transition to a setting with lower polluting carbon emissions.
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| 19-Aug-2024
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Strike while the iron is hot: optimal monetary policy with a nonlinear Phillips curve |
The recent inflation surge has been accompanied by a significant increase in the frequency of price changes by firms. Traditional economic models of price-setting cannot account for this, as they assume that firms update prices at a constant frequency, irrespective of the inflation level. However, so-called "menu cost" models provide a theory about why firms change their prices at a certain frequency that fits with the available evidence.
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| 15-Aug-2024
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Are low interest rates firing back? Interest rate risk in the banking book and bank lending in a rising interest rate environment |
Banks' engagement in maturity transformation, by borrowing short and lending long, allows them to earn the spread between the interest rates charged on longer-term assets and the interest rate paid on shorter-term liabilities. However, this exposes them to interest rate risk. Indeed, rapid and unexpected increases in interest rates can adversely impact the economic value of banks' equity due to changes in the present value and timing of future cash flows. Overall, increases in interest rates lead to a decline in a bank's net worth, as the value of assets declines more than the value of liabilities. This effect is most pronounced for banks that exhibit a large positive mismatch between the duration of their assets and liabilities, ie banks with a wider duration gap.
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| 25-Jul-2024
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Crypto exchange tokens |
Crypto exchange tokens are blockchain-based assets issued by crypto exchanges. These tokens may promise holders discounts on transaction fees and access to certain platform services. They are a major source of funding for crypto exchanges, and at times their combined market value has exceeded US$ 100 billion. Crypto exchange tokens have also been at the core of some of the biggest disruptions in the crypto industry. For example, the exchange token FTT played a central role in the collapse of the FTX platform. Despite the importance of crypto exchange tokens, little is known about their valuation and how their prices are influenced by buyback pledges from the exchange.
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| 18-Jul-2024
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Financial inclusion transitions in Peru: does labor informality play a role? |
In recent years, financial inclusion (FI) has become a prominent policy goal in emerging market and developing economies (EMDEs). FI is generally understood as affordable access to financial services provided by formal financial intermediaries, including payments, savings, credit and insurance. FI may depend on another key feature of EMDEs, namely labor informality (LI). Workers with informal jobs typically operate in cash-based ecosystems and may view opening a bank account as a burden.
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| 15-Jul-2024
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New spare tires: local currency credit as a global shock absorber |
Emerging market corporates saw a surge of dollar debt over the past two decades, potentially making them more vulnerable. We examine the ability of emerging market corporates to offset global shocks to their dollar debt by borrowing in local currency. We use data on bonds and syndicated loans to document long-run trends, and firm-level data to examine how dollar and local currency debt react to global shocks.
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| 12-Jul-2024
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Sovereign green bonds: a catalyst for sustainable debt market development? |
We research whether sovereign green bonds contribute to the development of sustainable corporate bond markets. We first construct a database of labelled bonds issued by sovereign governments and corporations. The database includes variables related to the size as well as the reporting and verification of green and other labelled bonds. It also includes data on the pricing and liquidity of corporate sustainable bonds. We then employ regression and event study analysis to assess the impact of sovereign green bond issuance on the growth, liquidity and pricing of corporate sustainable bonds as well as standards of green reporting and verification in the same jurisdiction.
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| 11-Jul-2024
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The gen AI gender gap |
Generative artificial intelligence (gen AI) holds the potential to boost economic activity. Evidence suggests it makes workers more productive, especially in occupations that require advanced cognitive abilities, and spurs firm growth and innovation. Gen AI is thereby poised to have profound effects on aggregate output and wages. If unequally adopted across demographic groups, however, gen AI could exacerbate existing differences in pay and job opportunities. Increasing AI adoption would then lead to greater inequality, a key policy concern.
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| 8-Jul-2024
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Digital payments, informality and economic growth |
Digital payments have become quite popular in advanced economies, but their rapid growth in emerging market and developing economies (EMDEs) is especially noteworthy. Between 2014 and 2021, the number of adults in EMDEs using digital payments increased from 35% to 57%. This raises the question of how digital payments contribute to economic growth and development. To date, macro evidence is limited on the extent to which digital payments impact economic growth. To address this gap, we examine the relationship between digital payment adoption and growth, productivity and informal labour in 101 economies from 2014 to 2019.
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| 3-Jul-2024
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The asymmetric and persistent effects of Fed policy on global bond yields |
How monetary policy is transmitted through bond markets is a central question in macroeconomics and finance. The impact of monetary policy actions on the yield curve shapes domestic financial conditions, borrowing costs and savings returns, and thereby the effects on real activity. In the case of the United States, the centrality of its financial markets in the global financial system means that assessing the effects of US monetary policy on global bond markets is also key to gauging its overall impact.
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| 13-Jun-2024
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Intelligent financial system: how AI is transforming finance |
Like the brain of a complex organism, the financial system processes vast amounts of dispersed information to guide the allocation of resources in the economy. The capacity of the financial system to perform this function has been shaped in large part by the computation and information-processing technology available. After examining how progressive generations of artificial intelligence (AI), from rule-based systems to machine learning to generative AI, have transformed the financial sector, we evaluate how to prepare for the coming arrival of AI agents and the possibility of artificial general intelligence (AGI).
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| 12-Jun-2024
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Aging gracefully: steering the banking sector through demographic shifts |
We examine the implications of demographic shifts, particularly ageing populations, on banking business models and financial stability. As populations age, demand for credit declines, prompting banks to adjust their operations and asset allocations. The gradual nature of demographic transition poses challenges for regulators and supervisors, who must detect and monitor associated risks early to prevent potential "Minsky moments", ie sudden wake-up calls triggered by crises. We emphasize the importance of refining policy frameworks to manage tail risks emerging from banks' adaptive strategies, highlighting the need for proactive financial surveillance to ensure robust financial stability in the face of ageing demographics.
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| 6-Jun-2024
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The wage-price pass-through across sectors: evidence from the euro area |
With the surge of inflation in 2021, wage developments also came to the fore. Surprise inflation first eroded real purchasing power and then prompted central banks and observers to ask whether wage increases were on the horizon. These could affect the persistence of inflation and make the "last mile" of disinflation more challenging. So the link between wages and prices, the so-called wage-price pass-through, is a key element for understanding inflation developments.
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| 24-May-2024
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The impact of macroprudential policies on industrial growth |
Many countries have implemented macroprudential policies, especially in the aftermath of the Great Financial Crisis. Most studies estimate the effect of macroprudential measures on credit; estimates of its impact on economic growth are still lacking. One reason for the difficulty in obtaining reliable estimates of the effect on economic growth is the reverse causality problem – authorities take future growth into account when making their decisions.
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| 22-May-2024
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CEO turnover risk and firm environmental performance |
Technology will play a pivotal role in reducing carbon dioxide emissions to meet the high-priority goal established by the Paris Agreement to maintain the rise in the global average temperature below 2oC above pre-industrial averages. Developing technologies, and thus achieving these results, arguably requires a long-term commitment. However, management incentives may at times be oriented towards the short term, particularly when the chief executive officer (CEO) faces a higher probability of being unwillingly terminated. We study what happens to a firm's environmental performance when its CEO faces the risk of a forced turnover. Specifically, do they keep pursuing environmental performance or do their behaviours reveal short-terminism?
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| 16-May-2024
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Sixty years of global inflation: a post-GFC update |
The extent to which international factors shape the inflation process has significant bearing on formulating domestic policy and maintaining economic stability. If inflation is associated with global factors, domestic policy tools may have less impact in controlling it, particularly in smaller and more open economies where external influences can be particularly strong. In light of these considerations, to what extent has the recent inflation experience been a global phenomenon?
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| 15-May-2024
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Finding a needle in a haystack: a machine learning framework for anomaly detection in payment systems |
High-value payment systems are a central piece of a country's financial infrastructure. We propose a novel machine learning framework for real-time transaction monitoring in these systems. Given the substantial volume of high-value payments settled each day and the scarcity of actual anomalous transactions, detecting anomalies in high-value payment systems is like trying to find a needle in a haystack. Our framework uses a layered approach. First, a supervised machine learning algorithm identifies and separates "typical" payments from "unusual" payments. Second, only the unusual payments are run through an unsupervised machine learning algorithm to detect anomalies. We test this framework using artificially manipulated transactions and payments data from the Canadian high-value payment system.
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| 14-May-2024
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Nothing to hide? Gender and age differences in the willingness to share data |
The ubiquity of data in the digital economy has underpinned the rise of financial technology (fintech), large technology firms (big tech) and artificial intelligence (AI). While greater use of personal data can reduce search and verification costs and allow for better and more personalised services, it has raised severe privacy concerns. Consumers worry about data being harvested for unwanted advertising or price discrimination. They also worry about a data breach, when their personal information is leaked or becomes publicly available online, with potential consequences for their personal safety and reputation. And even if some individuals think they have "nothing to hide", their own actions may affect the privacy of others, eg when their data lead to information about their contacts or those similar to them. These considerations require policymakers to balance the efficient use of personal data with appropriate protection of user privacy.
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| 8-May-2024
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Unconditional convergence in the Mexican manufacturing sector (1988–2018) |
This paper was produced as part of the BIS Consultative Council for the Americas (CCA) research conference on "Growth, productivity and macro modelling in the Americas", held in Ottawa on 26–27 October 2023.
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| 7-May-2024
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Allocative efficiency and the productivity slowdown |
This paper was produced as part of the BIS Consultative Council for the Americas (CCA) research conference on "Growth, productivity and macro modelling in the Americas", held in Ottawa on 26–27 October 2023.
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| 3-May-2024
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Determinants of currency choice in cross-border bank loans |
Dominant currencies provide the issuer with important economic, financial and strategic advantages, so it is important to understand why some currencies have a more prominent international role than others. We offer insights into the determinants of currency choice in cross-border bank lending, such as bilateral distance, financial and trade linkages to issuer countries of major currencies, and invoicing currency patterns.
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| 2-May-2024
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Why DeFi lending? Evidence from Aave V2 |
Decentralised finance (DeFi) lending protocols have experienced rapid growth, going from zero to more than $50 billion in total value locked in less than two years. However, little is known about the motives for lending or borrowing through these protocols. Given the need for over-collateralisation in DeFi lending (contrary to what happens in traditional banking), it is somewhat surprising that any borrowing activity takes place on these platforms at all. Using granular transaction-level data from the Aave V2 protocol, we shed light on agents' motivations to engage in DeFi borrowing and lending activity, contrasting them with those in traditional finance to highlight the unique nature of DeFi.
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| 30-Apr-2024
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Reserve requirements as a financial stability instrument |
Reserve requirements can be used as a macroprudential tool to manage credit and systemic risks. They can reduce the build-up of systemic risk and the frequency of financial distress episodes. However, during normal times, reserve requirements make loans more expensive, which reduces credit and could dampen economic activity.
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| 26-Apr-2024
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Synthetic controls with machine learning: application on the effect of labour deregulation on worker productivity in Brazil |
Evaluation of economic policy requires careful econometric analysis. One technique is the estimation of a "synthetic control", ie a counterfactual that enables a "what if" analysis. Synthetic controls are widely used but require subjective choices, such as the criteria for selecting a comparison group and evaluating the control quality. This technique can facilitate the evaluation of structural reforms, such as the 2017 landmark labour deregulation in Brazil, on worker productivity.
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| 22-Apr-2024
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Incentive-compatible unemployment reinsurance for the euro area |
The euro area sovereign debt crisis brought back the debate on establishing additional fiscal instruments for the euro area. A centralized European unemployment benefits scheme has been one of the solutions proposed to strengthen the automatic fiscal stabilizers of the European Monetary Union. Existing proposals to set up a euro area unemployment reinsurance mechanism aim at exploiting the observed asymmetries in the cyclical fluctuations of unemployment rates of euro area member countries. These asymmetries mean that when unemployment is high in some countries it can be low in others. We propose a scheme derived from mechanism-design first principles. Specifically, using historical data, we develop, solve and simulate a model in which countries participate in a common reinsurance platform.
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| 17-Apr-2024
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The impact of artificial intelligence on output and inflation |
Many believe artificial intelligence (AI) will be the next general-purpose technology that will boost productivity growth. Indeed, AI adoption is already happening at breathtaking speed – in virtually all countries and industries. While AI is poised to have a profound impact on the economy, relatively little is known about its impact on employment and output across various industries, as well as its implications for growth and inflation in both the short and long run.
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| 15-Apr-2024
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Finternet: the financial system for the future |
Advances in digital technology have transformed people's lives in recent decades. But large swathes of the financial system are stuck in the past. Many transactions still take days to complete and rely on time-consuming clearing, messaging and settlement systems and physical paper trails. Improving the functioning of the financial system is thus an important public policy objective. But building a financial system fit for the future requires a vision for what we want to achieve.
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| 28-Mar-2024
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Pre-publication revisions of bank financial statements: a novel way to monitor banks? |
A novel source of information regarding bank risk is pre-publication revisions of bank financial statements. Using a data set from the Central Bank of Brazil that covers a large number of banks over an extended period, we analyse the frequency and severity of revisions banks made before publishing their financial statements. We hypothesize that these revisions may contain forward-looking insights into bank risk, potentially offering early indicators of future problems. This study is unique in its focus on the flow of private information from banks to their supervisors, rather than public financial reporting.
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| 27-Mar-2024
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The effect of Covid pension withdrawals and the Universal Guaranteed Pension on the income of future retirees in Chile |
During the Covid-19 pandemic, several countries allowed people to withdraw savings from their pension accounts. Chile experienced pension withdrawals of around 20% of gross domestic product, the largest amount among countries with these schemes. In 2022, the government significantly increased non-contributory pension benefits to support the low pension earnings of retirees. What share of the costs of pension withdrawals will be supported by retirees? What share will be covered by the government through larger transfers? And what are the implications of the withdrawals and benefits legislation for future fiscal costs?
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| 25-Mar-2024
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Unmitigated disasters? Risk-sharing and macroeconomic recovery in a large international panel |
When disaster strikes, the immediate destruction and tragic loss of life are plain to see in the media. But the aftermath of the disaster has unseen consequences that shape economic activity for years. This paper estimates these indirect effects, where foregone growth can add to the overall cost of disasters. A novel aspect of our analysis is that we take into account how risk transfer in the form of insurance mitigates the macroeconomic cost of disasters.
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| 21-Mar-2024
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The impact of information and communication technologies on banks, credit, and savings: an examination of Brazil |
This paper was produced as part of the BIS Consultative Council for the Americas (CCA) research conference on "Growth, productivity and macro modelling in the Americas", held in Ottawa on 26–27 October 2023.
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| 19-Mar-2024
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The macroprudential role of central bank balance sheets |
Is there a role for central bank balance sheets away from the effective lower bound on interest rates? Should central banks maintain lean balance sheets, and how do these relate to those of financial intermediaries?
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| 14-Mar-2024
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Navigating by falling stars: monetary policy with fiscally driven natural rates |
The natural rate (r*), that is the long-term real interest rate, is commonly assumed to depend only on structural parameters, such as productivity growth or demographics. This assumption doesn't hold when we move from the standard complete-market representative-agent framework towards a heterogeneous-agent New Keynesian (HANK) model. In this case, the natural rate depends on the stock of public debt.
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| 13-Mar-2024
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DeFi leverage |
This paper focuses on a key pillar in the decentralised finance (DeFi) ecosystem – DeFi lending platforms. Borrowers on these platforms get collateralised loans, which are similar to repurchase agreements (repos) and securities lending. Using trade-by-trade data on major DeFi lending platforms, we construct a daily time series of individual DeFi borrowers' assets and debts, at the wallet level. We document their wallet leverage – ie their asset-to-equity ratio. We also analyse the factors associated with high wallet leverage and the attendant systemic risks to DeFi lending markets.
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| 11-Mar-2024
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Monetary policy transmission in emerging markets: proverbial concerns, novel evidence |
In recent years, considerable progress has been made in assessing the transmission of monetary policy in advanced economies. However, much less headway has been possible in the context of emerging market economies, mainly because of challenges in identifying monetary policy shocks. For example, identification approaches based on financial market reactions to monetary policy announcements are generally problematic in emerging markets due to a more limited level of financial development.
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| 22-Feb-2024
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Risk-based pricing in competitive lending markets |
We estimate the impact of competition on the way banks price the risk of default when giving credit to firms. When competition is strong, banks might be willing to offer lower interest rates to attract firms. In addition, banks might put less effort into examining the risks and then offer a rate based on less precise information. We use supervisory data on banks in Norway between 2012 and 2018. Competition varies substantially across the country's different geographical regions. We study how banks adapt their price-risk relationship across different regions to the level of competition.
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| 20-Feb-2024
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Corporate payout policy: are financial firms different? |
Financial firms show a higher propensity for corporate payouts (via dividends and share buybacks) than non-financial firms. The predominant explanation for this in corporate finance literature is that financial firms are intrinsically different from other firms, making them not directly comparable. Another view is that the difference is because not all determinants of firms' propensity to pay out dividends are adequately considered.
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| 9-Feb-2024
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Monetary policy with profit-driven inflation |
In this paper, we focus on the drivers of the recent inflation surge and argue that they are fundamentally different from those in past episodes. Back in the 1970s, unit labour costs were the main driver of inflation. But more recently, unit profits have taken this role. Empirical evidence even points to unit profits becoming a leading indicator of inflation.
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| 6-Feb-2024
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Tracing the adoption of digital technologies |
In recent decades, expanding internet access has benefited economic development, particularly in emerging markets. At the same time, digital divides persist, excluding many people from the benefits of digitalisation. Factors like income inequality, market competition, quality improvements and affordability can influence the adoption of digital technologies. To narrow the digital divide, understanding the contribution of these factors to the adoption process is key.
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| 1-Feb-2024
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The term structure of interest rates in a heterogeneous monetary union |
The prevailing view of the effects of asset purchase programmes revolves around the "duration risk extraction" channel. Under this mechanism, purchases of long-maturity bonds flatten the yield curve by reducing the term premium that private markets demand to compensate for duration risk. The short end of the curve is anchored by the risk-free short rate.
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| 29-Jan-2024
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Public information and stablecoin runs |
Stablecoins are crypto tokens that live on distributed ledgers and promise to always be worth a dollar. To make that promise credible, stablecoin issuers hold a variety of reserve (collateral) assets, including fiat-denominated money market instruments, Treasuries, bank deposits and other cryptoassets (including other stablecoins). For that reason, public information and perceptions regarding the quality, transparency and volatility of reserves are key for stablecoin peg stability, as was evident during the March 2023 US banking turmoil.
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| 25-Jan-2024
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Interchange fees, access pricing and sub-acquirers in payment markets |
In recent decades, payments with credit, debit and prepaid cards, as well as mobile money, have increasingly replaced the use of cash. Yet many consumers and merchants in developing economies still prefer cash. In this context, payment facilitators – or sub-acquirers – have emerged. They offer a cheaper and easier way for merchants, especially micro and small firms, to accept card payments. Sub-acquirers do not connect with the card network directly but operate through an acquirer. This paper analyses how introducing sub-acquirers affects the pricing and market structure of the payment industry. It also discusses how regulators may increase welfare and competition, eg by setting different access fees for sub-acquirers.
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| 24-Jan-2024
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Regulation, information asymmetries and the funding of new ventures |
Using the new and unregulated crypto sector as a testing ground, we examine how regulation affects the venture capital funding of young and innovative firms. We focus on understanding if and how an increase in the stringency of regulation reduces the knowledge gap between entrepreneurs and investors – a common hurdle in acquiring venture funding. We study how different regulatory interventions at the state level in the United States impact the amount of funding raised by startups.
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| 15-Jan-2024
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Global bank lending and exchange rates |
We estimate the impact of banks' cross-currency lending on exchange rates to shed light on the importance of flows as a major force affecting foreign exchange (FX) market outcomes. To rationalise our findings, we focus on the funding mechanism for how globally active banks source liquidity when granting loans in another currency such as the US dollar. When a foreign bank grants a cross-currency US dollar loan, it needs to obtain US dollar liquidity, which puts pressure on funding markets and leads to an appreciation of the US dollar. We focus especially on the aftermath of the 2008–09 financial crisis, which has seen not only a tightening of banking regulation but also structural shifts in US dollar funding markets.
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| 11-Jan-2024
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Inequality and the zero lower bound |
Recent decades have been characterised by a surge in wealth inequality and a persistent decline in real rates. This has partially reversed in the current inflationary spike although it is expected to return once price pressures abate. These two observations suggest that: (i) the zero lower bound (ZLB) on nominal interest rates may have highly heterogeneous effects across households with different levels of ; and (ii) changes in wealth inequality could be driving real rates closer to the ZLB.
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| 10-Jan-2024
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The "plucking" model of the unemployment rate floor: cross-country estimates and empirics |
We use unemployment rate (u-rate) data from 19 economies to analyse the uneven ups and downs in the economy – an idea from Friedman's "plucking theory". Larger upturns follow deeper downturns, but deeper downturns do not necessarily follow larger upturns. Bad shocks lift, or "pluck", the u-rate up from a floor, and then it rebounds. We estimate what that floor is in 19 economies and ask what this means for policy.
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| 3-Jan-2024
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Financial development and the effectiveness of macroprudential and capital flow management measures |
This paper analyses how domestic credit and cross-border capital flows respond to macroprudential and capital flow management measures (CFMs) by using data on 39 economies during the period 2000–13. In doing so, it takes a granular approach by considering price-based and quantity-based macroprudential measures and CFMs. Further, it examines if the level of financial development impacts the effectiveness of such policy measures.
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| 22-Dec-2023
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Fintech vs bank credit: How do they react to monetary policy? |
We investigate how fintech credit, which includes peer-to-peer and marketplace lending, as well as lending by major technology firms, responds to monetary policy changes. This is a relevant question given the rapid growth of fintech credit worldwide, particularly in countries like China, Korea, Malaysia, and Kenya, where it comprises up to 5% of total credit.
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| 20-Dec-2023
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Monetary policy frameworks away from the ELB |
In 2020 and 2021, the Federal Reserve, the European Central Bank and the Bank of Canada completed comprehensive reviews of their monetary policy frameworks. These reviews were largely motivated by the need to provide sufficient monetary stimulus to avoid or exit effective lower bound (ELB) periods, against the backdrop of a flat Phillips curve. Soon after their adoption, these revised frameworks were vigorously tested by the post-pandemic inflation surge. How did the frameworks perform during the inflation surge? And are they fit for the challenges ahead?
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| 19-Dec-2023
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Monetary tightening, inflation drivers and financial stress |
Since mid-2021, central banks have swiftly raised policy rates against the backdrop of a flare-up in inflation. Experience shows that rapid monetary tightening can usher in financial stress.
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| 15-Dec-2023
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Foreign investor feedback trading in an emerging financial market |
We study the relationship between the trading behaviour of foreign investors, different types of local investors and returns in foreign exchange, fixed income and equity markets of an emerging market economy (EME). We investigate which strategy best explains foreign investor trading behaviour, whether foreign investors bring unique information to local financial markets, and what impact they have on local asset returns and local investor trading.
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| 11-Dec-2023
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Foreign institutional investors, monetary policy, and reaching for yield |
Foreign institutional investors have played an increasingly important role in the US dollar (USD) bond market over time. Against this background, this paper conceptually and empirically analyses the investment behaviour of foreign institutional investors in the USD bond market, focusing on euro area investment funds.
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| 5-Dec-2023
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The heterogeneous impact of inflation on households' balance sheets |
Inflation may affect everyone but it does not affect everyone in the same way. Differences in wealth composition, salary or consumption patterns may lead to quite different outcomes for different individuals. The aim of this paper is to cast some light on the different channels through which inflation affects wealth inequality.
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| 29-Nov-2023
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The financial origins of regional inequality |
Over the last decades, regional inequality in the United States and other advanced economies has steadily increased as income growth in urban areas has outpaced that in rural areas. This geographic divergence is believed to have brought devastating economic and social cleavages, including entrenched poverty, deaths of despair and political polarisation.
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| 28-Nov-2023
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Markups and the asymmetric pass-through of cost push shocks |
Many countries have witnessed a significant increase in corporate pricing power in recent decades. Against this background and following the post-Covid surge in inflation, there was hope that high markups could absorb some of the cost pressures. However, high markups could also contribute to inflation. Firms with a high degree of market power may find it easier to pass on cost increases to their customers. Likewise, firms charging high markups could retain some of the benefits of falling input costs.
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| 24-Nov-2023
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Housing affordability: a new data set |
Housing affordability is a policy concern for many countries around the world. However, there are very few cross-country indicators that can capture the salient features of what makes purchasing a home affordable.
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| 22-Nov-2023
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Firm heterogeneity, capital misallocation and optimal monetary policy |
An inefficient allocation of capital across firms may significantly reduce total factor productivity (TFP). Monetary policy is an important driver of individual firms' investment decisions. But, if firm investment responds in different ways to changes in monetary policy, then monetary policy can affect capital misallocation and TFP. Monetary policy design has traditionally taken aggregate productivity as given. In the workhorse model of monetary policy – the New Keynesian model – the central bank faces a trade-off between stabilising inflation and reducing the short-term deviations of output from its potential level. If monetary policy can affect misallocation and TFP, the central bank should also ponder how its decisions will impact the supply side of the economy in the medium term. Such considerations may be of relevance in phases of very active monetary policy, such as in the current inflationary environment.
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| 17-Nov-2023
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Central Bank Digital Currency and Privacy: A Randomized Survey Experiment |
This study considers designs of central bank digital currency (CBDC) concerning privacy protection and data governance. We conduct a randomised survey experiment and find that privacy protection is among the key features to consider in the design of CBDC.
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| 17-Nov-2023
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On par: A Money View of stablecoins |
The rapid growth in stablecoin issuance, and the recent testing of stablecoins' par settlement promises, has provoked a flurry of papers proposing various forms of regulation and alternatives, from various vantage points. Our vantage point is the money view, which focuses attention on the mechanism of settlement, and the role of forward markets in absorbing price pressure in times of adverse settlement flows.
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| 15-Nov-2023
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Dollar and government bond liquidity: evidence from Korea |
This paper examines how the US dollar affects government bond liquidity in Korea, a representative emerging market economy (EME), and when the effects become more pronounced. I highlight how the limited intermediation capacity of EME dealers can dampen liquidity through tightened funding liquidity conditions and financial channels of exchange rates.
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| 10-Nov-2023
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Profitability, valuation and resilience of global banks - a tight link |
Equity valuations signal investors' persistent concerns about some global systemically important banks (G-SIBs). For these banks, the price-to-book ratio (PBR) – the market value relative to the accounting value of equity – has been trending downward or has remained at deeply low levels over most of the past decade. A low PBR indicates investor scepticism regarding the bank's capacity to sustainably generate profits. Against this backdrop, we investigate whether profitability deficiencies can undermine resilience.
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| 10-Nov-2023
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Do banks practice what they preach? Brown lending and environmental disclosure in the euro area |
The reduction of information asymmetries between banks and their stakeholders is essential to guarantee the functioning of the market discipline mechanisms that allow investors, depositors and other actors to monitor bank risk-taking practices. Despite regulatory requirements, there is still a risk that banks may engage in "environmental window dressing", which involves increasing the environmental disclosure in their financial reports without actually acting as environmentally responsible lenders (ie not practising what they preach).
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| 7-Nov-2023
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Platform lending and innovation |
In recent years, large technology companies (big techs) operating on platforms have ventured into loan provision. The vendors' financing activity is of interest to the platform as it allows it to potentially extract higher rents from transactions than traditional banks. However, as fees collected on the marketplace and the interest rate offered to borrowers are inherently related, and not all vendors have investment opportunities, it is not clear whether the entry of big tech platforms into the credit market has a positive or negative effect on the economy relative to a situation where only banks provide loans.
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| 6-Nov-2023
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Is high debt constraining monetary policy? Evidence from inflation expectations |
With the Covid-19 crisis, sovereign debt levels around the world rose to new heights. Debt levels are expected to remain high in the coming years, and demands on fiscal policy remain substantial. At the same time, higher levels of interest rates may increase debt service considerably.
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| 3-Nov-2023
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Relationship discounts incorporate bond trading |
The over-the-counter structure of the corporate bond market makes the value of bilateral interactions particularly important for investors. For clients, an established dealer relationship can let the client buy or sell bonds more easily and cheaply. For dealers, a client relationship could be helpful for managing inventory risk, for generating larger profits from loyal clients, or for extracting information from the client's order flow. Such relationships may be particularly valuable during stress episodes like the March 2020 Covid-19 crisis. In this paper, we use a unique regulatory data set on corporate bond transactions to study bilateral trading relationships in the dealer-customer segment of the corporate bond market.
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| 30-Oct-2023
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A journal ranking based on central bank citations |
Economic policy is informed by academic research. Over time, the realm of topics of interest to central banks has shifted in lockstep with real events and has significantly broadened. Nonetheless, certain outlets have consistently been a point of reference for the policy community. Which academic journals are at the forefront in publishing research that bears high policy significance for central banks and international financial institutions?
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| 26-Oct-2023
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Dealer capacity and US Treasury market functionality |
We investigate the dynamics of liquidity in the US Treasury market. In particular, we focus on the relationship between yield volatility and Treasury market illiquidity and highlight how limited dealer intermediation capacity worsens market illiquidity beyond yield volatility, but only at high levels of dealer balance sheet utilisation, as in March 2020.
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| 26-Oct-2023
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International portfolio frictions |
Regulated financial institutions like banks and insurers have high demand for government bonds, for a variety of reasons. Yet the total supply of government debt in Europe, especially from countries with lower interest rates, is much smaller than the size of this segment of the financial sector. European insurance companies and pension funds (ICPF) and banks cannot all hold safe government bonds without pushing down the yields significantly, so they have to tilt their portfolios towards other securities, notably corporate bonds. This paper sheds new light on the global asset allocation of European banks and insurers.
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| 26-Oct-2023
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Expectations and the neutrality of interest rates |
What is the dynamic effect of interest rates on inflation, in our world of abundant reserves, in which central banks set nominal interest rates, do not control money supplies, do not make equilibrium-selection threats and cannot directly change fiscal policy? And how do interest rates then affect output, employment and other variables?
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| 25-Oct-2023
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Artificial intelligence, services globalisation and income inequality |
Artificial intelligence (AI) is increasingly embedded into modern economies. This prompts fundamental questions about its implications for income distribution. This study seeks to explore how AI-related investment is associated with changes in income and income shares for various segments of the population. As AI continues to expand its capabilities, outperforming human capabilities in an array of tasks, the implications of this technological evolution for income inequality become even more important. The primary focus is on how AI-induced structural shifts in production and the labour market relate to income disparities.
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| 23-Oct-2023
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Bank competition, cost of credit and economic activity: evidence from Brazil |
The banking sector plays a central role in economy and it is often highly concentrated: in many countries, the share of assets held by the five largest banks is around 80%. Moreover, in the last decade the degree of market concentration has increased. Despite the importance of banks and of bank competition, understanding of the effects of bank competition on the real economy is still limited. A key reason is that the degree of bank competition depends on market conditions.
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| 20-Oct-2023
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Remote work and high-proximity employment in Mexico |
This paper was produced as part of the BIS Consultative Council for the Americas (CCA) research conference on "Structural changes in inflation and output dynamics after Covid and other shocks", held in Mexico City on 17–18 November 2022.
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| 20-Oct-2023
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Pandemic-induced increases in container freight rates: assessing their domestic effects in a globalised world |
This paper was produced as part of the BIS Consultative Council for the Americas (CCA) research conference on "Structural changes in inflation and output dynamics after Covid and other shocks", held in Mexico City on 17–18 November 2022.
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| 19-Oct-2023
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System-wide dividend restrictions: evidence and theory |
In March 2020, the ECB's Single Supervisory Mechanism recommended that euro area banks should refrain from distributing dividends for the financial years 2019 and 2020 until October 2020 at the earliest. The aim was to preserve bank capital to continue funding households and firms amid the Covid-19 crisis.
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| 19-Oct-2023
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What can 20 billion financial transactions tell us about the impacts of Covid-19 fiscal transfers? |
Fiscal transfers can play a key role to support an economy facing a downturn. During the Covid-19 pandemic in 2020 and 2021, governments promptly implemented direct cash transfers to individuals. We analyse the impacts of these transfers on household consumption and investigate the different responses across individuals of varying income levels.
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| 16-Oct-2023
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Big techs in finance |
Large technology companies, or big techs, are increasingly venturing into finance and transforming financial markets. Their activities in the financial sector have attained macroeconomic significance in several countries. Big techs owe their success to business models that generate a large stock of user data, which are then used to provide financial services. This paper focuses on the implications of the expanding footprint of big techs in finance.
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| 9-Oct-2023
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The cumulant risk premium |
Many episodes of market turbulence, including the Covid-19 crisis in March 2020, show that asset returns are not normally distributed and that higher-order moments play an important role in financial markets. This raises two questions: (1) What are the implications of higher-order moments for standard finance models? (2) How can the risk premium of higher-order moments across asset classes be measured in a tractable way? In this paper, we show that leveraged ETFs can be used as an alternative to options for measuring the risk of higher-order moments, and we quantify this risk across equities, bonds, commodities, currencies and volatility. To quantify the exposure to higher-order moments in a tractable way, we use the concept of cumulants, which are close relatives to the moments of a given distribution.
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| 29-Sep-2023
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The impact of green investors on stock prices |
We study the impact of green investors on stock prices in a dynamic equilibrium asset-pricing model, with three types of investor: green, passive or active. Green investors track an index that exludes progressively the firms with the highest greenhouse gas emissions. Active investors maximise expected returns and can buy the stocks of brown firms. Passive investors stick to a market capitalisation-based index.
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| 27-Sep-2023
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CBDC and the operational framework of monetary policy |
What effect would a retail central bank digital currency (CBDC) have on monetary policy implementation in the euro area, and how would this shape the macroeconomic effects of a CBDC? The introduction of a CBDC could affect the operational framework of monetary policy and the conditions in interbank markets if it brings about a sufficiently large decrease in excess reserves due to the reduction in bank deposits. This, in turn, could have important macroeconomic implications, both in the long run and during the CBDC adoption phase.
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| 25-Sep-2023
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Banks' credit loss forecasts: lessons from supervisory data |
After the Great Financial Crisis, policy initiatives sought to overhaul banks' measurement of financial risks for regulatory purposes. One objective was to reduce the procyclicality in risk estimates, ie their tendency to be low in tranquil times and spike under stress conditions. Another was to ensure that actual risks, rather than measurement practices, are the main driver of differences in risk estimates across banks. Against this backdrop, we evaluate banks' estimates of credit risk – which sits at the core of bank business models, has featured prominently in banking crises, and seems to have built up during the era of low-for-long interest rates.
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| 20-Sep-2023
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The effect of monetary policy on inflation heterogeneity along the income distribution |
Monetary policy has distributional effects – because a change in interest rates affects agents differently depending on their interest rate exposure, because income and wealth are affected differently, and possibly also because inflation responds differently across agents. While there is a large literature on the wealth and income effects of monetary policy, the effects on inflation differentials have barely been studied.
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| 14-Sep-2023
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Global supply chain interdependence and shock amplification – evidence from Covid lockdowns |
The Covid-19 pandemic and ensuing supply disruptions have reignited a longstanding debate over the benefits of global value chains (GVCs). At the same time, although aggregate trade generally rebounded across much of the globe during the second half of 2020, there were striking divergences in performance across industry sectors. Against this backdrop, we focus on two questions – how have GVCs evolved during the Covid years, and, does GVC participation amplify negative shocks?
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| 8-Sep-2023
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gingado: a machine learning library focused on economics and finance |
Machine learning (ML) has tremendous potential benefits for economic research and practice, but only trial and error reveal the best choice from a wide variety of algorithms and model parameters. For time series studies, testing at scale which economic series could be added to improve models is currently not a smooth process. Economists studying cross-sectional causal studies could benefit from the ability to simulate large causal data sets to test which ML models identify complex, non-linear causality. Another challenge is that, in contrast to other areas where ML is applied, economists are not typically encouraged to document their models or consider their broader implications – an important point when ML is used by a range of users in the private and public sectors.
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| 7-Sep-2023
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Margins, debt capacity, and systemic risk |
We lay out a stylised accounting framework for system-wide debt capacity, when debt serves both as an obligation of the borrower, and also as the collateral pledged by the lender to secure additional funding. Our focus is on fluctuations in margins and leverage. Changes in margin (and the corresponding fluctuations in leverage) are reflected in the fluctuations in the balance sheet size of market participants and in the financial system's broader risk-taking capacity. A sharp increase in margins, especially after a protracted period of thin margins, will tighten financial conditions for the whole system. We use our framework to provide a perspective on the liquidity imbalances that rocked financial markets in March 2020, amid the uncertainty of the Covid-19 pandemic.
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| 5-Sep-2023
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Energy shocks as Keynesian supply shocks: implications for fiscal policy |
The recent energy crisis has elicited much debate about its distributional and macroeconomic consequences and the appropriate fiscal (and monetary) policy response. Accordingly, the fiscal policy debate has focused on the need to target income support (in the form of subsidies or tax rebates) to the most vulnerable households. In this paper we develop a model to investigate the economic impact of energy supply shocks and the optimal fiscal policy response to them.
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| 4-Sep-2023
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Keep calm and bank on: panic-driven bank runs and the role of public communication |
On 9 March 2023, Silicon Valley Bank (SVB) was pushed into insolvency by an exceptionally rapid bank run, stoking fears that other banks could experience similar runs. To reassure depositors, the US President and the Federal Reserve made public statements expressing confidence in the stability of the US banking system. Does news about a large bank failure increase the risk of other bank runs? And can public communication by political leaders or central banks contain such a risk?
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| 30-Aug-2023
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The origins of monetary policy disagreement: the role of supply and demand shocks |
Central bank decisions are often taken by a committee or board rather than an individual. Some policy decisions are made after meetings with dissent votes. Which factors or shocks drive disagreement among the committee members voting on monetary policy? How can the central bank mandate, whether it be a single mandate for inflation or a dual goal of low inflation and maximum employment, explain disagreement?
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| 11-Aug-2023
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An impossibility theorem on truth-telling in fully decentralised systems |
Smart contracts are self-executing programmable contracts between two or more parties. Smart contracts do not require a vetting authority because their legitimacy relies on decentralised ledger technologies. However, the implementation of many potentially useful smart contract applications depends upon verifying that some real-world event has taken place. This is a problem. Given its fully decentralised nature, how does a smart contract select what the true state of the world is?
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| 9-Aug-2023
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Absolute blockchain strength? Evidence from the ABS market in China |
This paper considers the emerging asset-backed security (ABS) market in China and its rapid adoption of blockchain technology. We investigate whether blockchain adoption improves ABS trading. We also examine if the effect varies across different underlying asset classes or institutional arrangements. Finally, we ask if social factors, such as familiarity among key ABS market participants, may increase the benefit of adopting blockchain in ABS products.
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| 8-Aug-2023
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Sharks in the dark: quantifying HFT dark pool latency arbitrage |
Fierce competition on speed is a defining feature of modern financial markets. In response to a price signal with certain consequences, a race among market participants occurs based on how quickly they can react to that signal. These situations (labelled "latency arbitrage") can be harmful to liquidity in financial markets.
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| 4-Aug-2023
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The term structure of inflation forecasts disagreement and monetary policy transmission |
As inflation expectations play a crucial role in determining the actual price level, they are closely monitored by central banks. Our paper explores the implication of disagreement about inflation expectations on the transmission of monetary policy to both the real economy and financial markets. We focus on disagreement instead of consensus because, even when consensus inflation forecasts align perfectly with central bank inflation targets, individuals can still form varying beliefs about future inflation rates, raising concerns that inflation expectations might de-anchor.
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| 2-Aug-2023
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To lend or not to lend: the Bank of Japan's ETF purchase program and securities lending |
We study the effects of the Bank of Japan's (BOJ) ETF purchasing programme on stock returns, focusing particularly on the role of the stock lending market. In 2010, the BOJ established a programme to conduct outright purchases of various financial assets to stimulate the economy. This policy is unique as a monetary policy because equity index-tracking exchange-traded funds (ETFs) were included in those assets. The BOJ has continuously increased its purchasing amounts and its market presence has provoked discussions on how it has affected the market's structure.
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| 25-Jul-2023
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Trust bridges and money flows |
Cross-border payments are expensive, slow and opaque, reflecting multiple frictions. These problems are particularly acute for payments between counterparties located in developing economies. In order to improve upon this situation, we must first understand the root causes. Why are cross-border payments harder to complete than domestic payments, and why are payments between counterparties located in developing economies harder than those in more advanced economies? We provide a framework for answering these questions that centres on the fact that modern forms of money depend on credit relationships that require trust.
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| 18-Jul-2023
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How much do firms need to satisfy employees? - Evidence from credit spreads and online employee reviews |
The relationship between employees and firms has been a major social and economic issue for more than a century, and it continues to attract increasing interest from the media, policymakers and researchers. Particularly owing to the rapid development of information technology, information transparency in the working environment has increased substantially. Using online employee reviews, we examine the effect of employee treatment on firms' credit spreads.
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| 12-Jul-2023
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Fiscal sources of inflation risk in EMDEs: the role of the external channel |
Many emerging market and developing economies (EMDEs) have seen inflation spike after the Covid-19 pandemic following large fiscal stimulus. This has rekindled interest in the fiscal determinants of inflation. Not only could larger fiscal deficits boost inflation by adding to aggregate demand. By eroding investors' confidence in the creditworthiness of the sovereign, they could also lead to a currency depreciation, magnifying the initial inflation response.
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| 7-Jul-2023
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Original sin redux: role of duration risk |
Emerging market economies (EMEs) have been able to tap global capital markets by issuing government bonds in domestic currency. The "low-for-long" period of monetary policy globally has encouraged the issuance of longer-maturity bonds. The paper shows the mutually reinforcing nature of currency risk and duration risk. The disruptive impact of tightening global financial conditions is much larger when the EME government bonds have long maturities.
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| 6-Jul-2023
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Innovation convergence |
Economic convergence – the idea that less developed countries should grow faster and catch up with more developed ones – is predicted by many basic economic models of growth and has been a central empirical question. Innovation and improvement in productivity are essential for sustained long-term growth. Thus, the role of innovation in the convergence process – and whether innovation itself converges – is crucial to understand long-term growth.
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| 4-Jul-2023
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Financial heterogeneity and monetary union |
In March 2010, euro zone investors lost trust in the so-called periphery countries, precipitating a sharp pullback of private capital from the region. Although the periphery subsequently endured notable disinflation, a significant gap between the price levels in the core and periphery persisted during the ensuing crisis. As a result, real effective exchange rates in the periphery remained above those of the core countries, impeding the necessary economic adjustments.
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| 3-Jul-2023
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Global public goods, fiscal policy coordination, and welfare in the world economy |
The Covid-19 pandemic made it clear that, in today's globalised world, national borders cannot stop the propagation of viruses and communicable diseases. Compelling evidence also suggests that the rate of emergence of new diseases is accelerating, and that their adverse effects may increase significantly in the future. Observers have therefore advocated the implementation of a global strategy to address these potential risks.
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| 8-Jun-2023
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The demand for government debt |
We investigate how central bank balance sheet policies affect investor demand for government debt. As central banks embark on quantitative tightening (QT) to shrink their balance sheets, how different sectors will absorb government debt will largely depend on how sensitive their demand is to changes in the yields (or prices) of government bonds. We study compositional shifts in the investors that hold government debt in the euro area, Japan, the United Kingdom and the United States, and ask how different investor groups would respond under QT.
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| 7-Jun-2023
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The Crypto Multiplier |
The exchange rates of cryptocurrencies are highly volatile. Announcements by large investors, celebrity endorsements or financial crises can result in substantial crypto price movements. This paper explains why.
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| 2-Jun-2023
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Privacy regulation and fintech lending |
When designing privacy protection regulation, regulators face a challenging trade-off. On one hand, individuals are reluctant to share their personal data due to concerns about potential abuse or misuse. To protect consumers' privacy, regulators may consider limiting or even prohibiting the collection of personal data. On the other hand, data play a vital role for data-intensive firms like fintechs, which rely heavily on personal information to screen and price borrowers. Privacy regulation could thus potentially hinder the growth of fintechs and weaken competition in the financial sector.
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| 30-May-2023
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MPC heterogeneity and the dynamic response of consumption to monetary policy |
We study how household financial choices affect the impact of monetary policy on consumption. We use household-level survey data from Germany, France, Italy and Spain to estimate a model of how households allocate their income between savings (in risky and risk-free assets) and consumption. From our model, we derive marginal propensities to consume (MPCs), ie how much a household consumes out of an extra euro received. We use these MPCs to quantify the effect of a change in interest rates on consumption for each household.
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| 26-May-2023
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Insights into credit loss rates: a global database |
Credit risk was a key factor in the Great Financial Crisis and numerous other crises. Banks' overall credit losses tend to increase suddenly during a crisis from the typically low levels seen during "normal" times. The Covid-19 pandemic underscored the need for accurate credit risk assessments of bank balance sheets. In this paper, we present alternative micro- and macroprudential concepts and metrics to establish actual credit loss rates as well as forward-looking market- and macro-implied credit loss rate estimates for most jurisdictions worldwide. We also provide a public dashboard featuring 10 downloadable economy-level credit loss rate metrics, which will be updated regularly.
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| 24-May-2023
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Getting up from the floor |
How do central banks set interest rates? While the techniques are appreciated only by experts, their implications for the financial system can be surprisingly wide-ranging. This paper examines the evolution of techniques since the Great Financial Crisis (GFC), evaluates their merits and proposes a way forward.
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| 8-May-2023
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Who holds sovereign debt and why it matters |
Sovereign borrowing can help buffer the economy from macroeconomic shocks. This indebtedness can also make a country vulnerable to financial distress. The sharp increase in government spending and debt issuance with the Covid-19 pandemic has brought more urgency to understanding how a government can borrow. Answering this question requires knowledge of who invests in sovereign debt and how these investors may influence sovereign borrowing costs.
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| 5-May-2023
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Long-term debt propagation and real reversals |
Economic propagation mechanisms that capture how disturbances systematically feed through the economy over time are central to macroeconomic models. Such mechanisms allow us to understand the behaviour of key macroeconomic variables and help us make more reliable forecasts. Unfortunately, many macro models lack strong propagation based on understandable economic behaviour and instead rely on mechanisms for which there is no economic rationale.
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| 3-May-2023
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Dampening global financial shocks: can macroprudential regulation help (more than capital controls)? |
Fluctuations in global financial markets can severely destabilise emerging market economies (EMEs). The academic and policy debate on enhancing their resilience has focused on the role of capital controls and foreign exchange intervention because these tools directly target international financial transactions. In this paper, we provide a different perspective by asking whether EMEs might also rely on macroprudential regulation to protect themselves against global financial shocks.
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| 2-May-2023
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Money market funds and the pricing of near-money assets |
US Treasury bills (T-bills) and repurchase agreements (repos) are among the most important financial instruments in global finance, and US money market funds (MMFs) are key components of both the T-bill and repo market. It remains an open question as to what extent the portfolio allocation of MMFs affects the pricing of these short-term assets, and whether MMFs create interdependencies between the repo and T-bill markets.
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| 28-Apr-2023
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Sectoral shocks, reallocation, and labor market policies |
This paper was produced as part of the BIS Consultative Council for the Americas (CCA) research conference on "Structural changes in inflation and output dynamics after Covid and other shocks", held in Mexico City on 17–18 November 2022.
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| 27-Apr-2023
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The foreign exchange market |
The global foreign exchange (FX) market, the largest financial market in the world by trading volume, has remained opaque as trading takes place over-the-counter (OTC). With the FX market under light regulatory oversight in most countries, the structure and operation of the market have been driven by commercial interests and the market participants' needs. We provide an overview of the evolution of the FX spot market's size and of its trading environment from the time of the inception of the first electronic brokers in the 1990s through 2022. Algorithmic trading and non-bank intermediation have now become prominent features of the FX market.
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| 26-Apr-2023
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Sovereign risk and bank lending: evidence from 1999 Turkish earthquake |
Banks are important providers of credit to both non-financial borrowers and governments. Lending to their own sovereigns increases their exposure to sovereign risk. An increase in sovereign risk directly affects bank balance sheets when they hold sovereign debt. The decline in asset value reduces bank net worth, which can then constrain bank borrowing and lending. The surge in government borrowing across both advanced and emerging markets, spurred by the Covid-19 crisis, has reignited these concerns. Recent turmoil in the banking sector further underscores the potential impact of valuation losses from sovereign securities.
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| 25-Apr-2023
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Mobile payments and interoperability: Insights from the academic literature |
A functional payment network requires significant infrastructure investment, which often has a public good element. At the same time, market forces may lead to the emergence of a dominant player. We focus on (i) the balance between competition and cooperation between service providers; (ii) the governance of key infrastructures in mobile payments; and (iii) the welfare implications of making mobile payment systems interoperable.
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| 21-Apr-2023
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FinTech, investor sophistication and financial portfolio choices |
Financial technology (fintech) enables data to be more efficiently used to solve problems related to asymmetric information. In finance, artificial intelligence can be used to increase financial inclusion and reduce the costs of financial services. However, fintech can also lead to discrimination among investor groups, particularly if they have different levels of access to, or use of, the new technology. For instance, fintech can allow sophisticated market players to acquire better data and formulate profitable trading strategies, while less sophisticated ones may lose out. So are advances in financial technology democratising finance and levelling the playing field?
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| 17-Apr-2023
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Tackling the fiscal policy-financial stability nexus |
Despite the great strides made by policy reforms following the Great Financial Crisis, the link between fiscal policy and financial stability has attracted less attention. We review the channels through which fiscal and financial risks propagate and mutually reinforce each other and suggest how policy could best tackle these links.
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| 14-Apr-2023
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Intraday liquidity around the world |
Banks typically make large payments to each other through large-value payment systems (LVPS). Most LVPS settle payments on a gross basis, which means that banks must fund each payment one by one. While this helps to reduce any credit risk that arises if payments are accumulated and settled on a net basis, it is liquidity-intensive, because banks need to cover any mismatches between incoming and outgoing payments by drawing on their reserves or central bank credit lines. This gives rise to strategic behaviour in how banks manage their intraday liquidity. In this paper, we use a unique cross-country data set to assess intraday liquidity usage by banks around the world.
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| 6-Apr-2023
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Big techs and the credit channel of monetary policy |
Big techs are lending to small and medium-sized enterprises and vendors on their e-commerce platforms, thus encroaching on financial markets. These changes in financial intermediation could affect monetary policy transmission in at least two ways. First, the business model of big techs depends on using vast amounts of data instead of collateral to solve agency problems between borrowers and lenders. By using machine learning and big data to generate credit scores, big techs can assess a company's creditworthiness more accurately than traditional credit bureau ratings can. As a result, this may decrease the relevance of the "collateral channel" and, simultaneously, increase the responsiveness of credit to changes in firms' business conditions. Second, the threat of reputational damage, or of being excluded from the e-commerce platform, serves as an extra-legal but highly effective means of contract enforcement for big tech firms.
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| 4-Apr-2023
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Crypto carry |
The cryptoassets ecosystem has matured to a point where cash and derivative instruments are now actively traded both on native crypto exchanges as well as on traditional exchanges. We study one of the most salient features of these instruments in recent years: the large difference between spot and futures prices, the so-called futures basis or "crypto carry". The crypto carry encapsulates the return on a simple "cash and carry" strategy: going long in the spot market, while selling short in the futures contract. We analyse the crypto carry observed for the two major digital assets, Bitcoin and Ethereum, shed light on its economic drivers, and study how these are connected to the boom-and-bust dynamics often seen in crypto markets.
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| 3-Apr-2023
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CBDC policies in open economies |
Central banks are currently considering issuing digital money to the general public, known as central bank digital currency (CBDC). Much attention so far has focused on the microeconomic benefits of CBDC, while the implications for macroeconomic and financial stability remain less well understood. What are the macroeconomic gains and risks associated with CBDC, particularly if it could be transferred across borders? And how should the central bank set its CBDC policy in the light of these potential benefits and costs?
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| 29-Mar-2023
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Supervisory policy stimulus: evidence from the euro area dividend recommendation |
In March 2020, the European Central Bank made the recommendation that, at least until October 2020, no "significant institution" should pay out dividends. We investigate the recommendation's impact on the credit supply to non-financial corporations amid the Covid-19 economic shock. Bank managements effectively faced a choice of how to allocate their capital when deciding whether to follow the ECB recommendation, with differing implications for the credit supply. On the one hand, given constant demand and price effects, they might have opted to use the surplus capital to increase lending supply, thus responding countercyclically to support the economy. On the other hand, they might have decided to increase their resilience to future shocks by saving capital, and/or strengthening their loss-absorption capacity by making additional provisions. The paper asks whether the ECB's dividend recommendation led to an increase or a decrease in the credit supply to non-financial corporations, and whether this effect varied for different types of firm and sector.
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| 17-Mar-2023
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Big tech credit and monetary policy transmission: micro-level evidence from China |
Big tech credit has been growing rapidly in recent years. As they are less reliant on traditional collateral, big tech lenders can lend to borrowers that have been unserved or underserved by traditional financial institutions. As a source of disruption, big techs represent a "brave new world" for monetary policymakers, requiring them to re-evaluate the effectiveness of monetary policy transmission through these new lenders. This paper attempts some answers to such questions.
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| 15-Mar-2023
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Commodity prices and the US Dollar |
In the aftermath of the Covid-19 pandemic, rising commodity prices went hand in hand with a stronger US dollar, reversing the usual relationship between these variables. US dollar appreciation increased the inflationary effects of higher commodity prices for commodity-importing economies, and dampened the "shock-absorbing" effects of exchange rate movements for commodity exporters. This paper examines whether the post-pandemic correlation patterns between commodity prices and the US dollar will become more common in the future.
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| 13-Mar-2023
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Public debt and household inflation expectations |
Inflation has increased sharply against the background of record-high levels of public debt during the post-pandemic economic recovery. In this paper, we ask whether high public debt might be helping to increase household inflation expectations.
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| 8-Mar-2023
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What happens to EMEs when US yields go up? |
We study episodes of rapid increases in 10-year US Treasury yields and their effect on emerging market economies (EMEs). We focus on four outcomes of interest in EMEs: local currency yields, exchange rates, equity prices and portfolio fund flows. We use statistical techniques to identify the key US, global and EME-specific financial developments associated with negative outcomes in EMEs during episodes of rapid increases in US yields.
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| 7-Mar-2023
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Did interest rate guidance in emerging markets work? |
Interest rate guidance consists of central bank statements about the future path of policy interest rates. Advanced economies deployed it after the Great Financial Crisis, successfully influencing long-term interest rates, as well as expectations about the economic outlook. It thus proved useful in complementing traditional monetary policy tools during crises or following unexpected shocks. Emerging market economies (EMEs) adopted interest rate guidance only recently, as part of their policy responses to the Covid-19 pandemic. In this paper we study the experience of the central banks of five EMEs during that episode, asking in particular whether their interest rate guidance could provide additional monetary stimulus and influence market expectations in the desired way.
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| 6-Mar-2023
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Volume dynamics around FOMC announcements |
From 1994 to 2011, about 80% of excess returns in the equity market could be obtained in the 24 hours before scheduled Federal Open Committee (FOMC) announcements. In the standard economic paradigm, price is determined through trading between buyers and sellers. The 1987 market crash demonstrated that the mechanics of trading can significantly affect market prices. To shed light on the price formation process, this paper studies the volume dynamics around FOMC announcements.
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| 3-Mar-2023
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Greenhouse gas emissions and bank lending |
Using more than 10 years of loan data for individual Japanese listed firms and banks, we investigate whether the greenhouse gas (GHG) emissions of borrowing firms have affected bank lending to these firms. In particular, we focus on the varied behaviour across banks with different financial characteristics. In addition, we examine why the GHG emissions of firms may influence bank lending to these firms.
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| 28-Feb-2023
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Understanding post-Covid inflation dynamics |
This paper was produced as part of the BIS Consultative Council for the Americas (CCA) research conference on "Structural changes in inflation and output dynamics after Covid and other shocks", held in Mexico City on 17–18 November 2022.
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| 23-Feb-2023
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The shape of business cycles: a cross-country analysis of Friedman's plucking theory |
As the advanced economies continue to recover from the Covid-19 recession, it would be helpful to know more about how economies typically behave following recessions. While large recessions tend to precede strong expansions, strong expansions do not tend to precede large recessions. Are economic recoveries complete? If not, what factors influence how far a recovery will run?
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| 21-Feb-2023
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Overcoming original sin: insights from a new dataset |
The emerging market sovereign bonds dataset used in this paper is available here. The compilation guide provides meta data by country and describes the main steps involved in constructing the holdings series.
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| 16-Feb-2023
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Non-bank lending during crises |
Since the Great Financial Crisis of 2007–09, non-bank financial institutions have steadily increased their global footprint. They now account for around half the global financial system's assets. Recent work on the role of non-banks in mitigating the effectiveness of monetary policy emphasises the importance of their funding models. Much less is known about the behaviour of global non-bank lending during crises, and whether relationships with non-banks benefit borrowers.
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| 14-Feb-2023
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Constrained liquidity provision in currency markets |
The paper examines the role of financial intermediaries in supporting the functioning of the foreign exchange (FX) market. We argue that tighter constraints on the intermediation capacity of dealers, such as higher funding costs and more restrictive value-at-risk (VaR) limits, can lead to increased liquidity costs and affect the efficacy of no-arbitrage conditions. Our study focuses on understanding the impact of these constraints on both the cost and quantity of liquidity provision in the FX market.
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| 13-Feb-2023
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Climate tech 2.0: social efficiency versus private returns |
Technology can play a crucial role in combating climate change, but to finance breakthroughs, large volumes of private and public capital are needed. What are the implications of these investments from a social efficiency perspective? And what has their financial performance been?
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| 30-Jan-2023
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Financial access and labor market outcomes: evidence from credit lotteries |
Much hope has been placed in improved financial access to overcome the economic hurdles facing low-income households. Yet randomised-control trials across a diverse set of settings and countries have documented that lending to low-income households has only a modest or negligible effect. These findings raise the question of whether the return on capital is generally lower than expected for households with insufficient access to loans, or whether interventions might be better targeted on investments that generate higher returns.
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| 25-Jan-2023
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Theory of supply chains: a working capital approach |
Production takes time, especially when conducted through long supply chains. Working capital in the form of inventories and receivables bridges the timing mismatch between incurring costs and receiving cash from sales. This paper lays out a theory of supply chains where financial conditions play a pivotal role in the determination of the length of supply chains.
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| 25-Jan-2023
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Global financial cycle and liquidity management |
The global financial cycle exposes emerging market economies to large fluctuations in capital inflows that tend to destabilise asset prices and macroeconomic conditions. In recent years, an influential line of research has advocated using capital controls to reduce the volatility of capital inflows and enhance macroeconomic resilience.
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| 25-Jan-2023
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Forecasting swap rate volatility with information from swaptions |
We calculate the swap rate model-free implied volatility from over-the-counter swaption quotes for swap rates with a wide cross section of tenors and with a variety of times to expiration. We examine the predictive power of the swap rate model-free implied volatility on future realised volatility of swap rates and compare the in-sample and out-of-sample predictability of the model-free implied volatility with other commonly used predictors.
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| 23-Jan-2023
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Signaling with debt currency choice |
Many emerging market firms finance themselves with foreign currency debt. Yet foreign currencies, especially safe haven ones, appreciate against the local currency during downturns. This has been a recurring theme in emerging market crises. Corporate leverage and foreign currency borrowing, especially in US dollars, have increased in recent years, making the reasons for borrowing in foreign currency and associated risks important to understand.
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| 19-Jan-2023
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The Technology of Decentralized Finance (DeFi) |
Decentralised finance (DeFi) builds on distributed ledger technologies (DLT) to offer services such as trading, lending and investing without using a traditional centralised intermediary. The fact that DeFi components can be programmed may open up new possibilities for more competitive financial markets, and could bring efficiency gains. However, DeFi introduces enormous technological and economic complexity that makes it increasingly difficult to assess the risks and potential of DeFi financial products. But financial institutions and regulators dealing with DeFi need just such a systematic evaluation of these factors.
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| 19-Jan-2023
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The Bank of Amsterdam and the limits of fiat money |
Fiat money is issued by decree, or "by fiat". Trust in fiat money is ensured through sound institutions, in particular central banks. Central banks work to maintain the value of the currency, often through measures on their own balance sheets. But what happens in the case of large losses? It is well known that central banks can operate with negative equity for a time, and many have done so in recent history. Yet there are limits, beyond which trust in fiat money falls away.
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| 13-Jan-2023
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Monetary policy and credit card spending |
This paper is the first to use credit card data to assess how monetary policy affects consumer spending. The analysis uses transaction-level information provided confidentially by Fable Data for more than 1 million accounts in Germany over the period 2017–21.
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| 16-Dec-2022
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Regulating big tech |
Digital platforms and, in particular, social media platforms enjoy significant market power, which can be used in both the economic and the political arenas. Without regulatory restrictions, these platforms serve global markets and so issues of market power quickly become geopolitical issues. Thus, it is very difficult to address the issues arising from market power by regulating solely at the national level.
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| 16-Dec-2022
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Systemic fragility in decentralised markets |
Collateral is widely used in financial markets to mitigate asymmetric information problems and to limit credit risk exposure for lenders. In decentralised finance, collateralised lending is automated: collateral value is constantly monitored and margins are enforced by third parties. We focus on the ways in which third party collateral liquidations affect protocol risk, collateral risk and risks to the decentralised financial system.
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| 16-Dec-2022
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Cryptocurrencies and Decentralised Finance (DeFi) |
Historically, financial intermediaries have been the key nodes in the financial system that control the accuracy of customer accounts, perform bookkeeping functions and ensure that unauthorised persons do not have access to an account. But recent advances in technology have enabled, in the form of decentralised finance (DeFi), a new form of intermediation in crypto markets that aims to cut out the middle men and reduce transaction costs. The key elements of the DeFi ecosystem are novel automated protocols on blockchains, ie forms of permissionless distributed ledger in which details of transactions are held in the ledger in the form of blocks of information.
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| 16-Dec-2022
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The burst of high inflation in 2021–22: how and why did we get here? |
The current institutional arrangements for monetary policy delivered more than two decades of low and stable inflation. Yet central banks failed to prevent the burst of high inflation in 2021–22. When inflation started to rise in the first half of 2021, many central banks dismissed it as a normal catchup of the price level after its sharp fall during the pandemic. Some even welcomed the return of inflation after many years when it was stubbornly stuck below target. But the initial correction in the price level became a persistent acceleration. In April 2022, the one-year inflation rate was 9.0%, 6.3%, and 7.5% in the United Kingdom, the United States and the euro zone, respectively.
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| 15-Dec-2022
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FX Intervention to Stabilize or Manipulate the Exchange Rate? Inference from Profitability |
Many central banks intervene in the foreign exchange rate market. Central banks generally claim that these interventions aim at stabilising the exchange rate, leaning against temporary excessive fluctuations. Yet critics argue that interventions are often geared at manipulating the exchange rate away from fundamental values, for example to gain a competitiveness advantage by keeping the exchange rate undervalued.
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| 14-Dec-2022
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The Lion's Share: Evidence from Federal Contracts on the Value of Political Connections |
Corporations and governments frequently interact. Perhaps most notably, corporations provide goods and services to governments through procurement contracts. What is the value for firms of establishing political connections to facilitate these interactions?
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| 13-Dec-2022
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Macro-financial stability frameworks: experience and challenges |
The 2007–09 Great Financial Crisis underscored the rationale for macro-financial stability frameworks, in both advanced economies (AEs) and emerging market economies (EMEs). Domestically, both AE and EME central banks have increasingly adopted macroprudential tools as a complement to monetary policy to better reconcile price and financial stability over longer horizons. Externally, EME central banks have resorted to FX intervention and, occasionally, to capital flow management measures (CFMs) to address capital flow and exchange rate volatility.
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| 12-Dec-2022
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Understanding the Food Component of Inflation |
Changes in food prices are often treated as separate from macroeconomic developments - a nuisance that is not worth modelling. Given that they represent an important share of CPI baskets, this paper examines the extent to which food prices respond to broader macroeconomic conditions such as output gaps and inflation expectations.
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| 6-Dec-2022
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The pandemic, cash and retail payment behaviour: insights from the future of payments database |
The Covid-19 pandemic has altered retail payment behaviour around the world. Cash withdrawals and cash use declined, even though microbiological research indicates that physical banknotes and coins are not any more likely to transfer infections than other regularly touched surfaces. A transition to digital payments, such as contactless card payments and digital payment apps, occurred rapidly. What implications do these changes have for the future of cash and digital payments, and how have they varied across economies?
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| 22-Nov-2022
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Inflation risk and the labor market: beneath the surface of a flat Phillips curve |
After the Great Financial Crisis, the labour market's influence on inflation decreased, largely due to anchoring of expectations and workers' reduced bargaining power. This paper studies whether perceived inflation risk, as gauged from inflation options, was more attuned to employment conditions. That is, did a tight labour market raise the perceived likelihood that inflation could overshoot expectations, even as realised inflation stayed subdued?
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| 22-Nov-2022
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How abundant are reserves? Evidence from the wholesale payment system |
As central banks start to shrink their balance sheets while tightening policy in response to inflation, the deposit balances of commercial banks ("reserve holdings") are set to shrink as a consequence. Adequate reserve holdings underpin smoothly functioning short-term funding markets, and central banks will need to determine the scope for a smooth reduction in reserves. This paper approaches the issue of adequacy of reserve holdings by gauging how much outgoing payments depend on incoming payments. As reserve balances are the deposits held by commercial banks at the central bank, outgoing payments reduce the reserve balance of the bank making the payment. Delaying payments until incoming payments replenish reserves would conserve reserves. The sensitivity of outgoing payments to incoming payments can therefore serve as a gauge of the value placed by commercial banks on their reserves.
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| 21-Nov-2022
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Systemic Risk in Markets with Multiple Central Counterparties |
Central clearing has become a key feature of global derivatives markets following the Great Financial Crisis, altering the shape of financial networks. In centrally cleared markets, a central counterparty (CCP) sits at the centre, becoming the buyer to every seller and the seller to every buyer. In practice, however, derivatives clearing is characterised not by a single CCP, but by a small set of them. Importantly, a limited number of large banks link these CCPs together, representing the joint clearing membership that together accounts for the lion's share of clearing volumes.
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| 17-Nov-2022
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How capital inflows translate into new bank lending: tracing the mechanism in Latin America |
Capital inflows affect firms' access to bank lending in emerging market economies. For example, when local banks receive a cross-border loan or when they sell bonds to investors abroad, capital flows into the country that can be passed on to local borrowers. We look at how local lending standards change during periods of high capital inflows by exploring changes in outstanding loans and prices. We compare banks with different balance sheet characteristics and how their lending standards differ for firms with high borrower risk.
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| 15-Nov-2022
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Population aging and bank risk-taking |
Advanced economies face an unprecedented rise in the population of older adults. Their high savings rate might lead to an abundance of savings and depressed returns, thereby potentially encouraging banks to reach for yield. Our paper investigates the consequences of population ageing for bank risk-taking and financial stability.
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| 14-Nov-2022
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Crypto trading and Bitcoin prices: evidence from a new database of retail adoption |
Cryptocurrencies are volatile assets that have gone through multiple boom-bust cycles. To date, people do not use cryptocurrencies widely to make payments, to measure value or to finance real-world investments. Yet despite this, retail investors continue entering into crypto exchanges to trade cryptocurrencies like Bitcoin. What explains this adoption?
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| 10-Nov-2022
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Is the Covid-19 pandemic fast-tracking automation in developing countries? Evidence from Colombia |
Recent evidence suggests that the Covid-19 pandemic has tended to accelerate the automation process in developed economies. We assess whether this is also happening in Colombia, a developing country characterised by a combination of low investment in research and development (R&D) and productivity, and high levels of informal labour and unemployment. In this context, the mobility restrictions imposed by the government in order to reduce the spread of the virus and the fear of contagion led to a reduction in labour supply, increasing labour cost relative to capital, which in turn could have enhanced automation.
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| 9-Nov-2022
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What drives inflation? Disentangling demand and supply factors |
Disentangling demand and supply factors driving inflation has often been a major challenge for monetary policy. This is also the case currently, as there are different views on the relative role of demand and supply in the inflation surge since 2021. In this paper, we estimate demand and supply factors and assess their contribution to inflation dynamics in the United States over the past five decades. The analysis also covers the euro area over the past two decades.
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| 7-Nov-2022
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The case for convenience: how CBDC design choices impact monetary policy pass-through |
More and more central banks are transitioning from thinking about central bank digital currencies (CBDCs) in conceptual terms to considering a launch. Attention has shifted from high-level monetary policy and financial stability considerations to country-specific design and policy interactions.
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| 25-Oct-2022
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The term structure of carbon premia |
Our paper explores a carbon premium – the extra yield investors demand to buy bonds issued by firms with more greenhouse gas emissions – in the US corporate bond market. We analyse the carbon premium along two channels. One is the preference channel, under which the premium reflects investors' preference for firms that they perceive as being more environmentally responsible, all else equal. The other is the risk channel, where investors perceive more carbon-intensive firms as more prone to default.
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| 13-Oct-2022
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Gender diversity in bank boardrooms and green lending: evidence from euro area credit register data |
Since banks play a pivotal role in modern financial systems, they can help to accelerate the transition to a carbon-neutral economy if they make more sustainable lending decisions. A bank's climate strategy and related decision-making depend on the trajectory defined by the board, which in turn depends on the board's diversity. The presence of women in banks' boardrooms can add value along several dimensions, as explained by sociological and physiological theories, as well as empirical evidence.
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| 3-Oct-2022
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The scarring effects of deep contractions |
In the last two decades, the global economy has experienced several major contractions that were characterised by scarring effects. The Great Financial Crisis is the prime example. More recently, the deep recessions following the outbreak of the Covid-19 pandemic and the economic fallout from the Russian invasion of Ukraine have also raised the fears of long-term scarring. At the same time, we still know little about how scarring is caused, and the circumstances under which it becomes more probable, even though these are critical questions for both policymakers and researchers.
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| 28-Sep-2022
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Emerging market bond flows and exchange rate returns |
We study the relationship between international bond portfolio flows and exchange rate returns across a range of emerging market economies (EMEs). In particular, we investigate whether international bond flows are correlated with subsequent exchange rate changes, and if such a relationship could be exploited as a portfolio strategy.
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| 26-Sep-2022
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The impact of fintech lending on credit access for U.S. small businesses |
Financial technology (fintech) has allowed for new market entrants in many areas of financial services, including small business lending. New fintech lenders often use alternative data sources and machine learning to assess the credit quality of small firms, thus complementing the traditional credit scores and soft information used by traditional banks. In the United States, the growth of fintech lenders has been part of a broader trend in the growth of non-bank lenders amid a pullback by traditional banks. A key question is whether such lenders have enhanced credit access to small businesses which are likely to be underserved by traditional lenders.
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| 23-Sep-2022
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Quantifying the role of interest rates, the Dollar and Covid in oil prices |
Which are the key determinants of oil prices, and what role do financial factors play in Brent price formation? This paper sheds a new light on these fundamental questions relying on a widely used machine learning technique (random forests, based on 1,000 regression trees). As the article shows, the use of this technique leads to very large gains in oil price forecasting performance.
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| 14-Sep-2022
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Cyber risk in central banking |
Cyber attacks are becoming ever more frequent and sophisticated, and firms and policymakers list cyber risk as a major concern. Financial institutions and financial market infrastructures are especially at risk, and the financial industry ranks consistently as one of the most-attacked industries. While there have been several studies and surveys on cyber threats for the private sector – and firms in the financial sector in particular – little is known about central banks' assessment of cyber risk.
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| 1-Sep-2022
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Building portfolios of sovereign securities with decreasing carbon footprints |
We propose a strategy to build a "net zero" portfolio of sovereign securities that delivers progressively declining carbon footprints. Passive investors could use it as a new benchmark that is consistent with the Paris Climate Accords while keeping the portfolio's financial characteristics as close as possible to a business-as-usual benchmark.
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| 31-Aug-2022
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Big Techs vs Banks |
Large technology firms ("big techs") have access to massive amounts of data about firms that operate on their online platforms or use their QR-code payment systems. While this information can be harnessed to improve the assessment of a firm's credit risk, it may also lead to "data dominance", when the big tech can extract rents from the firm and reduce its profits to the minimum. In the case of e-commerce platforms, data dominance is compounded by the fact that firms are somewhat captive in the big tech ecosystem. In fact, defaulting on a big tech loan could cause a firm not only to be excluded from future loans (as in the traditional case of bank lending) but also to be shut out from the e-commerce platform and its payment services.
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| 24-Aug-2022
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Growth expectations and the dynamics of firm entry |
Business turnover, the process by which entrepreneurs create new firms and dissolve old ones, is a key feature of modern economies. Structural factors, such as barriers to entry or an inefficient insolvency process, play a considerable role in either slowing down or speeding up the entry and exit of firms.
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| 25-Jul-2022
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Cross-border financial centres |
When monitoring capital flows and analysing international interconnectedness, it is useful to distinguish financial centres that specialise in cross-border financial activity from other countries. Such centres are a channel for international investment, as opposed to an ultimate source or final destination for funds. Also, their external assets and liabilities are exceptionally large compared with their domestic economy. As a result, they account for a small share of the global economy but a large share of international financial activity. We propose a quantitative, transparent and replicable method for identifying cross-border financial centres.
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| 19-Jul-2022
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Debt sustainability and monetary policy: the case of ECB asset purchases |
We study how unconventional monetary policy affects sovereign debt dynamics in a debt sustainability analysis (DSA). We estimate the impact of the ECB's pandemic emergency purchase programme (PEPP) - and its unwinding - on sovereign spreads and how this affects debt trajectories. We also look at the effect of inflation under different central bank responses.
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| 18-Jul-2022
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The Holt-Winters filter and the one-sided HP filter: A close correspondence |
The Hodrick-Prescott (HP) filter is heavily used in economics and by policymakers. In many cases, the two-sided, full sample version is applied to determine trends. But the one-sided filter that is estimated recursively also has important applications. Most notably, it is embedded in the Basel III framework for the countercyclical capital buffer. In this paper, we show that the trend of the one-sided HP filter has a very close correspondence with the trend of the Holt-Winters (HW) filter.
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| 18-Jul-2022
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Capital flows and monetary policy trade-offs in emerging market economies |
Emerging market economies (EMEs) commonly combine inflation targeting monetary policy regimes with macroprudential tools, capital flow management measures and FX intervention, to meet the challenges they face from swings in capital flows. These swings raise difficult trade-offs for monetary policy and require policymakers to resort to complementary policy tools to enhance macro-financial stability. We provide a characterisation of these trade-offs, distinguishing between times of stress and normal times when vulnerabilities build up, and assess how complementary policy tools can address them.
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| 15-Jul-2022
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Risk capacity, portfolio choice and exchange rates |
Fluctuations in the risk sentiment of global portfolio investors can lead to shifts in portfolio holdings, even without changes in fundamentals or currency mismatches on the part of the borrower. Such shifts in risk sentiment can occur when the investor's risk constraint is relaxed or tightened in reaction to market events. The focus is on how exchange rate changes affect risk constraints and hence the investor portfolios of sovereign bonds issued in the local currencies of emerging market economies (EMEs).
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| 14-Jul-2022
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Mis-allocation within firms: internal finance and international trade |
Are conglomerate firms highly productive? Or do they suffer from internal quarrels and squander investment opportunities? An established observation in the trade literature is that conglomerate firms are more productive than single-product firms. By contrast, the finance literature has established that multi-segment firms trade at a discount to single-product firms, with a lower valuation ("Tobin's Q"), because funds are misallocated across their divisions through the internal capital market.
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| 13-Jul-2022
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Bank of Japan's ETF purchase program and equity risk premium: a CAPM interpretation |
We study the effects of the Bank of Japan's (BOJ) exchange-traded fund (ETF) purchase programme on equity risk premia. Constructing a unique panel data set of the amount of individual stocks that the BOJ has indirectly purchased in the programme, we see significant cross-sectional and time series variations among individual stocks due to their different weights in ETFs and the BOJ's policy changes on its share of purchases across ETFs. Using these cross-sectional and time series variations, we study whether the ETF programme changed the risk premia of Japanese stocks based on the Capital Asset Pricing Model.
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| 7-Jul-2022
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Fiscal deficits and inflation risks: the role of fiscal and monetary policy regimes |
The massive wave of fiscal stimulus unleashed by governments in the wake of the Covid-19 pandemic has sparked an intense debate about the inflationary consequences of current fiscal policies. Is higher inflation after the pandemic a fiscal phenomenon? Will the need to manage high public debt levels pose a risk to price stability?
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| 6-Jul-2022
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What drives repo haircuts? Evidence from the UK market |
Contract terms are rarely disclosed in repo markets, except for repo financed by US Treasury securities. As a result, we still know relatively little about the market-wide relationships between haircuts, collateral and counterparty characteristics. This is especially true of the European repo market, where there is a shortage of high-quality collateral since government bonds are of heterogeneous quality. Our paper fills this gap in the literature by estimating these relationships using a transaction-level UK data set and, importantly, by showing what types of market friction (eg adverse selection) are relevant for repo haircuts in general.
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| 14-Jun-2022
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Monetary policy announcements and expectations: the case of Mexico |
This paper was produced as part of the Final Conference of the BIS-CCA Research Network on "Monetary policy frameworks and communication (2019-2022)".
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| 14-Jun-2022
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Communication, monetary policy, and financial markets in Mexico |
This paper was produced as part of the Final Conference of the BIS-CCA Research Network on "Monetary policy frameworks and communication (2019-2022)".
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| 14-Jun-2022
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Forward guidance and expectation formation: A narrative approach |
This paper was produced as part of the Final Conference of the BIS-CCA Research Network on "Monetary policy frameworks and communication (2019-2022)".
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| 14-Jun-2022
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Monetary policy press releases: an international comparison |
This paper was produced as part of the Final Conference of the BIS-CCA Research Network on "Monetary policy frameworks and communication (2019-2022)".
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| 14-Jun-2022
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Effects of Banco de la Republica's communication on the yield curve |
This paper was produced as part of the Final Conference of the BIS-CCA Research Network on "Monetary policy frameworks and communication (2019-2022)".
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| 14-Jun-2022
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Seeing the forest for the trees: Using hLDA models to evaluate communication in Banco Central do Brasil |
This paper was produced as part of the Final Conference of the BIS-CCA Research Network on "Monetary policy frameworks and communication (2019-2022)".
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| 14-Jun-2022
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Alternative monetary-policy instruments and limited credibility: an exploration |
This paper was produced as part of the Final Conference of the BIS-CCA Research Network on "Monetary policy frameworks and communication (2019-2022)".
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| 25-May-2022
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Unconventional credit policy in an economy under zero lower bound |
This paper was produced as part of the BIS Consultative Council for the Americas (CCA) research conference on The economics of the Covid-19 pandemic.
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| 25-May-2022
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The limited power of monetary policy in a pandemic |
This paper was produced as part of the BIS Consultative Council for the Americas (CCA) research conference on The economics of the Covid-19 pandemic.
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| 25-May-2022
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Covid-19 and market power in local credit markets: the role of digitalization |
This paper was produced as part of the BIS Consultative Council for the Americas (CCA) research conference on The economics of the Covid-19 pandemic.
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| 20-May-2022
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Building regional payment areas: the Single Rule Book approach |
Under ideal circumstances, cross-border payments would be processed as seamlessly as comparable domestic payments, even where multiple currencies are involved. In practice, however, each border can add to the costs of a cross-border payment if crossing the border means entering a different technological, regulatory and legal environment, with different systems, regulators, and courts. This paper analyses regional payment integration projects across the world to identify key lessons for future cross-border payment enhancements on regional and global level, focusing on the role of technology, law and regulation.
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| 20-May-2022
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DLT-based enhancement of cross-border payment efficiency - a legal and regulatory perspective |
Traditionally cross-border payments have relied on a mutually trusted central entity. Distributed ledgers, blockchain and smart contracts (together dubbed "distributed ledger technologies" or DLT) could provide an alternative to that approach. However, different DLT applications in the cross-border payments context come with legal challenges. Hence, it is necessary to analyse the extent to what financial law and regulation is fit to deal with DLT-based payments.
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| 19-May-2022
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A shot in the arm: stimulus packages and firm performance during Covid-19 |
The Covid-19 pandemic prompted governments to launch large economic policy packages around the world. How effective these packages have been?
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| 18-May-2022
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Banking in the shadow of Bitcoin? The institutional adoption of cryptocurrencies |
The market capitalisations of cryptocurrencies and related economic activities have grown phenomenally in recent years. While the role of retail investors has received much attention, we know less about the role of financial intermediaries in this sector. How significant is the presence of traditional intermediaries such as banks and investment funds in crypto markets, and what motivates them to take on cryptocurrency exposures? And how important are novel intermediaries such as crypto exchanges?
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| 11-May-2022
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It takes two: Fiscal and monetary policy in Mexico |
The intertwined channels of fiscal and monetary policy are a challenge for policymakers. By design, the fiscal authority and the central bank decide and implement each form of policy independently. But taking policy decisions without considering the other side can lead to policies that are in conflict with one another. It is thus important to understand how fiscal and monetary policy interact and the nature of the feedback between them.
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| 4-May-2022
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Big techs, QR code payments and financial inclusion |
Information asymmetries between small firms and credit intermediaries can reduce financing of good investment opportunities and keep promising entrepreneurial projects from being developed. To help solve this problem, small enterprises can post collateral, rely on credit history or build close and long-term relationships with specific lenders. Big data and machine learning, however, have provided a new solution, allowing large technology firms ("big techs") to use credit scoring techniques to provide lending to clients operating in their business platforms.
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| 24-Mar-2022
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Financial openness and inequality |
Recent increases in inequality have prompted a lot of interest in what causes it. Existing research has identified international financial openness as one of the main potential drivers of income inequality. Nevertheless, the evidence has not been conclusive so far. This is largely due to the use of very different measures and methods across studies. Most papers have focused on legal restrictions on capital flows as a measure of openness ("de jure measures"). The few that have examined measures based on actual external financial positions ("de facto measures") have used only a subset of the key metrics.
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| 21-Mar-2022
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Quantitative forward guidance through interest rate projections |
Forward guidance on the future path of policy rates has become a key element of central banks' monetary policy toolbox over the past decade. This paper analyses quantitative forward guidance through the publication of interest rate projections, a practice pursued by some inflation targeting central banks.
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| 9-Mar-2022
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Deconstructing ESG scores: how to invest with your own criteria |
Environmental, social and governance (ESG) scores are becoming an increasingly important tool for asset managers to design and implement ESG investment strategies. However, there are drawbacks in using headline ESG scores that limit their usefulness. ESG scores amalgamate a broad range of fundamentally different factors, which creates ambiguity. Weak scores in one pillar can offset strong scores in another pillar.
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| 7-Mar-2022
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Cross-border regulatory spillovers and macroprudential policy coordination |
Financial institutions and markets are highly interconnected. Accordingly, differences in national macroprudential policies can be an important source of international spillovers. Through cross-border regulatory arbitrage, these differences may lead to large swings in capital flows. In turn, the transmission of financial shocks across regions may be magnified – and financial risks exacerbated. When global financial institutions can evade policy actions taken by regulators in their jurisdiction, financial cycles are not well synchronised across economies. Moreover, reverse spillovers are potentially significant. However, prior coordination may improve global welfare. This is one of the rationales underlying Basel III's principle of reciprocity.
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| 24-Feb-2022
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Estimating conditional treatment effects of EIB lending to SMEs in Europe |
Small and medium-sized enterprises (SMEs) play a key role in the economy of the European Union. Yet, SMEs often find it more challenging to access finance than their larger peers. The gap between the demand for credit from financially viable SMEs and the actual credit supply, is known as the "SME financing gap". Among international financial institutions, the European Investment Bank (EIB) stands out in terms of annual lending volumes to SMEs. Previous research has shown that EIB-supported lending has a positive effect on the employment levels, size, investments and innovation capacities of SMEs. However, it remains unexplored whether these impacts vary based on different types of recipients, or by the parameters of the financial support – such as the cost of a loan, its maturity or volume.
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| 23-Feb-2022
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The NAIRU and informality in the Mexican labor market |
Reading the economic cycle is essential to implementing monetary policy. A key topic is whether employment is approaching its potential: the unemployment rate at which inflation remains constant in the absence of supply shocks (NAIRU). In Mexico and other Latin American countries, the sizeable number of informal workers makes it challenging to estimate the NAIRU. Since Mexico does not have unemployment insurance, workers who become unemployed immediately need to find a new job. The informal sector's flexibility allows it to absorb most of the people who cannot find a job in the formal labour market. As a result, the unemployment rate in Mexico is low and does not fully reflect labour market slack.
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| 22-Feb-2022
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Original sin redux: a model-based evaluation |
Having developed and deepened their local currency sovereign bond markets, many EMEs can now routinely borrow from abroad in their own currency. However, overcoming "original sin" – the traditional necessity of borrowing in dollars or another foreign currency – has not led to "redemption". As foreign investors still play an important role in their local currency bond market, EMEs remain vulnerable to capital flow and exchange rate swings. And this gives rise to "original sin redux".
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| 17-Feb-2022
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Global production linkages and stock market co-movement |
How do the forces of globalisation make asset returns move together ("asset return co-movement")? Although real economic integration via trade linkages should play an important role in making international equity markets fluctuate together, it has proven challenging so far to demonstrate this empirically. We revisit the role of real integration as an economically significant driver of international asset return co-movement by drawing on insights from the literature on global value chains (GVC), overturning some of the previous findings in this literature.
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| 16-Feb-2022
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Exorbitant privilege? Quantitative easing and the bond market subsidy of prospective fallen angels |
Massive issuance by BBB-rated firms has propelled growth of the US corporate bond market since the Great Financial Crisis. In this paper we investigate how quantitative easing (QE) boosted demand for BBB bonds and how it interacted with credit rating agencies' leniency to generate capital misallocation reminiscent of zombie lending.
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| 16-Feb-2022
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Unequal expenditure switching: Evidence from Switzerland |
How do import prices affect inequality via their varying effects on the cost of living? When the Swiss National Bank removed the Swiss franc's exchange rate against the euro in January 2015, a unique opportunity arose to test methods of measuring welfare changes in response to changes in import prices. The episode was unique because the policy change resulted in a large and unexpected surge in the domestic currency's value when the macroeconomic environment was otherwise stable. Further, full microeconomic data on prices were available, as well as information on consumer spending and the currency of invoicing at the border.
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| 9-Feb-2022
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Dollar beta and stock returns |
Operating through changes in market participants' risk capacity, the financial channel of exchange rates demonstrates how domestic financial conditions respond to exchange rate movements. We investigate whether stock market returns in emerging market economies (EMEs) reflect the financial channel of exchange rates. If so, we also consider if the broad dollar index has attributes of a cross-sectional asset pricing factor in EME stock markets, just as the broad dollar index serves as an indicator of the financial channel of exchange rate in other contexts.
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| 8-Feb-2022
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Shadow loans and regulatory arbitrage: evidence from China |
We investigate how far Chinese banks have managed to hide from regulators the risks associated with shadow loans on their balance sheets. We also consider if the financial market in China has priced in risks associated with such shadow loans. In particular, we ask if banks relying heavily on shadow lending have managed to keep funding costs from rising, and if investors in equity and bond markets have required higher returns for more vulnerable banks.
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| 2-Feb-2022
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Does IT help? Information technology in banking and entrepreneurship |
Information technology (IT) has dramatically changed how information is used in the financial sector. This may affect the supply of credit from banks, as a key function of banks is to screen and monitor borrowers. Lending to opaque borrowers, such as young firms and start-ups, is likely to be especially sensitive to such changes in IT. The reason is that young firms have not yet produced sufficient quantitative information, such as balance sheet data. Instead, lenders rely on soft information. As start-ups contribute disproportionately to job creation and productivity, but are often financially constrained, understanding how the IT revolution in banking has affected start-ups' access to finance is of paramount importance. Yet, direct evidence for the impact of lenders' IT capabilities on entrepreneurship is scarce.
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| 1-Feb-2022
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Money markets, collateral and monetary policy |
Our paper focuses on the money market developments observed in the euro area during the financial and sovereign debt crises. We emphasize four main facts. First, the share of unsecured interbank borrowing declined throughout the euro area, with banks substituting towards secured transactions. Second, with the onset of the sovereign debt crisis, market haircuts on southern government bonds increased substantially, while the European Central Bank (ECB) kept haircuts nearly unchanged throughout. Third, bank borrowing from the ECB increased eight-fold in southern regions. Fourth, household deposits at banks remained stable.
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| 27-Jan-2022
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Monetary policy expectation errors |
How market participants form expectations about future monetary policy is crucial to macroeconomics and finance. To investigate how financial markets price the outlook for monetary policy, we study the information about future monetary policy embedded in money market derivatives instruments such as fed funds (FF) futures and overnight index swaps (OIS). We find novel insights into how expectations about future monetary policy are formed, and we shed light on when and how market expectations diverge from subsequent central bank actions.
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| 26-Jan-2022
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When uncertainty decouples expected and unexpected losses |
Credit losses evolve through distinct phases. After seemingly benign periods, they surge abruptly and stay elevated for some time before returning to a prolonged phase of low levels. The underlying mechanism for this has remained elusive, so creditors – notably, banks – have had to set their loss-absorbing resources under much uncertainty. The fallout from the Covid-19 pandemic has brought this uncertainty to the fore.
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| 25-Jan-2022
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Capital flows and institutions |
Do foreign investors improve the quality of domestic institutions? This question is crucial to understanding how a country's capital inflows can spur or hinder economic growth.
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| 24-Jan-2022
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Term premium dynamics and its determinants: the Mexican case |
Term premia are an important component of long-term interest rates and have become more relevant with unconventional monetary policies. Since households' and businesses' savings and spending decisions can be influenced by such rates, the study of the dynamics of long-term interest rates and term premia is relevant for central banks and financial policymakers. Longer-term rates can be expressed as the sum of the average of the current short-term interest rate and its expectations for the long term. Central banks can influence the short-term interest rate through monetary policy actions and its expectations through their communication strategy.
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| 19-Jan-2022
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Bank opacity - patterns and implications |
How much do investors know about the composition of banks' portfolios? What parts of banks' balance sheets are least known to investors? What is the impact of public data releases on bank equity prices and CDS spreads? Do banks whose credit risk is underestimated by markets get cheaper funding and make riskier loans? We examine these questions by combining a novel event study methodology with a rich data set on the exposures of European banks.
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| 18-Jan-2022
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Monetary policy and endogenous financial crises |
We ask whether a central bank should turn aside from its objective of price stability to promote financial stability. We tackle this question within a textbook New Keynesian model augmented with capital accumulation and crises that originate within the financial system. We compare several interest rate rules, under which the central bank responds more or less forcefully to inflation, aggregate output and an index of financial fragility (the "yield gap").
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| 13-Jan-2022
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Informational switching costs, bank competition, and the cost of finance |
We test two theories of banking competition. The first is the market power hypothesis, which claims that higher market power leads to financial constraints and wider spreads. The second is the information hypothesis, which argues that banks need some market power to offset their lack of knowledge of borrowers ( "information asymmetry") in lending markets. According to the information hypothesis, less competition induces banks to engage in relationship lending. In this way, banks might obtain more soft information and so reduce the effects of information asymmetry. On this view, increased competition would lessen the attractiveness of relationships and increase the cost of credit.
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| 13-Jan-2022
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Central bank digital currencies (CBDCs) in Latin America and the Caribbean |
While much research has examined the pros and cons of central bank digital currencies (CBDCs), there has been less focus on the relative merits of CBDCs in particular economies or global regions. We attempt to fill that gap for the Latin American and Caribbean (LAC) economies.
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| 12-Jan-2022
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The premia on state-contingent sovereign debt instruments |
State-contingent debt instruments (SCDIs) have many theoretical benefits. For instance, they reduce interest payment burden in recessions and provide fiscal space when a shock hits the economy. But the use of SCDIs is limited in practice. Despite renewed interest during the Covid-19 pandemic, we know very little about the empirical properties of these instruments.
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| 11-Jan-2022
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Zombies on the brink: Evidence from Japan on the reversal of monetary policy effectiveness |
For more than a decade, many central banks have engaged in unconventional monetary policy. How do these actions affect economic activity, including through firms' investment decisions?
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| 10-Jan-2022
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Platform-based business models and financial inclusion |
New players in finance include fintech and big tech firms with digital platforms in e-commerce, search or social media. Increasingly, incumbent financial institutions are also adopting platform-based business models. Digital platforms operate in multi-sided markets, using big data to match different groups of customers (eg users and providers). This paper assesses how these models can affect financial inclusion, competition, financial stability and consumer protection.
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| 16-Dec-2021
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Building benchmarks portfolios with decreasing carbon footprints |
An increasing share of investors and asset managers are looking for ways to trim the carbon footprint of their investments. We describe simple approaches that will help a passive investor make such reductions, whether in a world-wide or a regional portfolio of stocks. Of particular interest is whether investors would need to divest away from emerging market economies or high-emissions sectors such as energy, utilities and cement to reduce their carbon footprint.
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| 1-Dec-2021
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Credit constrained firms and government subsidies: evidence from a European Union program |
Globally, small and medium-sized enterprises (SMEs) have patchy access to finance. Due to the important economic role of these firms, especially as employers, governments subsidise and support SMEs generously. Research has shown that subsidies help SMEs to grow in size. However, it is not well understood if subsidies take effect by making credit more available, or by cutting the cost of funding. Moreover, it is also not obvious if a subsidy-led growth in assets will translate into higher sales, profitability or productivity. On the one hand, if a firm has good investment ideas but cannot obtain financing due to a short credit history (eg young firms) or the lack of collateral (eg small firms), then a subsidy can help it overcome a relevant constraint. On the other hand, if the firm has no worthwhile projects or is poorly managed, the credit constraint may simply reflect these other shortcomings, which subsidies may not help resolve.
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| 25-Nov-2021
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Losing traction? The real effects of monetary policy when interest rates are low |
Interest rates in many countries have been exceptionally and persistently low for over a decade now. Despite these very low rates and aggressive monetary policy easing, the strength of the economy has been disappointing. We ask whether this outcome implies that monetary policy has become less effective in stimulating aggregate expenditure.
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| 25-Nov-2021
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Navigating by r*: safe or hazardous? |
The concept of the natural rate of interest, or r-star (r*), has risen to prominence in monetary policy following the Great Financial Crisis. R-star is the real (inflation-adjusted) interest rate that equilibrates output at potential, so that inflation is stable. How useful is this concept as a guide to policy?
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| 25-Nov-2021
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Back to the future: intellectual challenges for monetary policy |
The central banking community faces daunting challenges, which may well define the future of the central bank as an institution for years to come. These entwined challenges are economic, intellectual and institutional. This lecture focuses on the intellectual challenge, ie the facts on the ground are increasingly testing the long-standing analytical paradigms on which central banks may rely to inform their policies.
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| 24-Nov-2021
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What does machine learning say about the drivers of inflation? |
Which are the key drivers of inflation, and what role do expectations play in the inflation process have been long-standing questions in macroeconomics, particularly given their relevance to economic policymaking. This paper sheds some fresh light on these central questions using machine learning.
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| 22-Nov-2021
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Dampening the financial accelerator? Direct lenders and monetary policy |
Ranging from business development companies to insurance companies, direct lenders have become increasingly active in corporate loan markets. We investigate the role that these non-bank credit intermediaries play in the monetary policy transmission mechanism. As direct lenders become more prominent, their response to monetary policy will have a growing influence on how monetary policy affects the real economy.
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| 22-Nov-2021
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Financial crises and political radicalization: How failing banks paved Hitler's path to power |
Do financial crises fan the flames of fanaticism? Many have argued that the financial crisis of 2007–09 not only wrought havoc on employment and output but that its problematic aftermath of failing financial institutions, public bailouts and austerity may also have paved the way for populists around the world. We examine the canonical case of a radical movement's rise to power: Hitler's Nazi party, which took office in the wake of the severe 1931 banking crisis in Germany – a turning point in modern history.
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| 16-Nov-2021
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Does gender diversity in the workplace mitigate climate change? |
At the 2021 26th Conference of the Parties (COP26), leaders from around the globe reached consensus on key actions to address climate change. These include rules that will govern the 2015 Paris climate accord, which aims to limit global temperature rise to well below 2°C (ideally 1.5°C) since pre-industrial times, and will provide funding to help countries to adapt to climate change. Studying how firms' organisational structure can affect climate change is thus relevant for policymakers. We hypothesise that women in managerial positions may be better suited than male managers to reducing firm CO2 emissions. Our hypothesis finds support in the literature which suggests that women are more inclined to counter climate change as they may be more likely to consider overall societal well-being without focusing narrowly on shareholders' interest.
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| 4-Nov-2021
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Central bank digital currencies: motives, economic implications and the research frontier |
A growing academic literature examines the economic implications of central bank digital currencies (CBDCs). The main focus is on their "reserves for all" aspect and the balance sheet issues for central banks, as well as the implications for monetary policy and financial stability. By contrast, in policy circles, the emphasis is on designing CBDCs to achieve public policy goals within the current two-tier payment system. This implies a division of labour between the public and private sector, thus keeping the footprint of the central bank limited.
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| 3-Nov-2021
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ETFs, illiquid assets, and fire sales |
Bond exchange-traded funds (ETFs) have grown steadily over the past decade and as of early 2021 managed more than $1.2 trillion. We illustrate that the specifics of the bond market lead to different arbitrage mechanics of bond ETFs relative to traditionally studied equity ETFs. Bond ETF baskets (the set of assets used to create or redeem ETF shares) contain a small fraction of holdings – a fact we refer to as "fractional baskets". This fact challenges the common assumption that baskets are representative of holdings, and has important implications for the ETF arbitrage process. We argue that fractional baskets may be a feature of ETFs holding illiquid assets since they create a buffer between the ETF market and the underlying bond market. We also show that ETFs can avoid fire sales through the action of authorised participants.
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| 2-Nov-2021
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The natural rate of interest through a hall of mirrors |
Why have global real interest rates fallen so much? A common explanation is that factors such as shifting demographics and falling potential growth depress the natural interest rate, or r-star. This view has striking policy implications: central banks have no choice but to lower interest rates to keep their economies in balance. After all, they cannot control the natural interest rate. Extraordinary monetary policy and recent policy framework reviews can be seen as part of the strategy to combat the decline in r-star.
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| 29-Oct-2021
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What does digital money mean for emerging market and developing economies? |
Physical cash and commercial bank money are dominant vehicles for retail payments around the world, including in emerging market and developing economies (EMDEs). Yet payments in EMDEs are marked by several key deficiencies – such as a lack of universal access to transaction accounts, widespread informality, limited competition and high costs, particularly for cross-border payments. New digital money proposals seek to address these deficiencies.
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| 29-Oct-2021
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Non-bank financial intermediaries and financial stability |
The heft of non-bank financial intermediaries (NBFIs) in the financial system has grown significantly since the Great Financial Crisis. We look at the main drivers and consequences of their ascent, focusing on NBFIs' effect on the demand for and supply of liquidity. We develop a framework of systemic-risk propagation through NBFIs that allows us to provide a unified reading of market disruptions during the Covid-19 pandemic.
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| 27-Oct-2021
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Do term premiums matter? Transmission via exchange rate dynamics |
Using a small open economy model with long-term bonds, we ask whether term premia affect the inflation rate and the economy via the exchange rate. We focus in particular on the observation that uncovered interest rate parity holds better for long-term interest rate differentials. As term premia are the gap between long-term interest rates and the future path of short-term interest rates, this observation suggests that changes in term premia may influence the exchange rate and thus affect inflation and the real economy.
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| 21-Oct-2021
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Big techs in finance: on the new nexus between data privacy and competition |
Large technology companies such as Alibaba, Amazon, Facebook, Google and Tencent have started to provide financial services. The activities of big techs in finance are a special case of broader fintech innovation. While fintech companies are set up to operate primarily in financial services, big tech firms offer financial services as part of a much wider set of activities. Big techs' foray into finance raises both opportunities and risks.
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| 20-Oct-2021
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Inter-agency coordination bodies and the speed of prudential policy responses to the Covid-19 pandemic |
The Covid-19 pandemic threatened to disrupt bank funding and market functioning. To counter this threat, prudential policymakers provided relief by temporarily loosening prudential rules. This paper investigates whether inter-agency coordination bodies for financial stability (IABs) contributed to making such prudential responses faster.
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| 19-Oct-2021
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Indebted Demand |
Rising debt and falling interest rates have characterised advanced economies over the past 40 years. The average real interest rate dropped from 6% in 1980 to less than zero in 2019. Meanwhile, the average debt to GDP ratio almost doubled from 139% in 1980 to over 270% in 2019. The economic fallout of the Covid-19 health crisis is likely to accelerate these patterns going forward, as governments pursue aggressive debt-financed stimulus policies. The objective of this paper is to understand how the twin phenomena of high debt and low interest rates came to be.
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| 19-Oct-2021
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Joined at the hip: monetary and fiscal policy in a liquidity-dependent world |
In a low interest rate environment, financing government operations by issuing bonds is very similar to financing them by issuing bank reserves, ie money. But there remains one key difference: the way their prices are set. The price of money is the inverse of the price level. If prices are sticky, so is the price of money in terms of goods. By contrast, the price of bonds in terms of goods is free to jump all over the place. This difference matters a great deal for a number of monetary and fiscal policy issues.
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| 19-Oct-2021
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The Treasury market in spring 2020 and the response of the Federal Reserve |
In March 2020, as the Covid-19 crisis intensified, stress emerged in the market for Treasury securities. During the period 9–18 March, the 10-year yield surged sharply by 64 basis points while the stock market kept falling. This is contrary to typical risk-off events which are characterised by a simultaneous drop in equity prices and long-term yields. In response to these developments, on 15 March 2020 the Board of Governors of the Federal Reserve System (the Fed) unveiled a new programme to buy large amounts of Treasuries. Purchases exceeded $1 trillion in Q1 2020. This paper seeks to provide new facts and analysis to improve understanding of the episode.
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| 14-Oct-2021
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Technological capacity and firms' recovery from Covid-19 |
Businesses have confronted unprecedented challenges during the Covid-19 pandemic. Restrictions on people's movements have not only led to a sharp slowdown in economic activity, but also forced firms to alter their business models. Selling goods online has become the new norm, and so too has remote work. This paper analyses the extent to which better digital and technological infrastructure has helped firms to withstand the Covid-19 recession and adapt to this new environment.
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| 30-Sep-2021
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Macro-financial policies under a managed float: A simple integrated framework |
We study the performance of a range of macroeconomic policy tools under a managed float in a simple open economy with financial frictions. These tools include monetary policy, fiscal policy, foreign exchange intervention, macroprudential policy and capital controls. The impact of these policies are studied individually to highlight their transmission channels. However, we also study their impact in pairs in response to capital inflows induced by a reduction in world interest rates. This highlights the extent to which they complement each other.
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| 9-Sep-2021
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The Fed takes on corporate credit risk: an analysis of the efficacy of the SMCCF |
We evaluate the efficacy of the Secondary Market Corporate Credit Facility (SMCCF), a programme implemented by the Fed to stabilise the US corporate bond market in the wake of the Covid-19 shock. The Fed announced the SMCCF on 23 March 2020 and expanded the programme on 9 April. We estimate the direct effects of the Fed's announcements on corporate bond prices and market liquidity measures using a matched sample of programme-eligible and ineligible securities. We also identify the Fed's actual purchases in the secondary market, which allows us to quantify the impact of the facility's purchases on credit and bid-ask spreads.
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| 25-Aug-2021
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Global lending conditions and international coordination of financial regulation policies |
There are two main reasons for cross-border regulatory coordination. Firstly, there is the regulatory "race to the bottom". This is a tendency to remove regulation in order to give domestic banks a competitive advantage. Secondly, there is the issue of "leakages". Banks can bypass domestic regulations by setting-up subsidiaries in places with laxer standards. This paper proposes a different mechanism in support of cross-border regulatory coordination. It focuses on the interplay between regulatory policies and global lending conditions.
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| 17-Aug-2021
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Private equity buyouts and firm exports: evidence from UK firms |
Private equity (PE) firms strongly affect the activities of companies which they acquire. After buyouts, target companies enjoy better access to finance and experience operational enhancements. Such improvements could help companies acquired by PE firms to increase their export activities. Ascertaining whether this is the case is important because reaching external markets brings many benefits both to corporates and to the economy as a whole.
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| 12-Aug-2021
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Is window dressing by banks systemically important? |
Are banks window dressing their balance sheets to avoid tougher regulation? We explore this question by studying the assessment of global systemically important banks (G-SIBs). We examine the evolution of the G-SIB "score" around supervisory reporting dates for a large sample of banks in the European Union (EU). The score is the regulatory measure that determines banks' G-SIB status and the attendant capital requirements. It predominantly relies on a snapshot of banks' balance sheets at year-end.
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| 11-Aug-2021
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Macroeconomic effects of Covid-19: a mid-term review |
The global economy has rebounded strongly from the trough last year, as vaccination paved the way for lifting restrictions. Yet the recovery is uneven and global outlook remains uncertain. Many countries face vaccine shortages, and new virus strains threaten to derail progress made. To prepare for challenges lying ahead, it will be important to draw on experiences to date.
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| 10-Aug-2021
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Sharing asymmetric tail risk: smoothing, asset pricing and terms of trade |
International sharing of aggregate risk improves social welfare by allowing a smooth adjustment to shocks. The case for cross-border insurance remains strong even when crises are global in nature. Countries have largely different exposure to global crises - the Great Financial Crisis in 2008 and more recently the Covid-19 pandemic have largely asymmetric effects across borders.
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| 6-Aug-2021
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Ripple effects of monetary policy |
When a firm cannot easily substitute financially constrained clients or suppliers in the face of an adverse monetary policy shock, the fall in demand or supply may create bottlenecks and induce the firm to cut back its activity. We refer to this as the "ripple effects" of monetary policy. This paper studies how conventional monetary policy transmits through the demand and supply of intermediate goods and the role of input-output linkages as transmission channels.
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| 5-Aug-2021
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Are households indifferent to monetary policy announcements? |
An important channel of monetary policy transmission operates through agents' expectations about inflation. Central banks' communication strategies aim to steer agents' expectations consistently with the monetary policy decisions taken. It is generally acknowledged that financial markets participants' expectations react promptly to monetary policy announcements. But how well do such strategies perform in shaping expectations of households, especially those less sensitive to economic news?
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| 4-Aug-2021
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Quantifying the high-frequency trading "arms race" |
We use stock exchange message data to quantify the negative aspect of high-frequency trading, known as "latency arbitrage". This means arbitrage opportunities that are sufficiently mechanical and obvious that capturing them is primarily a contest in speed.
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| 22-Jul-2021
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Fiscal and monetary policy interactions in a low interest rate world |
Equilibrium real interest rates have declined significantly over recent decades. As a consequence, the zero lower bound (ZLB) on policy rates has become a more binding constraint for conventional monetary policy. This paper analyses the implications of the ZLB under low equilibrium interest rates for macroeconomic and public debt stability. It zooms in on the role of quantitative easing (QE) as a monetary policy instrument and on the interaction between fiscal rules and monetary policy in a low interest rate world.
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| 6-Jul-2021
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Limits of stress-test based bank regulation |
How should supervisory risk assessments, such as stress tests, inform bank regulation when such assessments provide imprecise signals? What trade-offs do regulators face when redesigning assessments to improve accuracy? Does the disclosure of assessment results improve the effectiveness of capital requirements? We develop a theoretical framework to investigate these questions. A key element of our framework is the impact of assessment accuracy on the future behaviour of banks. This, in turn, is crucial for the design of risk assessments and for subsequent decision-making about capital requirements.
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| 2-Jul-2021
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Passive funds affect prices: evidence from the most ETF-dominated asset classes |
This paper studies the size and source of exchange-traded funds' (ETFs) price impact in the most ETF-dominated asset classes: volatility (VIX) and commodities. These ETFs hold a much larger share of the underlying market compared with equities or bonds. The fraction of ETFs in the market for VIX futures often exceeds 40%, whereas it is less than 2% in the S&P 500 Index. Several episodes from the VIX market in 2018 and the oil market in 2020 showed that large ETF-induced trading can exacerbate price changes in turbulent times. To understand the risks of trading against ETFs, I propose a novel decomposition of ETF demand into three major components: calendar rebalancing, flow rebalancing and leverage rebalancing.
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| 1-Jul-2021
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Distrust or speculation? the socioeconomic drivers of U.S. cryptocurrency investments |
Cryptocurrencies such as bitcoin and ether have been marketed as alternatives to government-issued currencies and commercial banking. Proponents argue that key value propositions of the asset class are their asserted resistance to debasement and censorship by governments or financial institutions over who can transact. We evaluate whether distrust in the existing financial system is indeed a motive for investing in cryptocurrencies. We also examine the socioeconomic characteristics of cryptocurrency holders.
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| 10-Jun-2021
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Fiscal regimes and the exchange rate |
We study how the exchange rate's response to monetary and fiscal policy depends on the fiscal regime. In a Ricardian regime, the government always backs its debt, ie commits to increasing taxes in the future to satisfy its intertemporal budget constraint. In a non-Ricardian regime, the government does not necessarily commit to finance its debt. In this case, the fiscal authority may eventually default or the central bank may accommodate fiscal deficits, creating money and inflating away the debt.
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| 9-Jun-2021
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The natural interest rate in China |
The ongoing development of China's financial system and its increased influence on global economic and financial conditions creates a need for tools to evaluate the stance of monetary policy in China. Key among these is an estimate of the natural interest rate – the real policy interest rate that would be consistent with a closed output gap and stable inflation over the medium run – in China. Previous attempts to estimate the natural interest rate have struggled to overcome the challenges posed by relatively short macroeconomic data samples and stable aggregate GDP growth statistics.
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| 8-Jun-2021
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Central bank digital currency: the quest for minimally invasive technology |
Almost 50 central banks have already launched designs for central bank digital currencies (CBDCs) or prototypes. We ask what the rationale for issuing a CBDC is and how these objectives shape its economic design, as well as the architecture of the underlying technical systems.
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| 7-Jun-2021
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Money, technology and banking: what lessons can China teach the rest of the world? |
Technology companies entering the financial services industry have become a global phenomenon over the past decade. Using the rise of two big techs in China as a foundation for analysis, this paper examines the key factors that have driven the development in China and whether such factors are applicable elsewhere.
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| 1-Jun-2021
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The pricing of carbon risk in syndicated loans: which risks are priced and why? |
Do banks price the risks of climate policy change? We combine syndicated loan data with carbon intensity data (CO2 emissions relative to revenue) of borrowers across a wide range of industries. With this data, we study whether banks charge a "carbon premium". Firms with higher carbon intensity are at risk to suffer penalties if stricter climate policies, such as carbon taxes, are introduced. Hence, banks should be charging higher rates for firms with a higher carbon intensity.
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| 28-May-2021
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US monetary policy and the financial channel of the exchange rate: evidence from India |
Over the past decade, non-financial firms in emerging market economies (EMEs) have rapidly built up dollar debt. This makes them vulnerable to changes in US monetary policy. If a local currency weakens against the dollar, the domestic economy may shrink rather than expand if such firms have a large stock of unhedged dollar debt. Our paper examines the evidence for this hypothesis based on Indian firm-level and macro-level data.
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| 26-May-2021
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Income inequality, financial intermediation, and small firms |
This paper studies how income inequality affects job creation and finds that it reduces the number of jobs created by smaller firms.
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| 25-May-2021
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Income inequality and the depth of economic downturns |
Income inequality worldwide has been on an uptrend since the 1980s. We investigate whether greater income concentration at the top can affect cyclical economic outcomes. We do so by empirically analysing how changes in post-tax income inequality shape the dynamics of real per capita consumption across countries.
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| 19-May-2021
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FX policy when financial markets are imperfect |
In the last 15 years, central banks have purchased securities at unprecedented levels via quantitative easing and foreign exchange intervention. These policies have constituted the core response to crises such as the 2008–09 Great Financial Crisis, the 2011–12 European sovereign debt crisis and the ongoing Covid-19 pandemic. In many cases, policymakers have resorted to these policies as traditional monetary policy was constrained by the zero lower bound.
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| 19-May-2021
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The digitalisation of money |
The ongoing digital revolution may lead to fundamental changes to the traditional model of monetary exchange. Digital currencies facilitate instantaneous peer-to-peer transfers in a way that was previously impossible. New currencies that transcend national borders could redefine how payments and user data interact. They could affect the nature of currency competition, the architecture of the international monetary system and the role of government-issued money.
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| 19-May-2021
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Monetary-fiscal crosswinds in the European Monetary Union |
This paper studies the monetary-fiscal mix in the European Monetary Union. When economies are hit by large shocks, such as the Covid crisis, the pre-set fiscal rules in a monetary union could be a constraint and offset the conduct of accommodative monetary policy. In addition, a more active fiscal policy could be a powerful tool to stabilise economic conditions when short-term interest rates hit the zero lower bound. The paper develops an econometric framework to study the dynamics between primary deficits, yields and returns, the market value of the debt, and inflation, under different monetary policy scenarios.
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| 14-May-2021
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CCP Auction Design |
When a clearing member defaults, the central counterparty (CCP) organises an auction to sell the member's portfolio to surviving members. The higher the price of the auctioned portfolio, the lower the default loss, and thus the smaller the extent to which the CCP taps into the so-called guarantee fund, which is prefunded by members. To safeguard its resilience and reputation, the CCP seeks to encourage active bidding and minimise the default loss. We propose a tractable model to examine the design of CCP auctions.
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| 22-Apr-2021
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Growth, coal and carbon emissions: economic overheating and climate change |
Climate change is perhaps the greatest challenge of our time. It poses unprecedented risks to our economies. By the end of the century, global temperatures are likely to rise by 3 degrees Celsius from pre-industrial levels, and could rise even more. To avoid a climate catastrophe we need to reduce the emission of carbon dioxide that drives climate change. Therefore, our economies need to change. To devise the right policies, policymakers need to map macroeconomic variables into carbon emissions.
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| 21-Apr-2021
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The anchoring of long-term inflation expectations of consumers: insights from a new survey |
With euro area inflation and professionals' long-term euro area inflation expectations persistently below the European Central Bank's inflation aim, a key question for the ECB is whether long-term inflation expectations have de-anchored. To date, most of the empirical work has relied on measures of expectations of professionals, while little is known about the expectations of firms and of households.
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| 31-Mar-2021
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An empirical foundation for calibrating the G-SIB surcharge |
During the Great Financial Crisis (GFC) of 2007–09, policymakers intervened to prevent the failure of global systemically important banks (G-SIBs) and to alleviate turmoil in the financial system. Following the GFC, the Basel Committee on Banking Supervision (BCBS) introduced measures to reduce the likelihood and severity of a G-SIB failure in the future. Capital requirements corresponding to measures of systemic importance, along with other post-GFC reforms, increased the going-concern loss absorbency of G-SIBs and improved the resilience of the banking sector. The expected impact framework provides a theoretical foundation for these capital requirements based on systemic importance, which are often referred to as G-SIB surcharges. Our alternative implementation of the expected impact framework has the potential to improve the empirical basis of these surcharges and eliminate uneven incentives for G-SIB growth.
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