Browsing by Subject "E44"

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  • Verona, Fabio; Martins, Manuel M. F.; Drumond, Inês (2013)
    Bank of Finland Research Discussion Papers 4/2013
    Published in International Journal of Central Banking, Volume 9, Number 3, September 2013, Pages 73-117 ; http://www.ijcb.org/journal/ijcb13q3a3.htm
    Motivated by the U.S. events of the 2000s, we address whether a too low for too long interest rate policy may generate a boom-bust cycle. We simulate anticipated and unanticipated monetary policies in state-of-the-art DSGE models and in a model with bond financing via a shadow banking system, in which the bond spread is calibrated for normal and optimistic times. Our results suggest that the U.S. boom-bust was caused by the combination of (i) interest rates that were too low for too long, (ii) excessive optimism and (iii) a failure of agents to anticipate the extent of the abnormally favourable conditions. Keywords: DSGE model, shadow banking system, too low for too long, boom-bust JEL codes: E32, E44, E52, G24
  • Deryugina, Elena; Ponomarenko, Alexey (2014)
    BOFIT Discussion Papers 22/2014
    Published in Emerging Markets Finance and Trade, vol. 51(6), pages 1261 – 1275, October 2015 as Accounting for Post-Crisis Macroeconomic Developments in Russia: A Large Bayesian Vector Autoregression Model Approach.
    We apply an econometric approach developed specifically to address the ‘curse of dimensionality’ in Russian data and estimate a Bayesian vector autoregression model comprising 14 major domestic real, price and monetary macroeconomic indicators as well as external sector variables. We conduct several types of exercise to validate our model: impulse response analysis, recursive forecasting and counter factual simulation. Our results demonstrate that the employed methodology is highly appropriate for economic modelling in Russia. We also show that post-crisis real sector developments in Russia could be accurately forecast if conditioned on the oil price and EU GDP (but not if conditioned on the oil price alone). Publication keywords: Bayesian vector autoregression, forecasting, Russia
  • Kortela, Tomi (2016)
    Bank of Finland Research Discussion Papers 19/2016
    Typically a constant – or zero – lower bound for interest rates is applied in shadow rate term structure models. However, euro area yield curve data suggest that a time-varying lower bound might be appropriate for the euro area. I show that this indeed is the case, i.e. a shadow rate model with time-varying lower bound outperforms the constant lower bound model in euro area data. I argue that the time-variation in the lower bound is related to the deposit facility rate and, thus, to monetary policy. This time-variation in the lower bound gives a new channel via which monetary policy may affect the yield curve in a shadow rate model. I show that the intensity of this channel depends on how tightly the lower bound restricts the yield curve, and I argue that this channel has recently become important for the euro area.
  • Drehmann, Mathias; Juselius, Mikael; Korinek, Anton (2017)
    Bank of Finland Research Discussion Papers 12/2017
    When taking on new debt, borrowers commit to a pre-specified path of future debt service. This implies a predictable lag between credit booms and peaks in debt service which, in a panel of household debt in 17 countries, is four years on average. The lag is driven by two key features of the data: (i) new borrowing is strongly auto-correlated and (ii) debt contracts are long term. The delayed increase in debt service following an impulse to new borrowing largely explains why credit booms are associated with lower future output growth and higher probability of crisis. This provides a systematic transmission channel whereby credit expansions can have adverse long-lasting real effects.
  • Saarenheimo, Tuomas (2005)
    Bank of Finland Research Discussion Papers 2/2005
    The median age of the global population is presently increasing by nearly three months every year.Over the next couple of decades, almost every country in the world is set to experience an unprecedented increase in the share of elderly population.This development has the potential to fundamentally affect the functioning of economic and financial systems globally.This study concentrates on the effects of ageing on the evolution of global interest rates and financial flows.The study uses a 73-cohort general equilibrium overlapping generations model of five major economic areas (USA, EU-15, Japan, China, and India).Utilising actual population data and UN population projections, the model yields predictions for major economic and financial variables up to 2050.The model predicts a decline in global equilibrium real interest rates over the next two decades, but the size of the decline depends crucially on the future evolution of public pension benefits.If the present generosity of pension systems is maintained - leading to a steep increase in the cost of the pension systems - the maximum decline of interest rates is projected to be about 70 basis points from present levels.If pension benefits are reduced to offset the increasing cost pressures, the decline in global equilibrium interest rates can be much larger, while increases in the retirement age work in the opposite direction.The results do not anticipate a 'financial market meltdown' - a collapse in asset prices associated with the retirement of the baby-boomers - predicted by some.On the contrary, bond prices should fare fairly well over the next three decades.The main reason for this is that increasing life expectancy at retirement creates a need for higher retirement saving - in the future, people will want to retire wealthier than they do today.This trend more than offsets the negative effect of the retirement of baby-boomers on asset demand.Key words: Ageing, real interest rates, financial flows, public pension systems JEL classification numbers: J11, E44
  • Deli, Yota; Delis, Manthos D.; Hasan, Iftekhar; Liu, Liuling (2016)
    Bank of Finland Research Discussion Papers 23/2016
    Formal enforcement actions issued against banks for violations of laws and regulations related to safety and soundness can theoretically have both positive and negative effects on the terms of lending. Using hand-collected data on such enforcement actions issued against U.S. banks, we show that they have a strong negative effect on price terms (loan spreads and fees) for corporate loans and a positive one on non-price terms (loan maturity, size, covenants, and collateral). The results also indicate that in the absence of enforcement actions, the cost of borrowing during the subprime crisis would have been much higher, while punished banks intensify use of collateral.
  • Kauko, Karlo (2005)
    Bank of Finland Research Discussion Papers 9/2005
    This paper presents econometric analyses on the determination of bank deposit and lending rates using longitudinal Finnish data. Interest rate pass-through is very strong, possibly complete, in the case of lending rates; in the case of deposit rates the pass-through is far from complete, even in the long term.The monetary union has benefited customers by decreasing the average rate on new loans.Credit and interest rate risk premiums are clearly observable in banks' lending rates.The impact of money market rates on loan stock rates seems to have been non-linear; no obvious explanation for this phenomenon has been found. Key words: banking, interest rates JEL classification numbers: G21, E43, E44
  • Pesola, Jarmo (2005)
    Bank of Finland Research Discussion Papers 13/2005
    The macroeconomic determinants of banking sector distresses in the Nordic countries, Belgium, Germany, Greece, Spain and the UK are analysed using an econometric model estimated on panel data from partly the early 1980s to 2002.The dependent variable is the ratio of banks' loan losses to lending.In addition to the lagged dependent variable, the explanatory variables include a surprise change in incomes and real interest rates, both variables as a separate cross-product term with lagged aggregate indebtedness.The underlying macroeconomic account that this paper puts forward is that loan losses are basically generated by strong adverse aggregate shocks under high exposure of banks to such shocks.The underlying innovations to income and real interest rates are constructed using published macro-economic forecast for these variables.According to the results, high customer indebtedness combined with adverse macroeconomic surprise shocks to income and real interest rates contributed to the distress in banking sector. Loan losses also display strong autoregressive behaviour which might indicate a feedback effect from loan losses back to macroeconomic level in deep recessions.The results can be used in macro stresstesting the banking sector. Key words: financial fragility, shock, loan loss, banking crisis JEL Classification numbers: G21, E44
  • Noth, Felix; Busch, Matias Ossandon (2017)
    BOFIT Discussion Papers 11/2017
    This paper estimates the effect of a foreign funding shock to banks in Brazil after the collapse of Lehman Brothers in September 2008. Our robust results show that bank-specic shocks to Brazilian parent banks negatively affected lending by their individual branches and trigger real economic consequences in Brazilian municipalities: More affected regions face restrictions in aggregated credit and show weaker labor market performance in the aftermath which documents the transmission mechanism of the global financial crisis to local labor markets in emerging countries. The results represent relevant information for regulators concerned with the real effects of cross-border liquidity shocks.
  • Chang, Roberto; Fernández, Andrés; Gulan, Adam (2016)
    Bank of Finland Research Discussion Papers 22/2016
    Published in Journal of Monetary Economics, Volume 85, 1 January 2017: 90-109 http://dx.doi.org/10.1016/j.jmoneco.2016.10.009
    Corporate sectors in emerging markets have noticeably increased their reliance on foreign financing, presumably reflecting low global interest rates. The evidence also shows a rebalancing from bank loans towards bonds. To study these developments, we develop a dynamic open economy model where these modes of finance are determined endogenously. The model replicates the stylized facts following a drop in world interest rates; in particular, rebalancing towards bonds occurs because bank credit becomes relatively more expensive, reflecting the scarcity of bank equity. More generally, the model is suitable for studying interactions between modes of finance and the macroeconomy.
  • Martins, Manuel M. F.; Verona, Fabio (2021)
    Finance Research Letters March
    The typical increase of the corporate bond-to-bank ratio during downturns is known to mitigate business cycle recessions. In the three longest and deepest post-war U.S. recessions this ratio didn't increase from their outsets. In this paper we focus on the timing of the corporate bank-to-bond substitution in the Great Recession, simulating counterfactual paths for output growth under plausible notional behaviors of the bond-to-bank ratio. We find that the Great Recession would have been milder and the recovery much stronger if the bank-to-bond substitution had started since the outset of the recession and evolved thereafter as in most U.S. recessions.
  • Gulan, Adam; Haavio, Markus; Kilponen, Juha (2021)
    Journal of International Economics July
    Published in BoF DP 9/2019 http://urn.fi/URN:NBN:fi:bof-201906051219
    We study the macroeconomic consequences of a major trade disruption using the example of the Finnish–Soviet trade collapse in 1991. This is a rare case of a well–identified large trade shock in a developed economy. We find that the shock significantly affected Finnish output. Even so, the trade collapse was insufficient to generate an all–out crisis, and accounts for only a part of the Finnish Great Depression (1990–1993). We show that shocks originating domestically played a major role throughout the depression.
  • Ma, Guonan; Yao, Wang (2016)
    BOFIT Discussion Papers 1/2016
    A global renminbi needs to be backed by a large, deep and liquid renminbi bond market with a world-class Chinese government bond (CGB) market as its core. China’s CGB market is the seventh largest in the world while sitting alongside a huge but non-tradable and captive central bank liability in the form of required reserves. By transforming the non-tradable cen-tral bank liabilities into homogeneous and tradable CGBs through halving the high Chinese reserve requirements, the size of the CGB market can easily double. This would help over-come some market impediments and elevate the CGBs to a top three government bond mar-ket globally, boosting market liquidity while trimming distortions to the banking system. With a foreign ownership similar to that of the JGBs, CGBs held by foreign investors may increase ten-fold by 2020, approaching 5 percent of the 2014 global foreign reserves and facilitating a potential global renminbi, especially in the wake of the renminbi’s inclusion into the basket of the IMF Special Drawing Rights.
  • Stolbov, Mikhail (2015)
    BOFIT Discussion Papers 15/2015
    Causality between the ratio of domestic private credit to GDP and growth in real GDP per capita is investigated in a country-by-country time-series framework for 24 OECD economies over the period 1980–2013. The proposed threefold methodology to test for causal linkages integrates (i) lag-augmented VAR Granger causality tests, (ii) Breitung-Candelon causality tests in the frequency domain, and (iii) testing for causal inference based on a fully modified OLS (FMOLS) approach. For 12 of 24 countries in the sample, the three tests yield uniform results in terms of causality presence (absence) and direction. Causality running from credit depth to economic growth is found for the UK, Australia, Switzerland, and Greece. The findings lend no support to the view that financial development shifts from a supply-leading to demand-following pattern as economic development proceeds. The aggregate results mesh well with the current discussion on “too much finance” and disintermediation effects. However, idiosyncratic country determinants also appear significant.
  • Ollikka, Kimmo; Tukiainen, Janne (2013)
    Bank of Finland Research Discussion Papers 21/2013
    We study whether the mechanism design in the central bank liquidity auctions matters for the interbank money market interest rate levels and volatility. Furthermore, we compare different mechanisms to sell liquidity in terms of revenue, efficiency and auction stage interest rate levels and volatility. Most importantly, we ask which mechanism is the best at implementing the target policy interest rates to the interbank market and what are the trade-offs involved. We construct a relatively general model of strategic bidding with interdependent valuations, and combine it with a stylized model of the interbank market. The novel feature of the model is that the expectations of the interbank market outcomes determine the valuations in the liquidity auctions. The model captures the relevant features of how the European Central Bank sells liquidity. We use simulations to compare discriminatory price, uniform price and Vickrey auctions to a posted price mechanism with full allotment. In order to analyze interactions between the primary and the secondary market under four different mechanisms, we need to make a lot of assumptions and simplifications. Given this caveat, we find that posted prices with full allotment is clearly the superior alternative in terms of implementing the policy interest rate to the interbank markets. This comes at the cost of less revenue compared to the revenue maximizing discriminatory price auction, but surprisingly, will not result in efficiency losses compared even to the Vickrey auction. Keywords: ECB liquidity auctions, Interbank markets, Mechanism design, Multi-unit auctions, Monetary policy, Posted-Prices. JEL: C63, C72, D02, D44, D47, D53, E43, E44, E52, E58, G21.
  • Cheung, Yin-Wong; Herrala, Risto (2013)
    BOFIT Discussion Papers 22/2013
    Published in Pacific Economic Review, 19: 1 (2014), pp. 112–134
    We study the renminbi (RMB) covered interest differential - an indicator of the effectiveness of capital controls. It is found that the differential is not shrinking over time and, in fact, appears larger after the global financial crisis than before. That is, capital controls in China are still substantial and effective. In addition to exchange rate changes and volatilities, the RMB covered interest differential is affected by credit market tightness indicators. The marginal explanatory power of these macroeconomic factors, however, is small relative to the autoregressive component and the dummy variables that capture changes in China's policy. Keywords: NDF implied RMB interest rate, capital controls, asymmetric response, macro determinants, credit market tightness JEL: E44, F31, F32.
  • Breitenlechner, Max; Nuutilainen, Riikka (2019)
    BOFIT Discussion Papers 15/2019
    We study the credit channel of Chinese monetary policy in a structural vector autoregressive framework. Using combinations of zero and sign restrictions, we identify monetary policy shocks linked to supply and demand responses in the loan market. Our results show that policy shocks coinciding with loan supply effects account for roughly 10 percent of output dynamics after two years, while loan demand effects represent up to 7 percent of output dynamics depending on the policy measure. The credit channel thus constitutes an important and economically relevant transmission channel for monetary policy in China. Monetary policy in China also accounts for a relatively high share of business cycle dynamics.
  • Juselius, Mikael; Tarashev, Nikola (2021)
    BoF Economics Review 3/2021
    While corporate credit losses have been low since the start of the Covid-19 pandemic, their future evolution is quite uncertain. Using a forecasting model with a solid track record, we find that the baseline scenario (“expected losses”) is benign up to 2024. This is due to policy support measures that have kept debt service costs low. However, high indebtedness, built up when the pandemic impaired real activity, suggests increased tail risks: plausible deviations from the baseline scenario (“unexpected losses”) feature ballooning corporate insolvencies. Taken at face value, the low expected loss forecasts are consistent with low bank provisions, whereas the high unexpected loss forecasts call for substantial capital.
  • Isoré, Marlène; Szczerbowicz, Urszula (2017)
    Journal of Economic Dynamics and Control 1 June
    CEPII Working Paper N°2015-16, September 2015
    In RBC models, disaster risk shocks reproduce countercyclical risk premia but generate an increase in consumption along the recession and asset price fall, through their effects on agents’ preferences (Gourio, 2012). This paper offers a solution to this puzzle by developing a New Keynesian model with such a small but time-varying probability of “disaster”. We show that price stickiness, combined with an EIS smaller than unity, restores procyclical consumption and wages, while preserving countercyclical risk premia, in response to disaster risk shocks. The mechanism then provides a rationale for discount factor first- and second-moment (“uncertainty”) shocks.
  • Fidrmuc, Jarko; Fungáčová, Zuzana; Weill, Laurent (2015)
    BOFIT Discussion Papers 7/2015
    Published in Open Economies Review, Volume 26, Issue 3, April 2015: 479-496.
    ​The financial crisis has shown that the liquidity creation function of banks is critical for the economy. In this paper, we empirically investigate whether bank liquidity creation fosters economic growth in a large emerging market, Russia. We follow the methodology of Berger and Bouwman (2009) to measure bank liquidity creation using a rich and exhaustive dataset of Russian banks. We perform fixed effects and GMM estimations to examine the relation of liquidity creation to economic growth for Russian regions in the period 2004–2012. Our results suggest that bank liquidity creation fosters economic growth. This effect was not washed out by the financial crisis. Our conclusion thus supports a positive impact of financial development on economic growth in Russia.