1,720,980 research outputs found
Are East African Countries Ready for a Common Currency? A Structural Vector Autoregression Analysis
No full textThe East African Community (EAC), a regional block composed of Burundi, Kenya, Rwanda, Tanzania and Uganda, has monetary integration as one of its short-term goals. This paper empirically investigates the suitability of such a project by using two different Structural Vector Autoregression (SVAR) models, which allow to identify the underlying structural shocks of the economies. The results indicate that the business cycles of these countries are generally not symmetric, and the five economies respond quite differently to shocks, suggesting that the EAC does not yet constitute an Optimum Currency Area (OCA)
Evaluating quantitative easing: a DSGE approach
No full textThis paper develops a simple dynamic stochastic general equilibrium (DSGE) model capable of evaluating the effect of large purchases of treasuries by central banks. The model exhibits imperfect asset substitutability between government bonds of different maturities and a feedback from the term structure to the macroeconomy. Both features are generated through the introduction of portfolio adjustment frictions. As a result, the model is able to isolate the portfolio rebalancing channel of quantitative easing (QE). This theoretical framework is employed to evaluate the impact on bond yields and on the macroeconomy of the large purchases of medium– and long–term treasuries recently carried out in the USA and UK. The results from the calibrated model suggest that large asset purchases of government assets had stimulating effects in terms of lower long–term yields, and higher output and inflation. The size of the effects is nevertheless sensitive to the speed of the exit strategy chosen by monetary authorities
How Repayments Manipulate Our Perceptions about Loan Dynamics after a Boom
No full textWe propose a method to decompose net lending flows into loan origination and repayments. We show that a boom in loan origination is transmitted to repayments with a very long lag, depressing the growth rate of the stock for many periods. In the euro area, repayments of the mortgage loans granted in the boom preceding the financial crisis have been dragging down net loan growth in recent years. This concealed an increasing dynamism in loan origination, especially during the last wave of ECB’s non-standard measures. Using loan origination instead of net loans has important implications for understanding macroeconomic developments. For instance, the robust developments in loan origination in recent times explain the strengthening in housing markets better than net loans. Moreover, credit supply restrictions during the crisis are estimated to be smaller. Overall, we show that analyses of credit dynamics benefit from putting the focus on loan origination instead of net loans, especially after large booms
Credit, Endogenous Collateral and Risky Assets: A DSGE Model
No full textWe propose a new Dynamic Stochastic General Equilibrium (DSGE) model with credit frictions and a banking sector. LTV ratios are assumed to be influenced by systemic and idiosyncratic risk. The model also features endogenous balance sheet choices and a novel formulation of the capital ratio, in which assets are risk-weighted by risk-sensitivity measures. We find that the presence of endogenous LTV ratios exacerbates the procyclicality of lending. Moreover, the model captures the role played by prudential regulatory frameworks in affecting business cycle fluctuations and restoring macroeconomic and financial stability. Our findings highlight the scope for coordination between monetary and macro-prudential policies
The macroeconomic impact of financial fragmentation in the euro area: Which role for credit supply?
No full textThis paper studies the macroeconomic impact of financial fragmentation in the euro area by analysing the role of credit supply shocks during the recent pre-crisis, bust, and post-crisis periods. We estimate a time-varying parameter vector autoregression (TVP-VAR) with stochastic volatility à la Primiceri (2005) for euro area countries, and we identify the structural shocks by imposing sign restrictions on impulse response functions based on the theoretical model by Gerali et al. (2010). The results suggest that credit supply shocks have been an important driver of business cycle fluctuations in euro area countries, and that their effects on the economy have generally increased since the recent crisis. More specifically, we find evidence that credit supply shocks contributed positively to output growth during the pre-crisis period and negatively during the downturn in economic activity in 2008–2009 in all the countries considered. In the post-crisis period, by contrast, we observe a strong rise in cross-country heterogeneity, reflecting financial fragmentation in the euro area associated with the sovereign debt crisis and weaker banks' balance sheets. Although this heterogeneity across euro area countries started to decline around 2012, the contribution of credit supply shocks to GDP growth and credit growth remained negative in most euro area countries in mid-2013 (the end of our sample), suggesting that constraints in the supply of credit continued to weaken economic activity
Announcements of ECB unconventional programs: Implications for the sovereign spreads of stressed euro area countries
No full textThis paper studies the effects of ECB communications about unconventional monetary policy operations on the sovereign spreads of Greece, Ireland, Italy, Portugal, and Spain relative to Germany between 2008 and 2012. More than fifty events concerning non-standard operations are identified and classified with respect to the specific ECB program. The empirical results suggest that the ECB announcements about unconventional monetary policies substantially reduced long-term government bond yield spreads relative to German counterparts in all countries, except Greece. Particularly, among the different types of measures, news about the Securities Markets Programme strongly affected the perceived sovereign risk of the five stressed euro area countries, while the announcements of the Outright Monetary Transactions seem to have a significant impact only in Italy and Spain
Bank Lending to Euro Area Firms - What Have Been the Main Drivers During the COVID-19 Pandemic?
No full textThe coronavirus (COVID-19) pandemic had a strong impact on firms’ business plans and financing needs. In view of the importance of bank borrowing as a source of financing for euro area non-financial firms, the banking sector has played a key role in facilitating the flow of credit to the corporate sector during the COVID-19 pandemic. This role has been crucially supported by the sizeable support measures by monetary, fiscal and supervisory authorities, which have so far acted as a backstop against the risk of an adverse feedback loop between the real and financial sectors. This article discusses the main drivers of bank lending to euro area firms during the pandemic. Understanding the relative role of credit supply and demand forces as well as the impact of the various policy measures is crucial for policy makers in order to draw appropriate conclusions with respect to the effectiveness of the implemented measures and the possible need for further action. Against this background, the article first focuses on the early stages of the pandemic, when acute emergency liquidity needs arising from the lockdown measures were satisfied by bank borrowing at very favourable conditions. Then, it examines bank lending dynamics in the second phase of the pandemic, which was characterised by abating liquidity needs, a continuation of the policy support measures, but also by the emergence of pressures on bank intermediation due to intensifying concerns about the deterioration of borrowers’ creditworthiness. The article concludes by highlighting some of the risks to banks’ credit intermediation capacity in the near future
Quantitative easing and credit rating agencies
No full textThis paper investigates the behaviour of credit rating agencies (CRAs) using a natural experiment in monetary policy. We exploit the corporate QE of the Eurosystem and its rating-based specific design which generates exogenous variation in the probability for a bond of becoming eligible for outright purchases. We show that after the launch of the policy, rating activity was concentrated precisely on the territory where the incentives of market participants are expected to be more sensitive to the policy design. Our findings contribute to better assessing the consequences of the explicit reliance on CRAs ratings by central banks when designing monetary policy
Domestic and multilateral effects of capital controls in emerging markets
No full textUsing a novel, high frequency dataset on capital control actions in 16 emerging market economies (EMEs) from 2001 to 2012, we provide new evidence on the domestic and multilateral effects of capital controls. Increases in capital account openness reduce monetary policy autonomy and increase exchange rate stability, confirming the constraints of the monetary policy trilemma. Both gross in- and outflows rise, while the effect on net capital flows is ambiguous. Tighter capital inflow restrictions generated significant spillovers, especially in the post-2008 environment of abundant global liquidity. We also find evidence of a domestic policy response to foreign capital control changes in countries that are affected by these spillovers
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