1,720,978 research outputs found
Bewley Banks
Full text linkHow do movements in the distributions of bank size and income affect the macroeconomy?To answer this question we develop a dynamic general equilibrium model with heteroge-neous financial intermediaries, incomplete markets, and aggregate uncertainty. We find that market incompleteness and uninsured idiosyncratic bank rate of return risk generate minimal concentration in the bank net worth distribution, leading to an “as-if” result, whereby the economy behaves as if it had a representative bank. However, introducing ex-ante hetero-geneity in the banks’ rates of return significantly raises concentration and amplifies real and financial fluctuations relative to the representative-bank case, as this increases a key suffi-cient statistic, the average marginal propensity to lend. We then extend the model with two empirically-validated features of the banking sector—countercyclical return risk and deposit market power—and show that these amplify and dampen aggregate fluctuations, respec-tively. Finally, because in the model with ex-ante heterogeneity the distribution of bank size is highly concentrated, shocks to the largest banks can account for almost all of the aggregate variation that is due to idiosyncratic risk, leading to granular banking and economic cycles. The failure of granular banks (“too big to fail”) produces sizeable macroeconomic crises
Essays in financial macroeconomics
No full textThis dissertation explores the relationship between financial frictions and the real economy. It studies three channels of macro-financial transmission: market power of financial intermediaries, credit portfolio risk that originates from granular borrowers, and aggregate implications of countercyclical bank income risk. The first Chapter of the dissertation develops a quantitative model with financial intermediaries that are heterogeneous along four empirically-motivated dimensions: balance sheet size, credit market power, default risk, and efficiency. The framework highlights a trilemma for bank regulation: financial competition, efficiency, and stability are incompatible – no policy intervention can improve all three facets simultaneously. This trilateral trade-off is shown to extend to numerous classic and new issues in macroeconomics and banking such as deposit insurance, capital requirements, the "too-big-to-fail" hazard, emergence of fintech lending, etc. The second Chapter (joint with Hélène Rey, Ragnar Juelsrud, and Sigurd Galaasen) provides the first bottom-up quantification of single-name credit concentration risk by applying a novel empirical approach to administrative matched bank-firm data from Norway. The study exploits granularity in the distribution of loan shares and shows that idiosyncratic shocks to large borrowers survive portfolio aggregation and impact bank outcomes, contrary to conventional theories. Moreover, granular credit shocks spill over to other firms through banks’ balance sheets, increase probability of default for the affected firms, thus having a significant impact on the real economy. The third Chapter (joint with Tommaso Monacelli) builds a quantitative macroeconomic model with aggregate uncertainty and heterogeneous financial intermediaries that face counter-cyclical idiosyncratic rate of return shocks. Counter-cyclicality of bank income risk is estimated directly from U.S. bank-level data, holds for the past 40 years, and extends to the most recent COVID-19 recession. The channel is found to significantly amplify and prolong economic downturns
Capital mobility in the Caucasus
Full text linkThis paper examines the degree of capital mobility in the countries of the Caucasus. We employ a simple model developed in the seminal paper by Feldstein and Horioka (1980). First, we estimate the model using conventional time-series econometrics in order to capture the short-run dynamics. Then, we construct a panel of 6 countries of the Caucasus – Azerbaijan, Armenia, Georgia, Kazakhstan, Russia, and Turkey – and obtain the long-run estimates by applying a panel cointegration approach. To that end, we make use of the fully modified ordinary least squares (FMOLS) estimation method for heterogeneous panels, developed by Pedroni (2000). We estimate the long-run saving retention ratio to be quite high, showing that capital mobility in the Caucasus is considerably low. In addition, we also look at the country ratings of the Index of Economic Freedom to compare our results with the official rankings in market openness. We also put our findings in an international context, and confirm that Caucasus is relatively financially restrained. Finally, we discuss the implications of our results for the region's policy-relevant issues such as financial integration, human capital mobility, across-border trading, fiscal and monetary policy, exchange rate volatility, solvency management, responsive consumption smoothing, and recession resistance
Channels of Monetary Transmission in the CIS
Full text linkTwenty years have passed since the breakdown of the Soviet Union, and it is time to draw a concluding line for monetary policy efficiency in the Commonwealth of Independent States (CIS). We propose a comprehensive treatment of the subject for nine members of the CIS for the period of 2000-2009. Four transmission channels are investigated: interest rate channel, exchange rate channel, bank lending channel, and monetary channel. First, we design a VAR framework for each CIS member-state and investigate the short-run dynamics of the impact of each of the four transmission channels on domestic output and inflation. Second, we construct Auto Regressive Distributed Lag Models (ARDL) in order to study the country-wise efficiency of transmission channels in the long run. Finally, we employ a panel data fixed effects method to show how the CIS behaves as a region. Our short-run individual country analysis yields highly heterogeneous results. In the long run, however, it’s apparent that broad monetary base (M2) is the most influential determinant of aggregate output. Inflation is affected the most by the refinancing rate and the flow of remittances. For both output and inflation, exchange rate plays a role of a supporting channel
Social capital and monetary policy
Full text linkThe U.S. have experienced a significant decline in generalized trust over the past three decades. Has this secular trend impacted central banking? Empirically, we document that states with high levels of institutional and interpersonal trust are robustly more responsive to monetary policy shocks. Theoretically, we embed a circle of trust block into the New Keynesian framework in continuous time. The calibrated model predicts that monetary policy has become 20% less effective due to the decline in trust. Our findings firm up the social capital channel of monetary non-neutrality and warn that crises of trust could lead to crises of policy inefficac
J-Curve Dynamics and the Marshall-Lerner Condition: Evidence from Azerbaijan
No full textThis paper seeks empirical evidence for the J-curve and the Marshal-Lerner condition for Azerbaijan. The results suggest that a real depreciation of the Azerbaijani Manat would cause a decline in the balance of trade in the short-run and an increase in the long-run. When including the prices of exports and imports into the analysis, the robustness test shows that the terms of trade ratio diminishes following the devaluation and does not return to its pre-depreciation level in the long-run, while the balance of trade continues to improve. This points at the presence of an underlying volume effect as the key driver of the trade balance growth. Overall, the results of this study suggest a fulfillment of the Marshall-Lerner condition criteria, indicate the existence of the J-curve, and the price and volume effects.Marshall-Lerner condition; Azerbaijan; J-curve; real depreciation; Manat; export and import price
The federal funds rate in the post-Volcker era: evidence from Basic VAR
Full text linkThis paper proposes a comparative analysis of the federal funds rate. The analysis is based on the results of an empirical study, conducted using the econometrics of Vector Auto Regressions. The results are compared across two time periods: 1960-1979 and 1983-2002, the intervals representing the pre and post-Volcker monetary eras. The study examines the degree of exogeneity of the federal funds rate and its power to explain and predict variations in macroeconomic aggregates. The paper concludes that for the post-Volcker era the federal funds rate has become more exogenous; that the federal funds rate has remained a strong economic indicator; that the notion of “lean against the wind” monetary policy continues to be relevant and appropriate; that the “price effect” of the response of inflation to innovations in the federal funds rate has become smaller. The paper also suggests that the Federal Reserve has since the 1980s initiated the practice of countercyclical monetary policy, and that economic cycles have tightened during the post-Volcker era.Federal Funds Rate, Bernanke and Blinder, Basic VAR, Funds Rate Exogeneity, Monetary Transmissions, Post-Volcker, Pre-Volcker
J-Curve Dynamics and the Marshall-Lerner Condition: Evidence from Azerbaijan
Full text linkThis paper seeks empirical evidence for the J-curve and the Marshal-Lerner condition for Azerbaijan. The results suggest that a real depreciation of the Azerbaijani Manat would cause a decline in the balance of trade in the short-run and an increase in the long-run. When including the prices of exports and imports into the analysis, the robustness test shows that the terms of trade ratio diminishes following the devaluation and does not return to its pre-depreciation level in the long-run, while the balance of trade continues to improve. This points at the presence of an underlying volume effect as the key driver of the trade balance growth. Overall, the results of this study suggest a fulfillment of the Marshall-Lerner condition criteria, indicate the existence of the J-curve, and the price and volume effects
Is There a J-curve for Azerbaijan? Evidence from Industry-Level Analysis
No full textThis paper has attempted to estimate the J-curve phenomenon for Azerbaijan using quarterly industry-level data over the period 2000-2009. A weighted average of the production indexes of Azerbaijan’s four major trading partners, which account for 70% of Azerbaijan’s total trade turnover, was chosen as a proxy for foreign income. Ten non-oil industries, which amount to 97% of Azerbaijan’s non-oil foreign trade, have been analyzed. A recent technique in cointegration has been employed, which allowed for a simultaneous short-run and long-run analysis of the trade balance model. Empirical results suggest that for 3 of 10 cases there is strong evidence for the fulfillment of the Marshall-Lerner condition, as the trade balance in each of those three industries improves in the long run in response to a currency devaluation. This study does not find any systematic presence of the J-curve effect in the short-run, although a few industries do show certain resembling patterns. The price effect is strong and present in almost all industries. All 10 cases exhibit long-run cointegration and are stable according to the CUSUM and CUSUMSQ stability tests
The federal funds rate in the post-Volcker era: evidence from Basic VAR
Full text linkThis paper proposes a comparative analysis of the federal funds rate. The analysis is based on the results of an empirical study, conducted using the econometrics of Vector Auto Regressions. The results are compared across two time periods: 1960-1979 and 1983-2002, the intervals representing the pre and post-Volcker monetary eras. The study examines the degree of exogeneity of the federal funds rate and its power to explain and predict variations in macroeconomic aggregates. The paper concludes that for the post-Volcker era the federal funds rate has become more exogenous; that the federal funds rate has remained a strong economic indicator; that the notion of “lean against the wind” monetary policy continues to be relevant and appropriate; that the “price effect” of the response of inflation to innovations in the federal funds rate has become smaller. The paper also suggests that the Federal Reserve has since the 1980s initiated the practice of countercyclical monetary policy, and that economic cycles have tightened during the post-Volcker era
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