1,720,969 research outputs found
Fiscal-Monetary Policy Scenarios and Securitisation Experiments in the Eurace Agent-Based Model
No full textThis thesis addressed two macro topics, i.e. fiscal and monetary policy making during recessions and the financial practise of securitisation, with the objective to contribute to the current debate and introduce novel aspects to the existing literature. The study of the impact of public policies pursued by the government and central bank on economic dynamics has incread its relevence, in particular in the aftermath of great financial crisis of 2007/9 and during the European soverign debt crisis. The securitisation process is considered a major triggering factor of the subprime mortgage crisis and still a possible source of financial instability. I delve into those topics using the large-scale agent-based and stock-flow consistent macroeconomic model and simulator EURACE, that has been enriched with the introduction of several fiscal and monetary policy choices and a securitisation process. The thesis discusses the advantages given by the Agent-Based Modeling (ABM) and the stock-flow consistent (SFC) approaches with respect to the mainstream dynamic stochastic general equilibrium (DSGE) models and show the main innovations of the enriched EURACE model compared to the existing agent-based models. I present in details the two main topics covered by the thesis and the results of computational experiments. Regarding the fiscal and monetary policiy scenarios, I set up an experiment with two base policy scenarios, i.e., stability and growth pact and fiscal compact, incrementally enriching them with complementary policies which relax fiscal rigidity and introduce quantitative easing. Results show that budgetary rigour performs well only if some mechanisms of fiscal relaxation and monetary accommodation are considered during bad times, thus confirming in a richer and more realistic model setting the fundamental tenet of Keynesian economics about the importance of sustaining aggregate demand during recessions. Concering the securitisation experiments, I enhanced EURACE by including a financial vehicle corporation (FVC), that buys loans and mortgages from banks and issues ABSs and MBSs, and a mutual fund, that invests both in ABSs and MBSs. By means of securitisation, banks conduct regulatory capital arbitrage in order to lend more. Results show that different levels of securitisation propensity are able to affect credit and business cycles in different manners. On one side, securitisation increases banks’ lending activity, influencing positively investment and consumption. On the other side, the increased amount of credit amplifies the negative shocks, due to higher loans write-offs probability, triggered by the boosted leding activity. The predominance of one effect on the other depends on the level of securitisation propensity and the time span considered
Breaking the economy: How climate tail risk and financial conditions can shape loss persistence and economic recovery
No full textAcute physical risks are becoming more frequent and severe, with future scenarios projecting further intensification. Such events can cause significant and potentially persistent economic losses, and strain public finances due to increasing disaster response and recovery costs. However, so far, macroeconomic models have struggled to capture the impacts of climate physical risks in the economy and public finance in a consistent way. In particular, tail weather events and key shock transmission channels are often neglected, leading to a partial assessment of disaster losses and of the recovery needs. This information, in turn, is crucial to assess the climate insurance protection gap and to design adequate and financially sound public policy response. To address this gap, we tailor and extend EIRIN, a Stock-Flow Consistent macrofinancial model of an open economy, calibrated at the country level. EIRIN is composed of a limited number of heterogeneous agents and sectors of the real economy and finance, which interact through markets. Importantly, the real and the financial side of the economy are modelled in an integrated way. Agents are represented as a network of interconnected balance sheet items calibrated on real data, and are characterised by bounded rationality. This approach enables us to analyse the conditions for economic disruptions to emerge and become persistent, considering climate tail risk scenarios, and the role of fiscal and credit constraints as amplification mechanisms. We calibrate EIRIN on Italy, a country that is highly exposed to natural disasters, has significant fiscal vulnerabilities and high public debt. We find that extreme weather events leading to 15% of firms’ capital stock loss, coupled with subsequent financial constraints on lending, can trigger large and persistent adverse effects on GDP growth and public debt levels. Negative shocks are amplified in absence of country’s adaptation strategies and tailored financial policies
Securitization and business cycle: an agent-based perspective
Full text linkWe study the effects of loans and mortgages securitisation on business cycles by
using a large-scale agent-based stock-flow consistent macroeconomic model and simulator, that we enriched by including a financial vehicle corporation (FVC), that buys loans and mortgages from banks and issues ABSs and MBSs, and a mutual fund, that invests both in ABSs and MBSs. Households own the equity of the mutual fund in the form of equity shares. By means of securitisation, banks conduct regulatory capital arbitrage and reduce risk weighted assets in their balance sheet, in order to lend more loans and mortgages. Results show that different levels of securitisation propensity are able to affect credit and business cycles in different manners.
On one side, securitisation increases banks lending activity, influencing positively investment and consumption. On the onther side, the increased amount of credit amplifies the negative shocks, due to higher loans write-offs probability, triggered by the boosted leding activity. Firms' bankruptcies impact the equity of banks, affecting their ability to grant new loans to consumption goods producers (CGPs), which need credit for their production activity, and mortgages to households, which are not able to purchase housing units. CGPs soon go bankrupt and households see their capital income reduced.
The predominance of one effect on the other depends on the level of securitisation propensity and the time span considered
Derisking the low-carbon transition: investors’ reaction to climate policies, decarbonization and distributive effects
No full textThe role of climate finance policies and instruments in scaling up and derisking low-carbon investments has received growing research attention. However, financial actors’ reaction to climate finance initiatives, and their implications on decarbonization of the economy and on inequality, has not been assessed yet. Our manuscript contributes to address this knowledge gap by analysing under which conditions government’s climate finance policies and investors’ climate risk adjustment can affect the success of the low-carbon transition and the ability to close the green investment gap. We further develop the EIRIN Stock-Flow Consistent behavioural model with a financial market, an energy market and investors’ portfolio choice of financial contracts, for the European Union. First, we study the macroeconomic impacts of government’s green subsidies that can be financed either by introducing an unanticipated carbon tax or by issuing green sovereign bonds. Then, we assess how investors adjust firms’ risk assessment in reaction to the carbon tax introduction, and how this affects firms’ low-carbon investment decisions. We find that both a carbon tax and green bonds financing can give rise to trade-offs in terms of decarbonization of the economy (absolute emission reductions), distributive effects and public debt sustainability. The channels of transmission differ and are policy and instrument specific. Green subsidies that are financed by green sovereign bonds issuance generate positive spillovers on GDP growth and less distributive effects than a carbon tax. Nevertheless, due to the relative decoupling of the economy, GDP growth impairs emission reduction efforts. Finally, investors’ climate risk adjustment helps to smooth this trade-off, contributing to a full decoupling
The double materiality of climate physical and transition risks in the euro area
Full text linkWe analyse the double materiality of climate physical and transition risks in the euro area economy and banking sector. First, by tailoring the EIRIN Stock-Flow Consistent behavioural model, we provide a dynamic balance sheet assessment of the Network for Greening the Financial System (NGFS) scenarios. We find that an orderly transition achieves early co-benefits by reducing CO2 emissions (12% less in 2040 than in 2020) while supporting growth in economic output. In contrast, a disorderly transition worsens the economic performance and financial stability of the euro area. Further, in a disorderly transition with higher physical risks, real GDP decreases by 12.5% in 2050 relative to an orderly transition. Second, we analyse how firms’ expectations about climate policy credibility (climate sentiments) affect investment decisions in high or low-carbon goods. Firms that trust an orderly policy introduction do anticipate the carbon tax and switch earlier to low-carbon investments. This, in turn, accelerates economic decarbonization and decreases the risk of carbon-stranded assets for investors. Our results highlight the crucial role of early and credible climate policies to signal investment decisions in the low-carbon transition
Systemic financial risk indicators and securitised assets: an agent-based framework
Full text linkThe paper presents an agent-based model of a credit economy which includes a securitisation process and a bailout mechanism for bank bankruptcies. Within this framework, banks are able to sell mortgages to a financial vehicle corporation, which finances its activity by creating mortgage-backed securities and selling them to a mutual fund. In turn, the mutual fund collects liquidity by selling shares to households and remunerates them with a monthly interest. The impact of this mechanism is analysed by means of computational experiments for different levels of banks’ securitisation propensity. Furthermore, we study a set of systemic risk indicators which have the aim of assessing the imbalances in the financial system. Two of them are the mortgage-to-GDP ratio and the capital adequacy ratio, which are constructed to detect only the on-balance sheet changes in banks’ credit exposure. We consider two additional indicators, similar to the previous ones with the only difference that they are also able to account for the off-balance sheet items. Moreover, we adopt an indicator, the so-called “virtuous–unvirtuous cycle” indicator, which, besides off-balance assets, targets also the GDP. The results show that higher securitisation propensity weakens the financial stability of banks with relevant effects on different sectors of the economy. Most importantly, the analysis of systemic risk reveals the important issue of designing suitable systemic risk indicators for predicting incoming financial crises, finding that an essential feature of these indicators should be to integrate banks’ off-balance sheet assets
The double materiality of climate physical and transition risks in the euro area
Full text linkThe analysis of the conditions under which, and extent to which climate-adjusted financial risk assessment affects firms’ investment decisions in the low-carbon transition, and the realisation of the climate mitigation trajectories, still represent a knowledge gap. Filling this gap is crucial to assess the “double materiality” of climate-related financial risks. By tailoring the EIRIN Stock-Flow Consistent model, we provide a dynamic balance sheets assessment of climate physical and transition risks for the euro area, using the climate scenarios of the Network for Greening the Financial System (NGFS). We find that an orderly transition achieves important co-benefits already in the mid-term, with respect to carbon emissions abatement, financial stability, and economic output. In contrast, a disorderly transition can harm financial stability, thus limiting firms’ capacity to invest in low-carbon activities that could decrease their exposure to transition risk and help them recover from climate physical shocks. Importantly, firms’ climate sentiments, i.e. their anticipation of the impact of the carbon tax across NGFS scenarios, play a key role for smoothing the transition in the economy and finance. Finally, the impact on GDP of orderly and disorderly transitions are highly influenced by the magnitude of shocks in NGFS scenarios. Our results highlight the importance for financial supervisors to consider the role of firms and investors’ expectations in the low-carbon transition, in order to design appropriate macro-prudential policies for tackling climate risks
Budgetary rigour with stimulus in lean times: Policy advices from an agent-based model
No full texttThe 2008 financial crisis, and the subsequent global recession, triggered a wide-spreadeconomic and political debate on the proper policy combination to deal with the crisis andto prevent similar ones in the future. Probably, the main dispute has been around the useof fiscal instruments in order to foster growth while keeping public debt under control. TheEuropean Union, for instance, endorsed “austerity” measures for fiscal consolidation but hasbeen sharply criticized by several scholars. This paper aims at contributing to the currentdebate by presenting the outcomes of a computational study performed with the Euraceagent-based model. We set up an experiment with two base policy scenarios, i.e., stabilityand growth pact and fiscal compact, incrementally enriching them with complementarypolicies which relax fiscal rigidity and introduce quantitative easing. Results show thatbudgetary rigour performs well if and only if some mechanisms of fiscal relaxation andmonetary accommodation are considered during bad times; thus confirming in a richerand more realistic model setting the fundamental tenet of Keynesian economics about theimportance of sustaining aggregate demand during recessions
Unconventional Monetary Policy in the USA and in Europe
No full textCentral banks reacted to the financial crisis through sets of unconventional monetary policies that encompass the use of market operations, forward guidance and negative interest rates. We discuss the phenomena that have characterized balance sheet-based policies in the USA and in the EU, and we relate the effects of these policies to the financial stability objective. Our interpretation of the available empirical evidence is that QE lowered long-term yields and eased credit conditions, but had only mild effects on macroeconomic fundamentals. Also, the recent tapering process might lead to potentially dangerous contingencies. Among them, we discuss the portfolio reallocation toward riskier stocks, the possibility of asset prices bubbles, a lower central bank independence and a reduced distance between monetary and fiscal policies
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