Category Archives: Credit and Banking

The Asymmetric Effect of Credit Supply on Firm‐Level Productivity Growth

Posted on by

Abstract

We study the impact of bank credit on firm productivity. We exploit a matched firm-bank database, covering all the credit relationships of Italian corporations, to measure idiosyncratic supply-side shocks to credit availability and estimate a production model augmented with financial frictions. We find the effect of credit supply to be asymmetric: contractions harm TFP growth, halting productivity-enhancing activities; positive credit supply shocks have limited effects. This points toward a role of financial stability in preserving productivity growth.

Dampening Global Financial Shocks: Can Macroprudential Regulation Help (More than Capital Controls)?

Posted on by

Abstract

We show that macroprudential regulation significantly dampens the impact of global financial shocks on emerging markets. Specifically, a tighter level of regulation reduces the sensitivity of GDP growth to capital flow shocks and movements in the Chicago Board Options Exchange's VIX. A broad set of macroprudential tools contributes to this result, including measures targeting bank capital and liquidity, foreign currency mismatches, and risky credit. We also find that tighter macroprudential regulation allows monetary policy to respond more countercyclically to global financial shocks. This could be an important channel through which macroprudential regulation enhances macro-economic stability. We do not find evidence that capital controls provide similar benefits.

Does the Government Spending Multiplier Depend on the Business Cycle?

Posted on by

Abstract

We investigate the state dependency of the government spending multiplier across the business cycle using a nonlinear two-regime VAR model. We find little evidence that multipliers vary between expansionary and recessionary periods. This is because the state of the business cycle itself changes after government spending shocks and converges toward a similar state. This result holds true regardless of how we model the business cycle. Our analysis shows that assumptions about the economic state built into linear impulse response functions are the key driver of the state dependency reported elsewhere in the literature.

The Credit‐Card‐Services Augmented Divisia Monetary Aggregates*

Posted on by

Abstract

While credit cards provide transaction services, they have never been included in measures of money supply. We derive the theory to measure the joint services of credit cards and money and propose two measures of their joint services: one based on microeconomic structural aggregation theory, providing an aggregated variable within the macroeconomy; the other a credit-card-extended aggregate, optimized as an indicator to capture the contributions of monetary and credit card as nowcasting indicator of nominal GDP. The inclusion of the new aggregates yields substantially more accurate nowcasts of nominal GDP, illustrating the usefulness of the information contained in credit cards.

Expectations Formation, Sticky Prices, and the ZLB

Posted on by

Abstract

At the zero lower bound (ZLB), expectations about the future path of monetary or fiscal policy are crucial. We model expectations formation under level-k thinking, a form of bounded rationality formalized by García-Schmidt and Woodford (2019) and Farhi and Werning (2019), consistent with experimental evidence. This process does not lead to a number of puzzling features from rational expectations models, such as the reversal puzzle, or implausible large fiscal multipliers. Optimal monetary policy at the ZLB under level-k thinking prescribes keeping the nominal rate lower for longer, but short-run macro-economic stabilization is less powerful compared to rational expectations.

Countercyclical Capital Buffers: A Cautionary Tale

Posted on by

Abstract

Countercyclical capital buffers (CCyBs) are an old idea recently resurrected. They compel systemically important banks to accumulate capital during expansions to sustain operations during downturns. We compare banks before the Great Depression, when CCyBs existed, and Great Recession, when they did not. Pre-Depression systemically important banks built capital buffers between 3% and 5% of total assets during booms, nearly twice the maximum modern CCyB, while also reducing risky lending and building cash reserves. These buffers enabled banks at the core of the financial system to continue operations during severe crises while the rest of the financial system collapsed. This analogy indicates that modern countercyclical buffers may achieve their goals of protecting core banks during crises but raises questions about whether they will contribute to overall financial stability.

The Size Distribution of the Banking Sector and Financial Fragility

Posted on by

Abstract

We study the role of the size distribution of the banking sector for bailout policy and financial fragility in a model of financial intermediation with limited commitment and noisy sunspots. In particular, due to the different costs of mitigating depositors' losses, differences in financial fragility arise endogenously in the sense that the large banking market admits a higher degree of instability. Moreover, the desire to reduce differences in the amount of bailout funding across segments of the banking system leads the fiscal authority to collect less taxes ex-ante but ends up rendering the scope for run equilibria larger.

The Quality‐Weighted Matching Function: Did the German Labor Market Reforms Trade‐Off Efficiency against Job Quality?

Posted on by

Abstract

We evaluate the quantity–quality trade-off on the labor market by estimating an augmented matching function weighting the matches by quality measures. We use the approach to evaluate the German labor market reforms conducted between 2003 and 2005. Indeed, we find a significant quantity–quality trade-off. However, even after controlling for job quality, a good half of the positive effect of the reforms on matching efficiency remains.

Owner‐Occupied Housing, Inflation, and Monetary Policy

Posted on by

Abstract

Owner-occupied housing (OOH) is currently excluded from the harmonized index of consumer prices (HICP) in Europe. Using microlevel data for Sydney and aggregated data for the United States, France, and Germany, we compare the impact of alternative treatments of OOH on measured inflation. We recommend including OOH in the HICP using a simplified version of the user-cost method. This would improve the harmonization of the HICP, help close the credibility gap between measured inflation and public perceptions of it, and allow the ECB to lean against a housing boom without departing from its inflation target.

Financial Expectations and Household Consumption: Does Middle‐Inflation Matter?

Posted on by

Abstract

We explore the finding that households often expect their financial position to remain unchanged compared to other alternatives. A generalized middle inflated ordered probit (GMIOP) model is used to account for the tendency of individuals to choose “neutral” responses when faced with opinion-based questions. Our analysis supports the use of a GMIOP model to account for this response pattern. Expectation indices based on competing discrete choice models are also explored. While financial optimism is significantly associated with increased consumption at both the intensive and extensive margin, indices which fail to take into account middle-inflation overestimate the impact of financial expectations.