|
on Financial Development and Growth |
| By: | Abigail S. Hornstein (Department of Economics, Wesleyan University) |
| Abstract: | Foreign direct investment (FDI) may represent an expansion in the domestic capital supply, which could thus increase GDP growth through the investment and consumption sectors and generate productivity increases. We examine this hypothesis by looking earlier in the investment process and use little-known data on FDI approvals from ten Asian countries that have routinely required advance approval of FDI and have also disclosed this data. We show that the approved FDI predicts actual FDI inflows, and that on average more FDI is approved than realized. The approved FDI is used to create an FDI commitment ratio and gap, which are thus absolute and relative measures of how FDI pledges are fulfilled. We then examine how the host economy is affected by the FDI commitment ratio and gap using an Arellano-Bond dynamic panel estimator to examine an unbalanced dataset spanning 1967–2022. We find GDP growth forecasts are significantly affected by both FDI measures. However, actual GDP growth is affected negatively by the FDI gap, with the effects strongest at the 3-year horizon. Thus, we show that FDI initially displaces domestic capital before expanding the domestic capital supply. |
| Keywords: | foreign direct investment, economic growth, household consumption, productivity, financial development |
| JEL: | F21 F23 G18 G31 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:wes:weswpa:2024-012 |
| By: | Miguel D. Ramirez (Department of Economics, Trinity College) |
| Keywords: | Error Correction (EC) model;Foreign Direct Investment (FDI); in-sample forecasts;Johansen method; Net payments of interests and profits; Pantula principle; VECM Granger Causality/Block Exogeneity test. |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:tri:wpaper:2403 |
| By: | Juergen Bitzer (University of Oldenburg, Department of Economics); C. Dannemann (University of Oldenburg, Department of Economics); Erkan Goeren (University of Oldenburg, Department of Economics) |
| Keywords: | Aid Effectiveness, Geo-Referenced Aid Projects, Economic Development, Economic Growth, Grid-Cell Analysis, GIS Data, Satellite Night-Time Light Data |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:old:dpaper:448 |
| By: | Issam Samiri |
| Abstract: | I propose a general equilibrium model with endogenous defaults among producers and a Value-at-Risk rule designed to stabilise insolvency risk in the banking sector. Bank equity fluctuates with aggregate default rates, affecting banks' lending capacity. The Value-at-Risk constraint induces procyclical leverage, amplifying the impact of bank equity fluctuations on credit supply. This mechanism generates countercyclical risk premia in lending rates, thus intensifying economic shocks. Analytical exploration identifies three channels driving the dynamics of bank leverage and credit spreads: (a) the credit demand channel, (b) the bank equity channel, and (c) a risk channel that captures the interaction between default expectations and the Value-at-Risk constraint. The model is calibrated to quantitatively replicate fluctuations in banks' balance sheets, credit spreads, and real business cycle variables. |
| Keywords: | RBC, Value-at-Risk, bank leverage, Credit Spreads, Financial Frictions |
| JEL: | E13 E32 E44 G21 G32 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nsr:niesrd:562 |
| By: | Matteo Bonato (Department of Economics and Econometrics, University of Johannesburg, Auckland Park, South Africa; IPAG Business School, 184 Boulevard Saint-Germain, 75006 Paris, France); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Christian Pierdzioch (Department of Economics, Helmut Schmidt University, Holstenhofweg 85, P.O.B. 700822, 22008 Hamburg, Germany) |
| Abstract: | Recent global economic and political events have made clear that shortages are a key factor driving macroeconomic and financial market developments. Against this backdrop, we studied the forecasting value of shortages for monthly U.S. stock market realized variance (RV) at the aggregate and sectoral level using data spanning the period 1900-2024 and 1926-2023 (for most sectors), respectively. To this end, we considered linear and non-linear statistical learning estimators. When we used linear estimators (OLS and shrinkage estimators), we did not find evidence that aggregate and disaggregate shortage indexes have predictive value for subsequent market or sectoral RVs. In contrast, when we used random forests, a nonlin- ear nonparametric estimator, we detected that aggregate and disaggregate shortage indexes improve forecast accuracy of market and sectoral RVs after controlling for realized moments (realized leverage, realized skewness, realized kurtosis, realized tail risks). We then decomposed RV into a high, medium, and low frequency component and found that the shortages indexes are correlated mainly with the medium and low frequencies of RV. |
| Keywords: | Shortages, Stock market, Realized volatility, Statistical learning, Forecasting |
| JEL: | C22 C53 E23 G10 G17 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:pre:wpaper:202450 |
| By: | Lucia Quaglietti |
| Abstract: | Financing conditions have tightened sharply since 2022 across OECD countries, reflecting the rapid increase of central banks’ policy rates. Credit conditions have worsened alongside, especially in the euro area, where credit provided by banks has been expanding at the slowest pace since the euro area sovereign debt crisis. Empirical estimates obtained for Germany, France, Italy, the United Kingdom and the United States suggest that the credit deceleration reflects a combination of tighter credit supply and falling credit demand, with the latter playing a predominant role in shaping credit conditions in the euro area. Credit supply has progressively dried up in all countries, and although there have been few signs of a severe and widespread credit shortage of the type seen in the global financial crisis, the negative effect on economic activity is being felt in several countries. Bank lending rates have started to edge down, pointing to a completed pass-through of past monetary policy tightening. However, tight credit conditions could weigh on activity through 2024, due to the long lags in the transmission of credit shocks. Credit demand could also weaken further, including in the event of a sharp tightening of labour markets or a swift repricing in asset prices. |
| Keywords: | credit drivers, credit effects, labour markets, monetary policy |
| JEL: | E3 E4 E5 |
| Date: | 2024–11–29 |
| URL: | https://d.repec.org/n?u=RePEc:oec:ecoaaa:1826-en |
| By: | Karlheinz Walch; Benjamin Weigert |
| Abstract: | AbstractThe idea of a Banking Union emerged in the aftermath of the global financial crisis. Ten years on, two of its three pillars, the Single Supervisory Mechanism and the Single Resolution Mechanism, have proven to be a success with regard to financial integration and stability. In this Policy Brief, experts from the Deutsche Bundesbank explain why, in times of structural change, it is crucial to complete the Banking Union and advance the Capital Markets Union.Key MessagesIn times of structural change and periods of upheaval, a resilient financial system plays a key role in the successful transformation of the economy.Two of the three pillars of the still unfinished Banking Union have proven to be important elements of financial integration and stability.To realize the full potential of the European financial system, the EU should complete the Banking Union and progress the Capital Markets Union.The Commission’s proposals to strengthen the existing EU bank crisis management are a step in the right direction. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:econpb:_67 |
| By: | Marc Raffinot (Université Paris Dauphine, LEDa DIAL, PSL); John Mbuluku (Banque centrale du Congo (RDC), Université de Kinshasa (UNIKIN)) |
| Abstract: | The impact of domestic public debt on bank credit to the private sector is debated in the economic literature. Some authors argue that the development of a market in government securities leads to a more professional banking sector, and ultimately to more credit for the economy. Conversely, other authors support the lazy banking approach, which is based on the idea that banks may prefer to hold government securities, which are less risky, and reduce credit to the economy. Empirical analysis does not allow us to settle this debate. By studying the case of the Democratic Republic of Congo, our article lends support to a new trend in the literature, which emphasises the heterogeneity of the banking sector. L’impact de la dette publique intérieure sur le crédit bancaire au secteur privé est débattu dans la littérature économique. Certains auteurs avancent que le développement d’un marché des titres publics permet un professionnalisation du secteur bancaire, et à terme un développement du crédit à l’économie. Inversement, d’autres auteurs soutiennent l’approche du lazy banking qui repose sur l’idée que les banques risquent de privilégier la détention de titres publics, moins risqués, et de réduire le crédit à l’économie. Les analyses empiriques ne permettent pas de trancher ce débat. Etudiant le cas de la République Démocratique du Congo, notre article apporte un soutien à un nouveau courant de la littérature qui met l’accent sur l’hétérogénéité du secteur bancaire. |
| Keywords: | Domestic public debt, credit to the private sector, banking sector, financial deepening, lazy banking, Dette publique intérieure, crédit au secteur privé, secteur bancaire, approfondissement financier |
| JEL: | E44 E63 G21 G23 H63 O16 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:dia:wpaper:dt202410 |
| By: | Patrocinio Tello-Casas (BANCO DE ESPAÑA) |
| Abstract: | La deuda pública de los países de ingresos bajos y medianos se sitúa en niveles históricamente elevados, lo que ha aumentado el número de países en riesgo de crisis de deuda soberana. Este aumento ha venido acompañado de un cambio importante en la composición de los acreedores internacionales, del que destaca el nuevo papel de China como un acreedor internacional relevante y, en ocasiones, como prestamista de último recurso. En este contexto, resulta de interés conocer no solo el volumen, sino también las características de la financiación concedida por las instituciones oficiales de China a otros países y los factores que condicionan sus decisiones de inversión. Para ello, en este documento se utiliza la base de datos de AidData, la Global Chinese Development Finance Dataset, que contiene información sobre los proyectos financiados por China en países de ingresos bajos y medianos durante el período 2000-2021. El análisis de esta información apunta a una elevada concentración del total de la financiación concedida por China en un número reducido de países, localizados en todos los continentes, y que presentan, en algunos casos, un riesgo elevado de afrontar una crisis de deuda soberana. China gestiona el riesgo de impago con la inclusión de garantías en sus contratos de préstamos. Asimismo, la financiación oficial de China se dirige principalmente a proyectos en los sectores de industria, minería y construcción y, más recientemente, en el sector de los servicios financieros mediante swaps de su banco central. Finalmente, la proximidad geopolítica con el país receptor desempeña un papel fundamental en la elección del destino de la financiación oficial por parte de China. |
| Keywords: | China, deuda externa, financiación oficial bilateral, Iniciativa de la Franja y de la Ruta, proximidad geopolítica |
| JEL: | F33 F34 E58 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:bde:opaper:2435 |
| By: | Shiyun Cao (Institute for Economic and Social Research, Jinan University); Jennifer T. Lai (School of Finance, Guangdong University of Foreign Studies); Paul D. McNelis (Boston College) |
| Abstract: | This paper assesses the network connectedness of risks in China’s stock market, focusing on how shocks in the real estate sector impact financial institutions. We analyze the effect of financial instability in real estate firms on the stability of the broader financial system. To measure the transmission of these risks, we use two key methods: generalized forecast error variance decomposition and the ∆CoVaR approach.Our findings reveal that banks often serve as net receivers of risk, while non-bank financial institutions amplify the transmission of real estate-related risks. This highlights the critical role of non-banks in propagating risk throughout the financial system and underscores the importance of robust systemic risk monitoring across financial networks. |
| Keywords: | financial contagion, China, real estate, regulation |
| JEL: | G21 G22 G23 G28 |
| Date: | 2024–11–26 |
| URL: | https://d.repec.org/n?u=RePEc:boc:bocoec:1083 |
| By: | Patrick Gruning (Latvijas Banka); Zeynep Kantur (Baskent University) |
| Abstract: | This paper introduces financial intermediaries, who engage in lending to firms for investments and buying public bonds issued by the government, and unconventional monetary policy in the form of quantitative easing or tightening into a rich New- Keynesian multi-sector E-DSGE model with production and investment networks. Due to the strong input-output linkages between sectors, almost all policies are found to be not effective in facilitating a green transition. The policies considered are sector-specific bank regulation policies, unconventional monetary policies, various carbon tax revenue recycling schemes, public green capital investment, and sector- specific investment tax/subsidy policies. Only if carbon tax revenues are used to build public green capital, thereby boosting productivity of the green sectors, the trade-off between achieving positive economic growth and reducing carbon emissions is fully resolved. |
| Keywords: | Production network, Investment network, Climate change, Financial intermediation, Financial stability, Stranded assets, Monetary policy |
| JEL: | E22 E32 E52 G21 L14 Q50 |
| Date: | 2024–11–14 |
| URL: | https://d.repec.org/n?u=RePEc:ltv:wpaper:202406 |
| By: | Ingrid Kubin (Vienna University of Economics and Business); Thomas O. Zoerner (Oesterreichische Nationalbank) |
| Abstract: | We augment an overlapping generations endogenous credit cycle model with an environmental sector and study the interplay between fiscal and financial environmental regulation, which ultimately affects environmental quality, macroeconomic stability, and income distribution. We define environmental quality as the amount of pollution emitted, which can be regulated either by financial constraints on polluting projects (environmental haircuts) or by tax-financed investment in abatement and improvement technologies. We find that environmental haircuts and environmental taxes each affect emissions and income distribution in unique ways, with interaction effects that reveal trade-offs between economic stability, income, and environmental outcomes. Compared to scenarios in which only financial regulations are implemented, the introduction of a supplementary environmental tax on emissions maintains similar environmental standards, but leads to higher total income and capital per worker. However, this shift in income distribution favors green investors, while the older generation, which relies more on capital income, may experience an overall decrease in net income. |
| Keywords: | Green transition, environmental regulation, economic stability, income distribution, nonlinear model |
| JEL: | C61 C62 E32 Q52 Q58 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:wiw:wiwwuw:wuwp373 |
| By: | Pongsak Luangaram; Yuthana Sethapramote; Kannika Thampanishvong; Gazi Salah Uddin |
| Abstract: | Understanding the impact of climate risks on financial stability is crucial for ensuring the resilience of banking sectors, particularly in economies exposed to climate change. This paper investigates how transition and physical risks influence systemic risk in Thailand’s banking sector. Transition risks are analyzed using the Fama-French multi-factor asset pricing model to estimate the risk premium of brown industries relative to green industries, termed Brown-minus-Green (BMG). Physical risks are assessed using the Standardized Precipitation Evapotranspiration Index (SPEI), an indicator of flood and drought conditions. Systemic risk at the bank level is measured using conditional value-at-risk (CoVaR). Panel regressions are employed to examine the relationship between climate risks and systemic risk. The results reveal that transition risks, as captured by the BMG factor, significantly heighten systemic risk among Thai banks, emphasizing their critical role in financial vulnerabilities. Additionally, physical risks, particularly those associated with flood exposure, create substantial challenges for bank portfolios. These findings highlight the importance of integrating transition and physical risk indicators into regulatory monitoring frameworks to enhance financial stability. Furthermore, Thai commercial banks can apply these insights to conduct climate stress tests and develop strategies for managing climate-related risks more effectively. |
| Keywords: | climate risk; Systemic risk; Thailand; Banking sector; BMG; SPEI; CoVar |
| JEL: | C58 G12 G21 Q54 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:pui:dpaper:224 |
| By: | Patrick Hendy (Reserve Bank of Australia); Benjamin Beckers (Reserve Bank of Australia) |
| Abstract: | Foreign or global economic and financial shocks can be significant drivers of economic outcomes in small open economies such as Australia, and are therefore a considerable source of uncertainty to the Australian economic outlook. Examining the extent to which global shocks affect the Australian financial system and economy and the channels through which these shocks operated over the 1990–2019 period, we find that global shocks drive considerable variation in the exchange rate and the cash rate, but a smaller proportion of variation in economic variables like real GDP. This suggests that, over our sample, the exchange rate and domestic monetary policy have effectively buffered the Australian economy from global shocks. Unlike some other recent literature on global spillovers, we do not find the Australian banking system to be a substantial channel of financial and economic spillovers to Australia. |
| Keywords: | global spillovers; global financial cycle; banks |
| JEL: | C38 F36 F42 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:rba:rbardp:rdp2024-10 |
| By: | David Kohn (Central Bank of Chile/Pontificia Universidad Católica de Chile); Emiliano Luttini (World Bank); Michal Szkup (University of British Columbia); Shengxing Zhang (Carnegie Mellon University) |
| Abstract: | We study how trade finance and long-term relationships between exporters and importers facilitate international trade by allowing exporters to learn about demand uncertainty and counterparty risk. Using detailed micro-level Chilean data, we document that new exporters are more likely to use cash-in-advance (CIA) arrangements andgradually switch to providing trade credit as they continue to export. These dynamics affect export growth and are more salient for firms with less exporting experience andselling to riskier destinations. We set up an international trade model in which firms make exporting and trade financing decisions subject to demand and counterparty risksand estimate it using microdata. We then use the model to quantify the relative importance of demand and counterparty risks and investigate how trade finance choicesand learning affect the dynamics of exports. Our model implies that the response of aggregate exports and the number of exporters to shocks to aggregate interest rates canovershoot in the short run if long-term relationships and relationship-specific knowledge are destroyed. Building relationships takes time, making the response to theseshocks sluggish and persistent. Crucially, these responses depend on the riskiness of trade destinations. |
| Keywords: | export dynamics, trade finance, learning, demand risk, counterparty risk |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:aoz:wpaper:346 |
| By: | Gareth Campbell (Queen’s University Belfast); Áine Gallagher (Queen’s University Belfast); Richard S.Grossman (Department of Economics, Wesleyan University) |
| Abstract: | Substantial amounts of British capital flowed to Latin America during the latter part of the nineteenth and early twentieth centuries. Companies financed by this capital were typically headquartered in the UK, but operated thousands of miles away. This paper asks how this separation between governance and place of business affected the valuation of these firms. We find that the location of the headquarters played a more important role than the location of operations. Stock prices tended to fluctuate in line with other equities based in the UK, suggesting that they were still regarded as being, at least partially, British companies. |
| Keywords: | Latin America, equity markets, portfolio investing, emerging markets |
| JEL: | F21 F54 F65 G11 G12 G15 G51 N16 N26 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:wes:weswpa:2024-013 |
| By: | Gustavo A. Del Angel (Department of Economics, CIDE); Manuel E. Prado Cedano (Department of Economics, CIDE) |
| Abstract: | El presente artículo estudia la evolución de la concentración industrial en el sistema bancario mexicano desde el Porfiriato a nuestros días. Si bien la concentración es persistente, se distinguen ciclos de expansión y ciclos de consolidación a lo largo de la historia. Algunos de los procesos de expansión, y de consolidación, han sido promovidos por las autoridades financieras, pero también episodios de choques exógenos como crisis determinan los ciclos consolidación. El artículo también explica que un factor importante para explicar la persistencia de la concentración, así como de la participación de mercado de los grandes bancos, es la inversión de los bancos en infraestructura de redes de distribución. Si bien a lo largo del tiempo ha habido una narrativa que vincula concentración con competencia, en este artículo no abordamos posibles problemas de competencia, sino que estudiamos la concentración como una característica estructural de la industria. El artículo hace énfasis en las últimas dos décadas, en las cuales, aunque la concentración en las mayores instituciones financieras persiste, la entrada de nuevos intermediarios ha conducido a una tendencia de desconcentración del mercado. |
| Keywords: | concentración, banca múltiple, bancos, México |
| JEL: | G20 L10 N20 N26 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:emc:wpaper:dte644 |
| By: | Lakdawala, Aeimit (Wake Forest University, Economics Department); Moreland, Timothy (University of North Carolina Greensboro); Fang, Min (University of Florida) |
| Abstract: | We show that the role of leverage in explaining firm-level responses to monetary policy changed around the financial crisis of 2007-09. Stock prices of firms with high leverage were less responsive to monetary policy shocks in the pre-crisis period but have become more responsive since the crisis. Using expected volatility measures from firm-level options, we further document that financial markets have been aware of this change. To explain this, we consider a model where firms borrow using both short-term and long-term debt. The reversal relies on the relative strength of two competing channels of monetary transmission through the existing level of debt: debt dilution and debt overhang. Before the crisis, the debt overhang channel dominated, so firms with high leverage were less responsive. Since the crisis, unconventional monetary policy has had an outsized effect on long-term interest rates, strengthening the debt dilution channel that benefits firms with high leverage more. Additional firm-level evidence supports this mechanism. |
| Keywords: | Monetary policy transmission; leverage; debt maturity; firm heterogeneity |
| JEL: | E22 E43 E44 E52 |
| Date: | 2024–12–19 |
| URL: | https://d.repec.org/n?u=RePEc:ris:wfuewp:0120 |
| By: | Donato Masciandaro (Department of Economics, Bocconi University); Davide Romelli (Department of Economics, Trinity College Dublin); Stefano Ugolini (Department of Economics, Universit' Toulouse Capitole) |
| Abstract: | This paper focuses on an early unique experiment of freely floating State-issued money, implemented in Venice between 1619 and 1666. Building on a new hand-collected database from a previously unexplored archival source, we show that, despite the Venetian ducat's status as an international currency and the government's reputation for fiscal prudence, its external value was significantly, and increasingly, affected by episodes of automatic government deficit monetization through the Banco del Giro during the crises of 1630 (outbreak of the bubonic plague) and 1648-50 (escalation of the Cretan War). This suggests that the institutional context plays an important role in the transmission mechanism between government deficit monetization and exchange rates. |
| Keywords: | Fiscal Dominance, Monetary Policy, Early Modern Venice, Banco del Giro, Fiat Money, Deficit Monetization, Historical Exchange Rates |
| JEL: | F31 E63 N33 N43 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:tcd:tcduee:tep1124 |
| By: | José Ramón Martínez Resano (BANCO DE ESPAÑA) |
| Abstract: | This paper explores the financial stability nexus within a monetary ecosystem that has been expanded to include a central bank digital currency (CBDC). The paper examines the new risks associated with the introduction of a CBDC, their mitigants and their potential amplification factors. Economists and academics still seem to be split on the validity of the traditional principle of separating money into two tiers of public and private money, as a structural mitigant of the risks of deposit substitution and banking disintermediation towards CBDCs. The potential amplification of the risks associated with CBDCs through credit-related second-round effects is an additional concern. The systematic study of the risks and mitigants carried out in the paper highlights the importance of partially adapting the two-tier system of money by implementing certain limits, as envisaged in CBDC plans. The endogenous mitigation of the risks through improved bank competition often attributed to CBDCs is uncertain and may be insufficient from a systemic risk perspective. The introduction of exogenous mitigants, like CBDC holding limits calibrated on the basis of a robust methodology, seems instrumental to ensure the consistency of a monetary ecosystem that includes a CBDC. Hence, the paper addresses some fundamental methodological issues related to these limits, such as the rationale for alternative targets for the limits, the influence of disintermediation speed, the time horizons involved in the limitation and adaptation process, and the role of regulatory and market frictions. An illustrative empirical analysis for the Spanish case indicates that financial stability might not be a concern for reasonable levels of CBDC take-up, although the complexity and novelty of this instrument call for a more in-depth analysis in the future. |
| Keywords: | central bank digital currency, digital money, payments, financial stability |
| JEL: | E41 E42 E51 E52 E58 G21 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:bde:opaper:2436 |
| By: | Fritz, Benedikt; Krüger, Ulrich; Wong, Lui Hsian |
| Abstract: | We examine the impact of introducing a digital euro, as currently conceptualized in the proposal by the European Commission, on the liquidity situation of banks in Germany. The analyses are the basis for assessing the effects of a digital euro on banks' liquidity, as presented in the 11th Annual Report of the German Financial Stability Committee. This paper extensively addresses the technical details of the analyses and substantiates the robustness of the discussed findings. Our analysis focuses on short-term effects. In this environment, deposits are swiftly withdrawn and converted into digital euros, leaving banks with limited opportunities to adapt. We consider a scenario where users fully utilize the holding limit of the digital euro, along with additional scenarios that account for risk-mitigating factors. We employ a unique dataset that combines banking supervisory data with payment transaction information. Our analysis demonstrates that particular savings banks and cooperative banks are vulnerable to retail deposit outflows from exchanges into digital euro. However, only few banks would experience a liquidity shortfall if liquidity in the form of high-quality liquid assets could be redistributed within the banking associations (liquidity balancing). Furthermore, our analysis indicates that based on a holding limit of €3, 000 the liquidity shortfall based on the Liquidity Coverage Ratio remains relatively small in aggregate compared to the level of high-quality liquid assets of the entire banking system in all scenarios (up to 2%). |
| Keywords: | Central bank digital currency, holding limits, bank liquidity, systemic risk |
| JEL: | G21 G32 G38 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubtps:307139 |
| By: | Josué Thélissaint (Univ Rennes, CNRS, CREM – UMR6211, F-35000 Rennes, France) |
| Abstract: | This paper aims at exploring risk factors which are driving forces behind the global cryptomarket behaviour. Its purpose is to enhance understanding of the transmission mechanisms of aggregated fluctuations. Identification of such factors will contribute to laying foundation for anchoring expectations from a forward-looking perspective. We use the Factor-Augmented Autoregression (FAVAR) framework to estimate the latent factors. Nevertheless due to asymmetries, assessments are performed through a Threshold-VAR which helps to highlight predictive power of the factors. Six leading risk factors are identified. Each of them represents distinct market risks and exerts asymmetric effects on cryptomarket dynamics. Especially, the first factor (F1) encapsulates global market risks associated with volatility and collapse uncertainty. It orchestrates regime transitions among low−, medium−, and high − risk states. The sixth factor (F6) reflects market optimism toward cryptos. It shows a notable negative correlation (− 37%) with F1 over 20 business days. While F1 demonstrates high persistence, other factors exhibit mean-reverting behaviour. Furthermore, our findings are complemented by insights into the structure of shock transmission across different time horizons, highlighting the joint influence of macroeconomic and emotional shocks on market trajectories. Overall, this paper contributes to the existing literature as it offers a novel perspective on risk factors in cryptomarkets and it underscores specific issues for further research. |
| Keywords: | cryptomarkets, common risk factor, factor-augmented vector auto-regression, nonlinear impulse response function, time-varying frequency connectednes |
| JEL: | C58 G12 G17 G41 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:tut:cremwp:2024-14 |