Knowledge that Transforms

In the dynamic stochastic general equilibrium (DSGE) literature there has been an increasing awareness on the role that the banking sector can play in macroeconomic activity. We present a DSGE model with financial intermediation as in Gertler and Karadi (2011). The estimation of shocks and of the structural parameters shows that time-variation should be crucial in any attempted empirical analysis. Since DSGE modelling usually fails to take into account inherent nonlinearities of the economy, we propose a novel time-varying parameter (TVP) state-space estimation method for VAR processes both for homoskedastic and heteroskedastic error structures. We conduct an exhaustive empirical exercise to compare the out-of-sample predictive performance of the estimated DSGE model with that of standard ARs, VARs, Bayesian VARs and TVP-VARs. We find that the TVP-VAR provides the best forecasting performance for the series of GDP and net worth of financial intermediaries for all steps-ahead, while the DSGE model outperforms the other specifications in forecasting inflation and the federal funds rate at shorter horizons.

In recognition of the severe consequences of the recent international financial crisis, the topic of macroprudential policy has elicited considerable research effort. The present study constructs, for 46 economies around the globe, an index of the capacity to deploy macroprudential policies. Building on elements that have been the subject of recent research, we develop an index that aims to represent the essence of what constitutes a macroprudential regime. Specifically, the index quantifies: (1) how existing macroprudential frameworks are organized; and (2) how far a particular jurisdiction is from reaching the goals established by the Group of Twenty (G20) and the Financial Stability Board (FSB). The latter is a benchmark that has not been considered in the burgeoning literature that seeks to quantify the role of macroprudential policies.

This paper re-examines the empirical relationship between financial and economic development while (i) taking into account their dynamics and (ii) differentiating between stock market and banking sector development. We study the cointegration and causality between finance and growth for 22 advanced economies. Our time series analysis suggests that causality patterns depend on whether countries’ financial development stems from the stock market or the banking sector. We show that stock market development tends to cause economic development, while a reverse causality is mostly present between banking sector development and output growth. These findings indicate that the direction of causality between finance and growth is likely to be different at high levels of development.

We find that in the aftermath of the recent financial crisis banks replenished only 12% of crisis-related losses through SEOs in 2009 and 2010. However, SEOs are disproportionately conducted by Capital Purchase Program (CPP) recipients, and this is not explained by CPP recipients’ economic and regulatory capital needs. SEOs in 2009 and 2010 by CPP recipients alone account for 27% by number, and 50% by dollar amount, of all SEOs by U.S. banks between 1994 and 2010, indicating the CPP is an influential event in the history of U.S. bank SEOs during this period. Controlling for economic and regulatory capital determinants of SEOs, CPP recipients were more likely than non-recipients to have a SEO within four quarters subsequent to CPP receipt. SEO proceeds were used to repay CPP receipts without jeopardizing loan growth. Banks that received CPP funds prior to the passage of the American Recovery and Reinvestment Act (ARRA), and banks with greater reliance on non-traditional banking activities, were more likely to have a SEO expeditiously and repay CPP funds early. Collectively, the results provide new evidence on the realized consequences of the CPP for bank SEOs. Tests suggest the CPP's indirect costs of restrictions on corporate policies and actions as the most likely explanation for the results.

This paper investigates the explanatory and forecasting power of macroeconomic fundamentals on emerging market sovereign credit spreads. We pay special attention to a new set of macroeconomic factors related to market values that reflect investor expectations concerning future economic performance. The model we propose captures a significant part of the empirical variation in spreads. Importantly, it also includes a powerful forecasting component that extends up to 12 months outside the sample period. The forward-looking variables that we construct are significant and complement and enhance the explanatory content of the conventional variables found in the extant literature.

This article extends earlier efforts at redating the US industrial cycles for the prewar period (1890–1938) using the methodologies proposed by Bry and Boschan (1971) and Hamilton (1989) and based on the monthly industrial production index constructed by Miron and Romer (1990) and modified by Romer (1994). The alternative chronology detects 90% of the peaks and troughs identified by the NBER and Romer (1994), but the new dates are consistently dated earlier for more than 50% of them, especially as regards the NBER troughs. The new dates affect the comparison of the average duration of recessions and expansions in both pre-WWI and interwar eras. Whereas the NBER reference dates show an increase in average duration of the expansions between the pre-WWI and interwar periods, the new dates show evidence of shortened length of expansions. However, the new dates confirm the traditional finding that contractions lasted longer in the post-war period than during the pre-war period.

The Single Point of Entry (SPOE)—the FDIC strategy to implement its new Dodd–Frank Orderly Liquidation Authority (OLA)—promises to reduce the financial market turmoil caused by the failure of a large complex financial institution by using parent holding company resources to recapitalize its large failing subsidiary banks. We identify legal and financial impediments that may prevent the use of a SPOE strategy for this purpose. Dodd–Frank does not authorize bank recapitalizations through SPOE or otherwise, and the OLA cannot be invoked unless the failure of a subsidiary puts the parent in danger of default. The imprecise legislative language that authorizes OLA creates a new source of systemic risk. Regulations required to operationalize SPOE will require bank holding companies to issue a substantial volume of new subordinated debt, increasing these institutions’ leverage and financial fragility. Unless the Dodd–Frank Act is amended, OLA could well magnify and not reduce market instability in the next financial crisis.

We study whether banks’ involvement into different types of securitization activity – asset backed securities (ABS) and covered bonds – in Spain influences credit supply before and during the financial crisis. While both ABS and covered bonds were hit by the crisis, the former were hit more severely. Employing a disequilibrium model to identify credit rationing, we find that firms with banks that were more involved in securitization see their credit constraints more relaxed in normal periods. In contrast, only greater covered bonds issuance reduces credit rationing during crisis periods whereas ABS aggravates these firms’ credit rationing in crisis periods. Our results are in line with the theoretical predictions that a securitization instrument that retains risk (covered bond) may induce a more prudent risk behavior of banks than an instrument that provides risk transferring (ABS).

This paper presents VAR results on the recent economic history of the U.S. and focuses on the dependence of U.S. macrofinancial variables on international capital flows. Both gross and net flows are included in the analysis. The results indicate that cross-border funding has affected the build-up in the U.S. housing market irrespective of how these flows are defined and measured. Both the savings glut hypothesis and the banking glut hypothesis are supported by these findings. However, net banking flows appear to explain the higher volatility in the increase in house prices as well as the mortgage loan boom.

We analyze the relationship between the stance of monetary policy and the implicit risk aversion in European Stock market prices in an international open-economy framework. We use a structural vector autoregression (SVAR) model that incorporates the effect of a factor that reflects the global monetary policy stance. We use shocks in the US Fed monetary policy stance as a proxy of this global factor. Our results indicate mixed evidence depending on whether simultaneity between domestic monetary policy stance and the stock market behavior is taken into full account. When this simultaneity is not allowed we confirm previous evidence found in the literature, extended to the international field: a lax monetary policy, both domestic and global, decreases risk aversion. However, when we take this into account, results indicate that a lax monetary policy increase in the short-run the risk aversion of the domestic representative investor.