Knowledge that Transforms

To rationalize the increased use of capital flows regulations in recent times, we study the capacity of capital flow management measures (CFMs) to insulate an economy from external shocks. We examine the extent to which CFMs mitigate the effects of US monetary shocks and whether measuring this mitigation at the net or gross level of flows matters. Our analysis is carried out for a panel of emerging market economies and for different disaggregations of the flows. Our results indicate that the level of aggregation matters for evaluating the effects of CFMs, and that analyses with excessively aggregated flows or with only net measures may lead to biases in assessing the insulation features of the CFMs. Furthermore, CFMs have insulation properties that mitigate capital repatriations; however, these are mostly related to risky portfolio and banking flows.

This paper provides evidence of a flight home effect in the syndicated loan market during the COVID-19 pandemic, where lenders rebalance their loan portfolios towards domestic borrowers. Specifically, a one standard deviation increase in COVID exposure in the lenders’ home country is associated with a 4.1 percentage point decrease in lenders’ share of foreign loans. This home bias eases with the intensity of government restrictions during the pandemic and strengthens with expansionary monetary policy. We further pinpoint an operative supply-side mechanism, where smaller, less capitalized banks with a higher proportion of non-performing loans are more likely to rebalance towards domestic borrowers. Although different forms of asymmetric information exert a material – yet not uniform – effect on the lenders’ rebalancing decisions, the flight home effect emerges independently of the existence of these information asymmetries.

We exploit staggered real estate transaction tax (RETT) hikes across German states to identify the effect on the growth rates of regional house prices and outstanding mortgage loans by all local German banks. The results show that a RETT hike by one percentage point reduces regional house prices by 3%–4%. Furthermore, IV-regressions yield that a 1 percentage point drop in regional house prices induced by a RETT increase leads to a 0.3% decline in regional mortgage lending, particularly among low-capitalized banks in rural regions.

This paper measures China's financial resilience from the perspective of external risk shocks and analyzes its influencing factors for forecasting. First, we introduce an innovative financial resilience model comprising three submodels: the dynamic factor model, the TVP-VAR model, and a resilience characteristic measurement model that captures resistance and recoverability through absorption intensity and absorption duration. The results show a clear inverse relationship between absorption intensity and absorption duration, with resilience fluctuations exhibiting distinct phase characteristics. Notably, intervals of low resilience often correspond to specific risk events. Second, we apply the Lasso-logistic model for recursive estimation and forecasting financial resilience, while comparing its performance to that of the Logistic regression model. The results indicate that the Lasso-logistic model achieves, on average, a 10 % higher forecasting accuracy than the Logistic model does. Among the most important features identified by the model are macroeconomic and public expectation variables. The analysis shows that the stability of economic fundamentals and market participants' confidence in the future play pivotal roles in strengthening financial resilience and ensuring the stability of the financial system.

We examine whether a firm’s organization capital (OC) affects its labor investment efficiency. We find that a higher level of OC is related to lower deviations from the optimal level of labor investment according to economic conditions (higher labor investment efficiency). We find that this result is empirically robust to a stacked difference-in-differences approach using exogenous CEO turnover as a quasi-natural experiment and planned CEO retirements and forced CEO turnovers as placebo tests. We identify that the ability to retain talented employees and reduction of agency costs are the two channels by which OC improves a firm’s labor investment efficiency. Furthermore, we report that the positive effect of OC on labor investment efficiency is more pronounced in firms in highly competitive markets, firms with better access to external financing and firms with highly skilled labor.

This paper analyzes financial contagion in a banking system where banks are linked to each other by interbank claims and common assets. We find that asset commonality makes banking systems more vulnerable to idiosyncratic liquidity shocks and helps to determine which interbank network structures are resistant to contagion. When the degree of commonality is homogeneous across banks, the complete interbank network, in which each bank borrows evenly from all the others, displays the usual robust-yet-fragile property. However, in the more general case of heterogeneous common asset holdings the complete interbank network is less resilient than other incomplete networks but not necessarily the most fragile. We also show that the degree and variability of asset commonality between banks and the way this intertwines with the cross-holdings of interbank deposits have important implications for macroprudential regulation.

This study examines how various facets of social and political freedom shape the impact of political connections on bank lending. Using a new dataset covering the period 2007–2018 and more than 100 countries, we find that the establishment of political connections stimulates lending, but only in countries with constrained media freedom and restricted freedom of association and expression, as well as in those scoring low on political rights and civil liberties. These results suggest that social and political freedom constitute critical factors that limit the resource-allocation distortions caused by political connections.

We show the possibility of negative nominal interest rates in a general equilibrium model with financial intermediation. We establish that the decentralization of the planner’s steady state requires a zero nominal lending rate on bank loans to firms, as well as a negative nominal lending rate on central bank loans to banks. We also find that implementing the planner’s steady state requires firms to be bound by collateral requirements that limit their leverage. The key driver of the results is the very defining characteristic of banking, namely banks’ ability to create money by opening deposit accounts that borrowers can withdraw from, and that are unbacked by household deposits. Our results can be used to rationalize the ultra-low rates policy implemented by major central banks in the second half of the 2010’s and early 2020’s.

This study investigates the association between corporate digital transformation and default risk for a sample of Chinese-listed firms from 2009 to 2022. We find a robust positive association between digital transformation and corporate default risk. Further tests reveal the destabilizing impact of digital adoption strengthens under greater competition, human capital intensity, shareholder expropriation, and weak monitoring. The additional analysis points to resource misallocation and managerial manipulations as two potential channels propagating distress. We show that digital transformation correlates with escalated asset impairments and financial frauds. Our study provides evidence that digital transformation strategies entail underappreciated risks to financial stability.

Social psychology research suggests that management groups under greater external pressure are more prone to groupthink (i.e., a tendency to reach premature consensus), leading to greater performance volatility. To isolate the group dynamics channel, we focus on the pressure management faces from largely uninformed and dissatisfied non-blockholders. Consistent with the groupthink view, we find that non-blockholder dissatisfaction is positively associated with performance volatility, which is further corroborated by tests addressing omitted variable bias and reverse causality. In addition, the baseline relationship is stronger in firms with greater interaction among directors, more powerful CEOs, and less diverse boards. Our findings suggest that non-blockholder dissatisfaction heightens performance volatility by exacerbating groupthink.