Knowledge that Transforms

This paper investigates the impact of macroprudential policy on sovereign risk. As long as macroprudential policy improves financial stability, it lowers sovereign risk and enables governments to increase spending without raising taxes. Consequently, countries with tighter macroprudential policies have lower primary budget balances and accumulate government debt over time. However, this effect diminishes or reverses when there is excessive regulation or high levels of debt. These findings are somewhat paradoxical: macroprudential policy may lower private debt, while increasing public debt.

This paper investigates the role of common institutional blockholders (CIBs) in promoting strategic alliances and facilitating the transfer of human capital between alliance partner firms. We find that firms are more likely to form strategic alliances (including research and development (R&D), licensing, manufacturing, and marketing alliances) when they share CIBs with a larger proportion of their industry peers. To establish a causal relationship, we exploit the exogenous shocks to CIB ownership induced by annual Russell 1000/2000 index reconstitutions. Our firm-pair-level analysis indicates that two firms are more likely to form alliances when they share a CIB. Additionally, we show that R&D alliance partner firms connected through CIBs exhibit greater across-partner redeployment of R&D-related human capital than partner firms without CIB connections. Overall, our findings underscore the significance of common institutional blockholder ownership in reducing the distrust that hinders strategic alliance formation and in realizing the economic benefits of such alliances.

Macroprudential policy is traditionally characterized by countercyclical rules that respond to credit variables. In this paper, we augment these rules with additional indicators, including the credit spread. First, we empirically assess the relevance of the credit spread by showing its correlation with credit booms. Then, we incorporate this variable into a Dynamic Stochastic General Equilibrium (DSGE) model with financial frictions. Using the model, we evaluate the extent to which macroprudential measures that also respond to credit spreads can improve welfare, focusing on both a capital requirement ratio (CRR) rule and a loan-to-value ratio (LTV) rule. We find that credit spreads are particularly useful for credit supply-based measures, while borrower-based measures benefit more from an additional response to house prices. Overall, the augmented rules enhance welfare by reducing output volatility, although this comes at the cost of increased inflation volatility. Finally, we show that the welfare gains from responding to credit spreads are robust to the monetary policy stance in the case of the CRR, while for the LTV rule, they depend on the degree of monetary policy responsiveness to inflation.

The involvement of the Communist Party of China in corporate decision-making has formed a corporate governance model with “Chinese characteristics” that diverges from commonly studied governance models. This paper aims to provide direct insight into China’s corporate governance model by examining how the involvement of Party organizations in corporate governance influences the performance of private firms. To address endogeneity concerns, we use a quasi-natural experiment (i.e., sudden deaths of board directors) that leads to an exogenous change in the proportion of Party directors. Using difference-in-differences estimation, we find that an increase in the proportion of Party directors (i.e., stronger political governance) improves private firms’ performance. This finding is robust to various tests. Moreover, the channel analysis suggests that the Party organization performs advisory and supervisory functions in corporate governance. Last, we present evidence that the excessive involvement of the Party organization in corporate governance also imposes political costs on private firms.

Fire-sale (FS) vulnerabilities, including those associated with nonbank financial intermediaries, are often measured using FS models. While existing studies use granular data to analyze these dynamics, the scope tends to focuses on a particular jurisdiction, leaving out the cross-jurisdictional dimension. This paper uses flow of funds data from Japan, the United States, and the Euro area to measure cross-border spillovers of market shocks (interlinkage effect) in the global financial system using a standard FS model. We find that the interlinkage effect has substantially increased at the global level since the global financial crisis, suggesting a global structural change in the transmission of market shocks.