Post Keynesian endogenous money theory: A theoretical and empirical investigation of the credit demand schedule

The article investigates the relationship between interest rates and loan amounts provided by commercial banks from both a theoretical and an empirical perspective. Theoretically, some scholars belonging to the post Keynesian endogenous money tradition advocate that a decrease (increase) in interest rates leads to a positive (negative) effect on the amount of loans demanded by households and firms. On the other hand, some heterodox economists maintain that interest rates do not stimulate firms’ credit demand but that a certain degree of influence is allowed for loans provided to households. By applying a vector autoregression (VAR) and vector error-correction model (VECM) methodology to European Central Bank and Organisation for Economic Co-operation and Development data for the eurozone, this article proposes an empirical validation of such theoretical premises by analysing the relationship between the different types of credit provided by commercial banks and the corresponding interest rates. The main results show a negative relationship between the interest rates and the credit provided for the purchase of houses. Conversely, no significant relationship is found between loans granted to enterprises and loans for the purchase of consumption goods and the corresponding interest rates.     

Multiple equilibrium overnight rates in a dynamic interbank market game

We analyse a two-period model of the interbank market, i.e. the market where banks trade liquidity. We assume that banks do not take the interbank interest rate as given, but instead negotiate on interest rates and transaction volumes with each other. The solution concept applied is the Shapley value. We show that there are a multiplicity of average equilibrium interest rates of the first period so that the average interest rate in this period does not convey any information on the expected liquidity situation on the interbank market. As the banks control not only the transaction volumes, but also the interest rates, they can leave the interest rates constant and adjust the transaction volumes when, for example, a liquidity deficit becomes more likely.     

Bank behavior, incomplete interest rate pass-through, and the cost channel of monetary policy transmission

This paper employs a New Keynesian DSGE model to explore the role of banks within the cost channel of monetary policy transmission for shaping the interest rate pass-through from money market rates to loan rates. Banks extend loans to firms in an environment of monopolistic competition by setting their loan rates in a staggered way, which means that the adjustment of the aggregate loan rate to a monetary policy shock is sticky. We estimate the model for the euro area by adopting a minimum distance approach. Our findings exhibit that (i) financial costs are an important factor for price changes, (ii) frictions in the loan market have an effect on the propagation of monetary policy shocks as the pass-through from a change in money market rates to loan rates is incomplete, and (iii) the strength of the cost channel is mitigated as banks shelter firms from monetary policy shocks by smoothing loan rates.     

Australian financial firms’ exposures to the level,slope, and curvature of the interest rate term structure

This study examines the risk exposure of Australian financial firms to changes in the term structure of interest rates. Non-linearity in the interest rate term structure is captured by the three-factor model of interest rate level, slope, and curvature. We observe that financial firms have negative exposures to the interest rate level, while non-financial firms have positive exposures. This finding suggests that financial firms need to hedge against rising interest rates, while non-financial firms need to hedge against falling interest rates. Small banks and insurance companies have a positive risk exposure to the slope factor, while real estate firms have a negative risk exposure to the curvature factor. Though the interest rate level is the most important factor, ignoring the slope and curvature factors could lead to underestimating a financial firm’s overall interest rate risk exposure. These findings are robust to controlling for the orthogonalized market return, time-varying equity risk premium, and the global financial crisis. This study offers practical tools to regulators, such as the Reserve Bank of Australia and Australian Prudential Regulatory Authority for assessing interest rate risk exposures of the financial and non-financial sectors.     

Bank regulation and supervision and its welfare implications

This study provides a general equilibrium model to explore the welfare implications of bank regulation and supervision (RS). The model supports the basic expectations regarding the positive effects of RS on the growth rate, output, credit, investment, wages and profits; and its negative effects on the interest rate. In addition, RS is observed to lead to a convergence effect. Furthermore, it is observed that the decision of banks to monitor and charge differentiated interest rates to firms depends on the distribution of firm-specific moral hazard rates; bank monitoring increases profits as the distribution of producer type improves.     

A post‐Keynesian model of output,employment and monetary demand

This paper presents a simple model based on three broad Post‐Keynesian hypotheses: (1) the economic process develops over time; (2) money is endogenous; and (3) producers are price setters. To make the analysis easier we also assume (4) that firms are vertically integrated. Producers assess the expected demand and ask banks for credit in order to start production; banks create credit at the request of producers to finance the wage bill; workers buy goods sold by firms; firms must repay banks the amount borrowed plus interest and earn a target rate of profit. Since firms have created only as much purchasing power as they have advanced to workers in the form of the wage fund, equilibrium requires that there is an amount of autonomous monetary demand equal to profits and interest. Furthermore, in order to make the value of supply equal to the value of effective demand, firms will employ the number of workers necessary to create the purchasing power which, when added to the anticipated autonomous demand, enables all costs to be covered and the planned rate of profits to be attained.     

Equilibrium real interest rates and the financial cycle: Empirical evidence for Euro area member countries

We estimate the equilibrium real interest rate for nine Euro area member countries and the Euro area as a whole using quarterly data from 1995 to 2015. We expand the standard model of estimating real equilibrium interest rates to incorporate the financial cycle for the private sector. We show that adding the financial cycle indeed alters the equilibrium real interest rate estimates and, in line with previous studies, that there is a fall in the equilibrium real interest rate over time. Our results indicate that in most member countries the real rate is lower than its equilibrium level. Hence, they should not worry about secular stagnation now. This is because secular stagnation is likely to occur when real interest rates are higher than their equilibrium levels. This result can serve as a starting point for further research in this field, e.g. by adding public sector financial cycles or disentangling the roles of households, corporations and the government.     

Regional foreign banks and financial inclusion: Evidence from Africa

Regional foreign banks expanded quickly over the past decade in developing and emerging countries and have a growing influence in banking systems. We question whether the development of African regional foreign banks, also called Pan-African banks, influences financial inclusion of firms and households. To this end, we combine the World Bank Global Findex database and the World Bank Enterprise Surveys with a hand-collected database on the presence of regional foreign banks. We find that Pan-African banks presence increases firms’ access to credit and limited evidence that they favor financial access of the middle class by restoring confidence in banks. We suggest that this impact is related to the adoption of an aggressive strategy aiming at gaining market shares rather than through the exploitation of informational and technological advantages.     

Electricity market mergers with endogenous forward contracting

We analyze the effects of electricity market mergers in an environment where firms endogenously choose their level of forward contracts prior to competing in the wholesale market. We apply our model to Alberta’s wholesale electricity market. Firms have an incentive to reduce their forward contract coverage in the more concentrated post-merger equilibrium. We demonstrate that endogenous forward contracting magnifies the price increasing impacts of mergers, resulting in larger reductions in consumer surplus. Current market screening procedures used to analyze electricity mergers consider firms’ pre-existing forward commitments. We illustrate that ignoring the endogenous nature of firms’ forward commitments can yield biased conclusions regarding the impacts of market structure changes such as mergers. In particular, we show that the price effects of mergers can be largely underestimated when forward contract quantities are held at pre-merger levels. Whether the profits of the merged firm are greater with fixed or endogenous forward quantities is ambiguous.     

Risk sharing and export performance with firm heterogeneity

We investigate how market uncertainty affects the export performance of a firm through financial frictions. We first extend Melitz's (2003) heterogeneous firm trade model by incorporating demand shocks, linking the demand uncertainties to the financing costs of firms. In this extension, the default probability is endogenously determined by a firm's productivity and demand uncertainty. Hence, firms with higher productivity or lower market uncertainty are offered lower interest rates and thus show better export performance. As an application, we also show that a risk-sharing mechanism, that pools default risk for a certain group of firms, lowers the default risk. This mechanism allows banks to charge lower interest rates to the member firms and therefore ultimately improves their export performance in both extensive and intensive margins. We find a real-world example of such a mechanism from business groups in Korea. Using Korean firm-level data, we show that the more diversified the business group, the greater the likelihood that its member firms export and the bigger their export revenues. We also show that our results are robust to alternative explanations for Korean business groups’ export competitiveness.     

Lenders on the storm of wholesale funding shocks: saved by the central bank?

We provide empirical evidence on banks’ responses to shocks in the wholesale funding market, using data of 181 euro area banks over the period from August 2007 to June 2013. Responses to funding liquidity shocks for both banks’ lending volumes and loan rates, to households and corporates, are analysed in a panel VAR framework. We thereby distinguish banks by country, extent of Eurosystem borrowing, bank size and capitalization. The results show that shocks in the securities and interbank markets have significant effects on loan rates and credit supply, particularly of banks in stressed countries of the periphery. The results also suggest that central bank liquidity has mitigated this effect on lending volumes. Lending to nonfinancial corporations is more sensitive to wholesale funding shocks than lending to households. Lending volumes of large banks that are typically more dependent on wholesale funding and banks with large exposure to sovereign bonds show stronger responses to wholesale funding shocks.     

Increasing inequality,consumer credit and financial fragility in an agent based macroeconomic model

We investigate the interplay between increasing inequality and consumer credit in a complex macroeconomic system with financially fragile heterogeneous households, firms and banks. Simulation results show that there are pros and cons of introducing consumer credit: on the one hand, for a certain time, it leads to lower unemployment through boosting aggregate demand; on the other hand, it accelerates the system tendency to the crisis. Since the increase of financial profits goes with a decline of households’ real wealth, a policy trade-off emerges.     

Modifying Taylor reaction functions in the presence of the zero‐lower‐bound — Evidence for the ECB and the Fed

We propose an alternative way of estimating Taylor reaction functions if the zero‐lower bound on nominal interest rates is binding. This approach relies on tackling the real rather than the nominal interest rate. So if the nominal rate is (close to) zero central banks can influence the inflation expectations via quantitative easing. The unobservable inflation expectations are estimated with a state‐space model that additionally generates a time varying series for the equilibrium real interest rate and the potential output — both needed for estimations of Taylor reaction functions. We test our approach for the ECB and the Fed within the recent crisis. We add other explanatory variables to this modified Taylor reaction function and show that there are substantial differences between the estimated reaction coefficients in the pre‐ and crisis era for both central banks. While the central banks on both sides of the Atlantic act less inertially, put a smaller weight on the inflation gap, money growth and the risk spread, the response to asset price inflation becomes more pronounced during the crisis. However, the central banks diverge in their response to the output gap and credit growth.     

大贷款人角色:我国银行具有监督作用吗?

目前,银行贷款仍是我国企业的主要融资途经之一,但是作为大贷款人,银行能否发挥监督作用呢?本项工作比较了两项银行贷款政策——贷款利率和贷款续新,结果发现,贷款利率与借款人财务状况之间有正向压力传导效应,即业绩越好,贷款利率越低,说明存在监督作用,但是贷款续新与借款人财务状况之间的情况则相反,业绩较差,获得续贷的可能性更高。经过分析本文认为,我国银行作为大贷款人已具有一定的监督作用,且主要通过贷款利率政策体现出来,但贷款续新政策反映的主要是银行的融资作用而不是监督作用。     

Creditor passivity: The effects of bank competition and institutions on the strategic use of bankruptcy filings

In transition countries, banks often fail to take action against loan defaulters. Using a model of the bank–firm relationship, we study the trade-off a bank faces when having defaulting firms declared bankrupt. First, the bank receives a payoff if a firm is liquidated. Second, it provides information about a firm’s type to its competitors. Therefore, asymmetric information between banks is reduced, and bank competition intensifies. We find that the better the institutions and the more competitive the banking sector, the greater the bank’s incentive to bankrupt defaulting firms. This makes information between banks less asymmetric and thus leads to lower interest rates and increases the probability that all banks offer loans.     

FINANCIAL RISK AND UNEMPLOYMENT

There is a strong correlation between corporate interest rates, their spreads relative to Treasuries, and the unemployment rate. We model how corporate interest rates affect equilibrium unemployment and vacancies, in a Diamond–Mortesen–Pissarides search and matching model. Our simple model permits the exploration of U.S. business cycle statistics through the lens of financial shocks. We calibrate the model using U.S. data without targeting business cycle statistics. Volatility in the corporate interest rate can explain a quantitatively meaningful portion of the labor market. Data on corporate firms support the hypothesis that firms facing more volatile financial conditions have more volatile employment.     

Incomplete interest rate pass-through under credit and labor market frictions

By introducing search and matching frictions in both the labor and the credit markets into a cash in advance New Keynesian DSGE model, we provide a novel explanation of the incomplete pass-through from policy rates to loan rates. We show that this phenomenon is ineradicable if banks possess some power in the bargaining over the loan rate of interest, if the cost of posting job vacancies is positive and if firms and banks sustain costs when searching for lines of credit and when posting credit vacancies, respectively. We also show that the presence of credit market frictions moderates the reactions of employment and wages to a monetary shock. Finally, we confirm the finding that pass-through incompleteness has limited short-term impacts on the transmission of monetary policy shocks to output and inflation.     

Interest rate dispersion and volatility in the market for daily funds

The purpose of this paper is to study the determinants of equilibrium in the market for daily funds. We use the EONIA panel database which includes daily information on the lending rates applied by contributing commercial banks. The data clearly show an increase in both the time series volatility and the cross-section dispersion of rates towards the end of the reserve maintenance period. These increases are highly correlated. We design a model to account for these empirical facts. Our theoretical model shows how the operational framework of monetary policy causes a reduction in the elasticity of the supply of funds by banks throughout the reserve maintenance period. This reduction in the elasticity together with market segmentation and heterogeneity is able to generate distributions for the interest rates and quantities traded with the same properties as in the data. We also investigate the effects of the changes in the Eurosystem's operational framework, enacted on March 2004, for interest rate behaviour.     

A policy model to analyze macroprudential regulations and monetary policy

We construct a small‐open‐economy, new Keynesian dynamic stochastic general‐equilibrium model with real financial linkages to analyze the effects of financial shocks and macroprudential policies on the Canadian economy. The model incorporates rich interactions between the balance sheets of households, firms and banks, long‐term household and business debt, macroprudential policy instruments and nominal and real rigidities and is calibrated to match dynamics in Canadian macroeconomic and financial data. We study the transmission of monetary policy and financial and real shocks in the model economy and analyze the effectiveness of various policies in simultaneously achieving macroeconomic and financial stability. We find that, in terms of reducing household debt, more targeted tools such as loan‐to‐value regulations are the most effective and least costly, followed by bank capital regulations and monetary policy, respectively.     

垄断与产权:我国利率市场化的制度性障碍

在缺乏竞争的金融体系下，借贷价格偏离均衡价格，消费剩余减少，资源配置扭曲，金融运行效率降低。在我国，资金供应依然主要由居于垄断地位的国有商业银行及其变种组成和资金需求依然主要由国有企业及其变种组成的情况下，利率市场化会使得资金价格扭曲和变形，理论上推演的利率市场化预期效果在很大程度上无法实现。我国利率市场化的时间表只能视微观经济主体市场化的进程而定。