Does income inequality lead to banking crises in developing countries? Empirical evidence from cross-country panel data

This study empirically examines whether increasing income inequality results in banking crises using panel data for 68 countries covering the years 1973 to 2010. The results show that developing countries with high inequality tend to have higher levels of domestic credit and that domestic credit booms increase the probability of banking crises. We also find that developing economies display direct channels from inequality to banking crises without an association with credit booms. We find no consistent evidence that income inequality contributes to banking crises in advanced economies. In developing countries, the probability of banking crises increases dramatically as income inequality levels increase: The probability of a systemic banking crisis within three years is 9.5% when the Gini is as low as 0.2 in developing countries and increases to 57.4% when the Gini is 0.4. These results are robust to several specifications.     

The income elasticity of mortgage loan demand

One explanation for the emergence of the housing market bubble and the subprime crisis is that increases in individuals’ income led to higher increases in the amount of mortgage loans demanded, especially for the middle class. This hypothesis translates to an increase in the income elasticity of mortgage loan demand before 2007. Using applicant‐level data, we test this hypothesis and find that the income elasticity of mortgage loan demand in fact declines in the years before 2007, especially for the mid‐ and lower‐middle income groups. Our finding implies that increases in house prices were not matched by increases in loan applicants’ income.     

The effect of family welfare support on the likelihood of having another child and parents’ labor supply

Governments have recently attempted to reverse the below-replacement fertility rates in Europe by reducing child-rearing costs through child benefits, grants and paid leaves. This article examines the causal effect of family allowances on the likelihood of having another child, and on the extensive and intensive margins of labor supply. Evidence from Switzerland suggests that higher child benefits incentivize parents to have more children but do not affect their employment choice. The effect is larger for low-income families. These findings imply that policies aimed at improving the economic well-being of families are likely to increase fertility rates without distorting labor market outcomes.     

Drivers of systemic risk: Do national and European perspectives differ?

With the establishment of the Banking Union, the European Central Bank has been granted the power to impose stricter regulations than the national regulator if systemic risks are not adequately addressed at the national level. We ask whether there is a cross-border externality in the sense that a bank’s systemic risk differs when applying a national versus a European perspective. On average, banks’ contribution to systemic risk is similar at the two regional levels, and so is the ranking of banks. Generally, larger banks and banks with a lower share of loans are more systemically important. The effects of these variables are qualitatively but not quantitatively similar at the national versus the European level.     

International trade,foreign direct investments,and firms’ systemic risk : Evidence from the Netherlands

This paper measures the contribution of firms in the financial and non-financial sectors to systemic risk. We quantify systemic risk as possible risk spillovers from individual firms to the economy by taking into account time-varying linkages between the firm and the economy. Based on a novel dataset that combines data on international trade and foreign direct investments with daily stock data for 67 Dutch listed companies from 2006–2015, our results indicate that high systemic risk contributions are not only present in the financial sector, but also occur in other sectors of the economy. We find that firms within the financial sector are more capable than non-financial firms of reverting to their pre-financial crisis level of systemic risk contribution. Having examined the potential role globalization fulfills in determining systemic risk, we find two main opposing effects. First, firms in internationally trade-intensive sectors contribute less to systemic risk than firms in sectors with low trade intensity. Second, systemic risk rises when firms are engaged in foreign direct investment activity, suggesting that international networks and global supply chains contribute to systemic risk propagation. Our empirical results imply that macro-prudential policy aimed at monitoring systemic risk should be extended to non-financial sectors and should take into consideration globalization measures, such as foreign direct investments and global supply chains.     

Network VAR models to measure financial contagion

Financial contagion among countries can arise from different channels, the most important of which are financial markets and bank lending. The paper aims to build an econometric network approach to understand the extent to which contagion spillovers (from one country to another) aris from financial markets, from bank lending, or from both. To achieve this aim we consider a model specification strategy which combines Vector Autoregressive models with network models. The paper contributes to the contagion literature with a model that can consider bank exposures and financial market prices, jointly and not only separately. From an empirical viewpoint, our results show that both bilateral exposures and market prices act as contagion channels in the transmission of shocks arising from a country to other countries.     

Investigating the dynamic relationship between cryptocurrencies and conventional assets: Implications for financial investors

Cryptocurrencies are gradually establishing themselves as a new class of assets with unique features, although there remains skepticism and a lack of understanding of their nature. In this study, we compare the financial properties of these new digital assets and investigate their dynamic relationship with major financial securities and commodities. Furthermore, we evaluate the economic and financial potential benefits of cryptocurrencies for financial investors. Using different time-varying copula approaches and bivariate dynamic conditional correlation GARCH models, we find that the cross-correlation with conventional assets is changing over time but weak, supporting the idea that these cryptocurrencies can be suitable for financial diversification. However, our analysis of portfolios shows that cryptocurrencies are poor hedging instruments in most of the considered cases. Moreover, we find that the relationship between cryptocurrencies and conventional assets is sensitive to external economic and financial shocks.     

Monetary Policy and Financial Stability: Cross‐Country Evidence

We explain the heterogeneous response of central banks to financial stability risks based on a financial stability orientation (FSO) index, which reflects statutory, regulatory, and discretionary components of central banks' monetary policy frameworks. Our baseline results from a cross‐country panel of modified Taylor rules suggest that central banks with a high FSO increase their policy rates in response to elevated financial stability risks by 0.27 percentage points more than central banks with a low orientation. Back‐of‐the‐envelope calculations suggest that this policy rate differential translates into a reduced crisis probability but also into considerably lower inflation and output growth rates.