International monetary equilibrium with default

We present an integrated framework for the study of the international financial economy with trade, fiat money, monetary and fiscal policy, endogenous default and regulation. Money is introduced via a cash-in-advance requirement and real trade is endogenous. The standard international finance pricing results obtain. Market incompleteness and positive default in equilibrium allow for the study of the transmission of default through the international financial markets and imply a positive role for policy. Finally, we present an example where, due to the trade-off between the non-pecuniary cost of default and the resulting allocation, a Pareto improvement occurs following an increase in interest rates.     

Endogenizing the provision of money: Costs of commodity and fiat monies in relation to the value of trade

We consider the problem of including the costs and value of the institutions that define money and support trade, within the framework of economic optimization. We compare monetary systems mediated by durable commodity monies, versus pure fiat monies, in order to understand the separation and eventual independence of the institutionally-created value of money from the values of underlying traded goods. We treat the emergence of monetary function as a problem in mechanism design, modeled by minimal strategic market games that overcome a generalized Jevons failure when agents must commit ahead of time to specialist resource production. We consider in particular the problem of defining closures with respect to both money flows and labor-allocation and trading decisions, and show that minimal models require many of the fundamental institutions of banking and contract enforcement found in real economies, in order to define a self-policing system. We define costs, value, and the efficiencies of the institutions that support trade in terms of a natural money-metric welfare function, and compare the characteristics of commodity and fiat monies by these measures. Through careful treatment of the stock/flow distinction in repeated-game settings, we find that commodity money, even when its value derives heavily from its institutional role, remains defined by its flow characteristics, in contrast to fiat money, for which the control function is defined inherently in terms of stock variables. Our notation is somewhat nonconventional for economics but to do justice to econo-physics concepts such as scaling and dimensional analysis and to stress the distinction between stocks and flows, we believe this notation is justified. We provide a full listing of notation in Appendix A.     

Bankruptcy and optimality in a closed trading mass economy modelled as a non-cooperative game

In this paper we establish the existence of (a) an optimal bankruptcy rule which enables us to describe the Walrasian trading economy as a game with trade in fiat money; and (b) non- cooperative equilibrium points of this game which (in terms of prices and the final allocation yielded) include the competitive equilibrium points, and the accompanying money rate of interest (induced by borrowing at a central bank), when the bankruptcy rule is different from optimal.     

Existence of a competitive equilibrium when all goods are indivisible

This paper investigates an economy where all consumption goods are indivisible at the individual level, but perfectly divisible at the overall level of the economy. In order to facilitate trading of goods, we introduce a perfectly divisible parameter that does not enter into consumer preferences — fiat money. When consumption goods are indivisible, a Walras equilibrium does not necessarily exist. We introduce the rationing equilibrium concept and prove its existence. Unlike the standard Arrow–Debreu model, fiat money can always have a strictly positive price at the rationing equilibrium. In our set up, if the initial endowment of fiat money is dispersed, then a rationing equilibrium is a Walras equilibrium. This result implies the existence of a dividend equilibrium or a Walras equilibrium with slack.     

The Role of Financial,Macroeconomic, and Non-financial Information in Bank Loan Default Timing Prediction

We assess the use of bank loan information in predicting the timing to default. We use unique data on defaults in small and medium enterprises maintained by the Central Bank of Portugal which includes financial accounting and macroeconomic indicators, as well as non-financial information. The findings are indicative of the incremental predictive ability of non-financial information over and above macroeconomic and financial accounting information in the baseline, industry, and in- and out-of-sample models. Specifically, total credit secured by firms is, as expected, negatively and significantly related to default. Gross domestic product is negatively and significantly related to default, and benchmark market rate is positively and significantly associated with default. The findings also reveal that firms which are operated by partners, which have stronger financial support from partners, and which possess operational assets exhibit lower hazards of default. The study indicates that non-financial information and macroeconomic indicators assessed alongside financial accounting data can significantly improve the forecasting performance of default models.     

A vector-autoregression analysis of credit and liquidity factor dynamics in US LIBOR and Euribor swap markets

We use a vector autoregressive approach to investigate the determinants of US Dollar LIBOR and Euribor swap spread variation during the 2007–2009 crisis in global credit and money markets. Using market-quoted yield and spread data from the highly liquid credit default swap (CDS) and overnight index swap (OIS) markets, we provide compelling empirical evidence that liquidity risk factor shocks have been the dominant drivers of the variation in swap spreads over this period. Our findings provide an explanation for the temporal differences that liquidity shocks have on swap spreads and provide a contemporary perspective on the dynamical interplay between credit-default and liquidity risk-factors in these markets. As all our risk-factor proxies are traded in liquid derivatives markets, our findings have implications for proprietary hedge fund traders hedging an exposure to swap-spread risk, for bank treasurers managing their liquidity requirements and for central bankers seeking to better understand the response of markets to their macroeconomic policy implementation and liquidity management actions. Indeed our markets-based analysis suggests that the European Central Bank (ECB) has underperformed relative to the Federal Reserve in terms of the differing levels of market confidence placed in its macroeconomic policy actions and remedial liquidity interventions during the period.     

Inflationary equilibrium in a stochastic economy with independent agents

We prove the existence of stationary monetary equilibrium with inflation in a “Bewley” model with constant aggregate real variables but with idiosyncratic shocks to the endowments of a continuum of individual agents, when a central bank stands ready to borrow or lend fiat money at a fixed nominal rate of interest and the agents face borrowing constraints. We also find that, in the presence of real micro uncertainty about individual endowments, the rate of inflation is higher (equivalently, the real rate of interest is lower) than it would be in a “certainty-equivalent economy”; to wit, one in which every agent’s endowment is replaced by its expected value. Thus, underlying microeconomic uncertainty and borrowing constraints are shown to generate additional inflation.     

Global Credit Risk: World,Country and Industry Factors

We investigate the dynamic properties of systematic default risk conditions for firms in different countries, industries and rating groups. We use a high‐dimensional nonlinear non‐Gaussian state‐space model to estimate common components in corporate defaults in a 41 country samples between 1980:Q1 and s2014:Q4, covering both the global financial crisis and euro area sovereign debt crisis. We find that macro and default‐specific world factors are a primary source of default clustering across countries. Defaults cluster more than what shared exposures to macro factors imply, indicating that other factors also play a significant role. For all firms, deviations of systematic default risk from macro fundamentals are correlated with net tightening bank lending standards, suggesting that bank credit supply and systematic default risk are inversely related. Copyright © 2016 John Wiley & Sons, Ltd.     

Federal Home Loan Bank advances and bank risk

The Federal Home Loan Bank system (FHLB) has evolved into a major source of liquidity for the banking system with the demonstrated ability to borrow over a trillion dollars in world financial markets based on an implied U. S. Treasury guarantee. The FHLB loans the borrowed funds to commercial banks at reduced rates that are not adjusted for the risk of an individual bank. Moral hazard could cause member banks using FHLB loans to increase financial leverage and exposure to high risk assets. Conversely, the FHLB offers banks additional liquidity and specialized debt instruments that help them manage interest rate risk. We use dynamic panel generalized method of moments estimation to test the relation between FHLB advances and bank risk. We find that if banks have relatively normal default probabilities, advances are not associated with increased bank risk but, instead, advances are related to decreased interest rate risk. However, when bank default probabilities are high, our evidence suggests advances and higher bank risk are related.     

Replica core equivalence theorem: An extension of the Debreu–Scarf limit theorem to double infinity monetary economies

An overlapping generations model with the double infinity of commodities and agents is the most fundamental framework to introduce outside money into a static economic model. In this model, competitive equilibria may not necessarily be Pareto-optimal. Although Samuelson (1958) emphasized the role of fiat money as a certain kind of social contract, we cannot characterize it as a cooperative game-theoretic solution like the core. In this paper, we obtained a finite replica core characterization of Walrasian equilibrium allocations under non-negative wealth transfer and a core-limit characterization of Samuelson’s social contrivance of money. Preferences are not necessarily assumed to be ordered.     

Evidence on the effect of credit counseling on mortgage loan default by low-income households

Research on the effectiveness of credit counseling is surprisingly scarce given its widespread use and given that it has been around for at least three decades. This paper studies the effects of counseling on default by adopting an option-based approach to mortgage termination. Data come from a counseling program developed as result of the collaborative efforts of a large Midwest bank, Community Churches, and a local community development company implemented during the 1992–1996 period. We find some evidence that counseled borrowers defaulted less often than non-counseled borrowers and that counseling affects optimal exercise of the default option.     

The shadow costs of repos and bank liability structure

Making use of a structural model that allows for optimal liquidity management, we study the role that repos play in a bank׳s financing structure. In our model the bank׳s assets consist of illiquid loans and liquid reserves and are financed by a combination of repos, long-term debt, deposits and equity. Repos are a cheap source of funding, but they are subject to an exogenous rollover risk. We show that the use of repos inflicts two types of indirect (“shadow”) costs on the bank׳s shareholders: first, it induces the bank to maintain higher liquid reserves in order to alleviate the additional default risk; second, it adds to the cost of long-term debt financing. These shadow costs limit the bank׳s appetite for cheap but unstable repo funding. This effect is, however, weakened under poor returns on risky assets, access to deposit funding and the depositor preference rule. We also analyze the impact of a liquidity coverage ratio, payout restrictions and a leverage ratio on the bank׳s financing choices and show that all these tools are able to curb the bank׳s reliance on repos.     

Adaptive learning and monetary exchange

This paper investigates three classic questions in monetary theory: How can an intrinsically worthless asset, such as fiat money, maintain value as a medium of exchange? What are the short-run and long-run effects of a change in the money supply? What is the social cost of inflation? I answer these questions using a microfounded model of monetary exchange that replaces the rational expectations assumption with an adaptive learning rule. First, I show that monetary exchange is a robust arrangement in the sense that agents are able to learn the stationary monetary equilibrium while the non-monetary equilibrium is unstable under learning. Second, an unanticipated monetary injection has real effects in the short-run because learning the value of money takes time. In the long run, agents successfully learn the value of money, hence money is neutral. Third, under a constant money growth policy, an increase in the growth rate of money increases output in the short-run producing a short-run Phillips curve. A ten percent increase in the money growth rate has a social cost of 0.41 percent of output per year. Alternatively, a ten percent decrease in the money growth rate has a social benefit of 0.37 percent of output per year.     

The impact of government intervention on the stabilization of domestic financial markets and on U.S. banks’ asset composition

The 2007–2009 financial crisis that evolved from various factors including the housing boom, aggressive lending activity, financial innovation, and increased access to money and capital markets prompted unprecedented U.S. government intervention in the financial sector. We examine changes in banks’ balance sheet composition associated with U.S. government intervention during the crisis. We find that the initial round of quantitative easing positively impacts bank liquidity across all bank samples. Our results show a positive impact of repurchase agreement market rates on bank liquidity for small and medium banks. We conclude that banks have become more liquid in the post-crisis period, especially the larger banks (large and money center banks). We show that real estate loan portfolio exposures have reverted to pre-crisis levels for money center banks and remained flat for all other bank samples.     

Fed Credit Policy: What is a Lender of Last Resort?

Discussions of the Fed׳s financial crisis lending – and its role as “Lender of Last Resort” more generally – often overlook the distinction between monetary policy and credit policy. Central bank actions constitute monetary policy if they alter the quantity of the bank׳s monetary liabilities, but constitute credit policy if they alter the composition of the bank׳s portfolio without affecting the outstanding amount of monetary liabilities. In the 19th century, Henry Thornton and Walter Bagehot advocated Lender of Last Resort policies as a means of expanding the money supply when the demand for money surged in a crisis. In contrast, the Fed׳s recent crisis lending for the most part left its outstanding monetary liabilities unaffected, and thus represented credit policy, not Lender of Last Resort activity. Credit allocation in a crisis is potentially costly because it affects market participants׳ beliefs about the likelihood of future central bank rescues, which in turn reduces their incentive to protect themselves against financial distress and thus exacerbates financial instability. Credible limits on credit policy thus are critical to central banks׳ core policy mission. One path to establishing such limits is to create “living wills” that detail how to resolve large, complex financial firms without government support.     

On the periphery of the international dollar standard: Canada,Latin America,and East Asia

This paper focuses on how the world dollar standard works in two respects. The first is the dollar as a benign facilitator of international exchange both in private and official transacting. The second is the possibility of dollar encroachment on the domestic domains of weaker currencies. But this encroachment is quite different across more mature industrial economies such as Canada with long-term bond markets in comparison to more extreme encroachment in Latin America and less extreme in East Asia where domestic bond markets barely exist. It examines the risks in alternative exchange rate regimes for emerging markets where the term to maturity of finance is short, with external liabilities all dominated in foreign exchange, largely dollars. Problems faced by central banks in regulating money and exchange rates, and bank regulators in limiting default risks, are jointly considered.     

Quantitative easing and the loan to collateral value ratio

We study optimal monetary policy in a New Keynesian model at the zero bound interest rate where households use cash alongside house equity borrowing to conduct transactions. The amount of borrowing is limited by a collateral constraint. When either the loan to value ratio declines or house prices fall, we observe a decrease in the money multiplier. We argue that the central bank should respond to the fall in the money multiplier and therefore to the reduction in house prices or the loan to collateral value ratio. We also find that optimal monetary policy generates a large and persistent fall in the money multiplier in response to the drop in the loan to collateral value ratio.     

基于预付账款的贸易融资模式、优势及风险分析——以徽商银行A支行为例

贸易融资业务是商业银行为处于正常产业链中的客户设计的一种新的金融产品,基于预付账款的贸易融资是其中的一种。结合徽商银行A支行的实践,本文探讨基于预付账款的贸易融资模式,分析其优势和相关风险,指出基于预付账款的贸易融资应依托中心厂商、封闭货物流和资金流才能实现客户的有效融资、保障业务行的资产安全。     

How does the money market development impact the bank lending channel of emerging Countries? A case from China

Transforming from quantitative-based instruments to price-based instruments is the primary goal of the monetary policy transformation in emerging economies. In essence, this process is gradually replacing the interest rate channel with the credit channel from the perspective of the monetary policy transmission mechanism, which is mainly achieved by promoting financial development to reduce the financial friction. However, there are opposite effects of financial development on the bank lending channel; thus, the topic is controversial. Using banks’ data from 2010 to 2018, this paper studies whether and how the money market development weakens the effect of the bank lending channel in China. The result shows that the mechanism through which the money market development influences the bank lending channel is realized by affecting the substitution elasticity of the asset and liability structure of banks’ balance sheets. Different from the theoretical expectation, the effect of the money market development on the bank lending channel is nonsignificant in China but appears to be weakened when the interest rate market-oriented reform is considered. However, further research based on structural analysis demonstrates that the money market development exerts heterogeneous effects on the bank lending channel under different types of sub-markets and different characteristics of the banks considered.     

BoE financing of the government deficit is no longer taboo

• ▪ The BoE has hinted that it could directly finance the government's soaring deficit. While there is no urgency to do so at present, BoE purchases could calm potential disruption in the gilt market and be a strong economic support.
• ▪ Direct money financing by the UK central bank would be a radical approach, but not unprecedented. However, it's necessary to go back to 1914 to find the last episode when the BoE took on the role of funding public borrowing.
• ▪ Once normality returns, money financing could result in a rise in prices. But a time-limited expedient shouldn't result in persistent inflation. And policymakers could seek to unwind the BoE's money creation.