Macroeconomic volatility after trade and capital account liberalization

What are the equilibrium effects of trade and capital liberalization on consumption smoothing? This question is addressed by studying the response to productivity shocks in a baseline two country, two goods, incomplete market model, where foreign borrowing is secured by collateral. The paper shows that international financial integration, modeled by relaxing a borrowing constraint a la Kiyotaki in the domestic country, worsens consumption smoothing; international trade integration, modeled by a reduction of non linear iceberg transportation costs, improves it. As a measure of consumption smoothing, the analysis uses the ratio between the simulated standard deviation of consumption growth and the simulated standard deviation of output growth. These results are qualitatively consistent with the empirical evidence provided by Kose, Prasad and Terrones (2003).Emerging Markets,Economic Theory&Research,Free Trade,Debt Markets,Trade Policy

Current account reversals in industrial countries: does the exchange rate regime matter?

This paper studies current account reversals in industrial countries across different exchange rate regimes. There are two major findings which have important implications for industrial economies with external imbalances: first, triggers of current account reversals differ between exchange rate regimes. While the current account deficit and the output gap are significant predictors of reversals across all regimes, reserve coverage, credit booms, openness to trade and the US short term interest rate determine the likelihood of reversals only under more rigid regimes. Conversely, the real exchange rate affects the probability of experiencing a reversal only under flexible arrangements. Second, current account reversals in advanced economies do not have an independent effect on growth. This result holds not only for industrial economies in general but also for countries with fixed exchange rate regimes in particular

Can Real Exchange Rate Undervaluation Boost Exports and Growth in Developing Countries? Yes, But Not for Long

A policy of managed real undervaluation may have been an important factor behind the success of East Asia’s export-led growth model. But current discussions over the value of China’s currency demonstrate the controversy this kind of policy can generate. Although a managed real undervaluation can enhance domestic competitiveness, it is difficult to sustain—both economically and politically—in the post-crisis environment. We show that a real undervaluation works only for low-income countries, and only in the medium term.exchangte rates, undervaluation, exports, growth, developing countries, China, currency, East Asia, competitiveness, renminbi

Macro stress testing euro area banks' fees and commissions

This paper uses panel econometric techniques to estimate a macro-financial model for fee and commission income over total assets for a broad sample of euro area banks. Using the estimated parameters, it conducts a scenario analysis projecting the fee and commission income ratio over a three years horizon conditional on the baseline and adverse macroeconomic scenarios used in the 2016 EU-wide stress test. The results indicate that the fee and commission income ratio is varying in particular with changes in its own lag, the shortterm interest rate, stock market returns and real GDP growth. They also show that the fee and commission income ratio projections are more conservative under the adverse scenario than under the baseline scenario. These findings suggest that stress tests assuming scenario-independent fee and commission income projections are likely to be awed

Trade openness reduces growth volatility when countries are well diversified

This paper addresses the mechanisms by which trade openness affects growth volatility. Using a diverse set of export concentration measures, we present strong evidence pointing to an important role for export diversification in conditioning the effect of trade openness on growth volatility. Indeed, the effect of openness on volatility is shown to be negative for a significant proportion of countries with relatively diversified export baskets

Banking on assumptions? : How banks model deposit maturities

How do banks manage the behavioural maturity of non-maturing deposits (NMDs)? Using a rich and confidential dataset, we investigate how banks model deposit maturities based on internal assumptions. Although NMDs are contractually floating-rate liabilities with zero maturity, banks reallocate them across different maturity buckets using models that reflect past customer behaviour. Notably, only 20% of NMDs are treated as having zero maturity, while about 10% are assigned maturities beyond seven years. We assess whether these modelling assumptions align with banks’ deposit structures. Results show that banks with more volatile, interest rate-sensitive, and digitalised deposit bases tend to assign shorter maturities, appropriately reflecting underlying risks. However, during the recent monetary policy tightening, banks with more sensitive NMDs did not shorten assumed maturities or update models. These findings underscore the critical importance of timely and accurate calibration of NMD assumptions to support effective asset-liability management and preserve financial stability

Cost efficiency in the euro area banking sector and the negative interest rate environment

This brief shows that euro area banks' cost efficiency, measured by a cost efficiency score inferred from an input-output analysis alongside the ratio of operating expenses over total assets, has improved somewhat in recent years. However, the analysis also indicates that there is still ample scope to achieve further efficiency gains. Banks most affected by the negative interest rate policy (NIRP), i.e. those relying mostly on retail deposits as a source of funding, strategically reacted to the negative effects of NIRP on their net interest margins by improving their cost efficiency. In particular, high-deposit banks that were larger, less profitable, with riskier loan portfolios, weaker pre-NIRP lending growth and that operated in more competitive banking sectors enhanced their cost efficiency more strongly after NIRP than their peers. This helped them to offset the impacts of negative interest rates on their profitability and, thus, supported their solvency and extension of credit. On the other hand, low-deposit banks recorded a decline in their cost efficiency after the introduction of the NIRP. Therefore, going forward, these latter banks will need to invest more effort in improving their efficiency

Making a virtue out of necessity : the effect of negative interest rates on bank cost efficiency

Do negative interest rates affect banks’ cost efficiency? We exploit the unprecedented intro- duction of negative policy interest rates in the euro area to investigate whether banks make a virtue out of necessity in reacting to negative interest rates by adjusting their cost efficiency. We find that banks most affected by negative interest rates responded by enhancing their cost efficiency. We also show that improvements in cost efficiency are more pronounced for banks that are larger, less profitable, with lower asset quality and that operate in more competitive banking sectors. In addition, we document that enhancements in cost efficiency are statistically significant only when breaching the zero lower bound, indicating that the pass-through of interest rates to cost efficiency is not effective when policy rates are positive. These findings hold important policy implications as they provide evidence on a beneficial second-order effect of negative interest rates on bank efficiency

Making a virtue out of necessity : the effect of negative interest rates on bank cost efficiency

Do negative interest rates affect banks’ cost efficiency? We exploit the unprecedented introduction of negative policy interest rates in the euro area to investigate whether banks make a virtue out of necessity in reacting to negative interest rates by adjusting their cost efficiency. We find that banks most affected by negative interest rates responded by enhancing their cost efficiency. We also show that improvements in cost efficiency are more pronounced for banks that are larger, less profitable, with lower asset quality and that operate in more competitive banking sectors. In addition, we document that enhancements in cost efficiency are statistically significant only when breaching the zero lower bound (ZLB), indicating that the pass-through of interest rates to cost efficiency is not effective when policy rates are positive. These findings hold important policy implications as they provide evidence on a beneficial second-order effect of negative interest rates on bank efficiency