Banking Concentration: Implications for Systemic Risk and Safety Net Design

This paper explores the impact of banking concentration on safety net design –in particular, deposit insurance– and on systemic risk. The paper focuses on a system characterized by high concentration and low total number of banks. Each issue is addressed separately. The first section discusses best practices in deposit insurance design and derives conclusions for the case we are interested in. One is that in this context deposit insurance cannot be thought of as a stand-alone instrument, but rather must be understood as an element of the intervention and resolution policy. The second part of the paper studies systemic risk in such a system, using the Eisenberg and Noe (2001) approach to model and study risk in a network of banks. A working metric of the “too big to fail” situation can be derived in the model. More importantly, this section shows how the risk of idiosyncratic shocks spreading through the system are substantially higher in concentrated systems than in decentralized ones. Finally, the paper proposes and evaluates a specific regulatory measure that successfully contains systemic risk.

Tax Incentives for Retirement Savings: Macro and Welfare Effects in an OLG-GE Model with Liquidity Constraints and Heterogeneous Consumers.

This paper uses an Overlapping Generations-General Equilibrium model to study the impact of the introduction of tax incentives to voluntary savings for retirement in Chile. The paper analyzes the macro impact of the reform, driven mainly by its effect on savings and capital accumulation, and its effect on welfare. A setting with heterogeneous consumers is considered where agents differ in their income levels, and therefore on the relevance that tax-incentives have for them. Both the transition and the final steady state are analyzed. The heterogeneity modeled allows unveiling important distributive effects of the reform, in particular during the transition to the new steady state.

How Does Pension Reform Affect Savings and Welfare

This paper explores the effects of pension reform on precautionary savings, wealth accumulation and welfare. The impact of pension programs on income uncertainty through life has been largely ignored in the literature of precautionary savings and pension reform. This paper uses dynamic programming techniques to solve for the optimal consumption of a worker that faces uncertainty on labor and retirement income. Subsequently, with parameter values for the U.S., I study the impact of two policies on workers with different on educational levels. One is the elimination of redistribution in the current benefits formula. The second is the change from system defined in benefits (DB) to one defined in contributions (DC). In the first case, results show that redistribution is valued positively by all types of agents, even by those who expect losses from it, given their expected income. As a consequence, workers increase their savings to prepare for the increased uncertainty. The increase in aggregate savings is in the order of 4%. The second case has the opposite consequences. Welfare increases with the adoption of the DC system because it has superior insurance properties. The advantage consists in that periods on which the variance of income is lower receive a higher weight in the calculation of benefits. Precautionary savings are reduced with a fall in aggregate savings of 1.4%.

Concentration of Population in Capital Cities: Determinants and Economic Effects

This paper studies the impact and determinants of the concentration of population in capital cities across countries. Fast population growth in capital cities is a widespread phenomenon that does not seems to be explained by economic factors. In addition, this fact violates Zipf’s law, a strong empirical regularity in the distribution of city sizes. The paper addresses first the impact of this fact on economic growth. A model is built to study the consequences of distortions in the spatial allocation of resources in production. The empirical results show a negative correlation between this distortion and economic growth. The second part of the paper studies the determinants of this phenomenon. Three hypotheses advanced in the literature are tested. The results show that trade barriers do not explain concentration in capitals, nor does political instability. Both results are robust and oppose previous findings in the literature. This paper finds support to the hypothesis that concentration in capitals can be explained by weak political rights in the population.

FinanciaL Stability, Monetary Policy and Central Banking: an Overview

This overview presents an integrated summary of the works presented at the twelfth annual conference of the Central Bank of Chile, Financial Stability, Monetary Policy and Central Banking,” held in November 2008 and to be compiled into a forthcoming book. The works, that include both theoretical and empirical aspects, contribute elements for financial stability management within the context of global financial integration.

Financial Stability, Monetary Policy and Central Banking: An Overview

This paper summarizes the works presented at the twelfth Annual Conference at the Central Bank of Chile entitled “Financial Stability, Monetary Policy and Central Banking”, held in November 2008 and compiled in a forthcoming book. These works, that include both theoretical and empirical aspects, provide elements to handle financial stability in a globally integrated financial context.