A dynamic macroeconometric model for short-run sabilisation in India

This paper presents a small macroeconometric model examining the determinants of Indian trade and inflation to address the effects of a reform policy package similar to those implemented in 1991. This is different from previous studies along one important dimension that we explicitly incorporate the non-stationarity of the data into our model and estimation procedures, which suggest that the stationarity assumption may be a source of misspecification in previous work. So the model has been estimated using the data from 1950 to 1995 employing fully-modified Phillips-Hansen Method of estimation to obtain the cointegrating relations and short-run dynamic model. Policy simulations using dynamic simulations method compare the dynamic responses to devaluation with the responses to tight credit policy. It is shown that the trade balance effects of tight credit policy are more enduring than those of devaluation. The simulations demonstrate that the devaluation has actually worsened the trade balance and hence devaluation is not an option in response to a negative trade shock, whereas the reduction in domestic credit produces a desirable improvement in the trade balance

The real effects of financial stress in the Euro zone

Using two identification strategies based on a Bayesian Structural VAR and a Sign-Restriction VAR, we examine the real effects of financial stress in the Eurozone. In particular, we assess the macroeconomic impact of: (i) a monetary policy shock; and (ii ) a financial stress shock. We find that a monetary policy contraction strongly deteriorates financial stress conditions. In addition, unexpected variation in the Financial Stress Index (FSI) plays an important role in explaining output fluctuations, and also demands an aggressive response by the monetary authority to stabilise output indicating a preference shift from targeting inflation as it is currently happening in major economies. Therefore, our paper reveals the importance of adopting a vigilant posture towards financial stress conditions, as well as the urgency of macro-prudential risk management.monetary policy, financial stress, Bayesian Structural VAR, Sign-Restrictions, Euro-zone.

Monetary Policy Rules in the BRICS: How Important is Nonlinearity?

Given limited research on monetary policy rules in emerging markets, this paper estimates monetary policy rules for five key emerging market economies: Brazil, Russia, India, China and South Africa (BRICS) analysing whether the monetary authority reacts to changes in financial markets, in monetary conditions, in the foreign exchange sector and in the commodity price. To get a deeper understanding of the central bank’s behaviour, we assess the importance of nonlinearity using a smooth transition (STAR) model. Using quarterly data, we find strong evidence that the monetary policy followed by the Central Banks in the BRICS varies from one country to another and that it exhibits nonlinearity. In particular, considerations about economic growth (in the cases of Brazil and Russia), inflation (for India and China) and stability of financial markets (in South Africa) seem to be the major drivers of such nonlinear monetary policy behaviour. Moreover, the findings suggest that the monetary authorities pursue, with the exception of India, a target range for the threshold variable rather than a specific point target. In fact, the exponential smooth transition regression (ESTR) model seems to be the best description of the monetary policy rule in these countries.monetary policy, emerging markets, smooth transition.

Is technology factor-neutral? Evidence from the US manufacturing sector

This paper analyses the neutrality of technology using data from the NBER-CES Manufacturing industry database. We show that technology has a positive effect on the skilled-to-unskilled labour and wage ratios, offering a skill-premium for these skilled workers. We also find that technology has become more favourable towards skilled labour since the eighties, thereby, explaining the rise in the relative abundance of skilled workers. Finally, differences in productivity among the two labour inputs are important when they are relatively poor substitutes, despite the increase in the elasticity of substitution between unskilled and skilled labour that occurred over the past decades.Fundação para a Ciência e a Tecnologia (FCT

The non-monotonic impact of bank size on their default swap spreads: cross-country evidence

This paper studies the drivers of bank's credit default swap (CDS) spread, taken as a measure of credit risk, by considering the impact of housing market along with a number of bank level determinants, such as regulatory capital, leverage, size, liquidity, asset quality and operations income ratio. We build upon a unique dataset consisting of 115 banks (during pre- and post-crisis periods) headquartered in 30 countries from both developed and emerging countries. Results suggest that CDS spread is driven by asset quality, liquidity and operations income ratio, while bank size is found to have a non-monotonic impact on CDS spread. If the bank is small, an increase in size reduces the average credit risk. If the bank is large enough, an increase in size raises the latter. From our results we derive the level of bank size that minimizes the CDS spreads. Financial institutions growing beyond this threshold are subject to higher credit risk, implying that smaller and medium sized banks are safer than large banks. When considering the estimates in the periods before and after the 2007 crisis, we further find a different extreme point of bank size in the former (approximately 1642 billion Euros) relative to a significantly lower level of optimal bank size (around 70 billion) in the post-crisis period, implying too-big-to-fail and too-big-to-save in the pre-crisis regime

Pay transparency intervention and the gender pay gap: evidence from research‐intensive universities in the UK

This study investigates the impact of a pay transparency intervention in reducing the gender pay gap in the UK university sector. Introduced in 2007, the initiative enabled public access to average annual earnings disaggregated by gender in UK universities. We use a detailed matched employee-employer administrative dataset that follows individuals over time, allowing us to adopt a quasi-experimental approach based on event studies around the intervention. We find that the earnings of female academics increased by around 0.62 percentage points compared to their male counterparts as the control group, whose earnings remained constant after the pay transparency intervention, reducing the gender pay gap by 4.37 per cent. Further evidence suggests that the main mechanism for the fall in the pay gap is driven by female employees negotiating higher wages, particularly among senior female academics

Bank credit risk and macro-prudential policies: role of counter-cyclical capital buffer

This paper investigates the impact of macro-prudential policy (proxied by the counter-cyclical capital buffer (CCyB)) on bank credit risk during uncertain times, as banking sector stability is crucial in promoting financial intermediation. Using a unique daily data set consisting of 4939 credit default swaps (CDS) of 70 banks from 25 countries over the period 2010–2019, we find that CCyB tightening decreases bank-level CDS spreads, while CCyB loosening increases CDS spreads. This heterogeneous effect of CCyB arises due to its asymmetric effect on the capital ratio (i.e., the equity-to-total assets ratio) of banks. Tightening CCyB significantly increases capital, whereas loosening CCyB does not impact capital. Thus, the risks that emanate from the banking sector during periods of heightened uncertainty and financial distress can be significantly dampened when CCyB regulation is enabled. Consequently, macro-prudential policies for banks to hold higher levels of capital during good times are justified to contain financial market risks during downturns

Does local knowledge spillover matter for firm productivity? The role of financial access and corporate governance

Global productivity growth has either stagnated or declined, despite continued technological innovations with the rise of knowledge-intensive intangibles that arise from the growth of knowledge stock (R&D activities). Understanding the root causes of this paradox in the context of growing economies requires an investigation of whether local knowledge diffusion can explain firm-level productivity differences, including key constraining factors like sources of financing or corporate governance structure. Using financial data of 7970 Indian firms over a 20-year period and clustering firms across industries, we assess the impact of R&D stock that is external to the firm through estimating both within (intra) and between (inter) industry spillovers. We find that both R&D and non-R&D-performing firms benefit from ‘between industry’ spillovers. We further show that firms with better access to finance achieve higher productivity, not only through their own R&D capital stock but also via both types of industry-level knowledge spillover. We allow for the two key sources of international spillovers namely import intensity and FDI. While import-intensive firms experience lower productivity, FDI mitigates this adverse productivity effect across knowledge-intensive exporting firms. The paper concludes that financially unconstrained firms and firms with greater corporate board connectedness derive positive industry-level spillover effects, reflecting intra- and inter-industry as domestic spillover or local value-chain effect in the literature on technological innovation

Inclusive banking, financial regulation and bank performance: cross-country evidence

This paper investigates whether inclusive banking can boost bank-level performance, using an international sample of 1,740 banks over the period 2004-2015. We find that there is a significant positive association between financial inclusion and bank efficiency. Greater financial inclusion helps banks in reducing the volatility of their deposit-funding share as it provides more stable long-term funds for banks, while also mitigating the adverse effects of their return volatility. The association is stronger in countries with limited restrictions on banking activities or more capital regulation stringency as the deposit channel enables greater flow of low-cost funds for high-return investments. The results are robust to instrumental variable analysis, multiple dimensions of financial inclusion (supply, demand, and pro-access policy), and a difference-in-differences estimator that exploits cross-country and temporal variations in actively promoting an inclusive agenda, further confirming that inclusive financial development can be beneficial for banks