9 Works

Quantifying Contagion Risk in Funding Markets: A Model-Based Stress-Testing Approach

Kartik Anand, Céline Gauthier & Moez Souissi
We propose a tractable, model-based stress-testing framework where the solvency risks, funding liquidity risks and market risks of banks are intertwined. We highlight how coordination failure between a bank’s creditors and adverse selection in the secondary market for the bank’s assets interact, leading to a vicious cycle that can drive otherwise solvent banks to illiquidity. Investors’ pessimism over the quality of a bank’s assets reduces the bank’s recourse to liquidity, which exacerbates the incidence of...

Changes in the Effects of Monetary Policy on Disaggregate Price Dynamics

Christiane Baumeister, Philip Liu & Haroon Mumtaz
We examine the evolution of the effects of monetary policy shocks on the distribution of disaggregate prices and quantities of personal consumption expenditures to assess the contribution of monetary policy to changes in U.S. inflation dynamics. Given that the transmission of monetary policy to aggregate inflation is determined by the responses of its underlying components, the degree of monetary non-neutrality is ultimately the result of relative price effects at the sectoral level. We provide evidence...

Commodities and Monetary Policy: Implications for Inflation and Price Level Targeting

Don Coletti, René Lalonde, Paul Masson, Dirk Muir & Stephen Snudden
We examine the relative ability of simple inflation targeting (IT) and price level targeting (PLT) monetary policy rules to minimize both inflation variability and business cycle fluctuations in Canada for shocks that have important consequences for global commodity prices. We find that commodities can play a key role in affecting the relative merits of the alternative monetary policy frameworks. In particular, large real adjustment costs in energy supply and demand induce highly persistent cost-push pressures...

Oil Price Movements and the Global Economy: A Model-Based Assessment

Selim Elekdag, René Lalonde, Douglas Laxton, Dirk Muir & Paolo Pesenti
We develop a five-region version (Canada, an oil exporter, the United States, emerging Asia and Japan plus the euro area) of the Global Economy Model (GEM) encompassing production and trade of crude oil, and use it to study the international transmission mechanism of shocks that drive oil prices. In the presence of real adjustment costs that reduce the short- and medium-term responses of oil supply and demand, our simulations can account for large endogenous variations...

Emergency Liquidity Facilities, Signalling and Funding Costs

Céline Gauthier, Alfred Lehar, Héctor Pérez Saiz & Moez Souissi
In the months preceding the failure of Lehman Brothers in September 2008, banks were willing to pay a premium over the Federal Reserve’s discount window (DW) rate to participate in the much less flexible Term Auction Facility (TAF). We empirically test the predictions of a new signalling model that offers a rationale for offering two different liquidity facilities. In our model, illiquid yet solvent banks need to pay a high cost to access the TAF...

Geographical and Cultural Proximity in Retail Banking

Santiago Carbo-Valverde, Hector Perez-Saiz & Hongyu Xiao
This paper measures how both geographical and cultural proximity of bank branches affect household credit choice and pricing. We examine both types of proximity jointly to separately identify the importance of soft information versus alternative mechanisms. Using a detailed household-level database for Canada, we find that both geographical and cultural proximity increase consumer credit by reducing the cost of obtaining soft information. Furthermore, soft information obtained via the two types of proximity can be either...

Alternative Trading Systems: Does One Shoe Fit All?

Nicolas Audet, Toni Gravelle & Jing Yang
This paper examines the factors that lead liquidity-motivated investors to choose the type of market structure they prefer. We assume that investors can choose between a dealership and a limit-order-book market. This study builds a theoretical model for both the dealership and order-book markets and develops a numerical method to solve the Nash equiibrium strategies of heterogeneous market participants. We find that a dealership market would be preferred by investors in an environment where customer...

Growth in Emerging Market Economies and the Commodity Boom of 2003–2008: Evidence from Growth Forecast Revisions

Elif C. Arbatli & Garima Vasishtha
Demand for industrial raw materials from emerging economies, particularly emerging Asia, is widely believed to have fueled the surge in oil and industrial commodity prices during 2002-2008. The paper first presents a simple storage model in which commodity prices respond to market participant’s changing expectations of the future macroeconomic environment. In the model, the change in the price of a commodity depends on the unanticipated changes in demand factors, along with the real exchange rate,...

Understanding Post-COVID Inflation Dynamics

Martín Harding, Jesper Lindé & Mathias Trabandt
We propose a macroeconomic model with a nonlinear Phillips curve that has a flat slope when inflationary pressures are subdued and steepens when inflationary pressures are elevated. The nonlinear Phillips curve in our model arises due to a quasi-kinked demand schedule for goods produced by firms. Our model can jointly account for the modest decline in inflation during the Great Recession and the surge in inflation post-COVID-19. Because our model implies a stronger transmission of...

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