1,300 Works

Lending Standards, Productivity and Credit Crunches

Jonathan Swarbrick
We propose a macroeconomic model in which adverse selection in investment drives the amplification of macroeconomic fluctuations, in line with prominent roles played by the credit crunch and collapse of the asset-backed security market in the financial crisis.

Determinants of Borrowing Limits on Credit Cards

Shubhasis Dey & Gene Mumy
The difference between actual borrowings and borrowing limits alone generates information asymmetry in the credit card market. This information asymmetry can make the market incomplete and create ex post misallocations. Households that are denied credit could well turn out to be ex post less risky than some credit card holders who borrow large portions of their borrowing limits. Using data from the U.S. Survey of Consumer Finances, the authors find a positive relationship between borrower...

Educational Spillovers: Does One Size Fit All?

Robert Baumann & Raphael Solomon Solomon
In a search model of production, where agents accumulate heterogeneous amounts of human capital, an individual worker's wage depends on average human capital in the searching population. Following this model, the authors use a large American panel data set to estimate a Mincerian wage equation augmented with terms for average human capital. They find that there is a positive and significant spillover effect, but that the effect differs by gender and population group (whites, blacks,...

Opaque Assets and Rollover Risk

Toni Ahnert & Benjamin Nelson
We model the asset-opacity choice of an intermediary subject to rollover risk in wholesale funding markets. Greater opacity means investors form more dispersed beliefs about an intermediary’s profitability. The endogenous benefit of opacity is lower fragility when profitability is expected to be high. However, the endogenous cost of opacity is a “partial run,” whereby some investors receive bad private signals about profitability and run, even though the intermediary is solvent. We find that intermediaries choose...

Modelling and Forecasting Housing Investment: The Case of Canada

Frédérick Demers
The author proposes and evaluates econometric models that try to explain and forecast real quarterly housing expenditures in Canada. Structural and leading-indicator models of the Canadian housing sector are described. The long-run relationship between expenditure and its determinants is shown to have shifted during the late 1970s, which implies that important changes have occurred in how the housing market is driven. The author finds that the response of housing investment to interest rates has become...

Housing and Tax-Deferred Retirement Accounts

Anson T. Y. Ho & Jie Zhou
Assets in tax-deferred retirement accounts (TDA) and housing are two major components of household portfolios. In this paper, we develop a life-cycle model to examine the interaction between households’ use of TDA and their housing decisions. The model generates life-cycle patterns of home ownership and the composition of net worth that are broadly consistent with the data from the Survey of Consumer Finances. We find that TDA promotes home ownership, as households take advantage of...

The Impact of Bankruptcy Reform on Insolvency Choice and Consumer Credit

Jason Allen & Kiana Basiri
We examine the impact of the 2009 amendments to the Canadian Bankruptcy and Insolvency Act on insolvency decisions. Rule changes steered debtors out of division I proposals and into the more cost-effective division II proposals. This also led to a significant substitution out of bankruptcies and into proposals. Using credit bureau data on credit card limits we test, but do not find, any evidence that this substitution into more creditor-friendly insolvencies had any impact on...

The Exchange Rate and Canadian Inflation Targeting

Christopher Ragan
The author provides a non-technical explanation of the role played by the exchange rate in Canada's inflation-targeting monetary policy. He reviews the motivation for inflation targeting and describes the monetary transmission mechanism. Though the exchange rate is an integral component of the transmission mechanism, the author explains why it is not a target for monetary policy. He provides a simple taxonomy for exchange rate movements, distinguishing between movements associated with direct shocks to aggregate demand...

Forecasting Canadian GDP: Region-Specific versus Countrywide Information

Frédérick Demers & David Dupuis
The authors investigate whether the aggregation of region-specific forecasts improves upon the direct forecasting of Canadian GDP growth. They follow Marcellino, Stock, and Watson (2003) and use disaggregate information to predict aggregate GDP growth. An array of multivariate forecasting models are considered for five Canadian regions, and single-equation models are considered for direct forecasting of Canadian GDP. The authors focus on forecasts at 1-, 2-, 4-, and 8-quarter horizons, which best represent the monetary policy...

Expectations and Monetary Policy: Experimental Evidence

Oleksiy Kryvtsov & Luba Petersen
The effectiveness of monetary policy depends, to a large extent, on market expectations of its future actions. In a standard New Keynesian business-cycle model with rational expectations, systematic monetary policy reduces the variance of inflation and the output gap by at least two-thirds. These stabilization benefits can be substantially smaller if expectations are non-rational. We design an economic experiment that identifies the contribution of expectations to macroeconomic stabilization achieved by systematic monetary policy. We find...

The ‘Celtic Crisis’: Guarantees, Transparency and Systemic Liquidity Risk

Philipp König, Kartik Anand & Frank Heinemann
Bank liability guarantee schemes have traditionally been viewed as costless measures to shore up investor confidence and prevent bank runs. However, as the experiences of some European countries, most notably Ireland, have demonstrated, the credibility and effectiveness of these guarantees are crucially intertwined with the sovereign’s funding risks. Employing methods from the literature on global games, we develop a simple model to explore the systemic linkage between the rollover risks of a bank and a...

Why Do Emerging Markets Liberalize Capital Outflow Controls? Fiscal versus Net Capital Flow Concerns

Joshua Aizenman & Gurnain Pasricha
In this paper, we provide empirical evidence on the factors that motivated emerging economies to change their capital outflow controls in recent decades. Liberalization of capital outflow controls can allow emerging-market economies (EMEs) to reduce net capital inflow (NKI) pressures, but may cost their governments the fiscal revenues that external financial repression generates. Our results indicate that external repression revenues in EMEs declined substantially in the 2000s compared with the 1980s. In line with this...

Countercyclical Bank Capital Requirement and Optimized Monetary Policy Rules

Carlos De Resende, Ali Dib, René Lalonde & Nikita Perevalov
Using BoC-GEM-Fin, a large-scale DSGE model with real, nominal and financial frictions featuring a banking sector, we explore the macroeconomic implications of various types of countercyclical bank capital regulations. Results suggest that countercyclical capital requirements have a significant stabilizing effect on key macroeconomic variables, but mostly after financial shocks. Moreover, the bank capital regulatory policy and monetary policy interact, and this interaction is contingent on the type of shocks that drive the economic cycle. Finally,...

Volatility Forecasting when the Noise Variance Is Time-Varying

Selma Chaker & Nour Meddahi
This paper explores the volatility forecasting implications of a model in which the friction in high-frequency prices is related to the true underlying volatility. The contribution of this paper is to propose a framework under which the realized variance may improve volatility forecasting if the noise variance is related to the true return volatility. The realized variance is defined as the sum of the squared intraday returns. When based on high-frequency returns, the realized variance...

What Central Bankers Need to Know about Forecasting Oil Prices

Christiane Baumeister & Lutz Kilian
Forecasts of the quarterly real price of oil are routinely used by international organizations and central banks worldwide in assessing the global and domestic economic outlook, yet little is known about how best to generate such forecasts. Our analysis breaks new ground in several dimensions. First, we address a number of econometric and data issues specific to real-time forecasts of quarterly oil prices. Second, we develop real-time forecasting models not only for U.S. benchmarks such...

Central Bank Communications Before, During and After the Crisis: From Open-Market Operations to Open-Mouth Policy

Ianthi Vayid
The days when secrecy and opacity were the bywords of central banking are gone. The advent of inflation targeting in the early 1990s acted as the catalyst for enhanced transparency and communications in the conduct of monetary policy. In the wake of the 2007-09 global financial crisis, this trend accelerated, resulting in further striking advances in monetary policy and financial stability communications, including markedly the emergence of extraordinary forward guidance as a distinct policy tool...

On the Value of Virtual Currencies

Wilko Bolt & Maarten van Oordt
This paper develops an economic framework to analyze the exchange rate of virtual currency. Three components are important: first, the current use of virtual currency to make payments; second, the decision of forward-looking investors to buy virtual currency (thereby effectively regulating its supply); and third, the elements that jointly drive future consumer adoption and merchant acceptance of virtual currency. The model predicts that, as virtual currency becomes more established, the exchange rate will become less...

Liquidity and Central Clearing: Evidence from the CDS Market

Joshua Slive, Jonathan Witmer & Elizabeth Woodman
An international initiative to increase the use of central clearing for OTC derivatives emerged as one of the reactions to the 2008 financial crisis. The move to central clearing is a fundamental change in the structure of the market. Central clearing will help control counterparty credit risk, but it also has potential implications for market liquidity. We analyze the relationship between liquidity and central clearing using information on credit default swap clearing at ICE Trust...

Consumer Bankruptcy and Information

Jason Allen, H. Evren Damar & David Martinez-Miera
We analyze the relationship between the intensity of banks’ use of soft-information and household bankruptcy patterns. Using a unique data set on the universe of Canadian household bankruptcies, we document that bankruptcy rates are higher in markets where the collection of soft, or qualitative locally gathered information, is the weakest. Using two Canadian bank mergers as exogenous variation in local market structure, we show that the differences in bankruptcy rates are not due to changes...

Financial Crisis Resolution

Josef Schroth
This paper studies a dynamic version of the Holmstrom-Tirole model of intermediated finance. I show that competitive equilibria are not constrained efficient when the economy experiences a financial crisis. A pecuniary externality entails that banks’ desire to accumulate capital over time aggravates the scarcity of informed capital during the financial crisis. I show that a constrained social planner finds it beneficial to introduce a permanent wedge between the deposit rate and the economy’s marginal rate...

Consumer Interest Rates and Retail Mutual Fund Flows

Jesus Sierra
This paper documents a link between the real and financial sides of the economy. We find that retail equity mutual fund flows in Canada are negatively related to current and past changes in a component of the prime and 5-year mortgage rates that is uncorrelated with government rates. The effect is present when we control for other determinants of fund flows and is more pronounced for big and old funds. The results suggest that consumers’...

Unconventional Monetary Policy and the Great Recession: Estimating the Macroeconomic Effects of a Spread Compression at the Zero Lower Bound

Christiane Baumeister & Luca Benati
We explore the macroeconomic effects of a compression in the long-term bond yield spread within the context of the Great Recession of 2007-2009 via a time-varying parameter structural VAR model. We identify a ‘pure’ spread shock defined as a shock that leaves the policy rate unchanged, which allows us to characterize the macroeconomic consequences of a decline in the yield spread induced by central banks’ asset purchases within an environment in which the policy rate...

Why Do Shoppers Use Cash? Evidence from Shopping Diary Data

Naoki Wakamori & Angelika Welte
Recent studies find that cash remains a dominant payment choice for small-value transactions despite the prevalence of alternative means of payment such as debit and credit cards. For policy makers an important question is whether consumers truly prefer using cash or merchants restrict card usage. Using the Bank of Canada’s 2009 Method of Payment Survey, we estimate a generalized multinomial logit model of payment choices to extract individual heterogeneity (demand-side factors) while controlling for merchants’...

A Model of Housing Boom and Bust in a Small Open Economy

Hajime Tomura
This paper considers a dynamic stochastic general equilibrium model for a small open economy and finds that an improvement in the terms of trade causes a housing boom-bust cycle if the duration of the improvement is uncertain. It is shown that as the economy has better access to the international financial market, the extent of the housing boom and bust gets larger. Also, an increase in the loan-to-value ratio in the domestic mortgage market tends...

Price Level versus Inflation Targeting under Model Uncertainty

Gino Cateau
The purpose of this paper is to make a quantitative contribution to the inflation versus price level targeting debate. It considers a policy-maker that can set policy either through an inflation targeting rule or a price level targeting rule to minimize a quadratic loss function using the actual projection model of the Bank of Canada (ToTEM). The paper finds that price level targeting dominates inflation targeting, although it can lead to much more volatile inflation...

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