infrastructure investment the cost of capital and regulation an assessment the paper considers the role of infrastructure in improving economic performance and its compar ative neglect relative to traditional macroeconomic and microeconomic policies it explains why infrastructure matters why britain s infrastructure performance has been poor and summarizes the scale of the challenge for the coming decade privatization liberalization and competition have focused on monopoly market failure and private incentives but they have neglected the time inconsistency problem which confronts investors in networks with high fixed and sunk costs the failure to commit which has characterized british approaches to infrastructure has been partially addressed through the creation of regulated asset bases rabs backed up by the duty on regulators to ensure that functions can be financed the paper considers how the rabs can be developed to provide credible long term contracts over a wide range of activities and how the financial regu latory regime can complement this commitment notably through the split cost of capital and the indexation of the cost of debt approaches the paper concludes by setting out the building blocks of a credible regulatory framework for infrastructure together with the impacts on reducing the cost of capital the role of the state in reinforcing this commitment and the associated institutions are also set out

liquidity at risk joint stress testing of solvency and liquidity abstract the traditional approach to the stress testing of financial institutions focuses on capital adequacy and solvency liquidity stress tests have been applied in parallel to and independently from solvency stress tests based on scenarios which may not be consistent with those used in solvency stress tests we propose a structural framework for the joint stress testing of solvency and liquidity our approach exploits the mechanisms underlying the solvency liquidity nexus to derive relations between solvency shocks and liquidity shocks these relations are then used to model liquidity and solvency risk in a coherent framework involving external shocks to solvency and endogenous liquidity shocks arising from these solvency shocks we define the concept of liquidity at risk which quantifies the liquidity resources required for a financial institution facing a stress scenario finally we show that the interaction of liquidity and solvency may lead to the amplification of equity losses due to funding costs which arise from liquidity needs

banking panics information and rational expectations equilibrium this paper shows that bank runs can be modeled as an equilibrium phenomenon we demonstrate that some aspects of the intuitive story that bank runs start with fears of insolvency of banks can be rigorously modeled if individuals observe long lines at the bank they correctly infer that there is a possibility that the bank is about to fail and precipitate a bank run however bank runs occur even when no one has any adverse information extra market constraints such as suspension of convertibility can prevent bank runs and result in superior allocations banking panics were a recurrent phenomenon in the united states until the 1930s they have re emerged as a source of public concern and much theoretical research recently in this paper we provide an information theoretic rationale for bank runs the traditional story is that contagion is an important aspect of bank runs the idea seems to be that when the general public observes large withdrawals from the banking system fears of insolvency grow resulting in even larger withdrawals of deposits in our model some individuals withdraw because they get information that future returns are likely to be low uninformed individuals observing this also have an incentive to liquidate their investments in addition some individuals need to withdraw deposits for other than informationally based reasons thus if the random realization of such a group of individuals is unusually large then the uninformed individuals will be misled and will precipitate a run on the bank the technology is such that a large volume of withdrawals involves liquidation costs consequently runs on the bank do impose social costs a mechanism that may reduce these costs in our model is to suspend convertibility if withdrawals are high however those individuals who need to withdraw their assets for liquidity reasons are worse off ex post our model provides a rationalization for restrictions in demand deposits that were widespread prior to 1929 friedman and schwartz 7 suggest that restrictions of payments ensured

nonmonetary effects of the financial crisis in propagation of the great depression this paper examines the effects of the financial crisis of the 1930s onthe path of aggregate output during that period our approach is complementary to that of friedman and schwartz who emphasized the monetary impact of the bank failures we focus on non monetary primarily credit related aspects of the financial sector output link and consider the problems of debtors as well as those of the banking system we argue that the financial disruptions of 1930 33 reduced the efficiency of the credit allocation process and that the resulting higher cost and reduced availability of credit acted to depress aggregate demand evidence suggests that effects of this type can help explain the unusual length and depth of the great depression this abstract was borrowed from another version of this item

network models and financial stability abstract systemic risk is a key concern for central banks charged with safeguarding overall financial stability in this paper we investigate how systemic risk is affected by the structure of the financial system we construct banking systems that are composed of a number of banks that are connected by interbank linkages we then vary the key parameters that define the structure of the financial system including its level of capitalisation the degree to which banks are connected the size of interbank exposures and the degree of concentration of the system and analyse the influence of these parameters on the likelihood of knock on defaults first we find that the better capitalised banks are the more resilient is the banking system against contagious defaults and this effect is non linear second the effect of the degree of connectivity is non monotonic i e initially a small increase in connectivity increases the contagion effect but after a certain threshold value connectivity improves the ability of a banking system to absorb shocks third the size of interbank liabilities tends to increase the risk of knock on default even if banks hold capital against such exposures fourth more concentrated banking systems are shown to be prone to larger systemic risk all else equal in an extension to the main analysis we study how liquidity effects interact with banking structure to produce a greater chance of systemic breakdown we finally consider how the risk of contagion might depend on the degree of asymmetry tiering inherent in the structure of the banking system a number of our results have important implications for public policy which this paper also draws out

further evidence on the relationship between federal government debt and inflation does an increase in the federal debt cause inflation dwyer 1982 using a par value measure of debt finds no support for such a causal link cox 1985 using a market value measure finds evidence that increases in debt produce higher inflation rates we reconcile these results by demonstrating that failure to capture the interest rate effects inherent in the market value measure accounts for the finding that debt causes inflation incorporating interest rates into our test equations using the market value series leads us to conclude that like the par value series results increases in federal debt do not cause higher rates of inflation

on avoiding bank runs abstract can bank runs be avoided and should they be avoided i analyze a banking environment where bank runs can occur as a result of negative signals about the bank s investments in this environment banks can make sure that runs do not occur by designing the deposit contract appropriately i show that there are conditions under which it is profit maximizing for the bank to avoid runs and others under which occasional runs are part of optimal bank behavior i also compare the banking arrangement to an arrangement based on trading in equity

exchange rate regimes banking and the non tradable sector abstract this paper presents a small open economy two good version of the diamond and dybvig model with cash constraints to analyze the implications on banking of different exchange rate regimes and monetary policies i show that fixed exchange rates with a central bank providing liquidity in local currency imply pareto efficiency with conditions for a run equilibrium stronger than in the literature in a flexible exchange rate regime multiple equilibria may not be eliminated in particular for very a expansive monetary policy there exists an equilibrium where a fraction of patient consumers purchases dollars in the interim period which constitutes a partial currency run a dollarized banking system without international short run credit may also implement the efficient allocation under certain conditions

liquidity risk and policy options abstract on the basis of a liquidity management model liquidity risks defined as the probability of payment failures in a real time gross settlement rtgs payment system may either stem from liquidity management inefficiencies or insufficient cash balances i will show that penalties charged on the amount of payment failures minimise liquidity risks without interfering with the bank s technology preferences i will instead show that liquidity requirements although as effective as penalties to contain the risk of liquidity shortage may distort the bank s technology preferences and cannot stem liquidity management inefficiencies i will also show that liquidity risks within rtgs payment systems are potentially smaller because they depend more on the liquidity management efficiency than on the randomness of cash inflows and outflows

information acquisition coordination and fundamentals in a financial crisis abstract this paper reconciles the two explanations of a financial crisis the self fulfilling prophecy and the fundamental causes in an empirically relevant framework by explicitly modeling the costly voluntary acquisition of information about fundamentals in a variant of diamond and dybvig diamond d dybvig p 1983 bank runs deposit insurance and liquidity journal of political economy 91 401 419 the model exhibits strategic complementarity in information acquisition in the partial run equilibrium investors engage in costly evaluation of projects so that banks with lower return projects fail there also exist the classic full run and no run equilibria in which there is no project evaluation investors coordination on a specific equilibrium is triggered by a self fulfilling prophecy so financial crises are seen as both fundamentals based and self fulfilling prophecies based phenomena

financing investment in the european electricity transmission network consequences on long term sustainability of the tsos financial structure this article focuses on the ability of european tsos to meet the demand for substantial investments in the electricity transmission grid over the next two decades we employ quantitative analysis to assess the impact of the required capital expenditures under a set of alternative financing strategies we consider a best case scenario of full cooperation between the european tsos it appears that under current trends in the evolution of transmission tariffs only half the volumes of investment currently planned could be funded a highly significant increase in transmission tariffs will be required to ensure the whole scale investments can be delivered finally alternative strategies can dampen the impact on tariffs but they can only partially substitute for this increase in charges paid by network users

a model of the topology of the bank firm credit network and its role as channel of contagion this paper proposes a stochastic model of a bipartite credit network between banks and the non bank corporate sector that encapsulates basic stylized facts found in comprehensive data sets for bank firm loans for a number of countries when performing computational experiments with this model we find that it shows a pronounced non linear behavior under shocks the default of a single unit will mostly have practically no knock on effects but might lead to an almost full scale collapse of the entire system in a certain number of cases the dependency of the overall outcome on firm characteristics like size or number of loans seems fuzzy distinguishing between contagion due to interbank credit and due to joint exposures to counterparty risk via loans to firms the later channel appears more important for contagious spread of defaults

rollover risk as market discipline a two sided inefficiency abstract why does the market discipline that financial intermediaries face seem too weak during booms and too strong during crises this paper shows in a general equilibrium setting that rollover risk as a disciplining device is effective only if all intermediaries face purely idiosyncratic risk however if assets are correlated a two sided inefficiency arises good aggregate states have intermediaries taking excessive risks while bad aggregate states suffer from costly fire sales the driving force behind this inefficiency is an amplifying feedback loop between asset values and market discipline in equilibrium financial intermediaries inefficiently amplify both positive and negative aggregate shocks

reprint of central bank collateral frameworks abstract this paper seeks to inform about a feature of monetary policy that is largely overlooked yet occupies a central role in modern monetary and financial systems namely central bank collateral frameworks their importance can be understood by the observation that the money at the core of these systems central bank money is injected into the economy on terms not defined in a market but by the collateral frameworks and interest rate policies of central banks using the collateral framework of the eurosystem as a basis of illustration and case study the paper brings to light the functioning reach and impact of collateral frameworks a theme that emerges is that collateral frameworks may have distortive effects on financial markets and the wider economy they can for example bias the private provision of real liquidity and thereby also the allocation of resources in the economy as well as contribute to financial instability evidence is presented that the collateral framework in the euro area promotes risky and illiquid collateral and more generally impairs market forces and discipline the paper also emphasizes the important role of ratings and government guarantees in the eurosystem s collateral framework

unique equilibrium in a model of self fulfilling currency attacks even though self fulfilling currency attacks lead to multiple equilibria when fundamentals are common knowledge we demonstrate the uniqueness of equilibrium when speculators face a small amount of noise in their signals about the fundamentals this unique equilibrium depends not only on the fundamentals but also on financial variables such as the quantity of hot money in circulation and the costs of speculative trading in contrast to multiple equilibrium models our model allows analysis of policy proposals directed at curtailing currency attacks

res diffusion and r d investments in the flexibilisation of the european electricity networks abstract the present analysis adds up to the discussion carried around the flexibilisation of the electricity networks as means of higher diffusion of renewable energy sources res inspiring from innovation studies the paper proposes an economic rationale for considering res technology manufacturers as investors in electricity networks moreover the present analysis scrutinize the extent to which the various economic operators within specific segments of the power supply chain invest in a portfolio of research and development activities among which the electricity grids and storage technologies the intensity of these research investments was mapped across the european countries for the year of 2011 their geographic distribution confirms the rationale of an analysis based on canonical correlation testing the associations between res market diffusion and power network indicators the analysis provides useful insights for specific technology such as the one revealing pv market sensitivity to research investments in storage technologies confirming a potential business model coupling the two technologies accommodating this pattern and enabling further diversification of research portfolios the public incentives could be redesigned in order to address the flexibilisation of power networks

evaluating theories of bank runs with heterogeneity restrictions this paper empirically tests theories of bank runs we use a structural panel var to extract runs from deposit market data identification exploits cross sectional heterogeneity in deposit insurance we identify bank runs as adverse deposit market supply shocks hitting uninsured banks harder compared to insured conditional on a run we study the behavior of uninsured banks with bad and good fundamentals we find that both experience runs but deposit outflows at the former are more severe panic effects which affect all uninsured deposits alike irrespective of fundamentals dominate in the aggregate insured banks partially absorb the outflow of uninsured deposits

the role of finance in environmental innovation diffusion an evolutionary modeling approach abstract the implementation of climate adaptation and mitigation policies depend on the development of green technologies whose diffusion is constrained by a number of barriers which prevent them to spread broadly and at a fast pace by means of an agent based computational model the paper investigates the macro and micro economic dynamics considering the role of a traditional commercial bank and a state investment bank that explicitly supports green investments simulation results emphasize that green finance matter and that the market diffusion of environmental innovation is more pronounced when the presence of the public investment bank is combined with strong consumers preferences oriented towards environmental quality the relevance of the paper is twofold besides contributing to the literature on the finance innovation nexus by considering the role of climate finance within a complex systems framework it provides a model that can be used as a tool to explore policies to foster environmental innovation diffusion

distinguishing panics and information based bank runs welfare and policy implications in this paper we contrast panics and information based bank runs in an effort to provide a robust and empirically plausible model of how bank runs are triggered the model of information based runs is characterized by two sided asymmetric information the bank cannot observe the true liquidity needs of the depositors while depositors are asymmetrically informed about bank asset quality we also examine the relative degrees of risk sharing provided by bank deposit contracts and traded equity contracts we show that the choice of deposit or equity depends on the attributes of and information about the underlying investment returns

aig in hindsight the near failure on september 16 2008 of american international group aig was an iconic moment in the financial crisis two large bets on real estate made with funding vulnerable to bank run like dynamics pushed aig to the brink of bankruptcy aig used securities lending to transform insurance company assets into residential mortgage backed securities and collateralized debt obligations ultimately losing at least 21 billion and threatening the solvency of the life insurance companies aig also sold insurance on multisector collateralized debt obligations backed by real estate assets ultimately losing more than 30 billion these activities were apparently motivated by a belief that aig s real estate bets would not suffer defaults and were money good we find that these securities have in fact suffered write downs and that the stark money good claim can be rejected ultimately both liquidity and solvency were issues for aig

bank runs as an equilibrium phenomenon a standard demand deposit contract in which individuals are entitled to their full deposit at any time provided the bank is solvent is analyzed in a context in which there are no exogenous events on which agents condition their behavior and a unique equilibrium involving a bank run with positive probability is shown to exist

microprudential regulation in a dynamic model of banking this paper studies the quantitative impact of microprudential bank regulations on bank lending and value metrics of efficiency and welfare in a dynamic model of banks that are financed by debt and equity undertake maturity transformation are exposed to credit and liquidity risks and face financing frictions we show that 1 there exists an inverted u shaped relationship between bank lending welfare and capital requirements 2 liquidity requirements unambiguously reduce lending efficiency and welfare and 3 resolution policies contingent on observed capital such as prompt corrective action dominate in efficiency and welfare terms noncontingent capital and liquidity requirements

the impact of us economic variables on bank of canada policy direct and indirect responses abstract the impact of us economic variables on canadian monetary policy is assessed using quarterly data for 1963 88 canadian monetary base growth is regressed upon the least squares predictors of 11 us and canadian variables using a generalized least squares procedure that permits isolation of i direct responses by the monetary authority to its expectations of the us variables and ii indirect responses to past us influences that impact upon the current fitted values of the canadian variables the results reveal significance of both direct and indirect us influences on canadian policy across fixed and floating exchange rate regimes

domestic and international financial market responses to federal deficit announcements abstract this study examines the response of domestic and international financial variables to announced changes in federal deficit projections over the 1981 1994 period as observed in earlier studies rates on us treasury securities responded positively to announced increases in federal deficit projections new evidence shows that deficit effects are transmitted internationally with foreign long term interest rates also increasing in response to announced increases in us deficit projections the exchange value of the dollar tends to be positively related to announced changes in deficit projections but that result appears to be related to the degree of insulation of foreign financial markets from us financial markets finally the price of gold responded positively to announced changes in deficit projections taken together the results suggest that higher projected deficits raise real interest rates in part because of an increase in an inflation risk premium

government deficits and money growth additional empirical evidence is provided concerning the impact of government financing decisions on monetary expansion in the united states for the post world war ii period the budget position of the fiscal authority and the rate of money growth set by the fed are specified as endogenous variables within a system of equations the empirical analysis generates evidence of a policy shift in the 1980s with budget deficits exerting no independent influence on high powered money growth prior to 1981 while after 1981 such a linkage is found to exist copyright 1990 by mit press

optimal financial crises empirical evidence suggests that banking panics are related to the business cycle and are not simply the result of sunspots panics occur when depositors perceive that the returns on bank assets are going to be unusually low we develop a simple model of this in this setting bank runs can be first best efficient they allow efficient risk sharing between early and late withdrawing depositors and they allow banks to hold efficient portfolios however if costly runs or markets for risky assets are introduced central bank intervention of the right kind can lead to a pareto improvement in welfare from the earliest times banks have been plagued by the problem of bank runs in which many or all of the bank s depositors attempt to withdraw their funds simultaneously because banks issue liquid liabilities in the form of deposit contracts but invest in illiquid assets in the form of loans they are vulnerable to runs that can lead to closure and liquidation a financial crisis or banking panic occurs when depositors at many or all of the banks in a region or a country attempt to withdraw their funds simultaneously prior to the twentieth century banking panics occurred frequently in europe and the united states panics were generally regarded as a bad thing and the development of central banks to eliminate panics and ensure financial stability has been an important feature of the history of financial systems it has been a long and involved process the first cerntral bank the bank of sweden was established more than 300 years ago the bank of england played an especially important role in the development of effective stabilization policies in the eighteenth and nineteenth centuries by the end of the nineteenth century banking panics had been eliminated in europe the last true panic in england was the overend gurney company crisis of 1866

currency elasticity and banking panics theory and evidence existing models of banking panics contain no role for monetary factors and fail to explain why some banking systems experienced panics while others did not a monetary model is constructed where seasonal variations in the demand for liquidity and credit play a critical role in generating banking panics these panics occur when there are restrictions on the issue of currency in private banks but they do not occur if banks are unrestricted empirical evidence from canada and the united states for the period 1880 1910 is largely consistent with the predictions of the model

the creditor channel of liquidity crises this paper presents a model to study the transmission of liquidity shocks across financial institutions through the creditor channel in the model a borrower institution obtains funds from a large institutional lender and small investors when the large lender s asset market is hit by a liquidity shock it might decide to withdraw funding extended to the borrower the potential withdrawal by the large lender causes small investors to panic and to close positions even if the large lender does not facing funding problems the borrower has to cut its activities contributing to further shocks to the supply of market liquidity the original shock is exacerbated which reinforces withdrawals by all creditors the model helps explain how the spreading of liquidity shocks from the broker dealer sector to the hedge fund sector and the feedback contribute to a systemic crisis

money financial stability and efficiency most analyses of banking crises assume that banks use real contracts however in practice contracts are nominal and this is what is assumed here we consider a standard banking model with aggregate return risk aggregate liquidity risk and idiosyncratic liquidity shocks we show that with non contingent nominal deposit contracts the first best efficient allocation can be achieved in a decentralized banking system what is required is that the central bank accommodates the demands of the private sector for fiat money variations in the price level allow full sharing of aggregate risks an interbank market allows the sharing of idiosyncratic liquidity risk in contrast idiosyncratic bank specific return risks cannot be shared using monetary policy alone real transfers are needed

bank runs the deposit currency ratio and the interest rate abstract this paper provides a model of an economy with a banking system which is subject to bank runs the model is then used to explain the rise in short term interest rates during bank runs and the fall in the deposit currency ratio in anticipation of possible runs

financial integration and liquidity crises this paper analyzes the effects of financial integration on the stability of the banking system financial integration allows banks in different regions to smooth local liquidity shocks by borrowing and lending on a world interbank market we show under which conditions financial integration induces banks to reduce their liquidity holdings and to shift their portfolios toward more profitable but less liquid investments integration helps reallocate liquidity when different banks are hit by uncorrelated shocks however when a correlated systemic shock hits the total liquid resources in the banking system are lower than in autarky therefore financial integration leads to more stable interbank interest rates in normal times but to larger interest rate spikes in crises these results hold in a setup in which financial integration is welfare improving from an ex ante point of view we also look at the model s implications for financial regulation and show that in a second best world financial integrati

the transmission of inflation in a small economy an empirical analysis of the influence of us monetary disturbances on canadian inflation 1962 1980 abstract the paper examines the transmission of inflation in canada during 1962 1980 using an empirical methodology which is very flexible in determining the direction of casuality and the shape of distributed lag effects the paper finds that us monetary growth exerted an important effect on canadian inflation during both fixed and flexible exchange rate periods the evidence also shows that canadian monetary growth has remained linked to us monetary growth under the present flexible exchange rate regime

testing interest rate parity and rational expectations for canada and the united states the purpose of this paper is to examine the joint hypothesis of interest rate parity and rational expectations for canada and the united states using monthly data two approaches to testing are considered 1 the substitution method and 2 testing the cross equation non linear rational expectations restrictions from solving the interest rate parity equation it is demonstrated that standard application of the substitution method requires the assumption that the interest rate parity equation holds deterministically tests for unit roots in the spot exchange rate and interest rate differentials are also investigated

rollover risk liquidity and macroprudential regulation i study rollover risk in wholesale funding markets when intermediaries hold liquidity ex ante and fire sales may occur ex post multiple equilibria exist in a global rollover game intermediate liquidity holdings support equilibria with both positive and zero expected liquidation a simple uniqueness refinement pins down the private liquidity choice which balances the forgone expected return on investment with reduced fragility and costly liquidation due to fire sales liquidity holdings are strategic substitutes intermediaries free ride on the holdings of other intermediaries causing excessive liquidation to internalize the systemic nature of liquidity a macroprudential authority imposes liquidity buffers

liquidity provision banking and the allocation of interest rate risk abstract the paper studies the efficient allocation of technology induced interest rate risk and the implications of such risk for efficient liquidity provision complete immunization against interest rate risk is shown to be undesirable as it precludes the exploitation of favourable reinvestment opportunities under the assumptions of diamond dybvig 1983 interest induced valuation risks of long term assets should be born by early withdrawers reinvestment opportunity risks of short term assets by late withdrawers efficient liquidity provision thus entails no shifting of interest rate risk in the absence of additional moral hazard second best allocations can be implemented through unregulated competition among banks

deposit competition and financial fragility evidence from the us banking sector preliminary and incomplete please do not cite without permission we develop and estimate an empirical model of the u s banking sector using a new data set covering the largest u s banks over the period 2002 2013 our model incorporates insured depositors and run prone uninsured depositors who have rich preferences over dierentiated banks banks compete for deposits in the spirit of matutes and vives 1996 and can endogenously default we estimate demand for uninsured

information choice and amplification of financial crises we propose an amplification mechanism of financial crises based on the information choices of investors information acquisition makes investors more likely to act against their prior deteriorating public news under an initially strong weak prior increases reduces the value of private information and induces more less information acquisition deteriorating public news increases the probability of a crisis since the initially strong weak prior induces no attacks attacks this effect is amplified with endogenous information choices to enhance financial stability a policy maker affects information acquisition via taxes and subsidies we derive and discuss testable implications for the magnitude of amplification

a theoretical model of bank lending does ownership matter in times of crisis abstract the present study investigates theoretically the lending responses of government owned and private banks in the event of unexpected financial shocks our model predicts that public banks provide more loans to the real sector during times of crisis compared to private banks which cut down on lending and increase liquidity holdings we put forth three reasons for this heterogeneous behavior first the objective of public banks in contrast to their private peers is not only to maximize profits given risks but also to stabilize and promote the recovery of the economy second public banks may suffer less deposit withdrawals or avoid a bank run in a severe crisis because the state has better access to additional funds making a recapitalization more likely and finally public banks may suffer less deposit withdrawals due to their higher credibility in promising a future recapitalization in the case of a severe crisis

a market based transmission planning for hvdc grid case study of the north sea there is significant interest in building hvdc transmission to carry out transnational power exchange and deliver cheaper electricity from renewable energy sources which are located far from the load centers this paper presents a market based approach to solve a long term tep for meshed vsc hvdc grids that connect regional markets this is in general a nonlinear non convex large scale optimization problem with high computational burden partly due to the many combinations of wind and load that become possible we developed a two step iterative algorithm that first selects a subset of operating hours using a clustering technique and then seeks to maximize the social welfare of all regions and minimize the investment capital of transmission infrastructure subject to technical and economic constraints the outcome of the optimization is an optimal grid design with a topology and transmission capacities that results in congestion revenue paying off investment by the end the project s economic lifetime approximations are made to allow an analytical solution to the problem and demonstrate that an hvdc pricing mechanism can be consistent with an ac counterpart the model is used to investigate development of the offshore grid in the north sea simulation results are interpreted in economic terms and show the effectiveness of our proposed two step approach

the timing of monetary and price changes and the international transmission of inflation this paper presents a theoretical and empirical investigation into timing relationships between variables within and across industrialized countries the main empirical results of our analysis are 1 domestic monetary expansion appears to lead inflation in the sense that money granger causes prices without feedback contradicting an implication of the monetary approach to the balance of payments 2 hardly any significant timing relationship exists between domestic and foreign rates of inflation during the fixed exchange rate period providing no evidence for a generalized law of one price 3 some sterilization of official reserve inflows was successfully performed by the non reserve central banks except for canada 4 u s interest rates granger cause foreign rates providing evidence of some international transmission via asset markets

the role of demandable debt in structuring optimal banking arrangements demandable debt finance by banks warrants explanation because it entails costs of bank suspension liquidation and idle reserve holdings an explanation is developed in which demandable debt provides incentive compatible intermediation where the banker has comparative advantage in allocating investment funds but may act against the interests of uninformed depositors demandable debt attracts funds by giving depositors an option to force liquidation its usefulness in transacting follows from information sharing between monitors and nonmonitors copyright 1991 by american economic association

turning bagehot on his head lending at penalty rates when banks can become insolvent ever since bagehot s 1873 pioneering work it is a widely accepted wisdom that in order to alleviate ex ante bank moral hazard a lender of last resort should lend at penalty rates only in a model in which banks are subject to shocks but can exert effort to affect the likelihood of these shocks we show that the validity of this argument crucially relies on banks always remaining solvent the reason is that when banks become insolvent bagehot s prescription dictates to let them fail penalty rates charged when banks are illiquid but solvent then reduce banks incentives to avoid insolvency ex ante and thus increase bank moral hazard we derive a condition which shows precisely when this effect on ex ante incentives outweighs the traditional one and show that it is fulfilled under plausible scenarios

central bank collateral frameworks abstract this paper seeks to inform about a feature of monetary policy that is largely overlooked yet occupies a central role in modern monetary and financial systems namely central bank collateral frameworks their importance can be understood by the observation that the money at the core of these systems central bank money is injected into the economy on terms not defined in a market but by the collateral frameworks and interest rate policies of central banks using the collateral framework of the eurosystem as a basis of illustration and case study the paper brings to light the functioning reach and impact of collateral frameworks a theme that emerges is that collateral frameworks may have distortive effects on financial markets and the wider economy they can for example bias the private provision of real liquidity and thereby also the allocation of resources in the economy as well as contribute to financial instability evidence is presented that the collateral framework in the euro area promotes risky and illiquid collateral and more generally impairs market forces and discipline the paper also emphasizes the important role of ratings and government guarantees in the eurosystem s collateral framework

firm level employment labour market reforms and bank distress abstract we explore the impact of financial frictions on the employment effect of labour market reforms our study combines a new cross country reform database on labour market reforms with matched firm bank data for nine euro area countries over the period 1999 to 2013 while we find that labour market reforms are overall effective in increasing employment restricted access to bank credit can undo up to half of medium to long term employment gains at the firm level entrepreneurs without sufficient access to credit cannot reap the full benefits of more flexible employment regulation

international transmission of us macroeconomic policy and the inflation record of western europe abstract the interaction between monetary policy government budget deficits and inflation is examined for the four largest western european economies comprising france italy the united kingdom and west germany in order to assess the possible impact of us macroeconomic policy past us monetary base growth deficits and inflation rates are included in the set of explanatory variables for each of the european countries empirical results for the 1962 2 1985 4 sample period reveal interplay between domestic monetary and fiscal policy to be augmented by a significant impact of the us variables across all four countries in the sample

does deposit insurance improve financial intermediation evidence from the russian experiment this study examines how the introduction of deposit insurance affects depositors and banks using the deposit insurance scheme introduced into the russian banking system as a natural experiment the fundamental research question is whether the introduction of deposit insurance leads to a more effective banking system as evidenced by increased deposit taking and decreased reliance upon state owned banks as custodians of retail deposits we find that banks entering the new deposit insurance system increase both their level of retail deposits and their ratios of retail deposits to total assets relative to banks that do not enter the new deposit insurance system these results hold up in a multivariate panel data analysis that controls for bank and time random effects the longer a bank has been entered into the deposit insurance system the greater is its level of deposits and its ratio of deposits to assets moreover this effect is stronger for regional banks and for smaller banks we also find that implementation of the new deposit insurance system has the effect of leveling the playing field between state owned banks and privately owned banks finally we find strong evidence of moral hazard following implementation of deposit insurance in the form of increased bank risk taking financial risk and to a lesser degree operating risk increase following implementation

innovation accounting for the impact of fluctuations in u s variables on the canadian economy innovation accounting is conducted on a nine variable vector autoregression estimated using u s and canadian monthly data for january 1971 to december 1983 this reveals inter alia a positive impact of the u s interest rate on the canadian rate with the role the exchange rate plays in cushioning this impact being clearly apparent a positive effect of the u s money supply on both u s and canadian interest rates a positive albeit muted response of canadian production to a shock in u s production and a persistent influence of u s prices on production negatively and prices positively in canada are also detected l impact des fluctuations dans les variables americaines sur l eonomie canadienne une analyse utilisant la technique d innovation accounting les auteurs utilisent la technique d innovation accounting dans le cadre d un systeme a neuf variables estime comme autoregression vectorielle a l aide de donnees mensuelles canadiennes et americaines couvrant la periode de janvier 1971 a decembre 1983 cette analyse revl un effet positif de la masse monetaire americaine a la fois sur les taux d interet canadiens et americains une reaction positive mais en sourdine du niveau de production au canada a un choc dans le niveau de production americaine et une influence persistence des niveaux de prix americains sur le niveau de production au canada influence negative ainsi que sur les niveaux de prix canadiens influence positive we should like to thank gordon anderson douglas clarke john kennan john kuszczak angelo melino and stanely winer for a number of helpful discussions earlier versions of the paper were presented at the meetings of the canadian economics association in vancouver in june 1983 at the winter meetings of the econometric society in san francisco in december 1983 and in a session of invited papers at the meetings of the canadian economics association in guelph in june 1984 our discussants jacques raynauld in vancouver thomas doan and stephen king in san francisco and allan gregory in guelph offered many useful comments as too did the members of the money macro workshop at the university of western ontario alan harrison also thanks the economics department at the university of warwick for its hospitality and the social science and humanities research council of canada for financial support canadian journal of economics revue canadienne d economique xviii no 4 november novembre 1985 printed in canada imprime au canada 0008 4085 85 784 98 1 50 canadian economics association this content downloaded from 40 77 167 14 on fri 16 sep 2016 06 02 12 utc all use subject to http about jstor org terms impact of fluctuations in us variables 785

a re examination of the monetary model of exchange market pressure canada 1963 1988 in re evaluating the performance of the girton and roper 1977 two country monetary model of exchange market pressure emp for canada estimates are provided for an extended specification that allows for unrestricted dynamics results show the hypothesized negative effect of domestic credit growth on emp to be supported throughout the relevance both of the dynamics and of the hypothesized unitary tradeoff between exchange rate and international reserve movements for bank of canada policy is demonstrated for the sequence of fixed and floating exchange rate regimes contained in the 1963 1 1988 1 sample

illiquidity component of credit risk we describe and contrast three dierent measures of an institu tion s credit risk insolvency risk is the conditional probability of default due to deterioration of asset quality if there is no run by short term creditors total credit risk is the unconditional probability of default either because of a short term creditor run or long run asset insolvency illiquidity risk is the dierence between the two i e the probability of a default due to a run when the institution would otherwise have been solvent we discuss how the three kinds of risk vary with balance sheet composition we provide a formula for illiquidity risk and show that it is i decreasing in the liquidity ratio the ratio of realizable cash on the balance sheet to short term liabilities ii increasing in the outside option ratio a measure of the opportunity cost of the funds used to roll over short term liabil ities and iii increasing in the fundamental risk ratio a measure of ex post variance of the asset portfolio

renewable generation across italian regions spillover effects and effectiveness of european regional fund abstract this paper investigates on the determinant factors that drive the italian regions toward a sustainable development path and evaluates the effectiveness of european regional development incentives in promoting investments in renewable energy sources res starting from the consideration that there are spillover effects between similar regions first we identify the factors that capture these similarities then we use them to evaluate their relevance in determining the success of the investments in res an econometric analysis based on the use of spatial panel specification model is implemented to support the hypotheses two important results emerge from the study the first is the identification of regional determinants of res production that are driven by the similarities between regions and that can be interpreted as guidelines in the policy choices in support of investments the second is the lack of effectiveness of the incentives in support of res results indicate that the capacity of some regional governments to direct the funds allocated by the central government or european commission towards efficient production of renewable energy is likely limited and these incentives have been undone

the hazards of debt rollover freezes incentives and bailouts we investigate the trade o between incentive provision an di ne ient rollover freezes for a firm financed with short term debt first debt maturity that is too short term is ine cient even with incentive provision th eo ptimal maturity is an interior solution that avoids excessive rollover risk whil ep roviding su ient incentives for the manager to avoid risk shifting when the firm is in good health second allowing the manager to risk shift during a freeze actually increase sc reditor conf idence debt policy should not prevent the manager from holding what may appear to be otherwise low mean strategies that have option value during a freeze third a limited but not perfectly reliable form of emergency financing during a freeze a bailout may improve the terms of the trade o and increase total ex ante va lue by instilling confidence in the creditor markets our conclusions highlight the endogenous interaction between risk from the asset and liability sides of the balance sheet

dynamic debt runs we develop a dynamic model of debt runs on a rm which invests in an illiquid asset by rolling over staggered short term debt contracts i e dierent contracts mature at dierent times we derive a unique threshold equilibrium in which creditors coordinate their asynchronous rollover decisions based on the rm s publicly observable and time varying fundamental the coordination problem ampli es the creditors concerns about the rm s future rollover risk created by its time varying fundamental and causes each maturing creditor to run ahead of others even when the current fundamental is substantially higher than its liability our model provides a set of implications on the roles played by volatility illiquidity and debt maturity in driving debt runs as well as on rms capital adequacy standards and credit risk

business cycles and the exchange rate system some international evidence this paper investigates the differences in time series behavior of key economic aggregates under alternative exchange rate systems we use a postwar sample of 49 countries to compare the behavior of output consumption trade flows government consumption spending and real exchange rates under alternative exchange rate systems pegged floating and cooperative systems such as the ems we then examine evidence from two particular episodes involving canada and ireland of changes in the exchange rate system aside from greater variability of real exchange rates under flexible than under pegged nominal exchange rate systems we find little evidence of systematic differences in the behavior of macroeconomic aggregates or international trade flows under alternative exchange rate systems these results are of interest because a large class of theoretical models implies that the nominal exchange rate system has important effects on a number of macroeconomic quantities

banks and liquidity crises in emerging market economies abstract this paper presents and analyzes a simple banking model in which banks have access to international capital markets and domestic asset markets the model generates two types of equilibria a no default equilibrium and a mixed equilibrium in the no default equilibrium all banks are symmetric and always solvent while in the mixed equilibrium some banks can be internationally illiquid and default simultaneously the latter equilibrium captures the basic features of banking crises after financial liberalization in emerging market economies in this case a large capital inflow leads to high asset price volatility and magnifies a banking crisis

interrelations between the united states and the united kingdom 1873 1975 abstract this article is an excerpt from a monograph monetary trends in the united states and the united kingdom their relation to income prices and interest rates 1867 1975 that the university of chicago press has scheduled for publication in july 1982 earlier in the monograph we estimate a single demand curve for money for the united states and the united kingdom and also show that velocity in the two countries had parallel movements and that the rates of change of velocity were nearly identical in the two countries for most of the century we cover similar behavior of velocity in the two countries requires in addition to a largely common demand curve similar behavior of the variables affecting the demand for money chapter 7 from which this excerpt is taken begins by examining the interrelations between velocity in the two countries the excerpt though self contained is clearly incomplete note that the basic data are geometric averages of annual data for cycle phases expansions or contractions which average 2 0 years in length for the united states 2 8 years for the united kingdom rates of change g with a subscript for the variable for a phase are the slopes of straight lines fitted to the logarithms of three successive phase averages the phase in question the prior phase and the following phase money refers to currency plus adjusted demand and time deposits of commercial banks held by the public income refers to net national product nominal money m or income y is income in dollars or pounds at current prices prices p refer to the implicit price index obtained by dividing national product in current prices by national product in constant 1929 prices velocity v is the ratio of nominal income to nominal money short term interest rates refer to the us commercial paper rate and the uk rate on 3 month bank bills demand shift and postwar readjustment effects refer to the values of dummy variables in the demand curves for each country these effects allow for an upward shift in the demand for money during selected phases of economic uncertainty and for readjustments in the demand for money following world wars i and ii

coordination failures and the lender of last resort was bagehot right after all the classical doctrine of the lender of last resort lolr elaborated by bagehot 1873 asserts that the central bank should lend to illiquid but solvent banks under certain conditions several authors have argued that this view is now obsolete in modern interbank markets a solvent bank cannot be illiquid this paper provides a possible theoretical foundation for rescuing bagehot s view our theory does not rely on the multiplicity of equilibria that arises in classical models of bank runs we built a model of banks liquidity crises that possesses a unique bayesian equilibrium in this equilibrium there is a positive probability that a solvent bank cannot find liquidity assistance in the market we derive policy implications about banking regulation solvency and liquidity ratios and interventions of the lender of last resort furthermore we find that public bailout and private bail in involvement are complementary in implementing the incentive efficient solution and that bagehot s lender of last resort facility must work together with institutions providing prompt corrective action and orderly failure resolution finally we derive similar implications for an international lender of last resort ilolr jel g21 g28

public policy influence on renewable energy investments a panel data study across oecd countries this paper examines the impact of public policy measures on renewable energy re investments in electricity generating capacity made by institutional investors using a novel combination of datasets and a longitudinal research design we investigate the influence of different policy measures in a sample of oecd countries to suggest an effective policy mix which could tackle failures in the market for clean energy the results call for technology specific policies which take into account actual market conditions and technology maturity to improve the conditions for institutional investments advisable policy instruments include economic and fiscal incentives such as feed in tariffs fit especially for less mature technologies additionally market based instruments such as greenhouse gas ghg emission trading systems for mature technologies should be included these policy measures directly impact the risk and return structure of re projects supplementing these with regulatory measures such as codes and standards e g rps and long term strategic planning could further strengthen the context for re investments

measuring monetary policy interdependence abstract this paper measures the degree of monetary policy interdependence between major industrialized countries from a new perspective the analysis uses a special data set on central bank issued policy rate targets for 14 oecd countries methodologically our approach is novel in that we separately examine monetary interdependence due to 1 the coincidence in time of when policy actions are executed from 2 the nature and magnitude of the policy adjustments made the first of these elements requires that the timing of events be modeled with a dynamic discrete duration design the discrete nature of the policy rate adjustment process that characterizes the second element is captured with an ordered response model the results indicate there is significant policy interdependence among these 14 countries during the 1980 1998 sample period this is especially true for a number of european countries which appeared to respond to german policy during our sample period a number of other countries appeared to respond to u s policy though this number is smaller than that suggested in preceding studies moreover the policy harmonization we find appears to work through channels other than formal coordination agreements

liquidity shortages and banking crises we show in this article that bank failures can be contagious unlike earlier work where contagion stems from depositor panics or contractual links between banks we argue that bank failures can shrink the common pool of liquidity creating or exacerbating aggregate liquidity shortages this could lead to a contagion of failures and a total meltdown of the system given the costs of a meltdown there is a possible role for government intervention unfortunately liquidity and solvency problems interact and can cause each other making it hard to determine the cause of a crisis we propose a robust sequence of intervention banks are often found at the center of systemic financial crises the causes of these crises have long been debated do they stem from depositor panics or do they arise because bank balance sheets are exposed to common factors if it is the latter then is there any sense in which bank failures can be contagious can anything be done to prevent these crises or stop them from propagating once they begin our purpose in this paper is to reexamine whether bank failures can start and propagate systemic crises even if we assume that depositors do not panic that is even if depositors actions are coordinated and they do not run simply because they fear others will run our focus is not because we think that panics are empirically unimportant the jury is still out on that instead we show that contagion can stem from an underlying real general equilibrium problem rather than just from lack of coordination among depositors from a policy perspective attempts to reassure investors through confidence building measures will not work if panic and lack of coordination are not the reasons for a crisis we begin in this paper with a model of a bank that we developed in diamond and rajan 2001 assets in this model are illiquid they cannot be borrowed against or sold for the full value of resources they will generate in their best use because the human capital necessary to generate that full value cannot

mobilizing private finance for low carbon innovation a systematic review of barriers and solutions this paper analyses the field of innovation studies regarding barriers to low carbon innovation and consequences for finance investment and divestment and contributes to a more holistic understanding of the underlying mechanisms a combination of technological barriers combined with economic barriers institutional and political barriers contribute to sub optimal low carbon investment all along the innovation cycle policy makers need to take a systemic approach to enable the redirection of diverse private financial sources instruments range from cutting dirty r d subsidies and support for clean technology innovation and diffusion levelling the institutional playing field and making risks of high carbon and low carbon technologies transparent to providing a consistent but adaptive long term transition strategy this would allow financiers to gradually shift their investments away from high carbon mainstream markets and scale low carbon technology niche markets however financiers also need to sharpen their competencies with regard to new clean technologies and markets

interbank lending and systemic risk systemic risk refers to the propagation of a bank s economic distress to other economic agents linked to that bank through financial transactions banking authorities often prevent systemic risk through an implicit insurance of interbank claims or by reducing interbank transactions and centralizing banks liquidity management this paper investigates whether the flexability afforded by decentralized bank interactions can be preserved while protecting the central banks from the necessity of conducting undesired rescue operations it develops a model in which decentralized interbank leading is motivated by peer monitoring in this context the paper derives the optimal prudential rules and in particular looks at the impact of interbank monitoring on the solvency and liquidity ratios of borrowing and lending banks last it provides conditions which a too big to fail policy is or is not justified and studies the possibility of propagation of a bank s liquidity shock throughout the financial system copyright 1996 by ohio state university press

deficits politics and money growth the authors examine the linkage between federal deficits and money growth by allowing the fed s resp onse to any given deficit to vary systematically according to how the deficit is generated and the party affiliation of the current presid ent in equations for m1 and monetary base growth the structural def icit is consistently significant and invariant across political chang es while the cyclical component of the deficit or a direct measure of the business cycle is significant only during the tenure of democ ratic presidents copyright 1987 by oxford university press

rollover risk and market freezes the debt capacity of an asset is the maximum amount that can be borrowed using the asset as collateral we model a sudden collapse in the debt capacity of good collateral we assume short term debt that must be frequently rolled over a small transaction cost of selling collateral in the event of default and a small probability of meeting a buy to hold investor we then show that a small change in the asset s fundamental value can be associated with a catastrophic drop in the debt capacity the kind of market freeze observed during the crisis of 2007 to 2008 one of the many striking features of the crisis of 2007 to 2008 was the sudden freeze in the market for the rollover of short term debt from an in stitutional perspective the inability to borrow overnight against high quality but long term assets was a market failure that effectively led to the demise of a substantial part of investment banking in the united states more broadly it led to the collapse in the united states the united kingdom and other countries of banks and other financial institutions that had relied on signifi cant maturity mismatch between assets and liabilities and in particular on the rollover of short term wholesale debt in the asset backed commercial paper abcp and overnight sale and repurchase repo markets in this paper we are interested in developing a model of a sudden collapse in the ability to borrow short term against long lived assets in the absence of obvious problems of asymmetric information or fears about the value of col lateral we refer to this phenomenon as a market freeze more precisely a market freeze occurs when the debt capacity the maximum amount of collat eralized borrowing that can be supported by an asset is a small fraction of the fundamental value the economic value measured by the net present value npv of the stream of future returns an extreme form of a market freeze occurs when the fundamental value is close to the maximum possible value of the asset whereas the debt capacity is close to the minimum possible value of the asset

dynamics of currency crises with asset market frictions abstract this paper presents a dynamic model of currency crises with frictions by construction a speculative attack is not an instantaneous event but takes a little time to deplete the country s reserves and in the event of an attack agents are uncertain about whether they will be able to act before the devaluation comes the currency will be overvalued ripe for attack for a long time before an attack takes place a discrete and sizable devaluation will occur small changes in fundamentals may trigger an attack the model brings insights about the dynamics of currency crises and the effects of some key policy variables

transparency in the financial system rollover risk and crises we present a theory of optimal transparency when banks are exposed to rollover risk disclosing bank specific information enhances the stability of the financial system during crises but has a destabilizing effect in normal economic times thus the regulator optimally increases transparency during crises under this policy however information disclosure signals a deterioration of economic fundamentals which gives the regulator ex post incentives to withhold information this commitment problem precludes a disclosure policy that provides ex ante optimal insurance against aggregate shocks and can result in excess opacity that increases the likelihood of a systemic crisis

financing the uk power sector is the money available abstract the uk power generation sector faces a major new round of investment the coincidence of asset retiring and ambitious goals for decarbonisation is not unique but is particularly acute in the uk the uk government has put in place a raft of new policies that seek to promote new low carbon investment and ensure security of supply the traditional channel for financing the sector has been through large utility companies but this now looks challenging for various reasons the uk therefore offers an interesting case study on several counts the scale of the challenge effectiveness of new policies and the availability of alternative finance we find that the link between the finance sector and the electricity sector is not broken but the flow of money to the sector is threatened by the current weakness of the utilities business model this paper compares estimates of the scale of investment required in the uk with historical investment rates it summarises contemporary finance industry views of conditions and trends and potential policy interventions that might be needed to bridge the investment gap the potential for channelling institutional investor funds directly into energy assets is reviewed

interbank contagion at work evidence from a natural experiment this article tests financial contagion due to interbank linkages for identification we exploit an idiosyncratic sudden shock caused by a large bank failure in conjunction with detailed data on interbank exposures first we find robust evidence that higher interbank exposure to the failed bank leads to large deposit withdrawals second the magnitude of contagion is higher for banks with weaker fundamentals third interbank linkages among surviving banks further propagate the shock finally we find results suggesting that there are real economic effects these results suggest that interbank linkages act as an important channel of contagion and hold important policy implications jel g01 g21 g28 e58 since the onset of the financial turmoil increased uncertainty reflected particularly in counterparty risk has led banks to hoard liquidity this has resulted in a significant decline of trading in the interbank money markets jean claude trichet president of the european central bank december 2008

interaction between central bank behaviour and fiscal policy the us case federal reserve behaviour is analysed using a model which incorporates an effect an effect of iscal pressure on monetary policy formulation incentive structures are hypothesized to be such that the central bank plans over a longer horizan than that relevant to the administration with the cyclically adjusted deficit proxying for fiscal pressure from the administration the response to the deficit then plays an interactive role in affecting the trade off weights applied to the competing goals of monetary policy the model performs well for the usa and provides a pattern of policy that is stable over the full 1961ndash 83 period

coordination risk and the price of debt abstract creditors of a distressed borrower face a coordination problem even if the fundamentals are sound fear of premature foreclosure by others may lead to pre emptive action undermining the project recognition of this problem lies behind corporate bankruptcy provisions across the world and it has been identified as a culprit in international financial crises but has received scant attention from the literature on debt pricing without common knowledge of fundamentals the incidence of failure is uniquely determined provided that private information is precise enough this affords a way to price the coordination failure comparative statics on the unique equilibrium provides several insights on the role of information and the incidence of inefficient liquidation

who borrows from the lender of last resort understanding why banks borrow from the lender of last resort lolr during a nancial crisis is crucial to understanding the macroeconomic impact of such largescale interventions we document a strong divergence among banks take up of lolr assistance during the nancial crisis in the euro area as banks which borrowed heavily also used increasingly risky collateral we propose four explanations for this divergence

modes of governance for municipal energy efficiency services the case of led street lighting in germany energy efficiency retrofits are often impeded by high perceived investment risks long payback periods and a lack of skills at the municipal level these issues are particularly pronounced as procuring implementing and managing retrofits can exceed existing municipal governance capacities the diffusion of municipal led street lighting as a replacement for conventional lighting serves as an example this paper argues that technological e g complexity and maturity economic e g selling services vs products and financing costs institutional e g property situation and contracts and competency barriers to retrofitting e g lack of measurement capacity and qualified facilitators translate into transaction costs we develop a taxonomy of appropriate modes of municipal retrofitting governance based on transaction costs economics the findings indicate that more market based solutions energy performance contracts in particular can facilitate the procurement of innovative energy efficiency retrofitting solutions and associated investments among municipalities if neutral tenders open book accounting municipal ownership and intermediary organisations allow municipalities to choose appropriate governance structures for particular technologies and retrofits