We study the Ramsey optimal fiscal and monetary policy in an economy where banks face collateral constraints. Inflation reduces the net worth of banks and tightens their collateral constraint by ...revaluing their nominal assets and liabilities. The optimal policy balances tax distortions with the costs of inflation on banks, thereby deviating from perfect tax smoothing. Our quantitative analysis reveals that inflation plays a much smaller role in financing fiscal needs in the optimal policy compared to existing literature. When considering price stickiness and long-term government debt, optimal inflation is modest and persistent, and the role of inflation in fiscal financing increases with the maturity of government debt.
•Openness theory of financial development is examined at bank-level in emerging countries.•Banks development is measured in terms of cost, volume and risk of bank credit.•Higher trade openness ...promotes bank development by increasing the volume and decreasing the cost and risk of bank credit.•Higher financial openness though decreases the cost of credit, however it increases bank risk.•Trade openness results in efficient, large and safe banking sector, but the role of financial openness is limited.
Openness theory of financial development argues that opening up a country to both international trade and financial flows can promote financial development. In this study, I test the openness theory at micro-level by examining the impact of recent rapid trade and financial openness of emerging economies on their banks’ development. I use three sets of indicators of bank development to distinguish the cost, volume and risk of bank credit. Using a panel dataset of 287 key banks from 37 emerging countries over the period 2000–2012, I find robust evidence that higher trade openness promotes bank development by increasing the volume and decreasing the cost and risk of bank credit. I identify that these results are driven, respectively, by the higher demand for finance, the domestic financial sector liberalization reforms and the lending diversification opportunities caused by the higher trade-openness. Contrary, I find that the role of financial openness for bank development is limited because though the intense credit market competition caused by the capital inflows in financially open countries urges the banks to cut the cost of credit, however it also forces them to increase risk-taking despite the lower volume of credit extended. In such a scenario, the costs associated with higher bank risk-taking might outweigh the benefits associated with the lower cost of bank credit.
In this paper, we investigate the short-run and long-run macroeconomic effects of bank net worth and capital adequacy regulations. In general, capital adequacy regulations work as a stabilizer in the ...sense that they reduce the macroeconomic effects of negative productivity shocks. In addition, strengthening of the regulations increases the long-run capital stock, although it may lead the economy to a recession in the short run. However, the timing of the introduction of tight regulations is important. If the regulations become tighter when a negative productivity shock occurs, the economy falls into a long and severe slump. This is consistent with what the Japanese economy has experienced after the bubble economy.
Using data from a quantitative survey of German banks at three points in time (2015, 2017 and 2019), we analyze the impact of changes in the interest rate level on banks' net interest income and the ...countermeasures they take. A decline in the interest rate level has a more negative impact on net interest income, the longer the decline lasts and the lower the interest rate level is. This impact softens with increasing risk of changes in the present value of banking books. We do not find that banks generally increase their risks following a drop in income. However, poorly capitalized banks subsequently increase the credit risk of their bond portfolio. After a fall in operational income, banks increase their fee and commission income and reduce their costs. In addition, banks tend to extend their mortgage lending after a drop in their interest income.
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