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.
Liquidity has an impact on short-term yields, which makes it a key determinant of monetary transmission. The aim of the research was to examine how the increase in the banking system’s liquidity and ...its distribution within the banking system affects yields. To better understand this relationship, this analysis gives an econometric estimate of the interbank liquidity demand function. The research covers Hungary being a representative of small, open, emerging market economies. The analysis is based on segmented regressions, the study covers the period 2016–2020 regarding overnight interest rates. The slope of the demand function is negative, the coefficients decrease with the increase in excess reserves. The most significant breakpoints of the demand curve are detected around 0.83% and 1.53% of M2 in excess liquidity. There is a correlation between the level of excess reserves and its distribution and concentration. The distribution of liquidity became more balanced along with the increase in excess liquidity. The saturation of the banking system depends on the concentration of liquidity among banks. The results can be useful for other small and open emerging market economies with abundant liquidity, especially in the coming tightening cycle.
This paper analyzes the impact of “spirit of capitalism” on stationary welfare and stability properties of a one‐sector Ramsey economy, where the demand of money is motivated by a cash‐in‐advance ...constraint on consumption expenditures. Preferences are defined over consumption and capital stock. There is a monetary authority that follows either a money growth pegging rule or an interest rate pegging rule. When a money growth pegging rule is introduced, a unique steady state emerges. A slight desire for status is a sufficient condition for an increase in the money growth rate to exert a local stabilizing effect and to improve stationary welfare. When an interest rate pegging rule is introduced, two steady states may emerge: a “liquidity trap” and an “interior” steady state. Both steady states are locally determinate. Moreover, we show that a slight desire for status is also a sufficient condition to ensure that the stationary welfare at “interior” steady state is higher than the one of the “liquidity trap”. It follows that an increase in the policy rate is, then, an efficient way to exit the “liquidity trap” steady state. Under similar conditions, a higher policy rate increases the stationary welfare at the “interior” steady state.
Monetary Policy when Households have Debt CLOYNE, JAMES; FERREIRA, CLODOMIRO; SURICO, PAOLO
The Review of economic studies,
01/2020, Volume:
87, Issue:
1 (312)
Journal Article
Peer reviewed
Open access
Using household survey data for the U.S. and the U.K., we show that the aggregate response of consumption to interest rate changes is driven by households with a mortgage. Outright home-owners do not ...adjust expenditure at all while renters change their spending but by less than mortgagors. Income rises for all households as interest rate cuts directly affect firm investment and household consumption, boosting aggregate demand. A crucial difference between the housing tenure groups is the composition of their balance sheets: mortgagors hold sizable illiquid assets but little liquid wealth. Our results reveal that general equilibrium effects on household income coupled with balance-sheet-driven heterogeneity in the marginal propensity to consume play a key role in the transmission of monetary policy.
We examine the effects of institutional ownership on firms׳ information and trading environments using the annual Russell 1000/2000 index reconstitution. Characteristics of firms near the index ...cutoffs are similar, except that firms in the top of the Russell 2000 have discontinuously higher proportional institutional ownership than firms in the bottom of the Russell 1000 primarily due to indexing and benchmarking strategies. We find that higher institutional ownership is associated with greater management disclosure, analyst following, and liquidity, resulting in lower information asymmetry. Overall, indexing institutions׳ predilection for lower information asymmetries facilitates information production, which enhances monitoring and decreases trading costs.
Financial performance has a vital role in the company; good financial performance can positively impact the company. This study examines and demonstrates the influence of Islamic corporate social ...responsibility (ICSR), leverage, and liquidity on financial performance, which is moderated by firm size. The research population is a company registered in the Jakarta Islamic Index 30 (JII 30) for 2017-2021. The sample of this research is ten companies obtained from the purposive sampling method. The data analysis technique uses Moderated Regression Analysis (MRA). Financial performance is measured using return on assets (ROA), leverage using the debt to equity ratio (DER), liquidity is proxied by the current ratio (CR), and ICSR is measured using several predetermined indicators. The results showed that ICSR has no impact on financial performance, leverage has a significant positive impact on financial performance, and liquidity has a significant negative impact on financial performance. Company size cannot moderate the impact of ICSR on financial performance, but company size can moderate the impact of leverage and liquidity on financial performance. This research can complement existing theories and research results. It can be a reference for companies in improving and enhancing their performance, as well as for investors to evaluate company performance to obtain certainty in investment.
We examine the impact of corporate social responsibility (CSR) disclosure strategies on equity market liquidity. Using data on CSR disclosure from Bloomberg, we find that equity market liquidity ...improves as firms increase their CSR disclosure transparency. Specifically, firms with more transparent CSR disclosure strategies have narrower spreads and exhibit improvements in common measures of equity market liquidity. Additionally, we document that improvements in equity market liquidity occur contemporaneously with changes in firms' CSR disclosure strategies, suggesting that markets respond to the transparent disclosure of CSR initiatives without necessarily knowing the ultimate efficacy of the initiative itself. We condition our findings on firm transparency and provide evidence that CSR disclosure transparency acts to reduce information asymmetry, thus acting as the mechanism to improve equity market liquidity. Overall, our results suggest that CSR disclosure transparency leads to reductions in asymmetric information, ultimately making financial markets more equitable.
This paper develops a rational, liquidity-based model of closed-end funds (CEFs) that provides an economic motivation for the existence of this organizational form: They offer a means for investors ...to buy illiquid securities, without facing the potential costs associated with direct trading and without the externalities imposed by an open-end fund structure. Our theory predicts the patterns observed in CEF initial public offerings (IPOs) and the observed behavior of the CEF discount, which results from a trade-off between the liquidity benefits of investing in the CEF and the fees charged by the fund's managers. In particular, the model explains why IPOs occur in waves in certain sectors at a time, why funds are issued at a premium to net asset value (NAV), and why they later usually trade at a discount. We also conduct an empirical investigation, which, overall, provides more support for a liquidity-based model than for an alternative sentiment-based explanation.
Liquid markets are driven by information asymmetries and the injection of new information in trades into market prices. Where market matching uses an electronic limit order book (LOB), limit orders ...traders may make suboptimal price and trade decisions based on new but incomplete information arriving with market orders. This paper measures the information asymmetries in Bitcoin trading limit order books on the Kraken platform, and compares these to prior studies on equities LOB markets. In limit order book markets, traders have the option of waiting to supply liquidity through limit orders, or immediately demanding liquidity through market orders or aggressively priced limit orders. In my multivariate analysis, I control for volatility, trading volume, trading intensity and order imbalance to isolate the effect of trade informativeness on book liquidity. The current research offers the first empirical study of Glosten (1994) to yield a positive, and credibly large transaction cost parameter. Trade and LOB datasets in this study were several orders of magnitude larger than any of the prior studies. Given the poor small sample properties of GMM, it is likely that this substantial increase in size of datasets is essential for validating the model. The research strongly supports Glosten’s seminal theoretical model of limit order book markets, showing that these are valid models of Bitcoin markets. This research empirically tested and confirmed trade informativeness as a prime driver of market liquidity in the Bitcoin market.
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