Working Papers
2023
September 29, 2023
Assessing Macrofinancial Risks from Crypto Assets
Description: Failures in the crypto space—including the fall of Terra USD and the FTX debacle—have sparked calls for strengthening countries’ policy frameworks for crypto assets, including by enhanced regulation and supervision. How have these heightened concerns about crypto assets been picked up in systemic risk assessment, and what can be done going forward? In this paper, we introduce a conceptual macrofinancial framework to understand and track systemic risks stemming from crypto assets. Specifically, we propose a country-level Crypto-Risk Assessment Matrix (C-RAM) to summarize the main vulnerabilities, useful indicators, potential triggers and potential policy responses related to the crypto sector. We also discuss how experts and officials can weave in specific vulnerabilities stemming from crypto asset activity into their assessment of systemic risk, and how they can provide policy advice and take action to help contain systemic risks when needed.
September 29, 2023
New Evidence on Spillovers Between Crypto Assets and Financial Markets
Description: We analyze returns and volatility spillovers among a representative set of crypto and financial assets. The magnitude of spillovers increases during periods of heightened turbulence due to negative economic-financial news, crypto market events, or exogenous shocks. There is evidence of increasing spillovers over time, with a peak during the COVID-19 pandemic, implying growing interdependence. Crypto assets predominantly transmit spillovers to financial markets, though reversals occur during periods of financial stress. The increased correlation during risk-off episodes suggests that crypto assets could serve as important conduits for financial market shocks, generating financial stability risks.
September 29, 2023
Inflation Dynamics in Bulgaria: The Role of Policies
Description: This paper analyses inflation dynamics in Bulgaria using different complementary econometrics technics. We find that common factors play a large role in the EU’s inflation variation but impact individual countries differently due to country-specific factors. Greater weight of energy and food in Bulgaria’s CPI basket amplifies the impact of shocks on headline inflation. Furthermore, second-round effects in Bulgaria are likely pronounced, associated with a higher inflation persistence compared to the EU countries. Recent ECB monetary tightening has been insufficient for Bulgaria and its transmission is weak. Fiscal policy supported the recovery from the COVID crisis but added to inflation.
September 29, 2023
Financial Conditions in Europe: Dynamics, Drivers, and Macroeconomic Implications
Description: We develop a new measure of financial conditions (FCs) that targets the growth of financial liabilities using the partial least square methodology. We then estimate financial condition indexes (FCIs) across European economies, both at the aggregate and sectoral levels. We decompose the changes in FCs into several factors including credit availability and costs, price of risk, policy stance, and funding constraints. Our results show that FCs loosened during the pandemic thanks to policy support but started to tighten significantly since mid-2021. Using the inverse probability weighting method over the sample period from 2000 to 2023, we find that a shift from a neutral to a tight FCI regime such as the ongoing episode for most European countries will on average lower output and inflation by 2.2 percent and 0.7 percentage points respectively and increase unemployment by 0.3 percentage points over a three-year horizon.
September 22, 2023
Banks’ Joint Exposure to Market and Run Risk
Description: Recent failures of US banks highlight that large liability withdrawals can damage capital positions—i.e., that liquidity risk and solvency risk interact. A simple risk assessment for banks in a wide group of countries finds sizable exposure to this interaction. This varies significantly across banks—primarily reflecting differences in cash buffers, capitalization, securities holdings and exposure to market risk—and is highly concentrated. Vulnerability is generally greater for banks in AEs due to lower cash buffers, securities holdings and capitalization. Within AEs—unlike in EMs—larger banks are most exposed, due to greater wholesale funding and thinner capital buffers. Estimated aggregate losses are substantial in some countries, reflecting a range of recent shocks.
September 22, 2023
The Market Price of Risk and Macro-Financial Dynamics
Description: We propose the conditional volatility of GDP spanned by financial factors as a “Volatility Financial Conditions Index” (VFCI) and show it is closely tied to the market price of risk. The VFCI exhibits superior explanatory power for stock and bond risk premia compared to other FCIs. We use a variety of identification strategies and instruments to demonstrate robust causal relationships between the VFCI and macroeconomic aggregates: a tightening of financial conditions as measured by the VFCI leads to a persistent contraction of output and triggers an immediate easing of monetary policy. Conversely, contractionary monetary policy shocks cause tighter financial conditions.
September 22, 2023
Reaching (Beyond) the Frontier: Energy Efficiency in Europe
Description: The world is not decarbonizing fast enough, with global warming on track to reach as much as 4°C over the next century absent a global green transition. Policymakers in Europe—and beyond—still have an opportunity both to achieve net zero emissions by 2050 and to strengthen economic prospects by increasing energy efficiency, along with changing the energy mix from fossil fuels to renewables. In this paper, we assess energy efficiency (or intensity) in a panel of 38 European countries over the period 1980–2021 by using the stochastic frontier analysis and obtain statistically significant and intuitive results. We have two key findings. First, price signals, including through the introduction of a carbon tax and the removal of fossil fuel subsidies, are critical for energy efficiency, as consumers respond to changes in energy prices. Second, stronger environmental policies and institutions generate unambiguous improvements in energy efficiency by inducing investment in energy efficient equipment and buildings and nudging consumers for energy conservation. These results—robust to alternative specifications and methods—have important policy implications for green growth with higher energy efficiency.
September 22, 2023
Energy Support for Firms in Europe: Best Practice Considerations and Recent Experience
Description: The surge in energy prices due to Russia’s February 2022 invasion of Ukraine significantly increased costs for European firms, prompting governments to introduce a range of support schemes. Although energy prices had eased by early 2023, uncertainty around prices remains unusually large. Against this backdrop, this paper examines the case for government intervention and identifies best practices with a view to improving the design of existing energy support schemes, facilitating exit from those schemes, and preparing policymakers for a downside scenario in which energy prices flare up again. The paper argues that support should be limited in size, strictly temporary in nature, narrowly targeted, and accompanied by strong safeguards and conditionality, while preserving price signals as much as possible to encourage energy conservation. Finally, the paper reviews recent support schemes introduced by European governments in light of the identified best practice considerations.
September 15, 2023
The Zombie Lending Channel of Monetary Policy
Description: We uncover a new channel—the zombie lending channel—in the transmission of monetary policy to nonfinancial corporates. This channel originates from the presence of unviable and unproductive (zombie) firms. We identify exogenous variation in monetary conditions around the world by exploiting the international transmission of US monetary policy shocks. We find that tighter monetary policy leads to more favorable credit conditions for zombie firms relative to other firms. Zombies are then able to cut investment and employment by relatively less. This is indicative of evergreening motives by lenders when interest rates rise: lenders face incentives to restructure existing loans of zombie firms to avoid the realization of losses on their balance sheets. Policies that strengthen banks’ balance sheets, that limit banks’ incentives to engage in risky behavior, and laws that allow an efficient resolution of weak firms, may help mitigate zombie lending practices when financial conditions tighten.
September 15, 2023
ASEAN-5: Further Harnessing the Benefits of Regional Integration amid Fragmentation Risks
Description: The ASEAN-5 region, which comprises Indonesia, Malaysia, the Philippines, Singapore, and Thailand, has benefited substantially from its integration to the world economy, particularly through trade. Rising risks of geoeconomic fragmentation could reverse some gains reaped from globalization over the past decades. In this context, advancing regional integration among ASEAN-5 members has the potential to enhance the region’s resilience against external headwinds. This paper shows that despite sizeable progress, particularly in regional trade integration, there is room to advance financial integration, which also lags trade integration in ASEAN-5. Empirical findings from the paper illustrate that a higher degree of regional financial integration could generate sizeable output gains for the region. Using firm-level data, the paper highlights that digitalization, an area where the region is thriving, can support regional integration by helping firms better integrate into global value chains, with the benefits being stronger for small and medium sized enterprises. The results also suggest that digitalization can help firms move up the value chain through the production of more sophisticated products, often coined as higher export sophistication.