Macro-financial Risks Research Articles

Climate change risk pricing in the European stock market

ABSTRACT Climate risk is the potential risk for societies or ecosystems from the impacts of climate change. Whether financial markets price climate risks is critical to ensuring that the necessary funding flows into environmentally sound projects and that stranded assets risk is adequately managed along a ‘green transition path’. In this paper, we assess climate risks for the European stock market. We show that measures of returns spread of green vs. brown investment reflect climate risk and assets’ exposition to systematic macro-financial risk factors, which should be filtered out to measure climate risks accurately. We show that climate risks are priced by focusing on aggregate, industry, and company-level data. We propose a market-based green rating procedure to evaluate non-transparent and non-disclosing companies for which ESG information is unavailable. We illustrate its implementation using a sample of over 800 non-transparent firms.

Digital financial inclusion and household financial vulnerability: An empirical analysis of rural and urban disparities in China

In recent times, a notable increase in the leverage ratios among numerous households across China has been witnessed, culminating in heightened household financial vulnerability. Concurrently, the sphere of digital inclusive finance has witnessed rapid advancement, establishing itself as a crucial mechanism for Chinese households to counteract financial risk shocks. This research article meticulously constructs an ordered regression model, anchored in micro-level data from household surveys, to delve into the influence and operative mechanisms of digital inclusive finance on the vulnerability of household finances. Empirical findings from this study robustly indicate that the evolution of digital inclusive finance significantly mitigates the household financial vulnerability. A thorough mechanism analysis reveals that digital inclusive finance primarily curtails household financial vulnerability through several avenues: it notably enhances financial literacy, augments the income derived from household financial assets, and elevates contributions to commercial insurance. Intriguingly, a heterogeneity analysis underscores that the impact of digital inclusive finance is more pronounced in reducing financial vulnerability amongst households registered in rural areas and those with lower income levels. This article contributes to the expansion of the theoretical framework concerning household financial vulnerability, offering insightful guidance and policy implications for addressing financial vulnerability concerns and forestalling macro-financial risks.

Same old song: On the macroeconomic and distributional effects of leaving a Low Interest Rate Environment

In this paper, we present a hybrid Agent-Based Stock-Flow-Consistent (AB-SFC) model about the macroeconomic and distributional implications of central bank’s decision to leave a “Low(-for-long) Interest Rate Environment” (LIRE). Our goal is to study the non-linear effects of monetary tightening when implemented under LIRE than in an alternative “Higher Interest Rate” setting (HIRE). This way, we shed light over the interaction between monetary policy, inequality, and macro-financial fragility in a financialized economy characterized by the presence of securitization and the production of complex financial products, i.e., Asset-Backed Securities (ABSs). We obtain three main findings. First, consistent with existing empirical literature, LIRE may be sources of vulnerabilities in the financial industry (i.e., lower banks’ profitability and capital adequacy ratio). However, it may reduce systemic macro-financial risk by stimulating faster growth, lower unemployment and inequality records alongside with lower public and private indebtedness and lower-scale securitization. Second, central bank’s decision to raise interest rates improves financial sector’s performance indicators at the costs of harsh real-side consequences, i.e., permanently higher unemployment and inequality, when implemented under LIRE. Third, financialization structurally changes the functioning of the economy by feeding the creation of a debt-led economy in which monetary policy becomes less effective in its attempt of controlling inflation. Central bank’s reaction in the form of a permanently tighter monetary policy stance eventually prompts a more unequal and unstable rentier-friendly economy.

China's risk contagion using the mixed-frequency macro-financial network

We explore and compare the fundamental laws of risk contagion under different shocks during the global financial crisis and COVID-19 pandemic periods. Using the daily returns of financial market indices and the monthly growth rates of macroeconomic data for two periods, from January 1, 2003, to December 31, 2010, and from January 1, 2015, to December 31, 2021, we construct a macro-financial network with the mixed-frequency vector autoregression (MF-VAR) method to produce well-defined measures of intra-system and cross-system risk contagion. We investigate the differences in risk contagion under different types of major events using an event study model. The empirical results show that the financial system is the center of risk contagion. Regarding the direction of the cross-system risk contagion, the risk contagion from the financial to the macroeconomic system dominates the contagion in the opposite direction. The impacts of financial and pandemic shocks on the macro-financial risk contagion differ significantly. Importantly, both investor sentiment and consumer confidence mediate these impacts, providing useful insights into the prevention of risk contagion.

A taxonomy of macro-financial risks and policies to address them

A taxonomy of macro-financial risks and policies to address them

Обґрунтування заходів із мінімізації макрофіскальних ризиків в Україні

Introduction. Measures to minimize macro-fiscal risks in Ukraine are substantiated, based on the reduction of volatility of incomes formed as a result of the reproduction of the national economy, quality assurance of macroeconomic proportions. Problem Statement. Comparative analysis of reproductive processes in the national economy in the context of the formation of the system of gross and net income of consolidated national accounts with the application of economic and statistical methods of analysis.Justification of the results of comparative analysis to minimize macro-fiscal risks. Purpose. Justification of measures to minimize macro-financial risks in Ukraine based on the study of the formation of the income system in the national economy and the risks associated with them. Methods. The basis of the study was official statistical data - dynamic series of indicators of consolidated national accounts. The balance method and methods of economic and statistical analysis were used. Results. A system of indicators is proposed for statistical assessment of the volatility of the reproduction processes of the national economy. The formation of the income system and related risks for the economy of Ukraine and Germany has been studied. Measures to minimize macro-financial risks in Ukraine are substantiated. Comparative studies between countries on a single methodological basis made it possible to determine the strengths and weaknesses of the economic cycle of the compared countries, to identify the problems of economic reproduction. Conclusions. Minimization of macro-fiscal risks lies in the maintenance of macroeconomic proportions favourable to economic stability and economic growth, stability and consistency of revenue and expenditure items of the state budget.

Assessing Macrofinancial Risks from Crypto Assets

Assessing Macrofinancial Risks from Crypto Assets

WOULD FINTECH BE FUNDAMENTAL IN PREVENTING FINANCIAL CRISIS?

Since the last global financial crisis, supervisory mechanisms and regulations have become stricter, boosting banks resilience and improving financial stability. Apart from the traditional financial institutions that are governed by strict regulations, standards and guidelines, the technologically advanced form of financial services commonly referred to as FinTech has introduced new developments such as quick peer to peer lending which matches lenders and borrowers directly, putting more pressure on decision-makers and supervisors. This paper discusses the preventive steps and mitigating effects of other financial crisis. The paper explores the value of international cooperation among regulators in order to preserve financial stability in the recent world of technological changes and developments. FinTech has changed consumer preferences and priorities, with an increasing number of consumers demanding fast and easy access to services through mobile phones and other electronic devices. The paper demonstrates that while emerging innovations allow for the expansion of financial services, they also introduce new challenges to the financial system in terms of micro- and macro-financial risks during periods of financial crisis.

A Study on How International Portfolio Investment Flows Affect Macrofinancial Risks and Control Channels

In the current complex global economic background, international capital flows are becoming more frequent. Based on this, this paper takes international portfolio investment as the research object and empirically tests the causal relationship and control channel between international portfolio flows and macrofinancial risk in emerging economies. It selects the panel data of emerging economies from 2001 to 2020, constructs macrofinancial risk indicators by using contingent claim analysis and the entropy-based TOPSIS method, tests the effect of international portfolio flows on macrofinancial risk by using the panel distributed lag regression model, and explores the management effect of foreign exchange reserves and capital controls on the risk effect by using the panel threshold regression model. The results show that long-term international portfolio flows help reduce macrofinancial risk, but short-term capital flows appear to increase macrofinancial risk. In addition, both foreign exchange reserves and capital controls effectively reduce the risk effect of portfolio flows. However, when considering different types of portfolios, we find that foreign exchange reserves do not effectively control the risk effect of equity securities flows, while stricter capital controls do. This paper argues that emerging economies should be more open to international long-term portfolio flows, focus on the monitoring of short-term portfolio capital flows and equity securities flows, and coordinate the use of foreign exchange reserves and capital control instruments to manage the risk effects of portfolio flows. This paper verifies the risk effect of international portfolio investment flows through empirical analysis, tests the effectiveness of foreign exchange reserves and capital controls, and provides a decision-making reference for emerging economies to timely identify, effectively manage, and prevent the risk effect of international capital flows.

A BVAR toolkit to assess macrofinancial risks in Brazil and Mexico

espanolEste documento describe el conjunto de modelos vectoriales autorregresivos bayesianos (BVAR) que se utilizan en el Banco de Espana para elaborar proyecciones de crecimiento del PIB y simular escenarios de riesgo macrofinanciero para Brasil y Mexico. Esta herramienta esta compuesta por un modelo base para elaborar proyecciones de referencia y varios modelos satelite para llevar a cabo escenarios de riesgo. Ilustramos el uso de este marco de modelizacion con aplicaciones empiricas especificas. Dada la importancia material de Brasil y Mexico para la economia espanola y su sistema bancario, este conjunto de modelos contribuye al seguimiento de la exposicion internacional de Espana. EnglishThis paper describes the set of Bayesian vector autoregression (BVAR) models that are being used at Banco de Espana to project GDP growth rates and to simulate macrofinancial risk scenarios for Brazil and Mexico. The toolkit consists of large benchmark models to produce baseline projections and various smaller satellite models to conduct risk scenarios. We showcase the use of this modelling framework with tailored empirical applications. Given the material importance of Brazil and Mexico to the Spanish economy and banking system, this toolkit contributes to the monitoring of Spain’s international risk exposure.

Climate change and macro-financial risks: financial policy responses for an orderly low-carbon transition

Climate-related financial policies (CRFPs) are needed to tame potential climate-related financial risks deriving from climate change and to finance the low-carbon transition. International engagement levels and CRFP adoption are currently too low to encourage an adequate low-carbon transition and protect the financial system from materializing climate risks. Therefore, greater global commitment is especially important as the COP27 will likely uphold the 1.5 ∘C targets while following the Intergovernmental Panel on Climate Change’s advice to keep global warming below 2 ∘C. Despite the recent rapid proliferation of the literature on climate-related financial policymaking, some important knowledge gaps remain. Additional investigation, particularly in financial disclosure and stress tests, climate-aligned macro-prudential policies aimed at financial capital, climate data availability, and new research approaches, is required to help decision-makers achieve orderly and swift decarbonization.

Unfolding macroprudential mechanisms: central bank-led mechanisms during the post-Global Financial Crisis Turkish experience

AbstractThe Global Financial Crisis of 2008 was followed by an increased volatility in capital flows, posing considerable macro-financial risks, especially for emerging markets. Turkey addressed these macro-financial risks between 2010 and 2011. Principal decision makers at the Central Bank of the Republic of Turkey took policy actions by introducing policy mixes that trigger causal mechanisms informing the behaviour of bankers and their customers at the macro level to contain such risks. Utilising insights from causal mechanisms theory, critical realism, and realist evaluation, this article explores how the Central Bank implemented the policy mix. Our central argument is that at the macro level (i.e., structural and institutional contexts), causal mechanisms link actions with micro-level contexts (i.e., perceptions and reasoning of the target audience), whilst at the micro level, multiple causal mechanisms link policy outcomes with actor behaviour through non-linear feedback mechanisms. Our article contributes to the causal mechanisms literature by linking policy mixes and policy outcomes via causal mechanisms that informed agential actions and outcomes containing macro-financial risks.

Growth at risk: Methodology and applications in an open-source platform

This article describes the construction of an open-source growth-at-risk (GaR) model. The model provides a flexible analytical tool for policymakers and researchers aiming to use the GaR approach to characterize the probability density of GDP growth conditional on domestic and international macrofinancial variables. This article, together with its related online repository, aims to foster an understanding of macrofinancial risk factors both in advanced and emerging economies.

Macrofinancial Risks of the Transition to a Low-Carbon Economy

A disorderly transition to a low-carbon economy may pose significant costs for both financial and nonfinancial firms through the stranding of physical assets, firms’ defaults, and volatility in asset prices. The spread of these disruptions through production and financial networks may exacerbate transition costs. Green financial and monetary policies may help to mitigate the cost of transitioning to a low-carbon future, but coordination among public institutions (governments, central banks, and financial supervisors) is needed. We discuss qualitative, empirical, modeling, policy, and institutional research on this topic and identify priorities for future research.

RESEARCH ON THE MACRO NET FINANCIAL ASSETS VALUE EFFECT OF MONETARY POLICY

This paper focuses on the impact of Chinese and US monetary policy on the net financial assets value of macro balance sheet from both theoretical and empirical aspects and reveals the sectoral solvency risk conduction path based on the balance sheet channel. In addition, the paper is focused on the effects of the interest rate as a target tool for monetary policy on the macro net financial assets. In the theoretical analysis, the net present value model of the economy is constructed, and a general equilibrium model representing the relationship between the real interest rate and net asset value of five sectors is derived (government, financial, resident, enterprise and central bank sector). This model explains the basic principle how interest rates affect net financial assets values. The dataset includes the central bank, commercial banks and shadow banks, and the stock and equity liabilities of the debtor are taken as the net asset of financial institutions during the period 2000–2016. The empirical results show that an increase in the real deposit interest rate improves the net financial assets value of the four sectors, and an increase in the real loan interest rate reduces the net financial assets value of the four sectors, while the effect of the real loan interest rate is greater than the real deposit interest rate. The effect ranking of interest rates on the four sectors is financial, enterprise, government, and resident sector. Overall, loose monetary policies can reduce macro-financial risks through the balance sheet channel, while the negative effects of long-term low-interest policies should be prevented; the macro-policies should hedge sectoral risks triggered by the exit of the easing policy via the macro balance sheet channel.

Financial leverage interactions: evidence from US households and government sectors

ABSTRACT Applying VAR/SVAR analysis to the national balance sheet data of the US, this paper provides evidence that the households markedly interact with those of government sectors through the channel of financial leverage, which is defined as the liabilities-to-assets ratio. In particular, the impulse-response and forecasting error decomposition analysis further show that the federal government plays an important role in absorbing the leverage shocks in households. Nevertheless, it should be emphasized that this role of the federal government as somewhat of a macroeconomic stabilizer also costs it heavily in view of its escalating leverage over time. Among other concerns, this highly leveraged financial position renders the federal balance sheet more vulnerable to macro-financial risks, thus reducing the room for manoeuvre for countercyclical policies. Finally, with a relatively low and stable leverage ratio, the state/local governments seem to be less involved in such interactions. However, their prudent balance sheet position also implies that they play a minor role in fiscal measures supporting households during economic downturns.

Macro-financial risk in the South Pacific: analysing balance sheet effects for Fiji economy

Macro-financial risk in the South Pacific: analysing balance sheet effects for Fiji economy

Corporate Strategic Aggressiveness, Credit Cycle and Debt Default

In recent years, corporate debt default events occur frequently and accelerate in China. The debt default entities have gradually spread to state-owned enterprises, urban investment platforms, and listed companies. Constrained by the indirect mode of financing, commercial banks’ non-performing loan ratio is rising and their risk exposure is expanding in China. The continuous outbreak of debt default events and the continuous rise of bank non-performing loan ratios reflect the persistence of debt default in a period of time in China, which accumulating systemic risks in the financial sector through chain reactions, and even triggering financial crisis. Therefore, corporate debt default has become one of the major risks faced by China currently. It can not only help companies prevent and control debt default risks, but also help the financial sector better control macro financial risks to explore the main influencing factors of corporate debt default.The existing literature mainly studies the influencing factors of corporate debt default from the perspective of strategic differences. This paper combines with the reality of Chinese enterprises, re-examines the strategy from the perspective of three-dimensional balance of growth, profitability and risk, and explores the influence mechanism of enterprise strategic aggressiveness on debt default. By constructing a moderated mediating effect model, this paper puts credit cycle, which is an important factor affecting the external financing environment of enterprises, into the research framework, and further explores the moderating effect of credit cycle on the above two relationships. The results show that: Strategic aggressiveness is the main inducement of debt default; strategic aggressiveness can increase corporate default risks by negatively affecting investment efficiency, and also by positively affecting asset financial debt ratio（short-term loans for long-term investment）; credit tightening（easing）boosts（eases）the possibility of debt default for strategic aggressive enterprises, which will also indirectly adjust the impact of strategic aggressiveness on debt default by negatively affecting the relationship between investment efficiency and debt default, and also by negatively affecting the relationship between asset financial debt ratio（short-term loan for long-term investment）and debt default.On the basis of redefining the concept of strategic aggressiveness, this paper constructs the measurement index to provide theoretical support for the follow-up empirical research of strategic aggressiveness. It is helpful for managers to deepen the theoretical understanding to the influencing factors of corporate debt default and the mechanism of strategic aggressiveness, fully consider the supporting ability of their own funds to the implementation of the strategy when formulating corporate strategy, and avoid adopting radical financing strategies that rely excessively on financial liabilities or even short-term loans for long-term investments. It is also useful to provide theoretical support for the financial sector to understand the effect of credit policy implementation and better control macro financial risks. In response to the structural high-leverage problem faced by China at the present stage, avoiding the excessive deleveraging policy, the government should adopt the policy of deleveraging step by step, so as to help enterprises pass the top area of credit cycle smoothly.

Supplying Energy to Vulnerable Segments of the Population: Macro-Financial Risks and Public Welfare

The purpose of the study is to assess the level of energy supply to the population of the Eastern Europe, Caucasus, and Central Asian (EECCA) countries, taking into account their financial risk and energy efficiency for households as potential socially vulnerable consumers. The research methodology is based on three approaches to determining the energy poverty of the population, as well as the integral index of energy supply to socially vulnerable segments of the population. Based on the results of the three approaches to assessing the level of energy supply to the population of EECCA countries, it has been revealed that its critical indicators are found in Armenia, Georgia, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, and Ukraine. The multivariate analysis of variance has revealed that, in all EECCA countries, both financial risk and energy efficiency levels have a significant impact. In Azerbaijan, Kazakhstan, and Russia, financial risk has the greatest impact on the level of energy supply to socially vulnerable segments of the population, while in other EECCA countries the energy efficiency factor has the strongest impact. In a number of EECCA countries, households have poor energy supply and require efficient and reliable operation, the introduction of energy-efficient technologies for home maintenance, and the improvement of related programs. The novelty of this study lies in the proposed methodological approach to assessing the supply of energy resources to socially unprotected segments of the population, which makes it possible to determine the impact of financial risk and energy efficiency in EECCA countries.

Why does the combination of policy entrepreneur and institutional entrepreneur roles matter for the institutionalization of policy ideas?

Public administration, public policy, and political economy literatures are increasingly preoccupied with the role of agency in policy and institutional change, and the effects of institutions on the agency of individual actors. However, linkages between policy and institutional entrepreneurship in processes of institutionalization remain a black box. This article aims to fill this void. It contributes to our understanding of processes underlying the institutionalization of policy ideas in the public sector that have not been investigated adequately. Based on an exploratory case study of the introduction and institutionalization of macroprudential policies to contain macro-financial risks in Turkey, this article argues that policy and institutional entrepreneurship processes are inextricably intertwined and fundamental to the institutionalization of policy ideas: the institutionalization of new policy ideas that resolve conflicting institutional logics and facilitate cooperation and/or collaboration in inter-bureaucratic policy formulation and implementation is most likely when an individual agent with the requisite resources and capabilities builds coalitions through combining the policy and institutional entrepreneur roles while undertaking discursive and powering strategies.