Prudent Policy Research Articles

Risk connectedness between international oil and stock markets during the COVID-19 pandemic and the Russia-Ukraine conflict: Fresh evidence from the higher-order moments

Quantifying the connectedness across the oil and stock markets is vital for global asset allocation, systemic risk regulation, and prudent policy making. However, existing studies are mostly confined to return (first moment) and volatility (second moment) levels. This paper integrates the GARCHSK model with the TVP-VAR extended joint connectedness approach to examine higher-order moment risk connectedness between international oil and stock markets in both G7 and BRICS countries, thereby encompassing a wide range of global markets. This paper also discusses the impacts of geopolitical risks, acts, and threats on the total spillovers of volatility and higher-order moments based on the wavelet coherence method. Empirical results demonstrate that the risk spillovers between oil and stock markets are moment-dependent with the total kurtosis spillovers being stronger than the volatility and skewness spillovers. WTI, Brent, INE oil futures, and the Chinese and Japanese stock markets are consistent net receivers of spillovers whereas the remaining G7 stock markets are net transmitters. G7 and the Russian stock markets transmit significant net spillovers of higher-order moments to oil futures. The dynamic spillovers of volatility, skewness, and kurtosis are all time-varying and highly sensitive to the outbreak of major crisis events, especially the China-US trade war, the COVID-19 outbreak, and the Russia-Ukraine conflict. Driving factor analysis shows that the impacts of geopolitical risks, acts, and threats on total spillovers vary over time and across various frequency bands. Geopolitical risks strongly impact the total skewness spillovers during the crisis periods. Geopolitical acts exert a stronger influence on total kurtosis spillovers than geopolitical risks or threats. These findings can offer practical implications for cross-market investors, portfolio managers, market regulators, and policymakers.

The short-term effects of changes in capital regulations in Poland

In this study I attempt to address two questions. First, how to adequately measure capital regulations. Second, once they are adequately measured, what their effects are in Poland. As the starting point, I illustrate the threats of measuring capital regulations by actual regulatory capital ratios. Then, I analyse the effects of the transition to higher actual regulatory capital ratios due to the tightening of capital regulations. As a measure of capital regulations, I directly use minimum regulatory capital ratios. I apply Bayesian panel vector autoregressive models and local projections to bank-level data. I find that the tightening of capital regulations lowers bank lending for at least one out of two analysed minimum regulatory capital ratios. This implies that capital regulations could be an effective prudential policy tool in limiting excessive bank lending in Poland. I also attempt to identify whether the effects of changes in capital regulations depend on whether they are tightened or loosened.

A Data-Driven Pandemic Simulator with Reinforcement Learning

After the coronavirus disease 2019 (COVID-19) outbreak erupted, it swiftly spread globally and triggered a severe public health crisis in 2019. To contain the virus’s spread, several countries implemented various lockdown measures. As the governments faced this unprecedented challenge, understanding the impact of lockdown policies became paramount. The goal of addressing the pandemic crisis is to devise prudent policies that strike a balance between safeguarding lives and maintaining economic stability. Traditional mathematical and statistical models for studying virus transmission only offer macro-level predictions of epidemic development and often overlook individual variations’ impact, therefore failing to reflect the role of government decisions. To address this challenge, we propose an integrated framework that combines agent-based modeling (ABM) and deep Q-network (DQN) techniques. This framework enables a more comprehensive analysis and optimization of epidemic control strategies while considering real human behavior. We construct a pandemic simulator based on the ABM method, accurately simulating agents’ daily activities, interactions, and the dynamic spread of the virus. Additionally, we employ a data-driven approach and adjust the model through real statistical data to enhance its effectiveness. Subsequently, we integrated ABM into a decision-making framework using reinforcement learning techniques to explore the most effective strategies. In experiments, we validated the model’s effectiveness by simulating virus transmission across different countries globally. In this model, we obtained decision outcomes when governments focused on various factors. Our research findings indicate that our model serves as a valuable tool for decision-makers, enabling them to formulate prudent and rational policies.

The Impact Of Economic Contraction On The Financing Collectability Of Islamic Banking In Indonesia

The COVID-19 pandemic affected Indonesia's economic growth, which experienced a contraction in the first and second quarters of 2020. This study examines how economic contraction affects the collectability of Islamic banking in Indonesia, period for 2019: IV - 2020: II. The measurement of financial collectability is based on non-performing financing (NPF). The research data source comes from secondary data in publications from the Central Statistics Agency (CSA) and the Financial Services Authority (FSA). Data analysis uses descriptive statistics with the help of percentages, growth, and graphs. The results indicated that the economic contraction significantly impacted the decline in Islamic banking performance, as evidenced by an increase in NPF. The NPF increase occurs in all debtor groups: MSMEs, non-MSMEs, and households (consumption financing). The collectability of financing is separate from the area where COVID-19 spreads; where DKI Jakarta, East Java, and West Java are in the top five highest COVID-19 cases, they have better financing collectability than other provinces. Based on economic sectors, only mining and quarrying did not experience an increase in the NPF during the economic contraction period. These findings show differences with the growth-led finance paradigm. Regions that experience high cases of COVID-19 infection have better financing collectability. The practical implication of these findings is the importance of coordinating macro prudential policies with others, such as fiscal and actual sector policy, in encouraging the resilience of MSMEs, including managing the collectability of financing during economic contraction periods.

The Impact of IFRS 9 Adoption on the Financial Performance and Sustainability of Romanian Credit Institutions

ABSTRACT This paper aims to quantify the impact of the policies established by IFRS (International Financial Reporting Standards) 9 regarding the recognition and measurement of financial instruments and derivatives on the sustainability and financial performance of Romanian credit institutions. The results show a positive significant impact on performance when the evaluation is made at fair value through profit and loss and a negative one when is made through elements of other comprehensive income. While the expected credit loss policy is essential to underpin prudential policy, it also brought some financial instability for the sampled institutions.

ANALYZING THE SOCIO-LEGAL DYNAMICS AND IMPACT ASSESSMENT OF LAND ACQUISITION IN BANGLADESH: A COMPARATIVE PERSPECTIVE WITH INDIAN LAWS AND GLOBAL BEST PRACTICES

Land acquisition has continued to be a major concern in Bangladesh, a densely populated country, because of the nation’s limited land resources and the value of land to people’s livelihoods. There is a great deal of hardship and discontent as a result of inadequate land acquisition and rehabilitation policies, which have left the displaced with insufficient compensation and rehabilitation. This article compares and contrasts the land acquisition laws of India and Bangladesh, taking a critical look at both countries’ current legal frameworks. Although recent legislation has been introduced in both countries, Bangladesh’s framework is insufficient to protect the rights and interests of affected landowners. The Acquisition and Requisition of Immovable Property Act 2017 of Bangladesh has also fallen short of international standards on the acquisition process. In order to support sustainable growth and protect landowners’ rights, this article argues for the creation of a transparent legal framework and prudent policies. Based on global experiences and best practices, the paper offers a series of suggestions to improve the process of acquisition and guarantee equitable treatment for all impacted parties. Recognising the critical role of land acquisition in Bangladesh’s development trajectory and its profound impact on the livelihoods of millions, this article underscores the urgency of reforming the existing land acquisition law. This analysis contributes to the ongoing discourse on land acquisition in Bangladesh with the objective to establish a more equitable balance between public interests and the rights of landowners, ultimately benefiting society as a whole.

Coupling and decoupling of ancestral linkages and current cross-border economic activities: Genetics and policy

This paper studies the potential link between the biological evolution of populations and present-day economic interactions by estimating the correlation of shared ancestry among populations with cross-border capital and human flows. To this end, we employ the new concept of genetic distance, based on (dis)similarity of neutral gene alleles, to quantify shared ancestry. We then incorporate the genetic distance measure into an augmented gravity model, traditionally used to analyze the effect of geographical distance on bilateral exchange. Our analysis focuses on bilateral foreign direct investment (FDI) and migration across 135 countries and we use both linear regression techniques as well as the Poisson Pseudo-Maximum Likelihood Estimator to account for any non-linearities in the model. Our results show that a 1% increase in genetic distance reduces FDI flows by 0.08% while controlling for other distance constructs and factors associated with global capital and human movement. Genetic distance also has a negative effect on migration, where a 1% increase in genetic distance reduces migration flows by 0.22%, with all other things remaining constant. Our study, therefore, links shared ancestry with economic behavior, showing how historical connections are associated with current economic exchanges among nations. Additionally, recognizing that ancestral ties are outside human control, we examine policy measures that help nations overcome such distance barriers. Our findings show that strengthening a nation’s institutional quality and adherence to the rule of law can effectively mitigate any negative correlation of distance constructs with economic exchanges. These insights suggest that prudent policies to foster a stable business environment are essential for any nation to attract FDI and human capital, even from geographically or genetically distant nations.

The impact of macroprudential policies on industrial growth

This paper analyzes the causal impact of macroprudential policies on growth, using industry-level data for 89 countries for the period 1990 to 2021. The small industry size creates exogenous identification, avoiding reverse-causality. I find macroprudential tightening measures impact manufacturing growth negatively, but only for industries with high external finance dependence. This effect is stronger during banking crises, higher growth periods and for advanced economies. The effect is weaker during periods of high private credit growth. Prudential policies implemented before the pandemic mitigated the fall in growth. Growth effects on externally dependent industries are economically sizeable and can persist over three years.

Prudential net zero transition plans: the potential of a new regulatory instrument

AbstractNet zero transition plans are a promising additional instrument for prudential supervisors to assess, address and bring distant financial risks into the present. To date, transition plans have primarily emerged as non-financial disclosure requirement and as such, their prudential application has been limited. In this article, we discuss the role that transition plans can play as a new regulatory tool in banking supervision. The article outlines steps towards incorporating transition plans into prudential policy, thereby enabling supervisors to effectively use transition plans as a forward-looking instrument to better manage and overcome some of the challenges associated with climate transition risks.

How consistent are measures of financial liberalization in assessing its impact on bank cost efficiency? A cross–country empirical analysis

AbstractUsing a sample of commercial bank–year observations covering 104 countries over the 1999–2017 period, we consider five contemporary de jure and de facto indicators of financial liberalization to provide a comparative assessment of their impact on bank cost efficiency. With the sole exception of one de jure index, all other financial liberalization measures consistently indicate an improvement in cost efficiency. We also compare the effects before and after the 2007 global financial crisis, which instigated a policy shift from deregulation to prudential re–regulation. We find that prudential re–regulation did not detrimentally affect bank cost efficiency. Our results for the main financial liberalization measures hold irrespective of countries’ stage of economic development and prove robust to re–estimations based on a single-country efficiency frontier for the US, alternative model specifications and methodologies that account for endogeneity and cross section dependence. The key policy implication from our findings is that prudential policies aimed at fostering stability and less bank risk–taking, can be pursued without any risks of hindering financial intermediation and lowering bank cost efficiency.

Crowding in Private Quality: The Equilibrium Effects of Public Spending in Education

Abstract We estimate the equilibrium effects of a public school grant program administered through school councils in Pakistani villages with multiple public and private schools and clearly defined catchment boundaries. The program was randomized at the village level, allowing us to estimate its causal impact on the market. Four years after the start of the program, test scores were 0.2 standard deviations higher in public schools. We find evidence of an education multiplier: test scores in private schools were also 0.2 standard deviations higher in treated markets. Consistent with standard models of product differentiation, the education multiplier is greater for those private schools that faced a greater threat to their market power. Accounting for private sector responses increases the program’s cost-effectiveness by 85% and affects how a policy maker would target spending. Given that markets with several public and private schools are now pervasive in low- and middle-income countries, prudent policy requires us to account for private sector responses to public policy, both in policies’ design and evaluation.

Comparative investment analysis between crypto and conventional financial assets amid heightened geopolitical risk

This empirical research study aims to investigate the asymmetric spillovers among crypto and key financial assets such as gold, equity, bonds, and the dollar-to-ruble exchange rate volatility, focusing on new developments during the Russia-Ukraine conflict in 2022. Utilizing time- and frequency-domain methodologies, this study conducts an in-depth analysis employing daily frequency data from January 01, 2018, to May 30, 2023. The study employs value at risk and conditional value at risk estimations to assess potential losses in the portfolio during the crisis. The findings reveal that Bitcoin exhibits hedging ability, enabling investors to diversify risk among the underlying financial assets. The study observes a significant increase in Bitcoin investments during the crisis, leading to heightened volatility and uncertainty. Negative news has a stronger impact compared to positive news, underscoring the importance of prudent asset allocation for risk mitigation. The implications of our findings are particularly significant for financial policymakers and trade partners of Russia. The study urges them to differentiate their short- and long-term strategies and procurement contracts. In the long run, policymakers should be cognizant of the influence of the riskiness of crypto assets during economic crises, guiding the formulation of prudent policies and investment decision-making initiatives.

The Impact of Russia-Ukraine War on Bangladesh’s Economy: A Supply Chain Perspective and Way Forward

Bangladesh’s economy is facing significant challenges restricting from the Russia-Ukraine conflict, intensified by its status as an oil-importing nation vulnerable to global oil price fluctuations. This study addresses the current perspectives and challenges which include inflationary pressures, trade imbalances, and disruptions in the supply chain, leading to increased expenditures for essential commodities. This research was developed through a systematic literature review based on secondary data, including online databases, journals, and review papers, etc. This exploratory study reveals that policymakers need to diversify energy sources, forge new trade partnerships, and implement measures to bolster economic resilience. The economic fallout from the conflict, surpassing the actual war in cost, has depleted the central bank's reserves, prompting austerity measures. The forex market experiences volatility, contributing to high trade deficits and the highest inflation rate in recent years. Bangladesh must address forex management challenges and formulate prudent policies for economic recovery. The conflict has disrupted global commodity markets, leading to inflationary pressures and increased costs for businesses in Bangladesh, especially larger organizations handling rising raw material costs and weak consumer demand. The rationale of this paper is to evaluate the literature on this aspect and apprehend the global demand, and supply of food and commodities, economic impacts in Bangladesh, challenges in global trade, trade relations, currency fluctuations, inflation, emergency price, and its consequences, recognize gaps and advocate future research itineraries. The paper offers a synopsis and appraisal of the overall economy of Bangladesh and finally navigates a way forward to the policymakers which would unlock further research to develop this sector.

Energy, economy, financial development, and ecological footprint in Singapore

The escalating energy consumption resulting from rapid economic expansion is causing a decline in ecological health, therefore exacerbating the issue of climate change on a global scale. The juxtaposition of Singapore's ranking as having the most robust financial market with the largest ecological deficit globally implies the potential validity of the trade-off theory. The purpose of this study is to analyze the influence of Singapore's financial growth, energy use and economic development on the nation's ecological footprint. The investigation applied the Auto Regressive Distributed Lag (ARDL) method by using the annual time series data spanning from 1979 to 2021. The stationarity of data was confirmed by using several unit root tests. The ARDL bounds test revealed evidence for long term cointegration among the variables. The empirical results exposed that a 1% upsurge in financial growth, energy use, and economic expansion leads to a corresponding long-term increase in ecological footprint of 0.77%, 1.11% and 0.32%, as well as short-term increases of 0.44%, 0.61%, and 0.13%, respectively. Several diagnostic tests were used to confirm the accuracy of the ARDL outcomes. The findings of the analysis hold significant relevance for policymakers as they can inform the development of prudent policies that promote sustained economic prosperity without compromising environmental integrity.

Asymmetric Effect of Oil Price on Economic Activity: Evidence from Lebanon Using NARDL Model

The aim of this paper is to investigate the impact of oil prices on the real economic activity of Lebanon, represented by the Gross Domestic Product (GDP) while controlling for inflation. For this purpose, this study employs a non-linear auto-regressive distributed lag model (NARDL) that enables to take into consideration the asymmetrical nature of the relationship between these two variables. The empirical findings confirm the asymmetric impact of changes in oil prices on economic activity. Notably, reductions in oil prices positively influence GDP in the long term and exert a more pronounced fluctuating effect compared to increases in oil prices, which are statistically insignificant. In other words, the country’s GDP, serving as a measure of the total value of finished goods and services, does not respond significantly to oil price rises but is influenced by oil price reductions. This empirical analysis focuses particularly on Lebanon, and time series data spanning from 1988 to 2021 are used to explore this relationship. This study guides Lebanon's policymakers, revealing the impact of declining oil prices on economic activity. It highlights growth opportunities amidst challenges like economic crises and corruption. Advocating for prudent policies and strategies, it offers a pathway for sustainable development.

The heterogeneous impacts of environmental technologies and research and development spending on green growth in emerging economies: the moderating role of financial globalization

Introduction: Understanding the heterogeneous impacts of environmental technologies (ETs), research and development (RD) spending and financial globalization (FG) on green economic growth (GEG) is worthwhile to promote progress toward GEG. Besides, exploring the moderating role of FG is essential to uncover the nuanced dynamics that shape the relationship between ET, RD, GEG, and the influence of global financial integration. Thus, this study examines the effects of ET, RD and FD on GEG in emerging market economies (EMEs). In addition, we investigate the moderating role of FG on the effects of ETs and RD on GEG.Methods: The method of moments quantile regression (MMQR) is applied using a fixed effects model that can capture distributional heterogeneity and nonnormality concerns for the panel of 25 EMEs from 2000 to 2019. In addition, other alternative models are applied to conduct robustness analysis. We use green total factor productivity (GP) to proxy for GEG using the Malmquist–Luenberger Productivity Index (MLPI) strategy based on the directional distance function (DDF).Results and discussion: The findings imply that ETs significantly impact GEG, revealing evidence that promoting environmental innovation positively contributes to GEG progress in EMEs. Likewise, RD promotes GEG progression in EMEs. Additionally, FG positively impacts GEG. FG also positively moderates the effects of ETs and RD on GEG, implying that countries open to FG can better harness the positive roles of investment in ETs and RD on GEG in EMEs. Therefore, policymakers should develop prudent policies to encourage ETs and RD to promote GEG in EMEs, which aligns with the goals of controlling climate variation (SDG-13) and fostering innovation (SDG-9) to promote GEG in EMEs.

Basel III countercyclical bank capital buffer estimation and its relation to monetary policy

This paper proposes a new model to estimate the countercyclical bank solvency capital buffer established in Basel III. The model lies in a flexible semi-nonparametric approach to capture the probability distribution of the capital adequacy ratio, but also a stochastic Ornstein–Uhlenbeck process that incorporates components of the cyclical behavior. We measure the risk of breaching the minimum capital threshold that separates the countercyclical capital buffer from other capital components and analyze its relationship with macroeconomic variables such as interest rates, credit levels, and credit-to-GDP gaps. Furthermore, a vector autoregressive model is estimated to test the existence of the bank-capital channel and the risk-taking channel. The application to Germany and the Netherlands shows that countercyclical buffers are more accurate when skewness and kurtosis are considered and the probability of breaching the regulatory threshold is sensitive to macroeconomic signals. Overall, our model seems to be a useful tool for monitoring prudential policy and as a guide to establish countercyclical capital buffers.

Integration of B-to-B trade network models of structural evolution and monetary flows reproducing all major empirical laws

We develop a single two-layered model framework that captures and replicates both the statistical properties of the network as well as those of the intrinsic quantities of the agents. Our model framework consists of two distinct yet connected elements that were previously only studied in isolation, namely methods related to temporal network structures and those associated with money transport flows. Within this context, the network structure emerges from the first layer and its topological structure is transferred to the second layer associated with the money transactions. In this manner, we can explain how the micro-level dynamics of the agents within the network lead to the exogenous manifestation of the aggregated system statistical data en-wrapping the very same agents within the system. This is done by capturing the essential dynamics of collective motion in complex networks that enable the simultaneous emergence of tent-shaped distributions in growth rates within the agents, together with the emergence of scaling properties within the network in the study. We can validate the model framework and dynamics by applying these to the context of the real-world inter-firm trading network of firms in Japan and comparing the results of the statistical distributions at both network and agent levels in a temporal manner. In particular, we compare our results to the fundamental quantities supporting the seven empirical laws observed in data: the degree distribution, the mean degree growth rate over time, the age distribution of the firms, the preferential attachment, the sales distribution in steady states, their growth rates, their scaling relations generated by the model. We find these results to be nearly identical to the real-world data. The framework has the potential to be transformed into a forecasting tool to support decision-makers on financial and prudential policies.

The wisdom of claiming ownership of human genomic data: A cautionary tale for research institutions.

This article considers the practical question of how research institutions should best structure their legal relationship with the human genomic data that they generate. The analysis, based on South African law, is framed by the legal position that although a research institution that generates human genomic data is not automatically the owner thereof, it is well positioned to claim ownership of newly generated data instances. Given that the research institution exerts effort to generate the data, it can be argued that it has a moral right to claim ownership of such data. Combined with the fact that it has an interest in having comprehensive rights in such data, it appears that the prudent policy for research institutions is to claim ownership of the human genomic data instances that they generate. This policy is tested against two opposing policy positions. The first opposing policy position is that research participants should own the data that relate to them. However, in light of data protection legislation that already provides extensive protections to research participants, bestowing data ownership on research participants would offer little benefit to such individuals, while leading to significant practical problems for research institutions. The second opposing policy position is that the concept of ownership should be abandoned in favour of data custodianship. This opposing position is problematic, as avoiding reference to ownership is a denial of legal reality and hence not a useful policy. Also, avoiding reference to ownership will leave research institutions with limited legal remedies in the event of appropriation of data by third parties. Accordingly, it is concluded that the wisest policy for research institutions is indeed to explicitly claim ownership of the human genomic data instances that they generate.

Short-term Capital Inflows and Banking Systemic Risk

Based on stock data of listed banking companies, this article uses the Copula-CoVaR method to estimate banking systemic risk. Study has found that local and non-state-owned large banks are susceptible by negative impacts and greater the financial market risk spillovers. Research has calculated the scale of short-term cross-border capital inflows per quarter from 2010 to 2020 and found that short-term cross-border capital inflows have a positive impact on the improvement of banking systemic risk, and it will amplify its impact through real estate market fluctuations. The policy implication of the article is to pay attention to the use of macro prudential policy tools, guide cross-border capital inflows, avoid the aggregation of high-risk assets such as the real estate market, prevent risk accumulation, and prevent and resolve major systemic financial risks.