Tightening Of Financial Conditions Research Articles

Consumer Loan Rate Dispersion and the Role of Competition: Evidence from the Turkish Banking Sector

This paper aims to examine the degree of dispersion in the loan pricing of commercial banks and its association with competitive conditions. To this end, an indexation mechanism processing a novel bank-level dataset is proposed to quantify the lending rate variability in general-purpose, vehicle, and housing loans for the period January 2007-April 2020. In panel convergence tests, we show that there exists heterogeneity in long-term co-movements in banks’ loan pricing, while periods following the tightening in financial conditions display short-term deviations from general tendencies demonstrated by dispersion indices. The methodological setting also entails the construction of competition indicators for total and segment-based credit market developments. The competitive conditions monitored by Herfindahl-Hirschman Indicator (HHI) present that housing and vehicle loan segments have been concentrated in recent years. Quantile regression results further validate that improvements in the competition are associated with a lower level of lending rate dispersion in housing and vehicle segments in a statistically significant manner, whereas this relation is not applicable for general-purpose loans.

Financial Conditions and Economic Activity: Insights from Machine Learning

<ns3:p>Machine learning (ML) techniques are used to construct a financial conditions index (FCI). The components of the ML‐FCI are selected based on their ability to predict the unemployment rate one‐year ahead. Three lessons for macroeconomics and variable selection/dimension reduction with large datasets emerge. First, variable transformations can drive results, emphasizing the need for transparency in selection of transformations and robustness to a range of reasonable choices. Second, there is strong evidence of nonlinearity in the relationship between financial variables and economic activity—tight financial conditions are associated with sharp deteriorations in economic activity and accommodative conditions are associated with only modest improvements in activity. Finally, the ML‐FCI places sizable weight on equity prices and term spreads, in contrast to other measures. These lessons yield an ML‐FCI showing tightening in financial conditions before the early 1990s and early 2000s recessions, in contrast to the National Financial Conditions Index (NFCI).</ns3:p>

Markup dynamics and financial frictions: The Spanish case

In this paper, we estimate price markups on a panel of Spanish manufacturing firms for the period 2000–2012 ​at a 3-digit sectoral level. Our results reveal that there is no evidence of large market power in the industries considered; however, in around 60% of these industries average markups either increased or remained stable over the crisis (2008–2012), despite the sharp fall in economic activity. We examine whether this result is related to the extremely tight financial conditions faced by Spanish corporations during the crisis. In this setting, firms may try to boost current profits by increasing markups –and possibly foregoing market share– to cover their financial commitments and fund their operations. We find a positive association between our measure of financial pressure and the estimated change in average markups between 2000-2007 and 2008–2012. This result suggests that those manufacturing industries more exposed to financial shocks by the end of the expansionary period tended to experience a larger increase in markups over the crisis.

Non-Financial Corporate Debt in Advanced Economies, 2010–17

This paper studies the evolution of non-financial corporate debt among publicly listed companies in major advanced economies between 2010 and 2017. Since 2010, firms have started to rely more on corporate bond markets and have used part of their debt to increase their holdings of cash. In our sample of some 5,000 firms, we find substantial differences across countries, industries, firms, and years in leverage and debt maturity, and we also identify time factors that are common drivers of capital structures. Within countries, loosening an index of financial conditions seems to be associated with lengthening debt maturity after controlling for firms’ characteristics. Across firms and countries, leveraging and lengthening debt maturity have been greater where economic growth was stronger. Tighter financial conditions are positively associated with an increase in short-term debt financing. Quantile regressions suggest that there is substantial heterogeneity among firms on how they react to macro-financial conditions: large increases in long-term debt financing and large declines in short-term debt financing tend to be driven more by better macroeconomic performance, while large increases in short-term debt financing are more strongly impacted by tighter financial conditions. Since the paper uses data up to 2017, it does not reflect developments that occurred during the coronavirus pandemic. Nonetheless, sensitivity analysis shows that a significant amount of corporate debt, representing more than 5 percent of GDP, could be at risk in some countries, with an adverse spillover to the financial system if financial conditions tighten or economic growth slows down. This suggests that vulnerabilities should be closely monitored and policy action taken if warranted.

Ghana

The impact of the COVID-19 pandemic on the Ghanaian economy will be severe. The economic shock initially materialized through trade disruptions with China, the decline in commodity prices, and tightening of financial conditions, even before the first confirmed case on March 12. The authorities’ policy response to the pandemic has been timely and proactive, focusing on public health preparedness measures, partial lockdowns, and a targeted economic relief package. The pandemic and ensuing containment and behavioral responses are dampening domestic growth, affecting revenue mobilization, and putting significant pressures on foreign exchange reserves.

Forecasting Macroeconomic Risks

We construct risks around consensus forecasts of real GDP growth, unemployment, and inflation. We find that risks are time-varying, asymmetric, and partly predictable. Tight financial conditions forecast downside growth risk, upside unemployment risk, and increased uncertainty around the inflation forecast. Growth vulnerability arises as the conditional mean and conditional variance of GDP growth are negatively correlated: downside risks are driven by lower mean and higher variance when financial conditions tighten. Similarly, employment vulnerability arises as the conditional mean and conditional variance of unemployment are positively correlated, with tighter financial conditions corresponding to higher forecasted unemployment and higher variance around the consensus forecast.

Inflation at Risk

We investigate how macroeconomic drivers affect the predictive inflation distribution as well as the probability that inflation will run above or below certain thresholds over the near term. This is what we refer to as Inflation-at-Risk–a measure of the tail risks to the inflation outlook. We find that the recent muted response of the conditional mean of inflation to economic conditions does not convey an adequate representation of the overall pattern of inflation dynamics. Analyzing data from the 1970s reveals ample variability in the conditional predictive distribution of inflation that remains even when focusing on the post-2000 period of stable and low mean inflation. We also document that in the United States and in the Euro Area tight financial conditions carry substantial downside inflation risks, a feature overlooked by much of the literature. Our paper offers a new empirical perspective to existing macroeconomic models, showing that changes in credit conditions are also key to understand the dynamics of the inflation tails.

Non-Financial Corporate Debt in Advanced Economies, 2010-17

This paper studies the evolution of non-financial corporate debt among publicly listed companies in major advanced economies between 2010 and 2017. Since 2010, firms have started to rely more on corporate bond markets and have used part of their debt to increase their holdings of cash. In our sample of some 5,000 firms, we find substantial differences across countries, industries, firms, and years in leverage and debt maturity, and we also identify time factors that are common drivers of capital structures. Within countries, loosening an index of financial conditions seems to be associated with lengthening debt maturity after controlling for firms' characteristics. Across firms and countries, leveraging and lengthening debt maturity have been greater where economic growth was stronger. Tighter financial conditions are positively associated with an increase in short-term debt financing. Quantile regressions suggest that there is substantial heterogeneity among firms on how they react to macro-financial conditions: large increases in long-term debt financing and large declines in short-term debt financing tend to be driven more by better macroeconomic performance, while large increases in short-term debt financing are more strongly impacted by tighter financial conditions. Since the paper uses data up to 2017, it does not reflect developments that occurred during the coronavirus pandemic. Nonetheless, sensitivity analysis shows that a significant amount of corporate debt, representing more than 5 percent of GDP, could be at risk in some countries, with an adverse spillover to the financial system if financial conditions tighten or economic growth slows down. This suggests that vulnerabilities should be closely monitored and policy action taken if warranted.

Fiscal Multipliers with Financial Fragmentation Risk and Interactions with Monetary Policy

We quantify the size of fiscal multipliers under financial fragmentation risk and demonstrate how non-standard monetary policy can support the macroeconomic transmission of fiscal interventions. We employ a DSGE model with financial frictions whereby the interplay of corporate, banks and sovereign solvency risk affect the transmission of fiscal policy. The output multiplier of fiscal expansion is found to be significantly dampened by tighter financial conditions in case households are less certain about implicit and explicit state-guarantees for the banking system, or banks are weakly capitalized and highly exposed to the government sector. In this context, we show that central bank asset purchases or liquidity operations designed to ensure favourable bank funding conditions can restore fiscal multipliers. JEL Classification: E44, E52, E62

Social Responsibility: Motives, Values, Moral Grounds (On the Example of Business Organizations and NGOs of Volgograd)

The authors present the results of the study of motives, as well as value and moral grounds determining the socially responsible activities of commercial and non-profit organizations. The research is based on the hypothesis that the social responsibility of organizations is determined not only by economic and sociological factors (fixed concepts of "integrity", "voluntary contribution", "social investment", "consideration of public expectations", "partnership", "voluntary environmental reporting", etc.), but also moral and ethical attitudes, subjects orientation to moral values. These attitudes and orientations and practical experience related to them are objectified in the language with the help of such concepts as "charity", "unselfishness", "help", "care", etc. In order to test the hypothesis, the researches conducted an empirical study within which 15 experts were identified and interviewed. Data collection was carried out by the method of in-depth semi-structured interview with the subsequent analysis of the opinions expressed by experts. The qualitative research methods made it possible to identify and analyze the semantic content of ideas about social responsibility of representatives of business organizations and NGOs in Volgograd. The study showed the importance of not only economic opportunities for socially responsible activities, but also of moral grounds, because even in tight financial conditions the moral need to provide assistance and care encourage entrepreneurs to seek resources and opportunities for these purposes. The authors conclude that the initiative participation of business in solving social problems of the region (regardless of the declared goals and chosen forms) is determined by internal imperatives: personal value "coordinate system" and moral and ethical attitudes of business leaders and NGOs. According to the results of the study, socially responsible activity of business organizations and NGOs in Volgograd is often determined by personal relationships between people, rather than institutional ties. It is shown that the restriction of the expansion and institutionalization of socially responsible practices of business organizations in the region is due to their lack of financial resources. However, this does not prevent representatives of Volgograd business to respond to requests for help, but also to initiate helping behavior. The study showed that in conditions of lack of financial resources, moral and ethical factors (duty, care, loyalty, gratitude, unselfishness, justice, empathy, love for people) play a decisive role in motivating helping behavior and charity. The recommendations formulated by the results of the research are designed to contribute to the formation in the regional community of the attitude to socially responsible behavior as a natural component of human life. This will allow wider use of moral arguments and non-material incentives to promote and improve the efficiency of socially responsible activities of companies in our region.

Financial Frictions and Fluctuations in Volatility

During the recent U.S. financial crisis, the large decline in aggregate output and labor was accompanied by both a tightening of financial conditions and a large increase in the dispersion of growth rates across firms. The tightened financial conditions manifested themselves as increases in firms' credit spreads and decreases in both equity payouts and debt purchases. These features motivate us to build a model in which increased volatility of firm level productivity shocks generates a downturn and worsened credit conditions. The key idea in the model is that hiring inputs is risky because financial frictions limit firms' ability to insure against shocks. Hence, an increase in idiosyncratic volatility induces firms to reduce their inputs to reduce such risk. We find that our model can generate most of the decline in output and labor in the Great Recession of 2007–2009 and the observed tightening of financial conditions.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

World Economic Prospects Monthly

Overview: Global GDP growth to fall to a post‐crisis low ▀ The latest flare‐up in US‐China trade tensions and ongoing industrial weakness are adding to concerns about the global economic outlook. As a result, we have again lowered our world GDP growth forecasts slightly, to 2.6% in 2019 – the weakest since the global financial crisis – and then 2.7% in 2020, both well below the average of 3.0% in the preceding five years. ▀ In July, the global manufacturing PMI remained below the 50 no‐change level for the third month running and survey‐based measures of firms’ export orders continued their downward trend. Q3 will probably be another weak quarter for trade and industry. ▀ Japan's trade restrictions on Korea highlight the risk of trade tensions creeping beyond the US‐China frontline. Accordingly, we have scaled back both our world trade and investment forecasts. Both are now expected to record very weak rises in 2019 and then stage only modest recoveries in 2020. ▀ Although the recent softening in service sector surveys points to manufacturing woes spilling over to the more domestically‐focused sectors of the economy, consumer indicators overall have been fairly resilient. Our advanced economy consumer confidence indicator climbed to a 2019 high in July, while retail sales were strong at the end of Q2. We expect solid household spending to offset weakness elsewhere and to limit the scale of the slowdown in global growth. ▀ A clear downside risk to our forecast is that the US carries out its threat to impose 10% tariffs on a further $300bn of imports from China. The intention may be to railroad Beijing into agreeing a deal, but the persistent moving of the goal posts may make it disinclined to negotiate. We estimate that the tariff hikes could lower global GDP growth by just 0.1pp in 2020, but the impact could be larger if it has substantial confidence effects or leads to a significant tightening in financial conditions.

Labor Market and Financial Shocks: A Time‐Varying Analysis

AbstractWe estimate a time‐varying VAR model to analyze the effects of a financial shock on the U.S. labor market. We find that a tightening of financial conditions is highly detrimental to the labor market. We show that while negative financial shocks have been responsible for increases in unemployment, our model does not find significant contributions of financial shocks during periods of expansion. The source of this asymmetry is the time‐varying standard deviation of the identified shock, which is higher in times of financial distress; on the other hand, we find that the transmission mechanism does not significantly change over time.

Weakness of investment in Portugal: what role do credit supply and fiscal consolidation shocks play?

In order to illustrate how tightened financial conditions have hampered investment in Portugal, we estimate a Factor Augmented Vector AutoRegressive model (FAVAR) with Bayesian techniques. We extract a financial conditions indicator and identify credit supply, demand and fiscal consolidation shocks with sign restrictions. We show that changes in financial conditions, which result from both credit supply shocks and fiscal shocks, have a protracted impact, especially on bank loans and bank lending spreads. We then develop a scenario in which we the tightening in financial conditions in the wake of the sovereign crisis is attributed to credit supply shocks. The analysis suggests that, due to the crisis, by the end of 2017, Portuguese GDP, corporate investment and corporate loans were reduced by respectively 6, 22 and 20 p.p., public investment by 1 p.p. of GDP and bank lending spreads widened by 80 b.p.

World Economic Prospects Monthly

Overview: Market falls overstate loss of momentum ▀ Financial market moves in recent months suggest that there is increasing concern about a substantial global growth slowdown or even a recession. But we continue to see this as an over‐reaction to the weakening economic data; while the downside risks to the global GDP growth outlook have clearly risen, our baseline forecast for 2019 is little changed at 2.7%, down from 3% in 2018. ▀ Recent economic news confirms that the Q3 economic soft patch appears to have spilled over into Q4, particularly in the industrial sector which has seen a broad‐based loss of momentum in many economies coinciding with a further slowdown in global trade growth. But while surveys of service sector activity have also moderated, the falls have been rather less abrupt, suggesting that overall global GDP growth is slowing albeit not alarmingly so. ▀ On balance, we think that the weaker data do not provide compelling evidence that global growth is slowing more sharply than our December forecast. Although the financial market sell‐off and associated tightening in financial conditions will impinge on growth, this may at least be partly offset by weaker inflation in response to lower oil prices, now seen at US$61pb in 2019. This, combined with the continued strength of labour markets and the likelihood of further moderate wage growth, points to a further period of solid household spending growth. ▀ Nonetheless, the risk of a sharper slowdown has risen. Cyclical risks have increased over the past couple of years as spare capacity has diminished. And uncertainty over the economic and financial market impact of the unwinding of central balance sheets have added to the risk of policy mistakes. ▀ Although our central view is that the recent financial market correction will not morph into something rather nastier, further sustained weakness (particularly if accompanied by dollar strength) would have more significant implications for activity and could see world growth falling below the 2016 post‐crisis low of 2.4%.

Foreword

According to the OECD Economic Outlook from the 21st of November 2018, the global expansion has peaked. Global GDP growth is projected to ease gradually from 3.7% in 2018, to around 3½ per cent in 2019 and 2020, broadly in line with underlying global potential output growth. In the near term, policy support and strong job growth continue to underpin domestic demand. However, macro-economic policies are projected to become less accommodative over time, and headwinds from trade tensions, tighter financial conditions and higher oil prices are set to continue.....

World Economic Prospects Monthly

Overview: A solid 2019, despite the soft end to this year ▀ While the global economy looks set to end this year on a soft note, we still see the expansion regaining some momentum in 2019 and attach only a 5% probability to a global recession next year. Overall, we still see global GDP growth slowing to 2.8% in 2019 from 3.0% (0.1pp lower than last month) in 2018. ▀ The Q3 GDP figures from the advanced economies made fairly dismal reading. Admittedly, US growth only slowed marginally on a quarterly basis, and remains comfortably above potential, but Germany, Japan and Italy, among others, all contracted. Nonetheless, apart from Italy, these contractions appear to be explained by one‐off factors – as a result, we see growth rebounding in Q4, with only Italy entering recession. This is supported by the recent stabilisation of composite PMIs after their slide in Q3. ▀ China has also slowed and a further loss of momentum is likely in the short term as the effects of recent policy loosening take time to filter through to the real economy. Emerging market GDP growth has softened too and the generalised tightening in financial conditions suggests that the slowdown may continue. ▀ But the US and China slowdowns reduce the risk of destabilising imbalances building that would add to medium‐term downside risk. US growth is also likely to remain above trend and thus broadly supportive for the global outlook. A silver lining to US growth moderation may be a weaker US dollar – we expect the euro to rise to $1.20 by end‐2019 – which would, other things being equal, support global trade and should also boost EM growth via financial market and financial balance sheet channels. ▀ Finally, the oil price plunge over recent months may provide a fillip for global growth via lower inflation. We now expect the oil price to rise gently in 2019 to about $65pb by year‐end, well below our previous forecast of $73pb. Not only will this boost households' real incomes, but it may also temper central banks' plans to raise rates.

Economic policy uncertainty spillovers in small open economies: The case of Hong Kong

AbstractThis paper studies the extent to which economic policy uncertainty shocks in major economies affect real economic activity in small open economies. We use Hong Kong as a case study. Following Baker, Bloom and Davis (2016), we construct a newspaper‐based economic policy uncertainty index for Hong Kong for the period 1998 to 2016. We estimate international spillovers of uncertainty and find large spillovers of uncertainty from major economies to Hong Kong. Furthermore, using a structural vector autoregressive approach, we show that a rise in domestic economic policy uncertainty leads to tight financial conditions, and lower investment and vacancy posting, dampening domestic output growth.

Partisan Conflict, Policy Uncertainty and Aggregate Corporate Cash Holdings

This paper distinguishes political uncertainty from policy uncertainty shocks and uncovers new empirical facts about how each impacts the aggregate cash holdings of US firms. Our baseline structural vector autoregression model shows that an exogenous one standard deviation shock to political and economic policy uncertainty is followed by a 1 and 1.8 percent increase in aggregate corporate cash-to-total assets after five and eight quarters, respectively. The baseline result also shows that policy uncertainty shocks tend to raise financial market volatility while political uncertainty shocks tend to lower financial market volatility. Moreover, we find evidence that political uncertainty exerts asymmetric effects on aggregate corporate cash holdings, with a shock tending to raise cash holdings under normal financial conditions and lower cash holdings under tight financial conditions. Our main results are robust against a wide range of shock identification schemes as well as against parametric and non-parametric model estimations.

Partisan conflict, policy uncertainty and aggregate corporate cash holdings

This paper distinguishes political uncertainty from policy uncertainty shocks and uncovers new empirical facts about how each impacts the aggregate cash holdings of US firms. Our baseline structural vector autoregression model shows that an exogenous one standard deviation shock to political and economic policy uncertainty is followed by 1 and 1.8% increase in aggregate corporate cash-to-total assets after five and eight quarters, respectively. The baseline result also shows that policy uncertainty shocks tend to raise financial market volatility while political uncertainty shocks tend to lower financial market volatility. Moreover, we find evidence that political uncertainty exerts asymmetric effects on aggregate corporate cash holdings, with a shock tending to raise cash holdings under normal financial conditions and lower cash holdings under tight financial conditions. Our main results are robust against a wide range of shock identification schemes as well as against parametric and non-parametric model estimations.