The global Great Recession has sparked renewed interest in the relationships between financial conditions and real activity. This paper considers the Swiss experience, studying the impact of credit market conditions and housing prices on real activity over the last three decades through the lens of a medium-scale structural Bayesian vector autoregressive model (BVAR). From a methodological point of view, the analysis is challenging for two reasons. First, we must cope with a large number of variables which leads to a high-dimensional parameter space in our model. Second, the identification of economically interpretable shocks is complicated by the interaction among many different relevant factors. As to the first challenge, we use Bayesian shrinkage techniques to make the estimation of a large number of parameters tractable. Specifically, we combine a Minnesota prior with information from training observations to form an informative prior for our parameter space. The second challenge, the identification of shocks, is overcome by combining zero and sign restrictions to narrow the plausible range of responses of observed variables to the shocks. Our empirical analysis indicates that while credit demand and, in particular, credit supply shocks explain a large fraction of housing price and credit fluctuation, they have a limited impact on real activity.
This paper provides an empirical analysis of the network characteristics of two interrelated interbank money markets and their impact on overall market conditions. Based on transaction data from the unsecured and secured Swiss franc money markets, the trading network structures are assessed before, during and after the financial market crisis. It can be shown that banks in the unsecured market are connected to a lower number of counterparties but rely heavily on reciprocal and clustered trading relationships. The corresponding network structure likely favored the exchange of liquidity prior to the financial market crisis but also might have led to a lower resilience of the unsecured market. There is empirical evidence that conditions in both sub-markets were significantly driven by the individual network position of banks. The network topology likely affected the shift observed from unsecured to secured lending and the increase in risk premia for unsecured lending during the financial market crisis. This paper therefore provides further evidence on the functioning of interbank money markets and, especially, on the impact of market participants interconnectedness.
What is the added value of a security which qualifies as a "high-quality liquid asset" (HQLA) under the Basel III "Liquidity Coverage Ratio" (LCR)? In this paper, we quantify the added value in terms of yield changes and, as suggested by Stein (2013), call it HQLA premium. To do so, we exploit the introduction of the LCR in Switzerland as a unique quasi-natural experiment and we find evidence for the existence of an HQLA premium in the order of 4 basis points. Guided by theoretical considerations, we claim that the HQLA premium is state dependent and argue that our estimate is a lower bound measure. Furthermore, we discuss the implications of an economically significant HQLA premium. Thereby, we contribute to a better understanding of the LCR and its implications for financial markets.
The global Great Recession has sparked renewed interest in the relationships between financial conditions and real activity. This paper considers the Swiss experience, studying the impact of credit market conditions and housing prices on real activity over the last three decades through the lens of a medium-scale structural Bayesian vector autoregressive model (BVAR). From a methodological point of view, the analysis is challenging for two reasons. First, we must cope with a large number of variables which leads to a high-dimensional parameter space in our model. Second, the identification of economically interpretable shocks is complicated by the interaction among many different relevant factors. As to the first challenge, we use Bayesian shrinkage techniques to make the estimation of a large number of parameters tractable. Specifically, we combine a Minnesota prior with information from training observations to form an informative prior for our parameter space. The second challenge, the identification of shocks, is overcome by combining zero and sign restrictions to narrow the plausible range of responses of observed variables to the shocks. Our empirical analysis indicates that while credit demand and, in particular, credit supply shocks explain a large fraction of housing price and credit fluctuation, they have a limited impact on real activity.
This paper provides an empirical analysis of the network characteristics of two interrelated interbank money markets and their impact on overall market conditions. Based on transaction data from the unsecured and secured Swiss franc money markets, the trading network structures are assessed before, during and after the financial market crisis. It can be shown that banks in the unsecured market are connected to a lower number of counterparties but rely heavily on reciprocal and clustered trading relationships. The corresponding network structure likely favored the exchange of liquidity prior to the financial market crisis but also might have led to a lower resilience of the unsecured market. There is empirical evidence that conditions in both sub-markets were significantly driven by the individual network position of banks. The network topology likely affected the shift observed from unsecured to secured lending and the increase in risk premia for unsecured lending during the financial market crisis. This paper therefore provides further evidence on the functioning of interbank money markets and, especially, on the impact of market participants interconnectedness.
We ask whether the markets expected the Swiss National Bank (SNB) to discontinue the 1.20 cap on the Swiss franc against the euro in January 2015. In the runup to the SNB announcement, neither options on the euro/Swiss franc nor FX liquidity indicated a significant shift in market expectations. Furthermore, we find that the SNB's verbal interventions during the period of cap enforcement increased the credibility of the cap by reducing the uncertainty of future euro/Swiss franc rate. We conclude that the markets did not anticipate the discontinuation of the policy.
We ask whether the markets expected the Swiss National Bank (SNB) to discontinue the 1.20 cap on the Swiss franc against the euro in January 2015. In the runup to the SNB announcement, neither options on the euro/Swiss franc nor FX liquidity indicated a significant shift in market expectations. Furthermore, we find that the SNB's verbal interventions during the period of cap enforcement increased the credibility of the cap by reducing the uncertainty of future euro/Swiss franc rate. We conclude that the markets did not anticipate the discontinuation of the policy.
A surprisingly large number of countries have been able to finance a significant fraction of domestic investment using foreign finance for extended periods. While many of these episodes are in low-income countries where official finance is more important than private finance, this paper also identifies a number of episodes where a substantial fraction of domestic investment was financed via private capital inflows. That said, foreign savings are not a good substitute for domestic savings, since more often than not episodes of large and persistent current account deficits do not end happily. Rather, they end abruptly with compression of the current account, real exchange rate depreciation, and a sharp slowdown in investment. Summing over the deficit episode and its aftermath, growth is slower than when countries rely on domestic savings. The paper concludes that financing growth and investment out of foreign savings, while not impossible, is risky.
Recent attempts to connect the current ‘next billion’ to the Internet in places such as sub-Saharan Africa have not met expectations. In places where Internet infrastructure has come online and prices have gone down, the expected consequent increase in uptake was not observed. I develop a framework that incorporates language in the the two-sided markets framework, viewing differences as transaction costs. As a result of the cross-side network effects, it is difficult to isolate the causal effect of one on the other. The exogenous introduction of the Setswana language interface on the South African Google Search website was a spillover of the development of that interface for the Botswanan Google website. This exogenous improvement in the accessibility of Setswana-language content has resulted in a substantial increase in the number of native Setswana speakers coming online and owning personal computers. This is turn has also led to increased usage of the Setswana language online. This adoption appears to also lead to improvements in employment.
