The Effectiveness of Macroprudential Policy on Bank Risk (Job Market Paper) [PDF]
Following the 2007-2009 financial crisis, there has been an increase in the use of macroprudential policy tools – such as loan-to-value ratio caps and interbank exposure limits – to achieve financial stability. While the existing research on the effectiveness of macroprudential policy has focused on country-level variables, this study looks at how policy effectiveness varies across banks and policy tools. Using system GMM on bank-level data from 30 European countries for the time period between 2000 and 2014, I document that stricter regulation in the form of exposure limitations tends to decrease banks' risk levels whereas capital-based tools tend to induce higher risk-taking. After a policy tightening, loan loss provisions and non-performing loans ratios of banks suffering losses can increase substantially, up to five percentage points, while they are likely to decrease for profitable banks. Constraining activities by stricter regulation can lead to a search for yield. Therefore, policy designers should pay particular attention to the increase in risk-taking following policy tightening, especially by banks suffering losses.
Do Monetary Aggregates Belong in a Monetary Model? Evidence from the UK (Work in Progress)
It is crucial for policymakers to successfully gauge the stance of monetary policy and understand the mechanisms through which it affects the economy. Conventional models focus on interest rates alone, and omit monetary aggregates from policy discussions. This paper examines whether augmenting the measure of monetary policy with monetary aggregates helps in drawing more robust links between policy and economic fluctuations. After constructing the Divisa money index for United Kingdom, I employ structural vector autoregression to identify three different episodes of UK monetary policy regime. Inclusion of this (correct) measure of quantity of money, and disentangling money supply from money demand remedy the price and liquidity puzzles, which frequently appear in the VAR literature. The results point to the informational content embedded in monetary aggregates, and suggest that they should be taken into account while evaluating the monetary policy.
Determinants of Sovereign Debt Crises (with S. M. Ali Abbas and Suchanan Tambunlertchai) (Work in Progress)
In assessing debt sustainability for advanced and emerging markets, the IMF’s MAC DSA compares the levels of debt and gross financing needs (GFNs) against benchmarks separately derived from the noise-to-signal approach. In this paper, we identify the main factors that contribute to sovereign debt crises. We take into account a broad range of debt distress drivers, including debt and gross financing needs, but also debt composition, macroeconomic fundamentals, and country characteristics such as whether the country is a small state or member of a currency union. By using our estimation results, we first derive an indicative cutoff probability of debt distress level. Then, we calculate the corresponding thresholds for debt variables, above which countries are predicted to experience debt distress episode.