When Fiscal consolidation meets private deleveragingADEMU_Project
This document summarizes a model that analyzes the interaction between public and private deleveraging in a small open economy. The model shows that larger and front-loaded fiscal consolidations entail larger output and welfare losses by postponing the end of the private deleveraging process. The model finds that deleveraging-friendly fiscal consolidations that are more gradual in nature minimize these losses.
When Fiscal consolidation meets private deleveragingADEMU_Project
This document summarizes a model that analyzes the interaction between public and private deleveraging in a small open economy. The model shows that larger and front-loaded fiscal consolidations entail larger output and welfare losses by postponing the end of the private deleveraging process. The model finds that deleveraging-friendly fiscal consolidations that are more gradual in nature minimize these losses.
Costs of sovereign default: restructuring strategies, bank distress and the c...ADEMU_Project
This document discusses a research project analyzing how the costs of sovereign debt default, including impacts on economic growth, are affected by the restructuring strategy employed and whether the default triggers a bank crisis. The researchers aim to identify transmission channels through which defaults impact GDP, investment, bank credit, and capital flows, and whether these channels are influenced by the default strategy. They use a dataset of debt default and banking crisis events in 69 countries from 1970-2013. Local projections and augmented inverse probability weighting methods are employed to estimate effects on macroeconomic variables while addressing endogeneity concerns. Preliminary results suggest defaults negatively impact growth, investment, and credit by weakening the financial sector, and these effects depend on the restructuring strategy and whether a bank
1) The study examines whether high levels of corporate debt and short-term debt held back private corporate investment in Europe during the crisis.
2) The findings show that investment was linked to higher leverage, increased debt service costs, and relationships with weak banks. Firms with more long-term debt, which lowers rollover risk, increased investment more, especially if linked to weak banks.
3) Having a relationship with a weak bank negatively impacted investment, but this effect disappeared once demand shocks were controlled for. Debt overhang and rollover risk explained about 60% of the actual decline in aggregate corporate investment during the crisis period.
1) The document examines how government intervention in the banking sector during financial crises affects long-term productivity.
2) It finds that higher regulatory forbearance (allowing struggling banks to remain open) reduces short-term economic losses but is negatively associated with post-crisis productivity growth, as it allows inefficient firms to remain in operation.
3) In contrast, tougher policies like bank restructuring that force struggling banks to close are found to yield higher long-term job creation, wages, and economic growth, suggesting financial crises can "cleanse" economies of inefficient firms and banks when governments take a stricter approach.
The document summarizes and discusses three papers on the relationship between financial frictions, capital misallocation, and productivity. All three papers find different and innovative empirical evidence on this relationship. The discussion focuses on reconciling the different results, addressing open questions, and identifying areas where more work is needed, such as understanding differences between countries and the roles of banks, firm financial constraints, and credit supply shocks.
Ana Gouveia - Financial Policies, financial systems and productivity - Discus...Structuralpolicyanalysis
This document summarizes discussions from a conference on weak productivity and the role of financial factors and policies. It discusses four academic papers and their findings. The first paper finds that restricted credit availability due to the financial crisis led to increased business failure, especially for highly leveraged firms. The second paper finds that weak banks and high firm leverage reduced investment, and this effect was stronger for firms linked to weak banks with high rollover risk. The third paper finds that loose monetary policy increased productivity growth by alleviating credit constraints, while quantitative easing reduced productivity growth. The document then discusses insights from research on Portugal, including definitions of weak banks, mechanisms like the link between weak banks and zombie firms, non-linear effects of leverage on investment
This document discusses whether debt levels are too high in the Euro area, specifically looking at Greece and other high-debt countries like Italy. For Greece, the author argues debt is unsustainable and needs to be reduced through an official debt restructuring. For other countries, debt may be sustainable now but leaves them vulnerable to shocks that could trigger another crisis. Two approaches for reducing debt are discussed: gradual fiscal adjustment or conducting a debt swap operation where some national debts are exchanged for Euro area debt. However, both approaches face challenges in providing credible commitment to debt reduction.
Financial frictions likely contributed to the sharp and persistent productivity slowdown observed in advanced economies since the Global Financial Crisis (GFC).
The study finds that firms with higher pre-GFC debt vulnerabilities, such as larger amounts of debt maturing in 2008, experienced larger post-GFC declines in productivity growth compared to less vulnerable firms. This negative effect was stronger in countries where credit conditions tightened more severely after the collapse of Lehman Brothers.
The results suggest financial frictions hampered investment in intangible assets at vulnerable firms, reducing productivity. In contrast, such relationships were not observed following past recessions that did not involve banking crises, indicating the GFC had distinct and longer-lasting impacts
The document discusses how global insurers are rethinking their investment strategies in response to divergent monetary policies and quantitative easing programs. It finds that while insurers see positive short-term effects of QE on asset prices and growth, many are concerned about potential long-term imbalances and market distortions. Insurers are seeking to increase yield by taking on more risk, but are struggling due to low liquidity in fixed income markets and the lack of quality opportunities. They are holding high cash levels as they look for the right investments. Insurers are diversifying into alternative assets like real estate and private credit that generate income. Overall monetary policy uncertainty is a challenge as insurers balance short-term benefits of QE against
Isabelle Roland - The Aggregate Eects of Credit Market Frictions: Evidence f...Structuralpolicyanalysis
This document presents the key findings of a study that develops a theoretical framework to quantify the impact of credit market frictions on aggregate output and productivity. The study assesses these impacts using firm-level data on employment and default risk from UK administrative surveys. The main findings are:
1) Credit market frictions substantially depressed UK output between 2004-2012, reducing it by 3-5% annually on average. This impact worsened during the financial crisis and lingered thereafter.
2) Credit frictions can explain 11-18% of the fall in UK productivity between 2008-2009 and 13-23% of the post-crisis productivity gap in 2012.
3) The results are mainly
Luigi zingales - Weak Productivity: The Role of Financial Factors and PoliciesStructuralpolicyanalysis
The financial system may have contributed to weakening productivity growth in three ways:
1. By shifting resources from productive investments to housing and consumption. Credit increasingly financed these areas rather than firms.
2. By favoring industry concentration through mergers and common ownership that reduced competition and incentives for investment.
3. In Europe, the combination of existing financial systems and the Euro led to large misallocations of capital through the banking crisis in Southern Europe, reducing investments and growth.
"Debt Sustainability and the Terms of Official Support", by Giancarlo Corsett...ADEMU_Project
This document discusses how the terms of official lending can impact assessments of whether a country can sustain its debt levels. It presents a three-period model to illustrate how official lending with certain terms, such as long-term maturities at concessional rates, can restore debt sustainability by reducing the risk of default. The model is then used to analyze Portugal's debt crisis from 2011-2015, finding that official lending through the IMF and ESM helped lower borrowing costs and change the composition of Portugal's debt in a way that matches the data. Counterfactual analyses suggest debt sustainability thresholds are more sensitive to debt maturity terms than interest rate spreads.
1. The document analyzes the relationship between credit supply and productivity growth using a dataset of Italian firms and banks.
2. The authors find that a 1% increase in credit supply leads to a 0.1-0.13% increase in productivity growth, as measured by value added. They estimate that credit supply constraints can explain 12-30% of the observed drop in productivity during the financial crisis of 2007-2009 in Italy.
3. The effect is stronger for manufacturing firms, small firms, and firms with fewer lenders. The authors also find the effect persists over time and that negative credit supply shocks have a larger impact than positive shocks.
MTBiz is for you if you are looking for contemporary information on business, economy and especially on banking industry of Bangladesh. You would also find periodical information on Global Economy and Commodity Markets.
Philippe Aghion - Growth, Financial Constraints, and the Interaction between ...Structuralpolicyanalysis
The document discusses how monetary policy and structural reforms can interact to boost growth, focusing on the role of product market competition. It finds that in credit-constrained economies, more proactive monetary policy is more growth-enhancing when competition is higher. Specifically:
- Lower interest rates due to central bank actions like the ECB's OMT program had a larger positive effect on growth in highly indebted industries in countries with more competitive product markets and less regulation.
- High competition allows monetary policy to have larger real effects by reducing firms' need to hoard cash against liquidity shocks. With more competition, firms cannot rely on rents to survive downturns.
- The results suggest monetary policy works
Dan Andrews - Breaking the shackles:Zombie Firms, Weak Banks and Depressed Re...Structuralpolicyanalysis
1) The document discusses evidence that zombie firms, which are firms that are financially distressed but remain in operation, are more likely to be connected to weak banks.
2) It finds that zombie firms are more likely to be clients of banks that are in poorer financial health, as measured by various indicators of bank balance sheet strength. This is consistent with the hypothesis that weak banks continue to support zombie firms through forbearance to avoid realizing losses.
3) It also discusses how insolvency regimes that make corporate restructuring more difficult can strengthen banks' incentives to engage in forbearance with zombie firms. The negative relationship between bank health and zombie firms is stronger in countries with less restructuring-friendly insolvency
The document summarizes discussions from three papers presented at a conference on weak productivity and the role of financial factors and policies.
The first two papers examine the real effects of credit constraints on firms during the global financial crisis. One finds that investment declined more for highly leveraged firms borrowing from weak banks. The other finds higher exit rates for firms borrowing from weak banks, especially highly leveraged and more productive firms. The document discusses potential drivers of these results and suggestions for further analysis.
The third paper analyzes how monetary policy shocks that flatten the yield curve can negatively impact productivity growth by reducing efficient reallocation of factors across sectors. The document questions the theoretical basis and interpretations of this finding, noting little interest rate variability
The document discusses the policy challenges facing Asian economies from global liquidity infusion. It summarizes the magnitude and impact of capital flows into the Philippines, including the BSP's policy responses. While an early unwinding of quantitative easing could cause volatility, the Philippine economy has shown resilience due to strong growth, prudent policies, and adequate buffers. Overall, the economy has managed risks from capital flows well and has policy flexibility to navigate potential turbulence.
Filippos Petroulakis - Discussion on “Financial frictions and within firm per...Structuralpolicyanalysis
This document summarizes discussions from a conference on financial factors and productivity. It discusses three papers that found credit frictions have significant negative impacts on firm productivity. More bank forbearance during crises leads to less "cleansing" of unproductive firms but also less growth after crises. While bank recapitalization aims to strengthen banks, it can also act like forbearance. The document discusses reconciling these results and their implications for policies that preserve credit supply.
A framework to analyse the sovereign credit risk exposure of financial instit...Jide Lewis PhD, CFA, FRM
This paper develops an integrative dynamic framework to evaluate the exposure of banks to sovereign credit risk using stress tests. The framework is used to replicate the historical twin-crisis dynamics which ensues when stress tests are implemented on selected macro-financial variables, based on a perfect foresighting exercise for the case of Jamaica.
"The Seniority Structure of Sovereign Debt" by Christoph Trebesch, Matthias S...ADEMU_Project
1) The document analyzes the seniority structure of sovereign debt using data on debt arrears and debt restructuring haircuts from 1980-2006.
2) It finds that official creditors like the IMF and World Bank tend to be more senior than other creditors like bilateral or commercial banks based on lower levels of arrears and haircuts.
3) However, bondholders appear to have equal or higher seniority than official creditors based on analyses of arrears and haircut data during debt crises.
Costs of sovereign default: restructuring strategies, bank distress and the c...ADEMU_Project
This document discusses a research project analyzing how the costs of sovereign debt default, including impacts on economic growth, are affected by the restructuring strategy employed and whether the default triggers a bank crisis. The researchers aim to identify transmission channels through which defaults impact GDP, investment, bank credit, and capital flows, and whether these channels are influenced by the default strategy. They use a dataset of debt default and banking crisis events in 69 countries from 1970-2013. Local projections and augmented inverse probability weighting methods are employed to estimate effects on macroeconomic variables while addressing endogeneity concerns. Preliminary results suggest defaults negatively impact growth, investment, and credit by weakening the financial sector, and these effects depend on the restructuring strategy and whether a bank
1) The study examines whether high levels of corporate debt and short-term debt held back private corporate investment in Europe during the crisis.
2) The findings show that investment was linked to higher leverage, increased debt service costs, and relationships with weak banks. Firms with more long-term debt, which lowers rollover risk, increased investment more, especially if linked to weak banks.
3) Having a relationship with a weak bank negatively impacted investment, but this effect disappeared once demand shocks were controlled for. Debt overhang and rollover risk explained about 60% of the actual decline in aggregate corporate investment during the crisis period.
1) The document examines how government intervention in the banking sector during financial crises affects long-term productivity.
2) It finds that higher regulatory forbearance (allowing struggling banks to remain open) reduces short-term economic losses but is negatively associated with post-crisis productivity growth, as it allows inefficient firms to remain in operation.
3) In contrast, tougher policies like bank restructuring that force struggling banks to close are found to yield higher long-term job creation, wages, and economic growth, suggesting financial crises can "cleanse" economies of inefficient firms and banks when governments take a stricter approach.
The document summarizes and discusses three papers on the relationship between financial frictions, capital misallocation, and productivity. All three papers find different and innovative empirical evidence on this relationship. The discussion focuses on reconciling the different results, addressing open questions, and identifying areas where more work is needed, such as understanding differences between countries and the roles of banks, firm financial constraints, and credit supply shocks.
Ana Gouveia - Financial Policies, financial systems and productivity - Discus...Structuralpolicyanalysis
This document summarizes discussions from a conference on weak productivity and the role of financial factors and policies. It discusses four academic papers and their findings. The first paper finds that restricted credit availability due to the financial crisis led to increased business failure, especially for highly leveraged firms. The second paper finds that weak banks and high firm leverage reduced investment, and this effect was stronger for firms linked to weak banks with high rollover risk. The third paper finds that loose monetary policy increased productivity growth by alleviating credit constraints, while quantitative easing reduced productivity growth. The document then discusses insights from research on Portugal, including definitions of weak banks, mechanisms like the link between weak banks and zombie firms, non-linear effects of leverage on investment
This document discusses whether debt levels are too high in the Euro area, specifically looking at Greece and other high-debt countries like Italy. For Greece, the author argues debt is unsustainable and needs to be reduced through an official debt restructuring. For other countries, debt may be sustainable now but leaves them vulnerable to shocks that could trigger another crisis. Two approaches for reducing debt are discussed: gradual fiscal adjustment or conducting a debt swap operation where some national debts are exchanged for Euro area debt. However, both approaches face challenges in providing credible commitment to debt reduction.
Financial frictions likely contributed to the sharp and persistent productivity slowdown observed in advanced economies since the Global Financial Crisis (GFC).
The study finds that firms with higher pre-GFC debt vulnerabilities, such as larger amounts of debt maturing in 2008, experienced larger post-GFC declines in productivity growth compared to less vulnerable firms. This negative effect was stronger in countries where credit conditions tightened more severely after the collapse of Lehman Brothers.
The results suggest financial frictions hampered investment in intangible assets at vulnerable firms, reducing productivity. In contrast, such relationships were not observed following past recessions that did not involve banking crises, indicating the GFC had distinct and longer-lasting impacts
The document discusses how global insurers are rethinking their investment strategies in response to divergent monetary policies and quantitative easing programs. It finds that while insurers see positive short-term effects of QE on asset prices and growth, many are concerned about potential long-term imbalances and market distortions. Insurers are seeking to increase yield by taking on more risk, but are struggling due to low liquidity in fixed income markets and the lack of quality opportunities. They are holding high cash levels as they look for the right investments. Insurers are diversifying into alternative assets like real estate and private credit that generate income. Overall monetary policy uncertainty is a challenge as insurers balance short-term benefits of QE against
Isabelle Roland - The Aggregate Eects of Credit Market Frictions: Evidence f...Structuralpolicyanalysis
This document presents the key findings of a study that develops a theoretical framework to quantify the impact of credit market frictions on aggregate output and productivity. The study assesses these impacts using firm-level data on employment and default risk from UK administrative surveys. The main findings are:
1) Credit market frictions substantially depressed UK output between 2004-2012, reducing it by 3-5% annually on average. This impact worsened during the financial crisis and lingered thereafter.
2) Credit frictions can explain 11-18% of the fall in UK productivity between 2008-2009 and 13-23% of the post-crisis productivity gap in 2012.
3) The results are mainly
Luigi zingales - Weak Productivity: The Role of Financial Factors and PoliciesStructuralpolicyanalysis
The financial system may have contributed to weakening productivity growth in three ways:
1. By shifting resources from productive investments to housing and consumption. Credit increasingly financed these areas rather than firms.
2. By favoring industry concentration through mergers and common ownership that reduced competition and incentives for investment.
3. In Europe, the combination of existing financial systems and the Euro led to large misallocations of capital through the banking crisis in Southern Europe, reducing investments and growth.
"Debt Sustainability and the Terms of Official Support", by Giancarlo Corsett...ADEMU_Project
This document discusses how the terms of official lending can impact assessments of whether a country can sustain its debt levels. It presents a three-period model to illustrate how official lending with certain terms, such as long-term maturities at concessional rates, can restore debt sustainability by reducing the risk of default. The model is then used to analyze Portugal's debt crisis from 2011-2015, finding that official lending through the IMF and ESM helped lower borrowing costs and change the composition of Portugal's debt in a way that matches the data. Counterfactual analyses suggest debt sustainability thresholds are more sensitive to debt maturity terms than interest rate spreads.
1. The document analyzes the relationship between credit supply and productivity growth using a dataset of Italian firms and banks.
2. The authors find that a 1% increase in credit supply leads to a 0.1-0.13% increase in productivity growth, as measured by value added. They estimate that credit supply constraints can explain 12-30% of the observed drop in productivity during the financial crisis of 2007-2009 in Italy.
3. The effect is stronger for manufacturing firms, small firms, and firms with fewer lenders. The authors also find the effect persists over time and that negative credit supply shocks have a larger impact than positive shocks.
MTBiz is for you if you are looking for contemporary information on business, economy and especially on banking industry of Bangladesh. You would also find periodical information on Global Economy and Commodity Markets.
Philippe Aghion - Growth, Financial Constraints, and the Interaction between ...Structuralpolicyanalysis
The document discusses how monetary policy and structural reforms can interact to boost growth, focusing on the role of product market competition. It finds that in credit-constrained economies, more proactive monetary policy is more growth-enhancing when competition is higher. Specifically:
- Lower interest rates due to central bank actions like the ECB's OMT program had a larger positive effect on growth in highly indebted industries in countries with more competitive product markets and less regulation.
- High competition allows monetary policy to have larger real effects by reducing firms' need to hoard cash against liquidity shocks. With more competition, firms cannot rely on rents to survive downturns.
- The results suggest monetary policy works
Dan Andrews - Breaking the shackles:Zombie Firms, Weak Banks and Depressed Re...Structuralpolicyanalysis
1) The document discusses evidence that zombie firms, which are firms that are financially distressed but remain in operation, are more likely to be connected to weak banks.
2) It finds that zombie firms are more likely to be clients of banks that are in poorer financial health, as measured by various indicators of bank balance sheet strength. This is consistent with the hypothesis that weak banks continue to support zombie firms through forbearance to avoid realizing losses.
3) It also discusses how insolvency regimes that make corporate restructuring more difficult can strengthen banks' incentives to engage in forbearance with zombie firms. The negative relationship between bank health and zombie firms is stronger in countries with less restructuring-friendly insolvency
The document summarizes discussions from three papers presented at a conference on weak productivity and the role of financial factors and policies.
The first two papers examine the real effects of credit constraints on firms during the global financial crisis. One finds that investment declined more for highly leveraged firms borrowing from weak banks. The other finds higher exit rates for firms borrowing from weak banks, especially highly leveraged and more productive firms. The document discusses potential drivers of these results and suggestions for further analysis.
The third paper analyzes how monetary policy shocks that flatten the yield curve can negatively impact productivity growth by reducing efficient reallocation of factors across sectors. The document questions the theoretical basis and interpretations of this finding, noting little interest rate variability
The document discusses the policy challenges facing Asian economies from global liquidity infusion. It summarizes the magnitude and impact of capital flows into the Philippines, including the BSP's policy responses. While an early unwinding of quantitative easing could cause volatility, the Philippine economy has shown resilience due to strong growth, prudent policies, and adequate buffers. Overall, the economy has managed risks from capital flows well and has policy flexibility to navigate potential turbulence.
Filippos Petroulakis - Discussion on “Financial frictions and within firm per...Structuralpolicyanalysis
This document summarizes discussions from a conference on financial factors and productivity. It discusses three papers that found credit frictions have significant negative impacts on firm productivity. More bank forbearance during crises leads to less "cleansing" of unproductive firms but also less growth after crises. While bank recapitalization aims to strengthen banks, it can also act like forbearance. The document discusses reconciling these results and their implications for policies that preserve credit supply.
A framework to analyse the sovereign credit risk exposure of financial instit...Jide Lewis PhD, CFA, FRM
This paper develops an integrative dynamic framework to evaluate the exposure of banks to sovereign credit risk using stress tests. The framework is used to replicate the historical twin-crisis dynamics which ensues when stress tests are implemented on selected macro-financial variables, based on a perfect foresighting exercise for the case of Jamaica.
"The Seniority Structure of Sovereign Debt" by Christoph Trebesch, Matthias S...ADEMU_Project
1) The document analyzes the seniority structure of sovereign debt using data on debt arrears and debt restructuring haircuts from 1980-2006.
2) It finds that official creditors like the IMF and World Bank tend to be more senior than other creditors like bilateral or commercial banks based on lower levels of arrears and haircuts.
3) However, bondholders appear to have equal or higher seniority than official creditors based on analyses of arrears and haircut data during debt crises.
This document discusses approaches to managing risks in sovereign debt restructuring. It proposes using risk management tools ex post to optimize debt restructuring and restore sustainability, as well as implementing sovereign contingent debt (S-CoCo) instruments ex ante to address risks proactively. S-CoCo bonds would trigger a payment standstill and IMF assistance if crisis indicators exceed thresholds. The document also presents a Greece case study analyzing the potential impact of risk management and S-CoCo on its debt situation. Key challenges to S-CoCo adoption are ensuring a solid investor base and coordination with IMF/ESM programs.
The document discusses debt sustainability analysis (DSA) and its practice in the Turkish Treasury. DSA aims to estimate future debt levels and test debt sustainability under adverse scenarios. The Turkish Treasury uses several models for DSA, including the conventional accounting approach (CAA), debt indicators module (DIM), and Turkish debt simulation model (TDSM). The TDSM is a stochastic model that generates forward-looking scenarios and assesses tail risks, providing a more robust analysis than CAA. Results are reported regularly to management and published to promote transparency.
Reply to DiscussionsD1 navyaA bank failure is the ending of.docxchris293
Reply to Discussions
D1: navya
A bank failure is the ending of an insolvent bank by a state or federal regulator. So the only power that closes the national banks is the comptroller who has a higher power in maintaining the currency. It mainly happens when a bank fails where it is assumed by the federal deposit insurance corporation in the insures of deposits. They find a different bank to take it over because various customers will specifically like the continuation using their debit cards, online banking tools, and accounts. So bank failures are mainly often to predict because the federal deposit insurance commission will not announce a particular bank to set go under the profits. Then bank diversification is the procedure that allocates the capital in a specific way because it reduces the exposure to a particular asset or risk. Therefore, the main reason for this bank diversification is to decrease the volatility or risk by investing in various assets (Goetz, 2012).
So considering both of those banking systems can easily relate to the country's economic health by determining the better quality of the loan book of different individual books. Then for maintaining the better quality of advance bank portfolio, there is only one crucial tool where it is credit monitoring. Credit monitoring plays a vital role in protecting the bank's exposures, but it also ensures the various funds that are channeled by maintaining the right purpose. It mainly acts as the guardrail for ensuring the health of banks and countries economically to stay in the right trajectory. Then various technology solutions will be readily available in the market for helping the automated process of credit monitoring to a large extent. They can ensure the functions of credit monitoring to keep the process and objective in the method oriented (Brownbridge, 2002).
References
Brownbridge, M. (2002). Resolving Bank Failures in Uganda: Policy Lessons from Recent Bank Failures. Development Policy Review, 20(3), 279-291. doi: 10.1111/1467-7679.00171
Goetz, M. (2012). Bank Diversification, Market Structure and Bank Risk Taking: Theory and Evidence from U.S. Commercial Banks. SSRN Electronic Journal. doi: 10.2139/ssrn.2651161
Reply:
D2: pavani
Diversification helps individual institutions and makes them be benefited. But Wagner says that the systematic risk increases by the degree of diversification. Raffestin also said something about the diversification that diversification can cause risks and any number of failures also. By the above words, we can know the negative aspects or negative effects of diversification. Systematic risks are very broad and complex term. This diversification process has some of the diversification measures. The indicator of diversification is calculated from the bank’s profitability. There are various methods of diversification. Commonly Alas et al proposed method is used (Mirzaei & Kutan, 2016).
And also the weight average diversification of banks ( AWDI.
Credit Risk and Monetary Pass-through. Evidence from ChileEesti Pank
The document discusses a study analyzing the relationship between monetary policy rates, credit risk measures, and commercial interest rates on business loans in Chile. It presents preliminary analysis showing no clear evidence of cointegrating relationships between the variables. The study then shifts to a univariate model allowing for asymmetric pass-through of policy rate changes and the role of monetary policy expectations. It notes some issues with autocorrelated residuals that are addressed by including MA terms in the residuals. The goal is to better quantify how credit risk changes impact the pass-through of policy rates to commercial lending rates.
Challenges to Balance of Payments Data Collection and its effect.docxsleeperharwell
Challenges to Balance of Payments Data Collection and its effect on International Business
By
Student’s Name
Institution
Date
Overview
Introduction
Literature Review
Data Presentation
The Theory
Data Analysis
Conclusion
Hello everyone,
Today I am going to make a presentation on my topic which was Challenges to Balance of Payments Data Collection and its effect on International Business. After making a brief introduction, I will guide you through my literature review. Data presentation, theory used, analysis based on this theory and finally provide my conclusions and recommendations.
Enjoy.
2
Introduction
Increase in trade between countries due to globalization
Economic and political differences in these countries mean differences in ability to do business cc
Bop used to indicate all transactions (monetary and economic) between two or more countries
Globalization has resulted to an increase in trade between countries irrespective of geographical location. However, given the economic and political differences in these countries, then the monetary and economic transactions made between the countries during the entire process becomes different. The BoP is a statement of all transactions (monetary and economic) between two or more countries during a specific period of time (Stern, 2017). All transactions have to be recorded for purposes of monitoring the financial activities between countries.
3
Introduction Cont.
The bop is used to account for all transactions made by a country over a specific period of time, recorded in three separate accounts;
Current account
The capital account
The financial account
Challenges addressed include
Errors And Omissions (Statistical Discrepancies),
Fluctuating Exchange Rates
Change In The Value Of Money And Other Accounting Conventions
According to the Federal Reserve Bank of New York, the BoP is used to account for all transactions made by a country over a specific period of time, recorded in three separate accounts. These are the current account, the capital account, and the financial account (Scitovsky, 2016). Understanding how the balance of payments works in a country is critical to keeping the right kind of records. However, challenges to the collection of data on balance of payments oftentimes result from the problems of BoP. For instance, a country will be unwilling to release data that indicates how badly the economy is in a BoP disequilibrium. Others include errors, and omissions (statistical discrepancies), fluctuating exchange rates, change in the value of money and other accounting conventions (Kyle, 2015).
4
Literature review
Razmi (2015)
Fávaro, Da Silva & Pirtouscheg (2016)
Bouchet, Fishkin & Goguel (2018)
Des Roches & Betancourt (2016)
Ko & Ha (2018)
Edmond, Midrigan & Xu, (2015)
A number of studies have been used to illustrate how BOP affects the ability of countries to do business. This sudy analyzed just but a few including the following;
Razmi (2015)
Fávaro, Da .
This document summarizes a presentation by Gita Gopinath at the Banco Central do Brasil on tackling high inflation in emerging markets. It discusses how emerging markets have fared relatively well in the current tightening cycle due to earlier monetary policy tightening. However, inflation has proven persistent, arguing for maintaining tight monetary policy. The document also examines how monetary policy should respond to potential financial stresses and the role of fiscal policy in fighting inflation.
Multivariate analysis of the impact of the commercial banks on the economic g...Alexander Decker
The document analyzes the impact of commercial banks on economic growth in Nigeria from 1970-2009 using multivariate analysis and the ordinary least squares method. It finds that commercial bank credits, deposit liabilities, and lending rates had a positive relationship with GDP, indicating they help achieve economic growth. However, the number of banks had a negative but insignificant relationship with GDP. The study concludes that policies aimed at increasing commercial bank capital bases should be pursued to increase loanable funds and sustainable economic growth and development.
This document summarizes a webinar presented by Mike Lubansky on stress testing loan portfolios. The webinar covered regulatory requirements for stress testing, the objective and importance of stress testing, different types of stress testing approaches for community banks, challenges with data collection, scenario selection, and maximizing the value of stress test reports. Sample stress test outputs were presented and common mistakes were discussed. The webinar provided an overview of effective stress testing practices for community banks.
The Sufficiency of Debt Relief as a Panacea to Sovereign Debt Crisis in Sub-S...Eesti Pank
The thesis analyzes the efficacy of debt relief as a solution to sovereign debt crises in Sub-Saharan Africa, using Ghana, Nigeria, and Zambia as case studies. It conducts debt sustainability analyses under various scenarios of partial or full debt reduction, cancellation, and standstills. Structural impulse response analyses show how macroeconomic factors like growth, interest rates, and exchange rates impact debt levels over time. The results suggest that debt relief can reduce debt burdens but economic reforms are also needed for long-term sustainability. Limitations include low frequency data and lower assumed interest rates.
Risk management optimization for sovereign debt restructuringStavros A. Zenios
This presentation discusses risk management optimization for sovereign debt restructuring. First, it introduced risk management metrics ---Debt-at-Risk and Conditional Debt-at-Risk--- in sovereign debt management. Second, is shows how to optimize debt restructuring. Third, it discusses the use of sovereign Contingent Debt (COCOs) in sovereign debt risk management.
It is based on work carried jointly with Andrea Consiglio and Ashoka Mody.
One paper is complete and posted at the SSRN link below as well as a Vox.eu editorial.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2478380
http://www.voxeu.org/article/greek-debt-sustainability-devil-tails
This document discusses issues with using econometric models for macro stress testing of credit portfolios. Specifically:
- Econometric models have limitations like insufficient data, unstable relationships between credit risk and macroeconomic variables, and inability to capture non-linear behavior in stressed conditions.
- An analysis of Hong Kong data from 1997-2007 illustrates these limitations, as default rates did not consistently correlate with macroeconomic factors during stressed periods.
- The document proposes a simple methodology for bank supervisors to estimate history-based stressed PDs for individual banks, using the highest observed default rate for the banking sector as a whole as a benchmark. This allows supervisors to validate banks' self-reported stressed PD estimates.
In this presentation I gave in the Financial Republic’s 2017 CECL Conference, I discussed the impacts of CECL on modeling and risk management with a focus on the reasonable and supportable forecast.
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Costs of sovereign default
1. Costs of Sovereign Default: Restructuring Strategies, Bank
Distress and the Credit-Investment Channel
Work in Progress
with T. Asonuma (IMF), M. Chamon (IMF) & A. Sasahara (UC Davis)
Fiscal Risk and Public Sector Balance Sheets
ADEMU Workshop
July 6-7, 2017
Disclaimer: The views in this presentation are the authors and are not to be
reported as those of the IMF, the ESM or their Management Boards.
2. Where we come from and where we try to go
Asonuma & Trebesh (2016): The way to restructure debt matters for its growth effects
Balteanu & Erce (2011): Sovereign defaults can trigger bank crises and exacerbate the
default costs
In this project we cross these two ideas and ask ourselves:
1. What are the channels through which debt restructuring affect GDP?
2. Are those channels affected by the restructuring strategies?
Short answers:
1. Both direct and indirect effects through the financial sector
Financial crises trigger decline in bank credit to private sector
Decline on investment follows, feeding into growth
2. Yes, the strength of these channels depends on the debt restructuring strategy
Accumulating arrears is not the right plan if your idea is to bring growth back
If a hard default is unavoidable: restructure fast and don’t be harsh
2
3. Related literature
Output costs of defaults
Sturzenegger (04), Tomz & Wright (07), Borensztein and Panizza (09), Furceri &
Zdzienicka (12), Kuvshinov & Zimmermann (16), Forni et al. (16), Asonuma et al.
(16), Cheng et al. (16)
Restructuring strategies
Sturzenegger & Zettelmeyer (06), Finger & Mecagni (07), Diaz-Cassou et al. (08), Erce
(12, 16), IMF (13), Duggar (13), Asonuma & Trebesch (16), Cheng et al. (16)
Sovereign and banking crises
Reinhart & Rogoff (09, 11), Borensztein & Panizza (09), Gennaioli et al. (14), Bolton &
Jeanne (11), Sosa-Padilla (15), Balteanu & Erce (16), Engler & Große Steffen (16)
3
5. Sources and sample size
Data sources:
Debt restructuring data: Asonuma and Trebesch (2016)
GDP, Investment, Population: Penn World Table 8.0
Bank credit to private sector: World Development Indicators (WB)
Lending rates: International Financial Statistics (IMF)
Financial crises: Laeven and Valencia (2013)
Net capital Flows: World Economic Outlook (IMF)
Sample:
1970-2013, annual frequency
69 countries experienced at least one DR episode
expanded sample for robustness check
5
7. Summary of the dataset
Summary of Debt Restructuring and Banking Crisis Events
Panel A: Private Debt Restructuring Sample
Panel B: Banking Crises Sample
Panel B: Banking Crisis Sample
7
Post-default
Weakly
preemptive
Strictly
preemptive
Episodes 111 45 23
Countries 60 26 13
Duration (in years) 5.1 1.0 0.7
Representative Episodes
in 1999–2010
Argentina 2001–5,
Russia 1998–2000
Ukraine (Global Exch. 2000,
Belize 2006–7
Pakistan (Ext. bonds) 1999,
Uruguay 2003,
Asonuma and Trebesch (2016)
Entire Sample
Countries with at least
one restructuring /1
Episodes 137 64
Countries 111 49
Duration (in years, average) 3.3 3.3
Representative Episodes in
1999–2010
Korea 1997–8,
Portugal 2008,
Spain 2008
Argentina 2001–3
Ukraine 1998–9
Laeven and Valencia (2013)
8. Summary of the dataset
Debt Restructurings and Banking Crises for Selected Countries
8
No. Country
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
1 Argentina
2 Brazil
3 Bulgaria
4 Cameroon
5 Costa Rica
6 Ecuador
7 Guyana
8 Guinea
9 Jordan
10 Kenya
11 Macedonia
12 Niger
13 Nigeria
14 Panama
15 Peru
16 Philippines
17 Russian Federation
18 Morocco
Year
Notes : indicates the start year of post-default debt restructuring.
indicates the start year of weakly preemptive debt restructuring.
indicates the start year of strictly preemptive debt restructuring.
indicates banking crises.
The data on debt restructurings come from Asonuma and Trebesch (2016) and the data on banking crises come from Laeven
and Valencia (2013). Countries that experienced both debt resturucting and banking crisis are listed in the figure.
10. Stylized Fact(s) #1
GDP and investment decline substantially in post-default DRs, less severely in weakly
preemptive ones, and are unaffected in strictly preemptive cases
Private credit falls and lending rates hike sharply during post-default DRs, while no
such effect is found for strictly pre-emptive cases
Capital flows remain low after any DR, but recover fast after strictly pre-emptive cases
10
11. Stylized Fact #2
GDP and Investment co-move more strongly in DRs that in normal times
Dep. Var. = GDP growth rate
*** Significant at 1% level. Robust standard errors, clustered at country-level, in parenthesis
Output and investment co-move, most strongly in DR, when both tank together
This “excess” co-movement around DR appears strongest in pre-emptive cases
What available theories explain this?
11
All countries
Countries that
experienced at
least one debt
restructuring
event
During post-
default
(the entire
period)
During post-
default
(the first half
period)
During
Weakly
preemptive
During
Strictly
preemptive
(1) (2) (3) (4) (5) (6)
Investment growth rate 0.200*** 0.245*** 0.336*** 0.302*** 0.315*** 0.561***
(0.03) (0.06) (0.05) (0.06) (0.03) (0.12)
Country fixed effect Yes Yes Yes Yes Yes Yes
R-squared 0.128 0.156 0.247 0.338 0.436 0.472
Number of countries 161 58 49 45 20 6
Number of observations 5,153 1,607 398 229 74 15
Observations with debt restructuring
Observations without debt
restructuring
12. Stylized Fact #3
Banking crises occur more frequently following post-default DR
12
Post-default
Weakly
preemptive
Strictly
preemptive
Debt Restructuring
Episodes
111 45 23
Countries 60 26 13
Banking Crisis
(within 3 years since the
start of debt crisis)
15
(15/111 = 14%)
3
(3/45 = 7%)
2
(2/23 = 9%)
Representative Episodes
Argentina 2001–5,
Russia 1998–2000
Turkey, 1981
Niger, 1983
Algeria, 1990
Ukraine, 1998
14. Local projections
As in Jorda & Taylor (2012), we estimate models of the following type:
𝑔𝑐,𝑡+ℎ=𝛼ℎ
𝑐
+ 𝐷𝑅 𝑐,𝑡 ∙ 𝛾 ℎ +𝑋𝑐,𝑡−1 ∙ 𝛽ℎ
−1
+ 𝑋𝑐,𝑡−2 ∙ 𝛽ℎ
−2
+ 𝜀 𝑐,𝑡+ℎ
Subscripts c and t indicate country and year, respectively.
h indicate horizon and we estimate from h = 0 up to h = 9.
𝑔𝑐,𝑡+ℎ = 100 ∙ (𝐺𝐷𝑃𝑐,𝑡+ℎ-𝐺𝐷𝑃𝑐,𝑡−1)/𝐺𝐷𝑃𝑐,𝑡−1 is the cumulative GDP growth rate
from time t -1 to t + h in country c.
𝛼ℎ
𝑐 are country-fixed effects.
𝐷𝑅 𝑐,𝑡 is our debt restructuring indicator (in country c in year t).
𝑋𝑐,𝑡 is a vector of control variables - lagged dependent variables, cyclical
component of GDP per capita, openness, and log of population.
𝜀 𝑐,𝑡+ℎ denotes the error term.
14
15. OLS estimation: GDP
GDP after Sovereign Debt Restructuring
Dep. Var. = 100 ∙ (𝐺𝐷𝑃𝑐,𝑡+ℎ-𝐺𝐷𝑃𝑐,𝑡−1)/𝐺𝐷𝑃𝑐,𝑡−1
15
16. OLS estimation: GDP
GDP after Sovereign Debt Restructuring
Figures show local projections of 100 ∙ (𝐺𝐷𝑃𝑐,𝑡+ℎ-𝐺𝐷𝑃𝑐,𝑡−1)/𝐺𝐷𝑃𝑐,𝑡−1 for h = 0, 1, …, 9, where h indicates
horizon. Solid lines are point estimates. Gray bands are 95% confidence intervals.
16
17. OLS estimation: Investment
Investment after Sovereign Debt Restructuring
Figures show local projections of 100 ∙ (𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛 𝑐,𝑡+ℎ − 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑐,𝑡−1)/𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑐,𝑡−1 for h = 0, 1,
…, 9, where h indicates horizon. Solid lines are point estimates. Gray bands are 95% confidence intervals.
17
18. OLS estimation: Private Sector Credit
Credit to the Private Sector after Sovereign Debt Restructuring
Figures show local projection of 100 ∙ (𝐶𝑟𝑒𝑑𝑖𝑡 𝑐,𝑡+ℎ-𝐶𝑟𝑒𝑑𝑖𝑡 𝑐,𝑡−1)/𝐶𝑟𝑒𝑑𝑖𝑡 𝑐,𝑡−1 for h = 0, 1, …, 9, where h
indicates horizon. Solid lines are point estimates. Gray bands are 95% confidence intervals.
18
19. OLS estimation: Capital Flows
Capital Flows after Sovereign Debt Restructuring
Figures show local projections of 100 ∙ (𝐼𝑛𝑓𝑙𝑜𝑤𝑠𝑡+ℎ − 𝐼𝑛𝑓𝑙𝑜𝑤𝑠𝑡−1)/𝐼𝑛𝑓𝑙𝑜𝑤𝑠𝑡−1 for h = 0, 1, …, 9, where h
indicates horizon. Solid lines are point estimates. Gray bands are 95% confidence intervals.
19
21. Endogeneity
Debt restructurings are not exogenous - policy makers’ decision
Define country i output at time t as 𝑌𝑡,𝑖. Our OLS estimates deliver
𝐸 𝑌𝑖,𝑡+ℎ 𝐷𝑖,𝑡 = 1 − 𝐸 𝑌𝑖,𝑡+ℎ 𝐷𝑖,𝑡 = 0
But, as shown by Angrist and Psichke (2008), this difference has two components:
– 𝐸 𝑌𝑖,𝑡+ℎ 𝐷𝑖,𝑡 = 1 - 𝐸 𝑌𝑖,𝑡 𝐷𝑖,𝑡 = 1 Average Treatment Effect (ATE)
– 𝐸 𝑌𝑖,𝑡 𝐷𝑖,𝑡 = 1 - 𝐸 𝑌𝑖,𝑡 𝐷𝑖,𝑡 = 0 Selection Bias
OLS might be biased and simply capture other features of countries undergoing DRs:
Higher public debt-to-GDP ratio
Lower private credit-to-GDP ratio
Lower country’s credit ratings
…
21
22. AIPW: Treatment Models and Selection Bias
One way to get around this selection bias is to model DRs as policy treatments and
use treatment effects models (Jorda et al. 15, 16) to rid of the selection bias.
We follow Jorda et al. (15, 16) and complement our local projections with an
Augmented Inverse Probability Weighted estimator (hereafter AIPW)
– Assess the extent to which treated and non treated units are different
– Estimate the likelihood of being treated (propensity score) and use it to
weight the observations when performing the OLS estimation
22
23. Endogeneity – prior characteristics
Characteristics of the Treatment and Control Groups
Asses differences between treatment (start of DR) and control groups (other observations), by
regressing each variable on the DR dummies and using the constant as normal times value.
Regressions include country FE.
These results show that countries indeed have different characteristics prior to any type of
restructurings, raising an issue of endogeneity
23
(1) (2) (3) (4) (5) (6)
Credit
ratings
Change in
credit
ratings
Interest
payment
(short-
term)/GDP×
100
Interest
payment
(total)/GDP
×100
GDP
growth
rate×100
Political
stability
(civil
liberties)
Average value
Normal time 28.83 0.53 0.29 2.11 3.69 4.09
A year before the start year of "Post-default" 22.19 -3.83 0.48 3.32 0.72 4.38
A year before the start year of "Weakly preemptive" 18.74 -3.38 0.46 4.08 3.72 4.42
A year before the start year of "Strictly preemptive" 18.94 -0.83 0.56 4.05 4.09 4.18
Difference from the normal time
A year before the start year of "Post-default" - Normal time -6.641*** -4.364*** 0.192*** 1.209*** -2.966*** 0.290**
(1.216) (0.388) (0.074) (0.296) (0.788) (0.117)
A year before the start year of "Weakly preemptive" - Normal time -10.09*** -3.912*** 0.175 1.971*** 0.038 0.326*
(1.612) (0.510) (0.114) (0.457) (1.122) (0.180)
A year before the start year of "Strictly preemptive" - Normal time -9.893*** -1.360* 0.274 1.937*** 0.404 0.0812
(2.209) (0.718) (0.171) (0.683) (1.719) (0.243)
# of countries 63 63 54 54 63 62
# of observations 1,566 1,503 2,068 2,068 2,419 2,467
24. Augmented Inverse Probability Weighted Estimator (AIPW)
Estimation steps:
1st stage:
o Estimate discrete-variable model: 𝑃 𝐷𝑅 𝑐,𝑡 = Φ(𝑍 𝑐,𝑡, . ), where 𝑍 𝑐,𝑡 includes
public debt, private credit, rating, and 2nd stage regressors
o Calculate weights based on propensity scores: ipw 𝑐,𝑡 =
𝜙(𝑍 𝑐,𝑡)
Φ(𝑍 𝑐,𝑡)
−
1−𝜙(𝑍 𝑐,𝑡)
1−Φ(𝑍 𝑐,𝑡)
2nd stage:
o Use ipw 𝑐,𝑡 as weights on the Local Projections to obtain ATE
One (big?) issue - # endogenous variables (restructuring strategies) >1
How do we define the 1st stage?
o Treat all types of debt restructuring as having identical drivers?
o Three different dependent variables? Use binomial or multinomial models?
Currently, we use a binomial, independent, model for each DR strategy
24
25. Predicting the start year of debt restructurings
Predicting Debt Restructuring Events
25
(1) (2) (3) (4) (5) (6)
Start year
(Post-
default)
Start year
(Weakly
preemptive)
Start year
(Strictly
preemptive)
Start year
(Post-default)
Start year
(Weakly
preemptive)
Start year
(Strictly
preemptive)
Change in credit ratings, lag 1 -0.0016 -0.0058*** -0.0004 -0.0172 -0.125** -0.043
(0.002) (0.001) (0.001) (0.047) (0.050) (0.098)
Interest payments (total)/GDP, lag 1 0.0732*** 0.0417*** 0.0021 1.103*** 0.845** 0.600
(0.014) (0.011) (0.006) (0.294) (0.381) (1.033)
Political stability (civil liberties), lag 1 0.0194*** -0.0051 0.0009 0.557*** -0.488 0.155
(0.006) (0.005) (0.003) (0.186) (0.359) (0.620)
Post-default (the last six years) -0.0215* -0.0119 -0.0005 -0.344 -0.167 0.134
(0.011) (0.008) (0.005) (0.273) (0.533) (0.813)
Weakly preemptive (the last six years) 0.0375*** 0.0140 0.0020 0.932*** -0.0747 0.278
(0.013) (0.010) (0.006) (0.314) (0.286) (0.637)
Strictly preemptive (the last six years) 0.0322 0.0422*** 0.0340*** 0.924* 2.280** 0.463
(0.020) (0.015) (0.009) (0.553) (1.023) (0.452)
Country fixed effect Yes Yes Yes Yes Yes Yes
R-squared 0.045 0.048 0.014
# of countries 52 52 52 30 14 8
# of observations 1,244 1,244 1,244 854 371 200
F-stat. 9.30 9.92 2.77
p-val. (F-stat.) 0.00 0.00 0.01
LR Chi-sq. 39.01 27.67 3.00
p-val. (LR Chi-sq.) 0.00 0.00 0.81
Linear probability model Logit
26. Predicting the start year of debt restructurings
Classification Power of the First Stage Regressors
Panel A: Post-default Panel B: Weakly Preemptive
Figures show the area under the ROC curve. ROC area takes values between 0.50 and 1. A
value of 0.50 indicates that regressors have no ability to classify observations.
The ROC curve is greater than 0.50 (Schularick & Taylor 2012 argue a curve above 0.70 is
sufficient) for all types of DRs (0.81, 0.91, and 0.80, respectively).
Past DRs, credit rating changes, and interest payments-to-GDP have classification power
26
27. AIPW estimation: GDP
GDP after Sovereign Debt Restructuring
Figures show local projections of 100 ∙ (𝐺𝐷𝑃𝑐,𝑡+ℎ-𝐺𝐷𝑃𝑐,𝑡−1)/𝐺𝐷𝑃𝑐,𝑡−1 for h = 0, 1, …, 9, where h indicates
horizon. Solid lines are point estimates. Gray bands are 95% confidence intervals.
27
28. AIPW estimation: Investment
Investment after Sovereign Debt Restructuring
Figures show local projections of 100 ∙ (𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛 𝑐,𝑡+ℎ − 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑐,𝑡−1)/𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑐,𝑡−1 for h = 0, 1,
…, 9, where h indicates horizon. Solid lines are point estimates. Gray bands are 95% confidence intervals.
28
29. AIPW estimation: Private Sector Credit
Credit to the Private Sector after Sovereign Debt Restructuring
Figures show local projection of 100 ∙ (𝐶𝑟𝑒𝑑𝑖𝑡 𝑐,𝑡+ℎ-𝐶𝑟𝑒𝑑𝑖𝑡 𝑐,𝑡−1)/𝐶𝑟𝑒𝑑𝑖𝑡 𝑐,𝑡−1 for h = 0, 1, …, 9, where h
indicates horizon. Solid lines are point estimates. Gray bands are 95% confidence intervals.
29
30. AIPW estimation: Lending Interest Rate
Lending Interest Rate after Sovereign Debt Restructuring
Figures show local projections of 100 ∙ (𝑖 𝑡+ℎ − 𝑖 𝑡−1)/𝑖 𝑡−1 for h = 0, 1, …, 9, where h indicates horizon.
Solid lines are point estimates. Gray bands are 95% confidence intervals.
30
31. AIPW estimation: Capital Flows
Capital Flows after Sovereign Debt Restructuring
Figures show local projections of 100 ∙ (𝐼𝑛𝑓𝑙𝑜𝑤𝑠𝑡+ℎ − 𝐼𝑛𝑓𝑙𝑜𝑤𝑠𝑡−1)/𝐼𝑛𝑓𝑙𝑜𝑤𝑠𝑡−1 for h = 0, 1, …, 9, where h
indicates horizon. Solid lines are point estimates. Gray bands are 95% confidence intervals.
31
33. Debt restructuring and credit crunch
Dig further into the link between credit, investment and GDP growth – to what extent
the linkage between these variables helps understand differences in performance?
We classify DRs in those accompanied by a credit crunch, and those which were not
A credit crunch is an event which the cumulative growth rate of private credit from year
0 to year h --- for h = 1, 2,…, 5 --- is negative
𝑔 𝑐𝑟𝑒𝑑𝑖𝑡
𝑖,ℎ
= ln 𝑐𝑟𝑒𝑑𝑖𝑡𝑖,𝑡+ℎ − ln 𝑐𝑟𝑒𝑑𝑖𝑡𝑖,𝑡
33
h = 1 h = 2 h = 3 h = 4 h = 5 Sum
Post-default 91 39 35 31 30 22 32
42.9% 38.5% 34.1% 33.0% 24.2% 35.2%
Weakly preemptive 39 14 13 11 11 10 11
35.9% 33.3% 28.2% 28.2% 25.6% 28.2%
Strictly preemptive 21 8 5 3 3 5 2
38.1% 23.8% 14.3% 14.3% 23.8% 9.5%
Total # of
episodes
# of episodes with credit crunch which is defined as episodes with
the cumulative growth rate of private credit from year 0 to year h is
negative
34. Debt restructuring and credit crunch
GDP and Investment in Debt Restructurings with/without Credit Crunches (average)
Panel A: GDP
Panel B: Investment
34
35. Debt restructuring and credit crunch
Debt restructurings with/without Credit Crunch, AIPW
Panel A: GDP
Panel B: Investment
Figures show local projections of the variable shown in each panel for h = 1, 2, …, 5, where h indicates horizon.
Bold lines are point estimates. Dotted bands are 95% confidence intervals. Red color refers to events with credit
crunch and blue to events without credit crunch
35
39. Other aspects of restructuring strategies: Haircuts (TZ, 2014)
As Trebesch and Zabel (2014), divide post-default events based on whether haircut is
above or below median
Figures show local projections of 100 ∙ (𝐺𝐷𝑃𝑐,𝑡+ℎ-𝐺𝐷𝑃𝑐,𝑡−1)/𝐺𝐷𝑃𝑐,𝑡−1 for h = 0, 1, …, 9, where h
indicates horizon. Solid lines are point estimates. Gray bands are 95% confidence intervals.
Policy implication:
Sovereigns can minimize output costs of hard default if they minimize the losses
imposed on creditors
39
40. Other aspects of restructuring strategies: Duration
Divide post-default events based on the duration the debt restructuring
Figures show local projections of 100 ∙ (𝐺𝐷𝑃𝑐,𝑡+ℎ-𝐺𝐷𝑃𝑐,𝑡−1)/𝐺𝐷𝑃𝑐,𝑡−1 for h = 0, 1, …, 9, where h indicates
horizon. Solid lines are point estimates. Gray bands are 95% confidence intervals.
Policy implication:
Sovereigns could minimize output losses from hard default by settling (reaching a
restructuring agreement) with creditors as fast as possible
40
41. Wrapping up
We add to the empirical literature on the costs of sovereign debt restructuring
Main findings
New stylized facts on GDP growth, investment and banking sector costs of DR
Show that a self-reinforcing credit/investment/growth effect, helps understanding the
output costs of DR
The strength of these effects depends on the restructuring approach
Post-default DRs imply worse output loss and stronger investment-credit effect
• Post-default :
=> 5%-peak GDP decline, lasting 5+ years. Bank crisis
• Weakly/strictly preemptive:
=> 3%-peak GDP decline, short-lived. No bank crisis
Even more so if:
Haircut imposed is large (Trebesch & Zabel 14) or negotiations lasts long
41
43. Banking Crisis Dataset
Laeven and Valencia (2013) define a banking crisis as an event that meets:
1) Significant signs of financial distress in the banking system (as indicated
by bank runs and large losses);
2) Significant policy measures in response to the losses in the banking system.
At least 3 out of the following 6 measures have been used:
i. Deposit freezes and/or bank holidays;
ii. Significant bank nationalizations;
iii. Bank restructuring gross costs (at least 3% of GDP);
iv. Large liquidity support (5% of deposits and liabilities to foreigners)
v. Significant guarantees put in place
vi. Significant asset purchases (at least 5% of GDP);
43
44. OLS estimation: Lending Interest Rate
Lending Interest Rate after Sovereign Debt Restructuring
Figures show local projections of 100 ∙ (𝑖 𝑡+ℎ − 𝑖 𝑡−1)/𝑖 𝑡−1 for h = 0, 1, …, 9, where h indicates horizon.
Solid lines are point estimates. Gray bands are 95% confidence intervals.
44
45. Endogeneity – sample selection
Figure: Kernel Density- Predicted Probabilities of Debt Restructuring
Treatment group = observations with debt restructuring
Control group = observations without debt restructuring
45
46. Endogeneity…
APIW is close to state-of-art to tackle selection biases due to observables…
…but unobservables may still generate endogeneity…
Any IV strategy in the room?!
46
47. Summary statistics
Table 4: Summary Statistics (At the Start Year of Debt Restructuring)
Panel A:
Panel B:
Panel C:
47
100*/)( 11 ttht GDPGDPGDP
Obs Mean Std. Dev. Min Max
Post-default (start year) 81 -0.45 11.39 -47.99 30.09
Weakly preemptive (start year) 39 1.04 7.09 -24.70 13.40
Strictly preemptive (start year) 18 0.68 5.05 -9.72 11.13
Countries experienced at least one debt restructuring 2279 3.30 9.13 -65.32 139.26
All observations 6183 5.06 84.53 -96.44 5809.40
100*/)( 11 ttt InvestmentInvestmentInvestment
Obs Mean Std. Dev. Min Max
Post-default (start year) 61 -6.58 22.35 -58.95 47.99
Weakly preemptive (start year) 30 -2.40 20.67 -39.42 43.64
Strictly preemptive (start year) 16 5.83 16.64 -17.59 52.91
Countries experienced at least one debt restructuring 1769 8.54 78.58 -376.22 2836.96
All observations 4618 6.77 64.51 -2562.39 2836.96
100*/)( 11 ttt REXREXREX
Obs Mean Std. Dev. Min Max
Post-default (start year) 77 9.10 30.43 -59.34 121.83
Weakly preemptive (start year) 38 10.75 18.78 -19.58 71.57
Strictly preemptive (start year) 21 3.98 16.78 -17.39 62.26
Countries experienced at least one debt restructuring 2388 225.90 10752.99 -99.90 525426.40
All observations 2490 216.77 10530.45 -99.90 525426.40
48. Summary statistics
Table 4: Summary Statistics (At the Start Year of Debt Restructuring)
Panel D:
Panel E:
Panel F:
48
Obs Mean Std. Dev. Min Max
Post-default (start year) 65 -2.65 10.18 -32.75 23.68
Weakly preemptive (start year) 38 -1.43 9.97 -24.16 17.17
Strictly preemptive (start year) 15 0.47 10.55 -13.31 17.78
Countries experienced at least one debt restructuring 2188 4.72 14.04 -77.04 236.73
All observations 5570 4.91 14.22 -77.04 314.97
100*/)( 11 ttt DepositDepositDeposit
Obs Mean Std. Dev. Min Max
Post-default (start year) 60 -0.75 17.82 -49.30 46.24
Weakly preemptive (start year) 36 0.48 12.70 -30.55 30.08
Strictly preemptive (start year) 16 7.27 58.36 -38.75 218.41
Countries experienced at least one debt restructuring 1572 3.90 28.71 -86.28 787.90
All observations 3642 4.45 23.99 -86.28 787.90
Obs Mean Std. Dev. Min Max
Post-default (start year) 49 16.48 53.00 -64.84 284.00
Weakly preemptive (start year) 26 3.16 20.67 -38.72 59.96
Strictly preemptive (start year) 14 -0.21 22.53 -50.21 35.71
Countries experienced at least one debt restructuring 1556 1.76 36.34 -98.41 769.79
All observations 4131 0.18 26.69 -98.41 769.79
100*/)( 11 ttt CreditCreditCredit
100*/)( 11 ttt eLendingRateLendingRateLendingRat
49. Backup Slide 1: AIPW estimator
• Estimation steps:
Step 1: Estimate the Probit model:
o takes unity for debt restructuring events
o is a vector including public debt-to-GDP ratio, private credit-to-GDP ration,
credit rating, # of past debt restructurings, and 2nd stage regressors
Step 2: Estimate the following equation:
o is the cumulative GDP growth rate.
o , and are post-default, weakly preemptive, and strictly preemptive
debt restructuring dummies, respectively.
Step 3: Obtain the predicted value from the regression in Step 2.
Step 4: Use and , find the average treatment effect:
for Type = {Post, Weak, and Strict}. 49
),,(}{ 1,,, αZZ tctctcDRP
tcDR ,
tc,Z
hti
h
tc
h
tc
Strict
tc
StircthWeak
tc
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Posthh
chtc DDDg ,22,11,,
,
,
,
,
,
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Post
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Dg
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ATE
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50. Panel VAR Evidence
Estimate the following Panel VAR model,
𝑔 𝑐,𝑡, 𝑖 𝑐,𝑡, 𝑐𝑟𝑐,𝑡, 𝑒𝑟𝑐,𝑡, 𝑅 𝑐,𝑡
𝑝𝑜𝑠𝑡
, 𝑅 𝑐,𝑡
𝑊𝑒𝑎𝑘
𝑎𝑛𝑑, 𝑅 𝑐,𝑡
𝑆𝑡𝑟𝑖𝑐𝑡
denote GDP growth rate,
investment growth rate, credit growth rate, exchange rate, post-default, weakly
preemptive, and strictly preemptive indicators, respectively.
𝛼1, 𝛼2 , 𝑎𝑛𝑑 𝛼3 are 7-by-7 matrices of coefficients to be estimated.
, and are the error terms.
50
.
e
e
e
e
e
e
e
R
R
R
er
cr
i
g
α
R
R
R
er
cr
i
g
α
R
R
R
er
cr
i
g
α
R
R
R
er
cr
i
g
Strict
Weak
Post
R
tc,
R
tc,
R
tc,
er
tc,
cr
tc,
i
tc,
g
tc,
Strict
3tc,
Weak
3tc,
Post
3tc,
3tc,
3tc,
3tc,
3tc,
3
Strict
2tc,
Weak
2tc,
Post
2tc,
2tc,
2tc,
2tc,
2tc,
2
Strict
1tc,
Weak
1tc,
Post
1tc,
1tc,
1tc,
1tc,
1tc,
1
Strict
tc,
Weak
tc,
Post
tc,
tc,
tc,
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tc,
WeakPost
R
tc
R
tc
er
tc
cr
tc
i
tc
g
tc eeeeee ,,,,,, ,,,,,
Strict
R
tce ,
51. Granger Causality
Use the Panel VAR to study Granger causality
Table: Granger Causality
The table reports Granger causalities implied from the panel VAR regression. Chi-squared statistics are
reported. Numbers in parentheses are p-values. Null hypothesis is that an excluded variable is not a
Granger-cause variable. ***, **, and * indicate significance at 1%, 5%, and 10% level, respectively
51
Outcome
Cause
GDP Investment
Credit to the
Private Sector
Real exchange
rate
Post-default
dummy
Weakly
preemptive
dummy
Strictly
preemptive
dummy
GDP 4.873 7.303* 1.493 1.640 3.753 2.593
(0.18) (0.06) (0.68) (0.65) (0.29) (0.46)
Investment 11.192** 0.747 2.373 1.130 9.251** 7.893*
(0.01) (0.86) (0.50) (0.77) (0.03) (0.05)
Credit to the Private Sector 10.602** 0.835 7.307* 1.890 1.679 1.154
(0.01) (0.84) (0.06) (0.60) (0.64) (0.76)
Real exchange rate 0.706 5.97 0.830 5.053 8.748** 5.149
(0.87) (0.11) (0.84) (0.17) (0.03) (0.16)
Post-default dummy 7.882* 21.320*** 13.421*** 3.398 5.765 7.220*
(0.05) (0.00) (0.00) (0.33) (0.12) (0.07)
Weakly preemptive dummy 2.119 2.144 9.222** 3.630 14.126*** 3.903
(0.55) (0.54) (0.03) (0.30) (0.00) (0.27)
Strictly preemptive dummy 2.836 0.835 11.461*** 1.245 9.982** 0.258
(0.42) (0.84) (0.01) (0.74) (0.02) (0.97)
All 37.381*** 40.429*** 24.001 22.199 23.252 24.482 16.251
(0.01) (0.00) (0.16) (0.22) (0.18) (0.14) (0.51)