Korea’s stars tell of an economy saddled with a real neutral rate (r-star) that has declined significantly in recent decades and is currently below zero. This reflects a significant decline in trend growth, and two large financial crises that triggered significant shifts in the saving-investment balance. Larger fiscal deficits and frothy financial conditions since 2012 have helped offset rising demand for safer assets, preventing the neutral rate from falling further. Nonetheless, the fall in the neutral rate, coupled with its effects on asset returns, has complicated the task of monetary policy stabilization. Korea’s neutral rate is likely to remain low over the medium-term and could fall further, reflecting a structural savings-investment imbalance owing to declining productivity and a rotation in demographics increasing the demand for precautionary saving and convenience yield, and widening the capital risk premia. The COVID pandemic risks magnifying these trends.
Outside of financial crises, investors have little incentive to produce private information on banks’ short-term liabilities held as information-insensitive safe assets. The same does not hold true during crises. We measure daily information production using data from credit default swap spreads during the global financial crisis and the subsequent European debt crisis. We study abnormal information production around major events and interventions during these crises and find that, on average, capital injections reduced abnormal information production while early European stress tests increased it. We also link information production to outcomes: high levels of information production predict bank balance sheet contraction and higher government expenditures to support financial institutions. In an addendum, we show information production on nonfinancials dramatically increased relative to financials at the height of the COVID-19 crisis, reflecting the nonfinancial nature of the initial shock.
International Monetary Fund. Monetary and Capital Markets Department
The Financial Sector Assessment Program (FSAP) took place against the backdrop of an ongoing recovery of the financial system. Since the global financial crisis (GFC), financial regulation has been substantially enhanced by the implementation of euro area-wide (EA-wide) regulatory and supervisory frameworks. Furthermore, the Italian authorities have implemented important measures that improved governance, facilitated capitalization, raised prudential requirements, and improved asset quality. In response, Italian banks have made substantial progress tackling legacy non-performing loans (NPLs) and improving solvency ratios.
We analyze the US public sector balance sheet and project it forward under the assumption that
current policies remain in place. We first document the history of the balance sheet and its
components since World War II, with a detailed account of its evolution during and after
the global financial crisis. While, based on assets and liabilities alone, public sector net
worth is negative, additional challenges arise from commitments to future spending implied
by current legislation and demographic trends. To quantify the risks to the balance sheet,
we then apply the macroeconomic scenarios from the Federal Reserve’s bank stress test to
the public sector balance sheet.
Mr. Bas B. Bakker, Marta Korczak, and Mr. Krzysztof Krogulski
In the last decade, over half of the EU countries in the euro area or with currencies
pegged to the euro were hit by large risk premium shocks. Previous papers have
focused on the impact of these shocks on demand. This paper, by contrast, focuses on
the impact on supply. We show that risk premium shocks reduce the output level that
maximizes profit. They also lead to unemployment surges, as firms are forced to cut
costs when financing becomes expensive or is no longer available. As a result, all
countries with risk premium shocks saw unemployment surge, even as euro area core
countries managed to contain unemployment as firms hoarded labor during the
downturn. Most striking, wage bills in euro area crisis countries and the Baltics
declined even faster than GDP, whereas in core euro area countries wage shares
Do euro area inflation expectations remain well-anchored? This paper finds that the protracted
period of low (and below-target) inflation in the euro area since 2013 has weakened their
anchoring. Testing their sensitivity to inflation and macroeconomic news, this paper expands
existing results in two key dimensions. First, by analyzing all available (advanced) inflation
releases. Second, the reactions of expectations are investigated at daily, time-varying and intraday
frequency regressions to add robustness to our conclusions. Results point to a significant
impact of inflation news over recent years that had not been observed before in the euro area.