Financial intermediation

Flow specific capital controls for emerging markets

This paper investigates the impact of capital controls on business cycle fluctuations and welfare. To perform this analysis, we deploy an asymmetric two country model that is subject to negative foreign interest rate shocks. The results show that both an inflow and outflow capital control are able to attenuate capital flow dynamics, but each control bears different implications for macroeconomic outcomes. Whilst the outflow capital control is associated with shock attenuation benefits, the inflow capital control is shown to amplify the impact of shocks.

Some Clarity on Banks as Financial Intermediaries and Money 'Creators'

Although the phrase ‘banks create money’ forms part of popular discourse, it has precipitated a factually incorrect understanding of a bank’s role in the money creation process. Bank money creation is the result of an underlying value-for-value exchange transaction; the bank facilitates the transaction, takes over responsibility for obligations created and records the money created—the bank is not the source of money creation. This has long been understood, even if it is not immediately evident, but contemporary explanations have confounded the issue.

Credit spread variability in U.S. business cycles: The Great Moderation versus the Great Recession

This paper establishes the prevailing financial factors that influence credit spread variability, and its impact on the U.S. business cycle over the Great Moderation and Great Recession periods. To do so, we develop a dynamic general equilibrium framework with a central role of financial intermediation and equity assets. Over the Great Moderation and Great Recession periods, we find an important role for bank market power (sticky rate adjustments and loan rate markups) on credit spread variability in the U.S. business cycle.

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