Technological Standardization, Endogenous Productivity and Transitory Dynamics [pdf]
Banque de France Working Paper No. 503
Technological standardization is an essential prerequisite for the implementation of new technologies: The interdependencies of these technologies require common rules ("standardization") to ensure compatibility. Though standardization is prevalent in practically every sector of industrialized economies, its macroeconomic implications have not been analyzed so far. Using data on standardization, we are able to measure the industry-wide adoption of new technologies and analyze their impact on macroeconomic variables. First, our results show that new technologies diffuse slowly and generate a positive S-shaped reaction of output and investment. Before picking up permanently, total factor productivity temporarily decreases, implying that the newly adopted technology is incompatible with the incumbent technology. Second, standardization reveals information about future movements of macroeconomic aggregates as evidenced by the positive and immediate reaction of stock market variables to the identified technology shock. Standardization triggers a lengthy process of technology implementation whose aggregate effects only materialize after years; however, forward-looking variables pick up these developments on impact.
Country Risk Premia, Endogenous Collateral Constraints and Non-linearities: A Threshold VAR
Recently, the notion of occasionally binding constraints has been used in macroeconomic models to generate threshold and amplified financial accelerator effects in order to stress the relevance of financial frictions - in particular for emerging market business cycles. As much as these models have to use global solution techniques, empirical models have to resort to non-linear estimation techniques to capture asymmetries. Using a threshold vector autoregression approach, I analyze the effect of shocks to the country risk premium in different regimes which are interpreted as states of the economy where collateral constraints bind to a different degree. Amplification coefficients which measure the non-linearity of responses are computed across various emerging market economies. As a first finding, the results show that there is large heterogeneity in the responses and the size of amplification coefficients across countries. In a second step, it is found that cross-country differences can be associated with characteristics such as liability dollarization or external leverage. This finding thus validates the underlying conceptual framework where vulnerability at the country level is assumed to depend on structural features and the degree of financial frictions. Third, this paper shows that both a debt-deflation mechanism which causes asset price spirals as well as pecuniary externalities stemming from exchange rate depreciation can lead to non-linearities; however, the former is associated with a higher likelihood of leading to regime switches.
International Funding Diversification and Bank Resilience – Evidence from UK Banks
The recent financial crisis has demonstrated the strong cross-border linkages that led to an unprecedented freeze in bank funding markets. This paper considers whether greater diversification of foreign funding across countries can make banks more resilient against adverse shocks. To date, most studies of banks' concentration risks during the crisis have focused on the asset side of their balance sheet. In this paper, we build a model of heterogeneous banks that are constrained in their ability to diversify away certain funding risks due to fixed costs. There is a trade-off between a high degree of diversification and the costs that such diversification entails. Heterogeneity in bank size and profitability translates into different relative fixed costs. Using detailed balance sheet data for all UK-resident banks, we show that banks' ability to weather the rise in funding costs during times of financial stress is related to their size and profitability. Conditional on banks' reliance on domestic core deposit funding, better diversified foreign funding mitigates the impact of a global shock. We specifically take into account the different dimensions of diversification. Along the extensive margin, banks are more resilient against shocks if they fund from a larger number of foreign sources. With regards to the intensive margin, an analysis of the specific correlation patterns of different funding sources is desirable as simple measures of concentration risk fall short of capturing the high degree of interconnectedness that characterizes foreign funding markets.
No Double Standards: Quantifying the Impact of Standard Harmonization on Trade [pdf]
Product standards are omnipresent in industrialized societies. Though standardization can be beneficial for domestic producers, divergent product standards have been categorized as a major obstacle to international trade. The harmonization of standards can be a powerful trade policy tool, but little is known about the mechanisms through which standard harmonization translates into economic outcomes. This paper quantifies the effect of standard harmonization on trade flows and characterizes the extent to which it changes the cost and demand structure of exporting. Using a novel and comprehensive database on cross-country standard equivalences, we identify standard harmonization events at the document level. Our results show that the introduction of new harmonized standards entails adaption costs and creates an entry barrier, while simultaneously raising the demand for products subject to harmonization. The latter effect dominates, thus increasing overall trade flows.
Work in progress
Diversification and International Contagion
International Banking Research Network (IBRN) projects [link]
International Banking and Liquidity Risk Transmission: Evidence from France [link]IMF Economic Review, 2015, vol. 63(3), p. 479-495.
The Banque de France contribution analyzes the effect of liquidity risk on domestic and foreign lending, credit and intragroup funding by French banking groups. The paper finds that a higher core deposit ratio, a higher commitment ratio, and a low ratio of illiquid assets are associated with higher growth of certain types of lending during times of liquidity risk. These effects are mitigated when public liquidity is accessed, thus confirming that public liquidity provision was conducive to maintaining lending growth. Most importantly, it finds that the quantitative importance of liquidity risk is more pronounced for foreign lending, which may suggest that the particular banking model of French banks and the strong domestic retail sector contributed to the stability of domestic credit.
International Banking and Cross-Border Effects of Regulation: Lessons from France [link]
International Journal of Central Banking, 2017, vol. 13(2), p. 163-193.
As part of the International Banking Research Network, the Banque de France contribution to the research project on prudential policy spillovers concentrates on the “outward” adjustment of French banks’ cross-border lending. We consider both adjustment of cross-border lending to foreign (“destination-country”) and French (“home-country”) regulation and investigate differences between financial and non-financial counterparties. For some regulatory measures, we find that French banks increase their cross-border lending growth in response to regulatory tightening abroad—presumably because they are not subject to these regulatory changes. All in all, we do not find particularly large quantitative adjustments to changes in foreign regulatory policies. Lastly, we find that balance sheet variables are important for the adjustment of crossborder lending growth in response to French regulatory policy changes.
International Spillovers of Monetary Policy: Evidence from France and Italy
Journal of International Money and Finance, forthcoming.
In this paper we provide empirical evidence on the impact of US and UK monetary policy changes on credit supply of banks operating in Italy and France over the period 2000--2015, exploring the existence of an international bank lending channel. Exploiting bank balance sheet heterogeneity, we find that monetary policy tightening abroad leads to a reduction of credit supply at home, in particular for US monetary policy changes. Our results show that USD funding plays an important role in the transmission mechanism, especially for French banks which rely to a larger extent on USD funding. We also show that banks adjust their euro and foreign currency lending differently, thus implying that funding sources in different currencies are not perfect substitutes. This is especially the case when tensions in currency swap markets are high, thus resulting in costly cross-currency funding.