Modeling Variation in U.S. Bank Holding Companies’ Net Interest Margins
By Daniel Dorchuck
This study explores variation in US bank holding companies’ (BHCs) net inter-est margins (NIMs) and the effects of interest rate risk exposure on NIMs. Interest rate risk (IRR) is intrinsic in maturity transformation and financial intermediation as banks take on short-term liabilities in the form of deposits and create assets in the form of loans with longer maturities and different repricing profiles. Accordingly, interest rate risk is necessary for bank holding companies (BHCs) to be profitable in financial intermediation, and net interest margins are chosen as a variable of inter-est because they are an isolated measure of bank’ profitability from interest earning assets. Naturally, BHCs employ maturity pairing and derivative hedging to mitigate IRR and ultimately increase and smooth earnings. Synthesizing banks’ balance sheet and income statement data, macroeconomic variables, credit conditions, and interest rate environment variables, this study hopes to expand on existing work by provid-ing insight on the determinants of NIMs as well as interest rate derivatives’ efficacy in increasing and stabilizing net interest margins. The models presented establish links between long term rate exposure, risk-averse capital positions, and increased margins. Additionally, the models suggest that banks earn smaller spreads (NIMs) in higher interest rate environments but benefit from steeper yield curves.
Advisor: Mary Beth Fisher, Kent Kimbrough | JEL Codes: E44, G20, G21 Tagged: Depository Institutions, Interest Rate Derivatives, Interest Rate Risk, Net Interest Margins, US Commercial Banking
Proposing an Alternative to the European Central Bank’s Fiscal Convergence Criteria
By Junaid Arefeen
The recent onset of the sovereign debt crisis in the Eurozone has brought the viabil-ity of the Eurozone as a currency area into question. The unsustainable debt and deficit balances accumulated by several Eurozone nations since the adoption of the common currency in 1999, and the consequent incidence of high levels of sovereign default risk in the euro-area, indicate that the fiscal convergence criteria employed by the European Central Bank to monitor the fiscal discipline and sustainability of its members have been largely ine↵ectual. This paper draws upon the theory of optimum currency areas, and proposes a set of business cycle convergence criteria that can be employed as an alternate means to minimize the risk of fiscal imbalances and sovereign default. Economic theory suggests that a currency union with convergent business cycles will be insulated from asymmetric shocks, removing the need for countries to rely wholly on their fiscal policies when dealing with negative shocks (as would be the case in a currency union with non-synchronous countries su↵ering from negative asymmetric shocks). Therefore, as the risk of fiscal imbalances is minimized, a currency union with synchronous business cycles is expected to have low incidences of sovereign default risk. This paper tests this economic intuition empirically, and employs a multivariable panel regression model to determine the relationship between business cycle convergence and sovereign default risk (proxied using sovereign yield spreads). The regressions reveal that the degree of business cycle convergence is one of the main determinants of yield di↵erentials, and the relationship between the two is negative (as expected). The consistency of the results to numerous robustness checks provide a strong case for substituting the current fiscal convergence criteria with measures that assess the degree of business cycle convergence.
Advisors: Andrea Lanteri, Cosmin Ilut, Kent Kimbrough | JEL Codes: E32, E43, F34, F44, F45 | Tagged: Cycle Convergence, Optimum Currency Area, Sovereign Default Risk
Inflation Volatility and Economic Growth: A Disaggregated Analysis
By Nicholas Becker
Inflation volatility has been theorized to negatively affect real economic growth, but empirical analyses have returned somewhat mixed results. Constructing my own dataset of household group inflation rates by disaggregating and linking Consumer Expenditure Survey data with Consumer Price Index data, I analyze inflation volatility and economic growth from the ground-up. Calculating inflation volatility using a moving-window methodology, I find: 1) significant heterogeneity of inflation volatility across household groups; 2) a negative correlation between inflation volatility and economic growth from 2000-2012 for all household groups, with a stronger negative correlation at lower income levels; 3) a positive correlation between volatility and growth during expansions and a negative correlation between volatility and growth during recessions. Results suggest reducing inflation volatility and refining policymaking to account for the heterogeneity of inflation volatility could improve growth over the longrun. Further analysis is warranted.
Advisor: Nir Jaimovich, Alison Hagy | JEL Codes: E31, E32, O40 | Tagged: Inflation, Economic Growth
Understanding the Argentine Peso’s Devaluation in 2014 —Analysis on Argentina’s Fiscal Sustainability from 1993 to 2013
By Feng Pan
This research analyzes the fiscal sustainability of Argentina from 1993 to 2013. Specifically, it explains the peso devaluation in early 2014 and suggests that it is primarily due to the fundamental problems in Argentina’s economy. This paper highlights Argentina’s inability to enhance its fiscal conditions and suggests possible future economic developments in Argentina. This paper concludes that there is high
chance of hyperinflation, debt default, and the eventual dissolution of the managed exchange rate regime in Argentina in the future.
Advisor: Alison Hagy, Craig Burnside | JEL Codes: E43, E44, E52, E58, E62, F31 | Tagged: Argentine Peso, Exchange Rate, Fiscal Sustainability
The Rise of Mobile Money in Kenya: The Changing Landscape of M-PESA’s Impact on Financial Inclusion
By Hong Zhu
M-PESA, the hugely popular mobile money system in Kenya, has been celebrated for its potential to “bank the unbanked” and increase access to financial services. This paper provides evidence to support this idea and explores mechanisms through which this might be the case. It specifically looks at the savings products held by individuals and how this changes in relation to M-PESA use. It then constructs an index for measuring the extent to which individuals are integrated into the formal financial sector. This paper argues that M-PESA’s effect on financial inclusion is a growing phenomenon, which suggests that keeping pace with the rapid evolutions of this mobile money system should be a high priority for researchers. As this paper elucidates, M-PESA has become notably more integrated with the formal financial sector in 2013 as compared to 2009, which holds implications for user behavior.
Advisor: Michelle Connolly, Xiao Yu Wang | JEL Codes: D14, E42, G21, G23, O1, O17, O16, O33 | Tagged: Financial Inclusion, Mobile Money, Savings,Technology
The Economic Effects of Military and Non-Military Government Spending
By Patrick Royal
There has been substantial investigation into the influence of government spending in general on economic growth, unemployment, and inequality, but relatively little investigation into the relative effects of different types of spending. This thesis attempts to separate the influence of military and non-military government spending on the economy. As with many such investigations, it focuses on a single economy – that of the United States. The results indicate that, dollar for dollar, military spending is just as effective as non-military spending at affecting unemployment, but much more effective at promoting short-term growth. Neither type of spending has a strong impact on income inequality, suggesting that the primary determinants of that are not related to government spending.
Advisor: Craig Burnside | JEL Codes: E1, E12, E62 | Tagged: Government Spending, Growth, Military
Fiscal Multicointegration and Sustainability in OECD Economics
By Rajlakshmi De
Policies surrounding government expenditures and revenues are often concerned with the size of the national public debt and whether it is sustainable or unsustainable by employing the multi-cointegration framework and assertion corresponding criteria for sustainability. Denmark, Norway, Finland, Canada, Sweden, Portugal, and Austria are found to exhibit sustainable fiscal policies during the paper’s sample period, whereas the policies of the United States, Italy, France, Netherlands, United Kingdom, Spain, and Japan are determined to be unsustainable.
Advisor: Kent Kimbrough, Lori Leachman | JEL Codes: E6, E61, E62, E66 | Tagged: Fiscal, Multicointegration, Sustainability
Manufactured Housing Securitization
By Renan Cunha
Through prices of manufactured homes rose in the 2000’s, demand fell dramatically because of the boom in the stick-built housing market. One of the stated goals of securitization is to increase the supply of credit and decrease the cost of lending to make borrowing accessible to more homeowners. This paper will study the effect of securitization of manufactured home loans on the availability of credit for borrowers in North Carolina.
Advisor: Charles Becker | JEL Codes: E51, R3, R31 | Tagged: Credit Availability, Manufactured Housing, Securitization, Trailer Parks
The Hidden Costs of Central Bank Borrowing
By Shane Hunt
This paper explores a previously overlooked unintended consequence of a private bank accepting Central Bank loans as a lender of last resort. Applying the basic Markowitz Security Model, I explore the potential effect of a private bank accepting a Central Bank loan as a signal of increased risk of investment in that private bank to the private markets. Finding a possibility that private investors will charge a penalty risk premium for having sought Central Bank financing, I consider the effects of this premium in three different game theoretic scenarios, each with a different set of assumptions that could apply in different Economic settings. Depending on the specific environment, possible effects include dependence on Central Bank financing, bankruptcy, or an eventual return to the private financial markets for future funding.
Advisor: Marjorie McElroy, Nir Jaimovich | JEL Codes: E58, G02, G21, G28, G32 | Tagged: Banking, Central Banking, Finance
