We study the relationship between banks’ size and risk-taking in context of supranational banking supervision. Consistently with theoretical work on unions contrast to analyses emphasising incentives underpinned by too-big-to-fail effect, we find an inverse non-performing loan growth for a sample European banks. Evidence is provided that mechanism operates through enhanced organisational effici...

The financial trilemma states that financial stability, financial integration and national financial policies are incompatible. Any two of the three objectives can be combined but not all three; one has to give. This paper develops a model to underpin the financial trilemma. Our findings for financial integration suggest that the financial trilemma is in particular at work in Europe. JEL codes:...

Can central banks defuse rising stability risks in financial booms by leaning against the wind with higher interest rates? This paper studies state-dependent effects of monetary policy on crisis risk. Based near-universe advanced economy cycles since nineteenth century, we show that discretionary policies during credit and asset price are more likely to trigger crises than prevent them. (JEL E4...

We study the dynamics linking monetary policy with bank leverage and show that adjustments in leverage act as the linchpin in the monetary transmission mechanism that works through uctuations in risk-taking. Motivated by the evidence, we formulate a model of the “risk-taking channel” of monetary policy in the international context that rests on the feedback loop between increased leverage of gl...

This paper synthesizes recent advances in the theoretical and empirical literature on capital controls. We start by observing that international flows have both benefits costs, but some of these are not internalized individual actors thus constitute externalities. The has identified pecuniary externalities aggregate demand respectively contribute to financial instability recessions. These provi...

Analyzing International Monetary Fund (IMF) data, we find that overly optimistic growth expectations for a country induce economic contractions few years later. To isolate the causal effect, take an instrumental variable approach—exploiting randomness in allocation of IMF mission chiefs. We first document chiefs differ their individual degrees forecast optimism, yielding quasi-experimental vari...

This paper characterizes the integration patterns of international currency unions (such as the CFA Franc zone). We empirically explore different features of currency unions, and compare them to countries with sovereign monies by examining the criteria for Mundell’s concept of an optimum currency area. We find that members of currency unions are more integrated than countries with their own cur...

This paper examines the in ationary consequences of a currency changeover in the catering market. Empirical evidence from the Michelin Red Guide shows that: i) di erently from restaurants in non-euro countries, restaurants in the euro area experienced abnormal price increases just after the changeover, ii) among restaurants in the euro area, tourist restaurants are responsible for most of the a...

We investigate global factors associated with bank capital ‡ows. We formulate a model of the international banking system where global banks interact with local banks. The solution highlights the bank leverage cycle as the determinant of the transmission of …nancial conditions across borders through banking sector capital ‡ows. A distinctive prediction of the model is that local currency apprec...

The paper compares the credibility of currency boards and (standard) pegs. Abandoning a currency board requires a time-consuming legislative process and an abolition will thus be previously expected. Therefore, a currency board solves the time inconsistency problem of monetary policy. However, policy can react to unexpected shocks only with a time lag, thus the threat of large shocks makes the ...