Contemporary Topics in Finance E-Book

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Surveys of Recent Research in Economics
• Sprache: Englisch

Seitenzahl: 971

Veröffentlichungsjahr: 2019

Beschreibung

The literature surveys presented in this edited volume provide readers with up-to-date reviews on eleven contemporary topics in finance. * Topics include unconventional monetary policy, implicit bank guarantees, and financial fraud - all linked to the exceptional event of the Global Financial Crisis * Explores how recent studies on inflation risk premia and finance and productivity have benefitted from new empirical methods and the availability of relevant data * Demonstrates how angel investing, venture capital, relationship lending and microfinance have benefitted from increased research as they have become more seasoned * Investigates crowdfunding and crypto-currencies which have both arisen from recent technological developments

Leseprobe

Contemporary Topics in Finance

A Collection of Literature Surveys

Edited by Iris Claus and Leo Krippner

This edition first published 2019

Chapters © 2019 The Authors

Book compilation © 2019 John Wiley & Sons Ltd

Originally published as a special issue of the Journal of Economic Surveys (Volume 32, Issue 5)

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, except as permitted by law. Advice on how to obtain permission to reuse material from this title is available at http://www.wiley.com/go/permissions.

The rights of Iris Claus and Leo Krippner to be identified as the authors of the editorial material in this work have been asserted in accordance with law.

Registered Offices

John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, USA

John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ, UK

Editorial Office

9600 Garsington Road, Oxford, OX4 2DQ, UK

For details of our global editorial offices, customer services, and more information about Wiley products visit us at www.wiley.com.

Wiley also publishes its books in a variety of electronic formats and by print-on-demand. Some content that appears in standard print versions of this book may not be available in other formats.

Limit of Liability/Disclaimer of Warranty

While the publisher and authors have used their best efforts in preparing this work, they make no representations or warranties with respect to the accuracy or completeness of the contents of this work and specifically disclaim all warranties, including without limitation any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives, written sales materials or promotional statements for this work. The fact that an organization, website, or product is referred to in this work as a citation and/or potential source of further information does not mean that the publisher and authors endorse the information or services the organization, website, or product may provide or recommendations it may make. This work is sold with the understanding that the publisher is not engaged in rendering professional services. The advice and strategies contained herein may not be suitable for your situation. You should consult with a specialist where appropriate. Further, readers should be aware that websites listed in this work may have changed or disappeared between when this work was written and when it is read. Neither the publisher nor authors shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

Library of Congress Cataloging-in-Publication data is available for this book.

9781119565161 (paperback)

Cover Design: Wiley

Cover Images: Lee Yiu Tung/Shutterstock, © Golden House Studio/Shutterstock

CONTENTS

Cover

1 Contemporary Topics in Finance: A Collection of Literature Surveys

References

2 A Survey of the International Evidence and Lessons Learned About Unconventional Monetary Policies: is a ‘New Normal’ in our Future?

1. Introduction

2. the Transition to Unconventional Policies

3. the International Evidence to Date: Financial Markets

4. the International Evidence to Date: Macro-Economic Effects

5. Conclusions: Lessons Learned, the Exit and the ‘New Normal’

Acknowledgements

Notes

References

3 Implicit Bank Debt Guarantees: Costs, Benefits and Risks

1. Introduction

2. Why Do Implicit Bank Debt Guarantees Arise?

3. Who Benefits from Implicit Bank Debt Guarantees?

4. What Are the Economic Costs of Implicit Bank Debt Guarantees?

5. What Factors Influence the Value of the Perceived Guarantee?

6. How Do Markets React to What Policy Makers Say and Do about Implicit Guarantees?

7. Concluding Remarks and Open Issues

Acknowledgements

References

Appendix A: Reform policies either implemented or being considered for implementation

Appendix B: Changes in resolution regimes and practises by country

4 Financial Fraud: A Literature Review

1. Introduction

2. False Financial Disclosures

3. Financial Scams

4. Fraudulent Financial Mis-Selling

5. Conclusion

Acknowledgements

Notes

References

5 Estimating Inflation Risk Premia Using Inflation-Linked Bonds: A Review

1. Introduction

2. Overview of Relevant Concepts

3. Estimating the Inflation Risk Premium with ILB Yields

4. Impact of Liquidity

5. Current Developments

6. Conclusion

Acknowledgements

Notes

References

6 Finance and Productivity: A Literature Review

1. Introduction

2. A Framework for the Analysis

3. Financial Development and Economic Growth

4. Finance and Productivity

5. Summary

Notes

References

Supporting Information

7 Business Angels Research in Entrepreneurial Finance: A Literature Review and A Research Agenda

1. Introduction

2. Methodology

3. Main Contributions of BA Research

4. Bibliometric Analysis

5. Conclusions and Directions for Future Research

Notes

References

Supporting Information

8 Venture Capital Internationalization: Synthesis and Future Research Directions

1. Introduction

2. Determinants of International VC Investment Flows

3. Strategies to Compensate for Liabilities of Foreignness

4. Outcomes of International VC Investments

5. Public Policy and VC Internationalization

6. Avenues for Future Research

7. Overall Conclusion

Acknowledgements

Notes

References

9 Is Relationship Lending Still a Mixed Blessing? A Review of Advantages and Disadvantages for Lenders and Borrowers

1. Introduction

2. Theoretical Foundations

3. Research Framework and Analysis of the Main Determinants of Relationship Lending

4. Relationship-Specific Determinants

5. Industry-Specific Variables

6

6. Relationship Lending in Times of Financial Distress for Lenders and/or Borrowers

7. Differences between Financial Systems

8. Final Remarks and Suggestions for Future Research

Notes

References

10 Determinants of the Performance of Microfinance Institutions: A Systematic Review

1. Introduction

2. MFI Performance: the Debate

3. Measuring MFI Financial and Social Performance

4. Methodology and Data Description

5. Data Analysis

6. Challenges and Conclusions

Acknowledgement

Notes

References

11 Crowdfunding and Innovation

1. Introduction

2. the Functioning of Crowdfunding Platforms

3. Crowdfunding and the Financing of Innovation

4. Does Crowdfunding Spur Innovation?

5. Conclusions

Notes

References

12 Crypto-Currencies – AN Introduction to Not-So-Funny Moneys

1. Introduction

2. Payment/Exchange Mechanisms

3. What Purpose Do Crypto-Currencies Serve?

4. Implications

5. Conclusion

Acknowledgement

Notes

References

End User License Agreement

Index

List of Tables

Chapter 2

Table 1

Chapter 3

Table 1

Table 2

Chapter 4

Table 1

Table 2

Chapter 5

Table 1

Table 2

Chapter 7

Table 1

Table 2

Table 3

Table 4

Table 5

Chapter 8

Table 1

Table 2

Table 3

Table 4

Table 5

Chapter 9

Table 1

Table 2

Table 3

Table 4

Table 5

Table 6

Table 7

Chapter 10

Table 1

Chapter 12

Table 1

List of Illustrations

Chapter 2

Figure 1 (a) Central Bank assets as a per cent of GDP. (b) Quarterly rate of change in C...

Figure 2 Summary of selected empirical studies: the impact of UMP on long-term governmen...

Figure 3 Summary of selected empirical studies: Spillovers of UMP on EMEs. (a) Long-term...

Figure 4 Varieties of impulse responses: USA.

Figure 5 Counterfactual experiment: What if the crisis never happened?

Chapter 3

Figure 1

De Facto

Change in the Traditional Financial Safety Net Definition.

Figure 2 Selected Considerations Regarding Costs, Benefits and Risks of Implicit Bank De...

Figure 3 Credit Rating Uplifts of Large Banks due to Assumed External Support.

Figure 4 Description of Mix of Regulatory Reforms Undertaken with a Bearing on the Value...

Figure 5 Implicit Guarantees, Too-Big-to-Fail and Bail-Out: Strength of Selected

Ex Ante

...

Figure 6 Interpretation of Difference-in-Difference Parameter Estimates. [Color figure c...

Chapter 4

Figure 1 Chain of Lies in the Mortgage Industry

Chapter 5

Figure 1 Illustration of Studies' Research Designs Discussed in Section 3.1.

Figure 2 Illustration of Studies' Research Designs Discussed in Section 3.2.

Chapter 6

Figure 1 Productivity Growth Has Declined Since the 1990s: Annualised Growth of Labour P...

Figure 2 Historic Expansion of Financial Activity: (a) Financial Institution Private Cre...

Figure 3 A Synopsis of the Productivity, Finance and Policy Nexus.

Chapter 7

Figure 1 Number of Articles Published per Year, by Thematic Area.

Figure 2 BA's Selection Criteria.

Figure 3 BA's Value-Added Activities.

Figure 4 BA's Investment Performance Measures.

Figure 5 Average Citations per Year, by Thematic Area.

Figure 6 Co-Authorship Analysis.

Chapter 9

Figure 1 the Multidimensional Framework of Relationship Lending.

Figure 2A Relationship-Specific Determinants.

Figure 2B Industry-Specific Determinants.

Chapter 12

Figure 1 Example QR-Code.

Figure 2 Bitcoin Genesis Address.

Figure 3 Nakamoto's Public PGP Key.

Figure 4 Stylized Bitcoin Transaction. [Color figure can be viewed at wileyonlinelibrary...

Figure 5 Unconfirmed Transactions in the Mempool. [Color figure can be viewed at wileyon...

Figure 6 Price of Bitcoin (USD). [Color figure can be viewed at wileyonlinelibrary.com]

Figure 7 Transactions Costs (Percentage of Transaction Value). [Color figure can be view...

Guide

Cover

Table of Contents

Chapter 1

Pages

iii

1

2

3

4

5

6

7

8

9

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

33

34

35

36

37

38

39

40

41

42

43

44

45

46

47

48

49

50

51

52

53

54

55

56

57

58

59

60

61

62

63

64

65

66

67

68

69

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

100

101

102

103

104

105

106

107

108

109

110

111

112

113

114

115

117

118

119

120

121

122

123

124

125

126

127

128

129

130

131

132

133

134

135

136

137

138

139

140

141

142

143

144

145

146

147

148

149

151

152

153

154

155

156

157

158

159

160

161

162

163

164

165

166

167

168

169

170

171

172

173

174

175

176

177

178

179

180

181

182

183

184

185

186

187

188

189

190

191

192

193

194

195

196

197

198

199

200

201

202

203

204

205

206

207

208

209

210

211

212

213

214

215

216

217

218

219

220

221

222

223

224

225

226

227

228

229

230

231

232

233

234

235

236

237

238

239

240

241

242

243

244

245

246

247

248

249

250

251

252

253

254

255

256

257

258

259

260

261

262

263

264

265

266

267

268

269

270

271

272

273

274

275

276

277

278

279

280

281

282

283

284

285

286

287

288

289

290

291

292

293

294

295

296

297

298

299

300

301

302

303

304

305

306

307

308

309

310

311

312

313

314

315

316

317

318

319

320

321

322

323

324

325

326

327

328

329

330

331

332

333

334

335

336

337

338

339

340

341

342

343

344

345

346

347

348

349

351

352

353

354

355

356

357

358

359

360

361

362

363

364

365

366

367

368

369

370

371

372

373

374

375

376

377

378

379

380

381

E1

257

384

385

386

387

388

389

390

391

1CONTEMPORARY TOPICS IN FINANCE: A COLLECTION OF LITERATURE SURVEYS

Iris Claus

University of Waikato

Leo Krippner

Reserve Bank of New Zealand

“For there was once a time when no such thing as money existed …. But it did not always and so easily happen that when you had something which I wanted, I for my part, had something that you were willing to accept. So a material was selected which, being given a stable value by the state, avoided the problems of barter by providing a constant medium of exchange.”

Julius Paulus Prudentissimus, about 230 A.D. (translation by A. Watson, 1985)

Finance has always played a critical role in economies, given it is at the heart of consumption, saving, and investment decisions by individuals, firms, and governments. As a practical and professional field, finance facilitates the efficient exchange of funds within economies between lenders, investors, and borrowers. Therefore, it is understandable that finance is continually evolving in practice.

However, it is important that the practical evolution of finance is complemented by active academic and policy related research. As a simple historical example, money, which lies at the core of finance and economics, has existed in practice for thousands of years, as has the temptation for its exploitation by authorities. The introductory quote is actually part of an academic argument on the key properties of money (an efficient medium of exchange, a secure store of value, and a stable unit of account) that successfully convinced Gordian III at the time against debasing the currency of Rome.

Following the theme of best practice being complemented by best research, this book comprises a collection of up-to-date reviews on eleven contemporary topics in finance. We have broadly grouped these into the three categories discussed in the following paragraph.

Developments in finance practice, research, policy, and regulation can be triggered by many catalysts. One such catalyst is exceptional financial and economic events that can lead policy makers, researchers, and society in general to question and revisit the parameters and limits under which the finance industry operates. A broader avenue, for research in particular, is the passage of time, which allows previously new forms of financing to be bedded in, while new empirical methods and data become available for quantitative analysis. A third catalyst is technological innovations, which can alter the efficiency of existing financial transactions and flows of funding, or create new ones.

The most exceptional financial and economic event in recent history is, of course, the Global Financial Crisis (GFC) and the associated Great Recession. The first three articles in this book relate to those events. They review the literature on the effectiveness of unconventional monetary policy, the costs of implicit bank debt guarantees, and drivers of financial fraud. Estimation of inflation risk premia, advances in finance and productivity, and less traditional forms of finance including business angels, venture capital, microfinance, and relationship lending are reviewed in the next six articles. The last two reviews are on new topics in finance that have arisen from technological advances; crowdfunding and innovation and an introduction to crypto-currencies.

The immediate challenges of the GFC and Great Recession were to stabilize financial markets and the economy, and ultimately setting them on a course for an eventual recovery. Hence, in “A survey of the international evidence and lessons learned about unconventional monetary policies: Is a ‘new normal’ in our future?” Pierre Siklos, Domenico Lombardi, and Samantha St. Amand discuss the effectiveness of unconventional monetary policy (UMP) and implications for the future. UMP is defined as any policy action, other than the conventional setting of short-term interest rates undertaken prior to the GFC of 2007/08 that influences economic activity and/or moderates shocks to the financial system to achieve a stated monetary policy objective. UMP therefore includes the well-known quantitative easing (QE) actions, where central banks change the size and/or composition of their balance sheet, forward guidance policies, where central banks change market expectations of interest rates by sending signals about the future policy path, and inflation target announcements that can change expected inflation and hence real interest rates.

The authors find considerable evidence that UMP can be powerful in offsetting the negative economic effects of a financial crisis. In that context, the evidence suggests that a successful monetary policy response should be forceful, that a joint response from both the fiscal and monetary authorities is desirable, and that the policy response should be persistent until confidence and the conditions for full recovery are in place. From these perspectives, the authors provide a retrospective on the case of UMP in Japan, given that it so far shows few signs of producing the aimed-for economic outcomes despite long and varied attempts. They also raise related questions for the euro area, given that the specific structure of its financial system and macroeconomic policy making processes may limit the desired co-ordinated response.

Regarding the aftermath of a financial crisis, the authors interpret the evidence as showing that UMP is not necessarily sufficient or capable of promoting stronger long-term economic growth on its own. Consistent with this, central banks have been reluctant to claim that they can restore growth to pre-crisis conditions without supporting fiscal and structural policies also being enacted.

The GFC was also a catalyst for revisiting the topic, and policy framework, around implicit government guarantees for banks, given that the banking system and many individual banks received unprecedented government support at the time, although the topic also has plenty of pre-GFC history. “Limiting implicit bank debt guarantees” by Sebastian Schich reviews the literature, noting that implicit government guarantees exist for banks essentially due to the expectation by market participants that public authorities might bailout the creditors of banks that are considered to be “too big to fail” (TBTF). The policy response to the GFC might have further entrenched that perception.

While implicit bank debt guarantees might benefit some stakeholders in the short term, they create economic costs as well as additional risks. In particular, they tend to weaken market discipline, encourage bank leverage and risk-taking, and distort competition between banks and non-banks, between small and large banks, and between banking sectors from different countries. They also create contingent liabilities for the sovereign and the taxpayer.

Policy measures to limit the value of implicit guarantees, and hence their costs, differ from country to country. One overarching goal is to strengthen bank balance sheets, thus making guarantees less valuable. Another avenue is to make bank failure resolution smoother and more effective, thus reducing the perception that implicit guarantees exist. Explicitly charging a user fee, as a disincentive for banks to “use” such guarantees, is considered less attractive, given the difficulty of making appropriate valuations and also potentially reinforcing the perception that guarantees exist. The approach of identifying some banks as globally systemically important and subjecting them to a special and more intrusive regulatory treatment may be seen as an indirect charge for the “use” of implicit guarantees. However, Schich finds little evidence that this specific approach has been successful so far.

Schich summarizes the measures of implicit guarantees which, while inherently difficult to value, can be used to assess progress regarding limiting TBTF. There is evidence that the values of implicit bank debt guarantees for banks have declined from their peaks attained during the GFC, but it is not clear whether the values have fallen below those prevailing before the crisis.

Open questions that remain are how much further should the value of implicit bank debt guarantees be reduced? And at what point can their level be considered low enough so that the costs of further efforts to reduce them would outweigh the benefits of doing so?

Another topic that has been given a new lease of life in the onset and the wake of the GFC is financial fraud, given the role of the subprime mortgage markets in that event, although the topic has had a long and colourful pedigree prior to the GFC. In “Financial fraud: A literature review”, Arjan Reurink surveys the empirical literature on financial fraud from three perspectives. The first is financial statement fraud, which involves false statements about investment entities, the second is financial scams, which are deceptive and fully fraudulent schemes, and the third is fraudulent mis-selling practices, where the product or service is knowingly unsuitable for clients’ needs.

Reurink finds that financial fraud is widespread throughout the financial industry, including the frequent involvement of established financial institutions, and is not simply attributable to a few “bad apples”. Indeed, the literature review highlights four recent developments that scholars think have facilitated the occurrence of financial fraud. First, financial deregulation has resulted in new conflicts of interest and perverse incentive structures, facilitated by incentive-based compensation structures in financial firms at all levels (and new layers of intermediaries, such as fund managers and financial advisers). Perverse incentive structures can orientate firms towards short-term profit-making and stock-price maximization, irrespective of the legal implications, and legal penalties can simply be seen as a cost of doing business. Second, financial markets have seen an influx of relatively unsophisticated investors during the last few decades, which has provided fraudulently predisposed market players with a larger pool of more easily exploitable investors. Third, the increasing complexity involved in financial market transactions provides opportunities for fraudsters to deceive other market participants. Fourth, the veil of secrecy and mystique surrounding some collective investment funds which have been on the rise over recent decades can facilitate fraud. The secrecy is justified in the context of proprietary trading models used by fund managers, but financial scams and financial statement frauds associated with the funds can thrive in the environment of incomplete disclosure.

Future research in the area, building on some existing work, could investigate the impact of fraud on the functioning of markets and the stability of financial systems, the political and economic structures that facilitate financial fraud, and the relationship between deregulation and financial fraud. Particularly relevant in the present environment of unusually low interest rates is how that might encourage excessive risk taking and facilitate Ponzi like schemes.

Within the second main category of existing topics in finance that have benefited from new research, we include six papers.

Alexander Kupfer in “Estimating inflation risk premia using inflation-linked bonds: A review” surveys studies investigating the premia in inflation-linked bonds (ILBs), which have grown in number with the availability of new data, notably in the United States over the past 20 years. Inflation expectations are an unobserved variable that are an important economic quantity for policy makers and investors. In principle, nominal bonds and ILBs should allow high frequency readings of implied inflation expectations for different horizons (unlike surveyed inflation expectations). However, nominal-ILB spreads are biased by inflation risk premia, liquidity premia, lags on indexing ILBs to inflation outturns, and embedded deflation options (some ILBs rule out indexation below face value). Allowing for those biases improves implied inflation expectations nominal-ILB spreads, and is also important for decisions on nominal versus ILB sovereign debt issuance. The sign of the inflation risk premium also offers some intuition about the state of the economy.

Kupfer finds that strategies to estimate the inflation risk premium vary considerably throughout the literature, including regression-based approaches, term structure models (with and without inflation data), and macro-finance term structure models. These studies generally find that the magnitude and variation in the inflation risk premium is material. Regarding the liquidity premium, it was highest in the first years of ILB issuance and around the time of the GFC. The indexation lag and deflation option are found to be negligible, apart from during the GFC in the latter case.

The survey also presents potential directions for future research. One is building on limited work so far using term structure models that allow for the effective lower bound in nominal yields, while ILB yields are free to evolve to negative values. Similarly, further and in-depth analysis is needed on ILB liquidity premia and their determinants because eliminating that premium would present a large fiscal saving when issuing ILBs. Finally, a further area for future research is to extend recent term structure approaches that gauge the equilibrium real rate using ILBs, and to investigate two-(or multi-)country term structure models that include ILB data.

Another topic that has evolved rapidly in the past decade, due in part to greater availability of firm-level and plant-level data and policy agenda priorities, is the relationship between finance and productivity. In “Finance and productivity” Mark Heil surveys the empirical literature, after providing an introduction to the long-term trends in productivity and finance, and a stylized view of key policy mechanisms that influence productivity.

Regarding empirical results, mounting evidence shows that financial development has been an important contributor to productivity growth. Conversely, financial frictions that impede the efficient flow of finance can mitigate the positive effects through a variety of channels. For example, inefficient insolvency regimes that impede the exit of low-productivity firms inhibits productivity growth. The magnitudes of frictional costs in general appear to be modest in financially developed economies, but are considerably larger in developing economies.

A primary driver of productivity growth is knowledge production, yet evidence that the availability of financing facilitates higher educational attainment is tenuous. On the whole, merger and acquisition activity is associated with gains in productivity, but the direct contributions of the financial sector to productivity are mixed; improvements during the late 1990s were substantial, but might be associated with the tech bubble at the time. Cross-country and single-country studies agree that financial liberalization, such as stock market opening and lifting of foreign capital controls, is associated with economically meaningful aggregate productivity gains.

The research suggests that the availability of equity financing is particularly valuable for the growth of young and small enterprises and it remains the primary external source for funding research and development. Recent studies of both periods of economic decline and booms suggest that business cycle influences on productivity are inconclusive.

As the author notes, the recent empirical literature provides fresh insights that may inform policy development to help enact finance related measures that more effectively promote productivity growth. However, it will be important in future research to identify empirical regularities, as well as differences across countries.

Angel finance is a non-traditional source of funds that has become more commonplace in recent decades, in practice and in the literature. In “Business angels research in entrepreneurial finance: A literature review and a research agenda”, Francesca Tenca, Annalisa Croce, and Elisa Ughetto provide a summary of findings of prior literature and a bibliometric analysis. Business angels are high wealth individuals who provide seed or growth capital, advice, and hands-on assistance to business start-ups in exchange for ownership equity. They invest at the earliest stages of ventures’ lifecycle typically long before institutional investors. Business angels play a complementary role to venture capitalists. They are typically more involved in the selection phase and first contact with entrepreneurs, while venture capitalists head the deal-structuring phase. In the post-investment phase, business angels are more involved in mentoring while venture capitalists are more engaged in monitoring through contracts and supervisory board involvement.

The authors categorize the literature on business angels into three thematic areas. The first is business angel characteristics, which was the first research stream to emerge. The second is business angel market, and the third is business angel investment process, which has become the most extensive research stream following increased growth in the number of papers published since 2011. However, a significant research gap has emerged between developed and emerging economies. Emerging markets are often characterized by political uncertainty, corruption, lack of supporting institutions for early stage investment, and legal protection for minority shareholders. Business angels manage such difficulties by adopting investment strategies of informal networking and co-investment. In emerging countries business angels co-invest to reduce high levels of financial, legal, currency, political, economic, and market risks while in developed economies they typically co-invest to reduce financial risks.

Quantitative analysis is the most frequent methodology used in business angel research. However, a key challenge is that business angels are often anonymous and invisible and hence difficult to identify which makes sampling problematic and most studies rely on convenience samples.

Venture capital is another non-traditional source of funds, sometimes described as the ‘business of building businesses’, which is reviewed by David Devigne, Sophie Manigart, Tom Vanacker, and Klaas Mulier in “Venture capital internationalization: Synthesis and future research directions”. Venture capital investments are long-term, illiquid, minority equity investments for the launch, growth, or expansion of privately held companies. In recent years the importance of foreign investments in venture capital has been increasing. But foreign venture capital firms face geographical, cultural, and institutional distance which constrains domestically used strategies to reduce information asymmetries. The authors review the literature on venture capital internationalization and suggest avenues for future research. They discuss which venture capital firms invest across borders and in what countries, how venture capital firms address liabilities of foreign investing, and the outcomes of international venture capital investments.

Foreign venture capital firms source, fund, syndicate, and monitor portfolio companies differently than domestic venture capital firms. A venture capital firm's internationalization strategy is typically influenced by the institutional environment in target countries and determined by the experience of its managers (human capital), and its network of syndication partners including international technical communities of immigrants (social capital). Investment deal features and legal contracts are used to reduce problems of information asymmetries, monitoring, and resource transfer. Another strategy of foreign venture capital firms is syndication with local venture capital firms which outsources monitoring and value adding functions to local co-investors who do not face geographical, cultural or institutional distance. Regarding outcomes of international venture capital investments in terms of development of portfolio companies and financial returns earned by venture capital investors upon exit from portfolio companies the authors find that the evidence is mixed and conclude that more research is needed.

A more traditional source of funding is through relationship lending, which Andi Duqi, Angelo Tomaselli, and Giuseppe Torluccio address in “Is relationship lending still a mixed blessing? A review of advantages and disadvantages for lenders and borrowers”. A key challenge for small businesses is that they generally do not have audited financial statements and traded debt or equity. A common lending technology is relationship lending which can help overcome these information difficulties because banks use proprietary information obtained over time through contact with firms, their owners, and local community to decide whether or not to lend to a firm and at what terms. Relationship lending thus differs from transactions based lending (or arm's length lending) where banks mostly use verifiable and hard information derived from financial statements, credit scoring or guarantees. In the review, the authors assess how the main determinants of relationship lending impact on benefits and costs for lenders and borrowers. They find that relationship lending helps banks screen out bad from good borrowers and reduces credit rationing compared to arm's length lending to small and medium-sized businesses but the benefits for borrowers appear to depend on borrowers’ ability to signal their reputation in the market. In particular, it is not optimal for firms to have many banks because this sends a signal of low quality to the market.

Relationship lending is typically practiced by small banks that are located near their customers, while large banks tend to rely on transactions based lending, possibly because they have the tools to implement and benefit from transactions based lending. During times of crisis the evidence suggests that relationship banks extend credit at better terms than transactions banks possibly because they charge higher interest rates in good times to compensate for during a crisis.

Relationship lending may lead to two problems. The first problem is a soft budget constraint which arises when a borrower is in financial distress or a project becomes more risky and the bank extends lending to avoid bankruptcy of the firm. The second problem is a hold-up problem which occurs when relationship lending gives banks a monopoly on information allowing them to charge higher interest rates.

Under the various Basel accords, which are a series of recommendations on banking laws and regulations, banks are increasingly adopting screening technologies that rely on the use of hard information. The authors venture that the Basel accords will discourage banks from gathering and processing soft information and recommend further research on optimal banking practices and their links with regulation, bank stability, and the real economy.

Microfinance is a recent introduction to the field of finance that now has more data and research available for analysis. Marek Hudon and Niels Hermes review the literature on the performance of microfinance institutions in “Determinants of the performance of microfinance institutions: A systematic review”. Microfinance institutions provide financial services to poor households who are excluded from the formal financial system. Their performance has typically been evaluated by their success in improving the lives of the poor and their independence of donor support in the long run. However, more recently there has been a shift in focus from social to financial performance. The attention is mainly on cost efficiency because lower costs of providing financial services maximize the contribution that the provision of financial services can make to reducing poverty.

Hudon and Hermes draw some conclusions from the literature. The size and scale of operations positively affect financial but not always social performance of microfinance institutions. The impact of subsidized funding on financial performance is mixed, but subsidies tend to improve social performance. Most studies focus on subsidies probably because most microfinance institutions are still dependent on subsidies from governments and only a few studies consider other funding sources, e.g. deposits, equity, and debt. The lack of attention to deposits as a funding source has consequences for the social performance of microfinance institutions because deposits and savings help manage fluctuations in income. Only a few studies have considered the relationship between the development of the domestic financial system and microfinance institutions’ performance. Regarding governance most papers focus on the role of boards and few discuss the importance of transparency and disclosure.

The last two papers are on new topics in finance that have arisen from technological advances. Technology can lead to innovations in finance through efficiencies that facilitate latent markets that might otherwise not be viable. Or pure technological advances can lead to entirely new financial products.

Fabrice Hervé and Armin Schwienbacher in “Crowdfunding and innovation” review a new form of finance called crowdfunding for small firms. Crowdfunding campaigns take place on dedicated platforms that facilitate the launch of campaigns by standardizing processes and create greater visibility of projects. A broad range of projects now raise money through crowdfunding and different types have emerged ranging from rewards based, donations based, loans based, and equity crowdfunding. Many projects financed by crowdfunding are artistic and social.

Crowdfunding can provide equity financing to small, innovative firms that often is not available from professional investors, and it has some important differences with business angels and venture capital also surveyed in this issue. Crowd investors do not purchase equity per se but securities such as participating notes. In contrast, angel investors and venture capital funds typically purchase common shares and convertible preferred shares. Crowd investors, in addition to providing financial resources, may also participate in the development of projects by providing feedback and ideas to entrepreneurs.

Obtaining information and feedback from the crowd however may not always support the development of innovative projects, for example, when entrepreneurs have to spend significant time interacting with the crowd. Moreover, crowdfunding discloses more information about a project in the public domain than projects funded by professional investors because of the participation of a large number of individuals. As a result, projects that are difficult to replicate or only marginally innovative may be more likely to seek crowdfunding. Research on crowdfunding has mainly been theoretical and predictions remain to be tested empirically.

An example of a pure technological advance that has led to a new financial product is the use of computer encryption technology to create so-called crypto-currencies. In “Crypto-currencies: An introduction to not-so-funny moneys”, Christie Smith and Aaron Kumar provide an introduction to the key concepts and what to look out for with potential future developments. Smith and Kumar summarize the rise and potential future implications of crypto-currencies and distributed ledger technology, in particular highlighting some of the risks associated with crypto-currencies, and discussing some of the potential implications of these technologies for payments systems, financial institutions, markets, and regulators.

The authors conclude that crypto-currencies do not have the three basic attributes of money, given they are not yet generally accepted or used as a unit of account, and their volatility makes them an uncertain store of value. However, crypto-currencies possess some features that make them attractive, which help to explain the growing demand for them. For example, crypto-currencies allow quicker cross-border transactions, possibly lower transaction fees, transaction irreversibility, and pseudo-anonymity (even while related prosecutions illustrate there is no guarantee of absolute anonymity).

Crypto-currencies currently facilitate a very small proportion of global transactions, and so do not yet pose material competition to traditional financial systems and intermediaries. Similarly, while some efforts have been made to adapt crypto-currencies to the provision of credit, the economies of scale that financial intermediaries have for evaluating and monitoring borrowers means that those intermediaries will likely continue to play a dominant role in facilitating credit.

The future growth of crypto-currencies and their use as transaction media is by no means clear. Crypto-currencies and decentralized ledger technology could well become an important part of global payment systems (and distributed ledgers and the use of cryptography also have wider uses). But the wide-scale adoption for transactions would depend on competition from alternative transaction technologies, and scalability issues would need to be addressed in order to compete in intermediating the volume of transactions undertaken globally. What does seem clear is that the regulatory and legal status of crypto-currencies must be resolved if crypto-currencies are to play a prominent role in exchange. Regulatory and legal reform will need to account for the decentralised nature of most crypto-currencies, and for their capacity to transcend national borders. Undoubtedly there will be more to review on crypto-currencies in future given the relatively brief time since inception and common usage.

The eleven articles in this book provide up-to-date surveys on contemporary topics in finance—a field that continues to evolve in practice and research. We hope the reviews will prove useful to academics, governments and policy makers, financial analysts and anyone interested in critical insights into developments in finance.

References

Devigne, D., Manigart, S., Vanacker T. and Mulier, K. (2018) Venture capital internationalization: Synthesis and future research directions. This book.

Duqi, A., Tomaselli, A. and Torluccio, G. (2018) Is relationship lending still a mixed blessing? A review of advantages and disadvantages for lenders and borrowers. This book.

Heil, M. (2018) Finance and productivity: A literature review. This book.

Hervé, F. and Schwienbacher, A. (2018) Crowdfunding and innovation. This book.

Hudon, M. and Hermes, N. (2018) Determinants of the performance of microfinance institutions: A systematic review. This book.

Kupfer, A. (2018) Estimating inflation risk premia using inflation-linked bonds: A review. This book.

Reurink, A. (2018) Financial fraud: A literature review. This book.

Schich, S. (2018) Limiting implicit bank debt guarantees. This book.

Siklos, P., Lombardi, D. and St. Amand, S. (2018) A survey of the international evidence and lessons learned about unconventional monetary policies: Is a ‘new normal’ in our future? This book.

Smith, C. and Kumar, A. (2018) Crypto-currencies: An introduction to not-so-funny moneys. This book.

Tenca, F., Croce, A. and Ughetto, E. (2018) Business angels research in entrepreneurial finance: A literature review and a research agenda. This book.

Watson, A. (1985)

The Digest of Justinian: Volume 2

. University of Pennsylvania Press.

2A SURVEY OF THE INTERNATIONAL EVIDENCE AND LESSONS LEARNED ABOUT UNCONVENTIONAL MONETARY POLICIES: IS A ‘NEW NORMAL’ IN OUR FUTURE?

Domenico Lombardi

Banca di San Marino S.p.A.

Pierre Siklos

Wilfrid Laurier University

Samantha St. Amand

Centre for International Governance Innovation

1. Introduction

We are approaching a decade since the expressions quantitative easing (QE) and unconventional monetary policies (UMPs) became household words. Central bankers, however, have frequently repeated the need to pursue a ‘looser for longer’ stance in monetary policy, even after years of ultra-low interest rates and noninterest-rate forms of monetary easing. This study surveys the empirical literature on the effectiveness of UMP in responding to financial crises and boosting economic activity. In doing so, it considers the circumstances under which these policies have been found to be successful and examines cases where their impact remains questionable.

Before the 2007–2009 global financial crisis (GFC), an increasing number of central banks adopted a short-term interest rate setting as the main, if not sole, instrument of monetary policy. However, owing to the severity of the crisis and its potential implications on the real economy, the central banks that were most directly affected by the crisis quickly lowered their policy interest rates near zero. These policy settings were initially referred to as the ‘zero lower bound’ (ZLB) because it was argued that interest rates could not, for practical reasons, go below zero.1However, several central banks implemented negative interest rates alongside UMPs. Thus the ZLB expression became the ‘effective lower bound’ (ELB) in recognition that the article of faith once held by many policymakers had been abandoned (see Lombardi et al., forthcoming, and references therein).

For the purpose of this analysis an UMP tool is defined as any policy instrument, other than the setting of short-term interest rates, that aims at achieving a stated monetary policy objective either by influencing economic activity or by moderating shocks to the financial system. An unconventional policy need not only be used when the ELB has been reached. It may also be implemented to prevent reaching that threshold or to provide targeted policy support to specific segments of the financial system. In addition, unconventional tools need not be used exclusively to provide monetary stimulus, though there are few examples of their use during periods of monetary tightening. We provide in Section 2.1 listing of UMP tools that have been used in practice or discussed theoretically.

There has been significant scepticism about the economic benefits of UMP type policies. Some of the criticism arises because the ELB and the objectives of UMP seem to differ across central banks and across time, creating uncertainty about what purpose these policies are supposed to serve. Furthermore, the scale of interventions has been extraordinary, amounting to trillions of U.S. dollars in some economies, and their scope is also unprecedented. This has raised concerns about inducing distortions in financial markets (e.g. Borio and Disyatat, 2010). Similarly, at the macro-economic level, there are concerns that low policy interest rates and further stimulus through UMP have amplified both domestic and international spillover effects (e.g. Rajan, 2014). As a result, central banks have been accused of risking the loss of their hard-earned credibility in managing inflation expectations (e.g. Taylor, 2014).

In the wake of the GFC, policymakers argued that using these policy tools was necessary to prevent an even worse contraction. Once the crisis passed, they argued that the continued application of such policies could speed up the recovery from crisis conditions. In light of the received macro-economic wisdom about what monetary policy can (or cannot) accomplish in the medium term, it is important to review the evidence concerning the economic effects of UMP.

The present paper surveys the financial-market and macro-economic effects of UMP in the economies where these policies were introduced as well as their spillover effects across borders. This is not the only survey of its kind. However, the present survey considers the range of international experiences and implications of UMP, while others have focussed more on the outcomes in specific countries (see Bhattarai and Neely, 2016 for the U.S. experience). It also considers a wider range of UMP, rather than the impact of specific policy instruments (as in Gagnon, 2016, Haldane et al., 2016 and Reza et al., 2015, who focus on QE; and Charbonneau and Rennison, 2015, who focus on forward guidance). Our survey comes closest to Borio and Zabai (2016). However, our survey emphasizes the diversity of experience and outcomes in using UMP. We provide a retrospective on the important but often neglected case of Japan beginning in the late 1990s, where UMP were first attempted and, so far, show few signs of producing the aimed-for economic outcomes. We also consider whether the Eurozone's experience with UMP is substantively different from that of other jurisdictions, given the specific structure of its financial system and its macro-economic policymaking process.

Finally, we present some evidence that underscores one of the main claims made by central bankers about UMP: that they were essential in preventing much worse economic outcomes after the 2008 financial crisis, at least in advanced economies (AEs). This conclusion is important because it suggests that UMP should not be considered as part of a ‘new normal’ but are best thought of as a set of policies to be applied only under exceptional circumstances. We return to this point in the conclusions.

The next section establishes the economic and financial context within which central banks needed to resort to UMP and provides a typology of UMP. Section 3 evaluates the evidence of the short-term impact of UMP on financial markets. Section 4 turns to an analysis of the relatively smaller literature dealing with the macro-economic impact of UMP. Section 5 concludes.

2. The Transition to Unconventional Policies

2.1 The 2008 GFC

Financial crises are nothing new, as Reinhart and Rogoff (2009) remind us. Yet, at the time their work was published, UMP had not yet entered the vocabulary of the central bankers (indeed, neither term appears in their book's index). Was there something fundamentally different about the events that began in 2007? There are at least two notable differences between the GFC and all the crises that preceded it, save perhaps for the Great Depression of the 1930s. First, the crisis began and was centred in AE. Previously, financial crises were phenomena typically seen as being restricted to developing or emerging market economies (EMEs).

Financial crises have been classified in several ways, including: currency crises (exceptionally large depreciations or devaluations in the nominal exchange rate), inflation crises (persistently high inflation rates that exceed historical norms), sovereign debt crises, stock market crashes and, of course, banking crises.2 Aggregating all types of financial crises we observe – since the 1980s – that the median frequency of crises in EMEs was at least as high, or higher than, in AEs until the GFC. Similarly, the most recent banking crises erupted in AEs, while the last string of banking crises in EMEs were in the 1980s. Of course, banking crises were not unheard of in AEs prior to 2007 (see Siklos, 2017, chapter 3). However, the shock emanating from systemically important US and UK financial markets, combined with the imbalances in several economies through property-market bubbles or over-leveraged financial institutions, created the conditions for the eventual GFC.

Second, although central banks in the economies most directly affected by the GFC entered the crisis period with relatively low policy interest rates, their, inflation rates were also relatively low. Policy rates for three key central banks began at around 5% at the beginning of 2007. The Bank of Japan (BoJ) is the exception – its policy rate had been near zero since the late 1990s. The low starting point may have contributed to some hesitancy in rapidly lowering interest rates. Indeed, the Bank of England (BoE) only lowered its policy rate by 75 basis points over the period from the peak of its earlier tightening cycle in July 2007 to September 2008; it then lowered its policy interest rate another 450 basis points to the then ZLB of 0.5% over the subsequent six-month period from October 2008 to March 2009. The European Central Bank (ECB) actually increased interest rates in July 2008 to 4.25%, and did not effectively reach the ZLB even two years after the GFC. Only the U.S. fed funds rate was reduced relatively quickly, from 5.25% in August 2007 to the mid-point of a range between 0 and 0.25% by December 2008. Also influencing central banks may have been their success with lowering policy rates earlier in the decade when the threat of the deflation was on the minds of policy makers in several AEs (see IMF, 2003).

Widespread introduction of UMP came shortly after the height of the crisis in the fourth quarter of 2008. Much has been written about the Fed's large balance sheet, and the impression is sometimes given that the Fed has been more aggressive than its counterparts elsewhere. Figure 1 shows that this has not been the case. The top portion (Figure 1A) shows the size of balance sheets of the four major central banks as a per cent of GDP during the years surrounding the worst of the GFC. While the U.S. data show a sharp increase in late 2008, the ratio of Fed assets to the size of the U.S. economy rose only modestly thereafter. Indeed, increases of similar magnitude occurred more or less simultaneously at both the ECB and the BoE. Even the BoJ expanded its balance sheet at the time, despite its share of assets being higher than elsewhere, owing to the on-going legacy of its banking crisis in the 1990s. Finally, notice that by 2012 the share of assets to GDP at both the BoE and the ECB increased sharply once again, as the impact of the Eurozone crisis began to take hold in that part of the world. The most dramatic increase occurred in Japan in 2013 when its program of Qualitative and Quantitative Easing (QQE) was introduced (see Section 3.2 below). When we instead examine the rate of change in assets of the same central banks as displayed in Figure 1(B), it is immediately clear that the largest interventions via the central bank balance sheet took place in late 2008 and early 2009. The rate of accumulation in central bank assets subsided shortly thereafter except at the BoE and the ECB in 2011, during the Eurozone crisis. The interventions by the BoJ after 2013 show steady increases, producing noticeable growth in the balance sheet-to-GDP ratio.

Figure 1. (a) Central Bank assets as a per cent of GDP. (b) Quarterly rate of change in Central Bank assets as a per cent of GDP.

Note: Data source is CEIC. Sample size is from 2007Q4 to 2016Q4. The Bank of England changed its methodology for reporting its balance sheet in October 2014; the series therefore ends 2014Q3. [Color figure can be viewed at wileyonlinelibrary.com]

Figure 1, however, contains another important message. The Fed and the BoE began to shift emphasis away from the policy interest rate to the composition of their balance sheets before they approached the ZLB. Balance sheet policies were being used as a way of restoring confidence and easing the flow of credit in the financial sector. This outcome is also seen in the sharp deterioration of lending conditions in the four economies being reviewed (see Siklos, 2015; Siklos and Lavender, 2015; Filardo and Siklos 2018). The deterioration was largest for the United States, but was also significant in the euro area and the United Kingdom. Only Japan, mired in a low inflation and growth, seemed to escape the trend. Since the potential contraction of loans affects a key element of the transmission of monetary policy the threat to economic activity was potentially large.

2.2 A Brief Typology of UMP

Space limitations prevent a detailed discussion of different types of UMPs. For a more extensive account of these policies see, for example, Ball et al. (2016) and IMF (2013).

A UMP is defined as any policy instrument, other than the setting of short-term policy interest rates, that aims at achieving a stated monetary policy objective either by influencing economic activity or by moderating shocks to the financial system. It need not only be used when the ELB has been reached; it might, for example, be implemented to prevent reaching that threshold or to provide targeted policy support to specific segments of the financial system or economy. Table 1 provides a summary of the types of UMPs employed in AEs. Note that we present one of several ways to categorize UMP; there are many different typologies for these policies and there are also no neat separations among policies.

Table 1.Unconventional Monetary Policies in Advanced Economies (Chronological by Type).

Policy type

Economy

Policy name

Time period

Forward Guidance

1

Qualitative

Japan

Zero interest rate policy (ZIRP)

April 1999 to August 2000

United States

n/a

August 2003 to December 2005

United States

n/a

December 2008 to July 2011

Euro area

n/a

July 2013 to present

2

Calendar-Based

Canada

n/a

April 2009 to March 2010

United States

n/a

August 2011 to November 2012

State-Based

Japan

n/a

March 2001 to March 2006

Japan

n/a

October 2010 to March 2013

United States

n/a

December 2012 to February 2014

Japan

n/a

April 2013 to present

2

United Kingdom

n/a

August 2013 to January 2014

Balance Sheet Policies

Quantitative Easing

Japan

Quantitative Easing (QEJ)

March 2001 to March 2006

United States

Large Scale Asset Purchase Program (LSAP1)

January 2009 to March 2010

United Kingdom

Asset Purchase Facility – Gilt (BQE1)

January 2009 to February 2010

Japan

Comprehensive Monetary Easing (CME)

October 2010 to March 2013

United States

Large Scale Asset Purchase Program (LSAP2)

November 2010 to June 2011

United Kingdom

Asset Purchase Facility – Gilt (BQE2)

October 2011 to October 2012

United States

Large Scale Asset Purchase Program (LSAP3)

September 2012 to October 2014

Japan

Quantitative and Qualitative Monetary Easing (JGB purchases)

April 2013 to present

2

Euro area

Public Sector Purchase Programme

January 2015 to present

2

United Kingdom

Asset Purchase Facility – Gilt (BQE3)

August 2016 to present

2

Switzerland

Expansion of Sight Deposits (Reserves)

August 2011

Sweden

Government bonds

February 2015 to present

2

Credit Easing

United States

Commercial Paper Funding Facility

October 2008 to February 2010

United States

Mortgage-Backed Securities Purchases (see also LSAP1)

November 2008 to March 2010

Switzerland

Private Sector Bond Purchases

March 2009 to July 2009

United Kingdom

Asset Purchase Facility – Commercial Paper

March 2009 to November 2011

United Kingdom

Asset Purchase Facility – Secured Commercial Paper and Corporate Bond Secondary Market Scheme

March 2009 to August 2016

United States

Operation Twist

September 2011 to June 2012

Euro area

Securities Markets Programme

May 2010 to September 2012

Euro area

Outright Monetary Transactions Programme

September 2012 to present

2

Euro area

Asset Backed Securities Purchase Programme

September 2014 to present

2

Euro area

Covered Bond Purchase Programme

July 2009 to June 2010; November 2011 to October 2012; October 2014 to present

2

Japan

Quantitative and Qualitative Monetary Easing (ETF and J-REIT purchases)

April 2013 to present

2

Euro area

Corporate Sector Purchase Programme

June 2016 to present

2

United Kingdom

Asset Purchase Facility – Corporate Bond Purchase Scheme

September 2016 to April 2017

Subsidized Lending to Banking System

Euro area

Longer-term refinancing operations (LTRO)

6 month: March 2008 to March 2010; August 2011 12 month: May 2009 to December 2009; October 2011 3 year: December 2011

United States

Term Asset-Backed Securities Loan Facility (TALF)

November 2008 to June 2010

Japan

Loan Support Program

June 2010 to present

2

United Kingdom

Funding for Lending Scheme

July 2012 to present

2

Euro area

Targeted longer-term refinancing operations (TLTRO)

September 2014 to March 2017

United Kingdom

Term Funding Scheme

September 2016 to present

2

1Forward guidance only refers to the ad-hoc use of central bank communication of future policy path during crises or periods of high market uncertainty. The release of conditional forecasts (e.g. at the Reserve Bank of New Zealand, Norges Bank and Riskbank) are not included in this analysis (see, e.g. Kool and Thornton, 2012).

2As of 31 October 2017.

Source: Individual country central banks accessible via the BIS's Central Bank Hub (https://www.bis.org/cbanks.htm).

The term QE is often used to refer to any policy decision that aims to change the size and/or composition of the balance sheet. But these policies can take several forms. With QE, the central bank targets the liabilities side of its balance sheet by changing the level of reserves held by financial institutions. The aim is to change the money supply via the monetary base. Credit easing (CE) is another balance sheet policy that changes the composition of the central bank's assets. The aim is to improve liquidity conditions in one or more segments of the financial system, but it need not lead to a change in the size of the central banks’ balance sheet (i.e. asset purchases may be sterilized by the sale of other types of assets). A third balance sheet policy creates incentives for the recipients of funds from central bank operations, namely commercial banks, to increase loan activity in an effort to stimulate economic activity. Readers are referred to European Central Bank (2015), Borio and Zabai (2016) and Stone et al. (2011), for more detailed discussions and alternative classifications of balance sheet policies. For example, excluded from this analysis are foreign exchange interventions or the provision of foreign exchange liquidity, which are included in other classifications of balance sheet policies.