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International monetary transmission with bank heterogeneity and default risk


This paper compares the effectiveness, efficiency and robustness of standard and non-standard monetary policy tools, such as the banks’ refinancing interest rate, penalty interest rate on deposit facility holdings and minimum reserve requirements on attracted deposits. The assessment is performed on the basis of a numerically evaluated open economy general equilibrium model for macro-prudential analysis where optimal decisions by internationally linked banks are key determinants of international financial flows and wider economic outcomes. Banks differ in terms of balance sheet endowments and risk preferences and take decisions rationally and competitively. Default risk, borrowing and lending are endogenous results of individual decisions of private agents (banks and households), as well as systemic outcomes of market interaction.

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Fig. 1


  1. For a separate detailed analysis on the transmission of various regulatory policies and contingencies see Tsenova (2011).

  2. This data is publicly available at the website of the Bulgarian National Bank (BNB), as well as official banking supervision reports, such as BNB (2009a).

  3. For examples of standard representations of this type of models see Woodford (2003) and Smets and Wouters (2003).

  4. For detailed theoretical link between modelling partial repayment on obligation, partial default and probability of default see Tsomocos and Zicchino (2012).

  5. Note that the three representative households of type borrowers could be viewed as a pool of household loans or a portfolio of multiple household loans.

  6. In the EU countries, such schemes indeed exist, although there are certain bounds to the size of deposits fully covered. For example, in 2010 there was a unification in the minimum deposit size covered by state guarantee schemes, which was set to 100 thousand Euros.

  7. The Bulgarian Lev is pegged to the Euro at 1 Lev = 0.51129 Euro.

  8. See BNB, Bulgarian Gross Foreign Debt, July 2009, 24 September 2009b.

  9. Because the alternative case in which bank \(\delta \) experiences a liquidity crunch displays very similar results, it is not reported separately in the paper.


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The author is grateful to the two antonymous referees who provided valuable suggestions and recommendations. The author would also like to thank Dimitrios Tsomocos, Robert Bliss, Charles Calomiris, Alex Cukierman, Andrea Gerali, John Geanakopolos, Ivan Iskrov, Dimitar Kostov, Tonny Lybek, Stefano Neri, Paolo Onofri, Marcelo Sanchez, Luca Sessa, Federico Maria Signoretti and Larry Wall for helpful support, comments and discussions.

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Correspondence to Tsvetomira Tsenova.

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The opinions expressed are those of the author and do not necessarily reflect the official views of the Bulgarian National Bank and the European System of Central Banks.

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Tsenova, T. International monetary transmission with bank heterogeneity and default risk. Ann Finance 10, 217–241 (2014).

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  • Banking
  • Monetary policy
  • Non-standard instruments
  • Macro-prudential policies
  • Financial stability
  • Contingency planning

JEL Classification

  • D58
  • E44
  • E51
  • E52
  • E58
  • G21