Distribution effects of inflation through banking credit: the case of Argentina Chief Economists` workshop: distribution effects of Central Bank policies Bank of England May 19 th, 2017 Mauro Alessandro Senior Manager of Strategy and Communication of Monetary Policy
Agenda 1 Financial repression 2 Ex ante distribution effects 3 Ex post distribution effects 4 What the Central Bank of Argentina is doing
Financial repression Financial repression Understood as regulations that conduct to systematically negative interest rates Facilitated (politically) by high inflation Shrinkage of financial system Investment by those who already have savings Inequality in the distribution (of opportunities, at least)
Monthly inflation Financial repression Note monthly change in the log of the price level Source BCRA.
Annual inflation: regional comparison Financial repression Belize Aruba Dominica Bahamas Antigua and Barbuda Grenada St. Lucia St. Kitts and Nevis St. Vincent El Salvador Peru Chile Panama Mexico Ecuador Guyana Colombia Barbados Dominican Rep Guatemala Paraguay Honduras Brazil Bolivia Costa Rica Trinidad and Tobago Nicaragua Uruguay Haiti Jamaica Suriname Argentina 25,1 Venezuela 0 5 10 15 20 25 30 35 40 Latin America & Caribbean (2006-2015) Source World Bank
Real return of fixed-term deposits Financial repression 120% Very High inflation Low inflation "Moderate" inflation 100% 80% 60% 40% 20% 0% 1,4% Apr-81 Jul-82 Oct-83 Jan-85 Apr-86 Jul-87 Oct-88 Jan-90 Apr-91 Jul-92 Oct-93 Jan-95 Apr-96 Jul-97 Oct-98 Jan-00 Apr-01 Jul-02 Oct-03 Jan-05 Apr-06 Jul-07 Oct-08 Jan-10 Apr-11 Jul-12 Oct-13 Jan-15 Apr-16 Hiperinflation High-Moderate Inflation Low-Moderate inflation Source BCRA based on Corso (2015) and Burdiso, Corso y Katz (2014)
Real return of usual assets Financial repression 1000% 900% Very High inflation Low inflation "Moderate" inflation 800% 700% 600% 500% 400% 300% Hiperinflation High-Moderate Inflation Low-Moderate inflation 200% 100% 0% Apr-81 Jul-82 Oct-83 Jan-85 Apr-86 Jul-87 Oct-88 Jan-90 Apr-91 Jul-92 Oct-93 Jan-95 Apr-96 Jul-97 Oct-98 Jan-00 Apr-01 Jul-02 Oct-03 Jan-05 Apr-06 Jul-07 Oct-08 Jan-10 Apr-11 Jul-12 Oct-13 Jan-15 Apr-16 177,4% 111,5% 67,7% 1,4% Fixed-term deposit ($) Us$ Immovable property Fed Fund Effective Rate Source BCRA based on Corso (2015) and Burdiso, Corso y Katz (2014)
Domestic credit to private sector (% of GDP) Financial repression Argentina Haiti Venezuela Dominican Rep Ecuador Mexico Suriname Uruguay Peru Jamaica Guatemala Nicaragua Trinidad and Tobago Paraguay Guyana Colombia El Salvador Bolivia Costa Rica Honduras St. Vincent Brazil Dominica Aruba Belize St. Kitts and Nevis Antigua and Barbuda Grenada Barbados Bahamas Panama Chile St. Lucia 13,3 0 20 40 60 80 100 120 Latin America (2005-2015) Note Regions include economies at all income levels. The term country, used interchangeably with economy, does not imply political independence but refers to any territory for which authorities report separate social or economic statistics. Source World Bank
Domestic credit to private sector (% of GDP) Financial repression 200 180 160 140 All regions (2005-2015) 120 100 80 60 40 20 0 Latin America & Caribbean South Asia Middle East & North Africa Sub-Saharan Africa Europe & Central Asia East Asia & Pacific North America Note Regions include economies at all income levels. The term country, used interchangeably with economy, does not imply political independence but refers to any territory for which authorities report separate social or economic statistics. Source World Bank
Fixed-term deposits (April-2017): short term Financial repression Up to 59 days 63% More than 366 days 1% Less than 366 days 99% From 60 to 89 days 16% From 90 to 179 days 14% From 180 to 365 days 6% Note Denominated in domestic currency. Source BCRA
Credit to private sector (April-2017): short term Financial repression Pledged credit 6% Personal credit 25% Mortgage credit 7% Other 93% Credit cards 24% Other credits 28% Current account advances 10% Note Denominated in domestic currency. Source BCRA
Financial repression Mortgage debt (% of GDP) (2006-2010) Note Mortgage debt to GDP. Average data for the period 2006 to 2010. Source Badev, Beck, Vado and Walley (2014)
Ex ante distribution effects Ex ante distribution effect High expected inflation leads to high nominal interest rates Through income to payment requirements, higher portions of the population are unable to access credit (distribution of opportunities) Even if their real income is not affected by inflation Solution while lowering inflation: capital adjusted by inflation
Income required for a 30 year mortgage loan of USD65.000 (average home in Buenos Aires) Ex ante distribution effects Annual income (USD) 72.000 64.000 10th decile 56.000 48.000 40.000 9th decile 8th decile 7th decile 6th decile 5th decile 4th decile 3th decile 2th decile 1th decile 32.000 24.000 16.000 8.000 0 0% 5% 10% 15% 20% 25% Interest rate Source BCRA.
Income required for a 30 year mortgage loan of USD65.000 (average home in Buenos Aires) Ex ante distribution effects Annual income (USD) 10th decile 72.000 64.000 56.000 UVA mortgage Example 1. Traditional Averange home price (BA City): USD78.000 Monthly mortgage payment: USD 1.082 Required income: USD 56.241 Traditional mortgage ($) 48.000 40.000 9th decile 8th decile 7th decile 6th decile 5th decile 4th decile 3th decile 2th decile 1th decile 32.000 24.000 16.000 8.000 Example 2. UVA Averange home price (BA City): USD78.000 Monthly mortgage payment: USD 347 Required income: USD 18.068 0 0% 5% 10% 15% 20% 25% Interest rate Source BCRA. 7th decile
Mortgage loans in UVAs (capital adjusted) Ex ante distribution effects millions (USD) 700 600 500 400 300 200 100 0 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Total Source BCRA.
Real total mortgage loans Ex ante distribution effects % 3 % 30 2 20 1 10 0 0-1 -10-2 -20-3 -4 Monthly change Year on year (Right scale) -30-40 -5-50 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Source BCRA.
Ex post distribution effects Ex ante distribution effects Typical from debtors to creditors See previous graph about real ex post returns
Real return of fixed-term deposits Ex post distribution effects 120% Very High inflation Low inflation "Moderate" inflation 100% 80% 60% 40% 20% 0% 1,4% Apr-81 Jul-82 Oct-83 Jan-85 Apr-86 Jul-87 Oct-88 Jan-90 Apr-91 Jul-92 Oct-93 Jan-95 Apr-96 Jul-97 Oct-98 Jan-00 Apr-01 Jul-02 Oct-03 Jan-05 Apr-06 Jul-07 Oct-08 Jan-10 Apr-11 Jul-12 Oct-13 Jan-15 Apr-16 Hiperinflation High-Moderate Inflation Low-Moderate inflation Source BCRA based on Corso (2015) and Burdiso, Corso y Katz (2014)
What is the CBA doing? What is the Central Bank of Argentina doing? Set positive monetary policy interest rate in real terms Introduce inflation targeting regimen, with decreasing targets Inflation and inflation expectations are decreasing but still above targets
Monetary Policy Rate What is the CBA doing? 75 65 55 45 35 25 15 5-5 -15-25 Central Bank Letters (LEBACs) Repo rate corridor (Pases 7d.) Monetary policy rate. Nominal Monetary policy rate. Real Inflation expectations Monetary policy rate expectations -35 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Source BCRA
Inflation targeting and expectations What is the CBA doing? Source BCRA
Expected inflation for next 12 months What is the CBA doing? % 23,0 22,0 21,0 20,0 19,0 18,0 17,0 16,0 CPI (National) CPI (Core-GBA; INDEC) CPI (General-GBA; INDEC) 15,0 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Source BCRA
Thank you.
Hidden slides Low inflation and low inflation volatility as drivers of deeper housing finance systems Interest rate risk passed from lenders to borrowers by offering floating (volatile) rate loans, which affect borrowers willingness to take a mortgage. 62 country cross section regression, where the dependent variables is the average mortgage debtto-gdp ratio for the 2001-2005 period. Markets and housing finance. Cacdac Warnock and Warnock (2007). NBER Significance at the 1%, 5%, and 10% levels, respectively, is denoted by a, b, and c.