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2008, 26
Measuring financial asset return and volatilty spillovers, with application to global equity markets
(2008)
We provide a simple and intuitive measure of interdependence of asset returns and/or volatilities. In particular, we formulate and examine precise and separate measures of return spillovers and volatility spillovers. Our framework facilitates study of both non-crisis and crisis episodes, including trends and bursts in spillovers, and both turn out to be empirically important. In particular, in an analysis of nineteen global equity markets from the early 1990s to the present, we find striking evidence of divergent behavior in the dynamics of return spillovers vs. volatility spillovers: Return spillovers display a gently increasing trend but no bursts, whereas volatility spillovers display no trend but clear bursts.
2007, 02
We provide a simple and intuitive measure of interdependence of asset returns and/or volatilities. In particular, we formulate and examine precise and separate measures of return spillovers and volatility spillovers. Our framework facilitates study of both non-crisis and crisis episodes, including trends and bursts in spillovers, and both turn out to be empirically important. In particular, in an analysis of sixteen global equity markets from the early 1990s to the present, we find striking evidence of divergent behavior in the dynamics of return spillovers vs. volatility spillovers: Return spillovers display a gently increasing trend but no bursts, whereas volatility spillovers display no trend but clear bursts. JEL Classification: F30, G15, F36
2008, 32
We argue for incorporating the financial economics of market microstructure into the financial econometrics of asset return volatility estimation. In particular, we use market microstructure theory to derive the cross-correlation function between latent returns and market microstructure noise, which feature prominently in the recent volatility literature. The cross-correlation at zero displacement is typically negative, and cross-correlations at nonzero displacements are positive and decay geometrically. If market makers are sufficiently risk averse, however, the cross-correlation pattern is inverted. Our results are useful for assessing the validity of the frequently-assumed independence of latent price and microstructure noise, for explaining observed cross-correlation patterns, for predicting as-yet undiscovered patterns, and for making informed conjectures as to improved volatility estimation methods.
577
Recent work has analyzed the forecasting performance of standard dynamic stochastic general equilibrium (DSGE) models, but little attention has been given to DSGE models that incorporate nonlinearities in exogenous driving processes. Against that background, we explore whether incorporating stochastic volatility improves DSGE forecasts (point, interval, and density). We examine real-time forecast accuracy for key macroeconomic variables including output growth, inflation, and the policy rate. We find that incorporating stochastic volatility in DSGE models of macroeconomic fundamentals markedly improves their density forecasts, just as incorporating stochastic volatility in models of financial asset returns improves their density forecasts.
2003, 31
We estimate a model with latent factors that summarize the yield curve (namely, level, slope, and curvature) as well as observable macroeconomic variables (real activity, inflation, and the stance of monetary policy). Our goal is to provide a characterization of the dynamic interactions between the macroeconomy and the yield curve. We find strong evidence of the effects of macro variables on future movements in the yield curve and much weaker evidence for a reverse influence. We also relate our results to a traditional macroeconomic approach based on the expectations hypothesis.
2005, 03
From a macroeconomic perspective, the short-term interest rate is a policy instrument under the direct control of the central bank. From a finance perspective, long rates are risk-adjusted averages of expected future short rates. Thus, as illustrated by much recent research, a joint macro-finance modeling strategy will provide the most comprehensive understanding of the term structure of interest rates. We discuss various questions that arise in this research, and we also present a new examination of the relationship between two prominent dynamic, latent factor models in this literature: the Nelson-Siegel and affine no-arbitrage term structure models. JEL Klassifikation: G1, E4, E5.
575
Commodity connectedness
(2017)
We use variance decompositions from high-dimensional vector autoregressions to characterize connectedness in 19 key commodity return volatilities, 2011-2016. We study both static (full-sample) and dynamic (rolling-sample) connectedness. We summarize and visualize the results using tools from network analysis. The results reveal clear clustering of commodities into groups that match traditional industry groupings, but with some notable differences. The energy sector is most important in terms of sending shocks to others, and energy, industrial metals, and precious metals are themselves tightly connected.
2008, 27
The popular Nelson-Siegel (1987) yield curve is routinely fit to cross sections of intra-country bond yields, and Diebold and Li (2006) have recently proposed a dynamized version. In this paper we extend Diebold-Li to a global context, modeling a potentially large set of country yield curves in a framework that allows for both global and country-specific factors. In an empirical analysis of term structures of government bond yields for the Germany, Japan, the U.K. and the U.S., we find that global yield factors do indeed exist and are economically important, generally explaining significant fractions of country yield curve dynamics, with interesting differences across countries.
2004, 09
Despite powerful advances in yield curve modeling in the last twenty years, comparatively little attention has been paid to the key practical problem of forecasting the yield curve. In this paper we do so. We use neither the no-arbitrage approach, which focuses on accurately fitting the cross section of interest rates at any given time but neglects time-series dynamics, nor the equilibrium approach, which focuses on time-series dynamics (primarily those of the instantaneous rate) but pays comparatively little attention to fitting the entire cross section at any given time and has been shown to forecast poorly. Instead, we use variations on the Nelson-Siegel exponential components framework to model the entire yield curve, period-by-period, as a three-dimensional parameter evolving dynamically. We show that the three time-varying parameters may be interpreted as factors corresponding to level, slope and curvature, and that they may be estimated with high efficiency. We propose and estimate autoregressive models for the factors, and we show that our models are consistent with a variety of stylized facts regarding the yield curve. We use our models to produce term-structure forecasts at both short and long horizons, with encouraging results. In particular, our forecasts appear much more accurate at long horizons than various standard benchmark forecasts. JEL Code: G1, E4, C5
No. 718
This research focuses on the cost of financing green projects on the primary bond market and tests for a potential price differential between green bonds issued by government entities and those issued by supranational and private sector issuers. Our findings indicate that government entities benefit from more favorable pricing conditions worldwide. This advantage is growing over time and particularly pronounced for sovereigns and municipal authorities. Our analysis also reveals that country-specific factors, such as strong political commitment to address climate change, low income level and high degree of indebtedness are significant predictors of the pricing spread across bonds.
485
We study a model where some investors ("hedgers") are bad at information processing, while others ("speculators") have superior information-processing ability and trade purely to exploit it. The disclosure of financial information induces a trade externality: if speculators refrain from trading, hedgers do the same, depressing the asset price. Market transparency reinforces this mechanism, by making speculators' trades more visible to hedgers. As a consequence, issuers will oppose both the disclosure of fundamentals and trading transparency. Issuers may either under- or over-provide information compared to the socially efficient level if speculators have more bargaining power than hedgers, while they never under-provide it otherwise. When hedgers have low financial literacy, forbidding their access to the market may be socially efficient.
2000, 09
This paper provides a broad empirical examination of the major currencies' roles in international capital markets, with a special emphasis on the first year of the euro. A contribution is made as to how to measure these roles, both for international financing as well as for international investment. The times series collected for these measures allow for the identification of changes in the role of the euro during 1999 compared to the aggregate of euro predecessor currencies, net of intra -euro area assets/liabilities, before stage 3 of EMU. A number of key factors determining the currency distribution of international portfolio investments, such as relative market liquidity and relative risk characteristics of assets, are also examined empirically. It turns out that for almost all important market segments for which data are available, the euro immediately became the second most widely used currency for international financing and investment. For the flow of international bond and note issuance it experienced significant growth in 1999 even slightly overtaking the US dollar in the second half of the year. The euro's international investment role appears more static though, since most of the early external asset supply in euro is actually absorbed by euro area residents.
654
We assess the effect and the timing of the corporate arm of the ECB quantitative easing (CSPP) on corporate bond issuance. Because of several contemporaneous measures, to isolate the programme effects we rely on one key eligibility feature: the euro denomination of newly issued bonds. We find that the significant increase in bonds issuance by eligible firms is due to the CSPP and that this effect took at least six months to unfold. This result holds even when comparing firms with similar ratings, thus providing evidence that unconventional monetary policy can foster a financing diversification regardless of firms’ risk profile. We also highlight the impact of the programme on the real economic activity. The evidence suggests that while all firms increased investment in capital expenditures and intangible assets, the CSPP induced eligible firms to invest in marketable and equity securities, to repurchase their own stocks, to hold cash and to carry out short-term investment.
510
No. And not only for the reason you think. In a world with multiple inefficiencies the single policy tool the central bank has control over will not undo all inefficiencies; this is well understood. We argue that the world is better characterized by multiple inefficiencies and multiple policy makers with various objectives. Asking the policy question only in terms of optimal monetary policy effectively turns the central bank into the residual claimant of all policy and gives the other policymakers a free hand in pursuing their own goals. This further worsens the tradeoffs faced by the central bank. The optimal monetary policy literature and the optimal simple rules often labeled flexible inflation targeting assign all of the cyclical policymaking duties to central banks. This distorts the policy discussion and narrows the policy choices to a suboptimal set. We highlight this issue and call for a broader thinking of optimal policies.
547
This paper shows that long debt maturities eliminate equity holders’ incentives to reduce leverage when the firm performs poorly. By contrast, short debt maturities commit equity holders to such leverage reductions. However, shorter debt maturities also lead to higher transactions costs when maturing bonds must be refinanced. We show that this tradeoff between higher expected transactions costs against the commitment to reduce leverage when the firm is doing poorly motivates an optimal maturity structure of corporate debt. Since firms with high costs of financial distress benefit most from committing to leverage reductions, they have a stronger motive to issue short-term debt.
546
n traditional portfolio theory, risk management is limited to the choice of the relative weights of the riskless asset and a diversified basket of risky securities, respectively. Yet in industry, risk management represents a central aspect of asset management, with distinct responsibilities and organizational structures. We identify frictions that lead to increased importance of risk management and describe three major challenges to be met by the risk manager. First, we derive a framework to determine a portfolio position's marginal risk contribution and to decide on optimal portfolio weights of active managers. Second, we survey methods to control downside risk and unwanted risks since investors frequently have non-standard preferences which make them seek protection against excessive losses. Third, we point out that quantitative portfolio management usually requires the selection and parametrization of stylized models of financial markets. We therefore discuss risk management approaches to deal with parameter uncertainty, such as shrinkage procedures or re- sampling procedures, and techniques of dealing with model uncertainty via methods of Bayesian model averaging.
2009, 25
The global financial crisis has lead to a renewed interest in discretionary fiscal stimulus. Advocates of discretionary measures emphasize that government spending can stimulate additional private spending — the so-called Keynesian multiplier effect. Thus, we investigate whether the discretionary spending announced by Euro area governments for 2009 and 2010 is likely to boost euro area GDP by more than one for one. Because of modeling uncertainty, it is essential that such policy evaluations be robust to alternative modeling assumptions and different parameterizations. Therefore, we use five different empirical macroeconomic models with Keynesian features such as price and wage rigidities to evaluate the impact of fiscal stimulus. Four of them suggest that the planned increase in government spending will reduce private spending for consumption and investment purposes significantly. If announced government expenditures are implemented with delay the initial effect on euro area GDP, when stimulus is most needed, may even be negative. Traditional Keynesian multiplier effects only arise in a model that ignores the forward-looking behavioral response of consumers and firms. Using a multi-country model, we find that spillovers between euro area countries are negligible or even negative, because direct demand effects are offset by the indirect effect of euro appreciation.
2008, 29
This paper explores the role of trade integration—or openness—for monetary policy transmission in a medium-scale New Keynesian model. Allowing for strategic complementarities in price-setting, we highlight a new dimension of the exchange rate channel by which monetary policy directly impacts domestic inflation. Although the strength of this effect increases with economic openness, it also requires that import prices respond to exchange rate changes. In this case domestic producers find it optimal to adjust their prices to exchange rate changes which alter the domestic currency price of their foreign competitors. We pin down key parameters of the model by matching impulse responses obtained from a vector autoregression on U.S. time series relative to an aggregate of industrialized countries. While we find evidence for strong complementarities, exchange rate pass-through is limited. Openness has therefore little bearing on monetary transmission in the estimated model.
667
Leveraging data from a leading FinTech peer-to-peer lending platform in the United States, allowing us to capture both individuals’ successful and unsuccessful loan applications, we test the effect of FinTech loans on subsequent employment choice and future financial performance of serial borrowers, those repeatedly soliciting loans on the platform. An analysis of 198,984 loan requests made by 92,382 individuals shows that a failed loan application increases the probability of switching employment status. Self-employed individuals are 22% more likely to switch to becoming an employee following an unsuccessful loan application. This probability increases to 31% for those in the lowest income decile and decreases to 13% for those in the highest income decile. We document an improvement in monthly income and credit access following a successful loan application. However, this enhancement is asymmetric. Monthly income enhancement is 3.11 times larger for self-employed individuals in the lowest income decile relative to individuals in the highest income decile. Access to credit enhancement is 1.85 times larger for self-employed individuals in the lowest credit access decile relative to individuals in the second highest credit access decile.
2004, 17
We analyze governance with a dataset on investments of venture capitalists in 3848 portfolio firms in 39 countries from North and South America, Europe and Asia spanning 1971-2003. We find that cross-country differences in Legality have a significant impact on the governance structure of investments in the VC industry: better laws facilitate faster deal screening and deal origination, a higher probability of syndication and a lower probability of potentially harmful co-investment, and facilitate board representation of the investor. We also show better laws reduce the probability that the investor requires periodic cash flows prior to exit, which is in conjunction with an increased probability of investment in high-tech companies. Klassifikation: G24, G31, G32.
665
COVID-19 brought about a shift in entrepreneurial opportunities and in the United States. In this paper, we proxy entrepreneurial processes by examining housing prices in different regions of the United States. Housing prices capture the movement in people, tax dynamics, and behavioral preferences for equity ownership in different regions and over time, all of which were drastically impacted by COVID-19. We examine all U.S. equity crowdfunding offerings starting with the very first offerings in 2016 Q2 until 2021 Q1 based on data from the Securities and Exchange Commission. The data indicate that regional housing prices post-COVID-19 are a strong predictor of the number of equity crowdfunding campaigns and the amount of capital raised. The impact of housing price changes on crowdfunding is more pronounced among more prosperous regions. The housing price effect is robust to numerous controls and consideration of outliers.
No. 700
This paper examines the performance of 538 sovereign wealth fund (SWF) investments into venture capital, private equity, and real asset funds (“alternative asset funds”) from 52 countries around the world over the years 1995-2020. The data indicate SWFs are significantly slower to fully liquidate and earn lower returns from their investments, particularly from their investments in venture capital funds. The longer duration and lower performance of SWFs is more pronounced for strategic SWFs than savings SWFs. We show that venture capital fund investments are more likely to be in countries with lower quality disclosure indices. SWFs are more often in buyout funds, and in larger funds with a greater number of limited partners. SWF performance is enhanced by having different types of institutional investors in the same limited partnership. Overall, the data indicate sovereign wealth funds make large investments in alternative asset funds with a longer-term view and earn a lower financial return consistent with strategic and political SWF investment motives.
No. 699
This paper examines the causes and consequences of hedge fund investments in exchange traded funds (ETFs) using U.S. data from 1998 to 2018. The data indicate that transient hedge funds and quasi-indexer hedge funds are substantially more likely to invest in ETFs. Unexpected hedge fund inflows cause a rise in ETF investments, and the economic significance of unexpected flow is more than twice as large for transient than quasi-indexer hedge funds. ETF investment is in general associated with lower hedge fund performance. But when ETF investment is accompanied by an increase in total flow and unexpected flow, the negative impact of ETF holdings on performance is mitigated. The data are consistent with the view that hedge fund ETF investment unrelated to unexpected flow is an agency cost of delegated portfolio management.
668
We propose three governance mechanisms pertinent to equity crowdfunding and campaign success through mitigating pronounced information asymmetries and agency problems. First, unlike IPOs for which the effect of Delaware incorporation has declined or disappeared over time, we propose Delaware incorporation matters a great deal for success in the new setting of equity crowdfunding. Second, we propose that security design is a critical tool for equity crowdfunding success and even more important than the limited 2-year financial statement disclosure. Third, we propose that platforms as intermediaries between entrepreneurs and investors play an important role in mitigating and sometimes exacerbating information asymmetries and agency problems. The population of equity crowdfunding campaigns from market inception in May 2016 to Q2, 2021 in the United States provides strong support for these propositions.
666
We consider whether traders are more likely to commit securities violations when trading at home, a new form of working induced by the Covid pandemic. We examine data pre- and post-Covid, during which some traders were unexpectedly forced to work at home. The data indicate the presence of both a treatment and a selection effect, where work at home exhibits fewer misconduct cases. Work at home is associated with fewer cases of trading misconduct, although no difference in communications misconduct. The economic significance of working from home on trading misconduct is large for both the treatment and selection effects.
2005, 33
Using unobservable conditional variance as measure, latent-variable approaches, such as GARCH and stochastic-volatility models, have traditionally been dominating the empirical finance literature. In recent years, with the availability of high-frequency financial market data modeling realized volatility has become a new and innovative research direction. By constructing "observable" or realized volatility series from intraday transaction data, the use of standard time series models, such as ARFIMA models, have become a promising strategy for modeling and predicting (daily) volatility. In this paper, we show that the residuals of the commonly used time-series models for realized volatility exhibit non-Gaussianity and volatility clustering. We propose extensions to explicitly account for these properties and assess their relevance when modeling and forecasting realized volatility. In an empirical application for S&P500 index futures we show that allowing for time-varying volatility of realized volatility leads to a substantial improvement of the model's fit as well as predictive performance. Furthermore, the distributional assumption for residuals plays a crucial role in density forecasting. Klassifikation: C22, C51, C52, C53
2005, 10
This paper computes the optimal progressivity of the income tax code in a dynamic general equilibrium model with household heterogeneity in which uninsurable labor productivity risk gives rise to a nontrivial income and wealth distribution. A progressive tax system serves as a partial substitute for missing insurance markets and enhances an equal distribution of economic welfare. These beneficial effects of a progressive tax system have to be traded off against the efficiency loss arising from distorting endogenous labor supply and capital accumulation decisions. Using a utilitarian steady state social welfare criterion we find that the optimal US income tax is well approximated by a flat tax rate of 17:2% and a fixed deduction of about $9,400. The steady state welfare gains from a fundamental tax reform towards this tax system are equivalent to 1:7% higher consumption in each state of the world. An explicit computation of the transition path induced by a reform of the current towards the optimal tax system indicates that a majority of the population currently alive (roughly 62%) would experience welfare gains, suggesting that such fundamental income tax reform is not only desirable, but may also be politically feasible. JEL Klassifikation: E62, H21, H24 .
2006, 21
In this paper we quantitatively characterize the optimal capital and labor income tax in an overlapping generations model with idiosyncratic, uninsurable income shocks, where households also differ permanently with respect to their ability to generate income. The welfare criterion we employ is ex-ante (before ability is realized) expected (with respect to uninsurable productivity shocks) utility of a newborn in a stationary equilibrium. Embedded in this welfare criterion is a concern of the policy maker for insurance against idiosyncratic shocks and redistribution among agents of different abilities. Such insurance and redistribution can be achieved by progressive labor income taxes or taxation of capital income, or both. The policy maker has then to trade off these concerns against the standard distortions these taxes generate for the labor supply and capital accumulation decision. We find that the optimal capital income tax rate is not only positive, but is significantly positive. The optimal (marginal and average) tax rate on capital is 36%, in conjunction with a progressive labor income tax code that is, to a first approximation, a flat tax of 23% with a deduction that corresponds to about $6,000 (relative to an average income of households in the model of $35,000). We argue that the high optimal capital income tax is mainly driven by the life cycle structure of the model whereas the optimal progressivity of the labor income tax is due to the insurance and redistribution role of the income tax system. Klassifizierung: E62, H21, H24
658
Using the exact wording of the ECB’s definition of price-stability, we started a representative online survey of German citizens in January 2019 that is designed to measure long-term inflation expectations and the credibility of the inflation target. Our results indicate that credibility has decreased in our sample period, particularly in the course of the deep recession implied by the COVID-19 pandemic. Interestingly, even though inflation rates in Germany have been clearly below 2% for several years, credibility has declined mainly because Germans increasingly expect that inflation will be much higher than 2% over the medium term. We investigate how inflation expectations and the impact of the pandemic depend on personal characteristics including age, gender, education, income, and political attitude.
2012, 18
This paper constructs a dynamic model of health insurance to evaluate the short- and long run effects of policies that prevent firms from conditioning wages on health conditions of their workers, and that prevent health insurance companies from charging individuals with adverse health conditions higher insurance premia. Our study is motivated by recent US legislation that has tightened regulations on wage discrimination against workers with poorer health status (Americans with Disability Act of 2009, ADA, and ADA Amendments Act of 2008, ADAAA) and that will prohibit health insurance companies from charging different premiums for workers of different health status starting in 2014 (Patient Protection and Affordable Care Act, PPACA). In the model, a trade-off arises between the static gains from better insurance against poor health induced by these policies and their adverse dynamic incentive effects on household efforts to lead a healthy life. Using household panel data from the PSID we estimate and calibrate the model and then use it to evaluate the static and dynamic consequences of no-wage discrimination and no-prior conditions laws for the evolution of the cross-sectional health and consumption distribution of a cohort of households, as well as ex-ante lifetime utility of a typical member of this cohort. In our quantitative analysis we find that although a combination of both policies is effective in providing full consumption insurance period by period, it is suboptimal to introduce both policies jointly since such policy innovation induces a more rapid deterioration of the cohort health distribution over time. This is due to the fact that combination of both laws severely undermines the incentives to lead healthier lives. The resulting negative effects on health outcomes in society more than offset the static gains from better consumption insurance so that expected discounted lifetime utility is lower under both policies, relative to only implementing wage nondiscrimination legislation.
No. 697
We analyze efficient risk-sharing arrangements when the value from deviating is determined endogenously by another risk sharing arrangement. Coalitions form to insure against idiosyncratic income risk. Self-enforcing contracts for both the original coalition and any coalition formed (joined) after deviations rely on a belief in future cooperation which we term "trust". We treat the contracting conditions of original and deviation coalitions symmetrically and show that higher trust tightens incentive constraints since it facilitates the formation of deviating coalitions. As a consequence, although trust facilitates the initial formation of coalitions, the extent of risk sharing in successfully formed coalitions is declining in the extent of trust and efficient allocations might feature resource burning or utility burning: trust is indeed a double-edged sword.
2007, 16
This paper proposes a possible way of assessing the effect of interest rate dynamics on changes in the decision-making approach, communication strategy and operational framework of a Central bank. Through a GARCH specification we show that the USA and Euro area displayed a limited but significant spillover of volatility from money market to longer-term rates. We then checked the stability of this phenomenon in the most recent period of improved policymaking and found empirical evidence that the transmission of overnight volatility along the yield curve vanished soon after specific policy changes of the FED and ECB.
503
Traditional least squares estimates of the responsiveness of gasoline consumption to changes in gasoline prices are biased toward zero, given the endogeneity of gasoline prices. A seemingly natural solution to this problem is to instrument for gasoline prices using gasoline taxes, but this approach tends to yield implausibly large price elasticities. We demonstrate that anticipatory behavior provides an important explanation for this result. We provide evidence that gasoline buyers increase gasoline purchases before tax increases and delay gasoline purchases before tax decreases. This intertemporal substitution renders the tax instrument endogenous, invalidating conventional IV analysis. We show that including suitable leads and lags in the regression restores the validity of the IV estimator, resulting in much lower and more plausible elasticity estimates. Our analysis has implications more broadly for the IV analysis of markets in which buyers may store purchases for future consumption.
2003, 44
We estimate a Bayesian vector autoregression for the U.K. with drifting coefficients and stochastic volatilities. We use it to characterize posterior densities for several objects that are useful for designing and evaluating monetary policy, including local approximations to the mean, persistence, and volatility of inflation. We present diverse sources of uncertainty that impinge on the posterior predictive density for inflation, including model uncertainty, policy drift, structural shifts and other shocks. We use a recently developed minimum entropy method to bring outside information to bear on inflation forecasts. We compare our predictive densities with the Bank of England's fan charts.
2012, 12
In the aftermath of the global financial crisis and great recession, many countries face substantial deficits and growing debts. In the United States, federal government outlays as a ratio to GDP rose substantially from about 19.5 percent before the crisis to over 24 percent after the crisis. In this paper we consider a fiscal consolidation strategy that brings the budget to balance by gradually reducing this spending ratio over time to the level that prevailed prior to the crisis. A crucial issue is the impact of such a consolidation strategy on the economy. We use structural macroeconomic models to estimate this impact focussing primarily on a dynamic stochastic general equilibrium model with price and wage rigidities and adjustment costs. We separate out the impact of reductions in government purchases and transfers, and we allow for a reduction in both distortionary taxes and government debt relative to the baseline of no consolidation. According to the model simulations GDP rises in the short run upon announcement and implementation of this fiscal consolidation strategy and remains higher than the baseline in the long run. We explore the role of the mix of expenditure cuts and tax reductions as well as gradualism in achieving this policy outcome. Finally, we conduct sensitivity studies regarding the type of model used and its parameterization.
2009, 17
Renewed interest in fiscal policy has increased the use of quantitative models to evaluate policy. Because of modeling uncertainty, it is essential that policy evaluations be robust to alternative assumptions. We find that models currently being used in practice to evaluate fiscal policy stimulus proposals are not robust. Government spending multipliers in an alternative empirically-estimated and widely-cited new Keynesian model are much smaller than in these old Keynesian models; the estimated stimulus is extremely small with GDP and employment effects only one-sixth as large.
2003, 08
In this paper we estimate a small model of the euro area to be used as a laboratory for evaluating the performance of alternative monetary policy strategies. We start with the relationship between output and inflation and investigate the fit of the nominal wage contracting model due to Taylor (1980)and three different versions of the relative real wage contracting model proposed by Buiter and Jewitt (1981)and estimated by Fuhrer and Moore (1995a) for the United States. While Fuhrer and Moore reject the nominal contracting model in favor of the relative contracting model which induces more inflation persistence, we find that both models fit euro area data reasonably well. When considering France, Germany and Italy separately, however, we find that the nominal contracting model fits German data better, while the relative contracting model does quite well in countries which transitioned out of a high inflation regime such as France and Italy. We close the model by estimating an aggregate demand relationship and investigate the consequences of the different wage contracting specifications for the inflation-output variability tradeoff, when interest rates are set according to Taylor 's rule.
2003, 09
In this paper we study the role of the exchange rate in conducting monetary policy in an economy with near-zero nominal interest rates as experienced in Japan since the mid-1990s. Our analysis is based on an estimated model of Japan, the United States and the euro area with rational expectations and nominal rigidities. First, we provide a quantitative analysis of the impact of the zero bound on the effectiveness of interest rate policy in Japan in terms of stabilizing output and inflation. Then we evaluate three concrete proposals that focus on depreciation of the currency as a way to ameliorate the effect of the zero bound and evade a potential liquidity trap. Finally, we investigate the international consequences of these proposals.
2004, 14
In this paper, we study the effectiveness of monetary policy in a severe recession and deflation when nominal interest rates are bounded at zero. We compare two alternative proposals for ameliorating the effect of the zero bound: an exchange-rate peg and price-level targeting. We conduct this quantitative comparison in an empirical macroeconometric model of Japan, the United States and the euro area. Furthermore, we use a stylized micro-founded two-country model to check our qualitative findings. We find that both proposals succeed in generating inflationary expectations and work almost equally well under full credibility of monetary policy. However, price-level targeting may be less effective under imperfect credibility, because the announced price-level target path is not directly observable. Klassifikation: E31, E52, E58, E61
2013, 06
This paper employs stochastic simulations of the New Area-Wide Model—a microfounded open-economy model developed at the ECB—to investigate the consequences of the zero lower bound on nominal interest rates for the evolution of risks to price stability in the euro area during the recent financial crisis. Using a formal measure of the balance of risks, which is derived from policy-makers’ preferences about inflation outcomes, we first show that downside risks to price stability were considerably greater than upside risks during the first half of 2009, followed by a gradual rebalancing of these risks until mid-2011 and a renewed deterioration thereafter. We find that the lower bound has induced a noticeable downward bias in the risk balance throughout our evaluation period because of the implied amplification of deflation risks. We then illustrate that, with nominal interest rates close to zero, forward guidance in the form of a time-based conditional commitment to keep interest rates low for longer can be successful in mitigating downside risks to price stability. However, we find that the provision of time-based forward guidance may give rise to upside risks over the medium term if extended too far into the future. By contrast, time-based forward guidance complemented with a threshold condition concerning tolerable future inflation can provide insurance against the materialisation of such upside risks.
2003, 13
Price stability and monetary policy effectiveness when nominal interest rates are bounded at zero
(2003)
This paper employs stochastic simulations of a small structural rational expectations model to investigate the consequences of the zero bound on nominal interest rates. We find that if the economy is subject to stochastic shocks similar in magnitude to those experienced in the U.S. over the 1980s and 1990s, the consequences of the zero bound are negligible for target inflation rates as low as 2 percent. However, the effects of the constraint are non-linear with respect to the inflation target and produce a quantitatively significant deterioration of the performance of the economy with targets between 0 and 1 percent. The variability of output increases significantly and that of inflation also rises somewhat. Also, we show that the asymmetry of the policy ineffectiveness induced by the zero bound generates a non-vertical long-run Phillips curve. Output falls increasingly short of potential with lower inflation targets.
639
We study the incidence and severity of lower-bound episodes and the efficacy of three types of state-dependent policies—forward guidance about the future path of interest rates, large-scale asset purchases and spending-based fiscal stimulus—in ameliorating the adverse consequences stemming from the effective lower bound on nominal interest rates. In particular, we focus on the euro area economy and examine, using the ECB’s New Area- Wide Model, the consequences of the lower bound both for the near-term economic outlook, characterised by persistently low nominal interest rates and inflation, and in a lasting low-real-interest-rate world. Our findings suggest that, if unaddressed, the lower bound can have very substantial costs in terms of worsened macroeconomic performance. Forward guidance, if fully credible, is most powerful and can largely undo the distortionary effects due to the lower bound. A combination of imperfectly credible forward guidance, asset purchases and fiscal stimulus is almost equally effective, in particular when asset purchases enhance the credibility of the forward guidance policy via a signalling effect.
656
Macroeconomic stabilisation and monetary policy effectiveness in a low-interest-rate environment
(2021)
The secular decline in the equilibrium real interest rate observed over the past decades has materially limited the room for policy-rate reductions in recessions, and has led to a marked increase in the incidence of episodes where policy rates are likely to be at, or near, the effective lower bound on nominal interest rates. Using the ECB's New Area-Wide Model, we show that, if unaddressed, the effective lower bound can cause substantial costs in terms of worsened macroeconomic performance, as rejected in negative biases in inflation and economic activity, as well as heightened macroeconomic volatility. These costs can be mitigated by the use of nonstandard instruments, notably the joint use of interest-rate forward guidance and large-scale asset purchases. When considering alternatives to inflation targeting, we find that make-up strategies such as price-level targeting and average-inflation targeting can, if they are well-understood by the private sector, largely undo the negative biases and heightened volatility induced by the effective lower bound.
2003, 07
In this study, we perform a quantitative assessment of the role of money as an indicator variable for monetary policy in the euro area. We document the magnitude of revisions to euro area-wide data on output, prices, and money, and find that monetary aggregates have a potentially significant role in providing information about current real output. We then proceed to analyze the information content of money in a forward-looking model in which monetary policy is optimally determined subject to incomplete information about the true state of the economy. We show that monetary aggregates may have substantial information content in an environment with high variability of output measurement errors, low variability of money demand shocks, and a strong contemporaneous linkage between money demand and real output. As a practical matter, however, we conclude that money has fairly limited information content as an indicator of contemporaneous aggregate demand in the euro area.
578
Monetary policy communication is particularly important during unconventional times, because high uncertainty about the economy, the introduction of new policy tools and possible limits to the central bank’s toolkit could hamper the predictability of policy actions. We study how monetary policy communication should and has worked under such circumstances. Our main results relate to announcements of asset purchase programmes and the use of forward guidance. We show that announcements of asset purchase programmes have lowered market uncertainty, particularly when accompanied by a contextual release of implementation details such as the envisaged size of the programme. We also show that forward guidance reduces uncertainty more effectively when it is state‐contingent or when it provides guidance about a long horizon than when it is open‐ended or covers only a short horizon, and that the credibility of forward guidance is strengthened if the central bank also has embarked on an asset purchase programme.
664
The nominee approach to equity crowdfunding pools all crowd investors into one (nominee) account where typically the platform acts as the legal owner but the crowd retains beneficial ownership. The platform plays an active digital corporate governance role that simultaneously enfranchises crowd investors with voting and ownership rights but removes the administrative burden on startups of having to deal with several hundred shareholders. Through an inter-platform and intra-platform analysis of a large sample of 1,018 initial equity crowdfunding campaigns, this paper assesses both the short-term and the long-term impact of nominee versus direct ownership. It finds that nominee initial campaigns are on average more successful than direct ownership campaigns in that they are more likely to succeed, raise more funds, attract overfunding and enjoy greater long run success in terms of successful seasoned equity crowdfunded offerings, numbers of such offerings, and probability of survival. These results hold inter-platform between the two main UK equity crowdfunding platforms (Seedrs and Crowdcube) as well as intra-platform, using the post-2015 quasi-natural experiment when the nominee approach became an option for startups raising capital on Crowdcube.
2002, 04
Forecasting stock market volatility and the informational efficiency of the DAX-index options market
(2002)
Alternative strategies for predicting stock market volatility are examined. In out-of-sample forecasting experiments implied-volatility information, derived from contemporaneously observed option prices or history-based volatility predictors, such as GARCH models, are investigated, to determine if they are more appropriate for predicting future return volatility. Employing German DAX-index return data it is found that past returns do not contain useful information beyond the volatility expectations already reflected in option prices. This supports the efficient market hypothesis for the DAX-index options market.
2004, 08
We consider three sets of phenomena that feature prominently - and separately - in the financial economics literature: conditional mean dependence (or lack thereof) in asset returns, dependence (and hence forecastability) in asset return signs, and dependence (and hence forecastability) in asset return volatilities. We show that they are very much interrelated, and we explore the relationships in detail. Among other things, we show that: (a) Volatility dependence produces sign dependence, so long as expected returns are nonzero, so that one should expect sign dependence, given the overwhelming evidence of volatility dependence; (b) The standard finding of little or no conditional mean dependence is entirely consistent with a significant degree of sign dependence and volatility dependence; (c) Sign dependence is not likely to be found via analysis of sign autocorrelations, runs tests, or traditional market timing tests, because of the special nonlinear nature of sign dependence; (d) Sign dependence is not likely to be found in very high-frequency (e.g., daily) or very low-frequency (e.g., annual) returns; instead, it is more likely to be found at intermediate return horizons; (e) Sign dependence is very much present in actual U.S. equity returns, and its properties match closely our theoretical predictions; (f) The link between volatility forecastability and sign forecastability remains intact in conditionally non-Gaussian environments, as for example with time-varying conditional skewness and/or kurtosis.
2007, 07
We focus on a quantitative assessment of rigid labor markets in an environment of stable monetary policy. We ask how wages and labor market shocks feed into the inflation process and derive monetary policy implications. Towards that aim, we structurally model matching frictions and rigid wages in line with an optimizing rationale in a New Keynesian closed economy DSGE model. We estimate the model using Bayesian techniques for German data from the late 1970s to present. Given the pre-euro heterogeneity in wage bargaining we take this as the first-best approximation at hand for modelling monetary policy in the presence of labor market frictions in the current European regime. In our framework, we find that labor market structure is of prime importance for the evolution of the business cycle, and for monetary policy in particular. Yet shocks originating in the labor market itself may contain only limited information for the conduct of stabilization policy. JEL Classification: E32, E52, J64, C11
2008, 35
We study the relation between cognitive abilities and stockholding using the recent Survey of Health, Ageing and Retirement in Europe (SHARE), which has detailed data on wealth and portfolio composition of individuals aged 50+ in 11 European countries and three indicators of cognitive abilities: mathematical, verbal fluency, and recall skills. We find that the propensity to invest in stocks is strongly associated with cognitive abilities, for both direct stock market participation and indirect participation through mutual funds and retirement accounts. Since the decision to invest in less information-intensive assets (such as bonds) is less strongly related to cognitive abilities, we conclude that the association between cognitive abilities and stockholding is driven by information constraints, rather than by features of preferences or psychological traits.