Working Paper Series : Institute for Monetary and Financial Stability
"Irresponsible lending" with a better informed lender
- We present a simple model of personal finance in which an incumbent lender has an information advantage vis-a-vis both potential competitors and households. In order to extract more consumer surplus, a lender with sufficient market power may engage in "irresponsible"lending, approving credit even if this is knowingly against a household’s best interest. Unless rival lenders are equally well informed, competition may reduce welfare. This holds, in particular, if less informed rivals can free ride on the incumbent’s superior screening ability.
(Un)anticipated monetary policy in a DSGE model with a shadow banking system : [Version 21 Juni 2012]
Manuel M. F. Martins
- Motivated by the U.S. events of the 2000s, we address whether a too low for too long interest rate policy may generate a boom-bust cycle. We simulate anticipated and unanticipated monetary policies in state-of-the-art DSGE models and in a model with bond financing via a shadow banking system, in which the bond spread is calibrated for normal and optimistic times. Our results suggest that the U.S. boom-bust was caused by the combination of (i) too low for too long interest rates, (ii) excessive optimism and (iii) a failure of agents to anticipate the extent of the abnormally favorable conditions.
A lender-based theory of collateral
Holger M. Mueller
- We consider an imperfectly competitive loan market in which a local relationship lender has an information advantage vis-à-vis distant transaction lenders. Competitive pressure from the transaction lenders prevents the local lender from extracting the full surplus from projects, so that she inefficiently rejects marginally profitable projects. Collateral mitigates the inefficiency by increasing the local lender’s payoff from precisely those marginal projects that she inefficiently rejects. The model predicts that, controlling for observable borrower risk, collateralized loans are more likely to default ex post, which is consistent with the empirical evidence. The model also predicts that borrowers for whom local lenders have a relatively smaller information advantage face higher collateral requirements, and that technological innovations that narrow the information advantage of local lenders, such as small business credit scoring, lead to a greater use of collateral in lending relationships. JEL classification: D82; G21 Keywords: Collateral; Soft infomation; Loan market competition; Relationship lending
A new comparative approach to macroeconomic modeling and policy analysis
Gernot J. Müller
Maik Hendrik Wolters
- In the aftermath of the global financial crisis, the state of macroeconomicmodeling and the use of macroeconomic models in policy analysis has come under heavy criticism. Macroeconomists in academia and policy institutions have been blamed for relying too much on a particular class of macroeconomic models. This paper proposes a comparative approach to macroeconomic policy analysis that is open to competing modeling paradigms. Macroeconomic model comparison projects have helped produce some very influential insights such as the Taylor rule. However, they have been infrequent and costly, because they require the input of many teams of researchers and multiple meetings to obtain a limited set of comparative findings. This paper provides a new approach that enables individual researchers to conduct model comparisons easily, frequently, at low cost and on a large scale. Using this approach a model archive is built that includes many well-known empirically estimated models that may be used for quantitative analysis of monetary and fiscal stabilization policies. A computational platform is created that allows straightforward comparisons of models’ implications. Its application is illustrated by comparing different monetary and fiscal policies across selected models. Researchers can easily include new models in the data base and compare the effects of novel extensions to established benchmarks thereby fostering a comparative instead of insular approach to model development
A theory of the boundaries of banks with implications for financial integration and regulation
- We offer a theory of the "boundary of the
rm" that is tailored to banking, as it builds on a single ine¢ ciency arising from risk-shifting and as it takes into account both interbank lending as an alternative to integration and the role of possibly insured deposit funding. Amongst others, it explains both why deeper economic integration should cause also greater financial integration through both bank mergers and interbank lending, albeit this typically remains ine¢ ciently incomplete, and why economic disintegration (or "desychronization"), as currently witnessed in the European Union, should cause less interbank exposure. It also suggests that recent policy measures such as the preferential treatment of retail deposits, the extension of deposit insurance, or penalties on "connectedness" could all lead to substantial welfare losses.
Aggregate and distributional effects of increasing taxes on top income earners
- We analyze the macroeconomic implications of increasing the top marginal income tax rate using a dynamic general equilibrium framework with heterogeneous agents and a fiscal structure resembling the actual U.S. tax system. The wealth and income distributions generated by our model replicate the empirical ones. In two policy experiments, we increase the statutory top marginal tax rate from 35 to 70 percent and redistribute the additional tax revenue among households, either by decreasing all other marginal tax rates or by paying out a lump-sum transfer to all households. We find that increasing the top marginal tax rate decreases inequality in both wealth and income but also leads to a contraction of the aggregate economy. This is primarily driven by the negative effects that the tax change has on top income earners. The aggregate gain in welfare is sizable in both experiments mainly due to a higher degree of distributional equality.
Aktienrecht zwischen börsen- und kapitalmarktorientiertem Ansatz
- I. EINLEITUNG II. VORSCHLAG DER WIRTSCHAFTSRECHTLICHEN ABTEILUNG ZUM 67. DEUTSCHEN JURISTENTAG 1. Darstellung und Begriffsbestimmung 2. Begründung III. BEDEUTUNG DES AUßERBÖRSLICHEN HANDELS IN DEUTSCHLAND IV. RECHTSVERGLEICHENDE BETRACHTUNG VON AKTIEN- UND KAPITALMARKTRECHT 1. Deutschland a) Organisation des Kapitalmarktes b) Differenzierung im Rahmen des Aktienrechts 2. Großbritannien a) Organisation des Kapitalmarktes b) Differenzierungen im „Companies Act 2006“ 3. USA a) Rechtsquellen des Kapitalgesellschafts- und Kapitalmarktrechts b) Organisation des Kapitalmarktes c) Kapitalgesellschaftsrecht V. STELLUNGNAHME 1. Anknüpfung der vorhandenen Regelungen an die Kapitalmarktorientierung 2. Verwischung der Grenzen zwischen Aktien- und Kapitalmarktrecht 3. Missbrauchsgefahr durch selbstbestimmte Wahl der Satzungsstrenge 4. Bisherige Reformansätze im deutschen Schrifttum 5. Die Abkehr von einer Differenzierung im Aktienrecht in der aktuellen Reformdiskussion 6. Ökonomische Analyse des Aktienrechts („Opt-In-Modell“) VI. FAZIT: Der Deregulierungsansatz, der eine Differenzierung zwischen börsen- und nichtbörsennotierten Aktiengesellschaften vorsieht, ist nicht zu befürworten. Vor dem Hintergrund der rechtsvergleichenden Betrachtung der Beispiele Großbritannien und der USA stellt sich vielmehr eine kapitalmarktorientierte Differenzierung der Anlegerschutzbestimmungen des Aktienrechts als vorzugswürdig dar. Die Anknüpfung von Deregulierungsmaßnahmen an das Kriterium der Kapitalmarktorientierung findet sich im Ansatz auch im bereits geltenden deutschen Recht. So enthält sowohl das Aktienrecht als auch das Kapitalmarktrecht entsprechend differenzierende Regelungen. Zudem weisen auch aktuelle nationale Gesetzesvorhaben und die Entwicklungen im europäischen Gesellschaftsrecht Tendenzen zu einer Abgrenzung nach dem Kriterium der Kapitalmarktferne oder -offenheit auf. Auch birgt der enge Anwendungsbereich der zwingenden Anlegerschutznormen des Aktienrechts auf börsennotierte Aktiengesellschaften erhebliche Missbrauchsrisiken. Aktiengesellschaften könnten in den außerbörslichen Handel wechseln, um in den Genuss von Deregulierungen und geringeren Transparenz- und Anlegerschutzanforderungen zu kommen. Letztlich folgt der Vorzug einer kapitalmarktorientierten Differenzierung auch aus der aktuellen Diskussion um Reformansätze zur Steigerung der Wettbewerbsfähigkeit des deutschen Gesellschafts- und Kapitalmarktrechts. Die in diesem Zusammenhang geforderte Aufhebung der Satzungsstrenge bei gleichzeitiger Normierung entsprechender Informations- und Anlegerschutzpflichten im Kapitalmarktrecht würde dazu führen, dass an bestehende Differenzierungen des Kapitalmarktrechts angeknüpft werden könnte.
Are rules and boundaries sufficient to limit harmful central bank discretion? Lessons from Europe
- Marvin Goodfriend’s (2014) insightful, informative and provocative work explains concisely and convincingly why the Fed needs rules and boundaries. This paper reviews the broader institutional design problem regarding the effectiveness of the central bank in practice and confirms the need for rules and boundaries. The framework proposed for improving the Fed incorporates key elements that have already been adopted in the European Union. The case of ELA provision by the ECB and the Central Bank of Cyprus to Marfin-Laiki Bank during the crisis, however, suggests that the existence of rules and boundaries may not be enough to limit harmful discretion. During a crisis, novel interpretations of the legal authority of the central bank may be introduced to create a grey area that might be exploited to justify harmful discretionary decisions even in the presence of rules and boundaries. This raises the question how to ensure that rules and boundaries are respected in practice
Asset pricing under rational learning about rare disasters : [Version 28 Juli 2011]
- This paper proposes a new approach for modeling investor fear after rare disasters. The key element is to take into account that investors’ information about fundamentals driving rare downward jumps in the dividend process is not perfect. Bayesian learning implies that beliefs about the likelihood of rare disasters drop to a much more pessimistic level once a disaster has occurred. Such a shift in beliefs can trigger massive declines in price-dividend ratios. Pessimistic beliefs persist for some time. Thus, belief dynamics are a source of apparent excess volatility relative to a rational expectations benchmark. Due to the low frequency of disasters, even an infinitely-lived investor will remain uncertain about the exact probability. Our analysis is conducted in continuous time and offers closed-form solutions for asset prices. We distinguish between rational and adaptive Bayesian learning. Rational learners account for the possibility of future changes in beliefs in determining their demand for risky assets, while adaptive learners take beliefs as given. Thus, risky assets tend to be lower-valued and price-dividend ratios vary less under adaptive versus rational learning for identical priors. Keywords: beliefs, Bayesian learning, controlled diffusions and jump processes, learning about jumps, adaptive learning, rational learning. JEL classification: D83, G11, C11, D91, E21, D81, C61
Atypical behavior of credit: evidence from a monetary VAR
- Credit boom detection methodologies (such as threshold method) lack robustness as they are based on univariate detrending analysis and resort to ratios of credit to real activity. I propose a quantitative indicator to detect atypical behavior of credit from a multivariate system - a monetary VAR. This methodology explicitly accounts for endogenous interactions between credit, asset prices and real activity and detects atypical credit expansions and contractions in the Euro Area, Japan and the U.S. robustly and timely. The analysis also proves useful in real time.