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152
The authors examine the effectiveness of labor cost reductions as a means to stimulate economic activity and assesses the differences which may occur with the prevailing exchange rate regime. They develop a medium-scale three-region DSGE model and show that the impact of a cut in the employers’ social security contributions rate does not vary significantly under different exchange rate regimes. They find that both the interest rate and the exchange rate channel matters. Furthermore, the measure appears to be effective even if it comes along with a consumption tax increase to preserve long-term fiscal sustainability.
Finally, they assess whether obtained theoretical results hold up empirically by applying the local projection method. Regression results suggest that changes in employers’ social security contributions rates have statistically significant real effects – a one percentage point reduction leads to an average cumulative rise in output of around 1.3 percent in the medium term. Moreover, the outcome does not differ significantly across the different exchange rate regimes.
102
A number of contributions to research on monetary policy have suggested that policy should be asymmetric near the lower bound on nominal interest rates. As inflation and economic activity decline, policy should ease more aggressively than it would in the absence of the lower bound. As activity recovers and inflation picks up, the central bank should act to keep interest rates lower for longer than without the bound. In this note, we investigate to what extent the policy easing implemented by the ECB since summer 2013 mirrors the rate recommendations of a simple policy rule or deviates from it in a way that indicates a “lower for longer” approach to policy near zero interest rates.
15
Inhalt Prof. Dr. Helmut Siekmann : Föderalismuskommission II für eine zukunftsfähige Gestaltung der Finanzsysteme nutzen. Stellungnahme für das Expertengespräch des Haushalts- und Finanzausschusses des Landtags Nordrhein-Westfalen am 14.02.2008 Stellungnahme 14/1785 Antrag der Fraktion BÜNDNIS90/Die Grünen im Landtag Nordrhein-Westfalen: Drucksache 14/4338 Fragenkatalog zum Expertengespräch des Haushalts- und Finanzausschusses und des Hauptausschusses am 14.02.2008
125
The authors relax the standard assumption in the dynamic stochastic general equilibrium (DSGE) literature that exogenous processes are governed by AR(1) processes and estimate ARMA (p,q) orders and parameters of exogenous processes. Methodologically, they contribute to the Bayesian DSGE literature by using Reversible Jump Markov Chain Monte Carlo (RJMCMC) to sample from the unknown ARMA orders and their associated parameter spaces of varying dimensions.
In estimating the technology process in the neoclassical growth model using post war US GDP data, they cast considerable doubt on the standard AR(1) assumption in favor of higher order processes. They find that the posterior concentrates density on hump-shaped impulse responses for all endogenous variables, consistent with alternative empirical estimates and the rigidities behind many richer structural models. Sampling from noninvertible MA representations, a negative response of hours to a positive technology shock is contained within the posterior credible set. While the posterior contains significant uncertainty regarding the exact order, the results are insensitive to the choice of data filter; this contrasts with the authors’ ARMA estimates of GDP itself, which vary significantly depending on the choice of HP or first difference filter.
132
We analyze cyclical co-movement in credit, house prices, equity prices, and longterm interest rates across 17 advanced economies. Using a time-varying multi-level dynamic factor model and more than 130 years of data, we analyze the dynamics of co-movement at different levels of aggregation and compare recent developments to earlier episodes such as the early era of financial globalization from 1880 to 1913 and the Great Depression. We find that joint global dynamics across various financial quantities and prices as well as variable-specific global co-movements are important to explain fluctuations in the data. From a historical perspective, global co-movement in financial variables is not a new phenomenon, but its importance has increased for some variables since the 1980s. For equity prices, global cycles play currently a historically unprecedented role, explaining more than half of the fluctuations in the data. Global cycles in credit and housing have become much more pronounced and longer, but their importance in explaining dynamics has only increased for some economies including the US, the UK and Nordic European countries. We also include GDP in the analysis and find an increasing role for a global business cycle.
171
Veronika Grimm, Lukas Nöh, and Volker Wieland assess the possible development of government interest expenditures as a share of GDP for Germany, France, Italy and Spain. Until 2021, these and other member states could anticipate a further reduction of interest expenditure in the future. This outlook has changed considerably with the recent surge in inflation and government bond rates. Nevertheless, under reasonable assumptions current yield curves still imply that interest expenditure relative to GDP can be stabilized at the current level. The authors also review the implications of a further upward shift in the yield curves of 1 or 2 percentage points. These implications suggest significant medium-term risks for highly indebted member states with interest expenditure approaching or exceeding levels last observed on the eve of the euro area debt crisis. In light of these risks, governments of euro area member states should take substantive action to achieve a sustained decline in debt-to-GDP ratios towards safer levels. They bear the responsibility for making sure that government finances can weather the higher interest rates which are required to achieve price stability in the euro area.
183
I have assessed changes in the monetary policy stance in the euro area since its inception by applying a Bayesian time-varying parameter framework in conjunction with the Hamiltonian Monte Carlo algorithm. I find that the estimated policy response has varied considerably over time. Most of the results suggest that the response weakened after the onset of the financial crisis and while quantitative measures were still in place, although there are also indications that the weakening of the response to the expected inflation gap may have been less pronounced. I also find that the policy response has become more forceful over the course of the recent sharp rise in inflation. Furthermore, it is essential to model the stochastic volatility relating to deviations from the policy rule as it materially influences the results.
169
The authors study the impact of dissent in the ECB‘s Governing Council on uncertainty surrounding households‘ inflation expectations. They conduct a randomized controlled trial using the Bundesbank Online Panel Households. Participants are provided with alternative information treatments concerning the vote in the Council, e.g. unanimity and dissent, and are asked to submit probabilistic inflation expectations. The results show that the vote is informative.
Households revise their subjective inflation forecast after receiving information about the vote. Dissenting votes cause a wider individual distribution of future inflation. Hence, dissent increases households‘ uncertainty about inflation. This effect is statistically significant once the authors allow for the interaction between the treatments and individual characteristics of respondents.
The results are robust with respect to alternative measures of forecast uncertainty and hold for different model specifications. The findings suggest that providing information about dissenting votes without additional information about the nature of dissent is detrimental to coordinating household expectations.
138
Household finance
(2020)
Household financial decisions are complex, interdependent, and heterogeneous, and central to the functioning of the financial system. We present an overview of the rapidly expanding literature on household finance (with some important exceptions) and suggest directions for future research. We begin with the theory and empirics of asset market participation and asset allocation over the lifecycle. We then discuss house-hold choices in insurance markets, trading behavior, decisions on retirement saving, and financial choices by retirees. We survey research on liabilities, including mortgage choice, refinancing, and default, and household behavior in unsecured credit markets, including credit cards and payday lending. We then connect the household to its social environment, including peer effects, cultural and hereditary factors, intra-household financial decision making, financial literacy, cognition and educational interventions. We also discuss literature on the provision and consumption of financial advice.
129
Exploiting the natural experiment of the German reunification, we examine how consumers adapt to a new environment in their macroeconomic forecasting. We document that East Germans expect higher in inflation and make larger forecast errors than West
Germans even decades after reunification. Differences in consumption baskets, financial literacy, risk aversion or trust in the central bank cannot fully account for these patterns. We find most support for the explanation that East Germans, who were used to a strong norm of zero inflation, persistently overadjusted the level of their expectations in the face of the initial inflation shock in reunified Germany. Our findings suggest that large changes in the economic environment can permanently impede people's ability to form accurate macroeconomic expectations, with an important role for the interaction of old norms and new experiences around the event.
128
Policymakers attach an important role to the macroeconomic outlook of households. Using a representative online panel form the U.S., the authors examine how individuals' macroeconomic expectations causally affect their personal economic prospects and their behavior and provide them with different professional forecasts about the likelihood of a recession. The authors find that groups with the largest exposure to aggregate risk, such as individuals working in cyclical industries, are most likely to respond to an improved macroeconomic outlook, while a large fraction of the population is unlikely to react.
92
This paper empirically investigates how organizational hierarchy affects the allocation of credit within a bank. Using an exogenous variation in organizational design, induced by a reorganization plan implemented in roughly 2,000 bank branches in India during 1999-2006, and employing a difference-in-differences research strategy, we find that increased hierarchization of a branch decreases its ability to produce "soft" information on loans, leads to increased standardization of loans and rationing of "soft information" loans. Furthermore, this loss of information brings about a reduction in performance on loans: delinquency rates and returns on similar loans are worse in more hierarchical branches. We also document how hierarchical structures perform better in environments that are characterized by a high degree of corruption, thus highlighting the benefits of hierarchical decision making in restraining rent seeking activities. Finally, we document a channel - managerial interference - through which hierarchy affects loan outcomes.
83
How special are they? - Targeting systemic risk by regulating shadow banking : (October 5, 2014)
(2014)
This essay argues that at least some of the financial stability concerns associated with shadow banking can be addressed by an approach to financial regulation that imports its functional foundations more vigorously into the interpretation and implementation of existing rules. It shows that the general policy goals of prudential banking regulation remain constant over time despite dramatic transformations in the financial and technological landscape. Moreover, these overarching policy goals also legitimize intervention in the shadow banking sector. On these grounds, this essay encourages a more normative construction of available rules that potentially limits both the scope for regulatory arbitrage and the need for ever more rapid updates and a constant increase in the complexity of the regulatory framework. By tying the regulatory treatment of financial innovation closely to existing prudential rules and their underlying policy rationales, the proposed approach potentially ends the socially wasteful race between hare and tortoise that signifies the relation between regulators and a highly dynamic industry. In doing so it does not generally hamper market participants’ efficient discoveries where disintermediation proves socially beneficial. Instead, it only weeds-out rent-seeking circumventions of existing rules and standards.
121
The paper illustrates based on an example the importance of consistency between the empirical measurement and the concept of variables in estimated macroeconomic models. Since standard New Keynesian models do not account for demographic trends and sectoral shifts, the authors proposes adjusting hours worked per capita used to estimate such models accordingly to enhance the consistency between the data and the model. Without this adjustment, low frequency shifts in hours lead to unreasonable trends in the output gap, caused by the close link between hours and the output gap in such models.
The retirement wave of baby boomers, for example, lowers U.S. aggregate hours per capita, which leads to erroneous permanently negative output gap estimates following the Great Recession. After correcting hours for changes in the age composition, the estimated output gap closes gradually instead following the years after the Great Recession.
168
The authors study the effects of forward looking communication in an environment of rising inflation rates on German consumers‘ inflation expectations using a randomized control trial. They show that information about rising inflation increases short- and long-term inflation expectations. This initial increase in expectations can be mitigated using forward looking information about inflation. Among these information treatments, professional forecasters‘ projections seem to reduce inflation expectations by more than policymakers‘ characterization of inflation as a temporary phenomenon.
115
Since 2014 the ECB has implemented a massive expansion of monetary policy including large-scale asset purchases and negative policy rates. As the euro area economy has improved and inflation has risen, questions concerning the future normalization of monetary policy are starting to dominate the public debate.
The study argues that the ECB should develop a strategy for policy normalization and communicate it very soon to prepare the ground for subsequent steps towards tightening. It provides analysis and makes proposals concerning key aspects of this strategy. The aim is to facilitate the emergence of expectations among market participants that are consistent with a smooth process of policy normalization.
163
Conditional yield skewness is an important summary statistic of the state of the economy. It exhibits pronounced variation over the business cycle and with the stance of monetary policy, and a tight relationship with the slope of the yield curve. Most importantly, variation in yield skewness has substantial forecasting power for future bond excess returns, high-frequency interest rate changes around FOMC announcements, and consensus survey forecast errors for the ten-year Treasury yield. The COVID pandemic did not disrupt these relations: historically high skewness correctly anticipated the run-up in long-term Treasury yields starting in late 2020. The connection between skewness, survey forecast errors, excess returns, and departures of yields from normality is consistent with a theoretical framework where one of the agents has biased beliefs.
172
In the communication of the European Central Bank (ECB), the statement that „we act within our mandate“ is often referred to. Also among practitioners of the Eurosystem the term „mandate“ has become popular. In his Working Paper, Helmut Siekmann analyzes the legal foundation of the tasks and objectives of the Eurosysstem and price stability as a legal term. He finds that the primary law of the EU only very sparsely employs the term „mandate“. It is never used in the context of monetary policy and its institutions. Moreover, he comes to the conclusion that inflation targeting as a task, competence, or objective of the Eurosystem is legally highly questionable according to the common standards of interpretation.
97
This paper investigates the effect of a change in informational environment of borrowers on the organizational design of bank lending. We use micro-data from a large multinational bank and exploit the sudden introduction of a credit registry, an information-sharing mechanism across banks, for a subset of borrowers. Using within borrower and loan officer variation in a difference-in-difference empirical design, we show that expansion of credit registry led to an improvement in allocation of credit to affected
borrowers. There was a concurrent change in the organizational structure of the bank that involved a dramatic increase in delegation of lending decisions of affected borrowers to loan officers. We also find a significant expansion in scope of activities of loan officers who deal primarily with affected borrowers, as well as of their superiors. There is suggestive evidence that larger banks in the economy were better able to implement similar changes as our bank. We argue that these patterns can be understood within the framework of incentive-based and information cost processing theories. Our findings could help rationalize why improvements in the information environment of borrowers may be altering the landscape of lending by moving decisions outside the boundaries of financial intermediaries.
136
We design, field and exploit survey data from a representative sample of the French population to examine whether informative social interactions enter householdsístockholding decisions. Respondents report perceptions about their circle of peers with whom they interact about Önancial matters, their social circle and the population. We provide evidence for the presence of an information channel through which social interactions ináuence perceptions and expectations about stock returns, and financial behavior. We also find evidence of mindless imitation of peers in the outer social circle, but this does not permeate as many layers of financial behavior as informative social interactions do.
33
We analyze how two key managerial tasks interact: that of growing the business through creating new investment opportunities and that of providing accurate information about these opportunities in the corporate budgeting process. We show how this interaction endogenously biases managers toward overinvesting in their own projects. This bias is exacerbated if managers compete for limited resources in an internal capital market, which provides us with a novel theory of the boundaries of the firm. Finally, managers of more risky and less profitable divisions should obtain steeper incentives to facilitate efficient investment decisions.
110
The currrent debate on monetary and fiscal policy is heavily influenced by estimates of the equilibrium real interest rate. Beyer and Wieland re-estimate the U.S. equilibrium rate with the methodology of Laubach and Williams and further modifications. They provide new estimates for the United States, the euro area and Germany and subject them to sensitivity tests. Beyer and Wieland conclude that due to the great uncertainty and sensitivity, the observed decline in the estimates is not a reliable indicator of a need for expansionary monetary and fiscal policy. Yet, if those estimates are employed to determine the appropriate monetary policy stance, such estimates are better used together with the consistent estimate of the level of potential output.
75
Following the experience of the global financial crisis, central banks have been asked to undertake unprecedented responsibilities. Governments and the public appear to have high expectations that monetary policy can provide solutions to problems that do not necessarily fit in the realm of traditional monetary policy. This paper examines three broad public policy goals that may overburden monetary policy: full employment; fiscal sustainability; and financial stability. While central banks have a crucial position in public policy, the appropriate policy mix also involves other institutions, and overreliance on monetary policy to achieve these goals is bound to disappoint. Central Bank policies that facilitate postponement of needed policy actions by governments may also have longer-term adverse consequences that could outweigh more immediate benefits. Overburdening monetary policy may eventually diminish and compromise the independence and credibility of the central bank, thereby reducing its effectiveness to preserve price stability and contribute to crisis management.
81
The recent decline in euro area inflation has triggered new calls for additional monetary stimulus by the ECB in order to counter the threat of a self‐reinforcing deflation and recession spiral. This note reviews the available evidence on inflation expectations, output gaps and other factors driving current inflation through the lens of the Phillips curve. It also draws a comparison to the Japanese experience with deflation in the late 1990s and the evidence from Japan concerning the outputinflation nexus at low trend inflation. The note concludes from this evidence that the risk of a selfreinforcing deflation remains very small. Thus, the ECB best await the impact of the long‐term refinancing operations decided in June that have the potential to induce substantial monetary accommodation once implemented for the first time in September.
69
Das Banken- und Versicherungsaufsichtsrecht benennt an mehreren Stellen ausdrücklich gruppenbezogene Pflichten des übergeordneten Unternehmens. Deren Realisierbarkeit hängt von gesellschafts-, insbesondere konzernrechtlichen Schranken ab, die für die Einflussnahme auf nachgeordnete Gruppenunternehmen bestehen. Der vorliegende Beitrag betrachtet das Zusammenspiel von Aufsichts- und Gesellschaftsrecht unter besonderer Berücksichtigung der regelungstragenden Ziele des ersteren. Die Gruppenverantwortung ist in dieser Sicht ein Institut, das zur Verwirklichung eines klar umrissenen, öffentlichen Interesses an der Befolgung bestimmter Normen das übergeordnete Unternehmen als interne Kontrollinstanz in die Pflicht nimmt und mit gruppendimensionalen Handlungspflichten belegt. Zur Gewährleistung der Effektivität dieses Instituts ist ein sektoral begrenzter Vorrang der aufsichtsrechtlichen Vorgaben anzuerkennen. Dieser ist durch die angemessene Berücksichtigung des mit dem Aufsichtsrecht verfolgten, öffentlichen Interesses als normativer Determinante der Leitungstätigkeit aller gruppenangehörigen Institute zu verwirklichen.
45
The European Monetary Union euro has done very well since its initiation. Price stability has been secured and the external value of the new currency is more than satisfactory. The confidence in it is also shown by its increasing use as a global reserve currency. It has been a stabilizing factor in the current crisis. The recent budgetary problems of some member states are principally not a problem of the Monetary Union. It is therefore in no way justified to speak of a "Euro-crisis". It is true, however, that the Monetary Union restricts the number of possibilities for member states to solve their financial problems but it does not eliminate them entirely that outside help would have become indispensible. The purchase of debt instruments of member states in financial distress by the ECB is questionable from an economic, and more important, from a legal point of view. The longer the duration, the less legally justifiable is it. Financial support for member states in severe financial distress might be acceptable as a temporary crisis resolution mechanism. A permanent support mechanism needs a basis in the primary law of the EU. The treatment of the risk of "sovereign" debt in the legal framework for financial institutions urgently needs improvement. Especially the capital requirements for credit institutions have to be adjusted.
122
85
This paper investigates the risk channel of monetary policy on the asset side of banks’ balance sheets. We use a factoraugmented vector autoregression (FAVAR) model to show that aggregate lending standards of U.S. banks, such as their collateral requirements for firms, are significantly loosened in response to an unexpected decrease in the Federal Funds rate. Based on this evidence, we reformulate the costly state verification (CSV) contract to allow for an active financial intermediary, embed it in a New Keynesian dynamic stochastic general equilibrium (DSGE) model, and show that – consistent with our empirical findings – an expansionary monetary policy shock implies a temporary increase in bank lending relative to borrower collateral. In the model, this is accompanied by a higher default rate of borrowers.
27
This paper presents a novel model of the lending process that takes into account that loan officers must spend time and effort to originate new loans. Besides generating predictions on loan officers’ compensation and its interaction with the loan review process, the model sheds light on why competition could lead to excessively low lending standards. We also show how more intense competition may fasten the adoption of credit scoring. More generally, hard-information lending techniques such as credit scoring allow to give loan officers high-powered incentives without compromising the integrity and quality of the loan approval process. The model is finally applied to study the implications of loan sales on the adopted lending process and lending standard.
55
In this paper, I introduce lumpy micro-level capital adjustment into a sticky information general equilibrium model. Lumpy adjustment arises because of inattentiveness in capital investment decisions instead of the more common assumption of non-convex adjustment costs. The model features inattentiveness as the only source of stickiness. I find that the model with lumpy investment yields business cycle dynamics which differ substantially from those of an otherwise identical model with frictionless investment and are much more consistent with the empirical evidence. These results therefore strengthen the case in favour of the relevance of microeconomic investment lumpiness for the business cycle.
65
Missachtung rechtlicher Vorgaben des AEUV durch die Mitgliedstaaten und die EZB in der Schuldenkrise
(2012)
Zusammenfassung und Ergebnisse
1. Es gibt gute Argumente für ein generelles Verbot (freiwilliger) Unterstützungsleistungen an Euro-Mitgliedstaaten.
2. Die Vereinbarkeit der Leistungen der EU im Rahmen des EFSM mit Art. 122 Abs. 2 AEUV ist fraglich. Die Beurteilung der Kausalitätsfrage ist maßgebend.
3. Die Vereinbarkeit der Leistungen der Mitgliedstaaten im Rahmen der speziellen Griechenlandhilfe und im Rahmen der EFSF mit dem AEUV in der damals geltenden Fassung ist nicht sicher.
4. Die Einführung von Art. 136 Abs. 3 AEUV modifiziert das Vertragsrecht und ist wohl noch in Einklang mit Art. 48 Abs. 6 EUV erfolgt.
5. ESM und Fiskalpakt verstoßen nach der Änderung des Primärrechts wohl nicht gegen den AEUV.
6. Unabdingbar für die Schaffung des ESM sind aber das Inkrafttreten von Art. 136 Abs. 3 AEUV und
7. Der Erwerb von Forderungen gegen Mitgliedstaaten über einen längeren Zeitraum und zur Erleichterung von Zinslasten überschreitet die Befugnisse und Zuständigkeiten des ESZB.
8. Der Erwerb von Forderungen gegen Mitgliedstaaten über einen längeren Zeitraum und zur Erleichterung von Zinslasten ist nicht mit dem Verbot der Kreditgewährung durch Zentralbanken an Hoheitsträger nach Art. 123 AEUV zu vereinbaren
9. Die Gewährung von langfristigen Krediten an Banken verstößt ebenfalls gegen die Zuständigkeitsordnung des AEUV und ist bei einer Weiterleitung der Mittel an Hoheitsträger nicht mit Art. 123 AEUV zu vereinbaren.
10. Die Akzeptierung von ausfallgefährdeten Forderungen als Sicherheit für die Gewährung von Krediten durch das ESZB verstößt gegen Art. 18.1., zweiter Spiegelstrich, Satzung ESZB/EZB.
35
This paper considers a firm that has to delegate to an agent, such as a mortgage broker or a security dealer, the twin tasks of approaching and advising customers. The main contractual restriction, in particular in light of related research in Inderst and Ottaviani (2007), is that the firm can only compensate the agent through commissions. This standard contracting restriction has the following key implications. First, the firm can only ensure internal compliance to a "standard of sales", in terms of advice for the customer, if this standard is not too high. Second, if this is still feasible, then a higher standard is associated with higher, instead of lower, sales commissions. Third, once the limit for internal compliance is approached, tougher regulation and prosecution of "misselling" have (almost) no effect on the prevailing standard. Besides having practical implications, in particular on how to (re-)regulate the sale of financial products, the novel model, which embeds a problem of advice into a framework with repeated interactions, may also be of separate interest for future work on sales force compensation. JEL Classification: D18 (Consumer Protection), D83 (Search; Learning; Information and Knowledge), M31 (Marketing), M52 (Compensation and Compensation Methods and Their Effects).
36
Misselling through agents
(2009)
This paper analyzes the implications of the inherent conflict between two tasks performed by direct marketing agents: prospecting for customers and advising on the product's "suitability" for the specific needs of customers. When structuring sales-force compensation, firms trade off the expected losses from "misselling" unsuitable products with the agency costs of providing marketing incentives. We characterize how the equilibrium amount of misselling (and thus the scope of policy intervention) depends on features of the agency problem including: the internal organization of a firm's sales process, the transparency of its commission structure, and the steepness of its agents' sales incentives. JEL Classification: D18 (Consumer Protection), D83 (Search; Learning; Information and Knowledge), M31 (Marketing), M52 (Compensation and Compensation Methods and Their Effects).
114
For some time now, structural macroeconomic models used at central banks have been predominantly New Keynesian DSGE models featuring nominal rigidities and forwardlooking decision-making. While these features are widely deemed crucial for policy evaluation exercises, most central banks have added more detailed characterizations of the financial sector to these models following the Great Recession in order to improve their fit to the data and their forecasting performance. We employ a comparative approach to investigate the characteristics of this new generation of New Keynesian DSGE models and document an elevated degree of model uncertainty relative to earlier model generations. Policy transmission is highly heterogeneous across types of financial frictions and monetary policy causes larger effects, on average. The New Keynesian DSGE models we analyze suggest that a simple policy rule robust to model uncertainty involves a weaker response to inflation and the output gap in the presence of financial frictions as compared to earlier generations of such models. Leaning-against-the-wind policies in models of this class estimated for the Euro Area do not lead to substantial gains. With regard to forecasting performance, the inclusion of financial frictions can generate improvements, if conditioned on appropriate data. Looking forward, we argue that model-averaging and embracing alternative modelling paradigms is likely to yield a more robust framework for the conduct of monetary policy.
13
Recently, the Bank of Japan outlined a “two perspectives” approach to the conduct of monetary policy that focuses on risks to price stability over different time horizons. Interpreting this as pertaining to different frequency bands, we use band spectrum regression to study the determination of inflation in Japan. We find that inflation is related to money growth and real output growth at low frequencies and the output gap at higher frequencies. Moreover, this relationship reflects Granger causality from money growth and the output gap to inflation in the relevant frequency bands. Keywords: spectral regression, frequency domain, Phillips curve, quantity theory. JEL Numbers: C22, E3, E5
119
Financial market interactions can lead to large and persistent booms and recessions. Instability is an inherent threat to economies with speculative financial markets. A central bank’s interest rate setting can amplify the expectation feedback in the financial market and this can lead to unstable dynamics and excess volatility. The paper suggests that policy institutions may be well-advised to handle tools like asset price targeting with care since such instruments might add a structural link between asset prices and macroeconomic aggregates. Neither stock prices nor indices are a good indicator to base decisions on.
67
In this paper, we provide some reflections on the development of monetary theory and monetary policy over the last 150 years. Rather than presenting an encompassing overview, which would be overambitious, we simply concentrate on a few selected aspects that we view as milestones in the development of this subject. We also try to illustrate some of the interactions with the political and financial system, academic discussion and the views and actions of central banks.
107
The global financial crisis and the ensuing criticism of macroeconomics have inspired researchers to explore new modeling approaches. There are many new models that deliver improved estimates of the transmission of macroeconomic policies and aim to better integrate the financial sector in business cycle analysis. Policy making institutions need to compare available models of policy transmission and evaluate the impact and interaction of policy instruments in order to design effective policy strategies. This paper reviews the literature on model comparison and presents a new approach for comparative analysis. Its computational implementation enables individual researchers to conduct systematic model comparisons and policy evaluations easily and at low cost. This approach also contributes to improving reproducibility of computational research in macroeconomic modeling. Several applications serve to illustrate the usefulness of model comparison and the new tools in the area of monetary and fiscal policy. They include an analysis of the impact of parameter shifts on the effects of fiscal policy, a comparison of monetary policy transmission across model generations and a cross-country comparison of the impact of changes in central bank rates in the United States and the euro area. Furthermore, the paper includes a large-scale comparison of the dynamics and policy implications of different macro-financial models. The models considered account for financial accelerator effects in investment financing, credit and house price booms and a role for bank capital. A final exercise illustrates how these models can be used to assess the benefits of leaning against credit growth in monetary policy.
193
This paper develops and implements a backward and forward error analysis of and condition numbers for the numerical stability of the solutions of linear dynamic stochastic general equilibrium (DSGE) models. Comparing seven different solution methods from the literature, I demonstrate an economically significant loss of accuracy specifically in standard, generalized Schur (or QZ) decomposition based solutions methods resulting from large backward errors in solving the associated matrix quadratic problem. This is illustrated in the monetary macro model of Smets and Wouters (2007) and two production-based asset pricing models, a simple model of external habits with a readily available symbolic solution and the model of Jermann (1998) that lacks such a symbolic solution - QZ-based numerical solutions miss the equity premium by up to several annualized percentage points for parameterizations that either match the chosen calibration targets or are nearby to the parameterization in the literature. While the numerical solution methods from the literature failed to give any indication of these potential errors, easily implementable backward-error metrics and condition numbers are shown to successfully warn of such potential inaccuracies. The analysis is then performed for a database of roughly 100 DSGE models from the literature and a large set of draws from the model of Smets and Wouters (2007). While economically relevant errors do not appear pervasive from these latter applications, accuracies that differ by several orders of magnitude persist.
154
On the accuracy of linear DSGE solution methods and the consequences for log-normal asset pricing
(2021)
This paper demonstrates a failure of standard, generalized Schur (or QZ) decomposition based solutions methods for linear dynamic stochastic general equilibrium (DSGE) models when there is insufficient eigenvalue separation about the unit circle. The significance of this is demonstrated in a simple production-based asset pricing model with external habit formation. While the exact solution afforded by the simplicity of the model matches post-war US consumption growth and the equity premium, QZ-based numerical solutions miss the later by many annualized percentage points.
78
Panel Sample Selection ModelsThe empirical evidence currently available in the literature regarding the effects of a country's IMF program participation on its output growth is rather inconclusive. In this paper we propose and estimate a panel data sample selection model featuring state dependence. As in this model the output growth effects of program participation can be conditional on the realization of a state variable (conditional pooling), our framework may reconcile previous empirical evidence based on models without state-dependent effects. We find that the effects of IMF program participation on output growth vary systematically with an index reflecting a country's institutional record, and that output growth effects of program participation are significantly positive only if the program participation is coupled with sufficient improvement of the institutional record.
192
In his speech at the conference „The SNB and its Watchers“, Otmar Issing, member of the ECB Governing Council from its start in 1998 until 2006, takes a look back at more than twenty years of the conference series „The ECB and Its Watchers“. In June 1999, Issing established this format together with Axel Weber, then Director of the Center for Financial Studies, to discuss the monetary policy strategy of the newly founded central bank with a broad circle of participants, that is academics, bank economists and members of the media on a „neutral ground“. At the annual conference, the ECB and its representatives would play an active role and engage in a lively exchange of view with the other participants. Over the years, Volker Wieland took over as organizer of the conference series, which also was adopted by other central banks. In his contribution at the second conference „The SNB and its Watchers“, Issing summarizes the experience gained from over twenty years of the ECB Watchers Conference.
63
We use a novel disaggregate sectoral euro area data set with a regional breakdown to investigate price changes and suggest a new method to extract factors from over-lapping data blocks. This allows us to separately estimate aggregate, sectoral, country-specific and regional components of price changes. We thereby provide an improved estimate of the sectoral factor in comparison with previous literature, which decomposes price changes into an aggregate and idiosyncratic component only, and interprets the latter as sectoral. We find that the sectoral component explains much less of the variation in sectoral regional inflation rates and exhibits much less volatility than previous findings for the US indicate. We further contribute to the literature on price setting by providing evidence that country- and region-specific factors play an important role in addition to the sector-specific factors, emphasising heterogeneity of inflation dynamics along different dimensions. We also conclude that sectoral price changes have a “geographical” dimension, that leads to new insights regarding the properties of sectoral price changes.
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There is substantial disagreement about the consequences of the Tax Cuts and Jobs Act (TCJA) of 2017, which constitutes the most extensive tax reform in the United States in more than 30 years. Using a large-scale two-country dynamic general equilibrium model with nominal rigidities, we find that the TCJA increases GDP by about 2% in the medium-run and by about 2.5% in the long-run. The shortrun impact depends crucially on the degree and costs of variable capital utilization, with GDP effects ranging from 1 to 3%. At the same time, the TCJA does not pay for itself. In our analysis, the reform decreases tax revenues and raises the debt-to-GDP ratio by about 15 percentage points in the medium-run until 2025. We show that combining the TCJA with spending cuts can dampen the increase in government indebtedness without reducing its expansionary effect.
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The authors focus on the stabilizing role of cash from a society-wide perspective. Starting with conceptual remarks on the importance of money for the economy in general, special attention is paid to the unique characteristics of cash. As these become apparent especially during crisis periods, a comparison of the Great Depression (1929 – 1933) and the Great Recession 2008/09 shows the devastating effects of a severe monetary contraction and how a fully elastic provision of cash can help to avoid such a situation.
The authors find interesting similarities to both crises in two separate case studies, one on the demonetization in India 2016 and the other on cash supply during various crises in Greece since 2008. The paper concludes that supply-driven cash withdrawals from circulation (either by demonetization or by capital controls) destabilize the economy if electronic payment substitutes are not instantly available.
However, as there is no perfect substitute for cash due to its unique properties, from the viewpoint of the society as a whole an efficient payment mix necessarily includes cash: It helps to stabilize the economy not only in times of crises in general, no matter which government is in place. The authors argue that it should be the undisputed task of central banks to ensure that cash remains in circulation in normal times and is provided in a fully elastic way in times of crisis.
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This paper examines the sustainability of the currency board arrangements in Argentina and Hong Kong. We employ a Markov switching model with two regimes to infer the exchange rate pressure due to economic fundamentals and market expectations. The empirical results suggest that economic fundamentals and expectations are key determinants of a currency board’s sustainability. We also show that the government’s credibility played a more important role in Argentina than in Hong Kong. The trade surplus, real exchange rate and inflation rate were more important drivers of the sustainability of the Hong Kong currency board.
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I characterize optimal monetary and fiscal policy in a stochastic New Keynesian model when nominal interest rates may occasionally hit the zero lower bound. The benevolent policymaker controls the short-term nominal interest rate and the level of government spending. Under discretionary policy, accounting for fiscal stabilization policy eliminates to a large extent the welfare losses associated with the presence of the zero bound. Under commitment, the gains associated with the use of the fiscal policy tool remain modest, even though fiscal stabilization policy is part of the optimal policy mix.