Institute for Monetary and Financial Stability (IMFS)
Refine
Year of publication
Document Type
- Working Paper (214)
- Part of Periodical (15)
- Article (8)
- Report (8)
- Book (2)
- Doctoral Thesis (1)
- Periodical (1)
Is part of the Bibliography
- no (249)
Keywords
- monetary policy (14)
- DSGE (7)
- Geldpolitik (7)
- Federal Reserve (6)
- Monetary Policy (6)
- Numerical accuracy (6)
- Solution methods (6)
- Bayesian estimation (5)
- DSGE models (5)
- Deutschland (5)
- banking union (5)
- model uncertainty (5)
- Bank (4)
- ECB (4)
- Monetary policy (4)
- central bank independence (4)
- crises (4)
- household finance (4)
- model comparison (4)
- policy rules (4)
- quantitative easing (4)
- Aktienkurs (3)
- DSGE model (3)
- EZB (3)
- European Central Bank (ECB) (3)
- Fiscal Policy (3)
- Hamiltonian Monte Carlo (3)
- Inflation (3)
- Machine Learning (3)
- Neural Networks (3)
- Optimal policy (3)
- Risikokapital (3)
- Transition risk (3)
- Zero Lower Bound (3)
- banknotes (3)
- business cycles (3)
- discretion (3)
- entry (3)
- forecasting (3)
- interest rates (3)
- money (3)
- prudential supervision (3)
- real-time data (3)
- sovereign debt (3)
- zero lower bound (3)
- Agency-Theorie (2)
- Bankenaufsicht (2)
- Bayesian Analysis (2)
- Bayesian Estimation (2)
- Business Cycles (2)
- Cash (2)
- Climate change (2)
- DSGE Estimation (2)
- Deutsche Bundesbank (2)
- Discretion (2)
- Environmental policy (2)
- European Banking Authority (EBA) (2)
- European Central Bank (2)
- Europäische Union (2)
- Europäische Zentralbank (2)
- FOMC (2)
- Finanzverfassung (2)
- Fiskalpolitik (2)
- Heterogeneous Agents (2)
- Hongkong (2)
- Japan (2)
- Kreditgewährung (2)
- Kreditmarkt (2)
- Kreditwürdigkeitsprüfung (2)
- Leistungsbilanz (2)
- New Keynesian model (2)
- Quantitative Easing (2)
- Recht (2)
- Sachbearbeiter (2)
- Sign Restrictions (2)
- Single Supervisory Mechanism (SSM) (2)
- Transfer Learning (2)
- Verbraucherschutz (2)
- Zero lower bound (2)
- Zero nominal interest rate bound (2)
- bail-in (2)
- beliefs (2)
- branches (2)
- business cycle (2)
- competition (2)
- consolidating supervision (2)
- consumption (2)
- cross-border banking (2)
- current account fluctuations (2)
- euro area (2)
- expectation formation (2)
- financial crisis (2)
- financial literacy (2)
- fiscal policy (2)
- forward guidance (2)
- frequency domain (2)
- inflation (2)
- markups (2)
- micro-prudential supervision (2)
- monetary policy strategy (2)
- policy evaluation (2)
- policy robustness (2)
- political economy of bureaucracy (2)
- refugees (2)
- regulatory capture (2)
- social interactions (2)
- stabilization (2)
- subsidiaries (2)
- survey (2)
- time-varying risk premia (2)
- unemployment (2)
- wealth inequality (2)
- Öffentliche Schulden (2)
- ARMA (1)
- Allfinanzkonzern (1)
- Altersversorgung (1)
- Argentinien (1)
- Artificial Intelligence (1)
- Artificial Intelligence; (1)
- Aufsicht (1)
- Backward error (1)
- Bank lending standards (1)
- Bank of Japan (1)
- Bankenaufsichtsrecht (1)
- Bankenkrise (1)
- Bankkredit (1)
- Basel regulation (1)
- Bayes-Lernen (1)
- Bayesian VAR (1)
- Bayesian analysis (1)
- Bayesian inference (1)
- Bayesian learning (1)
- Bayesian time-varying parameter estimation (1)
- Behandlungskapazität (1)
- Bevölkerungsentwicklung (1)
- Blue Chip (1)
- Budgetierung (1)
- Capital Inflows (1)
- Capital-Asset-Pricing-Modell (1)
- Central Bank Communication (1)
- Central Bank Losses (1)
- Central Bank of Cyprus (1)
- Central Banks and Their Policies (1)
- Classification (1)
- Climate finance (1)
- Collateral (1)
- Commitment (1)
- Complexity (1)
- Compliance (1)
- Computational Methods (1)
- Condition number (1)
- Conditional Forecasts (1)
- Container Trade (1)
- Corona (1)
- Credit (1)
- Credit supply (1)
- Crises Forecasting (1)
- Currency Board (1)
- Cyprus (1)
- DSGE Model (1)
- Deficit spending (1)
- Deflation (1)
- Delphic forward guidance (1)
- Determinacy (1)
- Disinflation (1)
- Dual rates (1)
- Dunkelziffer (1)
- Dynamic stochastic general equilibrium model (1)
- ELA (1)
- Economic research (1)
- Effective Lower Bound (1)
- Effektivinflation (1)
- Energy crisis (1)
- Entscheidungsprozess (1)
- Epidemiologic model (1)
- Epidemiologisches Modell (1)
- Estimation (1)
- Europarecht (1)
- European Monetary Fund (1)
- European Monetary Union (1)
- European Stability Mechanism (1)
- Eurosystem (1)
- Eurozone (1)
- Exchange rate regime (1)
- Financial Frictions (1)
- Financial Markets and the Macroeconomy (1)
- Financial frictions (1)
- Finanzausgleich (1)
- Finanzdienstleistungsaufsicht (1)
- Finanzierung (1)
- Finanzplanung (1)
- Finanzwirtschaft (1)
- Fiscal Consolidation (1)
- Fiscal Multiplier (1)
- Fiscal Stimulus (1)
- Fiscal policy (1)
- Fiscal stress (1)
- Fokker-Planck equation (1)
- Forecast Comparison/ Competition (1)
- Forecasting (1)
- Forecasting and Simulation (1)
- Forward Guidance (1)
- Forward error (1)
- Forward guidance (1)
- Forward-looking data (1)
- Frankfurt <Main, 2007> (1)
- Frequency Domain (1)
- G-SIB (1)
- Garantie (1)
- Gegenwartspreise (1)
- German Reunification (1)
- German natural gas market (1)
- Geschichte 1980-2007 (1)
- Geschichte 1983-2008 (1)
- Geschichte 1986-2006 (1)
- Geschäftsleiterermesse (1)
- Gewinnverwendung (1)
- Global Optimization (1)
- Global financial crisis (1)
- Globalization (1)
- Government Debt (1)
- Government Deficit (1)
- Government Spending (1)
- Government spending multiplier (1)
- Great Recession (1)
- Greenbook (1)
- Hamilton filter (1)
- Haushalt (1)
- Hedge Fund (1)
- Herdenimmunität (1)
- Hierarchies (1)
- Hong Kong (1)
- House Prices (1)
- Hypothekarkredite (1)
- Income and Wealth Inequality (1)
- Incomplete Markets (1)
- Infektionsdynamik (1)
- Inflation Forecasting (1)
- Inflationssteuerung (1)
- Information (1)
- Innovation (1)
- Interest Rate Forecasting (1)
- Interest rate rule estimation (1)
- Interest rates (1)
- International Monetary Fund (1)
- Internationaler Kreditmarkt (1)
- Investition (1)
- Kalman Filter (1)
- Kapitalstruktur (1)
- Kaufkraft des Geldes (1)
- Keynesian models (1)
- Keynessche Theorie (1)
- Kongress (1)
- Konkurrent (1)
- Konzernrecht (1)
- Konzernverantwortung (1)
- Kostenplanung (1)
- Kreditgeber (1)
- Kreditsicherung (1)
- Labor cost adjustments (1)
- Landesbank (1)
- Lebenskostenindex (1)
- Lebenszeitverlust (1)
- Liquidity Facilities (1)
- Liquiditätseffekte der Zinspolitik (1)
- Loan market competition (1)
- Local projection (1)
- Länder (1)
- MREL (1)
- Maastricht criteria (1)
- Macroeconomic Forecasting (1)
- Macroeconomic Modeling (1)
- Macroeconomic Models (1)
- Markov-switching DSGE (1)
- Minimum Reserves (1)
- Mixed-frequency data (1)
- Model Comparison (1)
- Model Uncertainty (1)
- Model evaluation (1)
- Model uncertainty (1)
- Models and Applications (1)
- Monetary macroeconomics (1)
- Monetary policy rules (1)
- Monetary policy strategy (1)
- Monetary-fiscal interaction (1)
- Monte Carlo Methods (1)
- Moral Hazard (1)
- Narrative Identification (1)
- Natural Language Processing (1)
- Neural Network (1)
- New Keynesian DSGE (1)
- New Keynesian Model (1)
- New Keynesian Models (1)
- New Keynesian macro-epidemic models (1)
- New Keynesian models (1)
- New Neoclassical synthesis (1)
- Nonlinear Bayesian Estimation (1)
- Nordrhein-Westfalen (1)
- Occasionally Binding Constraints (1)
- Organisationspflichten von Banken (1)
- Output Gap (1)
- Panel VAR (1)
- Phillips Curve (1)
- Phillips curve (1)
- Planungsrechnung (1)
- Policy Rules (1)
- Potential Output (1)
- Production, Saving, Consumption and Investment Forecasting (1)
- Production-based asset pricing (1)
- QE (1)
- RCT (1)
- Real-Time Data (1)
- Real-time data (1)
- Rechtsdurchsetzung (1)
- Rechtsordnung (1)
- Relationship lending (1)
- Reproduktionszahlen (1)
- Restrukturierung (1)
- Reversible Jump Markov Chain Monte Carlo (1)
- Revisions (1)
- Risiko (1)
- Risikomanagement (1)
- Risk channel (1)
- Robustness (1)
- SVAR (1)
- Sanktionen (1)
- Schadensindex (1)
- Sensitivität (1)
- Short-run and long-run inflation expectations (1)
- Sicherstellungspflichten von Geschäftsleitern (1)
- Single Supervisory Mechanism (1)
- Soft Information (1)
- Soft infomation (1)
- Sparkasse (1)
- Spezifität (1)
- Stabilisierung (1)
- Stability and Growth Pact (1)
- Stabilitäts- und Wachstumspakt (1)
- Sticky Information (1)
- Structural policies (1)
- Supply Chain (1)
- Swiss Army Knife (1)
- TLAC (1)
- Taylor Rule (1)
- Taylor rule (1)
- Temporal aggregation (1)
- Top Income Taxation (1)
- Twitter (1)
- US top-wealth shares (1)
- Unternehmensgründung (1)
- Unternehmenswachstum (1)
- VARs (1)
- Value at Risk (1)
- Vektor-autoregressives Modell (1)
- Verdopplungszeit (1)
- Vergütung (1)
- Vermögenspreise (1)
- Versicherungsaufsicht (1)
- Versicherungsaufsichtsrecht (1)
- Vorteil (1)
- Wechselkurs (1)
- Welfare (1)
- Westdeutsche Landesbank (1)
- Wettbewerb (1)
- Wirtschaftsaufsicht (1)
- Wirtschaftsberichterstattung (1)
- Wohnraum (1)
- Wohnungsfinanzierung (1)
- Word Embedding (1)
- Zentralbankautonomie (1)
- Zentralbanken (1)
- Zinsen (1)
- adaptive learning (1)
- aggregate uncertainty (1)
- asset prices (1)
- asset pricing (1)
- bailouts (1)
- balance sheet risk (1)
- bank resolution (1)
- behavioral inattention (1)
- biased beliefs (1)
- bond markets (1)
- boom-bust (1)
- borrowing (1)
- bubbles (1)
- capital injection to banks (1)
- capital regulation (1)
- capital taxation (1)
- capital taxes (1)
- career concerns (1)
- cash (1)
- cash flow effects of interest rate policy (1)
- central bank (1)
- central bank accountability (1)
- central bank communication (1)
- central bank governance (1)
- central bank mandates (1)
- cliff effect (1)
- climate change (1)
- climate-economy models (1)
- cognitive load (1)
- cognitive sophistication (1)
- collateral (1)
- common factor models (1)
- compensation design (1)
- complexity (1)
- conditional forecasts (1)
- controlled diffusions and jump processes (1)
- convergence (1)
- corporate debt (1)
- corporate taxes (1)
- counterfactual analysis (1)
- credit constraints (1)
- crisis (1)
- debt relief to households (1)
- default premium (1)
- deflation (1)
- demographic trends (1)
- density forecasts (1)
- disaggregated prices (1)
- disagreement (1)
- doubling time (1)
- dynamic factor models (1)
- dynamic investment (1)
- dynamic stochastic general equilibrium models (1)
- education (1)
- elections (1)
- employment (1)
- endogenous growth (1)
- equilibrium interest rate (1)
- equity prices (1)
- euro area regional and sectoral inflation (1)
- euro crisis (1)
- expectations (1)
- external instruments (1)
- financial cycles (1)
- financial frictions (1)
- financial regulation (1)
- financial sector (1)
- financial stability (1)
- financial system (1)
- fiscal dominance (1)
- fiscal policy transmission (1)
- fiscal rules (1)
- fiscal stimulus (1)
- forecast combination (1)
- forecasts (1)
- front loading Effekte (1)
- front loading effects (1)
- furlough (1)
- general equilibrium (1)
- geopolitical risk (1)
- global co-movement (1)
- government finance (1)
- green central bank policy (1)
- growth (1)
- growth and development (1)
- herd immunity (1)
- heterogeneous agents (1)
- heterogeneous expectations (1)
- hours per capita measurement (1)
- household debt (1)
- housing debt crisis (1)
- housing investments (1)
- index of lost lifetime (1)
- infection dynamics (1)
- inflation expectations (1)
- inflation forecasting (1)
- inflation persistence (1)
- inflation surge (1)
- inflation target (1)
- information (1)
- information networks (1)
- internal ratings (1)
- labor income taxes (1)
- laboratory experiment (1)
- learning about jumps (1)
- lender of last resort (1)
- leverage (1)
- liftoff (1)
- liquidity premium (1)
- loss index (1)
- loss sharing (1)
- low frequency trends (1)
- lumpy investment (1)
- machine learning (1)
- macro-finance (1)
- macro-financial models (1)
- macro-prudential supervision (1)
- macroeconomic conditions (1)
- macroeconomic experiences (1)
- macrofinancial linkages (1)
- macroprudential policy transmission (1)
- market discipline (1)
- menu costs (1)
- monetary and fiscal policy (1)
- monetary financing (1)
- monetary institutions (1)
- monetary law (1)
- monetary policy real-time output gap (1)
- monetary policy rule (1)
- monetary policy rules (1)
- monetary policy transmission (1)
- monetary transmission (1)
- mortgage loans (1)
- multiple equilibria (1)
- narrative sign restrictions (1)
- natural experiment (1)
- natural gas price (1)
- net wealth (1)
- nominal rigidity (1)
- nonlinearity (1)
- numerical solution method (1)
- online experiments (1)
- opportunity (1)
- optimal monetary policy (1)
- output gap (1)
- output gap estimates (1)
- output hysteresis (1)
- panel VAR (1)
- panel vector autoregression (1)
- peer effects (1)
- perceived wealth (1)
- persistent or transitory inflation shock (1)
- policy normalization (1)
- policy rule (1)
- political economy (1)
- populism (1)
- portfolio choice (1)
- potential output (1)
- price stability (1)
- principal-agent models (1)
- product market competition (1)
- productivity growth (1)
- propagation of inequality (1)
- proportionality (1)
- quantile regressions (1)
- quantity theory (1)
- randomized control trial (1)
- randomized controlled trial (1)
- rational expectations (1)
- rational learning (1)
- real estate lending (1)
- regulatory arbitrage (1)
- reproduction number (1)
- robust monetary policy (1)
- robust policy (1)
- robust simple rules (1)
- rules (1)
- rules vs discretion (1)
- saving (1)
- savings accounts (1)
- search and matching (1)
- seigniorage (1)
- sensitivity (1)
- shadow banking (1)
- shadow banking system (1)
- simple rules (1)
- skewness (1)
- sovereign credit rating (1)
- specificity (1)
- spectral regression (1)
- spending cuts (1)
- state-owned enterprises (1)
- sticky information (1)
- sticky wages (1)
- stochastic volatility (1)
- stock market reaction (1)
- stock prices (1)
- structural breaks (1)
- structural scenario analysis (1)
- subjective expectations (1)
- survey experiment (1)
- survey forecasts (1)
- sustainable finance (1)
- synchronization (1)
- tax reform (1)
- technological growth (1)
- technologische Schocks (1)
- technology shocks (1)
- time-varying parameter (1)
- too low for too long (1)
- treatment capacity (1)
- trend inflation (1)
- trend-cycle decomposition (1)
- trend-extrapolation (1)
- uncertainty (1)
- unconfirmed cases (1)
- unconventional monetary policy (1)
- updating (1)
- vector-autoregression (1)
- venture capital (1)
- war (1)
- working hours (1)
- yield curve (1)
- yields (1)
- z-Transform (1)
- Öffentliche Ausgaben (1)
Institute
In this paper, we construct a Dynamic Stochastic General Equilibrium (DSGE) model to examine the implications of dual rates for green lending. We demonstrate that implementing a distinct interest rate for banks engaged in green lending can effectively mitigate transition risks while channeling more capital towards green production sectors and firms for an immediate cut of emissions and net zero emission economy targets.
We use a structural VAR model to study the German natural gas market and investigate the impact of the 2022 Russian supply stop on the German economy. Combining conventional and narrative sign restrictions, we find that gas supply and demand shocks have large and persistent price effects, while output effects tend to be moderate. The 2022 natural gas price spike was driven by adverse supply
shocks and positive storage demand shocks, as Germany filled its inventories before the winter. Counterfactual simulations of an embargo on natural gas imports from Russia indicate similar positive price and negative output effects compared to what we observe in the data.
This paper contributes a multivariate forecasting comparison between structural models and Machine-Learning-based tools. Specifically, a fully connected feed forward non-linear autoregressive neural network (ANN) is contrasted to a well established dynamic stochastic general equilibrium (DSGE) model, a Bayesian vector autoregression (BVAR) using optimized priors as well as Greenbook and SPF forecasts. Model estimation and forecasting is based on an expanding window scheme using quarterly U.S. real-time data (1964Q2:2020Q3) for 8 macroeconomic time series (GDP, inflation, federal funds rate, spread, consumption, investment, wage, hours worked), allowing for up to 8 quarter ahead forecasts. The results show that the BVAR improves forecasts compared to the DSGE model, however there is evidence for an overall improvement of predictions when relying on ANN, or including them in a weighted average. Especially, ANN-based inflation forecasts improve other predictions by up to 50%. These results indicate that nonlinear data-driven ANNs are a useful method when it comes to macroeconomic forecasting.
Central bank intervention in the form of quantitative easing (QE) during times of low interest rates is a controversial topic. The author introduces a novel approach to study the effectiveness of such unconventional measures. Using U.S. data on six key financial and macroeconomic variables between 1990 and 2015, the economy is estimated by artificial neural networks. Historical counterfactual analyses show that real effects are less pronounced than yield effects.
Disentangling the effects of the individual asset purchase programs, impulse response functions provide evidence for QE being less effective the more the crisis is overcome. The peak effects of all QE interventions during the Financial Crisis only amounts to 1.3 pp for GDP growth and 0.6 pp for inflation respectively. Hence, the time as well as the volume of the interventions should be deliberated.
We create an alternative version of the present utility value formula to explicitly show that every store-of-value in the economy bears utility-interest (non-pecuniary income) for ist holder regardless of possible interest earnings from financial markets. In addition, we generalize the well-known welfare measures of consumer and producer surplus as present value concepts and apply them not only for the production and usage of consumer goods and durables but also for money and other financial assets. This helps us, inter alia, to formalize the circumstances under which even a producer of legal tender might become insolvent. We also develop a new measure of seigniorage and demonstrate why the well-established concept of monetary seigniorage is flawed. Our framework also allows us to formulate the conditions for liability-issued money such as inside money and financial instruments such as debt certificates to become – somewhat paradoxically – net wealth of the society.
The Federal Reserve has been publishing federal funds rate prescriptions from Taylor rules in its Monetary Policy Report since 2017. The signals from the rules aligned with Fed action on many occasions, but in some cases the Fed opted for a different route. This paper reviews the implications of the rules during the coronavirus pandemic and the subsequent inflation surge and derives projections for the future.
In 2020, the Fed took the negative prescribed rates, which were far below the effective lower bound on the nominal interest rate, as support for extensive and long-lasting quantitative easing. Yet, the calculations overstate the extent of the constraint, because they neglect the supply side effects of the pandemic.
The paper proposes a simple model-based adjustment to the resource gap used by the rules for 2020. In 2021, the rules clearly signaled the need for tightening because of the rise of inflation, yet the Fed waited until spring 2022 to raise the federal funds rate. With the decline of inflation over the course of 2023, the rules’ prescriptions have also come down. They fall below the actual federal funds rate target range in 2024. Several caveats concerning the projections of the interest rate prescriptions are discussed.
Despite a number of helpful changes, including the adoption of an inflation target, the Fed’s monetary policy strategy proved insufficiently resilient in recent years. While the Fed eased policy appropriately during the pandemic, it fell behind the curve during the post-pandemic recovery. During 2021, the Fed kept easing policy while the inflation outlook was deteriorating and the economy was growing considerably faster than the economy’s natural growth rate—the sum of the Fed’s 2% inflation goal and the growth rate of potential output.
The resilience of the Fed’s monetary policy strategy could be enhanced, and such errors be avoided with guidance from a simple natural growth targeting rule that prescribes that the federal funds rate during each quarter be raised (cut) when projected nominal income growth exceeds (falls short) of the economy’s natural growth rate. An illustration with real-time data and forecasts since the early 1990s shows that Fed policy has not persistently deviated from this simple rule with the notable exception of the period coinciding with the Fed’s post-pandemic policy error.
Highlights
• Six Newton methods for solving matrix quadratic equations in linear DSGE models.
• Compared to QZ using 99 different DSGE models including Smets and Wouters (2007).
• Newton methods more accurate than QZ with comparable computation burden.
• Apt for refining solutions from alternative methods or nearby parameterizations.
Abstract
This paper presents and compares Newton-based methods from the applied mathematics literature for solving the matrix quadratic that underlies the recursive solution of linear DSGE models. The methods are compared using nearly 100 different models from the Macroeconomic Model Data Base (MMB) and different parameterizations of the monetary policy rule in the medium-scale New Keynesian model of Smets and Wouters (2007) iteratively. We find that Newton-based methods compare favorably in solving DSGE models, providing higher accuracy as measured by the forward error of the solution at a comparable computation burden. The methods, however, suffer from their inability to guarantee convergence to a particular, e.g. unique stable, solution, but their iterative procedures lend themselves to refining solutions either from different methods or parameterizations.
The Eurosystem and the Deutsche Bundesbank will incur substantial losses in 2023 that are likely to persist for several years. Due to the massive purchases of securities in the last 10 years, especially of government bonds, the banks' excess reserves have risen sharply. The resulting high interest payments to the banks since the turnaround in monetary policy, with little income for the large-scale securities holdings, led to massive criticism. The banks were said to be making "unfair" profits as a result, while the fiscal authorities had to forego the previously customary transfers of central bank profits. Populist demands to limit bank profits by, for example, drastically increasing the minimum reserve ratios in the Eurosystem to reduce excess reserves are creating new severe problems and are neither justified nor helpful. Ultimately, the EU member states have benefited for a very long time from historically low interest rates because of the Eurosystem's extraordinary loose monetary policy and must now bear the flip side consequences of the massive expansion of central bank balance sheets during the necessary period of monetary policy normalisation.
Central banks sowing the seeds for a green financial sector? NGFS membership and market reactions
(2024)
In December 2017, during the One Planet Summit in Paris, a group of eight central banks and supervisory authorities launched the “Network for Greening the Financial Sector” (NGFS) to address challenges and risks posed by climate change to the global financial system. Until 06/2023 an additional 69 central banks from all around the world have joined the network. We find that the propensity to join the network can be described as a function in the country’s economic development (e.g., GDP per capita), national institutions (e.g., central bank independence), and performance of the central bank on its mandates (e.g., price stability and output gap). Using an event study design to examine consequences of network expansions in capital markets, we document that a difference portfolio that is long in clean energy stocks and short in fossil fuel stocks benefits from an enlargement of the NGFS. Overall, our results suggest that an increasing number of central banks and supervisory authorities are concerned about climate change and willing to go beyond their traditional objectives, and that the capital market believes they will do so.
The complexities of geopolitical events, financial and fiscal crises, and the ebb and flow of personal life circumstances can weigh heavily on individuals’ minds as they make critical economic decisions. To investigate the impact of cognitive load on such decisions, the authors conducted an incentivized online experiment involving a representative sample of 2,000 French households. The results revealed that exposure to a taxing and persistent cognitive load significantly reduced consumption, particularly for individuals under the threat of furlough, while simultaneously increasing their account balances, particularly for those not facing such employment uncertainty. These effects were not driven by supply constraints or a worsening of credit constraints. Instead, cognitive load primarily affected the optimality of the chosen policy rules and impaired the ability of the standard economic model to accurately predict consumption patterns, although this effect was less pronounced among college-educated subjects
We investigate how unconventional monetary policy, via central banks’ purchases of corporate bonds, unfolds in credit-saturated markets. While this policy results in a loosening of credit market conditions as intended by policymakers, we report two unintended side effects. First, the policy impacts the allocation of credit among industries. Affected banks reallocate loans from investment-grade firms active on bond markets almost entirely to real estate asset managers. Other industries do not obtain more loans, particularly real estate developers and construction firms. We document an increase in real estate prices due to this policy, which fuels real estate overvaluation. Second, more loan write-offs arise from lending to these firms, and banks are not compensated for this risk by higher interest rates. We document a drop in bank profitability and, at the same time, a higher reliance on real estate collateral. Our findings suggest that central banks’ quantitative easing has substantial adverse effects in credit-saturated economies.
This paper applies structure preserving doubling methods to solve the matrix quadratic underlying the recursive solution of linear DSGE models. We present and compare two Structure-Preserving Doubling Algorithms ( SDAs) to other competing methods – the QZ method, a Newton algorithm, and an iterative Bernoulli approach – as well as the related cyclic and logarithmic reduction algorithms. Our comparison is completed using nearly 100 different models from the Macroeconomic Model Data Base (MMB) and different parameterizations of the monetary policy rule in the medium scale New Keynesian model of Smets and Wouters (2007) iteratively. We find that both SDAs perform very favorably relative to QZ, with generally more accurate solutions computed in less time. While we collect theoretical convergence results that promise quadratic convergence rates to a unique stable solution, the algorithms may fail to converge when there is a breakdown due to singularity of the coefficient matrices in the recursion. One of the proposed algorithms can overcome this problem by an appropriate (re)initialization. This SDA also performs particular well in refining solutions of different methods or from nearby parameterizations.
Whatever it takes to understand a central banker : embedding their words using neural networks
(2023)
Dictionary approaches are at the forefront of current techniques for quantifying central bank communication. In this paper, the author propose a novel language model that is able to capture subtleties of messages such as one of the most famous sentences in central bank communications when ECB President Mario Draghi stated that "within [its] mandate, the ECB is ready to do whatever it takes to preserve the euro".
The authors utilize a text corpus that is unparalleled in size and diversity in the central bank communication literature, as well as introduce a novel approach to text quantication from computational linguistics. This allows them to provide high-quality central bank-specific textual representations and demonstrate their applicability by developing an index that tracks deviations in the Fed's communication towards inflation targeting. Their findings indicate that these deviations in communication significantly impact monetary policy actions, substantially reducing the reaction towards inflation deviation in the US.
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.
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.
This paper studies the macro-financial implications of using carbon prices to achieve ambitious greenhouse gas (GHG) emission reduction targets. My empirical evidence shows a 0.6% output loss and a rise of 0.3% in inflation in response to a 1% shock on carbon policy. Furthermore, I also observe financial instability and allocation effects between the clean and highly polluted energy sectors. To have a better prediction of medium and long-term impact, using a medium-large macro-financial DSGE model with environmental aspects, I show the recessionary effect of an ambitious carbon price implementation to achieve climate targets, a 40% reduction in GHG emission causes a 0.7% output loss while reaching a zero-emission economy in 30 years causes a 2.6% output loss. I document an amplified effect of the banking sector during the transition path. The paper also uncovers the beneficial role of pre-announcements of carbon policies in mitigating inflation volatility by 0.2% at its peak, and our results suggest well-communicated carbon policies from authorities and investing to expand the green sector. My findings also stress the use of optimal green monetary and financial policies in mitigating the effects of transition risk and assisting the transition to a zero-emission world. Utilizing a heterogeneous approach with macroprudential tools, I find that optimal macroprudential tools can mitigate the output loss by 0.1% and investment loss by 1%. Importantly, my work highlights the use of capital flow management in the green transition when a global cooperative solution is challenging.
The debate on monetary and fiscal policy is heavily influenced by estimates of the equilibrium real interest rate. In particular, this concerns estimates derived from a simple aggregate demand and Phillips curve model with time-varying components as proposed by Laubach and Williams (2003). For example, Summers (2014a) refers to these estimates as important evidence for a secular stagnation and the need for fiscal stimulus. Yellen (2015, 2017) has made use of such estimates in order to explain and justify why the Federal Reserve has held interest rates so low for so long. First, we re-estimate the United States equilibrium rate with the methodology of Laubach and Williams (2003). Then, we build on their approach and an alternative specification to provide new estimates for the United States, Germany, the euro area and Japan. Third, we subject these estimates to a battery of sensitivity tests. Due to the great uncertainty and sensitivity that accompany these equilibrium rate estimates, the observed decline in the estimates is not a reliable indicator of a need for expansionary monetary and fiscal policy. Yet, if these 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.
The forward guidance trap
(2023)
This paper examines the policy experience of the Fed, ECB and BOJ during and after the Covid-19 pandemic and draws lessons for monetary policy strategy and ist communication. All three central banks provided appropriate accommodation during the pandemic but two failed to unwind this accommodation in a timely manner. The Fed and ECB guided real interest rates to inappropriately negative levels as the economy recovered from the pandemic, fueling high inflation. The policy error can be traced to decisions regarding forward guidance on policy rates that delayed lift-off while the two central banks continued to expand their balance sheets. The Fed and the ECB fell into the forward guidance trap. This could have been avoided if policy were guided by a forward- looking rule that properly adjusted the nominal interest rate with the evolution of the inflation outlook.