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On November 8, 2013, several members of the British House of Lords’ Subcommittee A conducted a hearing at the ECB in Frankfurt, Germany, on “Genuine Economic and Monetary Union and its Implications for the UK”. Professors Otmar Issing and Jan Pieter Krahnen were called as expert witnesses.
The testimony began with a general discussion on the elements considered necessary for a functioning internal market. Do economic union and monetary union require a fiscal union or even a political union, beyond the elements of the banking union currently being prepared? In this context, also the critique of the German current account surplus and the international expectations that Germany stimulate internal demand to support growth in crisis countries, were discussed.
With regard to the monetary union, the members of the subcommittee asked for an assessment of how European nations and the banking industry would have fared in the banking crisis that followed the Lehman collapse, had there not been a common currency. Given the important role that the ECB has played in the course of the crisis management, the members further asked for an evaluation of the OMT-program of the ECB and also if the monetary union is in need of common debt instruments, in order to provide the ECB with the possibility of buying EU liabilities, comparable to the Fed buying US Treasury bonds. Finally, the dual role of the ECB for monetary policy and banking supervision was an issue touched on by several questions.
After the Global Financial Crisis a controversial rush to fiscal austerity followed in many countries. Yet research on the effects of austerity on macroeconomic aggregates was and still is unsettled, mired by the difficulty of identifying multipliers from observational data. This paper reconciles seemingly disparate estimates of multipliers within a unified and state-contingent framework. We achieve identification of causal effects with new propensity-score based methods for time series data. Using this novel approach, we show that austerity is always a drag on growth, and especially so in depressed economies: a one percent of GDP fiscal consolidation translates into 4 percent lower real GDP after five years when implemented in the slump rather than the boom. We illustrate our findings with a counterfactual evaluation of the impact of the U.K. government’s shift to austerity policies in 2010 on subsequent growth.
This paper empirically tests the role of bank lending tightening on non-financial corporate (NFC) bond issuance in the eurozone. By utilizing a unique data set provided by the ECB Bank Lending Survey, we capture the "pure" credit supply effect on corporate external financing. We find that tightened credit standards positively affect the NFC bond issuance: A 1pp increase in banks reporting considerable tightening on loans leads to around a 7% increase in firms' bond issuance in the eurozone. Focusing on a spectrum of aspects contributing to bank credit tightening, we document that banks' balance sheet constraints, as well as the perception of risk lead to significantly higher NFC bond issuance. In addition, we show that stricter lending conditions, such as wider margins, higher collateral requirements and covenants significantly increase NFC bond issuance volumes too. Furthermore, the impact of bank credit tightening on firms' bond issuance is particularly observable in core eurozone countries and not in peripheral countries. This is partially due to the underdeveloped of debt capital markets in the peripheral countries.
This article examines how the shale oil revolution has shaped the evolution of U.S. crude oil and gasoline prices. It puts the evolution of shale oil production into historical perspective, highlights uncertainties about future shale oil production, and cautions against the view that the U.S. may become the next Saudi Arabia. It then reviews the role of the ban on U.S. crude oil exports, of capacity constraints in refining and transporting crude oil, of differences in the quality of conventional and unconventional crude oil, and of the recent regional fragmentation of the global market for crude oil for the determination of U.S. oil and gasoline prices. It discusses the reasons for the persistent wedge between U.S. crude oil prices and global crude oil prices in recent years and for the fact that domestic oil prices below global levels need not translate to lower U.S. gasoline prices. It explains why the shale oil revolution unlike the shale gas revolution is unlikely to stimulate a boom in oil-intensive manufacturing industries. It also explores the implications of shale oil production for the transmission of oil price shocks to the U.S. economy.
Although oil price shocks have long been viewed as one of the leading candidates for explaining U.S. recessions, surprisingly little is known about the extent to which oil price shocks explain recessions. We provide the first formal analysis of this question with special attention to the possible role of net oil price increases in amplifying the transmission of oil price shocks. We quantify the conditional recessionary effect of oil price shocks in the net oil price increase model for all episodes of net oil price increases since the mid-1970s. Compared to the linear model, the cumulative effect of oil price shocks over course of the next two years is much larger in the net oil price increase model. For example, oil price shocks explain a 3% cumulative reduction in U.S. real GDP in the late 1970s and early 1980s and a 5% cumulative reduction during the financial crisis. An obvious concern is that some of these estimates are an artifact of net oil price increases being correlated with other variables that explain recessions. We show that the explanatory power of oil price shocks largely persists even after augmenting the nonlinear model with a measure of credit supply conditions, of the monetary policy stance and of consumer confidence. There is evidence, however, that the conditional fit of the net oil price increase model is worse on average than the fit of the corresponding linear model, suggesting much smaller cumulative effects of oil price shocks for these episodes of at most 1%.
In this paper we argue that very high marginal labor income tax rates are an effective tool for social insurance even when households have preferences with high labor supply elasticity, make dynamic savings decisions, and policies have general equilibrium effects. To make this point we construct a large scale Overlapping Generations Model with uninsurable labor productivity risk, show that it has a wealth distribution that matches the data well, and then use it to characterize fiscal policies that achieve a desired degree of redistribution in society. We find that marginal tax rates on the top 1% of the earnings distribution of close to 90% are optimal. We document that this result is robust to plausible variation in the labor supply elasticity and holds regardless of whether social welfare is measured at the steady state only or includes transitional generations.
We characterize optimal redistribution in a dynastic family model with human capital. We show how a government can improve the trade-off between equality and incentives by changing the amount of observable human capital. We provide an intuitive decomposition for the wedge between human-capital investment in the laissez faire and the social optimum. This wedge differs from the wedge for bequests because human capital carries risk: its returns depend on the non-diversi
able risk of children's ability. Thus, human capital investment is encouraged more than bequests in the social optimum if human capital is a bad hedge for consumption risk.
This paper explores consequences of consumer education on prices and welfare in retail financial markets when some consumers are naive about shrouded add-on prices and firms try to exploit it. Allowing for different information and pricing strategies we show that education is unlikely to push firms to disclose prices towards all consumers, which would be socially efficient. Instead, price discrimination emerges as a new equilibrium. Further, due to a feedback on prices, education that is good for consumers who become sophisticated may be bad for consumers who stay naive and even for the group of all consumers as a whole
Most simulated micro-founded macro models use solely consumer-demand aggregates in order to estimate deep economy-wide preference parameters, which are useful for policy evaluation. The underlying demand-aggregation properties that this approach requires, should be easy to empirically disprove: since household-consumption choices differ for households with more members, aggregation can be rejected if appropriate data violate an affine equation regarding how much individuals benefit from within-household sharing of goods. We develop a survey method that tests the validity of this equation, without utility-estimation restrictions via models. Surprisingly, in six countries, this equation is not rejected, lending support to using consumer-demand aggregates.
Advertising arbitrage
(2014)
Speculators often advertise arbitrage opportunities in order to persuade other investors and thus accelerate the correction of mispricing. We show that in order to minimize the risk and the cost of arbitrage an investor who identifies several mispriced assets optimally advertises only one of them, and overweights it in his portfolio; a risk-neutral arbitrageur invests only in this asset. The choice of the asset to be advertised depends not only on mispricing but also on its "advertisability" and accuracy of future news about it. When several arbitrageurs identify the same arbitrage opportunities, their decisions are strategic complements: they invest in the same asset and advertise it. Then, multiple equilibria may arise, some of which inefficient: arbitrageurs may correct small mispricings while failing to eliminate large ones. Finally, prices react more strongly to the ads of arbitrageurs with a successful track record, and reputation-building induces high-skill arbitrageurs to advertise more than others.