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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.
One of the motivations for establishing a European banking union was the desire to break the ties with between national regulators and domestic financial institutions in order to prevent regulatory capture. However, supervisory authority over the financial sector at the national level can also have valuable public benefits. The aim of this policy letter is to detail these public benefits in order to counter discussions that focus only on conflicts of interest. It is informed by an analysis of how financial institutions interacted with policy-makers in the design of national bank rescue schemes in response to the banking crisis of 2008. Using this information, it discusses the possible benefits of close cooperation between financial institutions and regulators and analyzes these in the wake of a European banking union.
Freiburg School of Law and Economics, Freiburg (Lehrstuhl-)Tradition and the Genesis of Norms
(2014)
The paper analyzes the parallels and differences between the Freiburg School of Law and Economics represented by the works of Eucken (and Röpke) and the Freiburg (Lehrstuhl-)Tradition represented by the works of Hayek and Vanberg. The parallels are illustrated by making use of the constitutional economics concepts Ordnungspolitik (i.e., order of rules/choices over rules) as well as freedom of privileges and discrimination. The differences, which have received surprisingly little attention, include the following aspects: 1. philosophy of science and epistemology, 2. genesis of norms, and 3. political philosophy. The paper tackles these issues in three steps. The second chapter presents Vanberg’s constitutional economics theory with special emphasis on the concepts of citizen sovereignty and normative individualism. The third chapter reviews the ordoliberal concepts of science and the state which are – to a certain degree – elitist and expertocratic, that is, they rely to a considerable degree on intellectual experts (in particular, scientists) being part of the societal elite. The fourth chapter differentiates two kinds of genesis of norms: an evolutionary one and an elitist-expertocratic one allowing for a differentiation between Eucken’s and Röpke’s Ordoliberalism on the on the hand and Vanberg’s Hayekian -- and Buchanan-style constitutional economics approach on the other hand. The paper ends with a summary of the main findings.
We analyze the risk premium on bank bonds at origination with a special focus on the role of implicit and explicit public guarantees and the systemic relevance of the issuing institutions. By looking at the asset swap spread on 5,500 bonds, we find that explicit guarantees and sovereign creditworthiness have a substantial effect on the risk premium. In addition, while large institutions still enjoy lower issuance costs linked to the TBTF framework, we find evidence of enhanced market disciple for systemically important banks which face, since the onset of the financial crisis, an increased premium on bond placements.
This paper is the first to conduct an incentive-compatible experiment using real monetary payoffs to test the hypothesis of probabilistic insurance which states that willingness to pay for insurance decreases sharply in the presence of even small default probabilities as compared to a risk-free insurance contract. In our experiment, 181 participants state their willingness to pay for insurance contracts with different levels of default risk. We find that the willingness to pay sharply decreases with increasing default risk. Our results hence strongly support the hypothesis of probabilistic insurance. Furthermore, we study the impact of customer reaction to default risk on an insurer’s optimal solvency level using our experimentally obtained data on insurance demand. We show that an insurer should choose to be default-free rather than having even a very small default probability. This risk strategy is also optimal when assuming substantial transaction costs for risk management activities undertaken to achieve the maximum solvency level.
SAFE Newsletter : 2014, Q4
(2014)
SAFE Newsletter : 2014, Q3
(2014)
SAFE Newsletter : 2014, Q2
(2014)
SAFE Newsletter : 2014, Q1
(2014)