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We examine the impact of increasing competition among the fastest traders by analyzing a new low-latency microwave network connecting exchanges trading the same stocks. Using a difference-in-differences approach comparing German stocks with similar French stocks, we find improved market integration, faster incorporation of stock-specific information, and an increased contribution to price discovery by the smaller exchange. Liquidity worsens for large caps due to increased sniping but improves for mid caps due to fast liquidity provision. Trading volume on the smaller exchange declines across all stocks. We thus uncover nuanced effects of fast trader participation that depend on their prior involvement.
This paper investigates the implications of monetary policy rules during the surge and subsequent decline of inflation in the euro area and compares them to the interest rate decisions of the European Central Bank (ECB). It focuses on versions of the Taylor (1993) and Orphanides and Wieland (OW) (2013) rules. Rules that respond to recent outcomes of HICP Core or domestic inflation data called for raising interest rates in 2021 and well ahead of the rate increases implemented by the ECB. Thus, such simple outcome-based policy rules deserve more attention in the ECB’s monetary policy strategy. Interestingly, the rules support the recent shift of the ECB to policy easing. Yet, they add a note of caution by suggesting that policy rates should not decline as fast as apparently anticipated by traded derivative-based interest rate forecasts.
We show that exposure to anti-capitalist ideology can exert a lasting influence on attitudes towards capital markets and stock-market participation. Utilizing novel survey, bank, and broker data, we document that, decades after Germany's reunification, East Germans invest significantly less in stocks and hold more negative views on capital markets. Effects vary by personal experience under communism. Results are strongest for individuals remembering life in the German Democratic Republic positively, e. g., because of local Olympic champions or living in a "showcase city". Results reverse for those with negative experiences like religious oppression, environmental pollution, or lack of Western TV entertainment.
We examine the effect of personal, two-way communication on the payment behavior of delinquent borrowers. Borrowers who speak with a randomly assigned bank agent are significantly more likely to successfully resolve the delinquency relative to borrowers who do not speak with a bank agent. Call characteristics related to the human touch of the call, such as the likeability of the agent’s voice, significantly affect payment behavior. Borrowers who speak with a bank agent are also significantly less likely to become delinquent again. Our findings highlight the value of a human element in interactions between financial institutions and their customers.
Die Zustandsbeschreibung der aktuellen gesellschaftlichen und wirtschaftlichen Lage als geprägt durch multiple Schocks und Krisen erscheint heutzutage redundant, nahezu banal. Umso wichtiger ist es aber für politische Entscheider einen Umgang mit der sich daraus ergebenden Unsicherheit zu finden, der weder der Komplexität der Probleme mit immer komplexeren Modellen beikommen möchte noch sich durch die Größe der Krise zur übergroßen vermeintlichen politischen Lösung verleiten lässt. Stattdessen täte die Politik gut daran, die beschränkten Möglichkeiten und die ungewissen Folgen ihrer Handlungen klar zu kommunizieren, qualitative wie quantitative Bewertungen in Entscheidungen einfließen zu lassen und in diesem Sinne wirtschaftspolitische Interventionen zurückhaltend vorzunehmen.
Banking Union is crucial for European integration, ensuring financial stability in the single market for financial services. The Court of Justice of the European Union (CJEU) plays an essential role in interpreting and enforcing the legal framework of the Banking Union, especially regarding the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM). This in-depth analysis scrutinises the pertinent CJEU case law and highlights its implications for the Banking Union and the EU legal order.
This document was provided/prepared by the Economic Governance and EMU Scrutiny Unit at the request of the ECON Committee.
We provide empirical evidence that the pricing of green bonds tends to be highly sophisticated and based on a two-tiered approach. When buying a green bond, investors do not look only at the green label of the bond but also consider additional characteristics that involve the soundness of the underlying project and the environmental score of the issuer. By comparing the yields at issuance of green bonds to those of a matched control sample of conventional bonds, we identify a premium of 16 basis points for the green label alone. However, when the environmental score of the issuer is in the top tercile of the cross-sectional distribution, the greenium increases up to doubling. Green certification and periods of heightened climate uncertainty also significantly influence the size of the greenium. Additionally, we find that this pricing mechanism fully emerged only after the Paris Agreement came into force in late 2016.
We provide evidence on narratives about the macroeconomy - the stories people tell to explain macroeconomic phenomena - in the context of a historic surge in inflation. In surveys with more than 10,000 US households and 100 academic experts, we measure economic narratives in open-ended survey responses and represent them as Directed Acyclic Graphs. Households' narratives are strongly heterogeneous, coarser than experts' narratives, focus more on the supply side than on the demand side, and often feature politically loaded explanations. Households' narratives matter for their inflation expectation formation, which we demonstrate with descriptive survey data and a series of experiments. Informed by these findings, we incorporate narratives into an otherwise conventional New Keynesian model and demonstrate their importance for aggregate outcomes.
We examine the evolution of spatial house price dispersion during Germany's recent housing boom. Using a dataset of sales listings, we find that house price dispersion has significantly increased, which is driven entirely by rising price variation across postal codes. We show that both price divergence across labor market regions and widening spatial price variation within these regions are important factors for this trend. We propose and estimate a directed search model of the housing market to understand the driving forces of rising spatial price dispersion, highlighting the role of housing supply, housing demand and frictions in the matching process between buyers and sellers. While both shifts in housing supply and housing demand matter for overall price increases and for regional divergence, we find that variation in housing demand is the primary factor contributing to the widening spatial dispersion within labor market regions.
Helmut Schlesinger: Wegbereiter und Garant der deutschen Geld- und Stabilitätspolitik wird 100
(2024)
Am 4. September 2024 vollendet Professor Dr. Helmut Schlesinger sein 100. Lebensjahr. Von 1991 bis 1993 bekleidete er das Amt des Präsidenten der Deutschen Bundesbank. Zuvor war er in verschiedenen Positionen für die Bank tätig, unter anderem als langjähriger Vizepräsident (von 1980 bis 1991) sowie als Leiter der Hauptabteilung Volkswirtschaft und Statistik. Das Jubiläum bietet Anlass, sein Lebenswerk zu beschreiben und zu würdigen. Für ehemalige Mitarbeiter war Helmut Schlesinger ein großes Vorbild und eine Quelle des Ansporns in vielerlei Hinsicht. Insbesondere vier Bereiche seiner Tätigkeiten haben die Arbeit seiner Mitarbeiter maßgeblich geprägt: Erstens seine Fähigkeit, ökonomisches Denken als eine Synthese aus Analyse und Statistik zu begreifen, zu vermitteln und zu organisieren, zweitens sein Verdienst, eine Stabilitätskultur in leitenden Positionen mitgeschaffen und bewahrt zu haben, drittens sein ordnungspolitisches Credo zur Preisstabilität und zur Unabhängigkeit der Zentralbank sowie viertens seine klaren Vorstellungen zu den Bedingungen einer erfolgreichen Europäischen Wirtschafts- und Währungsunion.
Im Folgenden soll ein Überblick über diese vier Schwerpunkte seiner Schaffensbilanz gegeben werden. In diesem Kontext ist insbesondere Schlesingers entscheidende Rolle bei der Schaffung der deutsch-deutschen Währungsunion 1990 sowie beim langjährigen Entstehungsprozess des Eurosystems und der Europäischen Zentralbank hervorzuheben. In der deutschen Bevölkerung, aber auch international hoch geachtet, wurde Helmut Schlesinger oft als die "Seele der Bundesbank" bezeichnet.Die Anforderungen, die er an jeden Einzelnen stellte, waren hoch. Er wurde von den Mitarbeitern sehr geschätzt, nicht zuletzt aufgrund seines großen Arbeitsethos und seiner unermüdlichen Schaffenskraft, die von Beständigkeit, Gradlinigkeit und Prinzipientreue geprägt waren.
I provide a solution method in the frequency domain for multivariate linear rational expectations models. The method works with the generalized Schur decomposition, providing a numerical implementation of the underlying analytic function solution methods suitable for standard DSGE estimation and analysis procedures. This approach generalizes the time-domain restriction of autoregressive-moving average exogenous driving forces to arbitrary covariance stationary processes. Applied to the standard New Keynesian model, I find that a Bayesian analysis favors a single parameter log harmonic function of the lag operator over the usual AR(1) assumption as it generates humped shaped autocorrelation patterns more consistent with the data.
The lack of a European Deposit Insurance Scheme (EDIS) – often referred to as the ‘third pillar’ of Banking Union – has been criticized since the inception of the EU Banking Union. The Crisis Management and Deposit Insurance (CMDI) framework needs to rely heavily on banks’ internal loss absorbing capacity and provides little flexibility in terms of industry resolution funding. This design has, among others, led to the rare application of the CMDI, particularly in the case of small and medium sized retail banks. This reluctance of resolution authorities weakens any positive impact the CMDI may have on market discipline and ultimately financial stability. After several national governments pushed back against the establishment of an EDIS, the Commission recently took a different approach and tried to reform the CMDI comprehensively, without seeking to erect a ‘third pillar’. The overarching rationale of the CMDI Proposal is to make resolution funding more flexible. To this end, the proposal seeks to facilitate contributions from (national) deposit guarantee schemes (DGS). At the same time, the CMDI Proposal tries to broaden the scope of resolution to include smaller and medium sized banks. This paper provides an assessment of the CMDI Proposal. It argues that the CMDI Proposal is a step in the right direction but cannot overcome fundamental deficiencies in the design of the Banking Union.
The lack of a European Deposit Insurance Scheme (EDIS) – often referred to as the ‘third pillar’ of Banking Union – has been criticized since the inception of the EU Banking Union. The Crisis Management and Deposit Insurance (CMDI) framework needs to rely heavily on banks’ internal loss absorbing capacity and provides little flexibility in terms of industry resolution funding. This design has, among others, led to the rare application of the CMDI, particularly in the case of small and medium sized retail banks. This reluctance of resolution authorities weakens any positive impact the CMDI may have on market discipline and ultimately financial stability. After several national governments pushed back against the establishment of an EDIS, the Commission recently took a different approach and tried to reform the CMDI comprehensively, without seeking to erect a ‘third pillar’. The overarching rationale of the CMDI Proposal is to make resolution funding more flexible. To this end, the proposal seeks to facilitate contributions from (national) deposit guarantee schemes (DGS). At the same time, the CMDI Proposal tries to broaden the scope of resolution to include smaller and medium sized banks. This paper provides an assessment of the CMDI Proposal. It argues that the CMDI Proposal is a step in the right direction but cannot overcome fundamental deficiencies in the design of the Banking Union.
Cross-predictability denotes the fact that some assets can predict other assets' returns. I propose a novel performance-based measure that disentangles the economic value of cross-predictability into two components: the predictive power of one asset's signal for other assets' returns (cross-predictive signals) and the amount of an asset's return explained by other assets' signals (cross-predicted returns). Empirically, the latter component dominates the former in the overall cross-prediction effects. In the crosssection, cross-predictability gravitates towards small firms that are strongly mispriced and difficult to arbitrage, while it becomes more difficult to cross-predict returns when market capitalization and book-to-market ratio rise.
This paper examines the dynamic relationship between firm leverage and risktaking. We embed the traditional agency problem of asset substitution within a multi-period model, revealing a U-shaped relationship between leverage and risktaking, evident in data from both the U.S. and Europe. Firms with medium leverage avoid risk to preserve the option of issuing safe debt in the future. This option is valuable because safe debt does not incur the expected cost of bankruptcy, anticipated by debt-holders due to future risk-taking incentives. Our model offers new insights on the interaction between companies' debt financing and their risk profiles.
Libra — a global virtual currency project initiated by Facebook — has been the subject of many controversial discussions since its announcement in June 2019. This paper provides a differentiated view on Libra, recognising that different development scenarios of Libra are conceivable. Libra could serve purely as an alternative payment system in combination with a dedicated payment token, the Libra coin. Alternatively, the Libra project could develop into a broader financial infrastructure for advanced financial services such as savings and loan products operating on the Libra Blockchain. Based on a comparison of the Libra architecture with other cryptocurrencies, the opportunities and challenges for the development of the respective Libra ecosystems are investigated from a commercial, regulatory and monetary policy perspective.
The importance of agile methods has increased in recent years, not only to manage IT projects but also to establish flexible and adaptive organisational structures, which are essential to deal with disruptive changes and build successful digital business strategies. This paper takes an industry-specific perspective by analysing the dissemination, objectives and relative popularity of agile frameworks in the German banking sector. The data provides insights into expectations and experiences associated with agile methods and indicates possible implementation hurdles and success factors. Our research provides the first comprehensive analysis of agile methods in the German banking sector. The comparison with a selected number of fintechs has revealed some differences between banks and fintechs. We found that almost all banks and fintechs apply agile methods in IT projects. However, fintechs have relatively more experience with agile methods than banks and use them more intensively. Scrum is the most relevant framework used in practice. Scaled agile frameworks are so far negligible in the German banking sector. Acceleration of projects is apparently the most important objective of deploying agile methods. In addition, agile methods can contribute to cost savings and lead to improved quality and innovation performance, though for banks it is evidently more challenging to reach their respective targets than for fintechs. Overall our findings suggest that German banks are still in a maturing process of becoming more agile and that there is room for an accelerated adoption of agile methods in general and scaled agile frameworks in particular.
The financial sector plays an important role in financing the green transformation. Various regulatory initiatives in the EU aim to improve transparency in relation to the sustainability of financial products and the sustainability of economic activities of non-financial and financial undertakings. For credit institutions, the Green Asset Ratio (GAR) has been established by the European regulatory authorities as a key performance indicator (KPI) for measuring the proportion of Taxonomy-aligned on-balance-sheet exposure in relation to the total assets. The breakdown of the total GAR by type of counterparty, environmental objective and type of asset provides in-depth information about the sustainability profile of a credit institution. This information, which has not been available to date, may also initiate discussions between management and shareholders or other stakeholders regarding the future sustainability strategy of credit institutions. This paper provides an overview of the regulatory background and the method of calculating the GAR along different dimensions. Finally, the potential benefits and limitations of the GAR are discussed.
Advances in distributed ledger technology are leading to a growing decentralisation of financial services (“decentralised finance”) that can be offered largely without intermediation by financial institutions. An important driver for this development is the ongoing tokenisation of assets, payments and rights, which enables the digital encryption of “crypto assets” on distributed ledgers. This article elaborates the foundations and fields of application of decentralised financial services with crypto assets that could challenge the established business models of financial institutions. This trend not only affects payment systems based on controversial crypto currencies such as Bitcoin, but also exchange platforms, capital markets solutions and corporate financing. A rapidly growing ecosystem of start-ups, tech companies and financial institutions is emerging, yet this ecosystem lacks a consistent regulatory framework. The European initiative MiCA (Markets in Crypto Assets) points in the right direction but needs to be adopted soon to ensure the future competitiveness of the European financial sector.
The financial sector plays an important role in supporting the green transformation of the European economy. A critical assessment of the current regulatory framework for sustainable finance in Europe leads to ambiguous results. Although the level of transparency on environmental, social and governance aspects of financial products has improved significantly, it is questionable whether the complex, mainly disclosure-oriented architecture is sufficient to mobilise more private capital into sustainable investments. It should be discussed whether a minimum taxonomy ratio or Green Asset Ratio has to be fulfilled to market a financial product as “green”. Furthermore, because of the high complexity of the regulation, it could be helpful for private investors to establish a simplified green rating, based on the taxonomy ratio, to facilitate the selection of green financial products.
With a notional amount outstanding of more than USD 500 trillion, the market for OTC derivatives is of vital importance for global financial stability. A growing proportion of these contracts are cleared via central counterparties (CCPs), which means that CCPs are gaining in importance as critical financial market infrastructures. At the same time, there is growing concern that a new „too big to fail" problem could arise, as the CCP industry is highly concentrated due to economies of scale. From a European perspective, it should be noted that the clearing of euro-denominated OTC derivatives mainly takes place in London, hence outside the EU in the foreseeable future. For some time there has been a controversial discussion as to whether this can remain the case post Brexit. CCPs, which clear a significant proportion of euro OTC derivatives and are systemically relevant from an EU perspective, should be subject to direct supervision by EU authorities and should be established in the EU. This would represent an important building block for a future Capital Markets Union in Europe, as regulatory or supervisory arbitrage in favour of systemically important third-country CCPs could be prevented. In addition, if a systemically relevant CCP handling a considerable portion of the euro OTC derivatives business were to run into serious difficulties, this may impact ECB monetary policy. This applies both to demand for central bank money and to the transmission of monetary policy measures, which can be significantly impaired, particularly in the event that the repo market or payment systems are disrupted. It is therefore essential for the ECB to be closely involved in the supervision of CCPs. Against this background, the draft amendment of EMIR (European Market Infrastructure Regulation) presented on 13 June 2017 is a step in the right direction. In addition, there is an urgent need to introduce a recovery and resolution mechanism for CCPs in the EU to complement the existing single resolution mechanism (SRM) for banks in the eurozone. Only then can the diverse interdependencies between banks and CCPs be adequately taken into account in the recovery and resolution programmes required in a financial crisis.
The German federal government intended to alleviate the burden of increasing fuel prices by introducing a temporary reduction of energy taxes on gasoline and diesel. In order to evaluate the impact of this measure on consumer prices at the filling stations the development of procurement costs for crude oil as well as the downstream development of refinery and distribution margins have to be taken into account. It turns out that about 80 % of the tax reduction has been passed on to end consumers on and around the effective date of the tax relief. However, within the first month the impact of the tax reduction has been wiped out for diesel completely as the gross margin of the mineral oil groups have substantially improved since then. On the other hand, for gasoline (E10) at least part of the impact can still be observed as the initial margin improvement has come down in the meantime. For a detailed analysis the German antitrust authority should look into the pricing algorithms of all 14,000 filling stations in Germany.
Mehr Nachhaltigkeit im deutschen Leitindex DAX : Reformvorschläge im Lichte des Wirecard-Skandals
(2020)
Im Rahmen der Aufarbeitung des Wirecard-Skandals wird auch eine Änderung der Kriterien zur Aufnahme in den deutschen Leitindex DAX diskutiert. Die bislang von der Deutschen Börse vorgesehenen Maßnahmen gehen in die richtige Richtung, sind aber nicht weitreichend genug. Es bedarf eines deutlichen Zeichens, dass sich künftig nur solche Unternehmen für den DAX qualifizieren können, die ein zumindest befriedigendes Maß an Nachhaltigkeit gemessen durch einen ESG-Risk-Score (Environment, Social, Governance) in ihrer Geschäftstätigkeit erreichen. Eine Simulation verdeutlicht, dass nach ESG-Kriterien seit langem kritisch betrachtete Unternehmen dem DAX nicht mehr angehören würden. Damit könnte mehr Kapital in nachhaltig wirtschaftende Unternehmen und Sektoren fließen.
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.
Experiments are an important tool in economic research. However, it is unclear to which extent the control of experiments extends to the perceptions subjects form of such experimental decision situations. This paper is the first to explicitly elicit perceptions of the dictator and trust game and shows that there is substantial heterogeneity in how subjects perceive the same game. Moreover, game perceptions depend not only on the game itself but also on the order of games (i.e., the broader experimental context in which the game is embedded) and the subject herself. This highlights that the control of experiments does not necessarily extend to game perceptions. The paper also demonstrates that perceptions are correlated with game behavior and moderate the relationship between game behavior and field behavior, thereby underscoring the importance and relevance of game perceptions for economic research.
This paper shows that support for climate action is high across survey participants from all EU countries in three dimensions: (1) Participants are willing to contribute personally to combating climate change, (2) they approve of pro-climate social norms, and (3) they demand government action. In addition, there is a significant perception gap where individuals underestimate others' willingness to contribute to climate action by over 10 percentage points, influencing their own willingness to act. Policymakers should recognize the broad support for climate action among European citizens and communicate this effectively to counteract the vocal minority opposed to it.
In recent decades, biodiversity has declined significantly, threatening ecosystem services that are vital to society and the economy. Despite the growing recognition of biodiversity risks, the private sector response remains limited, leaving a significant financing gap. The paper therefore describes market-based solutions to bridge the financing gap, which can follow a risk assessment approach and an impact-oriented perspective. Key obstacles to mobilising private capital for biodiversity conservation are related to pricing biodiversity due to its local dimension, the lack of standardized metrics for valuation and still insufficient data reporting by companies hindering informed investment decisions. Financing biodiversity projects poses another challenge, mainly due to a mismatch between investor needs and available projects, for example in terms of project timeframes and their additionality.
The development of China’s exports – is there a decoupling from the EU and the United States?
(2024)
Some observers warn that a high level of economic dependence on China could negatively affect the economic resilience of Western economies and therefore recommend reducing such dependence by gradually decoupling from China. On the other hand, industry leaders emphasise the economic importance of China and warn against any kind of trade conflicts.
Against this background, we briefly analyse the development of China’s export strategy. We find that the export intensity of the Chinese economy is diminishing and that exports are becoming more diversified overall. In addition, the relative importance of the United States and the European Union as export markets has been reduced, indicating a gradual decoupling of China from Western economies. Conversely, we find that exports to China have become more important, both for the EU and the United States. Although the figures remain at a non-critical level, Europe’s export activities could be more diversified as well.
How does the design of debt repayment schedules affect household borrowing? To answer this question, we exploit a Swedish policy reform that eliminated interest-only mortgages for loan-to-value ratios above 50%. We document substantial bunching at the threshold, leading to 5% lower borrowing. Wealthy borrowers drive the results, challenging credit constraints as the primary explanation. We develop a model to evaluate the mechanisms driving household behavior and find that much of the effect comes from households experiencing ongoing flow disutility to amortization payments. Our results indicate that mortgage contracts with low initial payments substantially increase household borrowing and lifetime interest costs.
We educate investors with significant dividend holdings about the benefits of dividend reinvestment and the costs of misperceiving dividends as additional, free income. The intervention increases planned dividend reinvestment in survey responses. Using trading records, we observe a corresponding causal increase in dividend reinvestment in the field of roughly 50 cents for every euro received. This holds relative to their prior behavior and a placebo sample. Investors who learned the most from the intervention update their trading by the largest extent. The results suggest the free dividends fallacy is a significant source of dividend demand. Our study demonstrates that simple, targeted, and focused educational interventions can affect investment behavior.
Inflation and trading
(2024)
We study how investors respond to inflation combining a customized survey experiment with trading data at a time of historically high inflation. Investors' beliefs about the stock return-inflation relation are very heterogeneous in the cross section and on average too optimistic. Moreover, many investors appear unaware of inflation-hedging strategies despite being otherwise well-informed about inflation and asset returns. Consequently, whereas exogenous shifts in inflation expectations do not impact return expectations, information on past returns during periods of high inflation leads to negative updating about the perceived stock-return impact of inflation, which feeds into return expectations and subsequent actual trading behavior.
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.
Almost ten years after the European Commission action plan on building a capital markets union (CMU) and despite incremental progress, e.g. in the form of the EU Listing Act, the picture looks dire. Stock exchanges, securities markets, and supervisory authorities remain largely national, and, in many cases, European companies have decided to exclusively list overseas. Notwithstanding the economic and financial benefits of market integration, CMU has become a geopolitical necessity. A unified capital market can bolster resilience, strategic autonomy, and economic sovereignty, reduce dependence on external funding, and may foster economic cooperation between member states.
The reason for the persistent stand-still in Europe’s CMU development is not so much the conflict between market- and state-based integration, but rather the hesitancy of national regulatory and supervisory bodies to relinquish powers. If EU member states wanted to get real about CMU (as they say, and as they should), they need to openly accept the loss of sovereignty that follows from a true unified capital market. Building on economic as well as historical evidence, the paper offers viable proposals on how to design competent institutions within the current European framework.
This note outlines the case for speedy capital market integration and for the adoption of a common regulatory framework and single supervisory authority from a political economy perspective. We also show the alternative case for harmonization and centralization via regulatory competition, elaborating how competition between EU jurisdictions by way of full mutual recognition may lead to a (cost-)efficient and standardized legal framework for capital markets. Lastly, the note addresses the political economy conflict that underpins the implementation of both models for integrating capital markets. We point out that, in both cases, national authorities experience a loss of legislative and jurisdictional competence at the national level. We predict that any plan to foster a stronger capital market union, following an institution based or a market-based strategy, will face opposition from powerful national stakeholders.
This study analyses potential consequences of exiting the Targeted Long-Term Refinancing Operations (TLTRO) of the European Central Bank (ECB). Thanks to its asset purchase programs, the Eurosystem still holds plenty of reserves even with a full exit from the TLTROs. This explains why voluntary and mandatory repayments of TLTRO III borrowing went smoothly. Nevertheless, the more liquidity is drained from the banking system, the more important becomes interbank market borrowing and lending, ideally between euro area member states. Right now, the usual fault lines of the euro area show up. The German banking system has plenty of reserves while there are first signs of aggregate scarcity in the Italian banking system. This does not need to be a source of concern if the interbank market can be sufficiently reactivated. Moreover, the ECB has several tools to address possible future liquidity shortages.
This document was provided/prepared by the Economic Governance and EMU scrutiny Unit at the request of the ECON Committee.
The economic rise of China has changed the global economy. The authors explore China’s transformation from a low-cost manufacturing hub to an increasingly innovation- and service-driven economy. Major growth drivers for the period 2010-2025 are analysed, including the paradigms of “Made in China” and the “Dual Circulation Strategy”. The export intensity of China’s economy is declining overall, with a tendency towards greater regional diversification and a gradual decoupling from North America and the European Union. At the same time, trade and investment activities are increasingly geared to the Belt and Road Initiative. Furthermore, labour and energy cost advantages for manufacturing operations in China are likely to diminish in the coming years, calling into question China’s attractiveness as a global manufacturing hub. In this regard, the further development of regional and industrial clusters is pivotal for China to enhance its global competitiveness and remain an attractive destination for foreign direct investment (FDI) in the medium term. On the other hand, high productivity in science and technology and rich deposits of critical minerals put China in a favourable position in advanced industries. Important challenges include the still wide development gap between rural and urban areas, the structural mismatch in the labour market, with persistently high youth unemployment, and the race to achieve carbon neutrality by 2060.
This paper studies whether Eurosystem collateral eligibility played a role in the portfolio choices of euro area asset managers during the “dash-for-cash” episode of 2020. We find that asset managers reduced their allocation to ECB-eligible corporate bonds, selling them in order to finance redemptions, while simultaneously increasing their cash holdings. These findings add nuance to previous studies of liquidity strains and price dislocations in the corporate bond market during the onset of the Covid-19 pandemic, indicating a greater willingness of dealers to increase their inventories of corporate bonds pledgeable with the ECB. Analysing the price impact of these portfolio choices, we also find evidence pointing to price pressure for both ECB-eligible and ineligible corporate bonds. Bonds that were held to a larger extent by investment funds in our sample experienced higher price pressure, although the impact was lower for ECB-eligible bonds. We also discuss broader implications for the related policy debate about how central banks could mitigate similar types of liquidity shocks.
What are the aggregate and distributional consequences of the relationship be-tween an individual’s social network and financial decisions? Motivated by several well-documented facts about the influence of social connections on financial decisions, we build and calibrate a model of stock market participation with a social network that emphasizes the interplay between connectivity and network structure. Since connections to informed agents help spread information, there is a pivotal role for factors that determine sorting among agents. An increase in the average number of connections raises the average participation rate, mostly due to richer agents. A higher degree of sorting benefits richer agents by creating clusters where information spreads more efficiently. We show empirical evidence consistent with the importance of connectivity and sorting. We discuss several new avenues for future research into the aggregate impact of peer effects in finance.
Looking beyond ESG preferences: The role of sustainable finance literacy in sustainable investing
(2024)
We assess how sustainable finance literacy affects people’s sustainable investment behavior, using a pre-registered experiment. We find that an increase in sustainable finance literacy leads to a 4 to 5% increase in the probability of investing sustainably. This effect is moderated by sustainability preferences. In the absence of moderate sustainability preferences, any additional increase in sustainable finance literacy is at minimum irrelevant, and we find some evidence that it might even reduce sustainable investments. Our findings underscore the role of knowledge in shaping sustainable investment decisions, highlighting the importance of factors beyond sustainability preferences.
We explore how personality traits are related to household borrowing behavior. Using survey data representative for the Netherlands, we consider the Big Five personality traits (openness, conscientiousness, agreeableness, extraversion and neuroticism), as well as the belief that one is master of one’s fate (locus of control). We hypothesize that personality traits can complement as well as substitute financial knowledge of a household. We present three sets of results. First, we find that personality traits are positively correlated with borrowing expectations. Locus of control, extraversion and agreeableness are correlated with informal borrowing expectations, which is the expectation that one can borrow from family and friends. With respect to expectations on the approval of a formal loan application, it is locus of control and conscientiousness that are positively associated. Effect sizes are large and economically meaningful. Second, we find that personality traits are important for borrowing constraints. A more internal locus of control and higher neuroticism are correlated with being denied for credit, as well as discouraged borrowing. Our third set of results reports findings on personality traits and loan regret, and how traits are correlated with dealing with loan troubles. Many households in our sample express regret (21%), but more open, more agreeable and more neurotic individuals are more likely to express regret. Our results are not driven by financial knowledge, time preferences or risk attitudes. Overall these findings imply that non-cognitive traits are important for borrowing behavior of households.
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.
This paper addresses the need for transparent sustainability disclosure in the European Auto Asset-Backed Securities (ABS) market, a crucial element in achieving the EU's climate goals. It proposes the use of existing vehicle identifiers, the Type Approval Number (TAN) and the Type-Variant-Version Code (TVV), to integrate loan-level data with sustainability-related vehicle information from ancillary sources. While acknowledging certain challenges, the combined use of TAN and TVV is the optimal solution to allow all stakeholders to comprehensively assess the environmental characteristics of securitised exposure pools in terms of data protection, matching accuracy, and cost-effectiveness.
This research focuses on the cost of financing green projects on the primary bond market and tests for a potential price differential between green bonds issued by government entities and those issued by supranational and private sector issuers. Our findings indicate that government entities benefit from more favorable pricing conditions worldwide. This advantage is growing over time and particularly pronounced for sovereigns and municipal authorities. Our analysis also reveals that country-specific factors, such as strong political commitment to address climate change, low income level and high degree of indebtedness are significant predictors of the pricing spread across bonds.
Contagious stablecoins?
(2023)
Can competing stablecoins produce efficient and stable outcomes? We study competition among stablecoins pegged to a stable currency. They are backed by interest-bearing safe assets and can be redeemed with the issuer or traded in a secondary market. If an issuer sticks to an appropriate investment and redemption rule, its stablecoin is invulnerable to runs. Since an issuer must pay interest on its stablecoin if other issuers also pay interest, competing interest-bearing stablecoins, however, are contagious and can render the economy inefficient and unstable. The efficient allocation is uniquely implemented when regulation prevents interest payments on stablecoins.
In this study, we unpack the ESG ratings of four prominent agencies in Europe and find that (i) each single E, S, G pillar explains the overall ESG score differently,(ii) there is a low co-movement between the three E, S, G pillars and (iii) there are specific ESG Key Performance Indicators (KPIs) that are driving these ratings more than others. We argue that such discrepancies might mislead firms about their actual ESG status, potentially leading to cherry-picking areas for improvement, thus raising questions about the accuracy and effectiveness of ESG evaluations in both explaining sustainability and driving capital toward sustainable companies.
We document the individual willingness to act against climate change and study the role of social norms in a large sample of US adults. Individual beliefs about social norms positively predict pro-climate donations, comparable in strength to universal moral values and economic preferences such as patience and reciprocity. However, we document systematic misperceptions of social norms. Respondents vastly underestimate the prevalence of climate-friendly behaviors and norms. Correcting these misperceptions in an experiment causally raises individual willingness to act against climate change as well as individual support for climate policies. The effects are strongest for individuals who are skeptical about the existence and threat of global warming.
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.
In its first ten years (2014-2023), the banking union was successful in its prudential agenda but failed spectacularly in its underlying objective: establishing a single banking market in the euro area. This goal is now more important than ever, and easier to attain than at any time in the last decade. To make progress, cross-border banks should receive a specific treatment within general banking union legislation. Suggestions are made on how to make such regulatory carve-out effective and legally sound.