Working paper series / Institute for Monetary and Financial Stability
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126
The recent sovereign debt crisis in the Eurozone was characterized by a monetary policy, which has been constrained by the zero lower bound (ZLB) on nominal interest rates, and several countries, which faced high risk spreads on their sovereign bonds. How is the government spending multiplier affected by such an economic environment?While prominent results in the academic literature point to high government spending multipliers at the ZLB, higher public indebtedness is often associated with small government spending multipliers. I develop a DSGE model with leverage constrained banks that captures both features of this economic environment, the ZLB and fiscal stress. In this model, I analyze the effects of government spending shocks. I find that not only are multipliers large at the ZLB, the presence of fiscal stress can even increase their size. For longer durations of the ZLB,multipliers in this model can be considerably larger than one.
JEL Classification: E32, E 44, E62
125
The authors relax the standard assumption in the dynamic stochastic general equilibrium (DSGE) literature that exogenous processes are governed by AR(1) processes and estimate ARMA (p,q) orders and parameters of exogenous processes. Methodologically, they contribute to the Bayesian DSGE literature by using Reversible Jump Markov Chain Monte Carlo (RJMCMC) to sample from the unknown ARMA orders and their associated parameter spaces of varying dimensions.
In estimating the technology process in the neoclassical growth model using post war US GDP data, they cast considerable doubt on the standard AR(1) assumption in favor of higher order processes. They find that the posterior concentrates density on hump-shaped impulse responses for all endogenous variables, consistent with alternative empirical estimates and the rigidities behind many richer structural models. Sampling from noninvertible MA representations, a negative response of hours to a positive technology shock is contained within the posterior credible set. While the posterior contains significant uncertainty regarding the exact order, the results are insensitive to the choice of data filter; this contrasts with the authors’ ARMA estimates of GDP itself, which vary significantly depending on the choice of HP or first difference filter.
124
What institutional arrangements for an independent central bank with a price stability mandate promote good policy outcomes when unconventional policies become necessary? Unconventional monetary policy poses challenges. The large scale asset purchases needed to counteract the zero lower bound on nominal interest rates have uncomfortable fiscal and distributional consequences and require central banks to assume greater risks on their balance sheets.
In his paper, Athanasios Orphanides draws lessons from the experience of the Bank of Japan (BoJ) since the late 1990s for the institutional design of independent central banks. He comes to the conclusion that lack of clarity on the precise definition of price stability, coupled with concerns about the legitimacy of large balance sheet expansions, hinders policy: It encourages the central bank to eschew the decisive quantitative easing needed to reflate the economy and instead to accommodate too-low inflation. The BoJ’s experience with the zero lower bound suggests important benefits from a clear definition of price stability as a symmetric 2% goal for inflation, which the Bank adopted in 2013.
123
Für Zwecke des privaten Konsums werden ständig Gegenwarts- und Zukunftsgüter bewertet und gehandelt. Ein zuverlässiges und umfassendes Maß für die allgemeine Kaufkraft des Geldes und deren Veränderung sollte diesem Grundsachverhalt Rechnung tragen. Im Unterschied zu konventionellen statistischen Verbraucherpreisindizes ist ein ökonomischer Lebenskostenindex intertemporal angelegt, da er die effektiven Konsumgüterpreise (Effektivpreise) über den Planungshorizont der privaten Haushalte bündelt. Ein Preisstabilitätsstandard, der diesen Zusammenhang ausblendet, ist tendenziell verzerrt und leistet einer asymmetrischen Geldpolitik Vorschub.
Effektivpreise sind Gegenwartspreise für künftigen Konsum, sie berücksichtigen Güterpreise und Zinsen bzw. Vermögenspreisänderungen, sind konsumtheoretisch und wohlfahrtsökonomisch fundiert und bilden die zentralen Bausteine für die Modellklasse der ökonomischen Lebenskostenindizes. Nutzentheoretisch gesehen sind Effektivpreise bewerteter Grenznutzen der letzten konsumierten Gütereinheit, und die daraus abgeleiteten Effektiven Inflationsraten sind intertemporale Grenzraten der Substitution.
Die Autoren entwickeln einen intertemporalen Lebenskostenindex auf der Grundlage des Konzepts der Effektivpreise und stellen empirische Zeitreihen und kohortenspezifische Szenarioanalysen für Deutschland vor.
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121
The paper illustrates based on an example the importance of consistency between the empirical measurement and the concept of variables in estimated macroeconomic models. Since standard New Keynesian models do not account for demographic trends and sectoral shifts, the authors proposes adjusting hours worked per capita used to estimate such models accordingly to enhance the consistency between the data and the model. Without this adjustment, low frequency shifts in hours lead to unreasonable trends in the output gap, caused by the close link between hours and the output gap in such models.
The retirement wave of baby boomers, for example, lowers U.S. aggregate hours per capita, which leads to erroneous permanently negative output gap estimates following the Great Recession. After correcting hours for changes in the age composition, the estimated output gap closes gradually instead following the years after the Great Recession.
120
Helmut Siekmann erläutert in seinem Beitrag die Einstandspflicht der Bundesrepublik Deutschland für die Deutsche Bundesbank und die Europäische Zentralbank. Dabei kommt er zu dem Schluss, dass weder eine „Haftung der Bundesrepublik Deutschland für Verluste der EZB noch eine Verpflichtung zur Auffüllung von aufgezehrtem Eigenkapital“ besteht.
Dieser Beitrag ist zuerst erschienen in: Festschrift für Theodor Baums zum siebzigsten Geburtstag, S. 1145-1179, Helmut Siekmann, Andreas Cahn, Tim Florstedt, Katja Langenbucher, Julia Redenius-Hövermann, Tobias Tröger, Ulrich Segna, Hrsg., Tübingen, Mohr Siebeck 2017
119
Financial market interactions can lead to large and persistent booms and recessions. Instability is an inherent threat to economies with speculative financial markets. A central bank’s interest rate setting can amplify the expectation feedback in the financial market and this can lead to unstable dynamics and excess volatility. The paper suggests that policy institutions may be well-advised to handle tools like asset price targeting with care since such instruments might add a structural link between asset prices and macroeconomic aggregates. Neither stock prices nor indices are a good indicator to base decisions on.
118
The level of capital tax gains has high explanatory power regarding the question of what drives economic inequality. On this basis, the authors develop a simple, yet micro-founded portfolio selection model to explain the dynamics of wealth inequality given empirical tax series in the US. The results emphasize that the level and the transition of speed of wealth inequality depend crucially on the degree of capital taxation. The projections predict that – continuing on the present path of capital taxation in the US – the gap between rich and poor is expected to shrink whereas “massive” tax cuts will further increase the degree of wealth concentration.
117
The bail-in tool as implemented in the European bank resolution framework suffers from severe shortcomings. To some extent, the regulatory framework can remedy the impediments to the desirable incentive effect of private sector involvement (PSI) that emanate from a lack of predictability of outcomes, if it compels banks to issue a sufficiently sized minimum of high-quality, easy to bail-in (subordinated) liabilities. Yet, even the limited improvements any prescription of bail-in capital can offer for PSI’s operational effectiveness seem compromised in important respects.
The main problem, echoing the general concerns voiced against the European bail-in regime, is that the specifications for minimum requirements for own funds and eligible liabilities (MREL) are also highly detailed and discretionary and thus alleviate the predicament of investors in bail-in debt, at best, only insufficiently. Quite importantly, given the character of typical MREL instruments as non-runnable long-term debt, even if investors are able to gauge the relevant risk of PSI in a bank’s failure correctly at the time of purchase, subsequent adjustment of MREL-prescriptions by competent or resolution authorities potentially change the risk profile of the pertinent instruments. Therefore, original pricing decisions may prove inadequate and so may market discipline that follows from them.
The pending European legislation aims at an implementation of the already complex specifications of the Financial Stability Board (FSB) for Total Loss Absorbing Capacity (TLAC) by very detailed and case specific amendments to both the regulatory capital and the resolution regime with an exorbitant emphasis on proportionality and technical fine-tuning. What gets lost in this approach, however, is the key policy objective of enhanced market discipline through predictable PSI: it is hardly conceivable that the pricing of MREL-instruments reflects an accurate risk-assessment of investors because of the many discretionary choices a multitude of agencies are supposed to make and revisit in the administration of the new regime. To prove this conclusion, this chapter looks in more detail at the regulatory objectives of the BRRD’s prescriptions for MREL and their implementation in the prospectively amended European supervisory and resolution framework.