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152
The authors examine the effectiveness of labor cost reductions as a means to stimulate economic activity and assesses the differences which may occur with the prevailing exchange rate regime. They develop a medium-scale three-region DSGE model and show that the impact of a cut in the employers’ social security contributions rate does not vary significantly under different exchange rate regimes. They find that both the interest rate and the exchange rate channel matters. Furthermore, the measure appears to be effective even if it comes along with a consumption tax increase to preserve long-term fiscal sustainability.
Finally, they assess whether obtained theoretical results hold up empirically by applying the local projection method. Regression results suggest that changes in employers’ social security contributions rates have statistically significant real effects – a one percentage point reduction leads to an average cumulative rise in output of around 1.3 percent in the medium term. Moreover, the outcome does not differ significantly across the different exchange rate regimes.
102
A number of contributions to research on monetary policy have suggested that policy should be asymmetric near the lower bound on nominal interest rates. As inflation and economic activity decline, policy should ease more aggressively than it would in the absence of the lower bound. As activity recovers and inflation picks up, the central bank should act to keep interest rates lower for longer than without the bound. In this note, we investigate to what extent the policy easing implemented by the ECB since summer 2013 mirrors the rate recommendations of a simple policy rule or deviates from it in a way that indicates a “lower for longer” approach to policy near zero interest rates.
15
Inhalt Prof. Dr. Helmut Siekmann : Föderalismuskommission II für eine zukunftsfähige Gestaltung der Finanzsysteme nutzen. Stellungnahme für das Expertengespräch des Haushalts- und Finanzausschusses des Landtags Nordrhein-Westfalen am 14.02.2008 Stellungnahme 14/1785 Antrag der Fraktion BÜNDNIS90/Die Grünen im Landtag Nordrhein-Westfalen: Drucksache 14/4338 Fragenkatalog zum Expertengespräch des Haushalts- und Finanzausschusses und des Hauptausschusses am 14.02.2008
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.
132
We analyze cyclical co-movement in credit, house prices, equity prices, and longterm interest rates across 17 advanced economies. Using a time-varying multi-level dynamic factor model and more than 130 years of data, we analyze the dynamics of co-movement at different levels of aggregation and compare recent developments to earlier episodes such as the early era of financial globalization from 1880 to 1913 and the Great Depression. We find that joint global dynamics across various financial quantities and prices as well as variable-specific global co-movements are important to explain fluctuations in the data. From a historical perspective, global co-movement in financial variables is not a new phenomenon, but its importance has increased for some variables since the 1980s. For equity prices, global cycles play currently a historically unprecedented role, explaining more than half of the fluctuations in the data. Global cycles in credit and housing have become much more pronounced and longer, but their importance in explaining dynamics has only increased for some economies including the US, the UK and Nordic European countries. We also include GDP in the analysis and find an increasing role for a global business cycle.
171
Veronika Grimm, Lukas Nöh, and Volker Wieland assess the possible development of government interest expenditures as a share of GDP for Germany, France, Italy and Spain. Until 2021, these and other member states could anticipate a further reduction of interest expenditure in the future. This outlook has changed considerably with the recent surge in inflation and government bond rates. Nevertheless, under reasonable assumptions current yield curves still imply that interest expenditure relative to GDP can be stabilized at the current level. The authors also review the implications of a further upward shift in the yield curves of 1 or 2 percentage points. These implications suggest significant medium-term risks for highly indebted member states with interest expenditure approaching or exceeding levels last observed on the eve of the euro area debt crisis. In light of these risks, governments of euro area member states should take substantive action to achieve a sustained decline in debt-to-GDP ratios towards safer levels. They bear the responsibility for making sure that government finances can weather the higher interest rates which are required to achieve price stability in the euro area.
183
I have assessed changes in the monetary policy stance in the euro area since its inception by applying a Bayesian time-varying parameter framework in conjunction with the Hamiltonian Monte Carlo algorithm. I find that the estimated policy response has varied considerably over time. Most of the results suggest that the response weakened after the onset of the financial crisis and while quantitative measures were still in place, although there are also indications that the weakening of the response to the expected inflation gap may have been less pronounced. I also find that the policy response has become more forceful over the course of the recent sharp rise in inflation. Furthermore, it is essential to model the stochastic volatility relating to deviations from the policy rule as it materially influences the results.
169
The authors study the impact of dissent in the ECB‘s Governing Council on uncertainty surrounding households‘ inflation expectations. They conduct a randomized controlled trial using the Bundesbank Online Panel Households. Participants are provided with alternative information treatments concerning the vote in the Council, e.g. unanimity and dissent, and are asked to submit probabilistic inflation expectations. The results show that the vote is informative.
Households revise their subjective inflation forecast after receiving information about the vote. Dissenting votes cause a wider individual distribution of future inflation. Hence, dissent increases households‘ uncertainty about inflation. This effect is statistically significant once the authors allow for the interaction between the treatments and individual characteristics of respondents.
The results are robust with respect to alternative measures of forecast uncertainty and hold for different model specifications. The findings suggest that providing information about dissenting votes without additional information about the nature of dissent is detrimental to coordinating household expectations.
138
Household finance
(2020)
Household financial decisions are complex, interdependent, and heterogeneous, and central to the functioning of the financial system. We present an overview of the rapidly expanding literature on household finance (with some important exceptions) and suggest directions for future research. We begin with the theory and empirics of asset market participation and asset allocation over the lifecycle. We then discuss house-hold choices in insurance markets, trading behavior, decisions on retirement saving, and financial choices by retirees. We survey research on liabilities, including mortgage choice, refinancing, and default, and household behavior in unsecured credit markets, including credit cards and payday lending. We then connect the household to its social environment, including peer effects, cultural and hereditary factors, intra-household financial decision making, financial literacy, cognition and educational interventions. We also discuss literature on the provision and consumption of financial advice.
129
Exploiting the natural experiment of the German reunification, we examine how consumers adapt to a new environment in their macroeconomic forecasting. We document that East Germans expect higher in inflation and make larger forecast errors than West
Germans even decades after reunification. Differences in consumption baskets, financial literacy, risk aversion or trust in the central bank cannot fully account for these patterns. We find most support for the explanation that East Germans, who were used to a strong norm of zero inflation, persistently overadjusted the level of their expectations in the face of the initial inflation shock in reunified Germany. Our findings suggest that large changes in the economic environment can permanently impede people's ability to form accurate macroeconomic expectations, with an important role for the interaction of old norms and new experiences around the event.
128
Policymakers attach an important role to the macroeconomic outlook of households. Using a representative online panel form the U.S., the authors examine how individuals' macroeconomic expectations causally affect their personal economic prospects and their behavior and provide them with different professional forecasts about the likelihood of a recession. The authors find that groups with the largest exposure to aggregate risk, such as individuals working in cyclical industries, are most likely to respond to an improved macroeconomic outlook, while a large fraction of the population is unlikely to react.
92
This paper empirically investigates how organizational hierarchy affects the allocation of credit within a bank. Using an exogenous variation in organizational design, induced by a reorganization plan implemented in roughly 2,000 bank branches in India during 1999-2006, and employing a difference-in-differences research strategy, we find that increased hierarchization of a branch decreases its ability to produce "soft" information on loans, leads to increased standardization of loans and rationing of "soft information" loans. Furthermore, this loss of information brings about a reduction in performance on loans: delinquency rates and returns on similar loans are worse in more hierarchical branches. We also document how hierarchical structures perform better in environments that are characterized by a high degree of corruption, thus highlighting the benefits of hierarchical decision making in restraining rent seeking activities. Finally, we document a channel - managerial interference - through which hierarchy affects loan outcomes.
83
How special are they? - Targeting systemic risk by regulating shadow banking : (October 5, 2014)
(2014)
This essay argues that at least some of the financial stability concerns associated with shadow banking can be addressed by an approach to financial regulation that imports its functional foundations more vigorously into the interpretation and implementation of existing rules. It shows that the general policy goals of prudential banking regulation remain constant over time despite dramatic transformations in the financial and technological landscape. Moreover, these overarching policy goals also legitimize intervention in the shadow banking sector. On these grounds, this essay encourages a more normative construction of available rules that potentially limits both the scope for regulatory arbitrage and the need for ever more rapid updates and a constant increase in the complexity of the regulatory framework. By tying the regulatory treatment of financial innovation closely to existing prudential rules and their underlying policy rationales, the proposed approach potentially ends the socially wasteful race between hare and tortoise that signifies the relation between regulators and a highly dynamic industry. In doing so it does not generally hamper market participants’ efficient discoveries where disintermediation proves socially beneficial. Instead, it only weeds-out rent-seeking circumventions of existing rules and standards.
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.
168
The authors study the effects of forward looking communication in an environment of rising inflation rates on German consumers‘ inflation expectations using a randomized control trial. They show that information about rising inflation increases short- and long-term inflation expectations. This initial increase in expectations can be mitigated using forward looking information about inflation. Among these information treatments, professional forecasters‘ projections seem to reduce inflation expectations by more than policymakers‘ characterization of inflation as a temporary phenomenon.
115
Since 2014 the ECB has implemented a massive expansion of monetary policy including large-scale asset purchases and negative policy rates. As the euro area economy has improved and inflation has risen, questions concerning the future normalization of monetary policy are starting to dominate the public debate.
The study argues that the ECB should develop a strategy for policy normalization and communicate it very soon to prepare the ground for subsequent steps towards tightening. It provides analysis and makes proposals concerning key aspects of this strategy. The aim is to facilitate the emergence of expectations among market participants that are consistent with a smooth process of policy normalization.
163
Conditional yield skewness is an important summary statistic of the state of the economy. It exhibits pronounced variation over the business cycle and with the stance of monetary policy, and a tight relationship with the slope of the yield curve. Most importantly, variation in yield skewness has substantial forecasting power for future bond excess returns, high-frequency interest rate changes around FOMC announcements, and consensus survey forecast errors for the ten-year Treasury yield. The COVID pandemic did not disrupt these relations: historically high skewness correctly anticipated the run-up in long-term Treasury yields starting in late 2020. The connection between skewness, survey forecast errors, excess returns, and departures of yields from normality is consistent with a theoretical framework where one of the agents has biased beliefs.
172
In the communication of the European Central Bank (ECB), the statement that „we act within our mandate“ is often referred to. Also among practitioners of the Eurosystem the term „mandate“ has become popular. In his Working Paper, Helmut Siekmann analyzes the legal foundation of the tasks and objectives of the Eurosysstem and price stability as a legal term. He finds that the primary law of the EU only very sparsely employs the term „mandate“. It is never used in the context of monetary policy and its institutions. Moreover, he comes to the conclusion that inflation targeting as a task, competence, or objective of the Eurosystem is legally highly questionable according to the common standards of interpretation.
97
This paper investigates the effect of a change in informational environment of borrowers on the organizational design of bank lending. We use micro-data from a large multinational bank and exploit the sudden introduction of a credit registry, an information-sharing mechanism across banks, for a subset of borrowers. Using within borrower and loan officer variation in a difference-in-difference empirical design, we show that expansion of credit registry led to an improvement in allocation of credit to affected
borrowers. There was a concurrent change in the organizational structure of the bank that involved a dramatic increase in delegation of lending decisions of affected borrowers to loan officers. We also find a significant expansion in scope of activities of loan officers who deal primarily with affected borrowers, as well as of their superiors. There is suggestive evidence that larger banks in the economy were better able to implement similar changes as our bank. We argue that these patterns can be understood within the framework of incentive-based and information cost processing theories. Our findings could help rationalize why improvements in the information environment of borrowers may be altering the landscape of lending by moving decisions outside the boundaries of financial intermediaries.
136
We design, field and exploit survey data from a representative sample of the French population to examine whether informative social interactions enter householdsístockholding decisions. Respondents report perceptions about their circle of peers with whom they interact about Önancial matters, their social circle and the population. We provide evidence for the presence of an information channel through which social interactions ináuence perceptions and expectations about stock returns, and financial behavior. We also find evidence of mindless imitation of peers in the outer social circle, but this does not permeate as many layers of financial behavior as informative social interactions do.
33
We analyze how two key managerial tasks interact: that of growing the business through creating new investment opportunities and that of providing accurate information about these opportunities in the corporate budgeting process. We show how this interaction endogenously biases managers toward overinvesting in their own projects. This bias is exacerbated if managers compete for limited resources in an internal capital market, which provides us with a novel theory of the boundaries of the firm. Finally, managers of more risky and less profitable divisions should obtain steeper incentives to facilitate efficient investment decisions.
110
The currrent debate on monetary and fiscal policy is heavily influenced by estimates of the equilibrium real interest rate. Beyer and Wieland re-estimate the U.S. equilibrium rate with the methodology of Laubach and Williams and further modifications. They provide new estimates for the United States, the euro area and Germany and subject them to sensitivity tests. Beyer and Wieland conclude that due to the great uncertainty and sensitivity, the observed decline in the estimates is not a reliable indicator of a need for expansionary monetary and fiscal policy. Yet, if those 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.
75
Following the experience of the global financial crisis, central banks have been asked to undertake unprecedented responsibilities. Governments and the public appear to have high expectations that monetary policy can provide solutions to problems that do not necessarily fit in the realm of traditional monetary policy. This paper examines three broad public policy goals that may overburden monetary policy: full employment; fiscal sustainability; and financial stability. While central banks have a crucial position in public policy, the appropriate policy mix also involves other institutions, and overreliance on monetary policy to achieve these goals is bound to disappoint. Central Bank policies that facilitate postponement of needed policy actions by governments may also have longer-term adverse consequences that could outweigh more immediate benefits. Overburdening monetary policy may eventually diminish and compromise the independence and credibility of the central bank, thereby reducing its effectiveness to preserve price stability and contribute to crisis management.
81
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.
69
Das Banken- und Versicherungsaufsichtsrecht benennt an mehreren Stellen ausdrücklich gruppenbezogene Pflichten des übergeordneten Unternehmens. Deren Realisierbarkeit hängt von gesellschafts-, insbesondere konzernrechtlichen Schranken ab, die für die Einflussnahme auf nachgeordnete Gruppenunternehmen bestehen. Der vorliegende Beitrag betrachtet das Zusammenspiel von Aufsichts- und Gesellschaftsrecht unter besonderer Berücksichtigung der regelungstragenden Ziele des ersteren. Die Gruppenverantwortung ist in dieser Sicht ein Institut, das zur Verwirklichung eines klar umrissenen, öffentlichen Interesses an der Befolgung bestimmter Normen das übergeordnete Unternehmen als interne Kontrollinstanz in die Pflicht nimmt und mit gruppendimensionalen Handlungspflichten belegt. Zur Gewährleistung der Effektivität dieses Instituts ist ein sektoral begrenzter Vorrang der aufsichtsrechtlichen Vorgaben anzuerkennen. Dieser ist durch die angemessene Berücksichtigung des mit dem Aufsichtsrecht verfolgten, öffentlichen Interesses als normativer Determinante der Leitungstätigkeit aller gruppenangehörigen Institute zu verwirklichen.
45
The European Monetary Union euro has done very well since its initiation. Price stability has been secured and the external value of the new currency is more than satisfactory. The confidence in it is also shown by its increasing use as a global reserve currency. It has been a stabilizing factor in the current crisis. The recent budgetary problems of some member states are principally not a problem of the Monetary Union. It is therefore in no way justified to speak of a "Euro-crisis". It is true, however, that the Monetary Union restricts the number of possibilities for member states to solve their financial problems but it does not eliminate them entirely that outside help would have become indispensible. The purchase of debt instruments of member states in financial distress by the ECB is questionable from an economic, and more important, from a legal point of view. The longer the duration, the less legally justifiable is it. Financial support for member states in severe financial distress might be acceptable as a temporary crisis resolution mechanism. A permanent support mechanism needs a basis in the primary law of the EU. The treatment of the risk of "sovereign" debt in the legal framework for financial institutions urgently needs improvement. Especially the capital requirements for credit institutions have to be adjusted.
122
85
This paper investigates the risk channel of monetary policy on the asset side of banks’ balance sheets. We use a factoraugmented vector autoregression (FAVAR) model to show that aggregate lending standards of U.S. banks, such as their collateral requirements for firms, are significantly loosened in response to an unexpected decrease in the Federal Funds rate. Based on this evidence, we reformulate the costly state verification (CSV) contract to allow for an active financial intermediary, embed it in a New Keynesian dynamic stochastic general equilibrium (DSGE) model, and show that – consistent with our empirical findings – an expansionary monetary policy shock implies a temporary increase in bank lending relative to borrower collateral. In the model, this is accompanied by a higher default rate of borrowers.
27
This paper presents a novel model of the lending process that takes into account that loan officers must spend time and effort to originate new loans. Besides generating predictions on loan officers’ compensation and its interaction with the loan review process, the model sheds light on why competition could lead to excessively low lending standards. We also show how more intense competition may fasten the adoption of credit scoring. More generally, hard-information lending techniques such as credit scoring allow to give loan officers high-powered incentives without compromising the integrity and quality of the loan approval process. The model is finally applied to study the implications of loan sales on the adopted lending process and lending standard.
55
In this paper, I introduce lumpy micro-level capital adjustment into a sticky information general equilibrium model. Lumpy adjustment arises because of inattentiveness in capital investment decisions instead of the more common assumption of non-convex adjustment costs. The model features inattentiveness as the only source of stickiness. I find that the model with lumpy investment yields business cycle dynamics which differ substantially from those of an otherwise identical model with frictionless investment and are much more consistent with the empirical evidence. These results therefore strengthen the case in favour of the relevance of microeconomic investment lumpiness for the business cycle.
65
Missachtung rechtlicher Vorgaben des AEUV durch die Mitgliedstaaten und die EZB in der Schuldenkrise
(2012)
Zusammenfassung und Ergebnisse
1. Es gibt gute Argumente für ein generelles Verbot (freiwilliger) Unterstützungsleistungen an Euro-Mitgliedstaaten.
2. Die Vereinbarkeit der Leistungen der EU im Rahmen des EFSM mit Art. 122 Abs. 2 AEUV ist fraglich. Die Beurteilung der Kausalitätsfrage ist maßgebend.
3. Die Vereinbarkeit der Leistungen der Mitgliedstaaten im Rahmen der speziellen Griechenlandhilfe und im Rahmen der EFSF mit dem AEUV in der damals geltenden Fassung ist nicht sicher.
4. Die Einführung von Art. 136 Abs. 3 AEUV modifiziert das Vertragsrecht und ist wohl noch in Einklang mit Art. 48 Abs. 6 EUV erfolgt.
5. ESM und Fiskalpakt verstoßen nach der Änderung des Primärrechts wohl nicht gegen den AEUV.
6. Unabdingbar für die Schaffung des ESM sind aber das Inkrafttreten von Art. 136 Abs. 3 AEUV und
7. Der Erwerb von Forderungen gegen Mitgliedstaaten über einen längeren Zeitraum und zur Erleichterung von Zinslasten überschreitet die Befugnisse und Zuständigkeiten des ESZB.
8. Der Erwerb von Forderungen gegen Mitgliedstaaten über einen längeren Zeitraum und zur Erleichterung von Zinslasten ist nicht mit dem Verbot der Kreditgewährung durch Zentralbanken an Hoheitsträger nach Art. 123 AEUV zu vereinbaren
9. Die Gewährung von langfristigen Krediten an Banken verstößt ebenfalls gegen die Zuständigkeitsordnung des AEUV und ist bei einer Weiterleitung der Mittel an Hoheitsträger nicht mit Art. 123 AEUV zu vereinbaren.
10. Die Akzeptierung von ausfallgefährdeten Forderungen als Sicherheit für die Gewährung von Krediten durch das ESZB verstößt gegen Art. 18.1., zweiter Spiegelstrich, Satzung ESZB/EZB.
35
This paper considers a firm that has to delegate to an agent, such as a mortgage broker or a security dealer, the twin tasks of approaching and advising customers. The main contractual restriction, in particular in light of related research in Inderst and Ottaviani (2007), is that the firm can only compensate the agent through commissions. This standard contracting restriction has the following key implications. First, the firm can only ensure internal compliance to a "standard of sales", in terms of advice for the customer, if this standard is not too high. Second, if this is still feasible, then a higher standard is associated with higher, instead of lower, sales commissions. Third, once the limit for internal compliance is approached, tougher regulation and prosecution of "misselling" have (almost) no effect on the prevailing standard. Besides having practical implications, in particular on how to (re-)regulate the sale of financial products, the novel model, which embeds a problem of advice into a framework with repeated interactions, may also be of separate interest for future work on sales force compensation. JEL Classification: D18 (Consumer Protection), D83 (Search; Learning; Information and Knowledge), M31 (Marketing), M52 (Compensation and Compensation Methods and Their Effects).
36
Misselling through agents
(2009)
This paper analyzes the implications of the inherent conflict between two tasks performed by direct marketing agents: prospecting for customers and advising on the product's "suitability" for the specific needs of customers. When structuring sales-force compensation, firms trade off the expected losses from "misselling" unsuitable products with the agency costs of providing marketing incentives. We characterize how the equilibrium amount of misselling (and thus the scope of policy intervention) depends on features of the agency problem including: the internal organization of a firm's sales process, the transparency of its commission structure, and the steepness of its agents' sales incentives. JEL Classification: D18 (Consumer Protection), D83 (Search; Learning; Information and Knowledge), M31 (Marketing), M52 (Compensation and Compensation Methods and Their Effects).
114
For some time now, structural macroeconomic models used at central banks have been predominantly New Keynesian DSGE models featuring nominal rigidities and forwardlooking decision-making. While these features are widely deemed crucial for policy evaluation exercises, most central banks have added more detailed characterizations of the financial sector to these models following the Great Recession in order to improve their fit to the data and their forecasting performance. We employ a comparative approach to investigate the characteristics of this new generation of New Keynesian DSGE models and document an elevated degree of model uncertainty relative to earlier model generations. Policy transmission is highly heterogeneous across types of financial frictions and monetary policy causes larger effects, on average. The New Keynesian DSGE models we analyze suggest that a simple policy rule robust to model uncertainty involves a weaker response to inflation and the output gap in the presence of financial frictions as compared to earlier generations of such models. Leaning-against-the-wind policies in models of this class estimated for the Euro Area do not lead to substantial gains. With regard to forecasting performance, the inclusion of financial frictions can generate improvements, if conditioned on appropriate data. Looking forward, we argue that model-averaging and embracing alternative modelling paradigms is likely to yield a more robust framework for the conduct of monetary policy.
13
Recently, the Bank of Japan outlined a “two perspectives” approach to the conduct of monetary policy that focuses on risks to price stability over different time horizons. Interpreting this as pertaining to different frequency bands, we use band spectrum regression to study the determination of inflation in Japan. We find that inflation is related to money growth and real output growth at low frequencies and the output gap at higher frequencies. Moreover, this relationship reflects Granger causality from money growth and the output gap to inflation in the relevant frequency bands. Keywords: spectral regression, frequency domain, Phillips curve, quantity theory. JEL Numbers: C22, E3, E5
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.
67
In this paper, we provide some reflections on the development of monetary theory and monetary policy over the last 150 years. Rather than presenting an encompassing overview, which would be overambitious, we simply concentrate on a few selected aspects that we view as milestones in the development of this subject. We also try to illustrate some of the interactions with the political and financial system, academic discussion and the views and actions of central banks.
205
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.
107
The global financial crisis and the ensuing criticism of macroeconomics have inspired researchers to explore new modeling approaches. There are many new models that deliver improved estimates of the transmission of macroeconomic policies and aim to better integrate the financial sector in business cycle analysis. Policy making institutions need to compare available models of policy transmission and evaluate the impact and interaction of policy instruments in order to design effective policy strategies. This paper reviews the literature on model comparison and presents a new approach for comparative analysis. Its computational implementation enables individual researchers to conduct systematic model comparisons and policy evaluations easily and at low cost. This approach also contributes to improving reproducibility of computational research in macroeconomic modeling. Several applications serve to illustrate the usefulness of model comparison and the new tools in the area of monetary and fiscal policy. They include an analysis of the impact of parameter shifts on the effects of fiscal policy, a comparison of monetary policy transmission across model generations and a cross-country comparison of the impact of changes in central bank rates in the United States and the euro area. Furthermore, the paper includes a large-scale comparison of the dynamics and policy implications of different macro-financial models. The models considered account for financial accelerator effects in investment financing, credit and house price booms and a role for bank capital. A final exercise illustrates how these models can be used to assess the benefits of leaning against credit growth in monetary policy.
193
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.
154
On the accuracy of linear DSGE solution methods and the consequences for log-normal asset pricing
(2021)
This paper demonstrates a failure of standard, generalized Schur (or QZ) decomposition based solutions methods for linear dynamic stochastic general equilibrium (DSGE) models when there is insufficient eigenvalue separation about the unit circle. The significance of this is demonstrated in a simple production-based asset pricing model with external habit formation. While the exact solution afforded by the simplicity of the model matches post-war US consumption growth and the equity premium, QZ-based numerical solutions miss the later by many annualized percentage points.
78
Panel Sample Selection ModelsThe empirical evidence currently available in the literature regarding the effects of a country's IMF program participation on its output growth is rather inconclusive. In this paper we propose and estimate a panel data sample selection model featuring state dependence. As in this model the output growth effects of program participation can be conditional on the realization of a state variable (conditional pooling), our framework may reconcile previous empirical evidence based on models without state-dependent effects. We find that the effects of IMF program participation on output growth vary systematically with an index reflecting a country's institutional record, and that output growth effects of program participation are significantly positive only if the program participation is coupled with sufficient improvement of the institutional record.
192
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.
63
We use a novel disaggregate sectoral euro area data set with a regional breakdown to investigate price changes and suggest a new method to extract factors from over-lapping data blocks. This allows us to separately estimate aggregate, sectoral, country-specific and regional components of price changes. We thereby provide an improved estimate of the sectoral factor in comparison with previous literature, which decomposes price changes into an aggregate and idiosyncratic component only, and interprets the latter as sectoral. We find that the sectoral component explains much less of the variation in sectoral regional inflation rates and exhibits much less volatility than previous findings for the US indicate. We further contribute to the literature on price setting by providing evidence that country- and region-specific factors play an important role in addition to the sector-specific factors, emphasising heterogeneity of inflation dynamics along different dimensions. We also conclude that sectoral price changes have a “geographical” dimension, that leads to new insights regarding the properties of sectoral price changes.
131
There is substantial disagreement about the consequences of the Tax Cuts and Jobs Act (TCJA) of 2017, which constitutes the most extensive tax reform in the United States in more than 30 years. Using a large-scale two-country dynamic general equilibrium model with nominal rigidities, we find that the TCJA increases GDP by about 2% in the medium-run and by about 2.5% in the long-run. The shortrun impact depends crucially on the degree and costs of variable capital utilization, with GDP effects ranging from 1 to 3%. At the same time, the TCJA does not pay for itself. In our analysis, the reform decreases tax revenues and raises the debt-to-GDP ratio by about 15 percentage points in the medium-run until 2025. We show that combining the TCJA with spending cuts can dampen the increase in government indebtedness without reducing its expansionary effect.
167
The authors focus on the stabilizing role of cash from a society-wide perspective. Starting with conceptual remarks on the importance of money for the economy in general, special attention is paid to the unique characteristics of cash. As these become apparent especially during crisis periods, a comparison of the Great Depression (1929 – 1933) and the Great Recession 2008/09 shows the devastating effects of a severe monetary contraction and how a fully elastic provision of cash can help to avoid such a situation.
The authors find interesting similarities to both crises in two separate case studies, one on the demonetization in India 2016 and the other on cash supply during various crises in Greece since 2008. The paper concludes that supply-driven cash withdrawals from circulation (either by demonetization or by capital controls) destabilize the economy if electronic payment substitutes are not instantly available.
However, as there is no perfect substitute for cash due to its unique properties, from the viewpoint of the society as a whole an efficient payment mix necessarily includes cash: It helps to stabilize the economy not only in times of crises in general, no matter which government is in place. The authors argue that it should be the undisputed task of central banks to ensure that cash remains in circulation in normal times and is provided in a fully elastic way in times of crisis.
20
This paper examines the sustainability of the currency board arrangements in Argentina and Hong Kong. We employ a Markov switching model with two regimes to infer the exchange rate pressure due to economic fundamentals and market expectations. The empirical results suggest that economic fundamentals and expectations are key determinants of a currency board’s sustainability. We also show that the government’s credibility played a more important role in Argentina than in Hong Kong. The trade surplus, real exchange rate and inflation rate were more important drivers of the sustainability of the Hong Kong currency board.
53
I characterize optimal monetary and fiscal policy in a stochastic New Keynesian model when nominal interest rates may occasionally hit the zero lower bound. The benevolent policymaker controls the short-term nominal interest rate and the level of government spending. Under discretionary policy, accounting for fiscal stabilization policy eliminates to a large extent the welfare losses associated with the presence of the zero bound. Under commitment, the gains associated with the use of the fiscal policy tool remain modest, even though fiscal stabilization policy is part of the optimal policy mix.
50
This paper characterises optimal monetary policy in an economy with endogenous
firm entry, a cash-in-advance constraint and preset wages. Firms must make pro
fits to cover entry costs; thus the markup on goods prices is efficient. However, because leisure is not priced at a markup, the consumption-leisure tradeoff is distorted. Consequently, the real wage, hours and production are suboptimally low. Due to the labour requirement in entry, insufficient labour supply also implies that entry is too low. The paper shows that in the absence of
fiscal instruments such as labour income subsidies, the optimal monetary policy under sticky wages achieves higher welfare than under flexible wages. The policy maker uses the money supply instrument to raise the real wage - the cost of leisure - above its flexible-wage level, in response to expansionary shocks to productivity and entry costs. This raises labour supply, expanding production and
rm entry.
54
This paper outlines relatively easy to implement reforms for the supervision of transnational banking-groups in the E.U. that should not be primarily based on legal form but on the actual risk structures of the pertinent financial institutions. The proposal also aims at paying close attention to the economics of public administration and international relations in allocating competences among national and supranational supervisory bodies. Before detailing the own proposition, this paper looks into the relationship between sovereign debt and banking crises that drive regulatory reactions to the financial turmoil in the Euro area. These initiatives inter alia affirm effective prudential supervision as a pivotal element of crisis prevention. In order to arrive at a more informed idea, which determinants apart from a perceived appetite for regulatory arbitrage drive banks’ organizational choices, this paper scrutinizes the merits of either a branch or subsidiary structure for the cross-border business of financial institutions. In doing so, it also considers the policy-makers perspective. The analysis shows that no one size fits all organizational structure is available and concludes that banks’ choices should generally not be second-guessed, particularly because they are subject to (some) market discipline. The analysis proceeds with describing and evaluating how competences in prudential supervision are currently allocated among national and supranational supervisory authorities. In order to assess the findings the appraisal adopts insights form the economics of public administration and international relations. It argues that the supervisory architecture has to be more aligned with bureaucrats’ incentives and that inefficient requirements to cooperate and share information should be reduced. Contrary to a widespread perception, shifting responsibility to a supranational authority cannot solve all the problems identified. Resting on these foundations, the last part of this paper finally sketches an alternative solution that dwells on far-reaching mutual recognition of national supervisory regimes and allocates competences in line with supervisors’ incentives and the risk inherent in crossborder banking groups.
135
Abundant studies show that individuals often struggle and frequently fail to form a correct perception of how much they are worth in terms of income or net wealth, both in absolute terms and relative to others. The authors find that wealth misperception arises even in a frictionless environment. They show that this wealth misperception is related to low cognitive abilities and inattention, and that subjects who misperceive wealth have a greater tendency to borrow and spend out of gains. A standard optimal consumption choice model, enriched with a rational but inattentive agent à la Gabaix aligns the key experimental findings.
176
The authors estimate perceptions about the Fed's monetary policy rule from panel data on professional forecasts of interest rates and macroeconomic conditions. The perceived dependence of the federal funds rate on economic conditions is time-varying and cyclical: high during tightening episodes but low during easings. Forecasters update their perceptions about the policy rule in response to monetary policy actions, measured by high-frequency interest rate surprises, suggesting that forecasters have imperfect information about the rule. The perceived rule impacts asset prices crucial for monetary policy transmission, driving how interest rates respond to macroeconomic news and explaining term premia in long-term interest rates.
156
Can boundedly rational agents survive competition with fully rational agents? The authors develop a highly nonlinear heterogeneous agents model with rational forward looking versus boundedly rational backward looking agents and evolving market shares depending on their relative performance. Their novel numerical solution method detects equilibrium paths characterized by complex bubble and crash dynamics. Boundedly rational trend-extrapolators amplify small deviations from fundamentals, while rational agents anticipate market crashes after large bubbles and drive prices back close to fundamental value. Overall rational and non-rational beliefs co-evolve over time, with time-varying impact, and their interaction produces complex endogenous bubble and crashes, without any exogenous shocks.
96
Mehr als 18 Milliarden Euro hat die Commerzbank im Zuge der Finanzkrise in Form von staatlichen Garantien, Kapitalspritzen oder Einlagen erhalten. Auch die Hypo Real Estate, die WestLB, die SachsenLB und die IKB profitierten von Stützungsmaßnahmen. Die EU genehmigte diese und andere staatlichen Hilfsmaßnahmen. Grundsätzlich sind staatliche Stützungsmaßnahmen jedoch als wirtschaftlicher Vorteil zu werten und damit zunächst eine verbotene Beihilfe. In seinem Working Paper betrachtet Tuschl die rechtlichen Grundlagen des EU-Beihilferechts und zeigt die teilweise differierende Praxis der EU-Kommission auf.
164
Debt levels in the eurozone have reached new record highs. The member countries have tried to cushion the economic consequences of the corona pandemic with a massive increase in government spending. End of 2021 public debt in relation to GDP will approach 100% on average. There are various calls to abolish or soften the Maastricht rules of limiting sovereign debt. We see the risk of a new sovereign debt crisis in this decade if it is not possible to bring public debt down to an acceptable level. Our new fiscal rule would be suitable and appropriate for this purpose, because obviously the Maastricht criteria have failed. In contrast to the rigid 3% Maastricht-criterion, our rule is flexible and it addresses the main problem: excessively high public debt ratios. And it lowers the existing incentives for highly indebted governments to exert expansionary pressure on monetary policy. If obeyed strictly, our rule reinforces the snowball effect and reduces the excessively high debt ratios within a manageable period, even if nominal growth is weak. This is confirmed by simulations with different scenarios as well as with the hypothetical application of the new fiscal rule to eurozone economies from 2022 to 2026. Finally, we take up the recent proposal by ESM economists to increase the permissible debt ratio from 60 to 100% of GDP in the eurozone.
91
Our paper evaluates recent regulatory proposals mandating the deferral of bonus payments and claw-back clauses in the financial sector. We study a broadly applicable principal agent setting, in which the agent exerts effort for an immediately observable task (acquisition) and a task for which information is only gradually available over time (diligence). Optimal compensation contracts trade off the cost and benefit of delay resulting from agent impatience and the informational gain. Mandatory deferral may increase or decrease equilibrium diligence depending on the importance of the acquisition task. We provide concrete conditions on economic primitives that make mandatory deferral socially (un)desirable.
130
Distributed ledger technology especially in the form of publicly coordinated validation networks such as Ethereum and Bitcoin with their own monetary circles provide for a revealing litmus test for current financial regulatory schemes. The paper highlights the interrelation between distributed coordination and the emission of virtual currency to make sense of the function of the new monetary phenomenon. It then argues for the regulation of financial services on the ground of the technology to ensure integrity standards. In this respect, it is useful to gear the development of a regulatory scheme towards the existing financial regulatory principles. However, future measures of the regulators must take the distributed nature of the platforms into account by relying on a “regulated self-regulation” of the community. Finally, the article focuses on the shortcomings of the current EU regulatory regimes, especially the regulation frameworks regarding financial services, payment services and electronic money.
93
This paper looks into the specific influence that the European banking union will have on (future) bank client relationships. It shows that the intended regulatory influence on market conditions in principle serves as a powerful governance tool to achieve financial stability objectives.
From this vantage, it analyzes macro-prudential instruments with a particular view to mortgage lending markets – the latter have been critical in the emergence of many modern financial crises. In gauging the impact of the new European supervisory framework, it finds that the ECB will lack influence on key macro-prudential tools to push through more rigid supervisory policies vis-à-vis forbearing national authorities.
Furthermore, this paper points out that the current design of the European bail-in tool supplies resolution authorities with undue discretion. This feature which also afflicts the SRM imperils the key policy objective to re-instill market discipline on banks’ debt financing operations. The latter is also called into question because the nested regulatory technique that aims at preventing bail-outs unintendedly opens additional maneuvering space for political decision makers.
133
We propose a simple modification of the time series filter by Hamilton (2018) that yields reliable and economically meaningful real-time output gap estimates. The original filter relies on 8-quarter-ahead forecast errors of a simple autoregression of log real GDP. While this approach yields a cyclical component of GDP that is hardly revised with new incoming data due to the one-sided filtering approach, it does not cover typical business cycle frequencies evenly, but short business cycles are muted and medium length business cycles are amplified. Further, the estimated trend is as volatile as GDP itself and can thus hardly be interpreted as potential GDP. A simple modification that is based on the mean of 4- to 12-quarter-ahead forecast errors shares the favorable real-time properties of the Hamilton filter, but leads to a much better coverage of typical business cycle frequencies and a smooth estimated trend. Based on output growth and inflation forecasts and a comparison to revised output gap estimates from policy institutions, we find that real-time output gaps based on the modified Hamilton filter are economically much more meaningful measures of the business cycle than those based on other simple statistical trend-cycle decomposition techniques such as the HP or the Bandpass filter.
38
158
Rising temperatures, falling ratings: the effect of climate change on sovereign creditworthiness
(2021)
How will a changing climate impact the creditworthiness of governments over the very long term? Financial markets need credible, digestible information on how climate change translates into material risks. To bridge the gap between climate science and real-world financial indicators, the authors simulate the effect of climate change on sovereign credit ratings for 108 countries, creating the world’s first climate-adjusted sovereign credit rating. The study offers a first methodological approach to extend the long-term rating to an ultra-long-term reality, aiming at long-term investors, but also regulators and rating agencies.
180
Optimal monetary policy studies typically rely on a single structural model and identification of model-specific rules that minimize the unconditional volatilities of inflation and real activity. In their proposed approach, the authors take a large set of structural models and look for the model-robust rules that minimize the volatilities at those frequencies that policymakers are most interested in stabilizing. Compared to the status quo approach, their results suggest that policymakers should be more restrained in their inflation responses when their aim is to stabilize inflation and output growth at specific frequencies. Additional caution is called for due to model uncertainty.
14
Schuldenanstieg und Haftungsausschluss im deutschen Föderalstaat : zur Rolle des Moral Hazard
(2007)
Einleitung: Die deutschen Staatsschulden sind in den letzten Jahrzehnten kontinuierlich gestiegen. Künftige Generationen werden zusätzlich aufgrund der demographischen Entwicklung durch die umlagenfinanzierten sozialen Sicherungssysteme belastet. Gerade auch der Anstieg der Verschuldung der Bundesländer war in den letzten Jahrzehnten spürbar. So betrug die Verschuldung aller deutschen Bundesländer zusammengenommen 1991 noch 168 Mrd. Euro, während Anfang 2007 die Verschuldung 483 Mrd. Euro betrug, was eine knappe Verdopplung der Schuldenquote der Länder (Verschuldung in Prozent des BIP) auf ca. 21 Prozent impliziert. In der aktuellen Diskussion um die Reform des deutschen Föderalismus besteht Einigkeit in der Diagnose des Problems. Die Entwicklung der Staatsschulden ist kritisch und darf sich so nicht fortsetzen. Uneinigkeit herrscht hingegen über die Ursache des Anstiegs. Ebenfalls wird um die beste Möglichkeit, diesen zu bremsen, gerungen. Verschiedene Autoren argumentieren, dass der Verschuldungsanstieg der deutschen Bundesländer vor allem auf den Moral Hazard Anreiz zurückzuführen ist. Der vorliegende Diskussionsbeitrag diskutiert dies als einen der möglichen Gründe des Schuldenanstiegs. Hierzu wird zunächst das Konzept kurz eingeführt. Anschließend wird die bestehende empirische Evidenz für Deutschland diskutiert. Schließlich wird eine Bewertung und Einordnung in die aktuelle Debatte vorgenommen. Schlußbemerkungen: Im vorliegenden Diskussionsbeitrag wird das "Moral hazard" Problem als einer der möglichen Gründe für den beobachteten starken Anstieg der Verschuldung deutscher Bundesländer diskutiert. Es wurde gezeigt, dass die Finanzmärkte kaum auf die erheblichen Unterschiede in den fiskalischen Fundamentaldaten der Länder reagieren. Mit einer Fallstudie wurde außerdem verdeutlicht, dass das aktuelle Bundesverfassungsgerichtsurteil zu einer eventuellen Haushaltsnotlage von Berlin Berlin die Risikoeinschätzung der Märkte für deutsche Bundesländer nicht verändert hat. Alles in allem scheint es sinnvoll, über eine größere Beteiligung der Gläubiger an Risiken einzelner Länder nachzudenken. Dies dürfte aber den Schuldenanstieg nur bei bereits hoch verschuldeten Ländern begrenzen und möglicherweise einem Notlagenfall vorbeugen, nicht aber den grundsätzlichen "Defizit-Bias" der Finanzpolitik kompensieren. Insgesamt scheinen deswegen vorgelagerte Regeln notwendig, um den Anstieg der Verschuldung schon früh zu unterbinden und somit Belastungen zukünftiger Generationen zu reduzieren.
100
Schätzwerte mittelfristiger Gleichgewichtszinsen mit der Methode nach Laubach und Williams (2003) werden inzwischen vielfach in der Diskussion um die Geld- und Fiskalpolitik zitiert. Unter anderem wurden sie von Summers (2014a) als Evidenz für eine säkulare Stagnation angeführt und von Yellen (2015) zur Rechtfertigung der Nullzinspolitik verwendet. In diesem Papier nehmen wir eine umfangreiche Untersuchung und Sensitivitätsanalyse dieser Schätzwerte für die Vereinigten Staaten, Deutschland und den Euro-Raum vor. Aufgrund der hohen Unsicherheit und Sensitivität, die mit den Schätzwerten mittelfristiger Gleichgewichtszinsen mit der Laubach-Williams-Methode und ähnlichen Ansätzen verbunden ist, sollten diese Schätzungen nicht den Ausschlag für entscheidende Weichenstellungen in der Geld- und Fiskalpolitik geben.
182
This paper presents and compares Bernoulli iterative approaches for solving 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. I find that Bernoulli methods compare favorably in solving DSGE models to the QZ, providing similar accuracy as measured by the forward error of the solution at a comparable computation burden. The method can guarantee convergence to a particular, e.g., unique stable, solution and can be combined with other iterative methods, such as the Newton method, lending themselves especially to refining solutions.
174
The authors present and compare 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. They 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.
195
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.
26
Inhalt: Prof. Dr. Helmut Siekmann : Stellungnahme für die öffentliche Anhörung des Haushalts- und Finanzausschusses des Landtags Nordrhein-Westfalen am 29. Oktober 2009 Gesetzentwurf der Landesregierung NRW : LANDTAG NORDRHEIN-WESTFALEN 14. Wahlperiode - Drucksache 14/9380 - 10.06.2009 Gesetz über die Feststellung eines zweiten Nachtrags zum Haushaltsplan des Landes Nordrhein-Westfalen für das Haushaltsjahr 2009 und zur Änderung des Gesetzes zur Errichtung eines Fonds für eine Inanspruchnahme des Landes Nordrhein-Westfalen aus der im Zusammenhang mit der Risikoabschirmung zugunsten der WestLB AG erklärten Garantie (Zweites Nachtragshaushaltsgesetz 2009) - Auszug Ergänzung der Landesregierung NRW zu dem Gesetzentwurf der Landesregierung - Drucksache 14/9380 (Zweites Nachtragshaushaltsgesetz 2009) - Drucksache 14/9510 – 01.07.2009 - Auszug Zweite Ergänzung der Landesregierung zu dem Gesetzentwurf der Landesregierung - Drucksachen 14/9380 und 14/9510 (1. Ergänzung) - Drucksache 14/9910 – 02.10.2009 - Auszug
19
Inhalt: Prof. Dr. Helmut Siekmann : Stellungnahme für die öffentliche Anhörung des Ausschusses für Wirtschaft, Mittelstand und Energie und des Haushalts- und Finanzausschusses des Landtags Nordrhein-Westfalen Keine Hilfe für Banken ohne einen neuen Ordnungsrahmen für die Finanzmärkte Stellungnahme 14/2328 Antrag der Fraktion Bündnis 90/Die Grünen : Keine Hilfe für Banken ohne einen neuen Ordnungsrahmen für Finanzmärkte Drucksache 14/7680 Fragenkatalog zur Anhörung von Sachverständigen am 04. Februar 2009 zum Antrag der Fraktion Bündnis90/Die Grünen Tableau Anhörung von Sachverständigen 57. Sitzung des Ausschusses für Wirtschaft, Mittelstand und Energie 85. Sitzung des Haushalts- und Finanzausschusses am Mittwoch, dem 4. Februar 2009
17
Inhalt: Prof. Dr. Helmut Siekmann : Stellungnahme für die öffentliche Anhörung des Haushaltsausschusses zu dem Gesetzentwurf der Fraktion der SPD und Bündnis 90/Die Grünen für ein Gesetz zur Änderung der Hessischen Landeshaushaltsordnung Gesetzentwurf der Fraktionen der SPD und Bündnis 90/Die Grünen für ein Gesetz zur Änderung der Hessischen Landeshaushaltsordnung (LHO) : Drucksache 17/265 Liste der Anzuhörenden im Haushaltsausschuss : am 17.09.2008 zur Drucksache 17/265
189
We present determinacy bounds on monetary policy in the sticky information model. We find that these bounds are more conservative here when the long run Phillips curve is vertical than in the standard Calvo sticky price New Keynesian model. Specifically, the Taylor principle is now necessary directly - no amount of output targeting can substitute for the monetary authority’s concern for inflation. These determinacy bounds are obtained by appealing to frequency domain techniques that themselves provide novel interpretations of the Phillips curve.
42
206
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.
66
In this paper we investigate the comparative properties of empirically-estimated monetary models of the U.S. economy using a new database of models designed for such investigations. We focus on three representative models due to Christiano, Eichenbaum, Evans (2005), Smets and Wouters (2007) and Taylor (1993a). Although these models differ in terms of structure, estimation method, sample period, and data vintage, we find surprisingly similar economic impacts of unanticipated changes in the federal funds rate. However, optimized monetary policy rules differ across models and lack robustness. Model averaging offers an effective strategy for improving the robustness of policy rules.
11
Inhalt: Vorwort Grußwort Vizepräsident Professor Dr. Ingwer Ebsen Grußwort Professor Dr. Helmut Siekmann Dr. Guntram B. Wolff : „Moral hazard und bail-out im deutschen Föderalstaat“ Ernst Burgbacher :„Erwartungen an die Föderalismusreform II – mehr Wettbewerb und mehr Autonomie für den deutschen Bundesstaat“ Professor Dr. Joachim Wieland : „Rechtsregeln für den Umgang mit extremen Haushaltsnotlagen“ Professor Dr. Kai A. Konrad : „Vorschläge zur wirksamen Verschuldungsbegrenzung der Länder“
201
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.
162
The authors present evidence of a new propagation mechanism for wealth inequality, based on differential responses, by education, to greater inequality at the start of economic life. The paper is motivated by a novel positive cross-country relationship between wealth inequality and perceptions of opportunity and fairness, which holds only for the more educated. Using unique administrative micro data and a quasi-field experiment of exogenous allocation of households, the authors find that exposure to a greater top 10% wealth share at the start of economic life in the country leads only the more educated placed in locations with above-median wealth mobility to attain higher wealth levels and position in the cohort-specific wealth distribution later on. Underlying this effect is greater participation in risky financial and real assets and in self-employment, with no evidence for a labor income, unemployment risk, or human capital investment channel. This differential response is robust to controlling for initial exposure to fixed or other time-varying local features, including income inequality, and consistent with self-fulfilling responses of the more educated to perceived opportunities, without evidence of imitation or learning from those at the top.
134
In the course of the crisis, the European System of Central Banks (ESCB) has acted several times to support the EU Member States and banking systems in financial distress by purchasing debt instruments: Covered Bonds Programmes (CBP), Securities Market Programmes (SMP), Long Term Refinancing Operations (LTRO), and Targeted Long Term Refinancing Operations (TLTRO), followed by the Outright Monetary Transactions (OMT) and then the Extended Asset Purchase Programmes (EAPP) – colloquially labelled as Quantitative Easing (QE).
Initially, the support measures of the ESCB might have to be judged as monetary policy but the selectivity of OMT and – even more – SMP in conjunction with the transfer of risks to the ESCB speak against it.
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.
1
Demographic change in industrialized nations has been a matter of common interest for some time. The financial implications of an ageing society are also increasingly discussed, particularly with regard to pension systems. The impact of this development on public finances is, however, only gradually being realized and the constitutional framework of public finances in Germany and the European Union just falls short of ignoring it entirely. This paper is a preliminary assessment of the burden of an ageing society under the fiscal law, specifically in respect of prospective entitlements to the public pension system. The first part analyses the provisions of the German constitution on finances (Finanzverfassungsrecht) to identify what rules, if any, exist addressing such (potential) expenditures, which lie in the immediate or very distant future. The second part of the paper analyses the fiscal requirements under European Union law. In the third and final part a few comments on the proposed national pact on stability and the recent moves to amend the German Federal Constitution are presented.
60
We examine both the degree and the structural stability of inflation persis tence at different quantiles of the conditional inflation distribution. Previous research focused exclusively on persistence at the conditional mean of the inflation rate. Economic theory, however, provides various reasons -for example downward wage rigidities or menu costs- to expect higher inflation persistence at the upper than at the lower tail of the conditional inflation distribution.
Based on post-war US data we indeed find slower mean reversion in response to positive than to negative shocks. We find robust evidence for a structural break in persistence at all quantiles of the inflation process in the early 1980s. Inflation persistence has decreased and become more homogeneous across quantiles. Persistence at the conditional mean became more informative about the degree of persistence across the entire conditional inflation distribution. While prior to the 1980s inflation was not mean reverting in response to large positive shocks, our evidence strongly suggests that since the end of the Volcker disinflation the unit root can be rejected at every quantile including the upper tail of the conditional inflation distribution.
51
How do changes in market structure affect the US business cycle? We estimate a monetary DSGE model with endogenous
rm/product entry and a translog expenditure function by Bayesian methods. The dynamics of net business formation allow us to identify the 'competition effect', by which desired price markups and inflation decrease when entry rises. We
find that a 1 percent increase in the number of competitors lowers desired markups by 0.18 percent. Most of the cyclical variability in inflation is driven by markup fluctuations due to sticky prices or exogenous shocks rather than endogenous changes in desired markups.
18
Hong Kong’s Linked Exchange Rate System (LERS) has been in operation for twenty-five years during which time many other fixed exchange rate systems have succumbed to shocks and/or speculative attacks. This fact alone suggests that the LERS is a robust system which enjoys a large measure of credibility in financial markets. This paper intends to investigate whether this is indeed the case, and whether it has been the case throughout its 25-year history. In particular we will use the tools of modern finance to extract information from financial asset prices about market expectations that are related to the credibility of the LERS. The main focus is on how market participants ‘judged’ the various changes made to the LERS, such as the ‘seven technical measures’ introduced in September 1998 and the ‘three refinements’ made in May 2005. These changes have been characterizes as making the system less discretionary over time, and we hypothesize that they have also made it more credible as revealed in the prices of exchange rate related asset prices. We also investigate the relationship between interest rates and exchange rates in the current system in light of modern models of target-zone exchange rate systems. We will examine whether the intramarginal intervention in November 2007 changed the dynamic properties of the exchange rate as suggested by such models.
159
This note argues that the European Central Bank should adjust its strategy in order to consider broader measures of inflation in its policy deliberations and communications. In particular, it points out that a broad measure of domestic goods and services price inflation such as the GDP deflator has increased along with the euro area recovery and the expansion of monetary policy since 2013, while HICP inflation has become more variable and, on average, has declined. Similarly, the cost of owner-occupied housing, which is excluded from the HICP, has risen during this period. Furthermore, it shows that optimal monetary policy at the effective lower bound on nominal interest rates aims to return inflation more slowly to the inflation target from below than in normal times because of uncertainty about the effects and potential side effects of quantitative easing.
204
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.
71
This note reviews the legal issues and concerns that are likely to play an important role in the ongoing deliberations of the Federal Constitutional Court of Germany concerning the legality of ECB government bond purchases such as those conducted in the context of its earlier Securities Market Programme or potential future Outright Monetary Transactions.
155
High-frequency changes in interest rates around FOMC announcements are a standard method of measuring monetary policy shocks. However, some recent studies have documented puzzling effects of these shocks on private-sector forecasts of GDP, unemployment, or inflation that are opposite in sign to what standard macroeconomic models would predict. This evidence has been viewed as supportive of a „Fed information effect“ channel of monetary policy, whereby an FOMC tightening (easing) communicates that the economy is stronger (weaker) than the public had expected.
The authors show that these empirical results are also consistent with a „Fed response to news“ channel, in which incoming, publicly available economic news causes both the Fed to change monetary policy and the private sector to revise its forecasts. They provide substantial new evidence that distinguishes between these two channels and strongly favors the latter; for example, regressions that include the previously omitted public macroeconomic news, high-frequency stock market responses to Fed announcements, and a new survey that they conduct of individual Blue Chip forecasters all indicate that the Fed and private sector are simply responding to the same public news, and that there is little if any role for a „Fed information effect“.
179
Output gap revisions can be large even after many years. Real-time reliability tests might therefore be sensitive to the choice of the final output gap vintage that the real-time estimates are compared to. This is the case for the Federal Reserve’s output gap. When accounting for revisions in response to the global financial crisis in the final output gap, the improvement in real-time reliability since the mid-1990s is much smaller than found by Edge and Rudd (Review of Economics and Statistics, 2016, 98(4), 785-791). The negative bias of real-time estimates from the 1980s has disappeared, but the size of revisions continues to be as large as the output gap itself.
The authors systematically analyse how the realtime reliability assessment is affected through varying the final output gap vintage. They find that the largest changes are caused by output gap revisions after recessions. Economists revise their models in response to such events, leading to economically important revisions not only for the most recent years, but reaching back up to two decades. This might improve the understanding of past business cycle dynamics, but decreases the reliability of real-time output gaps ex post.
190
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.
145
The ruling of the German Federal Constitutional Court and its call for conducting and communicating proportionality assessments regarding monetary policy have been the subject of some controversy. However, it can also be understood as a way to strengthen the de-facto independence of the European Central Bank. The authors shows how a regular proportionality check could be integrated in the ECB’s strategy that is currently undergoing a systematic review. In particular, they propose to include quantitative benchmarks for policy rates and the central bank balance sheet. Deviations from such benchmarks can have benefits in terms of the intended path for inflation while involving costs in terms of risks and side effects that need to be balanced. Practical applications to the euro area are provided
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
153
The recently observed disconnect between inflation and economic activity can be explained by the interplay between the zero lower bound (ZLB) and the costs of external financing. In normal times, credit spreads and the nominal interest rate balance out; factor costs dominate firms' marginal costs. When nominal rates are constrained, larger spreads can more than offset the effect of lower factor costs and induce only moderate inflation responses. The Phillips curve is hence flat at the ZLB, but features a positive slope in normal times and thus a hockey stick shape. Via this mechanism, forward guidance may induce deflationary effects.