Fire sales by euro area banks and funds: What is their asset price impact?

The assets under management of investment funds have soared in recent years, triggering a debate on their possible implications for financial stability. We contribute to this debate assessing the asset price impact of fire sales in a novel partial equilibrium model of euro area funds and banks calibrated over the period between 2008 and 2017. An initial shock to yields causes funds to sell assets to address investor redemptions, while both banks and funds sell assets to keep their leverage constant. These fire sales generate second-round price effects. We find that the potential losses due to the price impact of fire sales have decreased over time for the system. The contribution of funds to this impact is lower than that of banks. However, funds’ relative contribution has risen due to their increased assets under management and banks’ lower leverage and rebalancing towards loans. Should this trend continue, funds will become an increasingly important source of systemic risk.     

Overcapacities in banking: Measurement,trends and determinants

Global banks face profitability challenges since the global financial crisis. Besides cyclical factors, structural features such as overcapacities have been identified as root causes. While policymakers agree on the need for bank consolidation, there is less consensus on the definition and measurement of overcapacities in banking. This paper contributes by conceptualising and formalising the different dimensions of overcapacities in banking and by constructing a novel measure thereof. In addition, it empirically tests the main determinants of overcapacities in banking from 2006 to 2017 and assesses their relative importance. The results indicate that non-bank competition, the interest rate environment and bank business models are the most important driving factors of banking sector overcapacities. This is because shadow banks, benefitting from regulatory arbitrage, have altered banks’ capacity needs, low rates compressed margins and increased pressure to improve cost efficiencies, and retail-oriented business models have operated extensive branch networks entailing heavy fixed costs.     

Do news shocks increase capital utilization?

Using the workweek of capital as a measure of capital utilization, we empirically test whether news shocks actually increase capital utilization. To this end, by estimating a panel VAR on two-digit manufacturing data identifying news shocks as innovations to stock returns orthogonal to the variations in current-period TFP growth, we find the positive response of capital utilization to news shocks. Moreover, to explain the positive response of capital utilization to news shocks in terms of plant-level investment behavior, we propose a heterogeneous plant model that combines the fixed cost of capital adjustment and an endogenous capital utilization choice. With the presence of fixed costs, except for the plants that have recently adjusted capital stock, news shock shortens the effective time horizon of currently installed capital stock and increases capital utilization. When the model economy is calibrated to match the salient features of the plant-level investment rate distribution, the economy generates a news-driven positive response of capital utilization.     

Are high–frequency traders informed?

Are high–frequency traders (HFTs) informed? To address this question, we examine HFTs' activity in the call auction environment, where speed-related trading is limited and signal processing capacity becomes more relevant. To model the call market, we consider the Kyle (1989) rational expectations framework for strategic trading. The test we propose for detecting informed HFTs in this market assesses potential deviations of the informativeness of HFTs' aggregate (net) demand, from the informativeness of the aggregate demand submitted by the rest of the traders. Data from the Euronext Paris preopening phase indicate that informed HFTs are present in the market just before the opening. Our results provide useful guidance for the assessment of the influence of HFTs’ quotes on price quality, an important issue for market regulators and policy makers.     

Demographic Transition and Fertility Rebound in Economic Development*

Recent evidence on the “fertility rebound” offers credence to the idea that, from the onset of early industrialization to the present day, the dynamics of fertility can be represented by an N-shaped curve. An overlapping generations model with parental investment in human capital can account for these observed movements in fertility rates during the different stages of demographic change. A demographic transition with declining fertility emerges at the intermediate stage, when parents engage on a child quantity–quality trade-off. At later stages, however, the process of economic growth generates sufficient resources so that households can rear more children while still providing the desirable amount of education investment per child.     

最低工资标准、人力资本扩张与企业成本加成*

本文以人力资本扩张为切入点，构建了最低工资、人力资本扩张影响企业成本加成的理论框架，并使用中国1998-2013年284个地级市的工业企业数据进行了经验研究。结论显示：最低工资上调会显著抑制企业成本加成的提升，削弱了企业的市场势力，但该抑制效应在人力资本扩张的背景下得以缓解。同时本文通过进一步分组回归发现，最低工资标准与人力资本扩张对企业成本加成具有明显的异质性影响。因此，适度、稳定调整最低工资标准及推动人力资本质量的整体提升有助于保持企业成本加成能力及其动态竞争力。     

Elections and Capital Flows

This paper investigates the extent to which elections affect capital flows. I find little evidence of political capital flow cycles in advanced economies. In emerging and developing countries, however, presidential elections significantly lower preelection foreign direct investment (FDI) inflows but have no effect on other types of capital flows. Furthermore, I find evidence that these cycles are not caused by economic crises related to elections or preelection manipulation of policy variables. These results suggest that uncertainty about future government policies, which should have greater impact on more irreversible forms of capital flows like FDI, may be an important factor in generating this cycle.     

FX Intervention in the New Keynesian Model

We develop an open-economy New Keynesian Model with foreign exchange (FX) intervention in the presence of a financial accelerator and shocks to risk appetite in international capital markets. We obtain closed-form solutions for optimal monetary and FX intervention policies assuming the central bank cannot commit to future policies, and we compare the solution to that under policy commitment. We show how FX intervention can help reduce the volatility of the exchange rate, of inflation, and of the output gap, thus mitigating welfare losses associated with shocks in the international capital markets. We also show that, when the financial accelerator is strong, there is a risk of indeterminacy (self-fulfilling currency and inflation movements) although FX intervention can reduce this risk and thus reinforce the credibility of the inflation targeting regime. Model simulations match well the impact of a VIX shock obtained by local projections on a panel of inflation targeting emerging markets.     

The Role of Inflation Target Adjustment in Stabilization Policy

How and under what circumstances can adjusting the inflation target serve as a stabilization-policy tool and contribute to welfare improvement? We answer these questions quantitatively with a standard New Keynesian model that includes cost-push-type shocks. Our proposed inflation target rule calls for the target to be adjusted in a persistent manner and in the opposite direction to the realization of a cost-push shock, which is essentially a makeup strategy. The inflation target rule, combined with a Taylor-type rule, significantly reduces inflation fluctuations originating from cost-push shocks and mitigates the stabilization trade-off, resulting in a similar level of welfare to that associated with the Ramsey optimal policy.