Evaluating the Macroeconomic Effects of the ECB's Unconventional Monetary Policies

We quantify the macroeconomic effects of the European Central Bank's unconventional monetary policies using a dynamic stochastic general equilibrium model which includes a set of shadow interest rates. Extracted from the yield curve, these shadow rates provide unconstrained measures of the overall stance of monetary policy. Counterfactual analyses show that, without unconventional measures, the euro area would have suffered (i) a substantial loss of output since the Great Recession and (ii) a period of deflation from mid‐2015 to early 2017. Specifically, year‐on‐year inflation and GDP growth would have been on average about 0.61% and 1.09% below their actual levels over the period 2014Q1–17Q2, respectively.     

Aggregate stability under a budget rule and labor mobility

Whether a balanced budget rule stabilizes or destabilizes an economy depends on various factors such as the production function or the instrument used to balance the budget. This paper argues that migration, which has widely been neglected in the literature, also affects equilibrium properties. We study the effect of pro-cyclical labor mobility in a neoclassical growth model with public debt and a balanced budget requirement. Labor mobility can destabilize the economy due to external effects. After a negative shock hits the economy, living abroad becomes relatively more attractive, resulting in out-migration. This increases per capita public debt as migrants leave behind their implicit liabilities. The government increases tax rates to satisfy the balanced budget requirement, which further depresses the economy and increases out-migration. The destabilizing effect of public debt kicks in at only slightly higher debt levels than the ones observed in the Euro area after the financial crisis.     

Safe‐haven currency: An empirical identification

This paper attempts to empirically identify strong safe havens among six currencies: the Swiss franc, Japanese yen, British pound, euro, Canadian dollar and Norwegian krone. Using Markov regime‐switching vector autoregressive models, we test whether the currencies are negatively related to risky assets and whether the negative relation is stronger in times of crisis than in times of growth. We find that (1) the Swiss franc and Japanese yen qualify as strong safe havens, and (2) the other currencies qualify as “equity‐like” or risky currencies.     

Domestic Credit Growth and International Capital Flows*

During the pre‐crisis period, Europe experienced substantial cross‐country variation in domestic credit growth and cross‐border capital flows. We investigate the inter‐relations between domestic credit growth and international capital flows during the period 1993–2008, with a special focus on the boom period of 2003–2008. We establish that domestic credit growth in European countries is strongly related to net debt inflows but not to net equity inflows. This pattern also holds for an extended sample of 54 advanced and emerging economies.     

The influence of moral hazard on investment in financially constrained and unconstrained firms

We extend Triole (2006) to link together two seemingly different cases – firms facing potential free cash flow problems versus firms facing financial constraints. The model predicts a large number of disparate findings in the empirical literature and so demonstrates its usefulness.     

Uniqueness of Markov equilibrium in stochastic OLG models with nonclassical production

A large class of stochastic OLG economies with nonclassical production is shown to possess a unique Markov Equilibrium (ME) which is also the unique sequential equilibrium. Additional properties such as monotonicity, continuity, and smoothness of the ME are also discussed.     

Dilemma of the Silver Standard Economies: The Case of China

Exchange rate commitments implied in the silver standard originally anchored China's monetary policy and the inflation rate in the early republican period. It was believed that China's free silver standard acted as a natural check on the excessive issuing of notes by warlords and local governments. This consensus view, however, overlooks the fact that the silver standard was inherently unstable because it left no room for monetary policy to stabilize output and inflation. This article employs a formal structural model to show that a fiat currency unlinked to fluctuations in the price of silver that allows government to implement self‐adjusting monetary policies would further stabilize China's output and inflation.     

The shortage of safe assets in the US investment portfolio: Some international evidence

This paper develops a Bayesian Global VAR (GVAR) model to track the international transmission dynamics of two stylized shocks, namely a supply and demand shock to US-based safe assets. Our main findings can be summarized as follows. First, we find that (positive) supply-sided shocks lead to pronounced increases in economic activity which spills over to foreign countries. The impact of supply-sided shocks can also be seen for other quantities of interest, most notably equity prices and exchange rates in Europe. Second, a demand-sided shock leads to an appreciation of the US dollar and generally lower yields on US securities, forcing investors to shift their portfolios towards foreign fixed income securities. This yields sizable positive effects on US output, equity prices and a general decrease in financial market volatility.     

A recession‐and‐state forecasting model

The state forecasting model (SFM) developed herein predicts the probability that a recession will begin or end within the next quarter. It is also important to forecast the state, as models prone to false alarms are not useful. The model combines parsimony, predictive accuracy, and ease of estimation using readily available data. No regressor is benchmark‐revised, and only one is seasonally adjusted. The SFM correctly forecasts, out‐of‐sample, the binary state in 163 of 164 quarters for an overall proportion of correct forecasts of 0.994. The results demonstrate the discriminating ability, longevity and striking forecasting ability of the model. A benchmark model based on the newly revised Leading Economic Index of the Conference Board has zero marginal predictive power in the presence the SFM.