Learning from Japan: The European Central Bank and the European Sovereign Debt Crisis

What shapes central banks’ learning from the policy experiments of their peers? Both economic ideas and organizational interests play important roles. Thus, New Keynesian ideas led central banks to interpret Japan's experience with quantitative easing (2001–2006) through the impact on risk spreads, although the Japanese central bank never intended such effects. In turn, scholars and policy-makers alike ignored one critical lesson: successful policy innovations depend on banks’ funding models. It is argued here that this was a crucial omission because the shift to market-based funding impairs the effectiveness of the traditional crisis toolkit. Central banks must intervene directly in asset markets of systemic importance for funding conditions, as the Bank of Japan did by buying government bonds. Hence, market-based finance engenders a trade-off between financial stability and institutional stability defined through central bank independence. During critical periods, central banks cannot preserve both. The ECB illustrates this trade-off well. Early in the crisis, it outsourced financial stability to a (largely) market-dependent banking system to protect its independence. With the introduction of Outright Monetary Transactions in September 2012, the Bank recognized that the market-based nature of European banking required outright purchases of sovereign bonds. This new instrument gave the ECB additional powers to shape national fiscal decisions in the name of an independence that no longer has theoretical justifications.     

Adoption Dynamics in Buyer-Side Exchanges

The purpose of this paper is to understand buyer/seller adoption dynamics in independent, buyer-side B2B exchanges. In a stylized model, we assume that the main role of the exchange is to reduce search costs for buyers. Buyers and sellers enter or exit the exchange based on the relative economic surplus (loss) they receive inside vs. outside the exchange. We contrast two situations: one where participants' switching cost to join the institution is negligible and another, in which it is significant. In an extension, we also explore the impact of buyer/seller heterogeneity on adoption dynamics. We have three key findings with relevant implications for practice. First, we find that the general view that demand and supply (so-called liquidity) either grows or shrinks in the marketplace may not hold. In the presence of switching costs, the exchange can evolve to a stable state with only partial market participation. Second, our results suggest that the exchange is better off subsidizing buyers as opposed to sellers in order to achieve the so-called critical mass, beyond which there is full participation. Finally, we find that while in general, minor buyers of the industry have more incentive joining the exchange, when the fixed participation fee of the exchange is high, it is major buyers who are likely to join first. For sellers, this is not the case: minor sellers are always more keen in participating in a buyer-side exchange.     

Does Central Bank Financial Strength Really Matter for Inflation? The Key Role of the Fiscal Support

This paper examines whether weak central bank finances affect inflation by scrutinizing the key rationale for such a relationship: that the absence of Treasury support makes central bank finances relevant for price stability. Specifically, I ask whether central banks which are not likely to enjoy fiscal support when needed experience higher inflation as their financial situation deteriorates. I find this to be true among a large sample of 82 countries between 1998 and 2008. De facto potential fiscal support appears relevant, while de jure fiscal support, which I survey analyzing 82 central bank laws, does not appear to matter. The results also bring forward an explanation for the conflicting results of the previous empirical studies, which neglected this key component.     

Option pricing in the moderate deviations regime

We consider call option prices close to expiry in diffusion models, in an asymptotic regime (“moderately out of the money”) that interpolates between the well‐studied cases of at‐the‐money and out‐of‐the‐money regimes. First and higher order small‐time moderate deviation estimates of call prices and implied volatilities are obtained. The expansions involve only simple expressions of the model parameters, and we show how to calculate them for generic local and stochastic volatility models. Some numerical computations for the Heston model illustrate the accuracy of our results.     

Relating ultrasonic vocalizations from a pair of rats to individual behavior: A composite link model approach

Ultrasonic vocalizations (USVs) are crucial in the social behavior of rats. We aim to relate USV rates of pairs of rats to individual activity in an automated home cage (PhenoTyper®) where USVs are recorded per pair and not per individual. We propose a composite link model approach to parametrize a mechanistic “sum‐of‐rates” model in which the pair's USV rate is the sum of the USV rates of individuals depending on their own behavior. In generalized linear models (GLMs), the individual's USV rates are multiplied. We verified through simulation that composite link model gave lower Poisson deviance than GLM. We analyzed the data from an experiment in which half of the cages did allow the pairs to interact (Pair Housing) and the other half did not (Individual Housing). The “sum‐of‐rates” model fits best for Individual Housing and GLM for Pair Housing. An additional simulation study strongly suggests that interaction between rats changes the underlying mechanism for vocalization behavior.     

Moment explosions in the rough Heston model

Decisions in Economics and Finance - We show that the moment explosion time in the rough Heston model, introduced by El Euch and Rosenbaum in 2016, is finite if and only if it is finite for the...