Please click on each project to find out more.
Please click on each project to find out more.
We study the implications of multi-period mortgage loans for monetary policy, considering several realistic modifications — fixed interest rate contracts, lower bound constraint on newly granted loans, and possibility for the collateral constraint to become slack — to an otherwise standard DSGE model with housing and financial intermediaries. We estimate the model in its nonlinear form and argue that all these features are important to understand the evolution of mortgage debt during the recent US housing market boom and bust. We show how the nonlinearities associated with the two constraints make the transmission of monetary policy dependent on the housing cycle, with weaker effects observed when house prices are high or start falling sharply. We also find that higher average loan duration makes monetary policy less effective, and may lead to asymmetric responses to positive and negative monetary shocks.
This paper examines the effects of unconventional monetary policy measures by the European Central Bank on nine European countries not adopting the euro with a novel Bayesian mixed-frequency structural vector autoregressive technique. Unconventional monetary policy disturbances generate important domestic fluctuations. The wealth, the risk, and the portfolio rebalancing channels matter for international propagation; the credit channel does not. The responses of foreign output and inflation are independent of the exchange rate regime. International spillovers are larger in countries with more advanced financial systems and a larger share of domestic banks. A comparison with conventional monetary policy disturbances and with announcement surprises is provided.
We build a semi-structural New Keynesian model with financial frictions to study the drivers of macroeconomic tail risk (‘GDP-at-Risk’). We analyse the empirically observed fat left tail of the GDP distribution by modelling three key non-linearities emphasised in the literature: 1) an effective lower bound on nominal interest rates, 2) a credit crunch in bank credit supply when bank capital depletes, and 3) deleveraging by borrowers when debt service burdens become excessive. We obtain three key results. First, our model generates a significantly fat-tailed distribution of GDP – a finding that is absent in most linear New Keynesian and RBC models. Second, we show how these constraints interact with each other. We find that an economy prone to debt deleveraging will experience significantly more credit crunch and effective lower bound episodes than otherwise. Moreover, as the effective lower bound becomes more proximate, the frequency of credit crunch episodes increases significantly. As a rule of thumb, we find that each 50 basis point decline in monetary policy headroom requires additional capital buffers of 1% of assets or 2%–2.5% points lower debt service burdens to hold the risk level constant. Third, we use the model to generate a historical decomposition of GDP-at-Risk for the United Kingdom. The implied risk outlook deteriorates significantly in the run-up to the Global Financial Crisis, driven by depleted capital buffers and increasing debt burdens. Since then, GDP-at-Risk has remained elevated, with greater bank resilience and lower debt offset by the limited capacity of monetary policy to cushion adverse shocks.
Click here for the Working Paper.
We develop early warning models for financial crisis prediction using machine learning techniques on macrofinancial data for 17 countries over 1870–2016. Machine learning models mostly outperform logistic regression in out‑of‑sample predictions and forecasting. We identify economic drivers of our machine learning models using a novel framework based on Shapley values, uncovering non‑linear relationships between the predictors and crisis risk. Throughout, the most important predictors are credit growth and the slope of the yield curve, both domestically and globally. A flat or inverted yield curve is of most concern when nominal interest rates are low and credit growth is high.
We develop a dynamic stochastic general equilibrium framework that can account for important macroeconomic and financial moments, given Epstein-Zin preferences, heterogeneous banking and third-order approximation methods that yield a time-varying term premium that feeds back to the real economy. A risk perception shock increases term premia, lowers output, and reduces short-term credit in the private sector in response to higher loan rates and constrained borrowers, as banks rebalance their portfolios. A ‘bad’ credit boom, driven by investors mispricing risk, leads to a more severe recession and is less supportive of economic growth than a ‘good’ credit boom based on fundamentals.
We use data on monthly patent applications to construct an external instrument for identification of technology news shocks in an information-rich VAR. Technology diffuses slowly and affects total factor productivity in an S-shaped pattern. Responsible for about a tenth of economic fluctuations at business cycle frequencies, the shock elicits a slow, large and positive response of quantities, and a sluggish contraction of prices followed by an endogenous easing of the monetary stance. The ensuing economic expansion substantially anticipates any material increase in TFP. Technology news shocks are strongly priced into the stock market on impact, but measures of consumer expectations take sensibly longer to adjust, consistent with a New-Keynesian framework with nominal rigidities, and featuring informationally constrained agents.
The 2008 financial crisis has shown that financial busts can influence the real economy. However, there is less evidence to suggest that the same holds for financial booms. Using a Markov-Switching vector autoregressive model and euro area data, I show that financial booms tend to be less procyclical than financial busts. To identify the sources of asymmetry, I estimate a non-linear DSGE model with a heterogeneous banking sector and an occasionally binding borrowing constraint. The model matches the key features of the data and shows that the borrowers’ balance sheet channel accounts for the asymmetry in the macro-financial linkages. The muted macro-financial transmission during financial booms can be exploited for macroprudential policies. By comparing capital buffer rules with monetary policy ‘leaning-against-the-wind’ rules, I find that countercyclical capital buffers improve welfare.
Click here for a current version of the paper.