Publications

Macroprudential Capital Requirements, Monetary Policy and Financial Crises, with Jelena Živanovic

Economic Modelling, Volume 139, October 2024

How should bank capital requirements be designed in order to reduce the frequency and severity of financial crises? What is the role of monetary policy in this context? To answer these questions, we develop a New-Keynesian dynamic stochastic general equilibrium (DSGE) model in which the economy endogenously switches between normal times and financially turbulent times. Banks do not internalize that lower leverage contributes to the stability of the entire financial system. This creates a role for bank capital regulation. The proposed model replicates many of the dynamics observed during US financial crises. Basel-III-style capital buffers reduce the probability and length of financial crises while also reducing the size of the financial and non-financial sectors. Monetary policies that are more accommodative during financial crises can moderate economic downturns, thereby lowering the durations of financial distress. A combination of a small countercyclical capital buffer accompanied by a relief measure and an accommodative monetary policy during crises increases welfare.

Working Papers

Financial Integration and International Shock Transmission—The Terms of Trade Channel

R&R at JEDC | SSRN Working Paper (March 2026) | WiSo-HH Working Paper Series No. 80 (December 2023)

What are the effects of financial integration on global comovement? Using a standard two-country DSGE model with equity and bond market integration, I show that, in response to country-specific supply shocks, higher exposure to foreign assets reduces cross-country output correlations, while the opposite is true for country-specific demand shocks. I argue that an important yet overlooked transmission channel arises from the interaction between financial integration and terms of trade movements in response to the shocks hitting the economy. This transmission mechanism operates independently of whether the agents who hold the foreign assets are financially constrained or not.

Unconventional Monetary Policy in a Monetary Union

Local copy (January 2026) | BDPEMS Working Paper Series # 2018-01 

In a monetary union, the common policy rate cannot effectively stabilize country-specific shocks. I investigate the role of unconventional monetary policy in such contexts. Through the lens of a two-country monetary union model with financial intermediaries, I show that, contrary to intuition, country-specific central bank credit policies do not necessarily yield higher welfare than union-wide policies, even when shocks are asymmetric. This result stems from the inability of simple policy rules to fully offset the distortions caused by financial frictions. In this second-best environment, union-wide policies, though less targeted, may deliver more aggressive credit interventions, thereby more effectively mitigating the adverse effects of these frictions. The relative welfare performance of union-wide versus country-specific rules is shaped by the degree of capital market integration. These findings suggest that as integration deepens, the rationale for tailoring credit policies to individual member states changes from a welfare perspective.

Local Fiscal Pressure and Electoral Responses: A Tale of Two Germanys, with Iryna Stewen

Current version available on request (May 2026)

We study the electoral consequences of Germany's debt brake, which generated fiscal pressure at the municipal level through unfunded expenditure shifts from states. Using data on all German districts across four election types (2010--2022), we document a tale of two Germanys. In West Germany, local fiscal pressure increases far-right AfD support in low-salience elections, where protest voting dominates, but activates responsibility-based voting in high-salience ones, with the fiscal-conservative CDU gaining significantly. The protest effect is concentrated in economically vulnerable and demographically stressed districts. In former communist East Germany, local fiscal pressure channels votes toward the far-left Die Linke in low-salience elections and suppresses AfD support in high-salience ones---reflecting a different political vocabulary and a fundamentally different fiscal adjustment regime. The latter operates through municipal investment: western municipalities cut capital spending under fiscal pressure, generating visible infrastructure deterioration that drives protest voting; eastern municipalities are shielded by a compensatory transfer architecture that more than fully offsets the shock. Our results show that the political costs of fiscal consolidation depend critically on electoral salience, regional history, and fiscal adjustment regimes. 

Georisk and Systemic risk in Europe’s Financial System—Unpacking Transmission Channels, with Jelena Živanovic

Current version available on request (May 2026)

Analyzing a sample of European financial institutions from 2002 to 2025, we show that geopolitical risk (GPR) significantly heightens systemic risk of European banks and non-banks. We use Bayesian methods to measure dynamic ΔCoVaR, characterising systemic risk of financial institutions. Banks exhibit stronger responses to GPR shocks than non-banks. Transmission depends on economic and institutional conditions: global trade openness and uncertainty amplify the effects of GPR shocks, while trade integration with the United States and expansionary fiscal stances dampen them. Balance-sheet characteristics also matter—reliance on short-term funding and illiquid assets amplifies shock propagation, whereas higher intangible asset intensity attenuates short-run spillovers. In contrast, we find no robust evidence that macroprudential regulation mitigates the transmission of geopolitical shocks. These results highlight the importance of balance-sheet fragilities and uncertainty channels in shaping the systemic consequences of geopolitical risk

The Limits of Macroprudential Policy in Europe’s Financial System: Risk-Shifting Between Banks and Non-Banks, with Akhilesh K Verma

Local copy (June 2025) | WiSo-HH Working Paper Series No. 79 (December 2023)

The rapid rise of non-bank financial intermediaries (NBFI) in Europe questions the effectiveness of the current macroprudential toolkit, mainly designed for banks. Using a panel of both banks and NBFIs across European countries, we show that macroprudential tightenings have limited success in reducing systemic risk within the integrated financial system. While they tend to decrease the risk contribution of banks, they often lead to an increase in the risk contribution of NBFIs, indicating risk-shifting. Our results highlight the need to expand and strengthen regulation beyond banks to better address systemic risks in the modern, integrated financial system.

Household Inequality and the Transmission of QE in Euro Area Countries, with Stelios Tsiaras

Local Copy (February 2025) | WiSo-HH Working Paper Series No. 83 (July 2024) 

We examine the role of redistribution in the transmission of quantitative easing (QE) to output and explore the underlying mechanisms. Our findings reveal that, among euro area countries, the effects of QE shocks on real GDP are amplified by a larger fraction of liquidity-constrained households and by a more pronounced response of the labor market. The latter result is interpreted as evidence for a pivotal role of general equilibrium effects via the labor market in the transmission of monetary policy. For our analyses, we rely on a local projections instrumental variable approach in which the policy shock is instrumented by high-frequency changes in yields around ECB press conferences.

Work in Progress

Public Capital in a HANK Economy: Macro and Distributional Effects of the German Fiscal Expansion, with Florentine Schwark

Fiscal Policy and Endogenous Growth, with Florentine Schwark