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

Household Inequality and the Transmission of QE in Euro Area Countries

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. 

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

SSRN Working Paper (January 2025) | 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 leads to lower cross-country output correlations, while the opposite is true for country-specific demand shocks. I argue that an important, yet overlooked, transmission channel originates in the interplay between financial integration and terms of trade movements in response to the shocks hitting the economy. The transmission channel is independent of whether the agents who hold the foreign assets are financially constrained or not.

Macroprudential Policy Shocks, Non-Bank Financial Intermediation and Systemic Risk in Europe, with Akhilesh K Verma

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

How does macroprudential regulation affect financial stability in the presence of non-bank financial intermediaries? We estimate the contributions of traditional banks vis-à-vis non-bank financial intermediaries to changes in systemic risk -- measured as ΔCoVaR -- in reaction to exogenous macroprudential policy changes in European countries over various horizons. Using local projections, we find that while tighter macroprudential regulation, generally, decreases systemic risk among traditional banks, it has the opposite effect on systemic risk in the non-bank financial intermediation sector. For some types of regulations, the latter effect is even stronger than the former, indicating that macroprudential tightenings increase systemic risk in the entire financial system -- through leakages between the traditional and the non-bank financial intermediation sectors.

Unconventional Monetary Policy in a Monetary Union

Local copy (December 2023) | BDPEMS Working Paper Series # 2018-01 

I analyze the adoption of unconventional monetary policy measures in a monetary union. To this end, I lay out a two-country monetary union model with balance-sheet constrained financial intermediaries and central bank credit policy. The framework is used to compare the welfare implications of union-wide versus country-specific optimal simple unconventional monetary policy rules. It is shown that - despite the presence of country-specific shocks - country-specific rules are not necessarily associated with higher welfare from the viewpoint of a structurally symmetric union. Instead, to the extent that the central bank reacts to indicators which are highly correlated between countries, union-wide rules can be preferable. When considering structural asymmetries between countries, there is evidence that the introduction of unconventional monetary policy affects incentives to reform financial structures from the viewpoint of a financially less stable country, however, not necessarily in a negative way.

Geopolitical Risk and Bank Systemic Risk: The Role of the Macroprudential Policy Stance, with Akhilesh K Verma

Paper available on request

Based on a panel dataset of European banks over the period 2005 to 2019, we show that, first, changes in geopolitical risk significantly contribute to changes in systemic risk, and that, second, a tighter macroprudential policy stance is associated with smaller effects of geopolitical risk shocks on systemic risk in the respective country. In our estimations we rely on the Geopolitical Risk Index (GPR) developed by Caldara and Iacoviello (2022). Systemic risk is measured as ΔCoVaR. To make sure that our measure of macroprudential policy does not suffer from the issue of reverse causality, we identify the macroprudential policy stance of a country  as the part of policy which is orthogonal to observables.

Work in Progress

Fiscal austerity and populist voting in Germany