Endogenous Portfolio Choice by Banks and the International Risk-Sharing Puzzle  A Role for Macroprudential Policy? | July 2018

(available on request)

Abstract: International consumption risk-sharing is relatively low compared to what theoretical models would predict given the high level of international financial market integration. I show that a model in which leverage-constrained financial intermediaries undertake the international portfolio choice decision instead of households can explain this puzzle. The optimal portfolio composition choosen by financial intermediaries does, in general, not provide the highest possible degree of consumption risk sharing. In particular, financial intermediaries choose to hold too many home assets. This result is driven by an agency problem which causes the motives of bankers and households to diverge. Conditional on the nature of the shocks, macroprudential policy can decrease the wedge between actual and potential risk-sharing.

JEL-Classification: E44, F30, F44, G11



(BDPEMS Working Paper Series # 2018-01)

Abstract: 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 limits incentives to reform financial structures from the viewpoint of a financially less stable country.

JEL-Classification: E44, E52, E58, F45


Abstract: I propose a theoretical framework to think about the global comovement in real and financial variables during the recent financial crisis. The framework is used to address one question in particular: what is the role of banks' balance sheet exposure to foreign assets for the international transmission of country-specific shocks? First, it is shown that this role depends on the nature of the shock: Balance sheet exposure is essential for global comovement in the case of capital quality shocks but does not play a decisive role for cross-country correlations conditional on other shocks, e.g., technology shocks. Second, I show that if financial institutions undertake the international portfolio choice decision instead of households, they do not necessarily choose the portfolio which yields the highest degree of consumption risk sharing. In particular, they choose to hold too many home assets.

JEL-Classification: E44, F30, F44


Work in Progress
  • International Business Cycles in a DSGE Model with Financial Frictions - The Role of Balance Sheet Exposure
  • Macroprudential Policy and the Frequency of Crises (joint with Jelena Zivanovic, Bank of Canada)
  • Macroprudential Policy and the Frequency of Crises in Open Economies
  • Government Debt Purchases in a Monetary Union (joint with Felix Strobel, Goethe Universität Frankfurt)