25 Years IWH

25 Jahre IWH

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Should We Use Linearized Models To Calculate Fiscal Multipliers?

Jesper Lindé, Mathias Trabandt
Journal of Applied Econometrics, forthcoming
Abstract
We calculate the magnitude of the government consumption multiplier in linearized and nonlinear solutions of a New Keynesian model at the zero lower bound. Importantly, the model is amended with real rigidities to simultaneously account for the macroeconomic evidence of a low Phillips curve slope and the microeconomic evidence of frequent price changes. We show that the nonlinear solution is associated with a much smaller multiplier than the linearized solution in long-lived liquidity traps, and pin down the key features in the model which account for the di¤erence. Our results caution against the common practice of using linearized models to calculate scal multipliers in long-lived liquidity traps.
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On DSGE Models

Lawrence J. Christiano, Martin S. Eichenbaum, Mathias Trabandt
Journal of Economic Perspectives, forthcoming
Abstract
Macroeconomic policy questions involve trade-o s between competing forces in the economy. The problem is how to assess the strength of those forces for the particular policy question at hand. DSGE models are the leading framework that macroeconomists have for dealing with this problem in an open and transparent manner. This paper reviews the state of DSGE models before the financial crisis and how DSGE modelers have responded to the crisis and its aftermath. In addition, we discuss the role of DSGE models in the policy process.
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Crises and Rescues: Liquidity Transmission Through Global Banks

Michael Koetter, Claudia M. Buch, C. T. Koch
International Journal of Central Banking, forthcoming
Abstract
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Why Is there Resistance to Works Councils In Germany? An Economic Perspective

Steffen Müller, Jens Stegmaier
Economic and Industrial Democracy, forthcoming
Abstract
Recent empirical research generally finds evidence of positive economic effects for works councils, for example with regard to productivity and – with some limitations – to profits. This makes it necessary to explain why employers’ associations have reservations about works councils. On the basis of an in-depth literature analysis, this article shows that beyond the generally positive findings, there are important heterogeneities in the impact of works councils. The authors argue that those groups of employers that tend to benefit little from employee participation in terms of productivity and profits may well be important enough to shape the agenda of their employers’ organization and have even gained in importance within their organizations in recent years. The authors also discuss the role of deviations from profit-maximizing behavior like risk aversion, short-term profit-maximization and other non-pecuniary motives, as possible reasons for employer resistance.
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Vertical Grants and Local Public Efficiency. The Inference-disturbing Effect of Fiscal Equalization

Ivo Bischoff, Peter Bönisch, Peter Haug, Annette Illy
Public Finance Review, forthcoming
Abstract
The existing empirical literature on the impact of vertical grants on local public-sector efficiency yields mixed results. Given the fact that vertical financial equalization systems often reduce differences in fiscal capacity, we argue that empirical studies based on cross-sectional data may yield a positive relationship between grants and efficiency of public service production even when the underlying causal effect is not. We provide a simple illustrative theoretical model to show the logic of our argument and illustrate its relevance by an empirical case study for the German state of Saxony-Anhalt. We show that our main argument of an inference-disturbing effect applies to those existing studies that are more optimistic about the impact of vertical grants. Finally, we argue that it may disturb the inference drawn from studies in a number of other countries where vertical grants—intended or not—concentrate in fiscally weak municipalities.
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Covenants not to Compete: The Ties That Stifle Productivity

S. Anand, Iftekhar Hasan, P. Sharma, Haizhi Wang
Human Resource Management, forthcoming
Abstract
Covenants not to compete (CNCs) are frequently used by many businesses in an attempt to impede the departure of their human capital and continually retain their competitive edge. However, empirical evidence regarding the net impact of CNCs on the firm is largely inconclusive. Theorizing that CNCs impose restrictions on employee mobility and thus reduce their motivation to expand their human capital, we examine the impact of CNCs on firm productivity. We also explore the moderating effects of job opportunity concentration in a firm’s home state, and long-term executive compensation. We hypothesize that the enforceability of CNCs is negatively associated with firm productivity. This relationship becomes stronger as comparable job opportunities become more concentrated in a firm’s home state. On the other hand, this negative relationship is weakened as employee compensation becomes more long-term oriented. Results of hierarchical linear modeling analyses of 21680 observations for 3379 firms supported all three hypotheses.
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Too Connected to Fail? Inferring Network Ties from Price Co-movements

Jakob Bosma, Michael Koetter, Michael Wedow
Journal of Business & Economic Statistics, forthcoming
Abstract
We use extreme value theory methods to infer conventionally unobservable connections between financial institutions from joint extreme movements in credit default swap spreads and equity returns. Estimated pairwise co-crash probabilities identify significant connections among up to 186 financial institutions prior to the crisis of 2007/2008. Financial institutions that were very central prior to the crisis were more likely to be bailed out during the crisis or receive the status of systemically important institutions. This result remains intact also after controlling for indicators of too-big-to-fail concerns, systemic, systematic, and idiosyncratic risks. Both CDS-based and Equity-based connections are significant predictors of bailouts.
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The Political Economy of Financial Systems: Evidence from Suffrage Reforms in the Last Two Centuries

Hans Degryse, Thomas Lambert, Armin Schwienbacher
The Economic Journal, forthcoming
Abstract
Voting rights were initially limited to wealthy elites providing political support for stock markets. The franchise expansion induces the median voter to provide political support for banking development, as this new electorate has lower financial holdings and benefits less from the riskiness and financial returns from stock markets. Our panel data evidence covering the years 1830–1999 shows that tighter restrictions on the voting franchise induce greater stock market development, whereas a broader voting franchise is more conducive to the banking sector, consistent with Perotti and von Thadden (2006). The results are robust to controlling for other institutional arrangements and endogeneity.
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Market Power and Risk: Evidence from the U.S. Mortgage Market

Carola Müller, Felix Noth
Economics Letters, 2018
Abstract
We use mortgage loan application data of the Home Mortgage Disclosure Act (HMDA) to shed light on the role of banks’ market power on their presumably insufficient risk screening activities in the U.S. mortgage market in the pre-crisis era. We find that banks with higher market power protect their charter value. The effect is stronger for banks that have more information about local markets.
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Banks Fearing the Drought? Liquidity Hoarding as a Response to Idiosyncratic Interbank Funding Dry-ups

Helge Littke, Matias Ossandon Busch
IWH Discussion Papers, No. 12, 2018
Abstract
Since the global financial crisis, economic literature has highlighted banks’ inclination to bolster up their liquid asset positions once the aggregate interbank funding market experiences a dry-up. To this regard, we show that liquidity hoarding and its detrimental effects on credit can also be triggered by idiosyncratic, i.e. bankspecific, interbank funding shocks with implications for monetary policy. Combining a unique data set of the Brazilian banking sector with a novel identification strategy enables us to overcome previous limitations for studying this phenomenon as a bankspecific event. This strategy further helps us to analyse how disruptions in the bank headquarters’ interbank market can lead to liquidity and lending adjustments at the regional bank branch level. From the perspective of the policy maker, understanding this market-to-market spillover effect is important as local bank branch markets are characterised by market concentration and relationship lending.
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