Monetary Aggregates, Asset Prices and Real Outcomes
Paying close attention to money, credit, and asset prices shall improve the IWH's macroeconomic policy work, especially in terms of forecasting macroeconomic developments and risks, but also in terms of assessing the stance of monetary policy. To this end, it is necessary to understand the relationship between monetary and financial developments, on the one hand, and macroeconomic dynamics and stability, on the other hand. Money and credit are important determinants of the macroeconomic performance of a market economy. Research in this group contributes to the literature on quantitative macroeconomic models to be applied for forecasting and policy analysis that incorporate monetary and financial aspects.
Research ClusterMacroeconomic Dynamics and Stability
01.2017 ‐ 12.2017
Effects of exchange rate changes on production and inflation
Reconciling Narrative Monetary Policy Disturbances with Structural VAR Model Shocks?
in: Economics Letters, No. 2, 2013
Structural VAR studies disagree with narrative accounts about the history of monetary policy disturbances. We investigate whether employing the narrative monetary shocks as a proxy variable in a VAR model aligns both shock series. We find that it does not.
Explosive Preisentwicklung und spekulative Blasen auf Rohstoffmärkten
in: ORDO, No. 64, 2013
This paper analyzes whether price developments on commodity markets support the hypothesis that commodity prices are subject to speculative behavior in certain time periods. This is an important research question within the ongoing debate on the regulation of commodity trading. It can be shown that commodity prices occasionally exhibit explosive behavior. In particular, this is found for raw industrials, but also for foodstuff. An important implication is that the reasons and the effects on consumers and investors of bubbles on commodity markets have to be investigated in greater detail. Additionally, the distributional effects of these findings should be analyzed in future research.
The New EU Countries and Euro Adoption
in: Intereconomics, No. 3, 2013
In the new member states of the EU which have not yet adopted the euro, previous adoption strategies have come under scrutiny. The spillovers and contagion from the global financial crisis revealed a new threat to the countries’ real convergence goal, namely considerable vulnerability to the transmission of financial instability to the real economy. This paper demonstrates the existence of extreme risks for real convergence and argues in favour of a new adoption strategy which does not announce a target date for the currency changeover and which allows for more flexible and countercyclical monetary, fiscal and wage policies.
Money and Inflation: Consequences of the Recent Monetary Policy
in: Journal of Policy Modeling, No. 4, 2013
We use a multivariate state space framework to analyze the short run impact of money on prices in the United States. The key contribution of this approach is that it allows to identify the impact of money growth on inflation without having to model money demand explicitly. Using our results, that provide evidence for a substantial impact of money on prices in the US, we analyze the consequences of the Fed's response to the financial crisis. Our results indicate a raise of US inflation above 5% for more than a decade. Alternative exit strategies that we simulate cannot fully compensate for the monetary pressure without risking serious repercussions on the real economy. Further simulations of a double dip in the United States indicate that a repetition of the unusually expansive monetary policy – in addition to increased inflation – might cause growth losses exceeding the contemporary easing of the crisis.
Has the Euro Increased International Price Elasticities?
in: Empirica, No. 1, 2013
The introduction of the Euro has been accompanied by the hope that international competition between EMU member states would increase due to higher price transparency. This paper contributes to the literature by analyzing price elasticities in international trade flows between Germany and France and between Germany and the United Kingdom before and after the introduction of the Euro. Using disaggregated Eurostat trade statistics, we adopt a heterogeneous dynamic panel framework for the estimation of price elasticities. We suggest a Kalman-filter approach to control for unobservable quality changes which otherwise would bias estimates of price elasticities. We divide the complete sample, which ranges from 1995 to 2008, into two sub-samples and show that price elasticities in trade between EMU members did not change substantially after the introduction of the Euro. Hence, we do not find evidence for an increase in international price competition resulting from EMU.
Why is Unemployment so Countercyclical?
in: NBER Working Paper No. 26723, 2020
We argue that wage inertia plays a pivotal role in allowing empirically plausible variants of the standard search and matching model to account for the large countercyclical response of unemployment to shocks.
Resolving the Missing Deflation Puzzle
in: CEPR Discussion Papers 13690, 2019
We propose a resolution of the missing deflation puzzle. Our resolution stresses the importance of nonlinearities in price- and wage-setting when the economy is exposed to large shocks. We show that a nonlinear macroeconomic model with real rigidities resolves the missing deflation puzzle, while a linearized version of the same underlying nonlinear model fails to do so. In addition, our nonlinear model reproduces the skewness of inflation and other macroeconomic variables observed in post-war U.S. data. All told, our results caution against the common practice of using linearized models to study inflation and output dynamics.
The Appropriateness of the Macroeconomic Imbalance Procedure for Central and Eastern European Countries
in: IWH Discussion Papers, No. 16, 2017
The experience of Central and Eastern European countries (CEEC) during the global financial crisis and in the resulting European debt crises has been largely different from that of other European countries. This paper looks at the specifics of the CEEC in recent history and focuses in particular on the appropriateness of the Macroeconomic Imbalances Procedure for this group of countries. In doing so, the macroeconomic situation in the CEEC is highlighted and macroeconomic problems faced by these countries are extracted. The findings are compared to the results of the Macroeconomic Imbalances Procedure of the European Commission. It is shown that while the Macroeconomic Imbalances Procedure correctly identifies some of the problems, it understates or overstates other problems. This is due to the specific construction of the broadened surveillance procedure, which largely disregarded the specifics of catching-up economies.
U.S. Monetary-Fiscal Regime Changes in the Presence of Endogenous Feedback in Policy Rules
in: IWH Discussion Papers, No. 15, 2017
We investigate U.S. monetary and fiscal policy regime interactions in a model, where regimes are determined by latent autoregressive policy factors with endogenous feedback. Policy regimes interact strongly: Shocks that switch one policy from active to passive tend to induce the other policy to switch from passive to active, consistently with existence of a unique equilibrium, though both policies are active and government debt grows rapidly in some periods. We observe relatively strong interactions between monetary and fiscal policy regimes after the recent financial crisis. Finally, latent policy regime factors exhibit patterns of correlation with macroeconomic time series, suggesting that policy regime change is endogenous.
Monetary Policy in an Oil-dependent Economy in the Presence of Multiple Shocks
in: IWH Discussion Papers, No. 14, 2017
Russian monetary policy has been challenged by large and continuous private capital outflows and a sharp drop in oil prices during 2014, with both ongoings having put a significant depreciation pressure on the ruble and having led the central bank to eventually give up its exchange rate management strategy. Against this background, this paper estimates a small open economy model for Russia, featuring an oil price sector and extended by a specification of the foreign exchange market to correctly account for systematic central bank interventions. We find that shocks to the oil price and private capital flows substantially affect domestic variables such as inflation, output and the exchange rate. Simulations of the model for the estimated actual strategy and five alternative regimes suggest that the vulnerability of the Russian economy to external shocks can substantially be lowered by adopting some form of an inflation targeting strategy. Foreign exchange intervention-based policy strategies to target the nominal exchange rate or the ruble price of oil, on the other hand, prove inferior to the policy in place.