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 Cluster
Macroeconomic Dynamics and Stability

Your contact

Professor Boreum Kwak, PhD
Professor Boreum Kwak, PhD
Mitglied - Department Macroeconomics
Send Message +49 345 7753-851


01.2017 ‐ 12.2017

Effects of exchange rate changes on production and inflation

Deutsche Bundesbank

Professor Dr Oliver Holtemöller

Refereed Publications


Central Banks, Trade Unions and Reputation – Is there Room for an Expansionist Manoeuvre in the European Union?

Toralf Pusch A. Heise

in: Journal of Post Keynesian Economics, 2010


It is now a few years since the introduction of the common currency, and Europe is still experiencing high unemployment. The conventional logic attributes this problem to flaws in the labour market. In this article we look at the changes that occur if labour unions and the Central Bank have different options to choose from in a climate of uncertainty. In a single-stage game the most probable outcome is a high unemployment rate. Results change dramatically if the game is repeated. However, this effect does not occur if the Central Bank puts a too high weight on price stability. Secondly, if the trade unions do not possess the capability for coordinating and moderating their wage claims, a full employment equilibrium is out of range.

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Die Bedeutung der Besitzverflechtung von Kapitalgesellschaften für die Finanzkrise

Makram El-Shagi C. Ilgmann

in: ORDO, 2010


Im vorliegenden Papier wird die Bedeutung der Besitzverflechtungen zwischen Aktiengesellschaften (bzw. Kapitalgesellschaften im Allgemeinen) für die gegenwärtige Finanzmarktkrise herausgearbeitet. Durch den wechselseitigen Besitz von Firmen untereinander ist eine Situation entstanden, in denen bestellte Manager sich lediglich kontrollieren. Durch entstehende Abhängigkeiten und die innerhalb der verhältnismäßig kleinen Gruppe von Topmanagern mögliche implizite Koordination konnten Vorstände über die Entlohnungs- und damit auch über die Anreizsysteme, denen sie ausgesetzt sind, wesentlich mitentscheiden. Dies hat, wie gezeigt wird, erheblich zur Entstehung von Anreizsystemen beigetragen, die sich im Kern an kurzfristigen Erfolgen orientieren. Da insbesondere in der Finanzintermediation kurz- und langfristige Gewinnoptimierung durch die starke Korrelation von Risiko und Gewinnmöglichkeiten einem starken Trade- off unterliegen, haben diese Anreizsysteme wiederum eine erhebliche Rolle in der verfehlten Risikopolitik der Banken gespielt, die ein wesentliche Ursache der Krise war.

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A Simple Macro Model of Original Sin based on Optimal Price Setting under Incomplete Information

Axel Lindner

in: International Economics and Economic Policy, 2009


This paper analyses the consequences of “original sin“ (the fact that the currency of an emerging market economy usually cannot be used to borrow abroad) for macroeconomic stability. The approach is based on third-generation models of currency crises, but differs from alternative versions by explicitly modeling the price setting behavior of firms if prices are sticky and there is incomplete information about the future exchange rate. It is shown that a small depreciation is beneficial, but a large one is detrimental.

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Evaluating Communication Strategies for Public Agencies: Transparency, Opacity, and Secrecy

Axel Lindner

in: The B.E. Journal of Macroeconomics, 2009


This paper analyses in a simple global games framework welfare effects stemming from different communication strategies of public agencies if strategies of agents are complementary to each other: Communication can either be fully transparent, or the agency opaquely publishes only its overall assessment of the economy, or it keeps information completely secret. It is shown that private agents put more weight on their private information in the transparent case than in the case of opacity. Thus, in many cases, the appropriate measure against overreliance on public information is giving more details to the public instead of denying access to public information.

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Working Papers


The Evolution of Monetary Policy in Latin American Economies: Responsiveness to Inflation under Different Degrees of Credibility

Stefan Gießler

in: IWH Discussion Papers, No. 9, 2020


This paper investigates the forward-lookingness of monetary policy related to stabilising inflation over time under different degrees of central bank credibility in the four largest Latin American economies, which experienced a different transition path to the full-fledged inflation targeting regime. The analysis is based on an interest rate-based hybrid monetary policy rule with time-varying coefficients, which captures possible shifts from a backward-looking to a forward-looking monetary policy rule related to inflation stabilisation. The main results show that monetary policy is fully forward-looking and exclusively reacts to expected inflation under nearly perfect central bank credibility. Under a partially credible central bank, monetary policy is both backward-looking and forward-looking in terms of stabilising inflation. Moreover, monetary authorities put increasingly more priority on stabilising expected inflation relative to actual inflation if central bank credibility tends to improve over time.

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Why is Unemployment so Countercyclical?

Lawrence J. Christiano Martin S. Eichenbaum Mathias Trabandt

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.

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Resolving the Missing Deflation Puzzle

Jesper Lindé Mathias Trabandt

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.

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U.S. Monetary-Fiscal Regime Changes in the Presence of Endogenous Feedback in Policy Rules

Yoosoon Chang Boreum Kwak

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.

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Monetary Policy in an Oil-dependent Economy in the Presence of Multiple Shocks

Andrej Drygalla

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.

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