Exchange Rates and the Information Channel of Monetary Policy
Oliver Holtemöller, Alexander Kriwoluzky, Boreum Kwak
IWH Discussion Papers,
No. 17,
2020
Abstract
We disentangle the effects of monetary policy announcements on real economic variables into an interest rate shock component and a central bank information shock component. We identify both components using changes in interest rate futures and in exchange rates around monetary policy announcements. While the volatility of interest rate surprises declines around the Great Recession, the volatility of exchange rate changes increases. Making use of this heteroskedasticity, we estimate that a contractionary interest rate shock appreciates the dollar, increases the excess bond premium, and leads to a decline in prices and output, while a positive information shock appreciates the dollar, decreases prices and the excess bond premium, and increases output.
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16.09.2020 • 18/2020
Economy recovers from the shutdown – but a quick return to pre-crisis normality is unlikely
The German economy has bounced back strongly over the summer, recovering a considerable part of the production slump caused by the shutdown in spring. Nevertheless, real gross domestic product in 2020 is likely to contract by 5.7%. In 2021, growth is expected to average 3.2% according to IWH autumn economic forecast. The decline in production in 2020 is likely to be less pronounced in East Germany com¬pared to Germany as a whole.
Oliver Holtemöller
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The Effects of Fiscal Policy in an Estimated DSGE Model – The Case of the German Stimulus Packages During the Great Recession
Andrej Drygalla, Oliver Holtemöller, Konstantin Kiesel
Macroeconomic Dynamics,
No. 6,
2020
Abstract
In this paper, we analyze the effects of the stimulus packages adopted by the German government during the Great Recession. We employ a standard medium-scale dynamic stochastic general equilibrium (DSGE) model extended by non-optimizing households and a detailed fiscal sector. In particular, the dynamics of spending and revenue variables are modeled as feedback rules with respect to the cyclical components of output, hours worked and private investment. Based on the estimated rules, fiscal shocks are identified. According to the results, fiscal policy, in particular public consumption, investment, and transfers prevented a sharper and prolonged decline of German output at the beginning of the Great Recession, suggesting a timely response of fiscal policy. The overall effects, however, are small when compared to other domestic and international shocks that contributed to the economic downturn. Our overall findings are not sensitive to considering fiscal foresight.
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Who Buffers Income Losses after Job Displacement? The Role of Alternative Income Sources, the Family, and the State
Daniel Fackler, Eva Weigt
LABOUR,
No. 3,
2020
Abstract
Using survey data from the German Socio‐Economic Panel (SOEP), this paper analyses the extent to which alternative income sources, reactions within the household context, and redistribution by the state attenuate earnings losses after job displacement. Applying propensity score matching and fixed effects estimations, we find that income from self‐employment reduces the earnings gap only slightly and severance payments buffer losses in the short run. On the household level, we find little evidence for an added worker effect whereas redistribution by the state within the tax and transfer system mitigates income losses substantially.
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Physical Climate Change Risks and the Sovereign Creditworthiness of Emerging Economies
Hannes Böhm
IWH Discussion Papers,
No. 8,
2020
Abstract
I show that rising temperatures can detrimentally affect the sovereign creditworthiness of emerging economies. To this end, I collect long-term monthly temperature data of 54 emerging countries. I calculate a country’s temperature deviation from its historical average, which approximates present day climate change trends. Running regressions from 1994m1-2018m12, I find that higher temperature anomalies lower sovereign bond performances (i.e. increase sovereign risk) significantly for countries that are warmer on average and have lower seasonality. The estimated magnitudes suggest that affected countries likely face significant increases in their sovereign borrowing costs if temperatures continue to rise due to climate change. However, results indicate that stronger institutions can make a country more resilient towards temperature shocks, which holds independent of a country’s climate.
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Corona Shutdown and Bankruptcy Risk
Oliver Holtemöller, Yaz Gulnur Muradoglu
IWH Online,
No. 3,
2020
Abstract
This paper investigates the consequences of shutdowns during the Corona crisis on the risk of bankruptcy for firms in Germany and United Kingdom. We use financial statements from the period 2014 to 2018 to predict how pervasive risk of bankruptcy becomes for micro, small, medium, and large firms due to shutdown measures. We estimate distress for firms using their capacity to service their debt. Our results indicate that under three months of shutdown almost all firms in shutdown industries face high risk of bankruptcy. In Germany, about 99% of firms in shutdown industries and in the UK about 98% of firms in shutdown industries are predicted to be under distress. The furlough schemes reduce the risk of bankruptcy only marginally to 97% of firms in shutdown industries in Germany and 95% of firms in shutdown industries in the United Kingdom in case of a three-month shutdown. In sectors that are not shutdown under conservative estimates of contagion of sales losses, our results indicate considerable risk of widespread bankruptcies ranging from 76% of firms in Germany to 69% of firms in the United Kingdom. These early findings suggest that the impact of corona crisis on corporate sector via shutdowns can be severe and subsequent policy should be designed accordingly.
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16.06.2020 • 9/2020
The economy adapts to the pandemic
In the first half of 2020, the pandemic has exacted a heavy toll on the German economy, causing a slump in production that will not be fully recovered within the next year. According to IWH summer economic forecast, gross domestic product is expected to contract by 5.1% in 2020 and to increase by 3.2% in 2021. The decline in production in Eastern Germany is likely to be less pronounced compared to Germany as a whole and estimated at 3.2% in 2020.
Oliver Holtemöller
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Transmitting Fiscal Covid-19 Counterstrikes Effectively: Mind the Banks!
Reint E. Gropp, Michael Koetter, William McShane
IWH Online,
No. 2,
2020
Abstract
The German government launched an unprecedented range of support programmes to mitigate the economic fallout from the Covid-19 pandemic for employees, self-employed, and firms. Fiscal transfers and guarantees amount to approximately €1.2 billion by now and are supplemented by similarly impressive measures taken at the European level. We argue in this note that the pandemic poses, however, also important challenges to financial stability in general and bank resilience in particular. A stable banking system is, in turn, crucial to ensure that support measures are transmitted to the real economy and that credit markets function seamlessly. Our analysis shows that banks are exposed rather differently to deteriorated business outlooks due to marked differences in their lending specialisation to different economic sectors. Moreover, a number of the banks that were hit hardest by bleak growth prospects of their borrowers were already relatively thinly capitalised at the outset of the pandemic. This coincidence can impair the ability and willingness of selected banks to continue lending to their mostly small and medium sized entrepreneurial customers. Therefore, ensuring financial stability is an important pre-requisite to also ensure the effectiveness of fiscal support measures. We estimate that contracting business prospects during the first quarter of 2020 could lead to an additional volume of non-performing loans (NPL) among the 40 most stressed banks ‒ mostly small, regional relationship lenders ‒ on the order of around €200 million. Given an initial stock of NPL of €650 million, this estimate thus suggests a potential level of NPL at year-end of €1.45 billion for this fairly small group of banks already. We further show that 17 regional banking markets are particularly exposed to an undesirable coincidence of starkly deteriorating borrower prospects and weakly capitalised local banks. Since these regions are home to around 6.8% of total employment in Germany, we argue that ensuring financial stability in the form of healthy bank balance sheets should be an important element of the policy strategy to contain the adverse real economic effects of the pandemic.
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Banks’ Funding Stress, Lending Supply and Consumption Expenditure
H. Evren Damar, Reint E. Gropp, Adi Mordel
Journal of Money, Credit and Banking,
No. 4,
2020
Abstract
We employ a unique identification strategy linking survey data on household consumption expenditure to bank‐level data to estimate the effects of bank funding stress on consumer credit and consumption expenditures. We show that households whose banks were more exposed to funding shocks report lower levels of nonmortgage liabilities. This, however, only translates into lower levels of consumption for low‐income households. Hence, adverse credit supply shocks are associated with significant heterogeneous effects.
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Employment Effects of Introducing a Minimum Wage: The Case of Germany
Oliver Holtemöller, Felix Pohle
Economic Modelling,
No. 7,
2020
Abstract
Income inequality has been a major concern of economic policy makers for several years. Can minimum wages help to mitigate inequality? In 2015, the German government introduced a nationwide statutory minimum wage to reduce income inequality by improving the labour income of low-wage employees. However, the employment effects of wage increases depend on time and region specific conditions and, hence, they cannot be known in advance. Because negative employment effects may offset the income gains for low-wage employees, it is important to evaluate minimum-wage policies empirically. We estimate the employment effects of the German minimum-wage introduction using panel regressions on the state-industry-level. We find a robust negative effect of the minimum wage on marginal and a robust positive effect on regular employment. In terms of the number of jobs, our results imply a negative overall effect. Hence, low-wage employees who are still employed are better off at the expense of those who have lost their jobs due to the minimum wage.
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