What Explains International Interest Rate Co-Movement? ...
Three Research Clusters ...
When there were almost no flats in Halle yet ... Brigitte Loose about IWH's...
Measuring Market Expectations
Handbook of Economic Expectations,
Asset prices are a valuable source of information about financial market participants' expectations about key macroeconomic variables. However, the presence of time-varying risk premia requires an adjustment of market prices to obtain the market's rational assessment of future price and policy developments. This paper reviews empirical approaches for recovering market-based expectations. It starts by laying out the two canonical modeling frameworks that form the backbone for estimating risk premia and highlights the proliferation of risk pricing factors that result in a wide range of different asset-price-based expectation measures. It then describes a key methodological innovation to evaluate the empirical plausibility of risk premium estimates and to identify the most accurate market-based expectation measure. The usefulness of this general approach is illustrated for price expectations in the global oil market. Then, the paper provides an overview of the body of empirical evidence for monetary policy and inflation expectations with a special emphasis on market-specific characteristics that complicate the quest for the best possible market-based expectation measure. Finally, it discusses a number of economic applications where market expectations play a key role for evaluating economic models, guiding policy analysis, and deriving shock measures.
17.03.2022 • 6/2022
Price shock jeopardises recovery of German economy
Russia’s war in Ukraine is hitting the German economy primarily via an energy price shock, but also by disrupting trade flows and causing general uncertainty. At the same time, however, the economy is receiving a strong boost from the lifting of many pandemic restrictions. The Halle Institute for Economic Research (IWH) forecasts that gross domestic product will increase by 3.1% in 2022. The consumer price index will be 4.8% higher than one year ago. The war affects the East German eco-nomy about as hard as the economy in Germany as a whole.
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Resolving the Missing Deflation Puzzle
Journal of Monetary Economics,
A resolution of the missing deflation puzzle is proposed. 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.
Banking Globalization, Local Lending, and Labor Market Effects: Micro-level Evidence from Brazil
Journal of Financial Stability,
Recent financial crises have prompted the interest in understanding how banking globalization interacts with domestic institutions in shaping foreign shocks’ transmission. This paper uses regional banking data from Brazil to show that a foreign funding shock to banks negatively affects lending by their regional branches. This effect increases in the presence of frictions in internal capital markets, which affect branches’ capacity to access funding from other regions via intra-bank linkages. These results also matter on an aggregate level, as municipality-level credit and job flows drop in exposed regions. Policies aiming to reduce the fragmented structure of regional banking markets could moderate the propagation of foreign shocks.
How Can Macroprudential Policies Transmit Within a Banking Group?
WorldBank All About Finance,
The unexpected shock represented by the COVID-19 pandemic illustrates the importance of building robust macroprudential frameworks to increase countries’ resilience against sudden disruptions in financial markets. By now, a widespread opinion among commentators and policy makers is that the macroprudential frameworks that were implemented over the past decades were effective in moderating market stress, a view supported by ample evidence on the effectiveness of macroprudential policies.