Global implications of national unconventional policies

Dedola, Luca; Karádi, Péter; Lombardo, Giovanni

doi:10.1016/j.jmoneco.2012.12.001

Cited by 102 publications

(68 citation statements)

References 28 publications

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“…where we allow the share of diversion to vary over time (see, for example, Dedola, Karadi, and Lombardo, 2013). The discussion of this time variation is reserved for the next section.…”

Section: The General Setupmentioning

confidence: 99%

“…As mentioned, this parameter controls the share of total assets which bank managers can divert and which cannot be recovered by depositors. Dedola et al (2013) link a shock to this parameter to generate financial stress that originates in the banking sector compared with the capital quality shock, which affects the banking and the real sector simultaneously. In their model, the share is temporarily increased and it returns to its steady state level (following the underlying autoregressive process).…”

Section: Introducing Imperfect Information In the Gk Frameworkmentioning

confidence: 99%

“…which is close to Dedola et al (2013). Thus, we allow for transitory deviations from the steady state valueλ t .…”

Section: Introducing Imperfect Information In the Gk Frameworkmentioning

confidence: 99%

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Imperfect information about financial frictions and consequences for the business cycle

Hollmayr

Kühl

2016

Review of Economic Dynamics

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Reproduction permitted only if source is stated.ISBN 978-3-95729-134-9 (Printversion) Non-technical summary Research QuestionFinancial linkages between savers and borrowers are exposed to agency problems which may arise for several reasons. Imperfect information about an investment project can cause moral hazard behavior of borrowers if lenders do not have sufficient information about them. Our aim is to introduce imperfect information in a contract related to a limited enforcement problem. The way agents process and update new information is key for the optimizing behavior of the individual and hence for aggregate macroeconomic variables. In this paper we ask what the consequences for the business cycle are when agents have to learn about the behavior of banks. ContributionThe idea of our paper is to implement imperfect information into the banking sector of an otherwise standard New-Keynesian model, in which limited enforcement creates an agency problem. In our setting, economic agents learn about the size of changes in the diverting behavior of bankers. Everything else in the economy, i.e. both the structure and the parameter values, is known. Then we contrast the learning approach to full information rational expectations and analyze their respective roles for the business cycle. ResultsFor the period during which agents learn about the economy, the whole economy exhibits higher volatility and different outcome paths for macroeconomic variables compared with rational expectations. In particular, the introduction of imperfect information amplifies the responses of variables as the leverage ratio in the economy is higher for a longer period. Output is also higher due to a boost in investment before it undershoots the rational expectations benchmark outcomes. This goes hand in hand with an increase in uncertainty and higher volatility of all macro-variables. Compared with rational expectations output, investment and the leverage ratio display an increase in their respective volatility of between 1% and 8%. Output becomes even slightly more persistent in the learning case. Nichttechnische Zusammenfassung AbstractIn this paper, we discuss the consequences of imperfect information about financial frictions on the macroeconomy. We rely on a New Keynesian DSGE model with a banking sector in which we introduce imperfect information about a limited enforcement problem. Bank managers divert resources and can increase the share of diversion. This can only be observed imperfectly by depositors. The ensuing imperfect information generates a higher volatility of the business cycle. Spillovers from the financial sector to the real economy are higher and shocks in general are considerably amplified in the transition period until agents' learning is complete. Volatility and second-order moments also display an amplification under the learning setup compared with the rational expectations framework.

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“…where we allow the share of diversion to vary over time (see, for example, Dedola, Karadi, and Lombardo, 2013). The discussion of this time variation is reserved for the next section.…”

Section: The General Setupmentioning

confidence: 99%

Section: Introducing Imperfect Information In the Gk Frameworkmentioning

confidence: 99%

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Imperfect information about financial frictions and consequences for the business cycle

Hollmayr

Kühl

2016

Review of Economic Dynamics

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“…As a consequence, deposit holders will reduce deposits, which causes a tightening of the leverage constraint. We will therefore model a financial crisis as a sudden increase in k a t , see also Dedola et al (2013). In particular, we assume the following processes for the diversion rates k a t :…”

Section: Financial Intermediariesmentioning

confidence: 99%

Sovereign debt and bank fragility in Spain

Kwaak

Wijnbergen

2016

Rev World Econ

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In May 2012 the Spanish government announced a debt-financed recapitalization of the undercapitalized Spanish banking system. Although there was a wide consensus among economists and policymakers that this was key to solving Spain's economic troubles, both bank CDS and sovereign CDS further increased in the days following the announcement while lower bank CDS spreads were expected. Higher sovereign debt discounts deteriorated the fiscal position of the Spanish government. We propose a mechanism that can explain the events in Spain, namely the interaction whereby weak banks that are heavily exposed to risky domestic sovereign debt and weak government finances set off a negative amplification cycle: additional debt issue leads to higher sovereign debt discounts, resulting in capital losses on existing sovereign debt, deteriorating the capital base of banks, additional rounds of interest rate increases, a perverse amplification cycle substantially offsetting the initial recapitalization. We construct a DSGE model with balance-sheetconstrained financial intermediaries that finance private loans to the real economy, as well as sovereign debt subject to sovereign default risk. We calibrate the model to Spanish data, and find that our model is capable of matching the developments in the sovereign bond market in Spain in May/June 2012 quite well. We investigate anWe acknowledge the generous support of the Dutch Organization for Sciences, through the NWO Research Talent Grant No. 406-13-063. We thank Matthijs Knijnenburg for excellent research assistance. Electronic supplementary material

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“…For example, Dedola et al (2013) and Gieck (2014) employ two-country DSGE models to study cross-border implications of unconventional monetary policies.…”

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confidence: 99%

Negative Interest Rate Policies: Sources and Implications

Arteta¹,

Köse²,

Stocker³

et al. 2016

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract: Against the background of continued growth disappointments, depressed inflation expectations, and declining real equilibrium interest rates, a number of central banks have implemented negative interest rate policies (NIRP) to provide additional monetary policy stimulus over the past few years. This paper studies the sources and implications of NIRP. We report four main results. First, monetary transmission channels under NIRP are conceptually analogous to those under conventional monetary policy but NIRP present complications that could limit policy effectiveness. Second, since the introduction of NIRP, many of the key financial variables have evolved broadly as implied by the standard transmission channels. Third, NIRP could pose risks to financial stability, particularly if policy rates are substantially below zero or if NIRP are employed for a protracted period of time. Potential adverse consequences include the erosion of profitability of banks and other financial intermediaries, and excessive risk taking. However, there has so far been no significant evidence that financial stability has been compromised because of NIRP. Fourth, spillover implications of NIRP for emerging market and developing economies are mostly similar to those of other unconventional monetary policy measures. In sum, NIRP have a place in a policy maker's toolkit but, given their domestic and global implications, these policies need to be handled with care to secure their benefits while mitigating risks. Terms of use: Documents inJEL Codes: E52, E58, E60.

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Global implications of national unconventional policies

Cited by 102 publications

References 28 publications

Imperfect information about financial frictions and consequences for the business cycle

Imperfect information about financial frictions and consequences for the business cycle

Sovereign debt and bank fragility in Spain

Negative Interest Rate Policies: Sources and Implications

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