282 research outputs found
The End of Financial Globalization 3.0
No full textOver the past decade, developing nations such as China built up reserves to prevent a repeat of the 97-98 East Asian financial crisis. However, this may have set the stage for our current financial troubles, as spelled out by Moritz Schularick.
Den Staat entfesseln: Rezension zu "Der entzauberte Staat - Was Deutschland aus der Pandemie lernen muss" von Moritz Schularick
No full textMoritz Schularick: Der entzauberte Staat - Was Deutschland aus der Pandemie lernen muss. München: C.H. Beck 2021. 978-3-406-77782-
The massive inflow of foreign capital in the 2000s that enabled the American credit bubble was primarily from the private sector, not governments
No full textIn recent years, central bankers in the West have become proponents of the theory that a glut of savings from the developing world led to huge capital inflows into the US in the early 2000s. But did a hunger for investment from the developing world really fuel America’s housing boom? Moritz Schularick and Paul Wachtel take a close look at the recent history of financial flows between sectors of the U.S economy, finding that the American financial sector provided funding for domestic mortgages, which was in turn funded by foreign private investors, not foreign governments
Essays in Housing Markets and Finance
No full textIn my research, I have tried to integrate spatial heterogeneity into new asset pricing theories of housing, emphasizing that the value of a house as an investment also depends on its location. In particular, I apply asset pricing tools and theory to the study of housing prices in a spatial framework, thereby identifying and quantifying sources of risk and returns and how they interact with location in housing markets. In the first chapter of my thesis, I focus on documenting stylized facts about the spatial distribution of returns to housing. In the second and third chapters of my thesis, I explore the drivers of housing returns by focusing on the roles of idiosyncratic housing price risk and liquidity. Finally, I examine how systematic regional differences in housing risk explain the growing regional gap in housing prices. In “Superstar Returns? Spatial Heterogeneity in Returns to Housing”, which is co- authored with Moritz Schularick, Martin Dohmen, and Sebastian Kohl, we document the spatial distribution of total returns to housing and provide supporting evidence for its drivers. To conduct this analysis, we have assembled a new long run city-level dataset covering annual house prices and rents in twenty-seven prominent (”superstar”) cities across fifteen OECD countries over the past 150 years. Our data reveals that, over the long run, superstar cities have experienced lower total returns on housing in comparison to other regions within the same country. While house prices have grown more rapidly in these larger cities, the rental returns are significantly higher in more remote locations, resulting in overall higher returns in other parts of the country. We show that our key finding can be explained within a standard asset pricing framework, where excess returns outside large cities serve as compensation for higher risk. We then test this mechanism empirically and find that housing investments are indeed riskier outside large cities. In the second chapter of my thesis, I use detailed transaction-level data to quantify the extent to which idiosyncratic risk impacts housing prices and returns. In Price Uncertainty and Returns to Housing, I present empirical evidence that residential properties with higher idiosyncratic price risk are, on average, sold at lower prices and yield higher total returns. I show that this result can be rationalized within a bargaining model, in which a risk-averse and non-diversified buyer faces future sales price uncertainty. Finally, I present empirical evidence that houses with higher idiosyncratic risk undergo a more uncertain trading process, thereby exposing their buyers to greater liquidity risk. In the third chapter of my thesis I explore in more depth the relation between liquidity, location and housing prices. In Urban Spatial Distribution of Housing Liquidity, which is co-authored with Mark Toth and Jonas Zdrzalek, we examine how location, liquidity and prices interact in housing markets. By combining real estate online listings data with transaction data, we introduce a novel dataset that pro- vides transaction-level measures of liquidity in large German cities over the past decade. Empirically, we find that both housing liquidity and prices decrease with distance to the city center. To explain our empirical findings, we build a spatial search model of a housing market within a monocentric city. We show qualitatively and quantitatively that increasing travel costs to the city center can explain the joint urban spatial distribution of prices and liquidity. Using our calibrated model, we structurally estimate a spatial liquidity premium gradient. In the fourth and final chapter of my thesis, I analyse the consequences of heterogeneity in housing risk across regions. In “Interest Rates and the Spatial Polarisation of Housing Markets”, which is co-authored with Moritz Schularick, Martin Dohmen, and Sebastian Kohl, we reexamine the causes of regional housing price inequality. We build a spatial housing valuation model to demonstrate how a fall in real interest rates at the national level disproportionately affects the valuation of housing in regions with lower housing risk
Location, Location, Location: Long-run Trends in Housing Markets and Regional Economic Development
No full textThis thesis tries to make some progress in understanding long-run trends in the spatial behavior of housing markets and economic development. To achieve this, it introduces and analyses new regional long-run data to uncover new stylized facts and combines state-of the art econometric techniques with parsimonious, target-oriented economic theory. The questions this thesis wants to advance on are:
How do returns on housing investments vary across space (Chapter 1)? Does the nationwide fall in the risk-free rate have the potential to explain the increasing dispersion in housing prices relative to rents within developed countries (Chapter 2)? Can institutional innovations and an increase in market size help to explain why some regions in Europe industrialized quickly and are developed today whereas others stayed behind (Chapter 3)?
Chapter 1 - "Superstar Returns: The Geography of Housing Market Risk", which is joint work with Francisco Amaral, Sebastian Kohl, and Moritz Schularick, documents, for the first time, substantial spatial variation in housing market return premia. For this purpose, the chapter introduces a novel international data set covering 27 large cities from 15 developed countries spanning a period of nearly 150 years. Next to city-level housing price and rent series, it contains annual total housing return series as the sum of capital gains and rent returns. The data set uncovers large variation in total housing returns across locations. Total returns in large "superstar" cities are close to 100 basis points lower per year than in the rest of the country. As shown in previous studies, house prices tend to grow faster in large cities. Rent returns, however, are substantially smaller within large cities, resulting in lower long-run total returns.
This key finding can be rationalized in a standard asset-pricing framework where excess returns are a compensation for housing investment risk. Suppose that everything that makes a large "superstar" city – its diversified economy, its large and liquid housing market, its productivity, its amenities – also makes it a safer place as an investment. A consequence would be that buyers are willing to pay a higher price and accept a lower return for housing investments in these cities. The rest of the chapter provides empirical support for this interpretation of the (negative) large city premium. On the one hand, we present evidence that the co-variance between housing returns and income growth is lower in large cities. On the other hand, we show that idiosyncratic housing risk is larger outside the large cities, which seems to be related to the fact that housing markets in large cities are considerably more liquid.
Chapter 2 - "The Fall in the Risk-Free Rate and Rising House Price Dispersion", also written jointly with Francisco Amaral, Sebastian Kohl, and Moritz Schularick, offers a new explanation for the increasing dispersion of regional housing prices over the last decades. Existing explanations mainly from the urban economics try to explain the rising spatial heterogeneity in housing prices with local housing market fundamentals. A combination of rising local demand and inelastic housing supply implies an increase in the value of housing services in supply-constrained cities. As housing prices, in equilibrium, equal the discounted future value of housing services, this translates into growing housing prices in these cities. Recent empirical literature and our new data, however, show that rent dispersion has increased considerably less than housing price dispersion. This limits the potential of local fundamentals to explain the rising dispersion in housing prices.
The chapter develops a new spatial Gordon growth model that shows that a nationwide fall in the risk-free rate combined with initial regional differences in rent-price ratios increases housing price dispersion without affecting rent dispersion. The initial difference in rent-price ratios is evident in our new data. In accordance with Chapter 1, we argue that it is probably due to lower local housing risk-premia in larger cities. We calibrate our model to the 1985 values assuming a difference in risk-premia that coincides with the return differences uncovered in Chapter 1. Under these assumptions, a uniform fall in discount rates of only 1.3 percentage points is able to generate the increase in levels as well as dispersion in housing prices observed in the data in 2018.
Chapter 3 - "Freedom of Enterprise and Economic Development in the German Industrial Take-Off" turns away from housing markets and instead analyzes differences in long-run trends of economic development. It contributes to the literature on the fundamental causes of economic growth by examining the interaction between institutional innovations and increasing market size as drivers of the industrial revolution. In the literature, institutions are debated as a fundamental cause of economic development, because inclusive institutions might be necessary to create the incentives required to invest in and industrialize production processes. On the other hand, demand needs to be sufficiently high and markets sufficiently large to enable increasing returns to scale technologies to break even, such that a sector industrializes.
In the Chapter, I use the division of the Kingdom of Westphalia as a natural experiment to show that only reforms in both dimensions combined stimulated economic growth during the German industrial take-off. Homogeneous counties were allocated quasi-randomly to Prussia or the Electorate of Hesse as part of a package deal at the Congress of Vienna. In Prussian counties, the Gewerbefreiheit (freedom of enterprise) and the abolition of guilds increased incentives to industrialize manufacturing production, yet these counties and those under the guild system developed similarly. Only the establishment of the German Zollverein (customs union), which increased market size considerably, enabled counties featuring the Gewerbefreiheit to experience significantly higher growth
The End of Chimerica
No full textFor the better part of the past decade, the world economy has been dominated by a world economic order that combined Chinese export-led development with US over-consumption. The financial crisis of 2007-2009 likely marks the beginning of the end of the Chimerican relationship. In this paper we look at this era as economic historians, trying to set events in a longer-term perspective. In some ways China's economic model in the decade 1998-2007 was similar to the one adopted by West Germany and Japan after World War II. Trade surpluses with the U.S. played a major role in propelling growth. But there were two key differences. First, the scale of Chinese currency intervention was without precedent, as were the resulting distortions of the world economy. Second, the Chinese have so far resisted the kind of currency appreciation to which West Germany and Japan consented. We conclude that Chimerica cannot persist for much longer in its present form. As in the 1970s, sizeable changes in exchange rates are needed to rebalance the world economy. A continuation of Chimerica at a time of dollar devaluation would give rise to new and dangerous distortions in the global economy.
Essays in International Macroeconomics and Financial Crisis Forecasting
No full textThis thesis contributes long-run perspectives to the research on international macroeconomics and macro-finance. Chapters 2 and 3, analyze international financial linkages and their evolution over the past 150 years. Chapter 4 analyzes external adjustment under the pre-1914 Gold Standard – a fixed exchange rate regime in many ways reminiscent of today's euro area. Finally, chapter 5 uses the accumulated financial crisis experience since 1870 to evaluate the financial crisis forecasting performance of modern machine learning algorithms. Chapter 2, titled "Global risk-taking, exchange rates and monetary policy", revisits one of the core ideas in international macroeconomics, the idea that floating exchange rates help to decouple local interest rates from foreign rates. I find that this is only the case for safe rates, but not for risky rates. For risky rates, I find that their co-movement has increased over the 20th century, regardless of exchange rate regime. Why have floating exchange rates become less effective in decoupling risky rates? I argue that the growing role of leverage-constrained banks in global asset markets is key. More specifically, I introduce an international banking model in which banks' leverage constraints induce excessive volatility into risky rates, and their arbitrage activity spreads this volatility internationally, thus overwhelming floating exchange rates, which are already pinned down by safe rates. In chapter 3, which is joint work with Òscar Jordà, Alan M. Taylor and Moritz Schularick, we analyze the international co-movement of financial cycles and the effect of U.S. monetary policy on global asset prices. We show that the co-movement of financial variables has increased in the long run. The sharp increase in the co-movement of global equity markets in the past three decades is particularly notable. We demonstrate that fluctuations in risk premiums, and not risk-free rates and dividends, account for most of the observed equity price synchronization post-1980. We also show that U.S. monetary policy has come to play an important role as a source of fluctuations in risk appetite across global equity markets. Chapter 4, titled "When do fixed exchange rates work? Evidence from the Gold Standard" explores the circumstances under which a fixed exchange rate regime works. In joint work with Yao Chen, we empirically and theoretically analyze one of the world's largest and most durable fixed exchange rate regimes, the Gold Standard. External adjustment under the Gold Standard was associated with few, if any, output costs. In this chapter, we evaluate how flexible prices, international migration, and monetary policy contributed to this benign adjustment experience. For this purpose, we build and estimate an open economy model for the Gold Standard (1880-1913). We find that the output resilience of Gold Standard members that underwent external adjustment was primarily a consequence of flexible prices. When hit by a shock, quickly adjusting prices induced import- and export responses that stabilized incomes. Crucial in this regard was a historical contingency: namely large primary sectors, whose flexibly priced products drove the export booms that stabilized output during major external adjustments. Finally, chapter 5 contributes to the literature on financial crisis forecasting, using high dimensional data and modern machine learning algorithms. In this chapter, titled "Spotting the danger zone: Forecasting financial crises with classification tree ensembles and many predictors", I introduce classification tree ensembles (CTEs) to the banking crisis forecasting literature. I show that CTEs substantially improve out-of-sample forecasting performance over best practice early-warning systems. CTEs enable policymakers to correctly forecast 80% of crises with a 20% probability of incorrectly forecasting a crisis. These findings are based on a long-run sample (1870 - 2011), and two broad post-1970 samples which together cover almost all known systemic banking crises. More particular, I show that the marked improvement in forecasting performance over conventional best practice models results from the combination of many classification trees into an ensemble, and the use of many predictors
Replication Data for: 'Wealth of Two Nations: The U.S. Racial Wealth Gap, 1860-2020'
No full textThe data and programs replicating tables and figures from "Wealth of Two Nations: The U.S. Racial Wealth Gap, 1860-2020", by Derenoncourt, Kim, Kuhn, and Schularick are too large to host on the Harvard Dataverse. They are available for download here instead: https://hu.sharepoint.com/:f:/s/HarvardEconomicsDatasets/Eq4g3n5WstlBvdknSsAI_FYBVNFV2trgP1It-Wv0rb9G3w?e=axHfn0
They are also hosted by the authors on openICPSR:
https://www.openicpsr.org/openicpsr/project/194203/version/V1/view
Please see the ReadMe_DKKS_QJE_2023 file for additional details
When credit bites back: leverage, business cycles, and crises
No full textThis paper studies the role of leverage in the business cycle. Based on a study of nearly 200 recession episodes in 14 advanced countries between 1870 and 2008, we document a new stylized fact of the modern business cycle: more credit-intensive booms tend to be followed by deeper recessions and slower recoveries. We find a close relationship between the rate of credit growth relative to GDP in the expansion phase and the severity of the subsequent recession. We use local projection methods to study how leverage impacts the behavior of key macroeconomic variables such as investment, lending, interest rates, and inflation. The effects of leverage are particularly pronounced in recessions that coincide with financial crises, but are also distinctly present in normal cycles. The stylized facts we uncover lend support to the idea that financial factors play an important role in the modern business cycle.Business cycles ; Financial crises
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