1,721,149 research outputs found
Essays in International Macroeconomics and Financial Crisis Forecasting
Get PDFThis 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
Essays in Finance and Macroeconomics on the Effects and Resolution of Financial Distress
Get PDFThis dissertation examines the macroeconomic and microeconomic effects of institutions for financial distress resolution. The first chapter assesses the macroeconomic cost of corporate debt crises and the moderating power of well-designed corporate bankruptcy institutions. The second chapter highlights a novel trade-off for the design of creditor rights. The third and final chapter analyzes the dynamic effects of central bank liquidity injections during financial crises. Across all three chapters, this dissertation documents sizable macroeconomic and microeconomic costs of inefficient distress resolution. Economic shocks risk to be amplified by the incompleteness of financial contracts. But well-designed public institutions of bankruptcy (Chapter 1), securities law (Chapter 2) and emergency lending facilities (Chapter 3) complement private contracts and can remedy consequences of incompleteness ex post. These policies also change economic decisions ex ante, and I provide evidence on how this can create a trade-off for policy makers
Essays in Income and Wealth Inequality
Get PDFThe distribution of income and wealth across households in the U.S. has changed dramatically since the 1950s. How are rising income and wealth inequality linked? This thesis aims at providing new insights into the relationship between income, wealth accumulation and inequality. The first two chapters focus on trends of income and wealth portfolios over time. In the third chapter a new model is introduced that simulates the observed joint distribution of income and wealth
Essays on Monetary Policy and Financial Stability
Get PDFIf we want to understand the most severe macroeconomic disruptions, we must understand the causes of financial instability. Despite their devastating economic and social consequences, financial crises have been recurring phenomena in market economies throughout history. Preventing deep and persistent macroeconomic losses and mitigating the broader social damage they cause (Sufi and Taylor, 2022) requires a thorough understanding of why financial crises occur and what policies can effectively prevent them.
These questions came to the core of research and the policy debate following the Global Financial Crises of 2008 (Caballero, 2010). The post-2008 research agenda has provided valuable insights into the buildup, triggers, aftermath, and broader lessons of financial crises (Sufi and Taylor, 2022). However, one critical aspect remains underexplored: the connection between monetary policy and financial instability. This Dissertation brings monetary policy to the core of the financial instability debate. By employing a combination of empirical and theoretical tools and leveraging newly collected long-run data, I investigate how monetary policy contributes to creating the conditions that lead to financial instability
Essays in Macro-finance
Get PDFThis thesis provides a comparative perspective on current macro-financial phenomena. Understanding the causes and consequences of rare macroeconomic events and secular trends is inherently difficult. Competing theories and explanations are difficult to evaluate in a macroeconomic context as the potential for experimentation is limited and truly exogenous variation is hard to come by. In addition, macro-financial disasters are rare events, occurring on average less than once in a generation. This means that the time horizons to study them have to be long. A comparative perspective is also a natural starting point for the analysis of macro-financial trends. It tells us how unusual an observation is from a historical standpoint and helps to tell different explanations for the observed patterns apart.
For this purpose, the research projects included in this thesis introduce new long-run cross-country data to study some of the most pertinent questions in macro-financial research. The new data allow us to put the recent growth of listed equity markets into a long-run perspective (Chapter 1), study the joint evolution of safe and risky rates over the last 150 years (Chapter 2) and learn more about the causes and consequences of systemic banking crises and government bankruptcies (Chapter 3 and 4)
Location, Location, Location: Long-run Trends in Housing Markets and Regional Economic Development
Get PDFThis 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
Essays in Housing Markets and Finance
Get PDFIn 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
Essays on the Use of Unstructured Data in Macroeconomics
Get PDFEconomists need data to find patterns and test theories, but many concepts are hard to measure. This work contains three chapters showing how new unstructured data sources, such as text corpora, can be used to overcome this data scarcity. First, I analyze the effects of automation on employment by training a machine learning algorithm to classify patents as automation. Second, I create a new indicator of financial stress from historical newspapers. Third, I analyze whether errors in expectation formation might explain credit cycles, for which I build on a world-wide survey of banks and research institutes
Essays in Applied Macroeconomics
Get PDFThis dissertation consists of three independent research studies. All of them use empirical databases and methods to shed light on important topics. The first chapter provides a full picture of the effects of government spending in the Eurozone economy, including transmission mechanisms, regional spillovers, sectoral heterogeneity, and state dependencies. The second chapter focuses on the political consequences of fiscal austerity by estimating its impact on the vote share of the extreme right and left parties, political fragmentation, and trust in the incumbent government. The third chapter uses micro-level data to characterize earnings dynamics in Germany and describes the role of public and private insurance in protecting German households against individual income shocks
Essays on Inflation Expectations, Leaning Against the Wind Policy, and Consumer Bankruptcy
Get PDFTimes of severe economic crisis are, fortunately, rare events. Large recessions, such as the Great Depression of the 1930s or the Great Recession during the late 2000s, have detrimental effects on all economic sectors. During such times, the public as well as the academic debate centers around the causes of the crisis and which policies are best suited to alleviate the economic fallout. In its three chapters, this thesis contributes to our understanding of the answers to these questions. It draws on empirical as well as structural macroeconomic results to foster our knowledge of potential causes of, and historical experiences with, deep economic crises. In particular, this thesis presents insights into the German experience during the Great Depression, the link between monetary policy and the likelihood of financial crises, and how competitive pricing of income risk in unsecured credit markets exacerbates business cycle fluctuations
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