Asset Prices, Collateral and Unconventional Monetary Policy in a DSGE model (joint with Björn Hilberg)

In this paper we set up a New-Keynesian model that features an interbank market. The introduction of an interbank market is important to analyze liquidity problems among heterogenous agents within the financial sector. First, because this allows for a situation where increased liquidity supply by the central bank is only partially passed on to the interbank market. Second, this framework allows us to analyze one additional policy measure besides the common interest rate policy undertaken by central banks to alleviate the liquidity shortage on the interbank market. Namely haircuts on eligible assets in repurchase agreements (``Repos''). By varying haircuts applied to securities that serve as collateral in repurchase agreements the stress on the interbank market can be mitigated by bringing down the interest rate charged among banks. Furthermore an exogenous bubble process is modeled which enables us to examine the effects of a deviation of the market price of capital from its fundamental price. This leads to a discussion whether central banks should "lean against the wind", i.e. react to deviations of asset prices in the setting of their policy instrument. Finally, this paper tries to shed some light on the `exit strategy'' that a central bank should follow after the asset price bubble bursted and the interbank market begins to work properly again.

Learning about Fiscal Policy and the Effects of Policy Uncertainty (joint with Christian Matthes)


The recent crisis in the United States has often been associated with substantial amounts of policy uncertainty. In this paper we ask how uncertainty about fiscal policy affects the impact of fiscal policy changes on the economy when the government tries to counteract a deep recession. The agents in our model act as econometricians by estimating the policy rules for the different fiscal policy instruments, which include distortionary tax rates. 

Comparing the outcomes in our model to those under full-information rational expectations, we find that assuming that agents are not instantaneously aware of the new fiscal policy regime (or policy rule) in place leads to substantially more volatility in the short run and persistent differences in average outcomes.

Fiscal Spillovers and Monetary Policy Transmission in the Euro Area 

In this paper I set up a New-Keynesian model for each of the eleven original member countries of the Euro area and tie them together with the GVAR methodology of trade weights to obtain a fully structural multi-country model for the whole currency union. Each country is estimated with Bayesian methods on the same observable variables and with the same priors. Spillovers are negative if countries increase their government spending or their labor tax rate and positive after a consumption tax rate increase. The monetary transmission upon a shock to the common Taylor rule yields heterogeneous effects on output and inflation. This transmission would become more homogeneous if all countries followed the same fiscal rules. Stabilization Policy dictates for the central bank to target inflation as aggressively as possible and for the fiscal branch to react heavily to deviations of debt from its steady state.

(G)VAR: When is the G essential? Two Competing Views of Fluctuations and Shock Identification (joint with Cristian Badarinza)

In this paper the question is whether the VAR methodology is able to capture the dynamic and stochastic structure implied by the presence of spillovers in a GVAR system of interacting units. We derive analytical restrictions, propose a test indicating the degree to which aggregation is feasible and derive the asymptotic properties of the VAR estimator in the presence of spillovers.
We illustrate the effects of misspecification through a set of numerical examples and find that failing to account for spillovers can lead the econometrician to mistakenly perceive higher persistence and volatility or recover shocks where there are none.
Finally it is shown that an infinite order VAR can match the dynamics of a first order GVAR.


Discussion of "A DSGE model of the term structure with regime shifts" by Gianni Amisano and Oreste Tristani

Discussion of "Globalization and Business Cycle Spillovers
: A global VAR Approach
" by Michael Binder and Christian Offermanns

Discussion of "Empirical Analysis of the ECB's Monetary Policy" by Henrike Michaelis