19.10.2021: Hélène Rey – Central bank policy and the concentration of risk: empirical estimates

Before the 2008 crisis, the cross-sectional skewness of banks’ leverage went up and macro risk concentrated in the balance sheets of large banks. Using a model of profit-maximizing banks with heterogeneous Value-at-Risk constraints, we extract the distribution of banks’ risk-taking parameters from balance sheet data. The time series of these estimates allow us to understand systemic risk and its concentration in the banking sector over time. Counterfactual exercises show that (1) monetary policymakers confront the trade-off between stimulating the economy and financial stability, and (2) macroprudential policies can be effective tools to increase financial stability.

24.08.2021: Lucrezia Reichlin – Monetary-fiscal crosswinds in the European Monetary Union

We study the monetary-fiscal mix in the European Monetary Union. The medium and long-run effects of conventional and unconventional monetary policy can be analysed by combining monetary policy shocks identified in a Structural VAR, and the general government budget constraint featuring a single central bank and multiple fiscal authorities. In response to a conventional easing of the policy rate, the real discount rate declines, absorbing the increase in deficit due to the fiscal policy leaning towards the easing. Conversely, in response to an unconventional easing of the long end of the yield curve, the discount rate declines strongly, while the primary fiscal surplus barely moves. The long-run effect of unconventional monetary easing on inflation is about half than that of conventional, a result which also explains the muted response of fiscal policy. Results do not point to large differences across countries.

10.08.2021: Tarek Hassan – Country risk

We construct new measures of country risk and sentiment as perceived by global investors and executives using textual analysis of the quarterly earnings calls of publicly listed firms around the world. Our quarterly measures cover 45 countries from 2002-2020. We use our measures to provide a novel characterization of country risk and to provide a harmonized definition of crises. We demonstrate that elevated perceptions of a country’s riskiness are associated with significant falls in local asset prices and capital outflows, even after global financial conditions are controlled for. Increases in country risk are associated with reductions in firm-level investment and employment. We also show direct evidence of a novel type of contagion, where foreign risk is transmitted across borders through firm-level exposures. Exposed firms suffer falling market valuations and significantly retrench their hiring and investment in response to crises abroad. Finally, we provide direct evidence that heterogeneous currency loadings on global risk help explain the cross-country pattern of interest rates and currency risk premia.

05.08.2021: Iván Werning – Dynamic oligopoly and price stickiness

How does market concentration affect the potency of monetary policy? The ubiquitous monopolistic-competition framework is silent on this issue. To tackle this question we build a model with heterogeneous oligopolistic sectors. In each sector, a finite number of firms play a Bertrand dynamic game with staggered price rigidity. Following an extensive Industrial Organization literature, we focus on Markov equilibria within each sector. Aggregating up, we study monetary shocks and provide a closed form formula for the response of aggregate output, highlighting three measurable sufficient statistics: demand elasticities, market concentration, and markups. We calibrate our model to the empirical evidence on pass-through, and find that higher market concentration significantly amplifies the real effects of monetary policy. To separate the strategic effects of oligopoly from the effects this has on residual demand, we compare our model to one with monopolistic firms after modifying consumer preferences to ensure firms face comparable residual demands. Finally, the Phillips curve for our model displays inflation persistence and endogenous cost-push shocks.

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