Title: Okay Boomer... Excess Money Growth, Inflation, and Population Aging
Author: Joseph Kopecky
Abstract: Is inflation a monetary phenomenon? In the decades since the influential work of Milton Friedman, the great moderation has seemingly put to bed the idea that monetary aggregates serve as a useful tool for policy makers. While many point to a structural change in the underlying relationship between money growth and inflation, there is limited understanding as to why this monetary transmission has broken down. In this paper I provide evidence that population age structure has an important impact on the relationship between excess money growth and inflation. Estimating these effects using a long run sample of data, I find that the one-to-one relationship between excess money growth and inflation implied by the quantity theory appears to hold over long horizons, with short-to-medium run effects are smaller, but significant. I then show that changes in the population age structure, particularly as the baby boomer generation has moved through it, can explain a strengthening of this transmission during the highly inflationary period of the 1970s, as well as a complete disappearance during the 1990s and early 2000s. At present demographic headwinds on this relationship seem to have abated, with their effect opening the door for a potential return to money driven inflation.
Outlet: TEP Working Paper No.0721, Department of Economics, Trinity College Dublin.
Title: The Shock Absorbing Role of External Investments: net positions versus currency mix
Authors: Agustín Bénétrix, Beren Demirölmez and Martin Schmitz
Abstract: We present a comprehensive analysis of the shock absorption role of external positions using the latest currency exposures dataset by Bénétrix, Gautam, Juvenal and Schmitz (2020). While most of the literature studies how net external positions and currency determine the direction and scale of valuation effects, we focus on their amplitude. This is of central importance for global financial stability given large and increasing scale of external positions. To that end, we propose an indicator showing the extent to which external positions absorb or amplify exchange rate shocks. Focusing on a set of 50 countries over the 1990-2017 period, we find that the shock absorption property is present in advanced economies. While this was not the case for emerging markets, we report a shock absorption property in many of them for recent years. Finally, we identify relevant factors contributing to it, such as the level of development as well as macro-financial and institutional variables.
Outlet: TEP Working Paper No.0421, Department of Economics, Trinity College Dublin.
Title: Corporate Taxation and International Financial Integration: U.S. evidence from a consolidated perspective
Authors: Agustín Bénétrix and André Sanchez Pacheco
Abstract: We document a robust relation between corporate tax differentials and U.S. international financial integration (IFI). While this is the case for traditional IFI based on cross-border positions, the positive link also emerges for its larger consolidated-by-nationality version. The gap between these IFI measures, the key outcome variable in our analysis, exhibits a strong positive correlation with tax differentials too. This is in part due to consolidated assets of multinational enterprises being more strongly correlated with tax differentials than their cross-border counterpart. We interpret this as indirect evidence of U.S. multinationals taking advantage of tax differentials in ways that go beyond what is captured by traditional Balance of Payments procedures.
Outlet: TEP Working Paper No. 0321, Department of Economics, Trinity College Dublin.
Links: Working Paper
Title: The Resilience of the Euro
Authors: Philip R. Lane
Outlet: Journal of Economic Perspectives 35(2): 3–22, Spring 2021.
Links: Journal Article
Title: Monetary policy, Twitter and financial markets: evidence from social media traffic
Authors: Davide Romelli, Donato Masciandaro and Gaia Rubera
Abstract: How does central bank communication affect financial markets? This paper shows that the monetary policy announcements of three major central banks, i.e. the European Central Bank, the Federal Reserve and the Bank of England, trigger significant discussions on monetary policy on Twitter. Using machine learning techniques we identify Twitter messages related to monetary policy around the release of monetary policy decisions and we build a metric of the similarity between the policy announcement and Twitter traffic before and after the announcement. We interpret large changes in the similarity of tweets and announcements as a proxy for monetary policy surprise and show that market volatility spikes after the announcement whenever changes in similarity are high. These findings suggest that social media discussions on central bank communication are aligned with bond and stock market reactions.
Outlet: BAFFI CAREFIN Centre Research Paper No. 2021-160
Links: Working Paper
Title: Political Voice on Monetary Policy: Evidence from the Parliamentary Hearings of the European Central Bank
Authors: Davide Romelli, Maria Ferrara, Donato Masciandaro and Manuela Moschella
Abstract: Previous scholarship on central bank accountability has generally focused on monetary authorities' deeds and words while largely ignoring the other side of the accountability relationship, namely politicians’ voice on monetary policy. This raises a fundamental question: what are central banks held accountable for by elected officials? To answer this question, we employ structural topic models on a new dataset of the Monetary Dialogues between the Members of the European Parliament (MEPs) and the President of the European Central Bank (ECB) from 1999 to 2019. Our findings are twofold. First, we uncover differences in how MEPs keep the ECB accountable for its primary, price stability objective. We show that European politicians also attempt to keep the central bank accountable for a broader set of issues that are connected with, but distinct from, the central bank's primary goal. Second, we show that unemployment is a key explanatory variable for the political voice articulated by individual MEPs in accountability settings. In particular, higher rates of domestic unemployment lead MEPs to devote less voice on issues related to the ECB’s price stability mission. These findings reveal the existence of a "political" Phillips curve reaction function, which enriches our understanding of the principal-agent accountability relationship between politicians and central bankers.
Outlet: BAFFI CAREFIN Centre Research Paper No. 2021-159
Links: Working Paper
Title: The Murder-Suicide of the Rentier: Population Aging and the Risk Premium
Author: Joseph Kopecky and Alan M Taylor
Abstract: Population aging has been linked to global declines in real interest rates. A similar trend is seen for equity risk premia, which are on the rise. An existing literature can explain part of the declining trend in safe rates using demographics but has no mechanism to speak to trends in relative returns on different assets. In a historical panel of advanced economies, we show that demographics can explain a signification portion of the secular trends in asset returns, as well as the recent rise in the equity risk premium. We then calibrate a heterogeneous agent life-cycle model with equity markets and aggregate risk, and we show that aging demographics can simultaneously account for both the majority of a downward trend in the risk-free rate, while also increasing the return premium attached to risky assets. This is because the life-cycle savings dynamics that have been well documented exert less pressure on risky assets as older households shift away from risk. Under reasonable calibrations we find declines in the safe rate that are considerably larger than most existing estimates between the years 1990 and 2017. We are also able to account for most of the rise in the equity risk premium. Projecting our model results forward to 2050, persistent demographic forces continue keep the risk free rate close to zero, while the equity risk premium remains elevated.
Outlet: TEP Working Paper No.1220, Department of Economics, Trinity College Dublin
Links: Working Paper
Title: The Age for Austerity: The Effect of Demographic Structure on Fiscal Multipliers
Author: Joseph Kopecky
Abstract: The state dependence of fiscal multipliers is a well-established result. I explore the relationship between the underlying demographic structure of an economy and the size of fiscal multipliers in response to exogenous consolidation shocks. If household marginal propensity to consume varies over the life-cycle then the consumption responses of households to an exogenous government intervention should vary as well across countries with differing population age distributions. With underfunded pension liabilities looming, this question will be of crucial as governments seek solutions to future budgetary challenges. Spending around the Covid-19 crisis may also have differing impacts as many countries are in the midst of this transition and will only compound these challenges in the future. To investigate these potential linkages, I use narrative fiscal consolidation periods in a flexible local projections method to interact quasi-exogenous fiscal shocks with various measures of population age structure. I find that older populations have significantly weaker fiscal transmission, this may imply that many of today's large fiscal outlays may be easier to pay back under regimes where fiscal consolidations will have weaker impact, but may also imply that many, already old economies will struggle to have impactful spending packages in the present.
Title: Currency Unions
Authors: Davide Romelli, Patrick Honohan and Fadi Hassan
Abstract: The past twenty years have seen two waves of research on currency unions, prompted by the early experience of the European Economic and Monetary Union and by the existential crisis experienced by the euro area as a part of the global financial crisis. Alongside an original introduction, this important collection assembles key papers exploring a range of themes in these two waves of research, including subtopics such as reassessment of optimal currency area theory, new views on the policy choices, and the past and present experience of various currency unions. With a concluding section that addresses the question of complementary institutions going beyond an inflation-focused central bank, this two-volume collection provides an ample and comprehensive overview of currency unions.
Outlet: Edward Elgar Publishing, 2020
Title: Leverage Cycles, Growth Shocks, and Sudden Stops in Capital Inflows
Authors: Lorenz Emter
Abstract: Using a quarterly panel of 98 advanced as well as emerging and developing countries from 1990 to 2017 this paper shows that domestic variables are significantly related to the probability of incurring sharp reversals in capital inflows controlling for global push factors. In particular, negative growth shocks combined with high levels of leverage in the domestic private sector are a significant determinant of sudden stops. This is in line with real business cycle models including an occasionally binding credit constraint and income trend shocks.
Outlet: TEP Working Paper No. 1120, Department of Economics, Trinity College Dublin.
Title: Policy Uncertainty Shocks and Small Open Economies in Monetary Union: A Case Study of Ireland
Authors: Jonathan Rice
Abstract: This paper explores the implications of policy uncertainty shocks for Ireland, a small open economy operating within monetary union. Exogenous domestic uncertainty shocks foreshadow persistent declines in Irish investment and employment, with no clear response by the ECB. On the other hand, no such decline in demand is observed following global uncertainty shocks, largely resulting from an accommodative monetary policy stance by the ECB. Results from this paper suggest that policy uncertainty shocks have negative and persistent effects on Irish real activity, only when monetary policy does not counteract these shocks. Common identification problems in the literature are also discussed and suggestions are made for future work in the area.
Outlet: TEP Working Paper No. 1020, Department of Economics, Trinity College Dublin.
Title: Aggregate Risk and Wage Dispersion
Authors: Paul Scanlon
Abstract: Integrating elements of finance and labor theory, I quantify the degree to which aggregate risk affects wage premia. In the model, wages are stochastic, covary with the state of the economy, and command a risk premium. Using asset price data, I develop a lower bound for this premium, and show that it is quantitatively large for highly cyclical jobs with volatile labor compensation. By raising top incomes, this channel has played a role in amplifying income inequality.
Outlet: Economics Letters, 194(9), September 2020
Links: Journal Article
Title: Do Women Matter in Monetary Policy Boards?
Authors: Davide Romelli, Donato Masciandaro and Paola Profeta
Abstract: We construct a new dataset on the presence of women on central bank monetary policy committees for a set of 103 countries, over the period 2002-2016. We document an increasing share of women in monetary policy committees, which is mainly associated with a higher overall presence of women in central banks and less so with other institutional factors or country characteristics. We then investigate the impact of this trend on monetary policymaking by estimating Taylor rules augmented to include the share of women on monetary policy committees. We show that central bank boards with a higher proportion of women set higher interest rates for the same level of inflation. This suggests that women board members have a more hawkish approach to monetary policy. We confirm this result by analysing the voting behaviour of members of the executive board of the Swedish Central Bank during the period 2000-2017.
Outlet: BAFFI CAREFIN Centre Research Paper No. 2020-148
Links: Working Paper
Title: Did financial frictions stifle R&D investment in Europe during the great recession?
Authors: Davide Romelli and Oana Peia
Abstract: We investigate the role of financial frictions in R&D spending in a large sample of European firms. Our identification strategy exploits the contraction in credit supply that followed the 2008–09 global financial crisis and 2012 Euro area sovereign debt crisis, together with differences in financial frictions across firms and industries to identify a causal effect of financial constraints on investment in innovation. We show that firms that are more likely financially constrained, in industries more dependent on external finance, invest disproportionally less in R&D during periods of tight credit supply. Smaller, private firms with weaker balance sheets also have a lower share of R&D in total investment, suggesting R&D drops more than total investment during these crisis episodes. These results are robust to different proxies of financial constraints and fixed-effects identification strategies.
Outlet: Journal of International Money and Finance, forthcoming
Links: Journal Article
Title: Uncertainty Shocks and the Cross-Border Funding of Banks: Unmasking Heterogeneity
Authors: Agustín Bénétrix and Michael Curran
Abstract: This paper looks at the relation between uncertainty shocks and cross-border funding of banks through the lens of a new dataset. Our key innovation is to study the impact of uncertainty measures based on volatility, newspapers, and professional forecast surveys. We provide a comprehensive assessment of how cross-border liabilities in different banking systems respond to the uncertainty type, funding sector, country, and period. We show that the contraction of bank funding can be large and quite different along these dimensions. Volatility-based uncertainty and non-bank funding display the strongest results, with news-based uncertainty mattering most outside the Global Financial Crisis.
Outlet: TEP Working Paper No. 0920, Department of Economics, Trinity College Dublin.
Links: Working Paper short version data appendix
Title: Firm or bank weakness? Access to finance since the European sovereign debt crisis
Authors: Giuseppe Corbisiero and Donata Faccia
Abstract: This paper uses a unique dataset where credit rejections experienced by euro area firms are matched with firm and bank characteristics. This allows us to study simultaneously the role that bank and firm weakness had in the credit reduction observed in the euro area during the sovereign debt crisis, and in credit developments characterising the post-crisis recovery. Compared with the existing literature matching borrowers’ and lenders’ characteristics, our dataset provides a better representation of euro area firms of small and medium size. Our findings suggest that, while firm balance sheet factors have been strong determinants of credit rejections, in the crisis period bank weakness made it harder to obtain external finance for firms located in stressed countries of the euro area.
Outlet: TEP Working Paper No. 0320, Department of Economics, Trinity College Dublin.
Links: Working Paper ECB Version
Title: Cross-Border Currency Exposures. New evidence based on an enhanced and updated dataset
Authors: Agustín Bénétrix, Deepali Gautam, Luciana Juvenal and Martin Schmitz
Abstract: This paper provides a dataset on the currency composition of the international investment position for a group of 50 countries for the period 1990-2017. It improves available data based on estimates by incorporating actual data reported by statistical authorities and refining estimation methods. The paper illustrates current and new uses of these data, with particular focus on the evolution of currency exposures of cross-border positions.
Outlet: TEP Working Paper No. 0120, Department of Economics, Trinity College Dublin.
Links: Working Paper ECB Version IMF Version
Title: Cross-border banking in the EU since the crisis: What is driving the great retrenchment?
Author: Lorenz Emter, Martin Schmitz, Marcel Tirpák
Abstract: This paper examines the drivers of the retrenchment in cross-border banking in the European Union (EU) since the global financial crisis, which stands out in international comparison as banks located in the euro area and in the rest of the EU reduced their cross-border claims by around 25%. Particularly striking is the sharp and sustained reduction in intra-EU claims, especially in the form of deleveraging from cross-border interbank loans. Examining a wide range of possible determinants, we identify high non-performing loans as an important impediment to cross-border lending after the crisis, highlighting the spillovers from national banking sector conditions across the EU. We also find evidence that prudential policies can entail spillovers via cross-border banking in the EU, albeit with heterogeneity across instruments in terms of direction, magnitude and significance. Our results do not point to a major role of newly introduced bank levies in explaining cross-border banking developments.
Outlet: Review of World Economics, 155, 287-326
Links: Journal Article
Title: Firms' or banks' weakness? Access to finance since the European sovereign debt crisis
Author: Giuseppe Corbisiero and Donata Faccia
Abstract: This paper uses a unique dataset where credit rejections experienced by euro area firms are matched with firm and bank characteristics. This allows us to study simultaneously the role that bank weakness and firm weakness had in the credit reduction observed in the euro area during the sovereign debt crisis, and in credit developments characterising the post-crisis recovery. Compared with the existing literature matching borrowers’ and lenders’ characteristics, our dataset provides a better representation of euro area firms of small and medium size. Our findings suggest that, while firm balance sheet factors have been strong determinants of credit rejections, in the crisis period bank weakness made it harder to obtain external finance for firms located in stressed countries of the euro area.
Outlet: Central Bank of Ireland, Research Technical Papers 12/RT/19
Links: Working Paper
Title: New Goods and Asset Prices
Author: Paul Scanlon
Abstract: I extend the consumption capital asset pricing model to incorporate expanding product variety over time and states of nature. In the model, consumers have a love of variety, and consumption consists of different components: product groups and brands. By raising future marginal utility, growth in product groups increases the incentive to save and reduces the risk-free rate. By making marginal utility more volatile, variation in brand and quality growth magnifies consumption risk and raises the equity premium. Embedding new goods in a long-run risk setting has similar implications.
Outlet: Journal of Financial Economics, 132(3), June 2019
Links: Journal Article