Browsing by Person "Spahn, Peter"
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Publication A monetary-fiscal theory of prices in modern DSGE models(2018) Schröder, Christian Philipp; Spahn, PeterStarting with the Eurozone crisis in 2010, fiscal variables such as the government budget position and public debt of certain member countries as well as the design of the European Monetary Union as a whole came under close scrutiny again. Furthermore, as a consequence of the global financial crisis, the economic profession faced accusations that, using the established ‘workhorse models,’ it was not able to provide answers to the pertinent questions of the time. From the perspective of economic theory, two main issues can be outlined against this background: (1) How do the so-called DSGE (dynamic stochastic general-equilibrium) models work which form a quasi-consensus in practice, research, and teaching nowadays? This relates especially to determinacy, that is, the mathematical property of being able to draw unique conclusions from a given set of assumptions. (2) What roles do the main fields of macroeconomic policy---fiscal and monetary policy---play in this? The exposition of these items is carried out within a formally consistent theoretical model which adheres to common standards and strikes a balance between staying general enough for a broad range of approaches and being sufficiently specific to yield tangible results. Following a brief introduction, Chapter 2 presents a microfounded (‘baseline’) general-equilibrium model that acts as a foundation for subsequent analysis. The only substantial exception is the excursus in Chapter 3. It deals with interactions between the entities of the consolidated government sector, namely the treasury and the central bank, and in doing so also touches on traditional models which cannot be reconciled entirely with modern theory. One of the main aspects is the “unpleasant monetarist arithmetic” that describes the long-standing explanation for fiscally induced inflation. The fourth chapter then takes up the baseline model and ‘closes’ it by defining monetary as well as fiscal policy, both of which can be active (that is, dominant) or passive. Resulting from this classification are two stable macroeconomic regimes (monetary or fiscal dominance) plus two undesirable outcomes (explosive instability or indeterminacy of central model variables). Monetary dominance is tantamount to the prevailing world view—central banks can independently pursue a measure of price stability while governments have to follow a sustainable (Ricardian) fiscal policy—whereas fiscal dominance gives rise to a “fiscal theory of the price level” in which the treasury sets budget surpluses without regard for other variables and monetary policy can be an implicit accomplice at most. This latter regime ultimately puts price stability into the hands of the treasury. Initially, the only public liability is debt (there is no money at this stage); however, the is model is able to determine unique price levels in the stable regimes. Chapter 5 introduces several isolated complications to the model described so far. One is the role of money, especially in the fiscalist model variant; it shows that the main results remain unchanged if monetary policy is conducted via money-supply instead of interest-rate policy. Further considerations are the zero lower bound on interest rates (in a graphic analysis) as well as limits to public-sector liabilities. Subsequently, Chapter 6 applies the baseline model of Chapter 2 to the open economy—more precisely, a monetary union consisting of two countries. Since monetary policy is supranational here, outcomes crucially depend on national fiscal policies. While the baseline model assumes flexible prices, Chapter 7 adds the considerable complication of nominally rigid prices. A mostly ‘plain-vanilla’ New-Keynesian model emerges which, following common practice, is then linearized and simulated in Matlab/Dynare. At the core of the analysis lie the two stable regimes carved out in Chapter 4. The central implications of the monetary-fiscal theory derived so far are adjusted gradually, but remain in place generally. Towards the end, the thesis highlights empirical issues (verifiability of the regimes, historical case studies). Finally, the results obtained beforehand culminate in a comprehensive discussion of the monetary-fiscal theory, including a distinction from traditional approaches. Chapter 10 concludes.Publication Asset prices, inflation and monetary control : re-inventing money as a policy tool(2010) Spahn, PeterLow inflation on goods markets provides no reliable precondition for asset-market stability; it might even promote the emergence of bubbles because interest rates and risk premia appear to be low. A further factor driving asset demand is easy availability of credit, which in turn roots in the banking system operating in a regime of endogenous central-bank money. A comparison of Bundesbank and ECB policies suggests that credit growth can be controlled more efficiently if rising interest rates are accompanied by some liquidity squeeze that supports the spillover of a monetary restriction to capital markets. The announcement effect of a central bank Charter including the goal of financial-market stability helps to deter private agents from excessive asset trading.Publication Integration durch Währungsunion? : der Fall der Euro-Zone(2012) Spahn, PeterOld OCA theory recommends to unite homogenous countries so that their macroeconomic interrelations do not pose severe stabilisation problems. New OCA theory rightly criticizes the 1960s flavour of the old approach and believes in the endogenous emergence of an OCA if countries use the facilities of an integrated financial market for their catching-up. Whereas in theories of intertemporal optimisation single agents and national economies succeed to go from indebtedness to development, in EMU they were tempted live beyond their intertemporal budget constraint. Professional observers tended to tolerate high current account deficits and loss of competitiveness as temporary phenomena by relying on the Lawson Doctrine. Actually, some EMU countries could avoid insolvency only by monetising their balance of payment deficit.Publication Keynesian capital theory : declining interest rates and persisting profits(2019) Spahn, PeterThe current debate whether zero interest rates are caused by a saving glut or a liquidity glut is resolved by the distinction between the market and the natural rate, where saving affects only the latter variable, and monetary policy mainly the first. This topic is linked to a second one: the monetary determination of the rate of profit in Keynesian capital theory. Both topics merge in a critical review of Keyness vision of the "euthanasia of the rentier". The data show however that we have not reached a state of capital satiation. The rising gap between the rate of profit and the rate of interest poses a challenge for capital theory.Publication Langfristige Neutralität der Geldpolitik?(2010) Schmid, Kai Daniel; Spahn, PeterMacroeconomic theory often strictly separates cyclical analysis from trend analysis. Whereas the former is identified as the short-run phenomenon of a varying capacity utilization, the latter is understood as the long-run problem of economic growth that predominantly focuses on the evolution of basic growth factors, such as the supply of labour and technical progress, and disregards problems of macroeconomic stability. In particular, the consequences of monetary policy actions are modeled nonneutral in the short run but neutral in the long run. Policy implications of the present consensus view of stabilization policy depend on specific assumptions with regard to the equilibrium level of production. Thereby, the interpretation of equilibrium output rests on a separation of supply-side and demand-side adjustment to macroeconomic shocks promoting a dichotomy of short-term and long-term macrodynamics. For the present consensus model of macroeconomic stabilization policy this dichotomy represents one of the basic conceptual features. As non-neutrality is limited to the short run - interest rate policy affects aggregate demand and enables the central bank to target inflation - the system does not face a trade-off between real and nominal variables in the long run. The possibility that monetary policy actions may induce real effects that exceed short-term dynamics has been rarely discussed in mainstream economic literature and consequently has gained little attention in the discussion of monetary policy?s stabilization strategies. However, such a strict separation between short-term (generally associated with demand-side) and long-term (supply-side) macrodynamics not only provokes concern from the stance of basic insights of the theories of economic growth. Rather one has to argue that significant changes of capacity utilization that last over several periods may induce procyclical supply-side adjustments. For this reason, several economists raise severe concerns with regard to the corresponding model-setups described above. In fact, the (over-)simplification of an extensively exogenous evolution of productive capacity on the one hand and the mechanisms of procyclical adjustment of production factors on the other hand reveal a strong macrotheoretical tension. There are several channels that promote procyclical stimulus of aggregate demand and a changing factor utilization to the accumulation and efficiency of an economy?s productive capacity. Changing investment dynamics not only lead to quantitative adjustments of the capital stock, but also stimulate multifactor productivity through technical progress. Moreover, unemployment may forward the emergence of long-term unemployment and reduce the effective supply of labor by mechanisms of labor market hysteresis. This clearly weakens the conventional agreement of a trend-cycle-dichotomy which still plays a central role within the context of models that are used for stabilization analysis. Moreover, the theoretical considerations are supported by empirical findings that provide strong clues for procyclical evolution of productive capacity. Against the background of asymmetric factor utilization due to nominal divergence and the resulting differences in real interest rates EMU-members reflect clear differences with regard to the utilization and accumulation of production factors. As alternating stimuli of aggregate demand and supply support the view that the long-term development of an economy cannot be understood without its short-term outcomes, stabilization policy that is supposed to be nonneutral in the short run will exhibit long-term effects with regard to output and employment. The impact of a changing factor utilization on the accumulation and efficiency of production factors motivates path dependency and the existence of multiple equilibria. As cyclical movements of aggregate demand play a decisive role for the evolution of an economy?s productive capacity stability and uniqueness of long-term equlibria as a system?s point of return become uncertain. In particular, output gaps close not only via the shift of aggregate demand but also due to the procyclical adjustment of potential output. Although there seem to be strong arguments in favor of procyclical adjustment of potential capacity to variations in aggregate demand, monetary policy may not frivolously exploit supply?s elasticity for expansionary stimulus. This is not only due to the fact that supply-side adjustment limits itself to certain ranges but also the evolution of inflation expectations may reduce the reflationary scope. On the other hand, the long-term costs of pronounced underutilization highlight the asymmetric quality of stabilization impulses that seem to be disregarded within ordinary loss functions.Publication Macroeconomic stabilisation and bank lending : a simple workhorse model(2013) Spahn, PeterA hybrid standard macro model is supplemented by an explicit analysis of bank lending, based on a five-position aggregative balance sheet. In the model's two versions credit supply is based on a leverage targeting rule or on simple optimisation, taking into account lending risks and funding costs. Model simulations explore consequences of supply and demand disturbances, discretionary interest rate moves, asset valuation and credit risk shocks. Besides standard Taylor policies, the paper compares the relative efficiency of additional stabilisation tools like external-funding taxes and anti-cyclical leverage regulation. Quantitative restrictions for bank activities seem to be useful.Publication Monetärer Keynesianismus : Versuch einer Rekonstruktion von Hajo Rieses "Theorie der Geldwirtschaft"(2024) Spahn, PeterHajo Riese (FU Berlin) was a pioneer of the "Berlin School of Monetary Keynesianism", particularly in the 1980s and 1990s. His research work was based on the roots of monetary theory in the work of J. M. Keynes, with a particular focus on the theory of capital and interest rates. While in Keynes liquidity preference remained an element of money demand, for Riese it formed the central variable of a theory of credit supply. The credit contract is not based on goods or goods equivalents, but on the nominal category of money, because this is the sole medium for the fulfilment of contracts. In addition to the interest rate, the rate of return on real capital is also determined by the liquidity premium. The central bank has to take into account the regulatory-theoretical significance of monetary stability, which runs counter to the "easy money policy" usually demanded by Keynesians.Publication Monetary policy and systemic risk on financial markets : concepts, transmission channels and policy implications(2016) Scheffknecht, Lukas; Spahn, PeterThe present thesis explores the issue of systemic risk on financial markets and its interplay with monetary policy. Systemic risk is defined as the risk of experiencing a severe financial crisis. It is inefficiently high in the absence of appropriate regulation due to the presence of systemic externalities, which arise if financial institutions do not internalize the consequences of their actions for systemic stability. More specifically, such behavior may lead to vulnerable financial networks, poor diversification, fire sales, inefficient distribution of liquidity as well as to breakdowns of markets characterized by incomplete information. Macroprudential regulation aiming at systemic stability should therefore focus on the mitigation of systemic externalities. However, a critical assessment of the current state of financial regulation reveals that several important drivers of systemic risk remain unaddressed. Insufficient containment of systemic risk poses a challenge for monetary policy. First, financial crises have adverse effects on macroeconomic stability. Second, monetary policy itself has the potential to affect the evolution of systemic risk. It is subsequently tried to shed light on potential transmission channels running from an expansive policy stance to an increase in systemic risk. On a theoretical basis, it is found that a monetary expansion tends to induce higher leverage as well as credit risk and less stable refinancing in the intermediation sector. An empirical analysis of the US economy based on vector autoregressions supports this “risk-taking channel.” Moreover, the analysis of a simple macro-financial model shows that procyclical risk-taking behavior of financial intermediaries produces additional macroeconomic volatility. Optimal policy consists of a combination of strict capital requirements and an interest rate rule featuring an explicit reaction to credit dynamics. In a final step, I discuss implications for monetary policy. If macroprudential regulation is not strict enough, it is advisable to embark on a strategy of preemptive interest rate hikes in an environment of rising systemic risk. Its implementation could be achieved by a slight modification of the existing two-pillar strategy of the European Central Bank. Alternatively, central banks could rely on output gap measures which take financial conditions into account. However, such a strategy can increase short-term macroeconomic volatility. Hence, monetary policy faces the additional trade-off of balancing medium-term financial stability against macroeconomic stability in the short run. Moreover, monetary policy and macroprudential regulation should be carefully coordinated to deliver welfare-maximizing outcomes.Publication Population growth, saving, interest rates and stagnation : discussing the Eggertsson-Mehrotra model(2016) Spahn, PeterPost Keynesian stagnation theory argues that slower population growth dampens consumption and investment. A New Keynesian OLG model derives an unemployment equilibrium due to a negative natural rate in a three-generations credit contract framework. Besides deleveraging or rising inequality, also a shrinking population is a triggering factor. In all cases, a saving surplus drives real interest rates down. In other OLG settings however, with bonds as stores of value, slower population growth, on the contrary, causes a lack of saving and thus rising rates. Moreover, the recent fall in market interest rates was brought about by monetary factors.Publication Subprime and euro crises : should we blame the economists?(2013) Spahn, PeterEconomists in the public are accused of propagating highly professional, but unrealistic theories that mislead market agents and policy makers to place too much confidence in rational behaviour and market equilibrium. The paper analyses to what extent the US banking crisis and the euro crisis can be ascribed to fallacious assessments and recommendations on the part of economic theory. In the first case, myopic financial market theory and practice had neglected systemic repercussions of micro bank trading patterns. The euro crisis emerged from the neglect of undergraduate economic wisdom of necessary adjustment mechanisms in a currency union. Economists hopefully misinterpreted current account deficits as a sign of structural change.Publication Unconventional monetary policy : theoretical foundations, transmission mechanisms and policy implications(2018) Schmidt, Benjamin; Spahn, PeterThe financial crisis of 2007-09 can be divided into a ’pre-Lehman’ and a ’post-Lehman’ episode. The ’pre-Lehman’ episode lasted from August 2007 to September 2008 and was largely confined to distressed European and US money markets. In comparison, the ’post-Lehman’ episode was characterized by a global economic slump, deflationary risks, and policy rates at the effective lower bound in most advanced and many emerging economies. Accordingly, part I of this thesis starts with the monetary policy Response to the ’pre-Lehman’ turmoil on interbank markets, while part II addresses unconventional monetary policies at the zero lower bound. Finally, part III provides a theoretical and empirical assessment of their macroeconomic consequences. Beyond that, it also includes a short discussion on potential exit strategies from unconventional monetary policies. Part I: After a preliminary discussion of the way monetary policy is implemented in normal times, chapter 2 presents a simple corridor model of the reserve market. Subsequently, this model is used to describe some crisis-driven innovations in monetary policy frameworks. The key result of this chapter is that by replacing large parts of the malfunctioning interbank market with central bank intermediation, the Fed and the ECB succeeded in preventing an ’adverse spiral’ that may have easily unfolded from the heightened uncertainty among money market participants. As monetary policy in the ’post-Lehman’ era increasingly turned towards lowering the term-premium component of longer-term rates, chapter 3 highlights that the precrisis workhorse model of monetary policy analysis – the baseline New Keynesian model (NKM) – is inappropriate to capture such effects. The reason is that the NKM assumes rational expectations, perfectly flexible financial markets, and the existence of the pure expectations theory of the term structure, which altogether offer the rationale for the Wallace neutrality of central bank open market operations (Wallace, 1981). Accordingly, the chapter ends with the conclusion that most standard dynamic stochastic General equilibrium models (DSGE) lack the conditions conducive for central bank asset purchases to have a direct effect on either nominal or real economic variables. Part II: The second part starts with a basic classification of unconventional monetary policies. Those are: (i) forward guidance, (ii) quantitative vs. qualitative easing, and, (iii)negative policy rates. In a next step, I construct a preferred-habitat model of the term structure, which provides the theoretical foundation for the portfolio balance channel of central bank asset purchases (see chapter 4.2.) Chapter 5 sheds further light on the transmission channels of unconventional policies. In this context, the predictions of economic theory are cross-checked with the empirical evidence for the US, the UK, and the euro area. Since the focus of this thesis lies on the euro area, in chapter 6, I follow Altavilla et al. (2015) and conduct an event study on the ECB’s asset purchase program (APP). In contrast to previous studies, I investigate the set of all official ECB announcements related to the APP over the period from 2014 to 2016. Moreover, I do not confine the analysis to sovereign and corporate bond yields and, thus, provide a more comprehensive perspective on the impact of QE in the euro area. Beyond bond yields, I assess the impact on the European stock markets, on inflation expectations, and on various euro exchange rates. Consistent with the credit risk augmented preferred-habitat theory of chapter 4.2, I find that the APP significantly reduced Italian and Spanish government bond yields, while the effects on German and French yields were much less pronounced. This points to a portfolio balance effect that runs primarily through country-specific risk premia. Beyond its impact on sovereign bonds, the APP also significantly lowered the yields on euro area corporate bonds (both financial and non-financial). While the announcements led to a significant depreciation of the euro against the US dollar, I do not observe a significant effect on expected inflation and interbank swap rates. Hence, the signaling channel and the Inflation reanchoring channel seem to be less important in the euro area than in the US (see e.g. Bauer and Rudebusch, 2014). Part III: Although the immediate impact on financial markets might be a necessary precondition for the effectiveness of unconventional monetary policy, its ultimate Goal is to stabilize inflation and stimulate economic activity. In turn, part III deals with the macroeconomic effects of central bank asset purchases. In this context, firstly, the Impact of QE on the banking system is addressed. By taking a closer look at the empirical evidence for the credit channel in the UK, the euro area and the US, I reach the conclusion that with the ongoing deterioration in bank capital and the persistent economic slump that followed the failure of Lehman Brothers, the positive impact of additional liquidity increasingly receded. Instead, in the ’post-Lehman’ era, any stimulating effect of monetary policy on bank lending acted mainly through the bank capital channel. Given the prevalence of the portfolio balance effect, chapter 8 provides a detailed discussion within a modern DSGE set-up. By drawing on earlier insights from the preferred-habitat theory, this chapter highlights the macroeconomic implications of market segmentation and limits to arbitrage for the effectiveness of central bank asset purchases. In chapter 8.4, I follow Harrison (2012) and extend the portfolio balance model by including financial intermediaries and the zero lower bound on the short-term policy rate. Thereby, I am able to explicitly account for two separate policy instruments at the disposal of the central bank: conventional interest rate policy and central bank Balance sheet operations. This enables me to simulate the impulse response functions of central bank asset purchases in case of a binding and non-binding zero lower bound. Consequently, the simulation exercise underlines the important result that asset purchases are particularly powerful in stabilizing the macroeconomy at the zero lower bound of the short-term policy rate. However, the DSGE simulations provide only a qualitative validation for the theoretical predictions about the portfolio balance effect. Therefore, in chapter 9, I conduct a meta study on the existing empirical evidence concerning the macroeconomic effectiveness of unconventional monetary policies in the US, the UK, and the euro area. And while there is a great dispersion among the individual estimates, it seems evident that the macroeconomic impact of the ECB’s asset purchase program was substantially smaller than those of the Federal Reserve and the Bank of England. Finally, chapter 10 outlines some broad principles with respect to exiting unconventional monetary policies. A key finding of this chapter is that a successful exit strategy should likely involve the following steps: first, forward guidance concerning the expected path of future interest rates; second, the application of temporary reserve drainage operations and/or reserve requirements; third, stopping the reinvestment of maturing assets on the central bank’s balance sheet and, ultimately, the use of asset sales. Furthermore, I argue that potential central bank losses should not pose a serious constraint on plausible exit scenarios. Chapter 11 concludes.Publication Unconventional views on inflation control : forward guidance, the neo-Fisherian approach, and the fiscal theory of the price level(2018) Spahn, PeterIn recent years, various "unconventional" views have been advanced that promise to offer new analytical insights and policy approaches that are suited to control the value of money, particularly in a constellation of low growth and unemployment. Whereas Forward Guidance attempts to decrease the real interest rate by low nominal rates and by creating excessive inflationary expectations, the Neo-Fisherian approach suggests to increase nominal rates immediately to the long-run equilibrium value that corresponds to the inflation target. The Fiscal Theory of the Price Level believes that goods prices jump to a level that validates the long-run sustainability condition of government debt. All three views are criticized for analytical and empirical reasons.Publication Die Währungskrisenunion : die Euro-Verschuldung der Nationalstaaten als Schwachstelle der EWU(2011) Spahn, PeterDie Staatsschuldenkrise einiger Länder in der EWU ist letztlich doch eine Währungskrise. Nur im gemeinsamen Währungsraum war es überhaupt möglich, die Schuldaufnahme stark auszuweiten. Andererseits treten bei Zweifeln an der finanziellen Solidität von Schuldnerstaaten kumulative Instabilitätsprobleme auf, die in der internationalen Geldwirtschaft aus der Konstellation "Verschuldung in fremder Währung" bekannt sind. Die regulär nicht vorgesehene Kurspflege nationaler Schuldtitel seitens der EZB und endogene Liquiditätsengpässe im nationalen Banksystem bei einem massiven Umstieg der Anleger in Papiere mit besserer Reputation erzeugen eine durchaus rationale Insolvenzerwartung. Ironischerweise galt die Konstellation einer alleinigen Abhängigkeit der nationalen Finanzpolitik von Kreditanbietern auf dem Euro-Finanzmarkt als erwünschtes ordnungspolitisches Disziplinierungsprinzip; sie erweist sich nun als nicht tragfähig. Die Alternative sind permanente Rettungsschirme oder Euro-Bonds. In beiden Fällen wird die währungspolitisch schwache Stellung nationaler Schuldner durch implizite Zinszahlungen und Vermögensgarantien wirtschaftlich stärkerer Länder kompensiert. Die damit verbundenen Einkommens- und Vermögensverluste sind der Preis, den exportorientierte Länder wie die Bundesrepublik für die Bewahrung des Euro zahlen müssen.Publication Was war falsch am Merkantilismus?(2018) Spahn, PeterMercantilist theories and policies in early capitalism have been criticized for confusing microeconomic and macroeconomic sources of wealth, for misunderstanding the benefits of free trade, and for overrating the role of money. This paper aims to reconstruct the rationality of mercantilism as an efficient strategy of economic development. It presents a critical assessment of David Hume’s specie flow mechanism that counts as a major rebuttal of mercantilism and collects insights of early writers into the working of a monetary economy.