International Seminar on Macroeconomics

The NBER's 41st International Seminar on Macroeconomics, hosted by Central Bank of Ireland, took place in Dublin, Ireland, on June 29-30. Research Associates Jordi Galí of CREI and Kenneth D. West of University of Wisconsin, Madison organized the conference. These researchers' papers were presented and discussed:

Jing Cynthia Wu, University of Notre Dame and NBER, and Ji Zhang, Tsinghua University

Global Effective Lower Bound and Unconventional Monetary Policy (NBER Working Paper No. 24714)

In a standard open-economy New Keynesian model, the effective lower bound causes anomalies: output and terms of trade respond to a supply shock in the opposite direction compared to normal times. Wu and Zhang introduce a tractable two-country model to accommodate for unconventional monetary policy. In the model, these anomalies disappear. The researchers allow unconventional policy to be partially active and asymmetric between the countries. Empirically, they find the U.S., Euro area, and U.K. have implemented a considerable amount of unconventional monetary policy: the U.S. follows the historical Taylor rule, whereas the others have done less compared to normal times.

Anna Cieslak, Duke University, and Andreas Schrimpf, Bank for International Settlements

Non-Monetary News in Central Bank Communication

Cieslak and Schrimpf quantify the importance of non-monetary news in central bank communication. Using evidence from four major central banks and a comprehensive classification of events, they decompose central bank communication into news about (i) monetary policy, (ii) economic growth, and (iii) shocks to risk preferences. The researchers' approach exploits high-frequency comovement of stocks and interest rates combined with monotonicity restrictions across the yield curve. They find significant differences in news composition depending on the communication channel used by central banks. Non-monetary news prevails in about 40% of policy decision announcements by the Fed and the ECB, this fraction is even higher for communications that provide context to policy decision such as press conferences. The researchers show that non-monetary news accounted for a major part of financial markets' reaction during the financial crisis and in the early recovery, while monetary shocks have gained importance since 2013.

Alexander Bick, Arizona State University; Bettina Brueggemann, McMaster University; and Nicola Fuchs-Schündeln and Hannah Paule-Paludkiewicz, Goethe University Frankfurt

Long-Term Changes in Married Couples' Labor Supply and Taxes: Evidence from the U.S. and Europe Since the 1980s

Bick, Brueggemann, Fuchs-Schündeln, and Paule-Paludkiewicz document the time-series of employment rates and hours worked per employed by married couples in the U.S. and seven European countries (Belgium, France, Germany, Italy, the Netherlands, Portugal, and the U.K.) from the early 1980s through 2016. Relying on a model of joint household labor supply decisions, the researchers quantitatively analyze the role of non-linear labor income taxes for explaining the evolution of hours worked of married couples over time, using as inputs the full country- and year-specific statutory labor income tax codes. They further evaluate the role of consumption taxes, gender and educational wage premia, the educational distribution, and the degree of assortative matching into couples. The model is quite successful in predicting the time series behavior of hours worked per employed married woman, with labor income taxes being the key driving force. It also explains part of the secular increase in married women's employment rates, but the large increases among European married women in the 1980s and early 1990s are not driven by the factors considered in our study. The researchers will make the non-linear tax codes used as an input into the analysis available as a user-friendly and easily integrable set of Matlab codes.

Björn Richter and Moritz Schularick, University of Bonn, and Ilhyock Shim, Bank for International Settlements

The Costs of Macroprudential Policy

Central banks increasingly rely on macroprudential measures to manage the financial cycle, but the effects of such policies on the core objectives of monetary policy to stabilize output and inflation are largely unknown. Richter, Schularick, and Shim quantify the effects of changes in maximum loan-to-value (LTV) ratios on output and inflation. They rely on a narrative identification approach based on detailed reading of policy-makers' objectives when implementing the measures. The researchers find that over a four year horizon, a 10 percentage point decrease in the maximum LTV ratio leads to a 1.1% reduction in output. As a rule of thumb, the impact of a 10 percentage point LTV tightening can be viewed as roughly comparable to that of a 25 basis point increase in the policy rate. However, the effects are imprecisely estimated and the effect is only present in emerging market economies. The researchers also find that tightening LTV limits has larger economic effects than loosening them. At the same time, they show that changes in maximum LTV ratios have substantial effects on credit and house price growth. Using inverse propensity weights to rerandomize LTV actions, show that these effects are likely causal.

Ester Faia, Universitat Pompeu Fabra; Sebastien Laffitte, ENS Paris-Saclay; and Gianmarco Ottaviano, Bocconi University and London School of Economics

Foreign Expansion, Competition and Bank Risk

Using a novel dataset on the 15 European banks classified as G-SIBs from 2005 to 2014, Faia, Ottaviano, and Laffitte find that the impact of foreign expansion on risk is always negative and significant for most individual and systemic risk metrics. In the case of individual metrics, they also find that foreign expansion affects risk through a competition channel as the estimated impact of openings differ between host countries that are more or less competitive than the source country. The systemic risk metrics also decline with respect to expansion, though results for the competition channel are more mixed, suggesting that systemic risk is more likely to be affected by country or business models characteristics that go beyond and above the differential intensity of competition between source and host markets. Empirical results can be rationalized through a simple model with oligopolistic/oligopsonistic banks and endogenous asset risk.

Marco Del Negro, Domenico Giannone, and Andrea Tambalotti, Federal Reserve Bank of New York, and Marc Giannoni, Federal Reserve Bank of Dallas

Global Trends in Interest Rates

Del Negro, Giannone, Giannoni, and Tambalotti study the real interest rate for safe assets. The trend in the world real interest rate for safe and liquid assets fluctuated in a narrow range close to 2 percent for more than a century, but it has dropped significantly over the past three decades. This decline has been common across advanced economies and it has come to dominate the country-specific trends, which have all but vanished since the 1970s. An increase in the convenience yield for safety and liquidity and the reduction in global growth both play important roles in this decline.

Luigi Bocola, Northwestern University and NBER; Alessandro Dovis, University of Pennsylvania and NBER; and Gideon Bornstein, Northwestern University

Quantitative Sovereign Default Models and the European Debt Crisis

A large literature has developed quantitative versions of the Eaton and Gersovitz (1981) model to analyze default episodes on external debt. Bocola, Dovis, and Bornstein study whether the same framework can be applied to the analysis of debt crisis in which domestic public debt plays a prominent role. The researchers consider a model where a government can issue debt to both domestic and foreign investors, and derive conditions under which their sum is the relevant state variable for default incentives. The researchers then apply the framework to the European debt crisis and show that matching the cyclicality of public debt -- rather than that of external debt -- allows the model to better capture the empirical distribution of interest rate spreads and gives rise to more realistic crises dynamics.

Atsushi Inoue, Vanderbilt University, and Barbara Rossi, Universitat Pompeu Fabra

The Effects of Conventional and Unconventional Monetary Policy on Exchange Rates

What are the effects of monetary policy on exchange rates? And have unconventional monetary policies changed the way monetary policy is transmitted to international financial markets? According to conventional wisdom, expansionary monetary policy shocks in a country lead to that country's currency depreciation. Inoue and Rossi revisit the conventional wisdom during both conventional and unconventional monetary policy periods in the U.S. by using a novel identification procedure that defines monetary policy shocks as changes in the whole yield curve due to unanticipated monetary policy moves. The new approach allows monetary policy shocks to differ depending on how they affect agents' expectations about the future path of interest rates as well as their perceived effects on the riskiness/uncertainty in the economy. The empirical results show that: (i) a monetary policy easing leads to a depreciation of the country's spot nominal exchange rate in both conventional and unconventional periods, (ii) however, there is substantial heterogeneity in monetary policy shocks over time and their effects depend on the way they affect agents' expectations.

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