default correlation an empirical investigation of a subprime lender in recent years subprime lending has grown substantially as an important sector of the credit markets this paper is concerned with the risk management of subprime loan portfolios and the importance of default correlation in measuring that risk using a large portfolio of residential subprime loans from an anonymous subprime lender we show that default correlation is substantial for this lender in particular the significance of default correlation increases as the internal credit rating declines our results suggest that lenders and regulators would be well served investing in the understanding of default correlation in subprime portfolios

a monetary policy strategy in good and bad times lessons from the recent past we evaluate the ecb s monetary policy strategy against some of the underlying economic features of the eurozone in normal times and during the financial crisis we show that in the years preceding the crisis the ecb s emphasis on monetary indicators and deliberate avoidance of excessive activism were justified by the underlying macroeconomic conditions that the ecb faced in the eurozone and contributed to avoid more volatile patterns of inflation and economic activity after the collapse of financial intermediation in late 2008 the strategy of the ecb was to adopt several non standard policy measures according to our quantitative evaluation of the impact of the main non standard policies decided in october 2008 and in may 2009 which notably did not include entering commitments regarding the future path of the policy rate such measures have significantly contributed to preserving price stability and forestalling a more disruptive collapse of the macroeconomy stephan fahr roberto motto massimo rostagno frank smets and oreste tristani

the role of collateral in credit markets with imperfect information abstract the paper analyzes the structure of credit market equilibrium under imperfect information collateralization and credit rationing are compared as alternative means to cope with problems of adverse selection and moral hazard it is shown that lenders may use collateral as a self selection and incentive mechanism rationing occurs only if the borrowers collaterizable wealth is too small to allow perfect sorting or to create sufficiently strong incentives whenever there is rationing in an equilibrium some borrowers are charged the maximum amount of collateral

detecting imbalances in house prices what goes up must come down i suggest a toolkit of four bubble detection methods that can be used to monitor developments in house prices these methods are applied to us finnish and norwegian data for the united states all measures unanimously suggest a bubble in the early to mid 2000s whereas current us house prices are found to be aligned with economic fundamentals one of the measures indicates imbalances in finland while there are no signs of a bubble in norway i find that large parts of the us house price bubble can be explained by the sharp increase in capital inflows and the extension of loans to the subprime mortgage market

fire sales and the financial accelerator abstract during financial turmoil increases in risk lead to higher default foreclosure and fire sales this paper introduces a costly liquidation process for foreclosed collateral and pro cyclical recovery rates in a dynamic stochastic general equilibrium model of the financial accelerator links between endogenous recovery rates risk premia and default risk generate a liquidity spiral magnifying financial accelerator effects we illustrate how collateral liquidation and monetary policy alter the real impact of financial shocks operating through macro financial linkages and the way a government subsidy on collateral liquidity and required liquidity buffers can help dampen the liquidity spiral by shoring up recovery rates

a varma test on the gibson paradox we applied the varma test to examine the dynamic relation between prices and interest rates the dynamic relation which is important to characterize the nature of the gibson paradox provides economists new insight in discriminating against competing theories in light of our empirical findings all theories in the literature lose their persuasiveness we found some evidence of unidirectional relation from prices to interest rates but we found no evidence of unidirectional relation from interest rates to prices hence the business cycle explanations advanced by wicksell 1907 keynes 1930 lee and petruzzi 1986 and barsky and summers 1988 are especially in jeopardy a century and a half after its birth this paradox is more puzzling than ever copyright 1990 by mit press

liquidity and the dynamic pattern of asset price adjustment a global view abstract global liquidity expansion has been very dynamic since 2001 contrary to conventional wisdom high money growth rates have not coincided with a concurrent rise in goods prices at the same time however asset prices have increased sharply significantly outpacing the subdued development in consumer prices we investigate the interactions between money and goods and asset prices at the global level using aggregated data for major oecd countries our var results support the view that different price elasticities on asset and goods markets explain the observed relative price change between asset classes and consumer goods

fiscal policy and financial market movements abstract this paper estimates fiscal policy reaction function in order to investigate the links between financial market movements and fiscal policy outcomes an increase in asset prices affects in a positive and significant manner primary balances with the response reflecting both an increase in government revenues and a fall in government spending the most important impact on fiscal balances is due to changes in residential property prices changes in equity and commercial property prices are also important determinants of fiscal balances our findings suggest that the steepening of the slope of the yield curve contributes to expenditure based fiscal discipline

cross country variation in household access to financial services abstract this paper presents estimates for more than 160 countries of the fraction of the adult population using formal financial intermediaries the estimates are constructed by combining information on account numbers at banks and microfinance institutions together with banking depth and gdp data with estimates from household surveys for a smaller set of countries an illustrative application of the data compares them with information on poverty there is a correlation but it is not clearly causal

dynamics of a protected housing market the case of switzerland this study posits that there may be a strong relationship between the high degree of protectionism of the swiss housing market and its stability the article provides an overview of the swiss housing policies that it is argued are highly conservative in the context of an international comparison the stability of the swiss housing economy is empirically tested based on the time period from 1990 to 2009 in which two substantial crises occurred house prices and construction activity are modelled the emerging results which are admittedly based on a very short time series are nonetheless consistent with previous theoretical and empirical research furthermore the findings indicate that the swiss housing economy operates in accordance with fundamentals based on a tentative approach that measures the occurrence of the crisis with annual indicator variables no effects of the crises on the swiss housing market can be detected

bank lending and property prices in hong kong abstract this paper studies the relationship between residential property prices and bank lending in hong kong this is an interesting topic for three reasons first swings in property prices have been extremely large and frequent in hong kong second under the currency board regime monetary policy cannot be used to guard against asset price swings third despite the collapse in property prices since 1998 the banking sector remains sound while the contemporaneous correlation between lending and property prices is large our results suggest that the direction of influence goes from property prices to bank credit rather than conversely

the impact of macroeconomic and regulatory factors on bank efficiency a non parametric analysis of hong kong s banking system abstract this paper assesses the relative technical efficiency of institutions operating in a market that has been significantly affected by environmental and market factors in recent years the hong kong banking system these environmental factors are specifically incorporated into the efficiency analysis using the innovative slacks based second stage tobit regression approach advocated by fried et al fried h o schmidt s s yaisawarng s 1999 incorporating the operating environment into a nonparametric measure of technical efficiency journal of productivity analysis 12 249 267 a further innovation is that we also employ tone s tone k 2001 a slacks based measure of efficiency in data envelopment analysis european journal of operational research 130 498 509 slacks based model sbm to conduct the data envelopment analysis dea in addition to the more traditional approach attributable to banker charnes and cooper bcc banker r d charnes a cooper w w 1984 some models for estimating technical and scale efficiencies in data envelopment analysis management science 30 1078 1092 the results indicate high levels of technical inefficiency for many institutions considerable variations in efficiency levels and trends across size groups and banking sectors and also differential impacts of environmental factors on different size groups and financial sectors surprisingly the accession of hong kong to the people s republic of china episodes of financial deregulation and the 1997 1998 south east asian crisis do not seem to have had a significant independent impact on relative efficiency however the results suggest that the impact of the last mentioned may have come via the adverse developments in the macroeconomy and in the housing market

current real business cycle theories and aggregate labor market fluctuations hours worked and the return to working are weakly correlated traditionally the ability to account for this fact has been a litmus test for macroeconomic models existing real business cycle models fail this test dramatically we modify prototypical real business cycle models by allowing government consumption shocks to influence labor market dynamics this modification can in principle bring the models into closer conformity with the data our empirical results indicate that it does

do capital adequacy requirements reduce risks in banking abstract in a dynamic framework it is shown that capital adequacy rules may increase a bank s riskiness in addition to the standard negative effect of rents on risk attitudes of banks a further intertemporal effect has to be considered the intuition behind the result is that under binding capital requirements an additional unit of equity tomorrow is more valuable to a bank if raising equity is excessively costly the only possibility to increase equity tomorrow is to increase risk today

inference in cointegrating models uk m1 revisited the paper addresses the practical determination of cointegration rank this is difficult for many reasons deterministic terms play a crucial role in limiting distributions and systems may not be formulated to ensure similarity to nuisance parameters finite sample critical values may differ from asymptotic equivalents dummy variables alter critical values often greatly multiple cointegration vectors must be identified to allow inference the data may be 1 2 rather than 1 1 altering distributions and conditioning must be done with care these issues are illustrated by an empirical application of multivariate cointegration analysis to a small model of narrow money prices output and interest rates in the uk copyright 1998 by blackwell publishers ltd

interaction between housing prices and household borrowing the finnish case abstract employing time series econometrics this study shows that there has been a significant two way interaction between housing prices and housing loan stock in finland since the financial liberalization in the late 1980s before the financial deregulation the interaction was substantially weaker furthermore housing appreciation has a notable positive impact on the outstanding consumption loan stock it appears that there is no similar relationship between stock prices and credit understanding the two way interaction between housing prices and credit is of importance since the interdependence is likely to augment boom bust cycles in the economy and increase the fragility of the financial sector

leverage and house price dynamics in u s cities we use city level data to analyze the relationship between homeowner borrowing patterns and house price dynamics our principal finding is that in cities where a greater fraction of homeowners are highly leveraged i e have high loan to value ratios house prices react more sensitively to city specific shocks such as changes in percapita income this finding is consistent with recent theories that emphasize the role of borrowing in shaping the behavior of asset prices

a macroeconomic model with a financial sector this paper studies a macroeconomic model in which financial experts borrow from less productive agents we pursue four sets of results i the economy is prone to instability and occasionally enters volatile episodes as volatility spikes agents precautionary motive increases depressing prices even further log linear approximations fail to capture these non linear effects that can cause economies to be significantly depressed for long periods of time ii endogenous risk during volatile episodes increases asset price correlations iii financial experts impose a negative externality on each other and on the labor sector by not maintaining adequate capital cushion and funding structure iv while risk sharing within the financial sector through securitization and derivatives contracts reduces many inefficiencies it can also amlify systemic risks

money income and prices in the united kingdom 1870 1913 this paper examines certain aspects of the operation of the gold standard and its effects on the united kingdom in the period before world war i reduced form tests and estimates of output and money demand equations are presented the major conclusions are 1 prices and interest rates in the united kingdom can be represented as being determined independently of the money stock and output in the united kingdom and 2 evidence concerning lucas s version of the natural rate hypothesis indicates various inadequacies

an empirical study of credit shock transmission in a small open economy in this paper we identify and estimate the dynamic effects of foreign us and national canadian credit shocks in a small open economy we use standard credit spreads as proxies to the external finance premium our first result suggests that the us and canadian credit spreads contain substantial forecasting power for several measures of the canadian real economic activity especially during the recent financial crisis and its aftermath secondly an adverse us credit shock generates a significant and persistent economic slowdown in canada the national external finance premium rises immediately while interest rates credit aggregates output and employment indicators decline variance decomposition reveals that credit shocks have a sizeable effect on real activity measures leading indicators and credit spreads yet the unexpected shocks in domestic credit spreads are not able to generate any significant dynamic response of the real activity once we control for the us credit market conditions

chained credit contracts and financial accelerators sufficiently high net worth of financial intermediaries fis is considered a necessary condition for financial and macroeconomic stability in this paper we explore why the net worth of fis is important as compared to that of nonfinancial firms using a dynamic general equilibrium model in which both fis and nonfinancial firms rely on costly external debt we find that an exogenous disruption of the fis net worth has a greater aggregate impact than does the same sized disruption of the nonfinancial firms net worth the key reason is that the net worth of the fis in the united states is small jel e22 e44 g21

the lender of last resort a twenty first century approach the classical bagehot conception of a lender of last resort lolr that lends to illiquid banks has been criticized on two grounds on the one hand the distinction between insolvency and illiquidity is not clear cut on the other a fully collateralized repo market allows central banks to provide the adequate aggregate amount of liquidity and leave to the banks the responsibility of lending uncollateralized the object of this paper is to analyze these issues rigorously by providing a framework in which liquidity shocks cannot be distinguished from solvency ones and then asking whether there is a need for a lolr and how it should operate in the absence of systemic threats determining the optimal lolr policy requires a careful modeling of the structure of the interbank market and of the closure policy in our setup the results depend upon the existence of moral hazard if the main source of moral hazard is the banks lack of incentives to screen loans then the lolr may have to intervene to improve the efficiency of an unsecured interbank market in crisis periods if instead the main source of moral hazard is loan monitoring then the interbank market should be secured and the lolr should never intervene jel e58 628

optimal dynamic capital requirements we characterize welfare maximizing capital requirement policies in a macroeconomic model with household firm and bank defaults calibrated to euro area data we optimize on the level of the capital requirements applied to each loan class and their sensitivity to changes in default risk we find that getting the level right so that bank failure risk remains small is of foremost importance while the optimal sensitivity to default risk is positive but typically smaller than under basel irb formulas when starting from low levels initially both savers and borrowers benefit from higher capital requirements at higher levels only savers are in favour of tighter and more time varying capital charges

dynamic effects of credit shocks in a data rich environment we examine the dynamic effects of credit shocks using a large dataset of u s economic and financial indicators in a structural factor model an identified credit shock resulting in an unanticipate

house prices borrowing constraints and monetary policy in the business cycle i develop a general equilibrium model with sticky prices credit constraints nominal loans and asset prices changes in asset prices modify agents borrowing capacity through collateral value changes in nominal prices affect real repayments through debt deflation monetary policy shocks move asset and nominal prices in the same direction and are amplified and propagated over time the financial accelerator is not constant across shocks nominal debt stabilises supply shocks making the economy less volatile when the central bank controls the interest rate i discuss the role of equity debt indexation and household and firm leverage in the propagation mechanism finally i find that monetary policy should not target asset prices as a means of reducing output and inflation volatility

imperfect competition risk taking and regulation in banking abstract we asses the welfare implications of banking competition under various deposit insurance regimes in a model of imperfect competition with social failure costs and where banks are subject to limited liability we study the links between competition for deposits and risk taking incentives and conclude that the welfare performance of the market and the appropriateness of alternative regulatory measures depend on the degree of rivalry and the deposit insurance regime specifically when competition is intense and the social failure costs high deposit rates are excessive both in a free market and with risk based insurance if insurance premiums are insensitive to risk then the same is true even if there is no social cost of failure we find also that in an uninsured market with nonobservable portfolio risk or with flat premium deposit insurance deposit regulation rate regulation or deposit limits and direct asset restrictions are complementary tools to improve welfare in an uninsured market with observable portfolio risk or with risk based insurance deposit regulation may be a sufficient instrument to improve welfare

the cyclical behaviour of european bank capital buffers using an unbalanced panel of accounting data from 1997 to 2004 and controlling for individual bank costs and risk we find capital buffers of the banks in the eu15 have a significant negative co movement with the cycle for banks in the accession countries there is significant positive co movement capital buffers of commercial and savings banks and of large banks exhibit negative co movement those of co operative and smaller banks exhibit positive co movement speeds of adjustment are fairly slow we interpret these results and discuss policy implications noting that negative co movement of capital buffers will exacerbate the pro cyclical impact of basel ii

financial intermediation and delegated monitoring this paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders it presents a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary diversification within an intermediary serves to reduce these costs even in a risk neutral economy the paper presents some more general analysis of the effect of diversification on resolving incentive problems in the environment assumed in the model debt contracts with costly bankruptcy are shown to be optimal the analysis has implications for the portfolio structure and capital structure of intermediaries

shocks structures or monetary policies the euro area and us after 2001 abstract the us federal reserve cut interest rates more vigorously in the recent recession than the european central bank did by comparison with the fed the ecb followed a more measured course of action we use an estimated dynamic general equilibrium model with financial frictions to show that comparisons based on such simple metrics as the variance of policy rates are misleading we find that because there is greater inertia in the ecb s policy rule the ecb s policy actions actually had a greater stabilizing effect than did those of the fed as a consequence a potentially severe recession turned out to be only a slowdown and inflation never departed from levels consistent with the ecb s quantitative definition of price stability other factors that account for the different economic outcomes in the euro area and us include differences in shocks and differences in the degree of wage and price flexibility

are expectations of inflation rational or is variation of the expected real interest rate unpredictable abstract the joint hypothesis developed and tested in this paper is that the nominal interest rate is a rational expectation of the real interest rate plus the inflation rate and that variation of the expected real interest rate is unpredictable on the basis of information used in the test this test is applied to quarterly data on three month united states treasury bills of 1954 to 1973 the information used in the tests includes besides past interest rates and inflation rates past growth rates of the source base the money supply and real gnp some of the tests allow for a positive marginal tax rate which changes the results little the hypothesis is generally consistent with the data which provides support for the proposition that predictable changes of the money supply do not affect expected real interest rates over periods as short as a quarter

real estate prices and bank stability abstract real estate prices can deviate from their fundamental value due to rigid supply heterogeneity in quality and various market imperfections which have two contrasting effects on bank stability higher prices increase the value of collateral and net wealth of borrowers and thus reduce the likelihood of credit defaults in contrast persistent deviations from fundamentals may foster the adverse selection of increasingly risky creditors by banks seeking to expand their loan portfolios which increases bank distress probabilities we test these hypotheses using unique data on real estate markets and banks in germany house price deviations contribute to bank instability but nominal house price developments do not this finding corroborates the importance of deviations from the fundamental value of real estate rather than just price levels or changes alone when assessing bank stability

does collateral fuel moral hazard in banking this paper presents two models in which the fluctuating value of loan collateral real estate generates the problem of moral hazard between a bank and a deposit insurance agent the bank finances risky projects against collateral and relies on the rising collateral value if the collateral value later appreciates the bank enjoys handsome profits otherwise the bank fails the findings are rather consistent with the characteristics of the topical subprime mortgage crisis

bubbles and crises the role of house prices and credit this paper utilizes quarterly panel data for 20 oecd countries over the period 1975 q1 2014 q2 to explore the importance of house prices and credit in affecting the likelihood of a financial crisis

dynamic relationship between house prices in malaysia s major economic regions and singapore house prices fereidouni h g al mulali u lee j y m and mohammed a h dynamic relationship between house prices in malaysia s major economic regions and singapore house prices regional studies the purpose of this study is to examine house price diffusion among malaysia s major economic regions kuala lumpur selangor pulau pinang and johor and between each of these regions and neighbouring singapore by using the quarterly data from 2000 q1 to 2011 q1 by applying multivariate co integration approach the results show the existence of ripple effects among malaysia s major economic regions moreover it is found that house price diffusion observed within a country can be extended across the border implications are offered along with the findings of this research

real exchange rate dynamics revisited a case with financial market imperfections abstract in this paper we investigate the relationship between real exchange rate dynamics and financial market imperfections for this purpose we first construct a new open economy macroeconomics noem model that incorporates staggered loan contracts as a simple form of the financial market imperfections our model with such a financial market friction replicates persistent volatile and realistic hump shaped responses of real exchange rates which have been thought very difficult to materialize in standard noem models remarkably these realistic responses can materialize even with both supply and demand shocks such as cost push loan rate and monetary policy shocks this implies that the financial market development is a key element for understanding real exchange rate dynamics

tax evasion investment shocks and the consumption puzzle a dsge analysis with financial frictions recent studies identify marginal efficiency of investment mei shocks as important drivers of the business cycle however dynamic stochastic general equilibrium dsge models struggle to explain macroeconomic comovements between consumption and the key real variables after a mei shock moreover engaging in tax evasion practices is often an answer to financial constraints which have been recognized as important determinants of cyclical fluctuations as well we use a medium scale new keynesian dsge model that combines tax evasion with financial frictions to simulate a mei shock we show that entrepreneurial tax evasion can solve the comovement problem to a fair extent

increasing returns and unsynchronized wage adjustment in sunspot models of the business cycle a challenge to models of equilibrium indeterminacy based on increasing returns is that required increasing returns for generating indeterminacy can be implausibly large and rise quickly with the relative risk aversion in labor we show that unsynchronized wage adjustment via a relative wage effect can both lower the required degree of increasing returns for indeterminacy to a plausible level and make it invariant to the relative risk aversion in labor consequently indeterminacy and sunspot driven fluctuations can emerge for plausible increasing returns regardless of the relative risk aversion in labor our model generates reasonable dynamics in terms of matching the business cycle and sunspot shocks become more important with labor market friction

the relationship between house prices and house purchase loans the spanish case abstract this paper looks at recent developments in house purchase loans and house prices in spain and the linkages between them it aims at identifying deviations of these variables from their equilibrium levels and for this purpose we estimate a vector error correction model the results show that both variables are interdependent in the long run and that both variables were above their equilibrium level by the end of the sample period 2009 q1 the paper also offers insight into how overvaluation overindebtedness in house prices can lead to a false sense of no overindebtedness house prices overvaluation

optimal interest rate smoothing this paper considers the desirability of the observed tendency of central banks to adjust interest rates only gradually in response to changes in economic conditions it shows in the context of a simple model of optimizing private sector behaviour that assignment of an interest rate smoothing objective to the central bank may be desirable even when reduction of the magnitude of interest rate changes is not a social objective in itself this is because a response of policy to irrelevant lagged variables may be desirable owing to the way it steers private sector expectations of future policy

credit crises money and contractions an historical view abstract the relatively infrequent nature of major credit distress events makes an historical approach particularly useful using a combination of historical narrative and econometric techniques we identify major periods of credit distress from 1875 to 2007 examine the extent to which credit distress arises as part of the transmission of monetary policy and document the subsequent effect on output using turning points defined by the harding pagan algorithm we identify and compare the timing duration amplitude and co movement of cycles in money credit and output regressions show that financial distress events exacerbate business cycle downturns both in the 19th and 20th centuries and that a confluence of such events makes recessions even worse

a tale of two effects abstract this paper investigates the relationship between nominal interest rates and prices using nearly two centuries of data from ten industrial countries both a positive relationship between interest rates and price levels that is a positive gibson effect and a negative relationship between interest rates and subsequent price changes that is a negative fama fisher effect prevailed until world war i we propose a simple explanation wherein this doubly paradoxical juxtaposition of effects arises when money is supplied inelastically and prices are flexible this double paradox disappeared after world war ii when economies became mostly characterized by elastic money and sticky prices during that period a positive fama fisher effect emerged while the gibson effect largely dissipated

capital requirements and the behaviour of commercial banks abstract i study the consequences of capital regulations on the portfolio choices of commercial banks elaborating on previous work by kareken and wallace 1978 koehn and santomero 1980 and kim and santomero 1988 i obtain the following results if the objective of commercial banks is maximization of the market value of their future profits value maximizing banks capital regulations cannot prevent banks from choosing very specialized and very risky portfolios risk based insurance premia are in fact the relevant instrument for that purpose on the other hand if banks behave as portfolio managers utility maximizing banks capital regulations can be effective but only if the weights used in the computation of the ratio are proportional to the systematic risks of the assets their betas because of limited liability of commercial banks a minimum capital regulation or a closing rule may become necessary as well to prevent failing banks from betting for resurrection

intertemporal diversification in financial intermediation abstract this paper examines the incentive problem between a bank and depositors or deposit insurer limited liability makes risk shifting lucrative we show how intertemporal diversification of lending decisions i e bank s loan portfolio consists of overlapping long term loans and is thus gradually renewed may solve the incentive problem of risk shifting a new or expanding bank sets a high equity level and acquires depositors confidence subsequently it can allow its equity to depreciate to a permanently lower level depositors can control the bank by monitoring equity and realized credit losses ex post they do not have to monitor bank s lending choices ex ante maturity mismatch illiquidity of long term loans and liquidity of deposits is optimal the analysis can be extended more generally to the borrower lender relationship

securitization risk transferring and financial instability the case of spain abstract the 2007 2010 financial crisis has hit a variety of countries asymmetrically the case of spain is particularly illustrative as it exemplifies in a vivid manner most of the core issues largely responsible for the crisis this country experienced a pronounced housing bubble partly funded via spectacular developments in its securitization markets leading to looser credit standards and subsequent financial stability problems we analyze the sequential deterioration of credit in spain considering rating changes in securitized deals using a sample of 20 286 observations on securities and rating changes from 2000q1 to 2010q1 we build a model in which loan growth on balance sheet credit quality and rating changes are estimated simultaneously our results suggest that loan growth significantly affects on balance sheet loan performance with a lag of at least two years additionally loan performance is found to explain rating changes with a lag of four quarters importantly bank characteristics in particular observed solvency cash flow generation and cost efficiency also affect ratings considerably additionally these other bank characteristics seem to a higher weight in the rating changes of securities issued by savings banks as compared with commercial banks

lending behavior and real estate prices abstract the willingness of banks to provide funding for real estate purchases depends on the creditworthiness of borrowers besides other factors this creditworthiness depends on the development of real estate prices real estate prices in turn depend on the demand for homes which is influenced by the supply of mortgages i develop a theoretical model which explains this circular relationship i show how different kinds of expectation formations can lead to fluctuations in real estate prices furthermore i show that banks make above average profits in the upswing phase of the real estate cycle but suffer high losses when the market turns

the recent boom bust cycle the relative contribution of capital flows credit supply and asset bubbles abstract we use an estimated open economy dsge model with financial frictions for the us and the rest of the world to evaluate various competing explanations about the recent boom bust cycle we find that the savings glut hypothesis is insufficient for explaining all aspects of the boom in the us relatively strong tfp growth and expansionary monetary policy are also not able to explain fully the volatility of corporate and in particular residential investment we identify bubbles in the stock and housing market as crucial concerning the downturn in 2008 2009 the fall in house prices and residential investment only plays a minor role mortgage defaults have more explanatory power especially in a specification of the model with a segregated equity market finally the bursting of the stock market bubble was at least as important in this recession as in 2001 because of various negative shocks hitting the economy at the same time in 2008 2009 and continued positive technology growth not only the real interest rate declined but inflation fell rapidly and left insufficient room for monetary policy to play a similar stabilising role as in previous recessions

is urban land price adjustment more sluggish than housing price adjustment empirical evidence this article hypothesises that due to factors such as thin trading and lack of publicly available data on transactions in the land market urban land prices react more sluggishly to shocks in market fundamentals than housing prices do based on a vector error correction model utilising quarterly data for the helsinki metropolitan area in finland over 1988q1 2008q2 the empirical analysis provides support for this hypothesis in particular the results suggest that new information regarding the market fundamentals is more rapidly reflected in housing prices than in land prices nevertheless it is the housing price level instead of land prices that adjusts towards a cointegrating long run equilibrium between housing prices land prices and construction costs

the fisher hypothesis under different monetary regimes we examine the relation between inflation and nominal interest rates under the various monetary regimes in effect in the united states since the turn of the century our data include a newly constructed time series of short term municipal bond yields observed annually since 1902 the results generally support the hypothesis that after tax nominal yields adjust point for point with rationally forecasted inflation for the postwar years but strongly reject that hypothesis for the preceding years we suggest and offer supporting evidence that the difference between the two subperiods may be attributable to differences in the optimal forecasting technique for each era when forecasting is a costly endeavor

financial infrastructure and house prices we argue that banks operating in a local market possess better information about the local housing market than do nonlocal banks possessing this information may influence their willingness to grant loans to house buyers and the specifics of the loan terms which in turn may affect house prices because credit facilitation makes the housing market more efficient using a panel data set covering a period from 1993 to 2007 and involving 274 municipalities in sweden we establish a positive causal influence of local bank presence on local house prices there are significant spatial and spillover effects that is banks in a municipality affect the housing markets in neighbouring municipalities although to a lesser extent than in their own municipality similar results are obtained through a gravity model the results are robust over time and municipality size

introducing financial frictions and unemployment into a small open economy model the current nancial crisis has made it abundantly clear that business cycle modeling no longer can abstract from nancial factors it is also becoming increasingly clear that the stylized modeling of labor markets without explicit unemployment that is the current standard approach has its limitations some questions which the dominating extant business cycle models are mute on but that we would like to answer are how important are nancial and labor market frictions for the business cycle dynamics of a

comparing shocks and frictions in us and euro area business cycles a bayesian dsge approach this paper estimates a dsge model with many types of shocks and frictions for both the us and the euro area economy over a common sample period 1974 2002 the structural estimation methodology allows us to investigate whether differences in business cycle behaviour are due to differences in the type of shocks that affect the two economies differences in the propagation mechanism of those shocks or differences in the way the central bank responds to those economic developments our main conclusion is that each of these characteristics is remarkably similar across both currency areas copyright 2005 john wiley sons ltd

bank income structure and risk an empirical analysis of european banks the purpose of this paper is to investigate the relationship between bank risk and product diversification in the changing structure of the european banking industry based on a broad set of european banks for the period 1996 2002 our study first shows that banks expanding into non interest income activities present higher risk and higher insolvency risk than banks which mainly supply loans however considering size effects and splitting non interest activities into both trading activities and commission and fee activities we show that the positive link with risk is mostly accurate for small banks and essentially driven by commission and fee activities a higher share of trading activities is never associated with higher risk and for small banks it implies in some cases lower asset and default risks

capital regulation heterogeneous monitoring costs and aggregate loan quality abstract this paper develops a banking sector framework with heterogeneous loan monitoring costs banks are exposed to the moral hazard behavior of borrowers and endogenously choose whether to monitor their loans to eliminate this exposure after analyzing an unregulated banking system we examine several cases in which regulatory capital requirements bind the notional loan supplies of various subsets of banks to gauge the impact of capital requirements we define loan quality in terms of either the ratio of monitored to total loans or the ratio of monitoring banks to total bank population under the assumption of a specific cross sectional distribution of banks our simulations show that the imposition of binding capital requirements on a previously unregulated banking system unambiguously increases the market loan rate and reduces aggregate lending but has an ambiguous effect on loan quality nevertheless once capital requirements are in place the simulations indicate that regulators can contribute to higher overall loan quality by toughening capital requirements

house price appreciation liquidity constraints and second mortgages abstract this paper analyzes how households use second mortgages in response to shocks to housing wealth two related questions are examined do households use home equity in response to house price appreciation are liquidity constraints important for homeowners a theoretical model shows that liquidity constrained households respond more strongly to house price changes than unconstrained households using psid i find noteworthy differences in borrowing patterns of homeowners by the ratio of wealth to income low wealth to income homeowners exhibit a strong reaction to house price appreciation whereas high wealth to income ones do not the results indicate the importance of liquidity constraints among homeowners

evolving u s monetary policy and the decline of inflation predictability based on a structural var with time varying parameters and stochastic volatility for the post wwii u s we document a negative correlation between the evolution of the long run coefficient on inflation in the structural monetary rule and the evolution of the persistence and predictability of inflation relative to a trend component using an estimated sticky price model we show that a more aggressive policy stance towards inflation causes a decline in inflation predictability jel e37 e52 e58

is there a fiscal free lunch in a liquidity trap this paper uses a dsge model to examine the eects of an expansion in government spending in a liquidity trap the spending multiplier can be much larger than in the normal situation if the liquidity trap is very persistent and scal stimulus can be rapidly implemented moreover the budgetary costs may be minimal as the large response of output boosts tax revenues allowing for something close to a scal free lunch however we caution that the multiplier may be much smaller under plausible implementation lags for many types of public spending and or if the liquidity trap lasts less than two years in addition because the marginal impact of scal expansion decreases in the scale of the outlay it is crucial to distinguish between average and marginal multipliers

house prices non fundamental components and interstate spillovers the australian experience abstract using australian capital city data from 1984q3 2008q2 this paper utilizes a dynamic present value model within a var framework to construct time series of house prices depicting what aggregate house prices should be given expectations of future real disposable income the fundamental price and continues by comparing capital city fundamental prices with actual prices the extent to which revealed capital city non fundamental components spillover from state to state as well as their long term impact is also investigated results provide evidence of periods of sustained deviations of house prices from values warranted by income for all state capitals with the greatest deviations arising in the nsw market and starting around 2000 in general nsw is relatively more susceptible to spillovers transmitted from other states while act and wa are most isolated from the rest of the country

modeling investment sector efficiency shocks when does disaggregation matter the most straightforward way to analyze investment sector productivity developments is to construct a two sector model with a sector specific productivity shock an often used modeling shortcut accounts for such developments using a one sector model with shocks to the efficiency of investment in a capital accumulation equation this shortcut is theoretically justified when some stringent conditions are satisfied using a two sector model we consider the implications of relaxing several of the conditions that are at odds with the u s input output tables including equal factor shares across sectors the effects of productivity shocks to an investment producing sector of our two sector model differ from those of efficiency shocks to investment in a one sector model notably expansionary productivity shocks boost consumption in every period whereas expansionary efficiency shocks cause consumption to fall substantially for many periods

do banking shocks matter for the u s economy abstract the quantitative significance of shocks to the financial intermediary fi has not received much attention up to now we estimate a dsge model with what we describe as chained credit contracts using bayesian technique in the model credit constrained fis intermediate funds from investors to credit constrained entrepreneurs through two types of credit contract we find that the shocks to the fis net worth play an important role in the investment dynamics accounting for 17 of its variations in particular in the great recession they are the key determinants of the investment declines accounting for 36 of the variations

macroprudential policies and housing prices a new database and empirical evidence for central eastern and southeastern europe several countries in central eastern and southeastern europe used a rich set of prudential instruments during the recent credit and housing boom and bust cycles we construct a comprehensive database of these policy measures covering 16 countries at a quarterly frequency we use this database to investigate whether the policy measures had an impact on housing price inflation the measures that appeared to be effective were capital measures minimum capital adequacy ratio maximum ratio of lending to households to share capital and nonstandard liquidity measures marginal reserve requirements mrrs on foreign funding mrrs linked to credit growth

international house prices and macroeconomic fluctuations abstract the paper investigates linkages between general macroeconomic conditions and the housing market for the g 7 area among the key results of the paper we find that the us are an important source of global fluctuations not only for real activity nominal variables and stock prices but also for real housing prices secondly albeit distinct driving forces for real activity and financial factors can be pointed out sizeable global interactions are also evident in particular global supply side shocks are an important determinant of g 7 house prices fluctuations the linkage between real housing prices and macroeconomic developments is however bidirectional with investment showing in general a stronger reaction than consumption and output to housing price shocks implications for the real effects of the sub prime crisis are also explored

disinflation shocks in the eurozone a dsge perspective we investigate the effects of disinflation policies on key macroeconomic variables using euro area data and structural vector autoregressions svars we identify disinflation shocks as the only shocks that drive nominal variables to a lower long run level we find that in the immediate aftermath of a disinflation shock the euro area enters in a persistent recession we use these dynamic responses to estimate a dsge model with imperfect information about the disinflation shock we find that both nominal and real frictions and monetary policy gradualism have played a prominent role in the recessionary effect of disinflation shocks conversely allowing for imperfect credibility does not yield a better fit except when we shut key model s frictions down

how important are financial frictions in the united states and the euro area this paper aims to evaluate whether frictions in credit markets are important for business cycles in the united states and the euro area i modify the dsge financial accelerator model developed by bernanke gertler and gilchrist 1999 by adding such frictions as price indexation to past inflation sticky wages consumption habits and variable capital utilization when estimating the model using bayesian methods i find that financial frictions are relevant in both areas according to the posterior odds ratio the data clearly favor the model with financial frictions both in the united states and the euro area moreover financial frictions are larger in the euro area