Financial Frictions, Banking
Member of DFG Priority Program 1578
"Forward Guidance at the Zero Lower Bound in a Model of Price-Level Targeting" (joint with Gerhard Illing)
CESifo Economic Studies (2016), 62(1), 47-6
We study monetary policy at the ZLB in a traceable three period model, in which price level targeting emerges endogenously in the welfare function. We characterize optimal price-level forward guidance under discretion and commitment. Potentially non-monotonic discretionary welfare losses are lowest with perfectly flexible prices. Price level targeting introduces a new constraint on optimal forward guidance that restricts the credible amount of overshooting. With this constraint, the zero lower bound may be binding even after the shock has abated. We characterize conditions when the commitment to hold nominal rates at zero for an extended period is optimal. Finally, we introduce government spending and show that under persistently low policy rates optimal government spending becomes more front loaded, while procyclical austerity fares worse than discretionary government spending.
"Structural Stress Tests" (joint with Dean Corbae, Pablo D'Erasmo, Sigurd Galaasen and Alfonso Irarrazabal)
Working Paper coming soon
We develop a structural banking model for microprudential stress testing. We model a single bank that optimally chooses portfolio allocation, dividend policy and exit. It faces regulatory and technological constraints, as well as aggregate and idiosyncratic uncertainty. In this environment the bank has an incentive to hold a buffer stock of capital above regulatory requirements to protect its charter value. We explore optimal behavior during severe macroeconomic stress. In contrast to state-of-the-art reduced-form stress tests, our structural approach (1) offers a framework for stress scenarios with counterfactual policy parameters (e.g. risk weights, capital requirements) and (2) induces, with the exit decision, an endogenous hurdle rate to the stress test. We calibrate the model to a Norwegian banking group. The bank as a 4% exit probability for a probabilistic stress scenario. The exit probability increase to 27% for a counterfactually low capital requirement of 4.5%. Using an exogenous hurdle rate to measure bank health can bias stress results if the bank optimally exits with equity above this threshold. We compare structural stress test results for the calibrated banks with results from a stylized non-structural stress test. The reduced-from stress projects underestimate equity losses by 50% as sluggish normal times behavior of bank variables is extrapolated to the stress horizon.
"Bank Capital Regulation and Regulatory Arbitrage"
Work in Progress
M.Sc. in Economics
Ludwig-Maximilians-University, Munich (10/2010 - 06/2012)
University of California, Berkeley (08/2011 - 12/2011)
B.Sc. in Economics
Ludwig-Maximilians-University, Munich (04/2008 - 06/2010)
|Summer 2016||Macroeconomics II, Class||Wednesday, 16:00-18:00|