Research Work
with Stelios Bekiros and Gazi Salah Uddin
Journal of Economic Dynamics and Control 93, pp. 315-331, August 2018.
Abstract:This paper incorporates anticipated and unexpected shocks to bank capital into a DSGE model with a banking sector. We apply this model to study Basel III countercyclical capital requirements and their implications for banking stability and household welfare. We introduce three different countercyclical capital rules. The first countercyclical capital rule responds to credit to output ratio. The second countercyclical capital rule reacts to credit to its steady rate ratio, and the third rule reacts to credit growth. The second rule capital rule is the most effective in dampening credit supply, housing demand, household debt and output fluctuations. The second rule is the most effective tool in enhancing the banking stability by ensuring that banks have higher bank capital and capital to asset ratio than that of the other rules. We conduct welfare analyses and we find that the rank orders in terms of welfare are the second rule, the first rule, the baseline rule and the third rule respectively.
Economic policy uncertainty shocks, economic activity, and exchange rate adjustments
with Michał Rubaszek and Gazi Salah Uddin
Economics Letters, Volume 186, 108765, January 2020.
Abstract: We investigate the impact of foreign and domestic economic policy uncertainty (EPU) shocks on the UK economy. Simulations with a structural VAR model indicate that domestic industrial production declines after a shock to the EPU index in the US. On the contrary, disturbances to domestic uncertainty are an important source of real exchange rate fluctuations. Historical decomposition shows that a surge in domestic EPU after Brexit referendum was the reason behind a massive depreciation of the British pound. These results are robust to different model specifications.
with Stelios Bekiros and Gazi Salah Uddin
Journal of Financial Stability, Volume 49, 100760, August 2020
Abstract: We embed non-fundamental house price expectation shocks and endogenous mortgage defaults into a DSGE model with a housing and banking sector. We use our DSGE set-up to study the impact of variations in house price expectations upon macroeconomic dynamics and their implications for monetary and macroprudential policies. Model simulations show that an increase in expected future house prices leads to a decline in mortgage defaults and interest rates on loans, whereas it leads to an increase in house prices, household debt, bank leverage ratios and economic activity. Interestingly, a positive fundamental housing preference shock causes a rise in inflation, whilst a positive non-fundamental shock to house prices generates a decline in inflation. We demonstrate that even though monetary policy reacting to household credit growth improves the stability of the real economy, yet it jeopardizes price stability. Finally, we show that the effectiveness of monetary versus macroprudential policy depends on whether the economy is affected by non-fundamental or fundamental shocks.
Spillovers of the US real and financial uncertainty on the Euro area
with Yassine Bakkar and Anup Kumar Saha
Applied Economics Letters , 2020
Abstract: We study the spillovers of US real uncertainty and financial uncertainty shocks on Euro area economic activity in an SVAR framework. We find that a rise in US real or financial uncertainty triggers a decline in industrial production and an increase in credit spreads in the Euro area. The adverse effects of financial uncertainty shocks on Euro area industrial production are larger than those stemming from real uncertainty shocks (−0.8% versus −0.4%) due to a larger extent of financial friction. The contribution of US financial uncertainty shocks, vis-à-vis US real uncertainty shocks, to the Euro area is quantitatively more important.
(with Michał Rubaszek, Karsten Staehr & Gazi Salah Uddin)
Open Economies Review , 2021
Abstract: This paper investigates how the economic performance of four economies with floating exchange rates is affected by shocks in domestic and US economic policy uncertainty. We estimate a Bayesian VAR model describing the dynamics of ten local and US variables for each of the four countries and use it to evaluate the response of the system to structural shocks. The analysis reveals that increased economic uncertainty in the US reduces industrial output in all the countries analysed, while the effect of increased domestic uncertainty varies across the economies. A key finding concerns the role of the exchange rate. Whereas the real effective exchange rate amplifies the effect of uncertainty shocks in the US, it typically helps absorb shocks in the open economies. This asymmetry may reflect the role of the US as a safe haven in times of increased uncertainty.