Research

Publications:

We quantify the macroeconomic effects of interest rate forward guidance in an estimated medium-scale Two-Agent New Keynesian (TANK) model. Although TANK models can in principle dampen or amplify the power of forward guidance compared to a representative agent model, our estimates indicate a dampening, as there is sufficient countercyclical redistribution. An interaction of forward guidance with asset purchases gives rise to non-linear effects that depend on the horizon of the interest rate peg. Bundesbank Discussion Paper


Working Papers:

Several central banks resorted to negative interest rate policies (NIRP) to expand their monetary stance. While negative rates ease financing conditions, thereby stimulating loan demand (expansionary bank lending channel), they also squeeze banks' profitability, thereby depressing loan supply (contractionary net-worth channel). We assess the overall effectiveness of NIRP on macroeconomic activity within a medium-scale DSGE model with a banking sector that features both channels. We estimate the model on euro area data and find that negative rates have thus far been an effective tool to stabilise the economy. Strong modifications of the structural parameters can overturn this result. NIRP can be contractionary when either banks are very concerned regarding an erosion of net equity (stronger net-worth channel) or when the expansionary effect of monetary policy is reduced (weaker bank lending channel).


Large public debt holdings of the central bank can pose a challenge for central bank independence, ultimately hampering the effectiveness of asset purchase programmes. With an appropriate reinvestment strategy the central bank can reduce the size of its debt holdings while exerting the same macroeconomic stimulus. We analyse different reinvestment strategies in the context of the recent COVID-19 pandemic as well as in a stochastic simulation scenario. In light of a frequently binding effective lower bound, our results indicate that asset purchases stabilize the economy better than an increase in the inflation target.


  • Fiscal consolidation with long-term Public Debt [This version: November, 2019]

I assess the macroeconomic implications of tax-based vs. expenditurebased consolidation, emphasizing the role of real interest rate dynamics for government debt. Within a New Keynesian model, I show that the average maturity of debt determines whether real rates increase or decrease during consolidation. Calibrated to match US government debt characteristics, the model suggests that reducing the debt ratio permanently through tax-hikes can be welfare enhancing, since real (long-term) interest rates decrease. In a liquidity-trap, tax-based consolidation can shorten the time at ZLB. If debt would be only short-term, these results get reversed and spending should be reduced.


  • Financial Repression in General Equilibrium, with Alexander Kriwoluzky and Gernot Müller [This version: June, 2018]

Financial repression allows governments to borrow at artificially low interest rates. Quantifying financial repression is challenging, because it relies on an estimate of the interest rate which would prevail in the absence of repression - a counterfactual outcome. In this paper, we put forward a quantitative business cycle model which features financial repression. In the model the government can reduce the ex ante return on government debt by requiring banks to hold government debt. Repression thus lowers banks' profits and net worth. As banks are leverage constrained, they restrict lending and economic activity declines in response to financial repression. We estimate the model on US times series for the period 1948-1979 in order to quantify the extent of financial repression and its impact on the economy.


Other Publications:

This paper presents selected results from a model-based assessment of the impact of unconventional monetary policies. The model is estimated on euro area data and features two types of agents, a financial sector, several real and nominal frictions as well as rational expectations. In our model simulations, we allow for multiple non-linearities: an occasionally binding effective lower bound (ELB) on the short-term policy rate; a state-dependent and calender-based interest rate forward guidance; state-dependent asset purchases conducted only at the ELB. There are four main results. First, state-dependent forward guidance can reduce the volatility of the economy in comparison to unconditional calendar-based forward guidance. Second, the ELB induces a large negative inflation bias if the central bank has only its short-term policy rate at its disposal. Third, asset purchases that are initiated only at the ELB can provide significant inflation stabilisation, but it remains uncertain whether they allow the distortions created by the ELB to be fully offset. This is the case, for instance, when an upper limit on purchases is imposed. Fourth, an appropriate reinvestment strategy might help to mitigate the limits of asset purchases.


This paper presents selected results from a model-based assessment of the impact of unconventional monetary policies. The model is estimated on euro area data and features two types of agents, a financial sector, several real and nominal frictions as well as rational expectations. In our model simulations, we allow for multiple non-linearities: an occasionally binding effective lower bound (ELB) on the short-term policy rate; a state-dependent and calender-based interest rate forward guidance; state-dependent asset purchases conducted only at the ELB. There are four main results. First, state-dependent forward guidance can reduce the volatility of the economy in comparison to unconditional calendar-based forward guidance. Second, the ELB induces a large negative inflation bias if the central bank has only its short-term policy rate at its disposal. Third, asset purchases that are initiated only at the ELB can provide significant inflation stabilisation, but it remains uncertain whether they allow the distortions created by the ELB to be fully offset. This is the case, for instance, when an upper limit on purchases is imposed. Fourth, an appropriate reinvestment strategy might help to mitigate the limits of asset purchases.


The ECB’s price stability mandate has been defined by the Treaty. But the Treaty has not spelled out what price stability precisely means. To make the mandate operational, the Governing Council has provided a quantitative definition in 1998 and a clarification in 2003. The landscape has changed notably compared to the time the strategy review was originally designed. At the time, the main concern of the Governing Council was to anchor inflation at low levels in face of the inflationary history of the previous decades. Over the last decade economic conditions have changed dramatically: the persistent low-inflation environment has created the concrete risk of de-anchoring of longer-term inflation expectations. Addressing low inflation is different from addressing high inflation. The ability of the ECB (and central banks globally) to provide the necessary accommodation to maintain price stability has been tested by the lower bound on nominal interest rates in the context of the secular decline in the equilibrium real interest rate. Against this backdrop, this report analyses: the ECB’s performance as measured against its formulation of price stability; whether it is possible to identify a preferred level of steady-state inflation on the basis of optimality considerations; advantages and disadvantages of formulating the objective in terms of a focal point or a range, or having both; whether the medium-term orientation of the ECB’s policy can serve as a mechanism to cater for other considerations; how to strengthen, in the presence of the lower bound, the ECB’s leverage on private-sector expectations for inflation and the ECB’s future policy actions so that expectations can act as ‘automatic stabilisers’ and work alongside the central bank.