Research
Publications
House Prices and Ultra-low Interest Rates: Exploring the Nonlinear Nexus
with Hannah S. Hempell, Barbara Jarmulska, Jan H. Lang and Marek Rusnák
Empirical Economics, 2024.
Abstract: The acceleration of house price growth amidst falling interest rates to record-low levels across euro area countries between 2015 and 2021 has sparked renewed interest in the link between the two variables. Asset-pricing theory suggests that real house prices respond to changes in real interest rates in a non-linear fashion. This non-linearity should be especially pronounced at very low real interest rates. Most existing empirical studies estimate models with a con-stant semi-elasticity, thereby ruling out by design the potential non-linearities between house prices and interest rates. To address this issue, we estimate a panel model for the euro area countries with a constant interest rate elasticity (as opposed to a constant semi-elasticity), which is consistent with asset pricing theory. Our empirical results suggest that, in a low interest rate environment such as the period between 2015 and 2021, non-linearities in the house price response to interest rate changes are important: an increase of real interest rates from ultra-low levels could lead to downward pressure on real house prices three to eight times higher than the literature suggests.
Historical Banking Crises: A New Database and a Reassessment of their Incidence and Severity
With Matthew Baron (Cornell University)
In: Schularick, M. (ed.), Leveraged: The New Economics of Debt and Financial Fragility. Chapter 9, pp. 207-232. University of Chicago Press. 2022.
Abstract: We highlight limitations with existing chronologies of banking crises and showcase new approaches for reconstructing and analyzing the global history of banking crises. We review recent quantitative approaches to ask: When did banking crises happen and how severe were they? Building on the chronology of banking crises put forth by Baron, Verner, and Xiong (2021), we present a new database of the causes, timeline, bank failures, creditor panics, policy responses, and consequences of banking crises in 47 countries since 1870.
Working papers
Household inequality and financial stability in the euro area: Linking extrapolated survey data to bank exposures
ECB Working Paper, forthcoming.
Abstract: I present a quasi-real time granular assessment model of households’ financial conditions and their impact on the banking system in the euro area. For this, I utilize novel extrapolation techniques which include employment simulation and synthetic mortgage loan origination, to bring Household Finance and Consumption Survey (HFCS) waves forward in time to a quarter of choice. I also map a representative loan portfolio of households to the euro area’s banking system using supervisory data. I find a more pronounced and time-invariant risk of default in lower income quintiles. In most countries, however, systemic risk arising from potential loan defaults originating in lower income quintiles, which represent a lower share of total household debt than loans originated in higher income quintiles, is limited. Tested against recently released fourth-wave data, the nowcasting method works well in extrapolating 2017 third-wave data to 2021, matching structural changes over time especially in richer and larger economies.
Financial stability considerations in the conduct of monetary policy
ECB Working Paper No. 2870, 2023, with Paul Bochmann, Stephan Fahr and Josef Ruzicka.
Abstract: We empirically analyze the interaction of monetary policy with financial stability and the real economy in the euro area. For this, we apply a quantile vector autoregressive model and two alternative estimation approaches: simulation and local projections. Our specifications include monetary policy surprises, real GDP, inflation, financial vulnerabilities and systemic financial stress. We disentangle conventional and unconventional monetary policy by separating interest rate surprises into two factors that move the yield curve either at the short end or at the long end. Our results show that a build-up of financial vulnerabilities tends to be initially accompanied by subdued financial stress, but stress eventually surges over a medium term horizon, harming economic growth. Tighter conventional monetary policy reduces inflationary pressures but increases the risk of financial stress. We find unconventional monetary policy to be equally effective in reducing inflation, but with a lower adverse effect on growth and financial stress. Unconventional monetary policy is also found to have a dampening effect on the build-up of financial vulnerabilities.
Beyond Boom and Bust: Causes of Banking Crises, 1870–2016
with Matthew Baron (Cornell University) and Attila Balogh (Melbourne).
Abstract: We systematically reassess the economic historiography of banking crises for 46 countries over the past 150 years to document how their main causes have developed over time. Banking systems have become more resilient against shocks to the real economy with economic development, making financial shocks the prevalent cause of crises today. However, only about 40% of all banking crises with widespread bank failures are credit booms gone bust, making an increasing share of banking crises the result of international contagion. Prior to the 1970s, bank equity returns proxying for banking stability are sensitive to trade, commodity, and domestic GDP shocks, but less so to past real estate returns and credit booms—whereas the reverse is true afterwards.
Download paper (old version from 2022)
Market Sentiment, Financial Fragility, and Economic Activity: The Role of Corporate Securities Issuance
Freie Universität Berlin, School of Business & Economics Discussion Paper No. 2021/6
Abstract: Using new quarterly U.S. data for the past 120 years, I show that sudden reversals in equity and credit market sentiment approximated by several measures of corporate securities issuance are highly predictive of banking crises and recessions. Deviations in equity issuance from historical averages also help to explain economic activity over the business cycle. Crises and recessions often occur independently of domestic leverage, making the credit-to-GDP gap a deficient early-warning indicator historically. The fact that equity issuance reversals predict banking crises without elevated private credit levels, suggests that changes in investor sentiment can trigger financial crises even in the absence of underlying banking fragility.
Cross-Border Lending and the International Transmission of Banking Crises
Freie Universität Berlin, School of Business & Economics Discussion Paper No. 2020/13, in collaboration with the Bank of Israel.
Abstract: This paper introduces a new transmission channel of banking crises where sizable cross-border bank claims on foreign countries with high domestic crisis risk enable contagion to the home economy. This asset-side channel opposes traditional views that see banking crises originating from either domestic credit booms or from cross-border borrowing. I propose a combined model that predicts banking crises using both domestic and foreign factors. For developed economies, the channel is predictive of crises irrespective of other types of capital flows, while it is entirely inactive for emerging economies. I show that policy makers can significantly enhance current early warning models by incorporating exposure-based risk from cross-border lending.
Policy work
You can find my policy work on the website of the ECB: https://www.ecb.europa.eu/pub/research/authors/profiles/daniel-dieckelmann.en.html.