Jerger, Jürgen and Körner, Jenny (2019) Brexit and macroprudential regulation: a DSGE perspective, International Economics and Economic Policy, January 2019, https://doi.org/10.1007/s10368-018-00429-8.
This paper uses a small and simple theoretical DSGE model in order to conduct some exercises in comparative dynamics of shocks that can be associated with Brexit. We do so by comparing two policy environments, one where a flexible macroprudential regulation (FMR) is in place and one, where this is not the case. This enables us to evaluate whether and to what extent FMR helps to mitigate the Brexit related shocks. We conclude that FMR would indeed be helpful, although in quantitative terms only slightly so.
Körner (2018) Financial intermediation, the mortgage market and macroprudential regulation, CESifo Economic Studies Vol. 64 (1), pp. 50–77, https://doi.org/10.1093/cesifo/ify005 .
Abstract: This paper analyses the effects of macroprudential regulation in a DSGE-model with a mortgage market where banks and borrowers are subject to a leverage constraint. I evaluate the economic impact of i) a countercyclical non-risk adjusted bank capital (BC) requirement ratio, ii) a countercyclical loan-to-value ratio (LTV), and iii) both rules during economic and financial downturns. Simulations show two main results: First, the rule on the LTV-ratio mitigates the volatility of credit more effectively than BC regulation because the relaxed collateral limit on the LTV ratio stimulates credit demand. The inverse relation of leverage definitions accounts for the stronger de-amplification stemming from countercyclical leverage constraints of borrowers. Second, if the financial shock affects the macroeconomy exclusively over the private mortgage market, neither of both rules attenuates the negative output effect since borrowers and savers consumption effects cancel out. These results reveal that coutercyclical regulation of borrowers represents an important complement to BC-regulation to safeguard financial stability.
Jerger und Körner (2017) Assessing macroprudential regulation: the role of the zero lower bound, Applied Ecnomics Letters Vol. 25 (9), July, doi:10.1080/13504851.2017.1346359 .
Abstract: We look at the interaction between the zero lower bound (ZLB) and flexible macroprudential regulation (FMR). After an adverse demand shock, FMR contributes to financial stability irrespective of the ZLB and also to macroeconomic stabilization if the ZLB binds.
Körner (2017) Makroprudentielle Regulierung im IS-LM Modell mit Finanzmarktfriktionen, Wirtschaftswissenschaftliches Studium Heft 7-8, 46. Jahrgang, Hrsg. Prof. Dr. Berthold und Prof. Dr. Lingenfelder; Verlage C.H. Beck und Vahlen, München und Frankfurt a. M..
Abstract: In der Makroökonomie ergibt sich die Verbindung zwischen der Realwirtschaft und Finanzmärkten aus dem Kreditbedarf von Unternehmen zur Finanzierung von Investitionen. Dass negative Schocks so durch die Verschärfung von Finanzmarktbedingungen verstärkt werden, illustriert das um Finanzintermediäre erweiterten IS-LM Modell. Zentrale Aufgabe des Artikels ist es, die Wirkung von antizyklischen Eigenkapitalpuffern für Banken auf die Realwirtschaft zu verdeutlichen, um so die auf Finanzstabilität ausgerichtete makroprudentielle Regulierung näherzubringen.
Körner (2015) Monetary transmission in the Czech Republic after the transformation, East European Business and Economics Journal Vol. 1 (3), pp. 19-47.
Abstract: This paper analyzes the transmission mechanisms of a contractionary monetary policy shock on the real economy. The sufficiently long regime uniform time period since the political transformation in the Czech Republic provides evidence for effective inflation targeting by the Czech National Bank. I apply a recursive vector autoregression (VAR), a structural VAR, and structural vector error correction model (SVECM). In the SVAR the restrictions imply a lagged effect of the monetary policy shock on output and prices in the short run, and money neutrality in the long-run. In the SVECM a money demand and an interest rate relationship identify the cointegrating vectors. The impulse responses of all models state a reduction of output and consumer prices after monetary tightening. The exchange rate overshoots its steady state level in the VAR and SVECM models, indicating a large degree of exchange rate volatility after the shock. The results reveal an interest pass-through from Czech monetary policy to inflation.
Guido Cozzi, Matthieu Darracq Pariès, Peter Karadi, Jenny Körner, Christoffer Kok, Falk Mazelis, Kalin Nikolov, Elena Rancoita, Alejandro Van der Ghote, Julien Weber (2020) Macroprudential policy measures: macroeconomic impact and interaction with monetary policy, ECB Working Paper, Technical Paper No 2376, February 2020 (link)
This paper examines the interactions of macroprudential and monetary policies.We find, usinga range of macroeconomic models used at the European CentralBank, that in the long run, a 1% bank capital requirement increase has a smallimpact on GDP. In the short run, GDP declines by 0.15-0.35%. Under a strongermonetary policy reaction, the impact falls to 0.05-0.25%.The paper also examines how capital requirements and the conduct of macropru-dential policy affect the monetary transmission mechanism. Higher bank leverageincreases the economy’s vulnerability to shocks but also monetary policy’s abilityto offset them. Macroprudential policy diminishes the frequency and severity offinancial crises thus eliminating the need for extremely low interest rates. Counter-cyclical capital measures reduce the neutral real interest rate in normal times.
See also the article on VOX EU (March 2020) The effect of bank capital requirements on the real economy and their interaction with monetary policy
Cozzi, Gabriele ; Darracq Pariès, Matthieu ; Karadi, Peter; Körner, Jenny; Kok, Christoffer; Mazelis, Falk; Nikolov, Kalin; Rancoita, Elena; Van der Ghote, Alejandro; Weber, Julien (March 2020) The effect of bank capital requirements on the real economy and their interaction with monetary policy, VOX CEPR Policy Portal, Link
Following the financial crisis, central banks and regulatory authorities assumed new powers to set macroprudential bank capital requirements. This column describes a number of macro models used by the ECB to measure the real impact of capital requirements and their interactions with monetary policy. It warns that a weaker banking system amplifies the impact of monetary policy and contributes to economic instability. Banks’ capital buffers are best augmented during times of affluence, when looser monetary policy can mitigate the costs of increasing capital requirements.
Darracq Pariès, Körner and Papadopoulou (2019) Empowering Central Bank Asset Purchases: The Role of Financial Policies, ECB Working Paper, No 2237, February 2019 (link)
Abstract: This paper investigates the role of bank capital regulation for the transmission of central bank asset purchase programmes. In our estimated model, banks under limited liability engage in risk taking in response to low profit margins with central bank asset purchases. As a result excessive credit growth protracts and propagates the economic impact. In this context, we analyse the performance of regulatory, supervisory and macroprudential standards of capital-based regulation. Minimum requirements deter effectively bank risk shifting by curtailing excess credit. Indeed, these these favorable financial conditions lead to macroeconomic stabilization but only in the short term. Moreover, our findings suggest that regulatory uncertainty due to frequent revaluation of supervisory standards delays the transmission of non-standard policy. This is because banks tend to self-insure themselves against additional requirements, whereby suspending their intermediation function. Countercyclical regulation that reacts to the credit to GDP gap mitigates risk taking motives but dampens the transmission of non-standard monetary policy.
Adalid, R., Körner, J., Vandeweyer, Q., Kasperaviciute, G. (2019) The Fintech Evolution of Money: A Monetary Analysis Perspective
Technological innovations have permitted the appearance of new instruments that have the potential to deeply affect the structure of the payment system and the funding of financial institutions. We focus on two differentiated types of instruments: e-wallets and crypto-assets. E-wallets are a liability of an issuing institution, with the purpose to be used in cashless transactions. Crypto-assets, by contrast, are created by decentralised mechanisms and do not represent a financial claim of any institution. Their creators, commentators and some market participants increasingly argue that these new instruments could have the potential to replace those that we commonly consider money. We analyse from a monetary policy perspective if these instruments fulfill the important money charactersistics of liquidity provision and value stability.
Koerner (2016) Collateral constraints and borrowers' leverage ratio
Abstract: This paper analyzes countercyclical macroprudential rules in a NK DSGE model where households are subject to borrowing constraints. I analyze the effects of a countercyclical loan-to-value (LTV) rule on mortgage borrowers' level of indebtedness for finanical stability. My results show that highly leveraged borrowers benefit more than low leveraged borrowers from mitigated credit cycles, as the rule reduces overproportionally the financial multiplier effect associated with the credit limit. Moreover, I find an over-tight credit limit with the rule reduces output and causes deflation. The welfare analysis reassures that the level of borrowers’ leverage matters for the efficiency of countercyclical macroprudential regulation.
ECB Crypto-Assets Task Force (2019) Crypto-Assets: Implications for financial stability, monetary policy, and payments and market infrastructures, ECB Occasional Paper Series No. 223 (link).
This paper summarises the outcomes of the analysis of the ECB Crypto-Assets Task Force. First, it proposes a characterisation of crypto-assets in the absence of a common definition and as a basis for the consistent analysis of this phenomenon. Second, it analyses recent developments in the crypto-assets market and unfolding links with financial markets and the economy. Finally, it assesses the potential impact of crypto-assets on monetary policy, payments and market infrastructures, and financial stability. The analysis shows that, in the current market, crypto-assets’ risks or potential implications are limited and/or manageable on the basis of the existing regulatory and oversight frameworks. However, this assessment is subject to change and should not prevent the ECB from continuing to monitor crypto-assets, raise awareness and develop preparedness.