Research
Job Market Paper
Estimating trend-cycle decompositions to distinguish shorter- from longer-run developments is often of relevance to economic policymakers and for policy design. One case study for such decompositions are Basel III credit-to-GDP gaps which are used to assess whether aggregate credit is excessive or not. Basel III suggested estimates, however, remain historically unreliable beyond endpoint biases because the prescribed detrending method is prone to spurious regression issues. In consequence, official estimates are continuously reevaluated, do not converge to full sample estimates, are associated with ever-changing trend histories, and inconsistent ex post policy evaluation. Data revisions can further aggravate these issues. To illustrate that the historical variability in the derived gap and trend measures can get quite large, I introduce historical reliability bands as an intuitive concept which can also be applied to other indicators. These bands span the smallest to largest value estimated between initial and full sample assessment, accounting for all possible reevaluations in between. In the context of credit-to-GDP gaps, difference-filter-based approaches provide straightforward alternatives that resolve these inconsistencies while maintaining gap dynamics and amplitudes that the regulator seems to deem important.
coauthored with Sandra Eickmeier, Norbert Metiu, and Sabine Tanneberger, Handbook of Financial Integration, Editor: Guglielmo M. Caporale, 2024, Chapter 6, 134-171.
This paper analyzes the international transmission of a global financial stress shock. We use a large-scale factor-augmented vector autoregressive model, estimated over quarterly macroeconomic and financial data for 40 countries. We identify the shock using a combination of contemporaneous zero and sign restrictions on impulse responses and narrative restrictions. Emerging economies suffer larger real output losses than advanced economies from a global financial stress shock. Advanced economies benefit from safe-haven capital flows and are better able to stabilize their economies through more active monetary and fiscal policy. The shock gives rise to co-movement in financial asset prices and quantities across countries. Hence, financial channels are crucial in the transmission mechanism.
The Federal Reserve’s Output Gap: The Unreliability of Real-Time Reliability Tests
coauthored with Maik H. Wolters, Journal of Applied Econometrics, 2023, 38(7), 1101-1111.
Output gap revisions can be large even after many years. Real-time reliability tests might therefore be sensitive to the choice of the final output gap vintage that the real-time estimates are compared to. This is the case for the Federal Reserve’s output gap. When accounting for revisions in response to the global financial crisis in the final output gap, the improvement in real-time reliability since the mid-1990s is much smaller than found by Edge and Rudd (Review of Economics and Statistics, 2016, 98(4), 785-791). The negative bias of real-time estimates from the 1980s has disappeared, but the size of revisions continues to be as large as the output gap itself. We systematically analyse how the realtime reliability assessment is affected through varying the final output gap vintage. We find that the largest changes are caused by output gap revisions after recessions. Economists revise their models in response to such events. This might improve the understanding of past business cycle dynamics, but decreases the reliability of real-time output gaps ex post.
coauthored with Maik H. Wolters, Journal of Business & Economic Statistics, 2022, 40(1), pp. 152-168. [Matlab-Code][Online Appendix][Kiel Working Paper]
We propose a simple modification of Hamilton's time series filter that yields reliable and economically meaningful real-time output gap estimates. The original filter relies on 8 quarter ahead forecast errors of a simple autoregression of real GDP. While this approach yields a cyclical component that is hardly revised with new incoming data due to the one-sided filtering approach, it does not cover typical business cycle frequencies evenly, but mutes short and amplifies medium length cycles. Further, as the estimated trend contains high frequency noise, it can hardly be interpreted as potential GDP. A simple modification based on the mean of 4 to 12 quarter ahead forecast errors shares the favorable real-time properties of the Hamilton filter, but leads to a much better coverage of typical business cycle frequencies and a smooth estimated trend. Based on output growth and inflation forecasts and a comparison to revised output gap estimates from policy institutions, we find that real-time output gaps based on the modified and the original Hamilton filter are economically much more meaningful measures of the business cycle than those based on other simple statistical trend-cycle decomposition techniques, such as the HP or bandpass filter, and should thus be used preferably.
US Real-time Output Gap
German Real-time Output Gap
UK Real-time Output Gap
coauthored with Martin Ademmer and Wolfram Horn, International Journal of Finance & Economics, 2022, 27(4), pp. 3911-3923.
We quantify the contemporaneous relationships between stock markets in the euro area, the United States, and a group of emerging economies over the period from 2008 to 2017. Exploiting the heteroskedasticity in the stock market data, we identify shocks that originated in the respective domestic markets and shocks that are common to all markets. Our results underline the leading role of the US in international equity markets, but also point to the importance of indirect spillovers for all economies. Variance decompositions show that while domestic shocks explain the bigger part of the variation in each stock market, a substantial part of the variation in the euro area and the emerging economies can be attributed to foreign shocks. A comparison with a sample covering the pre-crisis period from 1999 to 2007 suggests a strengthening of the linkages among global stock markets in recent years. In particular, the spillovers from advanced to emerging economies have become more pronounced.
Working Paper
coauthored with Sandra Eickmeier and Yves Schueler, CEPR Discussion Paper 18940, 2024. [voxeu column]
We examine how natural disasters impact the US economy and financial markets using monthly data since 2000. Our analysis reveals large sustained adverse effects of disasters on overall economic activity, with significant implications across various sectors including labor, production, consumption, investment, and housing. Our findings suggest that these effects stem from heightened financial risk, increased uncertainty, declining confidence and heightened awareness of climate change, leading to negative repercussions on the economy. Additionally, consumer prices increase temporarily, likely due to rising energy and food costs. We find a decline in the monetary policy rate and an increase in government spending, which potentially mitigate the adverse macroeconomic effects. However, we also observe a prolonged rise in public debt relative to GDP and a decrease in r-star following the disasters. With climate change persisting, this could constrain the flexibility of monetary and fiscal policies in the future. Overall, our findings emphasize the urgency of combating climate change and, in tandem, enhancing economic and financial resilience.
Work in Progress
Lasting for Longer: On the Shifting Roles of Business Cycle Fluctuations - with Sebastian Rüth and Maik H. Wolters
We document a decreasing relative importance of shorter business cycles for overall cyclical variability in aggregate real economic activity for a broad set of economies. In total, we consider 37 advanced and emerging economies. For most countries, this decline is compensated by an increasing relevance of cycles lasting longer than 8 years, i.e. beyond common business cycle conception. Employing wavelet-based filtering, we provide a fine-grained decomposition of aggregate real economic activity into a slow-moving secular trend and differently persistent cyclical components. While shorter business cycles became relatively less important over time, they remain relevant especially during crisis periods that are associated with high GDP volatility.
Presentations at 14th RGS Doctoral Conference, IAAE 2021 Annual Conference, EEA-ESEM Virtual 2021.
Policy
The ECB’s Asset Purchase Programmes: Effectiveness, Risks, Alternatives - with Joscha Beckmann, Salomon Fiedler, Klaus-Jürgen Gern, Stefan Kooths, and Maik H. Wolters, Monetary Dialogue Papers September 2020, European Parliament Committee on Economic and Monetary Affairs.
Der Finanzzyklus in Deutschland - mit Nils Jannsen, Kurzbericht, IfW Box 2018.15.