"Macroprundential Policies and Housing Bubbles, an adaptive learning approach" with Luis Maldonado
"Monetary and Macroprudential Interactions in Closed and Open Economy" with Carmelo Salleo [New Draft Coming Soon - last version]
How does the degree of financial and trade integration between countries affect the strategic interactions among monetary and macroprudential policies? The paper provides tentative answers to this question through the lens of an open-economy monetary model featuring trade flows and financial frictions. Focusing on the domestic economy, we characterize a set of Within-Country Cooperative and Nash Equilibria for different degrees of trade and financial integration. Our analysis suggests that the Nash equilibria are always significantly inferior to the cooperative ones and are characterized by over-reaction of the authorities to fluctuations in the target variables. Moreover, the size of the gains from cooperation is significantly affected by the degree of cross-country integration and by the channel through which the integration is realized: trade integration reduces the gains, while higher globalization of credit markets makes cooperation more valuable. Moving to the Between-Countries Cooperative and Nash Equilibria analysis, we confirm that cooperation is beneficial from both the country and global perspective. Moreover, in this case, the Nash equilibria, differently from the within-country case, are characterized by an under-reaction of the authorities with respect to the cooperative equilibria because the policy spillovers are only partially internalized by the two authorities.
"Macro-Financial Copulas for scenario calibration" with Javier Ferreiro and Elena Rancoita [New Draft Coming Soon - last version]
In this paper we present an innovative methodology for designing countercyclical adverse scenarios suitable for the calibration and impact assessment of macroprudential policies aimed at addressing externalities caused by strategic complementarities and leading to the amplification of the cycle. According to this methodology, the scenarios are characterized by two main innovative features. First, there is a stable and transparent mapping between the level of cyclical systemic risk with the path of the scenario’s target variables, which are key variables determining the overall scenario’s severity. The link with the cyclical risk assessment guarantees a procyclical severity, namely the severity is stronger when the cyclical systemic risk is higher, and allows us to reconcile the scenario design with the ultimate goal of the macroprudential policy objective of the calibration. Indeed, the amplification of the financial cycle generated by the strategic complementarities is linked to the buildup of cyclical systemic risk. Second, we propose a coherent calibration of a set of scenario’s complementary variables based on a multivariate copula model on a mixture of macro and financial data (MacroFin Copula). The ability of the copula to properly estimate the co-movement of the variables conditional to the materialization of a tail event can significantly improve the coherence of the scenarios. Finally, in order to adapt the copula to the low-frequency macro data we propose a nonparametric approach based on a kernel smoothing function.
"Debt Maturity Choices and Macroprudential Policy" [Draft Coming Soon! Slides]
Exploiting the properties of a non-linear DSGE model with an occasionally binding collateral constraint and multiple assets, this paper studies how private debt maturity choices interact with systemic risk. Long-term liabilities provide insurance against debt rollover, but they come at an extra cost due to a liquidity premium required by international lenders. As a consequence, with a longer debt maturity structure, agents can partially overcome the collateral constraint and reduce systemic risk; however, atomistic agents do not internalize the general equilibrium effects of their actions and take on too much short-term debt. The decentralized equilibrium is then not constrained efficient and a macroprudential policy, raising the relative cost of short term debt, can lead to Pareto improvements and reduce the probability and severity of financial crises. We show that, under certain assumptions, the optimal macroprudential policy consists in a combination of taxes and subsidies to the different types of debt.
"Different Compositions of Animal Spirits and Their Impact on Macroeconomic Stability", R. Franke and F. Westerhoff; First Behavioural Macroeconomics Workshop, Bamberg, 15-16 May 2018; slide