Macroeconomics Department Publications

The Macro-Economic Effects of a European Deposit (Re-)Insurance Scheme

Recent proposals for a European deposit insurance scheme (EDIS) favor a reinsurance framework. In this paper, we use a regime-switching open economy DSGE model with bank defaults to assess the relative efficiency of such a scheme. We find that reinsurance by EDIS is more effective in stabilizing real activity, credit, and welfare than a national fiscal backstop. We demonstrate that risk-weighted contributions ...

Where Do They Care? The ECB in the Media and Inflation Expectations

This paper examines how news coverage of the European Central Bank (ECB) affects consumer inflation expectations in the four largest euro area countries. Utilizing a unique dataset of multilingual European news articles, we measure the impact of ECB-related inflation news on inflation expectations. Our results indicate that German and Italian consumers are more attentive to this news, whereas in Spain ...

Earn More Tomorrow: Overconfidence, Income Expectations, and Consumer Indebtedness

This paper examines whether biased income expectations due to overconfidence lead to higher levels of debt taking. We show suggestive evidence for a link between overconfidence and borrowing behavior in a representative survey of German households (German Socio-Economic Panel–Innovation Sample [GSOEP-IS]). This motivates a laboratory experiment to study causality behind these effects. In two experiments, ...

Determinants of Stock Market Participation

The low degree of stock market participation (SMP) is one of the big puzzles in finance. Numerous determinants have been proposed. We put these determinants into a structure that is derived from a standard static portfolio model. Then we discuss arguments put forward regarding specific SMP determinants and the empirical evidence that has been provided. The focus of our survey is on the identification ...

Committed to Flexible Fiscal Rules

We study the implications of fiscal rules for macroeconomic stabilization when countries are hit by adverse exogenous shocks. Exploiting the unpredictability of natural disasters, we document that economies with a fiscal rule absorb these shocks better than those without: the responses of GDP and private demand are significantly higher. This difference is coupled with more expansionary fiscal policy ...

Sovereign Haircuts: 200 Years of Creditor Losses

We study sovereign external debt crises over the past 200 years, with a focus on creditor losses, or “haircuts.” Our sample covers 327 sovereign debt restructurings with external private creditors over 205 default spells since 1815. Creditor losses vary widely (from none to 100%), but the statistical distribution has remained remarkably stable over two centuries, with an average haircut of around 45 ...

Stock Market Participation, Work from Home, and Inequality

Stock market participation among working household heads jumped upwards in 2020 - in Germany by about 25 %. A major cause is the required use of work from home (WfH). We show this by adding WfH to a large set of explanatory variables. Moreover, we implement an instrumental variables estimation based on industry-specific levels of WfH-capacity. The transmission channels seem to work via increased available ...

Sovereign vs. Corporate Debt and Default: More Similar than You Think

Theory suggests that corporate and sovereign bonds are fundamentally different, also because sovereign debt has no bankruptcy mechanism and is hard to enforce. We show empirically that the two assets are more similar than you think, at least when it comes to high-yield bonds over the past 20 years. We use rich new data to compare high-yield US corporate (“junk”) bonds to high-yield emerging market ...

Euro Area Inflation Differentials: The Role of Fiscal Policies Revisited

The Non-linear Impact of Risk Tolerance on Entrepreneurial Profit and Business Survival

Entrepreneurs tend to be risk tolerant but is higher risk tolerance always better? In a sample of about 2100 small businesses, we find an inverted U-shaped relation between risk tolerance and profitability. This relationship holds in a simple bilateral regression, and even after controlling for a large set of individual and business characteristics. Apparently, one major transmission goes from risk ...