Working Paper

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15-12-2017

Working Paper: A cost-benefit analysis of capital requirements for the Danish economy

We analyze the costs and benefits of increasing capital requirements for Danish banks. Costs are low if banks suspend dividend payments for two years and if investors' required return falls as banks accumulate new capital. An increase of required capital ratio from its current level reduces the probability of financial crises and the long-lasting output costs associated with these. Based on Danish data and using models for the Danish economy, we thus confirm findings in studies for other economies: The benefits outweigh the social costs of increasing capital ratios.

06-12-2017

Working Paper: The information content in contingent convertible bond prices

Credit institutions are to an increasing extent using Contingent Convertible Bonds, CoCos, to meet part of their capital requirements. This paper provides a thorough introduction to CoCos – the product, its use in capital regulation, the market and the specific risks faced by investors. A variety of models illustrate how the complexity of CoCos makes them difficult to use when assessing the soundness of the issuer; in addition to this, the many CoCo specific risks make it questionable whether the cost of CoCos constitutes a lower bound for the cost of equity.

09-11-2017

Working Paper: A regional model of the Danish housing market

In this paper, we investigate the geographical connection of the housing market. We estimate a regional model of single-family house prices and show that regions are connected via the relative prices, giving rise to a ripple effect – when house prices increase in one area, part of the housing demand is shifted to other areas. At the same time, we find that house prices are more sensitive to the development of fundamental factors, such as income and interest rates in Copenhagen, and that the ripple effect is stronger from Copenhagen to the rest of Denmark than in the opposite direction.

02-11-2017

Working Paper The Global FDI Network: Searching for Ultimate Investors

This paper addresses three types of geographical decoupling in foreign direct investment (FDI), i.e., challenges when using traditional FDI data as a proxy for real economic integration between economies: (i) large bilateral asymmetries between inward and outward FDI, (ii) the role of special purpose entities (SPEs), and (iii) the effect of moving from immediate counterpart economy to ultimate investing economy (UIE). A unique global FDI network is estimated, where SPEs are removed and FDI positions are broken down by the UIE.

02-10-2017

Working Paper: The ECB's unconventional monetary policy and the role of exchange rate regimes in cross-country spillovers

We study the impact of the ECB's large scale asset purchase programme on selected euro area and neighbouring countries with a particular focus on the role of the exchange rate regime. The effects of the programme are assessed by conducting an event study as well as by estimating a structural VAR model using a shadow short rate as a measure of the monetary policy stance. We find that the programme has contributed to reducing longer-term bond yields in the euro area as well as in neighbouring countries.

16-08-2017

Working Paper: A new approach to modelling banks' equity volatility: Adding time-to-maturity jumps

Time-to-maturity is introduced alongside leverage and asset volatility to explain equity volatility. The time-to-maturity can be interpreted as investors' views on when the firm will be liquidated and thereby relates to their view on the funding and solvency situation of the bank. Results for large European banks indicate that changes to the perceived time-to-maturity can indeed partly explain changes in observed equity volatility.

08-08-2017

Working Paper: Modelling Fire Sales From Regulatory Cliff Effects

This paper investigates fire sales triggered by regulatory cliff effects induced by the loss of Capital Requirements Regulations (CRR) compliance on covered bonds.

29-06-2017

Working Paper: Consumption and savings in a low interest-rate environment

This paper studies consumption and savings decisions of Danish households before and during the financial crisis as well as in the more recent years characterized by negative policy rates.

16-06-2017

Working Paper: Financial Cycles: What are they and what do they look like in Denmark?

In this paper we study what financial cycles are, what they look like in Denmark, and what their relationship is with the real economy. We show that medium term swings in house prices and credit should be used as an illustration of the financial cycle in Denmark.

06-04-2017

Working Paper: A Leading Indicator of House-Price Bubbles

The emergence of a house-price bubble can have sizeable implications for macroeconomic as well as financial stability. This paper investigates the dynamics of house prices in Denmark in order to identify emerging bubbles in due time. The empirical results identify developments in line with a price bubble from mid-2005 in Denmark. When applied to flats in Copenhagen, real price developments in 2015-16 indicate speculative behaviour but it cannot be ruled out that developments are driven by fundamental economic factors.

22-03-2017

Working Paper: What are the effects of changes in taxation and new types of mortgages on the real economy? - The case of Denmark during the 00's

What are the effects of introducing interest-only, flexible-rate mortgage contracts and a tax-freeze on housing wealth for the real- and financial economy? I study this within a medium-size DSGE-model with housing, banking and financial frictions, and the coexistence of flexible, fixed rate and interest-only mortgage contracts. I find that the introduction and the adaptation of flexible rate and interest-only mortgage contracts together with a freeze of taxation of the housing wealth can explain around 1/3 of the real house price gap in Denmark during the period 2004-06 and 15-40 per cent of the output gap. The household debt-to-GDP would have been almost constant instead of increasing by 20 percentage points. Finally, the analysis points to a more volatile economy after the implementation of the structural changes to the economy.

17-03-2017

Working Paper: Non-Parametric Estimation of Marginal Propensities to Consume: The Case of Regression Splines

We investigate a non-parametric method to estimating marginal propensities to consume (MPC) using regression splines.

27-02-2017

Working Paper: Revisiting potential output in Denmark

This paper provides a detailed description of Danmarks Nationalbank's current methodology for estimating potential output and output gaps in the Danish economy.

15-02-2017

Working Paper: Incorporating Funding Costs in Top-down Stress Tests

The paper discusses how to measure bank risk based on market data, the relationship between risk measures and bank funding costs and how increased funding costs can be incorporated in a stress test.