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Working Paper: Uncertainty and the real economy: Evidence from Denmark

The language in news articles can be used to measure the perceived level of economic uncertainty. In a model of the Danish economy, increased uncertainty contributed significantly to the drop in investments during the Sovereign Debt Crisis. So far, uncertainty has had a smaller impact on investments during the COVID-19 pandemic.


Working Paper: Do firms behave differently when nominal interest rates are below zero?

Denmark was the first country in the world to move its key monetary policy rate below zero. Using rich microdata and an event study framework, we find that firms exposed to negative deposit rates to a higher degree than other firms increase their fixed investments and employment.


Working Paper: Worker heterogeneity, selection, and employment dynamics in the face of aggregate demand and pandemic shocks

We model a COVID recession resulting from a negative demand shock and the need for social distancing, considering the US economy as an example. Low-productivity workers suffer a protracted surge in unemployment and inefficient separations from firms. Unemployment is amplified when nominal interest rates are close to the effective lower bound.


Working Paper: The Impact of Pessimistic Expectations on the Effects of COVID-19-Induced Uncertainty in the Euro Area

A statistical model for euro area macroeconomic aggregates shows that an increase in uncertainty and disagreement about the economic outlook impacts the economy three times as much if the outlook is pessimistic. This result implies that the uncertainty generated by COVID-19 can lead to a 15.1% fall in industrial production.


Working Paper: Spending when illiquid savings become liquid: Evidence from Danish wage earners

This paper offers new empirical evidence on the marginal propensity to consume out of an unanticipated liquidity shock. The results show a 43 dollar spending increase for each 100 dollar increase in liquid resources. The estimated spending patterns are consistent with the notion of wealthy hand-to-mouth behaviour.


Working Paper: News Uncertainty in Brexit UK

After the Brexit referendum, the behavior of the UK economy defied widespread expectations, as it did not exhibit a V-shaped recession, but a slow decline in production. We show that this pattern of propagation arises when uncertainty is about future, rather than current fundamentals, and if the expected duration of uncertainty is sufficiently long.


Working Paper: Monetary and Fiscal Policies in Times of Large Debt Unity is Strength

We study the implications of a coordinated fiscal and monetary strategy aiming at creating a controlled rise of inflation to wear away a targeted fraction of debt. Under this strategy, the fiscal authority introduces an emergency budget with no provisions on how it will be balanced, while the monetary authority tolerates a temporary increase in inflation to accommodate the emergency budget.


Working Paper: The Macroeconomic Effects of Shadow Banking Panics

We study the effects of shadow banking panics in a macroeconomic model with a rich financial system, including deposit-financed retail banks and wholesale-financed shadow banks. The model can quantitatively match the dynamics of key variables around the US financial crisis. Wholesale funding market interventions akin to those implemented by the Federal Reserve in 2008 reduced the fall in output by about half a percentage point. Generally, central bank interventions reduce output volatility and the likelihood of banking panics.


Working Paper: Dispersed consumption versus compressed output: assessing the sectoral effects of a pandemic

I process credit-card consumption data through an input-output model of sectoral linkages to impute the sector-level output responses to the Covid-19 pandemic. The sector-level consumption responses are highly dispersed and even positive for some. Yet, all sectors suffer from output losses. Production of intermediate goods stabilizes output. Consequently, the sectoral dispersion of final consumption is larger than sectoral dispersion of output produced.


Working Paper: Mandatory pension savings and long-run debt accumulation: Evidence from Danish register data

This paper uses two decades of individual level information from Danish administrative registers to investigate the connection between pension wealth and debt accumulation. A 1-dollar increase in pension wealth leads to a 26-cent rise in total debt. Liquidity constraints seem to play a key role, and we couple the crowding-out effect with an increased propensity to use interest-only mortgages.


Working Paper: Bad Jobs and Low Inflation

The low rate of inflation observed in the U.S. over the entire past decade is hard to reconcile with traditional measures of labor market slack. We show that an alternative notion of slack that encompasses workers' propensity to search on the job explains this missing inflation.


Working Paper: Modest pass-through of monetary policy to retail rates but no reversal

Monetary policy rates are negative in a number of countries, including Denmark. Concern has been expressed that negative rates may, in some cases, have had undesirable effects on bank lending rates. We show that in Denmark, pass-through to bank lending rates remains positive, and we do not find indications to suggest that negative rates have weakened bank lending. The pass-through of monetary policy interest rates to bank lending rates slowed around the financial crisis, and we show that this is driven primarily by the banks with the highest risk exposure before the crisis.


Working Paper: Macro-financial interactions in a changing world

We measure the time-varying strength of macro-financial linkages within and across the US and euro area economies. The main results show that the euro area is disproportionately more sensitive to shocks in the US macroeconomy and financial sector. Moreover, while macro-financial interactions have steadily increased in the euro area since the late 1980s, they have oscillated in the US, exhibiting very long cycles of macro-financial interdependence.


Working paper: The impact of inflation targeting: Testing the good luck hypothesis

Was the fall in the level and volatility of inflation over the last 30 years the result of good luck, or good monetary policy? We assess the inflation experience of Canada, an early adopter of an inflation targeting policy. Good luck explains only a minor portion of the changes in inflation after the shift in policy. Most of inflation and output stabilization is explained by the impact on expectations.


Working paper: Modeling frailty correlated defaults with multivariate latent factors

It is typically assumed within corporate default modeling that the covariates have a linear effect on the log-hazard scale, no interactions, and that there is only a single additive latent factor on the log-hazard scale. Using a sample of US corporate firms, we show in this paper that these standard assumptions are too strict and that they matter in practice. We propose instead a frailty-model that relaxes these assumptions and takes into account time-varying covariates, while being able to provide forecasts for arbitrary portfolios.


Working paper: Mortgage choice and expenditure over the lifecycle: evidence from expiring interest-only loans

We study how homeowners’ consumption responds to the beginning of the amortization period on interest-only mortgages. In response to an average increase in mortgage instalments worth 9 per cent of annual income, consumption drops by 3 percent of income, in the year when amortization starts. This expenditure cut is persistent, but only affects a small subset of borrowers with high leverage ratios. These borrowers might have been unable to rollover their interest-only loans into new ones.


Working paper: Banking panic risk and macroeconomic uncertainty

We show that systemic risk in the banking sector breeds macroeconomic uncertainty. We develop a model of a production economy with a banking sector where financial constraints of banks can lead to disastrous banking panics. We find that a higher probability of a banking panic increases uncertainty in the aggregate economy. We explore the implications of this banking panic-driven uncertainty for business cycles, asset prices and macroprudential regulation. Banking panic-driven uncertainty amplifies business cycle volatility and increases risk premia on asset prices. A countercyclical capital buffer lowers both the probability of banking panics and aggregate uncertainty.


Working paper: What is real and what is not in the global FDI network?

Macro statistics on foreign direct investment (FDI) are blurred by offshore centers with enormous inward and outward investment positions. This paper uses several new data sources to estimate the global FDI network while disentangling real investment and phantom investment and allocating real investment to ultimate investor economies. We find that phantom investment into corporate shells with no substance and no real links to the local economy may account for almost 40 percent of global FDI.