Working Paper

Published Download Title
10-03-2020

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.

06-03-2020

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.

22-01-2020

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.

09-01-2020

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.

08-01-2020

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.

11-12-2019

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.

22-11-2019

Working paper: Occupation-industry mismatch in the cross-section and the aggregate

I define occupations that are employed in more industries as “broader” occupations. I study the implications of broadness for mismatch of the unemployed and vacancies across occupations and industries. I empirically find that workers in broader occupations are better insured against industry-specific shocks. I build a general equilibrium model that uses occupational broadness as a microfoundation of mismatch. The model matches the empirical findings but predicts that mismatch cannot significantly contribute to aggregate fluctuations in the unemployment rate.

11-11-2019

Working paper: Liquidity Constraints in the U.S. Housing Market

We show that U.S. housing wealth is very illiquid despite all the instruments for extracting home equity available to homeowners. We come to this conclusion by studying the implications of liquidity constraints in a quantitative life-cycle model in which we explicitly account for key institutional details of the U.S. housing and mortgage markets. We find that mortgage market frictions that prevent homeowners from tapping into home equity are sizeable and that most homeowners keep their consumption low for precautionary reasons.

08-11-2019

Working Paper: Risk and risk weights

The paper studies the relationship between the riskiness of banks' assets and their average risk weight. Risk weights explain about half of the variation in projected credit losses in the 2018 European Banking Authority stress test, and show a clear relationship with estimates of banks' asset volatilities. However, risk weights do a worse job of explaining future credit losses than do asset volatilities, especially for banks using internal models.

04-11-2019

Working Paper: Revisiting the inflation perception conundrum

The level of inflation perceived by Danish households persistently exceed observed inflation levels measured by official Consumer Price Indices. Accounting for even several of the factors usually put forward to explain the overestimation bias can only reduce it slightly. Food prices carry a larger weight in perceived inflation than in the official CPI, and we find clear seasonal effects in the inflation perception bias. The bias is also reflected in the households' expectations of the future inflation level, but we find a much smaller bias in the expectations regarding future changes in inflation rates.

17-10-2019

Working Paper: Ahead of the Cycle

The paper describes how to conduct macroprudential policy in an environment where economic indicators move in a cyclical fashion, policy works with a lag, and there are adjustment costs to changing policy. It shows that policy instruments such as the countercyclical capital buffer should be set not only based on the present state of the cycle, but also on where the cycle is heading.

07-10-2019

Working Paper: Modeling Persistent Interest Rates with Volatility-Induced Stationarity

We propose a new model for the term structure of interest rates, which embraces the extreme persistence observed in interest rate data. This is achieved by introducing so-called volatility-induced stationarity. We apply the model to U.S. Treasury bond yield data and show that volatility-induced stationarity improves estimation of term premia and forecasting of interest rates compared to existing models.

04-10-2019

Working Paper: Seeing Through the Spin: The Effect of News Sentiment on Firms' Stock Market Performance

We show that Stock market investors react only on the objective facts and not the spin in media articles. We use natural language processing tools to compute the tone of 288 thousands articles written by Reuters between 2000 and 2018, and show that it predicts the short-term stock market performance of companies. However, by exploiting a combination of unsupervised machine learning and econometric techniques, we show that this effect is only due to the informational content of the article, and not the framing of that article. The market sees through media spin and can filter informational content from irrelevant tone.

05-09-2019

Working Paper: Macroeconomic and financial policies for climate change mitigation: A review of the literature

Climate change is one of the greatest challenges of this century. Mitigation requires a large-scale transition to a low-carbon economy. This paper provides an overview of the rapidly growing literature on the role of macroeconomic and financial policy tools in enabling this transition.

18-06-2019

Working Paper: Real Effects of Relaxing Financial Constraints for Homeowners: Evidence from Danish Firms

We study how the introduction of interest-only mortgages in 2003 affected job creation and the skill composition of the workforce over the business cycle. The reform significantly increased household expenditure and firms reacted to this demand shock by creating jobs. These positions, however, are classified as low-skilled occupations, filled by younger and less educated workers who face earlier separations and a higher degree of unemployment ex-post.

24-05-2019

Working Paper: The effects of macroprudential policies on house price cycles in an agent-based model of the Danish housing market

In this paper an agent-based model is used to investigate how tightening loan-to-value and loan-to-income ratios affects house price cycles. The use of an agent-based model allows for the analysis of the effects of these policies on heterogeneous households. I find that these policies reduce house price cycles in a non-linear way that depends crucially on the distribution of households and highlights the importance of macroprudential policymakers taking into account the distributions of households.

23-05-2019

Working Paper: Multiple credit constraints and time-varying macroeconomic dynamics

I build a DSGE model where households face a loan-to-value (LTV) constraint and a debt-service-to-income (DTI) constraint. From an estimation of the model, I infer when each constraint was binding over the 1975-2017 timespan in the U.S. I also infer that DTI standards were relaxed during the mid-2000s credit boom. In the light of this, the boom could have been avoided by tighter DTI limits, but not by tighter LTV limits. The role of multiple credit constraints for the emergence of nonlinear dynamics is corroborated by county panel data.