13.02.2023 | NBER Working Paper
A new paper by Maximilian Grimm, Òscar Jordà, Moritz Schularick, and Alan M. Taylor shows that a persistently loose stance of monetary policy increases financial fragility down the road considerably. The authors investigate the causal pathways that lead to this result and argue that credit creation and asset price overheating are important intermediating channels.
As in the literature on monetary policy rules, deviations of the real policy rate from the natural rate are a measure of the stance of monetary policy. When real policy rates are below the natural rate, the stance is loose and vice versa. In a first step, the authors adopt an approach from the literature to obtain long-run estimates of the natural rate and ultimately of the stance of monetary policy across countries.
Equipped with these estimates, the authors are the first to show that being in a low stance environment has strong implications for macro-level financial instability. Using an instrumental variable approach, when stance is 1 percentage point (pp) lower on average in a 5-year window, then the probability of a financial crisis in the next 5 to 7 years increases by 5.5 pps, and by 15.5 pps in the following 7 to 9 years ahead. Since the unconditional probability of experiencing a crisis in a 3-year window is only 10.5%, these effects are big.
The authors then explore the likely mechanisms at work, looking into the suspected channels through which an accommodative stance translates into increased financial fragility, focusing on credit markets and asset prices. Here, they find that when interest rates remain below the natural rate for an extended period of time, there is a buildup in asset prices and in credit growth, both of which have been shown to be associated with greater financial fragility.
14.11.2022 | Book release
What are the origins of financial instability in modern times? In LEVERAGED, Moritz Schularick and pioneering scholars offer insights that draw a new picture of how financial institutions and societies coexist, for better or worse. The book will be released on November 21, 2022.
The 2008 financial crisis was a seismic event that laid bare how financial institutions’ instabilities can have devastating effects on societies and economies. COVID-19 brought similar financial devastation at the beginning of 2020 and once more massive interventions by central banks were needed to heed off the collapse of the financial system. All of which begs the question: why is our financial system so fragile and vulnerable that it needs government support so often?
For a generation of economists who have risen to prominence since 2008, these events have defined not only how they view financial instability, but financial markets more broadly. Leveraged brings together these voices to take stock of what we have learned about the costs and causes of financial fragility and to offer a new canonical framework for understanding it. Their message: the origins of financial instability in modern economies run deeper than the technical debates around banking regulation, countercyclical capital buffers, or living wills for financial institutions. Leveraged offers a fundamentally new picture of how financial institutions and societies coexist, for better or worse.
There will be a book launch event on November 30th in Frankfurt. You can register here.
07.11.2022 | Job Market Candidate
Ricardo Duque Gabriel is a Ph.D. candidate at the University of Bonn and member of our MacroFinance & MacroHistory Lab. He is currently on the academic job market. He works at the intersection of empirical macroeconomics and finance with economic policy.
In his job market paper "The Credit Channel of Public Procurement", he documents that public procurement contracts can be used as collateral to increase firms' access to credit. This finding highlights a novel mechanism through which future fiscal stimuli impact the real economy today: procurement contracts increase firms' net worth today by increasing their future cashflows. The latter can be used as collateral to ease borrowing constraints and boost corporate liquidity with immediate implications for firm investment and employment which persistently increase and spill over to the overall economy.
You can find out more about Ricardo's research on his webpage.
19.09.2022 | Award
The Jordà-Schularick-Taylor Macrohistory Database wins the Engerman-Goldin Prize awarded by the Economic History Association. The prize is awarded for creating, compiling, and sharing data and information with scholars.
The JST Macrohistory Database is the result of an extensive data collection effort over several years. In one place it brings together macroeconomic data that previously had been dispersed across a variety of sources. On this website, we provide convenient no-cost open access under a license to the most extensive long-run macro-financial dataset to date. The data covers 18 advanced economies since 1870 on an annual basis. With the 6th release in the year 2022 new variables were included and the return data series was extended.
The Engerman-Golding Prize is awarded by the Economic History Association for creating, compiling, and sharing data and information with scholars. It is awarded in even number years, beginning in 2018, for contributions made in the previous six years.
15.09.2022 | New Members
We are very happy to welcome Hanna Schwank as an Assistant Professor and Mintra Dwarkasing as a Research Fellow at the MacroFinance & MacroHistory Lab.
Hanna Schwank joined the MacroFinance & MacroHistory Lab as an Assistant Professor of Economic History in August 2022. She received a Bachelor's degree in Economics and a Master's degree in Public Economics from Free University Berlin. She completed her Ph.D. in Economics at Boston University in May 2022. Hanna is an applied microeconomist with a focus on labor economics and economic history. Her research interests include topics such as internal migration, the impact of natural disasters on individuals' work trajectories, and the role of women on the labor market.
Mintra Dwarkasing joined the MacroFinance & MacroHistory Lab as a Research Fellow and is affiliated with the ECONtribute Excellence Cluster. She holds a Ph.D. from Tilburg University. Her research interests include economic history, corporate finance, financial intermediaries and inequality.
19.07.2022 | EER
Martin Dohmen published his paper "Freedom of enterprise and economic development in the German industrial take-off" in the European Economic Review.
This paper examines the interaction between institutions and market size as drivers of economic development. The author uses the division of the Kingdom of Westphalia as a natural experiment to show that only reforms in both dimensions combined induced industrialization and stimulated economic growth during the German industrial take-off. Homogeneous counties were allocated quasi-randomly to Prussia or the Electorate of Hesse as part of a package deal at the Congress of Vienna. In Prussian counties, Gewerbefreiheit (freedom of enterprise) and the abolition of guilds increased incentives to industrialize manufacturing production, yet these counties and those under the guild system developed similarly.
Only the establishment of the German Zollverein (customs union), which increased market size considerably, ensured that IRS technologies were able to break even. This enabled counties featuring the Gewerbefreiheit to experience significantly higher growth.
13.12.2021 | CEPR
A new paper by Francisco Amaral, Martin Dohmen, Sebastian Kohl and Moritz Schularick shows that a housing investment in a national superstar city (e.g. London or Paris) yields lower total returns than in the rest of the respective country.
The authors study long-term returns on residential real estate in 27 “superstar” cities in 15 countries over 150 years. They find that total returns in superstar cities are close to 100 basis points lower per year than in the rest of the country. House prices tend to grow faster in the superstars, but rent returns are substantially greater outside the big agglomerations, resulting in higher long-run total returns. The excess returns outside the superstars can be rationalized as a compensation for risk, especially for higher co-variance with income growth and lower liquidity. Superstar real estate is comparatively safe.
This work is the first to put together international long-run housing return series for different cities and regions. This adds a regional dimension to the existing literature on long-run house prices (Knoll, Schularick, and Steger, 2017) and returns on housing portfolios (Jordà et al., 2019) and an international dimension to individual papers on long-run housing returns in individual regions (Demers and Eisfeldt, 2021; Eichholtz et al., 2020). The paper also complements the existing urban economics literature by bringing together house price data with rental yields, housing returns and measures of local housing risk. While the existing literature has focused on the spatial distribution of house price appreciation (Gyourko, Mayer, and Sinai, 2013; Hilber and Vermeulen, 2015), this paper shows that the spatial distribution of housing returns is different – a fact that is explained with differences in local housing market risks.
09.12.2021 | Award
Moritz Schularick wins the most important research funding award in Germany. The Leibniz Prize recognizes his outstanding research achievements in the field of economics. In particular, the way he connects macroeconomics with economic history, his insights into the causes of financial crises and his research on the historical development of wealth distribution.
The Deutsche Forschungsgemeinschaft (DFG, German Research Foundation) today awarded the 2022 Gottfried Wilhelm Leibniz Prize to ten scientists. The award recipients will each receive prize money of 2.5 million euros. The award winners can use these funds for their research work for up to seven years, according to their own ideas and without bureaucratic effort.
The Leibniz Prize for Moritz Schularick recognizes his outstanding research achievements in the field of economics. This applies in particular to the new way in which he connects macroeconomics with economic history and his insights into the causes of financial crises and the historical development of wealth distribution. While the 2008 financial crisis caught the economic sciences largely unprepared, Schularick promptly succeeded in demonstrating that financial crises regularly follow strong growth phases. He thus developed a more fundamental understanding of crisis dynamics that can help predict and mitigate future financial crises. More recently, Schularick focused his research interest on the causes of social inequality. To this end, he analyzed the development of capital and real estate returns and was thus able to identify aspects of unequal resource endowments as essential for the increase in social inequality. His work has contributed considerably to a better understanding of central problems of the present and is taken up in many debates on economic and social policy.
01.09.2021 | Award
Ricardo Duque Gabriel received the APHES Award for his paper “Monetary Policy and the Wage Inflation-Unemployment Tradeoff”. This award is for the best communication of a young researcher presented at the annual meeting of the Portuguese Association of Economic and Social History.
Ricardo Duque Gabriels paper adds to our understanding of how relevant the Phillips curve is to understanding the relationship between inflation and unemployment over time. The recent weakening of the inflation-unemployment tradeoff has instigated a debate on whether the New Keynesian framework has outlived its usefulness. Understanding the source of that structural change is crucial for proper monetary policy conduction. Ricardo Duque Gabriel estimates the inflation-unemployment tradeoff using newly assembled data on wages and unemployment rates for 17 advanced economies since 1870. He shows that the wage Phillips curve has always been "alive and well" despite displaying a time-varying slope. Using the Phillips multiplier framework, he shows that the tradeoff becomes weaker in low price inflation environments due to a muted wage inflation response to monetary policy.
01.06.2021 | New Member
We are very happy to welcome Chi Hyun Kim as a new Post-Doctoral Researcher at the MacroFinance and MacroHistory Lab!
Chi is no stranger to the Economics Department in Bonn, as she obtained her Bachelor and Master degree in Economics at the University of Bonn. Before joining us, Chi was a PhD student at the Martin-Luther-University Halle-Wittenberg and DIW Graduate Center in Berlin.
Her research interests are in the field Monetary Policy, Time-Series Econometrics, and Household Finance. She is currently working on a project that aims to analyze the long-run evolution of the racial wealth gap in the US from Emancipation to the present in order to inform policy discussions around reparations and the reduction of Black-white economic disparities.
Chi is also an associated member of the ECONtribute Cluster Markets & Public Policy.
You can find out more about Chi’s research on her webpage.
01.03.2021 | ORA Grant
Luis Bauluz, Filip Novokmet and Moritz Schularick have received a grant from the Open Research Area (ORA) for the Social Sciences to study the link between national and sub-national income inequality in Germany, France, Canada, the UK, and the US.
The project, entitled “Linking National and Regional Income Inequality: Cross-Country Data Harmonization and Analysis", aims to measure and analyze the evolution of regional and national income inequality from a consistent cross-country perspective.
The ORA is an agreement between ANR (France), DFG (Germany), ESRC (UK), and SSHRC (Canada) to strengthen international co-operation in the social sciences through a common call for proposals to fund the highest quality joint research projects. Luis, Filip and Moritz constitute the German team for this project, which will include three other groups of researchers in the UK (LSE and Oxford University), France (Paris School of Economics and Evry University), and Canada (McGill University). The project's duration is three years: 2021, 2022, and 2023.
16.02.2021 | VoxEU
Manuel Funke, Moritz Schularick, and Christoph Trebesch have published a lead commentary in the VoxEU debate on Populism.
The rise of populism in the past two decades has motivated much work on its drivers, but less is known about its economic and political consequences. This column uses a comprehensive cross-country database on populism dating back to 1900 to offer a historical, long-run perspective. It shows that (1) populism has a long history and is serial in nature – if countries have been governed by a populist once, they are much more likely to see another populist coming to office in the future; (2) populist leadership is economically costly, with a notable long-run decline in consumption and output; and (3) populism is politically disruptive, fostering instability and institutional decay. The analysis suggests that populism is here to stay.
10.02.2021 | VoxEU
Alina K. Bartscher, Moritz Kuhn, Moritz Schularick, and Paul Wachtel have published a VoxEU column on "Monetary policy and racial inequality".
Racial income and wealth gaps in the US are large and persistent. Central bankers and politicians have recently suggested that monetary policy may be used to reduce these inequalities. This column investigates the distributional effects of monetary policy in a unified framework, linking monetary policy shocks both to earnings and wealth differentials between black and white households. Over multi-year horizons, it finds that while accommodative monetary policy tends to reduce racial unemployment and thus earnings differentials, it exacerbates racial wealth differentials, which implies an important trade-off for policymakers.
29.01.2021 | LSE EUROPP Blog
Ricardo Duque Gabriel, Mathias Klein, and Ana Sofia Pessoa explore a detailed regional dataset to provide empirical evidence of strong positive demand and supply-side effects of fiscal stimulus in the Eurozone.
The question of how fiscal policy affects the Eurozone economy has received substantial attention over the last decade. As the main policy interest rate of the European Central Bank (ECB) has reached its lower bound, commentators have frequently asked for more fiscal actions to stimulate the economy. In one of his last press conferences, parting ECB President Mario Draghi stated that it is now “high time I think for the fiscal policy to take charge”. Drawing on a new study for the Eurozone economy, Gabriel, Klein, and Pessoa find that output reacts positively to a fiscal stimulus. By inspecting the transmission mechanisms, they find that this positive response follows not only a positive response of the demand-side of the economy (via positive investment and consumption responses) but also a positive supply-side response via a productivity increase. Moreover, changes in regional government spending have sizeable effects on local labor markets, following a fiscal stimulus we observe an increase in employment, wages, and the labor share - indicating a possible redistribution of income towards workers.
12.01.2021 | VoxEU
Moritz Schularick, Lucas ter Steege, and Felix Ward have published a VoxEU column.
The question of whether monetary policymakers can defuse rising financial stability risks by ‘leaning against the wind’ and increasing interest rates has sparked considerable disagreement among economists. This column contributes to the debate by studying the state-dependent effects of monetary policy on financial stability, based on the ‘near-universe’ of advanced economy financial cycles since the 19th century. It shows that deploying discretionary leaning against the wind policies during credit and asset price booms are more likely to trigger crises than prevent them.