Abstract This paper shows that forecasts from professional economists in the Livingston survey imply countercyclical variation in expected excess returns on U.S. stocks. These expectations are approximately rational and strongly positively correlated with expected excess returns from the log‐utility investor of Martin (2017), the habit model of Campbell and Cochrane (1999), and the long‐run risk model of Bansal and Yaron (2004). The Livingston survey also implies countercyclical cash flow expectations based on forecasts of tax‐adjusted corporate profits. However, this feature is not matched by either the habit or the long‐run risk model.
Abstract We present a model in which income inequality interacts with banks' risk‐taking incentives, generating financial instability. Competition and deposit insurance cause some banks to lend to lower‐income borrowers at underpriced rates, creating “risky banks” that fail in downturns, while others lend to higher‐income borrowers and avoid default. Rising inequality affects stability by expanding the underpriced loan segment and increasing the share of risky banks. Moreover, borrower risk does not automatically imply bank risk: without risk‐shifting, no bank fails, even as borrowers become riskier. The model identifies when inequality heightens bank risk and clarifies the mechanisms connecting inequality, lending behavior, and financial fragility.
I investigate the empirical asset pricing implications of a three-factor macro model that extends the baseline consumption model Consumption Capital Asset Pricing Model (CCAPM) by adding the innovations in expected long-run consumption growth (consumption growth news) and expected long-run consumption variance (variance news) as risk factors. By using a reasonable cross-section of equity risk premia, such a model is largely rejected (both on statistical and economic grounds), as the factor risk prices are either insignificant and/or economically implausible, whereas the pricing errors are very large. Thus, long-run consumption risks (LRR) do not rescue the CCAPM, which represents a major challenge for the voluminous LRR literature.
This paper draws quantitative implications for certain historical coinage issues by adapting a fiat-money multiple-denomination model. The model is parameterized to match some key monetary characteristics of late medieval England. A small coin has a more prominent role than mere small change; thus, a shortage of small coins is very costly for poor people, and when commerce advances, it is very costly for all people. A debasement may effectively supply substitutes for small coins in shortage. But debasements cannot be an ultimate solution because the precious metals used to produce coins are practically indivisible.
Quantitative easing (QE) introduced during the 2008 financial crisis, has since remained a key monetary policy tool. Our paper studies how QE affects market liquidity using unique data on Swedish government bonds. We find that there is a deterioration in the level of market liquidity from QE. This scarcity effect is nonlinear. Only after QE reaches a certain volume level, it outweighs the improvement in liquidity from boosting market demand. Unlike market prices, which often react to announcements, liquidity does not change when QE is announced. Instead, the liquidity effect occurs in connection with the actual purchases.
We study how alternative carbon pricing policies, namely carbon taxes and cap-and-trade schemes, affect macroeconomic dynamics and the welfare cost of business cycles in a dynamic stochastic general equilibrium model with financial frictions (FFs) and pollution externalities. FFs play a critical role in shaping how business cycle shocks propagate across carbon pricing regimes. We find that, with financial frictions, welfare costs are generally lower under cap-and-trade schemes than under carbon taxes, as procyclical permit prices dampen financial amplification. The welfare gap between the two policies narrows as credit markets become more efficient or countercyclical macroprudential regulation weakens shock transmission.
We develop an open-economy heterogeneous household model with incomplete markets to quantitatively evaluate the welfare and distributional effects-both within and across countries-of the corporate tax cut (Tax Cuts and Jobs Act, TCJA) implemented in the U.S. in 2017. The model allows for examining outcomes under various possibilities including the tax cut in the U.S. being permanent versus temporary and potential fiscal responses of other countries to the TCJA. We find that the TCJA is regressive in the U.S. and has relatively more regressive outcomes in other countries. Whether the wealth-poor in the U.S. benefit from the TCJA or not depends on the persistence of the tax cut. Finally, when a small country reduces its corporate tax in response to the TCJA, it has a progressive distributional result in its own economy.
The European Union Emissions Trading System (EU ETS) experienced sharp allowance price increases from 2018 onward, prompting claims that rational bubbles were driving the surge. We reassess this hypothesis using expectations based on futures prices. We modify an existing testing approach under risk-neutrality and show that this version of the test is valid in the presence of a dynamic risk premium and robust when the underlying fundamental exhibits a unit root or mildly explosive behavior. Using weekly spot and futures data from 2013 to 2023, we find no evidence of rational bubbles. The evidence is consistent with shifting allowance-scarcity expectations.
We investigate monetary policy transmission and energy saving incentives in response to rising energy prices. We add energy in consumption and production, and energy conservation capital, to a tractable New Keynesian model with heterogeneous agents, unemployment risk, and nominal asset holdings. We find that monetary policy influences the energy conservation through both unemployment risk and asset returns; energy price shocks intensify monetary policy trade-offs in terms of stabilizing inflation and output. A weaker policy response is beneficial in terms of agents' welfare despite higher inflation. The Ramsey policy predicts a strong rise in the policy rate with a decline afterward.
We study the two-way relationship between fixed-rate mortgages (FRMs) and monetary policy in a panel of up to 35 countries observed over the last two decades. The data set includes quarterly information on the composition of mortgage flows and stocks by type of rate-fixation and monetary policy shocks cleaned of information effects. Using instrumental-variable local projections, we show that FRMs induce both path- and state-dependency in monetary transmission. Changes in policy rates shape mortgage choice, increasing (decreasing) the share of FRMs during easing (tightening) cycles. Over time, this mechanism alters the composition of the outstanding mortgage stock which, in turn, affects the central bank's ability to stabilize the economy ex-post. A greater (lower) prevalence of FRMs weakens (strengthens) monetary policy transmission to real private consumption and GDP.
We consider a payment arrangement in which transfers and holdings of currency, but not of real resources, can be recorded and traced by monitoring technology. We show that this payment arrangement improves upon traditional cash payments, allowing transfers of currency among strangers, which can be interpreted as monetary loans.
Understanding how risk factors shape the economic outlook is essential for guiding policy decisions. This paper develops a flexible framework that decomposes distributional risk forecasts of macro-economic variables into underlying contributions and supports the construction of interpretable risk measures. Multiple modeling strategies, including density and quantile regression, are accommodated underscoring the versatility of the approach. The framework is illustrated using recent U.S. inflation data, showing postpandemic risk forecasts were driven by the business cycle, commodity prices, monetary policy, and inflation expectations. Simulation studies demonstrate robustness, establishing the framework as a general tool for macro-economic and financial risk assessment.
In this paper, we propose incorporating both self-fundamentals, defined as the fundamentals of two economies in one currency pair, and cross-fundamentals, defined as the fundamentals of other major economies, to forecast exchange rates in line with the theory of "third-country effects" of Berg and Mark (2015). We utilize the Mallows model averaging method proposed in Hansen (2007) to optimally combine the predictions provided by fundamental submodels. We find that our approach significantly outperforms the random walk and the alternatives for one-month-ahead predictions and that both the self- and cross-fundamentals play important roles in prediction. Furthermore, according to our prediction, we obtain meaningful investment profit trading on currencies and bonds.
We show that carbon pricing and bank credit complement each other in reducing firms' carbon emission intensity. Our identification exploits a reform-driven carbon price increase in the EU emission trading system (ETS) and administrative microdata, including the Italian credit registry. We find that highly exposed ETS firms increase term-loan demand, relative to less exposed ETS firms. Such credit channel is associated with larger investment, but not with higher carbon emissions, reducing emission intensity. These effects are significant only among firms undertaking green investments. Moreover, higher credit demand by ETS firms crowds out credit supply to smaller firms in brown sectors.
This paper argues that lower government debt issuance is equivalent to a central bank-operated asset purchase program, commonly known as quantitative easing (QE), as both reduce anticipated future bond supply. However, as it involves neither asset purchases nor associated reserves creation, it is labeled passive QE. A novel classification scheme of central bank balance sheet policies ranks passive QE as stimulative. Supportive evidence from a temporary lowering of government debt issuance in Denmark suggests that declines in long-term yields reflected both reduced term premia, consistent with supply-induced portfolio balance effects, and increased safety premia, consistent with safe assets scarcity effects.
We show that banks do not decentralize the first best in a nominal Diamond-Dybvig economy with inside money. Furthermore, state-contingent deposit contracts do not expand the consumption possibility set to include the first best either. Central banks can improve welfare but only for savers and only with unconventional monetary policy. Finally, central banks could prevent runs using their lender-of-last-resort facility. These results suggest that, without an explicit incorporation of inside money, it is not trivial to provide a theoretical argument about the ability of the banking sector to efficiently supply liquidity in our economies.
A general wisdom, since at least the work of Schmitt-Groh & eacute; and Uribe (1997), holds that a government that relies on adjusting capital (rather than labor) income tax rate to balance its budget is immune to aggregate instability driven by self-fulfilling expectations. This conventional wisdom is overturned in the present paper that augments the neoclassical framework with endogenous capital utilization. We show that the interaction between the capital tax rate and the capital utilization rate generates fiscal increasing returns and factor share redistribution to induce equilibrium indeterminacy. It is also shown that capital depreciation allowances can act as a stabilization device to preempt extrinsic instability. We demonstrate that self-fulfilling instability can occur in real-world economies, but that it can be prevented if capital depreciation allowance is combined with capital taxation to achieve budget objective.
We use laboratory experiments to evaluate the effectiveness of redemption fees and gates in reducing runs on funds. Our setup takes into account that investors may withdraw preemptively if they anticipate the imposition of fees or gates. We find that gates fail to reduce the propensity to run, whereas fees do have a mitigating effect on run behavior. However, the effect of fees is relatively small and takes time to materialize. Overall, our experimental results indicate that liquidity management tools are unlikely to eliminate fund fragility, consistent with the experience of the 2020 money market fund turmoil.
Not very. We find even the most destructive weather disasters over the last quarter century had only modest effects on U.S. banks' performance. This stability seems endogenous rather than a mere reflection of federal disaster aid, as disasters tend to increase loan demand, which helps offset losses and boosts profits. Local banks avoid mortgage lending where floods are more common than official flood maps would predict, suggesting local knowledge may also mitigate disaster impacts. Our findings inform ongoing assessments of the physical risks to banks from climate change.
We address how different restrictions or "strings" attached to the usage of government aid distributed through banks during crises affect subprime consumer debt. Leveraging quasi-natural experiments, we compare Troubled Asset Relief Program (TARP), characterized by limits on executive and shareholder compensation but no strings attached to lending with the highly restrictive Paycheck Protection Program (PPP) loan requirements but no limits on executives and shareholders. We evaluate the programs' impacts on millions of consumer debt observations from the Consumer Credit Panel. Results indicate that the PPP funds significantly reduced debt for subprime borrowers, primarily through income shock mechanisms, compared to additional debt through credit shocks under TARP.
