Excessive household borrowing has been identified as an important determinant of financial crises. Borrower-based macroprudential instruments have been proposed as a possible remedy. In Germany, two instruments have been available to macroprudential supervisors since 2017: a cap on the loan-to-value (LTV) ratio and an amortization requirement, but none of them has been activated so far. Therefore, this paper presents a simulation tool that allows the impact of activating of borrower-based instruments to be evaluated ex ante. The simulation is based on microdata from the German Panel on Household Finances (PHF) and is at the same time calibrated to match aggregate developments in the residential real estate market. This micro-macro consistent simulation approach can be used to detect vulnerabilities in household balance sheets and perform an ex ante analysis of the activation and calibration of borrower-based macroprudential instruments. An illustrative example of a hypothetical activation shows that the introduction of a cap on the loan-to-value (LTV) ratio of new mortgage loans in Germany could improve important indicators of household vulnerability.

Politikmaßnahmen könnten regelgebunden evaluiert werden. Dafür sind die Bedingungen derzeit besser denn je. Eine Evidenzbasierung der Politik ist nötig, in einer Zeit populistischer Strömungen, die häufig auf fehlerhaften Informationen basieren. Der Beitrag zeigt auf, welche Elemente ein strukturierter Politikzyklus enthalten sollte, welche Beispiele es hierfür im internationalen Umfeld gibt, wie Politikevaluierung in Deutschland besser vorankommen kann, und welche Maßnahmen helfen können, die Infrastruktur für Evaluierungen zu verbessern.

Macroprudential policy is a relatively new policy field. Its goal is to preserve financial stability and to prevent the build-up of systemic risk that may have adverse effects for the functioning of the financial system and for the real economy. New institutions have been tasked with the implementation of macroprudential policies, and new policy instruments have been introduced. Nonetheless, uncertainty about the state of the financial system and the effects and effectiveness of these policy instruments is high. This uncertainty entails two risks: the risk of acting too late (inaction bias) and the risk of choosing an inappropriate instrument or inadequate calibration. In this paper, we argue that both risks can be mitigated if macroprudential policy is embedded in a structured policy process. Such a policy process involves four steps: defining policy objectives for macroprudential policies, choosing intermediate objectives and appropriate indicators, linking instruments to these indicators through ex-ante evaluation studies, and analyzing the effects of these policies through ex-post evaluation studies. We argue that the infrastructure for this policy process can be further improved by providing data for policy evaluation, establishing or strengthening legal mandates for policy evaluation, establishing mechanisms for international cooperation, and building up repositories of evaluation studies.

Abstract Projected demographic changes in industrialized and developing countries vary in extent and timing but will reduce the share of the population in working age everywhere. Conventional wisdom suggests that this will increase capital intensity with falling rates of return to capital and increasing wages. This decreases welfare for middle aged asset rich households. This paper takes the perspective of the three demographically oldest European nations – France, Germany and Italy – to address three important adjustment channels to dampen these detrimental effects of aging in these countries: investing abroad, endogenous human capital formation, and increasing the retirement age. Our quantitative finding is that endogenous human capital formation in combination with an increase in the retirement age has strong implications for economic aggregates and welfare, in particular in the open economy. These adjustments reduce the maximum welfare losses of demographic change for households alive in 2010 by about 2.2 percentage points in terms of consumption equivalent variation.

We propose a simple and transparent tool to extend household-level data from the Household Finance and Consumption Survey using aggregate series and micro-simulations. We quantify shocks to wealth and financial pressure faced by various categories of households since the onset of the Great Recession. The shocks differ substantially across countries and across economic and socio-demographic characteristics. We find that the rising unemployment rate disproportionately affected the income-poor, while the declining asset prices more the income-rich. Although borrowers benefited from lower interest rates, debt service-income and debt-income ratios for poor households went up due to falling incomes. As a policy contribution we illustrate how our “pseudomicro data” can be used to assess the distributional impact of asset prices on consumption: the unprecedented declines in asset prices substantially contributed to the sluggish consumption growth driven by both rich and poor households. While the former were hit by large shocks to wealth, the latter also significantly cut their spending because of their high MPCs.

This paper analyses the challenges that high public debt and ageing populations pose to medium-term growth. First, macroeconometric model simulations suggest that medium-term growth can benefit from credible fiscal consolidation, partly through reductions in sovereign risk premia. Second, a disaggregated growth accounting exercise suggests that the impact of population ageing on medium-term growth can be mitigated by structural reforms boosting labour force participation. Finally, general equilibrium models suggest that pay-as-you-go public pension systems will require reforms combining lower benefits, a later retirement age and higher social contributions. These findings suggest several policy recommendations: (a) “fiscal space” should be preserved to counter adverse shocks, (b) credible fiscal plans can benefit growth through the sovereign risk channel, (c) the demographic transition increases the need for improved fiscal policy coordination and more flexible labour migration policies, and (d) fiscal consolidation should avoid perverse incentive effects that could lower labour supply and medium-term growth.

Using data from the pre-crisis period we investigate banks' joint bidding behavior in the ECB's Main Refinancing Operations (MRO) and Longer Term Refinancing Operations (LTRO). We test whether banks bid at lower rates in MROs before the LTRO and at higher rates after the LTRO, compared to other operations. We motivate this by findings from the auction literature suggesting that agents' bidding behavior is forward looking and takes sequences of future auctions into account.We offer two findings. First, we find that in general banks bid in the MRO before the LTRO at lower rates as compared to other MRO5. Moreover, MRO participants that also bid in the following LTRO bid at even lower rates, compared to peers not bidding in the LTRO. These findings support the hypothesis that banks view obtaining liquidity from the two operations as a substitute. Second, we find that banks generally bid more aggressively in the MRO after the LTRO. Banks that participated also in the LTRO preceding the MRO bid at substantially higher rates. These findings reflect that "short" banks, with potentially large net liquidity needs in the MRO after the LTRO, bid more aggressively. Although size plays a considerable role for bidding behavior, the conclusions are valid for banks of different sizes. (C) 2015 Elsevier Ltd. All rights reserved.

Using individual data from the Eurosystem’s liquidity providing tenders for the pre-crisis period we investigate banks’ joint bidding behaviour in Main Refinancing Operation (MRO) and Longer Term Refinancing Operations (LTRO). We test whether banks bid at lower rates in MROs before the LTRO and at higher rates after the LTRO, compared to other operations. We offer two main findings. First, we find that in general banks bid in the MRO before the LTRO at lower rates as compared to “other” MROs. Moreover, MRO participants which also bid in the following LTRO bid at even lower rates, compared to peers not bidding in the LTRO. These findings support the hypothesis that banks view obtaining liquidity from the two operations as substitutes and bid strategically. Second, we find that banks generally bid more aggressively in the MRO after the LTRO. Even more striking, banks which participated also in the LTRO preceding the MRO bid at substantially higher rates. These findings reflect that “short” banks, with potentially large net liquidity needs after the LTRO bid more aggressively. Other counterparties with liquidity needs in that particular operation are forced, as a best response reaction, to bid also at higher rates. Although size plays a considerable role for bidding behaviour, the conclusions are valid for banks of different size.

We calibrate an incomplete markets large scale OLG model to the US income and wealth distribution and examine the effects of alternative government debt levels and adjustment policies on macroeconomic aggregates and welfare. We find that the government should hold negative debt. Due to the high degree of wealth and income dispersion ex ante lifetime utility increases with increasing wages (falling interest rates) by around 6% of lifetime consumption at optimal debt levels. The optimal level depends on the adjustment policy can vary by up to 70% of GDP (between -180% and -110%). With lower government debt, high income/wealth agents are always worse off. Adjusting transfers benefits the lowest income/wealth group. The largest gains are, however, experienced by agents in the middle of the income/wealth distribution: they benefit from higher wages and transfers but do not lose too much capital income.

Projected demographic changes in the U.S. will reduce the share of the working-age population. Analyses based on standard OLG models predict that these changes will increase the capital–labor ratio. Hence, rates of return to capital decrease and wages increase, which has adverse welfare consequences for current cohorts who will be retired when the rate of return is low. This paper argues that adding endogenous human capital accumulation to the standard model dampens these forces. We find that this adjustment channel is quantitatively important. The standard model with exogenous human capital predicts welfare losses up to 12.5% (5.6%) of lifetime consumption, when contribution (replacement) rates to the pension system are kept constant. These numbers reduce to approximately 8.7% (4.4%) when human capital can endogenously adjust.

This appendix of our paper, “Demographic Change, Human Capital and Welfare”, contains further material that could not be included in the paper due to space limitations. It is organized as follows. Section A contains the formal equilibrium definition. Section B provides more results on the fit of our model to observed life-cycle profiles of hours and wages, the implied laborsupply elasticities of our model, additional results on predicted aggregate variables during the demographic transition as well as the associated welfare effects and a sensitivity analysis. Our population model is explained in Section C. Details on our computational procedures can be found in Section D.

This paper develops a model with increasing adult life expectancy as the driving force of the economic and demographic transition. We show that if parents invest their own time into children's human capital, rising adult life expectancy unambiguously increases fertility. With children educated in schools and parents paying tuition fees, the reaction of fertility to changes in longevity is ambiguous. If productivity of adult human capital is sufficiently large and parent's valuation for additional children is sufficiently low, fertility will decrease. Without a schooling system, rising life expectancy therefore initially increases fertility. As during the development process life expectancy rises, a schooling system will be endogenously adopted and the relationship between fertility and longevity reversed. We argue therefore that it is important to account for the change in the nature of the costs of child education: from time costs to monetary costs.

Projected demographic changes in industrialized countries will reduce the share of the workingage population. Analyses based on standard OLG models predict that these changes will increase the capital-labor ratio. Hence, rates of return to capital decrease and wages increase, which has adverse welfare consequences for current middle aged asset rich agents. This paper addresses two important endogenous adjustments channels to dampen these detrimental effects of demographic change: investing abroad and endogenous human capital formation. Our quantitative finding is that openness has a relatively mild effect. In contrast, endogenous human capital formation in combination with profound changes in pension policy – fixing contribution rates and increases in the retirement age – have strong effects. Maximum welfare losses of demographic change for households alive in 2010 decrease from 6.5% to 3.6% when human capital endogenously adjusts and when the statutory retirement age is indexed to life expectancy.

We develop a simple OLG model to analytically show that aging leads to increased educational efforts through a general equilibrium effect. The mechanism is that scarcity of raw labor increases the return of human relative to physical capital. While a reduction in the birth rate is shown to unambiguously increase educational efforts, increases in the survival rate have ambiguous effects. Falling birth rates also increase capital per worker, but the effects of rising survival rates are again ambiguous. We conclude that our model is a useful laboratory to highlight potentially offsetting effects in models with endogenous education and overlapping generations.

This paper develops a dynamic general equilibrium model of fertility, human capital accumulation, child labor and uncertain child survival focusing on the qualitative and quantitative effect of declining mortality on household decisions and economic development. Due to uncertainty about child survival, parents have a precautionary demand for children. Rising survival probability leads to falling fertility, eventually to investment into schooling and the demise of child labor. Child labor can be an obstacle to development since it lowers the incentives of parents to educate children. Furthermore, the paper argues that the decline of precautionary child demand as a consequence of falling mortality is not sufficient to generate a demographic transition. Falling mortality can only explain a relatively small part of the fertility decline. A sizable reduction in fertility can only be achieved by human capital investment and the induced quantity-quality trade off.

This paper employs a large scale overlapping generations (OLG) model with endogenous education to evaluate the quantitative role of human capital adjustments for the economic consequences of demographic change. We find that endogenous human capital formation is an important adjustment mechanism which substantially mitigates the macroeconomic impact of demographic change. Welfare gains from demographic change for newborn households are approximately three times higher when households endogenously adjust their education. Low ability agents experience higher welfare gains. Endogenous growth through human capital formation is found to increase the long-run growth rate in the economy by 0.2-0.4 percentage points.