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A comprehensive approach for currency crises theories stressing the role of the anchor country
(2008)
The approach is based on the finding that new generations of currency crises theories always had developed ex post after popular currency crises. Discussing the main theories of currency crises shows their disparity: The First Generation of currency crises models argues based on the assumption of a chronic budget deficit that is being monetized by the domestic central bank. The result is a trade-off between an expansionary monetary policy that is focused on the internal economic balance and a fixed exchange rate which is depending on the rules of interest parity and purchasing power parity. This imbalance inevitably results in a currency crisis. Altogether, this theory argues with a disrupted external balance on the foreign exchange market. Second Generation currency crises models on the other side focus on the internal macroeconomic balance. The stability of a fixed exchange rate is depending on the economic benefit of the exchange rate system in relation to the social costs of maintaining it. As soon as social costs are increasing and showing up in deteriorating fundamentals, this leads to a speculative attack on the fixed exchange rate system. The term Third Generation of currency crises finally summarizes a variety of currency crises theories. These are also arguing psychologically to explain phenomena as contagion and spill-over effects to rationalize crises detached from the fundamental situation. Apart from the apparent inconsistency of the main theories of currency crises, a further observation is that these explanations focus on the crisis country only while international monetary transmission effects are left out of consideration. These however are a central parameter for the stability of fixed exchange rate systems, in exchange rate theory as well as in empirical observations. Altogether, these findings provide the motivation for developing a theoretical approach which integrates the main elements of the different generations of currency crises theories and which integrates international monetary transmission. Therefore a macroeconomic approach is chosen applying the concept of the Monetary Conditions Index (MCI), a linear combination of the real interest rate and the real exchange rate. This index firstly is extended for international monetary influences and called MCIfix. MCIfix illustrates the monetary conditions required for the stability of a fixed exchange rate system. The central assumption of this concept is that the uncovered interest parity is maintained. The main conclusion is that the MCIfix only depends on exogenous parameters. In a second step, the analysis integrates the monetary policy requirements for achieving an internal macroeconomic stability. By minimizing a loss function of social welfare, a MCI is derived which pictures the economically optimal monetary policy MCIopt. Instability in a fixed exchange rate system occurs as soon as the monetary conditions for an internal and external balance are deviating. For discussing macroeconomic imbalances, the central parameters determining the MCIfix (and therefore the relation of MCIfix to MCIopt) are discussed: the real interest rate of the anchor country, the real effective exchange rate and a risk premium. Applying this theory framework, four constellations are discussed where MCIfix and MCIopt fall apart in order to show the central bank’s possibilities for reacting and the consequences of that behaviour. The discussion shows that the integrative approach manages to incorporate the central elements of traditional currency crises theories and that it includes international monetary transmission instead of reducing the discussion on an inconsistent domestic monetary policy. The theory framework for fixed exchange rates is finally applied in four case studies: the currency crises in Argentina, the crisis in the Czech Republic, the Asian currency crisis and the crisis of the European Monetary System. The case studies show that the developed monetary framework achieves integration of different generations of crises theories and that the monetary policy of the anchor country plays a decisive role in destabilising fixed exchange rate systems.
This dissertation contributes to the empirical analysis of economic development. The continuing poverty in many Sub-Saharan-African countries as well as the declining trend in growth in the advanced economies that was initiated around the turn of the millennium raises a number of new questions which have received little attention in recent empirical studies. Is culture a decisive factor for economic development? Do larger financial markets trigger positive stimuli with regard to incomes, or is the recent increase in their size in advanced economies detrimental to economic growth? What causes secular stagnation, i.e. the reduction in growth rates of the advanced economies observable over the past 20 years? What is the role of inequality in the growth process, and how do governmental attempts to equalize the income distribution affect economic development? And finally: Is the process of democratization accompanied by an increase in living standards? These are the central questions of this doctoral thesis.
To facilitate the empirical analysis of the determinants of economic growth, this dissertation introduces a new method to compute classifications in the field of social sciences. The approach is based on mathematical algorithms of machine learning and pattern recognition. Whereas the construction of indices typically relies on arbitrary assumptions regarding the aggregation strategy of the underlying attributes, utilization of Support Vector Machines transfers the question of how to aggregate the individual components into a non-linear optimization problem.
Following a brief overview of the theoretical models of economic growth provided in the first chapter, the second chapter illustrates the importance of culture in explaining the differences in incomes across the globe. In particular, if inhabitants have a lower average degree of risk-aversion, the implementation of new technology proceeds much faster compared with countries with a lower tendency towards risk. However, this effect depends on the legal and political framework of the countries, their average level of education, and their stage of development.
The initial wealth of individuals is often not sufficient to cover the cost of investments in both education and new technologies. By providing loans, a developed financial sector may help to overcome this shortage. However, the investigations in the third chapter show that this mechanism is dependent on the development levels of the economies. In poor countries, growth of the financial sector leads to better education and higher investment levels. This effect diminishes along the development process, as intermediary activity is increasingly replaced by speculative transactions. Particularly in times of low technological innovation, an increasing financial sector has a negative impact on economic development. In fact, the world economy is currently in a phase of this kind. Since the turn of the millennium, growth rates in the advanced economies have experienced a multi-national decline, leading to an intense debate about "secular stagnation" initiated at the beginning of 2015. The fourth chapter deals with this phenomenon and shows that the growth potentials of new technologies have been gradually declining since the beginning of the 2000s.
If incomes are unequally distributed, some individuals can invest less in education and technological innovations, which is why the fifth chapter identifies an overall negative effect of inequality on growth. This influence, however, depends on the development level of countries. While the negative effect is strongly pronounced in poor economies with a low degree of equality of opportunity, this influence disappears during the development process. Accordingly, redistributive polices of governments exert a growth-promoting effect in developing countries, while in advanced economies, the fostering of equal opportunities is much more decisive.
The sixth chapter analyzes the growth effect of the political environment and shows that the ambiguity of earlier studies is mainly due to unsophisticated measurement of the degree of democratization. To solve this problem, the chapter introduces a new method based on mathematical algorithms of machine learning and pattern recognition. While the approach can be used for various classification problems in the field of social sciences, in this dissertation it is applied for the problem of democracy measurement. Based on different country examples, the chapter shows that the resulting SVMDI is superior to other indices in modeling the level of democracy. The subsequent empirical analysis emphasizes a significantly positive growth effect of democracy measured via SVMDI.
A theory of managed floating
(2003)
After the experience with the currency crises of the 1990s, a broad consensus has emerged among economists that such shocks can only be avoided if countries that decided to maintain unrestricted capital mobility adopt either independently floating exchange rates or very hard pegs (currency boards, dollarisation). As a consequence of this view which has been enshrined in the so-called impossible trinity all intermediate currency regimes are regarded as inherently unstable. As far as the economic theory is concerned, this view has the attractive feature that it not only fits with the logic of traditional open economy macro models, but also that for both corner solutions (independently floating exchange rates with a domestically oriented interest rate policy; hard pegs with a completely exchange rate oriented monetary policy) solid theoretical frameworks have been developed. Above all the IMF statistics seem to confirm that intermediate regimes are indeed less and less fashionable by both industrial countries and emerging market economies. However, in the last few years an anomaly has been detected which seriously challenges this paradigm on exchange rate regimes. In their influential cross-country study, Calvo and Reinhart (2000) have shown that many of those countries which had declared themselves as ‘independent floaters’ in the IMF statistics were charaterised by a pronounced ‘fear of floating’ and were actually heavily reacting to exchange rate movements, either in the form of an interest rate response, or by intervening in foreign exchange markets. The present analysis can be understood as an approach to develop a theoretical framework for this managed floating behaviour that – even though it is widely used in practice – has not attracted very much attention in monetary economics. In particular we would like to fill the gap that has recently been criticised by one of the few ‘middle-ground’ economists, John Williamson, who argued that “managed floating is not a regime with well-defined rules” (Williamson, 2000, p. 47). Our approach is based on a standard open economy macro model typically employed for the analysis of monetary policy strategies. The consequences of independently floating and market determined exchange rates are evaluated in terms of a social welfare function, or, to be more precise, in terms of an intertemporal loss function containing a central bank’s final targets output and inflation. We explicitly model the source of the observable fear of floating by questioning the basic assumption underlying most open economy macro models that the foreign exchange market is an efficient asset market with rational agents. We will show that both policy reactions to the fear of floating (an interest rate response to exchange rate movements which we call indirect managed floating, and sterilised interventions in the foreign exchange markets which we call direct managed floating) can be rationalised if we allow for deviations from the assumption of perfectly functioning foreign exchange markets and if we assume a central bank that takes these deviations into account and behaves so as to reach its final targets. In such a scenario with a high degree of uncertainty about the true model determining the exchange rate, the rationale for indirect managed floating is the monetary policy maker’s quest for a robust interest rate policy rule that performs comparatively well across a range of alternative exchange rate models. We will show, however, that the strategy of indirect managed floating still bears the risk that the central bank’s final targets might be negatively affected by the unpredictability of the true exchange rate behaviour. This is where the second policy measure comes into play. The use of sterilised foreign exchange market interventions to counter movements of market determined exchange rates can be rationalised by a central bank’s effort to lower the risk of missing its final targets if it only has a single instrument at its disposal. We provide a theoretical model-based foundation of a strategy of direct managed floating in which the central bank targets, in addition to a short-term interest rate, the nominal exchange rate. In particular, we develop a rule for the instrument of intervening in the foreign exchange market that is based on the failure of foreign exchange market to guarantee a reliable relationship between the exchange rate and other fundamental variables.
Subject of the present study is the agent-based computer simulation of Agent Island. Agent Island is a macroeconomic model, which belongs to the field of monetary theory. Agent-based modeling is an innovative tool that made much progress in other scientific fields like medicine or logistics. In economics this tool is quite new, and in monetary theory to this date virtual no agent-based simulation model has been developed. It is therefore the topic of this study to close this gap to some extend. Hence, the model integrates in a straightforward way next to the common private sectors (i.e. households, consumer goods firms and capital goods firms) and as an innovation a banking system, a central bank and a monetary circuit. Thereby, the central bank controls the business cycle via an interest rate policy; the according mechanism builds on the seminal idea of Knut Wicksell (natural rate of interest vs. money rate of interest). In addition, the model contains also many Keynesian features and a flow-of-funds accounting system in the tradition of Wolfgang Stützel. Importantly, one objective of the study is the validation of Agent Island, which means that the individual agents (i.e. their rules, variables and parameters) are adjusted in such a way that on the aggregate level certain phenomena emerge. The crucial aspect of the modeling and the validation is therefore the relation between the micro and macro level: Every phenomenon on the aggregate level (e.g. some stylized facts of the business cycle, the monetary transmission mechanism, the Phillips curve relationship, the Keynesian paradox of thrift or the course of the business cycle) emerges out of individual actions and interactions of the many thousand agents on Agent Island. In contrast to models comprising a representative agent, we do not apply a modeling on the aggregate level; and in contrast to orthodox GE models, true interaction between heterogeneous agents takes place (e.g. by face-to-face-trading).
This paper examines the potential reinforcement of motivated beliefs when individuals with identical biases communicate. We propose a controlled online experiment that allows to manipulate belief biases and the communication environment. We find that communication, even among like-minded individuals, diminishes motivated beliefs if it takes place in an environment without previously declared external opinions. In the presence of external plural opinions, however, communication does not reduce but rather aggravates motivated beliefs. Our results indicate a potential drawback of the plurality of opinions - it may create communication environments wherein motivated beliefs not only persist but also become contagious within social networks.
Die Arbeit setzt sich mit Unterschieden des geldpolitischen Transmissionsprozesses im Verarbeitenden Gewerbe der Bundesrepublik Deutschland auseinander. Dazu wird der Sektor nach der Systematik der BACH-Datenbank der europäischen Kommission in 10 Branchen eingeteilt. An eine kurze Betrachtung der Industrie aus makro- und mikroökonomischer Sicht schließt sich die Beantwortung der ersten Frage an: Reagieren die Industriebranchen unterschiedlich auf geldpolitische Impulse? Monetäre Innovationen werden mit Anstiegen der kurzfristigen Geldmarktzinsen abgebildet. Damit konzentriert sich die Analyse auf die Auswirkungen von restriktiven Maßnahmen. Als Referenzgrößen wurden die Produktion und die Erzeugerpreise ausgewählt. Die Analyse der Auswirkungen auf die Produktionsentwicklung zeigt, dass ein Großteil der Industriezweige erwartungsgemäß mit Rückführungen auf Zinserhöhungen reagiert. Die stärksten Produktionseinbußen ergeben sich hierbei in der Branche Herstellung elektrischer Geräte, in der Grundlegenden Metallverarbeitung und im Industriezweig Metallerzeugnisse mit Maschinenbau. Dagegen sind die in vielen Branchen entdeckten kurzfristigen Preisanstiege auf den ersten Blick ein Rätsel. Denn die Notenbank verfolgt ihre Absicht – nämlich die Stabilisierung der Verbraucherpreise – mit einer restriktiven Ausrichtung, wenn die Preise Gefahr laufen, stärker als zielkonform anzusteigen. Die vorliegenden Ergebnisse sprechen daher dafür, dass in der kurzen Frist jedoch zusätzlicher Preisdruck auf vorgelagerter Stufe erzeugt wird. Wie können die unterschiedlichen Auswirkungen auf die Branchen erklärt werden? Dieser Frage widmet sich der zweite Hauptblock der Arbeit. In einem ersten Schritt werden die relevanten Transmissionstheorien diskutiert. Die empirische Überprüfung ausgewählter Transmissionstheorien mit Branchendaten hat dabei einige grundlegende Einsichten ans Licht gebracht. Erstens korreliert die Stärke der Outputveränderung deutlich mit der Zinssensitivität der Nachfrage nach den produzierten Gütern der Branche. Zweitens können die beobachteten Preisanstiege vereinzelt mit einer Dominanz der Geldpolitik als Angebotsschock erklärt werden. Zu einem großen Teil bleibt die identifizierte Preisreaktion aber ein Rätsel. Und drittens scheint der Bilanzkanal – zumindest gemäß der hier gewählten Identifikationsstrategie – nicht grundsätzlich geeignet zu sein, die Anpassungsprozesse in den untersuchten Branchen zu erklären. Dies sollte daran liegen, dass dieser Transmissionskanal Bonitätscharakteristika und -veränderungen auf Unternehmensebene als Vehikel der Übertragung sieht.
This study investigates the credit channel in the transmission of monetary policy in Germany by means of a structural analysis of aggregate bank loan data. We base our analysis on a stylized model of the banking firm, which specifies the loan supply decisions of banks in the light of expectations about the future course of monetary policy. Using the model as a guide, we apply a vector error correction model (VECM), in which we identify long-run cointegration relationships that can be interpreted as loan supply and loan demand equations. In this way, the identification problem inherent in reduced form approaches based on aggregate data is explicitly addressed. The short-run dynamics is explored by means of innovation analysis, which displays the reaction of the variables in the system to a monetary policy shock. The main implication of our results is that the credit channel in Germany appears to be effective, as we find that loan supply effects in addition to loan demand effects contribute to the propagation of monetary policy measures.
Ziel dieser Arbeit ist die Untersuchung der Bedeutung der Spezifikation für Ratingmodelle zur Prognose von Kreditausfallwahrscheinlichkeiten. Ausgehend von dem in der Bankenpraxis etablierten Logit-Modell werden verschiedene Modellerweiterungen diskutiert und hinsichtlich ihrer Eigenschaften als Ratingmodelle empirisch und simulationsbasiert untersucht. Die Interpretierbarkeit und die Prognosegüte der Modelle werden dabei gleichermaßen berücksichtigt. Besonderes Augenmerk wird auf Mixed Logit-Modelle zur Abbildung individueller Heterogenität gelegt. Die Ergebnisse zeigen, dass die Spezifikation einen wichtigen Einfluss auf die Eigenschaften von Ratingmodellen hat und dass insbesondere mit Hilfe von Mixed Logit-Ansätzen sinnvoll interpretierbare Ratingmodelle mit guten Prognoseeigenschaften erlangt werden können.
This dissertation focuses on the drivers of international capital flows to emerging markets, as well as the determinants of crises in emerging markets. Particular emphasis is devoted to the role of U.S. monetary policy. The dissertation consists of three independent chapters.
Chapter 1 is a survey of the voluminous empirical literature on the drivers of capital flows to emerging markets. The contribution of the survey is to provide a comprehensive assessment of what we can say with relative confidence about the empirical drivers of EM capital flows. The evidence is structured based on the recognition that the drivers of capital flows vary over time and across different types of capital flows. The drivers are classified using the traditional framework for external and domestic factors (often referred to as “push versus pull” drivers), which is augmented by a distinction between cyclical and structural factors. Push factors are found to matter most for portfolio flows, somewhat less for banking flows, and least for foreign direct investment (FDI). Pull factors matter for all three components, but most for banking flows. A historical perspective suggests that the recent literature may have overemphasized the importance of cyclical factors at the expense of longer-term structural trends.
Chapter 2 undertakes an empirical analysis of the drivers of portfolio flows to emerging markets, focusing on the role of Fed policy. A time series model is estimated to analyze two different concepts of high frequency portfolio flows, including monthly data on flows into investment funds and a novel dataset on monthly portfolio flows obtained from individual national sources. The evidence presented in this chapter suggests a more nuanced interpretation of the role of U.S. monetary policy. In the existing literature, it is traditionally argued that Fed policy tightening is unambiguously negative for capital flows to emerging markets. By contrast, the findings presented in this dissertation suggest that it is the surprise element of monetary policy that affects EM portfolio inflows. A shift in market expectations towards easier future U.S. monetary policy leads to greater foreign portfolio inflows and vice versa. Given current market expectations of sustained increases in the federal funds rate in coming years, EM portfolio flows could be boosted by a slower pace of Fed tightening than currently expected or could be reduced by a faster pace of Fed tightening.
Chapter 3 examines the role of U.S. monetary policy in determining the incidence of emerging market crises. A negative binomial count model and a panel logit model are estimated to analyze the determinants of currency crises, banking crises, and sovereign defaults in a group of 27 emerging economies. The estimation results suggest that the probability of crises is substantially higher (1) when the federal funds rate is above its natural level, (2) during Fed policy tightening cycles, and (3) when market participants are surprised by signals that the Fed will tighten policy faster than previously expected. These findings contrast with the existing literature, which generally views domestic factors as the dominant determinants of emerging market crises. The findings also point to a heightened risk of emerging market crises in the coming years if the Fed continues to tighten monetary policy.
The aim of this thesis is to examine the competition patterns that exist between originators and generics by focusing on the articulations between regulation and incentives to innovate.
Once the characteristics of regulation in pharmaceutical markets is reviewed in the first chapter and an analysis of some current challenges related to cost-containment measures and innovation issues is performed, then in the second chapter, an empirical study is performed to investigate substitution patterns. Based on the EC´s merger decisions in the pharmaceutical sector from 1989 to 2011, this study stresses the key criteria to define the scope of the relevant product market based on substitution patterns and shows the trend towards a narrower market in time.
Chapters three and four aim to analyse in depth two widespread measures, the internal reference pricing system in off-patent markets, and risk-sharing schemes in patent-protected markets. By taking into account informational advantages of originators over generics, the third chapter shows the extent to which the implementation of a reference price for off-patent markets can contribute in promoting innovation.
Finally, in the fourth chapter, the modeling of risk-sharing schemes explains how such schemes can help in solving moral hazard and adverse selection issues by continuously giving pharmaceutical companies incentives to innovate and supplying medicinal products of a higher quality.