A condensed version of the programme can be found here.
Day 1: Tuesday 5 July 2022
09:10 Keynote Address
Nellie Liang, Under Secretary of the Treasury for Domestic Finance, U.S. Treasury Department
10:30 Session: Banking and Regulation
“Liquidity and Safety over the Business Cycle” by Alexander Haas (University of Oxford) & Andrea Ferrero (University of Oxford), Discussant: Matthias Rottner (Bundesbank)
Abstract: This paper builds on two empirical observations: (i) Early stages of the 2007/08 financial crisis were driven by a dry-up of liquidity, and (ii), more generally, fluctuations in the availability of safe and liquid assets are relevant drivers of the business cycle. In a medium-scale new-Keynesian model with heterogeneous firms and two financial frictions (on asset liquidity and asymmetric information about asset quality), we endogenize and study both liquidity and safety premia of private assets. Using US macro and financial data to estimate the model, we (i) assess the relative importance of shocks to asset liquidity and safety over the business cycle, and (ii) study the 2007/08 financial crisis in detail, accounting for both conventional and unconventional monetary policy measures at the zero lower bound (ZLB). In further work, we aim to provide novel insights on the so-called liquidity puzzle in macroeconomics and highlight fiscal-monetary interactions in the spirit of a financial channel of government debt issuance.
“The Cross Border Effects of Bank Capital Regulation” by Saleem Bahaj (Bank of England & University College London) and Frederic Malherbe (University College London), Discussant: Rustam Jamilov (Oxford)
Abstract: We propose a model for studying the international collaboration of bank capital regulation under the principle of reciprocity. We show that such a regime makes countries strategically compete for scarce bank equity capital. Raising capital requirements in a country may generate bank capital outflows as well as inflows. We pin down the condition for the sign of the capital flow and the associated externality and highlight the implications for macroprudential regulation. Compared to full collaboration, individual countries are likely to set Basel III’s Counter-Cyclical Capital Buffer too high in normal times, and too low in bad times.
“The Geography of Bank Deposits and the Origins of Aggregate Fluctuations” by Shohini Kundu (University of California, Los Angeles), Seongjin Park (University of Chicago – Booth School of Business) & Nishant Vats (University of Chicago Booth School of Business), Discussant: Veronica Rappoport (London School of Economics)
Abstract: This paper presents a new mechanism through which the geography of bank deposits increases financial fragility. We document a new fact about the within-bank geographic concentration of deposits — 30% of bank deposits are concentrated in a single county. Hence, bank deposits are geographically concentrated. We hypothesize that large shocks to these concentrated areas can amplify through bank internal capital markets and generate aggregate fluctuations. We combine the within-bank geographic concentration of deposits with local natural disaster-induced property damages to construct novel bank deposit shocks. On aggregate, the bank deposit shocks can explain 3.30% of variation in economic growth. Specifically, local disaster shocks result in aggregate fluctuations through their effect on deposits, which negatively affect bank liquidity creation. Financial frictions such as regulatory constraints, informational advantages, and borrower constraints are critical for the aggregation of local shocks.
13:30 Session: Monetary Theory
“Money Talks: Information and Seignorage” by Maxi Guennewig (University of Bonn), Discussant: Tai-Wei Hu (Bristol)
Abstract: This paper analyses the consequences for monetary policy in the presence of currencies issued by firms. Such currencies generate seignorage revenues and information on consumers. In a benchmark model of imperfectly competing firms, information breaks the usual portfolio inde-terminacy as in Kareken and Wallace (1981): firms do not accept their competitors’ currencies. This limits the issuer’s seignorage base. Firms then optimally implement the Friedman rule to remove their seignorage income altogether. As a result, public currency is unable to compete unless the central bank follows suit, resulting in deflation. However, private currency market power—modelled as concentration of decision powers in a currency consortium as well as network effects—induces inflationary pressures, breaking the benchmark results.
“The Open Economy Macroeconomics of Central Bank Digital Currencies” by Marco Pinchetti (Bank of England), Michael Kumhof (Bank of England, CEPR and Centre for Macroeconomics), Phurichai Rungcharoenkitkul (Bank for International Settlements), and Andrej Sokol (European Central Bank), Discussant: Tim Jackson (University of Liverpool)
Abstract: We study the open-economy implications of introducing CBDCs into a 2-country DSGE environment that features a realistic financial system, with households deriving liquidity services from both CBDCs and bank deposits. We make several assumptions about the architecture and design features of CBDCs:
1) We focus on retail CBDC, and allow households to hold CBDCs in any currency;
2) CBDCs are strictly separated from reserves, and are remunerated at an interest rate below the policy rate due to their non-pecuniary convenience yield;
3) CBDCs are introduced via central bank purchases of government bonds or transfers to the government budget, ruling out direct and guaranteed conversion of bank deposits into CBDC at commercial banks;
4) CBDCs are separately issued in both countries.
We show that the introduction of CBDCs by a single economy is highly beneficial in terms of output and welfare. The effects of financial disturbances are not exacerbated by the presence of CBDCs, in fact their effect on banks is typically mitigated. Large reallocations of liquidity between currencies, and between deposits and CBDC, yield benign balance sheet adjustments and small real effects. Finally, a more aggressively countercyclical use of the interest rate on CBDC could be highly beneficial in terms of stabilizing output and inflation.
15:10 Session: Monetary Policy
“Getting in all the Cracks: Monetary Policy, Financial Vulnerabilities, and Macro Risk” by Andrea Ajello (Board of Governors of the Federal Reserve System) & Tyler Pike. Discussant: Ambrogio Cesa-Bianchi (Bank of England).
Abstract: We estimate the effect of monetary policy on financial vulnerabilities and the implications for macroeconomic tail risk. We extract a small set of common factors from a large dataset of financial vulnerability indicators and estimate a factor-augmented VAR to study the response of aggregate economic activity, inflation, and financial vulnerabilities to proxy monetary policy shocks. Exploiting the small set of factors extracted through the model we also estimate the effect of changes in vulnerabilities on macroeconomic tail risk via quantile regressions. We document that an unexpected tightening in the monetary policy stance puts modest downward pressure on overall financial vulnerabilities, trading off a sizable deterioration of macroeconomic conditions and a modest increased risks for output and inflation in the short run, against a moderate reduction in downside risk to the outlook in the medium run.
“Perceptions about Monetary Policy” by Michael Bauer (University of Hamburg), Carolin E. Pflueger, Adi Sunderam. Discussant: Ilaria Piatti (Queen Mary University of London)
Abstract: We estimate time-varying perceptions about the Fed’s monetary policy rule from cross-sectional survey data and document systematic shifts in the perceived rule that are relevant for both monetary policy and asset pricing. First, the perceived reaction coefficient to the output gap varies over the business cycle, consistent with a cycle of quick rate cuts but gradual tightenings. Second, this variation in the perceived rule explains changes in the sensitivity of interest rates to macroeconomic announcements. Third, high-frequency monetary policy surprises lead to updates in beliefs about the policy rule that depend on the state of the business cycle and are consistent with the predictions of rational learning. Fourth, when monetary policy is perceived to be more responsive to real activity, risk premia on long-term Treasury bonds are low, consistent with standard asset pricing logic. Our findings can explain several empirical puzzles, such as systematic forecast errors about short-term interest rates and the decoupling of long-term rates during tightening cycles.
“Government Debt Management and Inflation with Real and Nominal Bonds” by Vytautas Valaitis (European University Institute), Lukas Schmid (University of Southern California) & Alessandro T. Villa (Federal Reserve Bank of Chicago), Discussant: Sarah Mouabbi (Banque de France)
Abstract: Rising inflation in the wake of unprecedented debt financed stimulus packages raises concerns about a looming return of persistent inflation, as governments may be tempted to monetize debt. In this paper, we ask whether governments can use real (TIPS) bonds as part of the government debt portfolio to commit not to create elevated inflation? We thus examine optimal debt management in a setting where (i) the government can issue long-term nominal and real bonds, (ii) the monetary authority sets short-term interest rates according to a Taylor rule, and (iii) inflation has real costs as prices are sticky. Nominal debt can be inflated away giving ex-ante flexibility, but real bonds constitute a real commitment ex-post. We show that the optimal government debt portfolio includes a substantial allocation to both real and nominal bonds, which lowers inflation levels but increases inflation volatility in equilibrium. The associated lower correlation between inflation risk and government expenditure is reflected in welfare gains through real debt management. Quantitatively, our results are stronger i) the higher the initial debt level, and ii) the longer debt maturity. Our findings suggest that TIPS should be an important tool for debt management in the presence of looming inflation.
17:30 Panel: Monetary and Fiscal Policy Interactions
Panel 1: Jagjit Chadha (NIESR), Hanno Lustig (Stanford University), Ricardo Reis (London School of Economics) & Silvana Tenreyo (Bank of England).
18.40 Young Economist Prize Ceremony
- David Xiaoyu Xu, University of Texas at Austin: Financial Market Structure and the Supply of Safe Assets: An Analysis of the Leveraged Loan Market
- Elizaveta Sizova, KU Leuven: Banks’ Next Top Model
- Fabian Seyrich, Diw, Berlin School of Economics: A Behavioral Heterogeneous Agent New Keynesian Model
- Fabricius Somogyi, University of St. Gallen: Dollar Dominance in FX Trading
- Ghassane Benmir, London School of Economics: Policy Interaction and the Transition to Clean Technology
- Hillary Stein, Harvard University: Got Milk? The Effect of Export Price Shocks on Exchange Rates
- Niklas Schmitz, University of Cambridge: The Downside Risk Channel of Monetary Policy
19.00 Drinks reception and Poster Discussions
- “Heterogeneous information, subjective model beliefs, and the time-varying transmission of shocks” by Alistair Macaulay (University of Oxford)
- “Fintech Entry, Firm Financial Inclusion and Macroeconomic Dynamics in Emerging Economies” by Federico Mandelman (Federal Reserve Bank of Atlanta)
- “Learning and Misperception of Makeup Strategies” by James Hebden (Board of Governors of the Federal Reserve System)
- “The macroeconomic effects of temperature shocks in Europe” by Marta Maria Pisa (Sapienza University of Rome)
Day 2: Wednesday 6 July 2022
09:10 Keynote Address
Huw Pill, Chief Economist and Executive Director for Monetary Analysis, Bank of England
10:30 Session: Risks
“Asset Overhang and Technological Change” by Joris Tielens (National Bank of Belgium), Hans Degryse & Tarik Roukny, Discussant: Joseba Martinez (London Business School)
Abstract: Investors face reduced incentives to finance projects that devalue their legacy positions. We formalize this “asset overhang” and study its drivers. We apply our framework to the climate-banking nexus, where the net-zero transition effectively poses a dilemma to banks: while environmental innovation can be profitable, its widespread dissemination risks disrupting the value of legacy positions. Using granular firm-level data on innovation and diffusion of environmental goods & services, we document the presence of asset overhang as innovators (diffusors) of disruptive environmental technologies are approximately 5.9 p.p. (0.5 p.p) less likely to receive bank credit compared to non-disruptive counterparts. Individual investors with less legacy positions at risk mitigate the economywide asset overhang problem, thereby facilitating technological transition.
“Credit Horizons” by John Moore (University of Edinburgh), Nobuhiro Kiyotaki (Princeton) & Shengxing Zhang (London School of Economics) Discussant: Gabor Pintor (Bank of England)
Abstract: Entrepreneurs appear to raise funds largely against their near-term revenues, even when their investment has a longer horizon. To explain why, we develop a model of credit horizons in which the inalienable human capital of an entrepreneur-cum-engineer is essential for constructing and then maintaining a production plant. The further distant into the future, the larger the fraction of the revenue flow that can be attributed to the engineer’s cumulative maintenance. Looking ahead from the time of investment, we see that because the engineer cannot precommit to work for less than her marginal contribution to (future) production, as time passes more of the surplus goes (has effectively already gone) to her – and concomitantly less goes to financial claimants. Hence the investing engineer’s fundraising capacity is largely governed by revenues in the near horizon. We use our framework to examine how credit horizons interact with plant dynamics and the evolution of productivity. We also show that a permanent fall in the interest rate in small open economy can lead to a temporary boom followed by slower growth in the long run.
“Endogenous Production Networks under Supply Chain Uncertainty” by Alexandr Kopytov (University of Hong Kong), Bineet Mishra (Cornell University), Mathieu Taschereau-Dumouchel (Cornell University) Kristoer Nimark (Cornell University), Discussant: Matteo Bizzarri (Bocconi)
Abstract: Supply chain disturbances can lead to substantial increases in production costs. To mitigate these risks, firms may take steps to reduce their reliance on volatile suppliers. We construct a model of endogenous network formation to investigate how these decisions affect the structure of the production network and the level and volatility of macroeconomic aggregates. When uncertainty increases in the model, producers prefer to purchase from more stable suppliers, even though they might sell at higher prices. The resulting reorganization of the network leads to less macroeconomic volatility, but at the cost of a decline in aggregate output. The model also predicts that more productive and stable firms have higher Domar weights – a measure of their importance as suppliers – in the equilibrium network. We calibrate the model to U.S. data and find that the mechanism can account for a sizable decline in expected GDP during periods of high uncertainty like the Great Recession.
13:30 Panel: Central Bank Digital Currency
Panel 2: Jumana Saleheen (Chief Economist, Vanguard Asset Management), Sir Jon Cunliffe (Bank of England), Cecilia Skingsley (Sveriges Riksbank), Raphael Auer (BIS Innovation Hub Eurosystem Centre), George Selgin (Cato Institute)
15:00 Keynote: Fireside Conversation
With Raghuram Rajan (Katherine Dusak Miller Distinguished Service Professor of Finance at Chicago Booth) and Prof. David Aikman (Director, Qatar Centre for Global Banking & Finance)
16:00 Session: Markets
“How do repo markets behave under stress? Evidence from the COVID-19 crisis” by Anne-Caroline Hüser (Bank of England), Caterina Lepore (International Monetary Fund), Luitgard Anna Maria Veraart (London School of Economics & Political Science), Discussant: Nina Boyarchenko (Federal Reserve Bank of New York)
Abstract: We examine how the repo market operates during liquidity stress by applying network analysis to novel transaction-level data of the overnight gilt repo market including the COVID-19 crisis. During this crisis, the repo network becomes more connected, with most institutions relying on existing trade relationships to transact. There are however significant changes in the repo volumes and spreads during the stress relative to normal times. We find a significant increase in volumes traded in the cleared segment of the market. This reflects a preference for dealers and banks to transact in the cleared rather than the bilateral segment. Funding decreases towards non-banks, only increasing for hedge funds. Further, spreads are higher when dealers and banks lend to rather than borrow from non-banks. Our results can inform the policy debate around the behaviour of banks and non-banks in recent liquidity stress and on widening participation in CCPs by nonbanks.
“Demand-Supply Imbalance Risk and Long-Term Swap Spreads” by Aytek Malkhozov (Queen Mary University of London), Samuel G. Hanson, Gyuri Venter, Discussant: Dimitri Vayanos (London School of Economics)
Abstract: We develop a model in which long-term swap spreads are determined by end users’ demand for swaps, constrained dealers’ supply of swaps, and the risk of future imbalances between demand and supply. Exploiting the sign restrictions implied by our model, we estimate these unobserved demand and supply factors using data on swap spreads and a proxy for dealers’ swap arbitrage positions. We find that demand and supply play equally important roles in driving the observed variation in swap spreads. Yet, as predicted by the model, demand plays a more important role in shaping the expected returns on swap spread arbitrage, which embed a premium for bearing future demand-supply imbalance risk. Hedging activity from mortgage investors seems to play a key role in driving the demand for swaps. By contrast, the supply of swaps is closely linked to proxies for the tightness of dealers’ constraints. Finally, our analysis helps explain the relationship between swap spreads and other no-arbitrage violations.