What caused the great recession in the Eurozone? What could have avoided it?

Philippe Martin, Thomas Philippon 11 November 2014

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There is a wide disagreement about the nature and cause of the Eurozone crisis. Some see it as driven by fiscal indiscipline, some emphasise excessive private leverage, while others focus on external imbalances, sudden stops, or competitiveness divergence due to fixed exchange rates, as these quotes illustrate:

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Topics:  Global crisis Macroeconomic policy

Tags:  EZ crisis, Macroprudential policy, peripheral countries

Monetary policy and long-term trends

Charles A.E. Goodhart, Philipp Erfurth 03 November 2014

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Introduction

There has been a long-term downward trend in the share and strength of labour in national income, which is depressing both demand and inflation. This has prompted ever more expansionary monetary policies. While understandable, indeed appropriate, within a short-term business cycle context, this has exacerbated longer-term trends, increasing inequality and financial distortions. Perhaps the most fundamental problem has been over-reliance on debt finance (leverage).

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Topics:  Financial markets Macroeconomic policy Monetary policy

Tags:  monetary policy, Inequality, debt, leverage, wages, labour share, globalisation, consumption, propensity to consume, fiscal policy, Ageing, interest rates, investment, asset prices, housing, house prices, exchange rates, global crisis, mortgages, sub-prime crisis, Macroprudential policy, structural reforms, balance sheets, deleveraging, equity, shared-equity mortgages, Help to Buy

The great mortgaging

Òscar Jordà, Alan Taylor, Moritz Schularick 12 October 2014

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Understanding the causes and consequences of the rise of finance is a first order concern for macroeconomists and policymakers. The increasing size and leverage of the financial sector has been interpreted as an indicator of excessive risk taking1 and has been linked to the increase in income inequality in advanced economies,2 as well as to the growing political influence of the financial industry (Johnson and Kwak 2010). Yet surprisingly little is known about the driving forces behind these trends.

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Topics:  Economic history Financial markets Global crisis

Tags:  household debt, household leverage ratios, Macroprudential policy

The impact of capital requirements on bank lending

Jonathan Bridges, David Gregory, Mette Nielsen, Silvia Pezzini, Amar Radia, Marco Spaltro 02 September 2014

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The financial crisis has led to widespread support for greater use of time-varying capital requirements on banks as a macroprudential policy tool (see for example Yellen 2010 and Hanson et al. 2011). Policymakers aim to use these tools to enhance the resilience of the financial system, and, potentially, to curb the credit cycle. Under Basel III, national regulatory authorities will be tasked with setting countercyclical capital buffers over the economic cycle.

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Topics:  Financial markets

Tags:  Macroprudential policy, capital requirements, regulation, bank regulation, BASEL III, Bank of England, financial crisis, bank lending, UK

Making macroprudential regulation operational

Anil K Kashyap , Dimitri Tsomocos, Alexandros Vardoulakis 18 July 2014

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The IMF staff (Benes et al. 2014) recently unveiled a new model that “has been developed at the IMF to support macrofinancial and macroprudential policy analysis”. In introducing the model they argue that “such new analytical frameworks require a major revamp of the conventional linear dynamic stochastic general equilibrium (DSGE) models”. We agree with Benes et al.

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Topics:  Macroeconomic policy

Tags:  banks, Macroprudential policy, savers, model building

It’s time to deploy macroprudential policy: results from the Centre for Macroeconomics July Survey

Angus Armstrong, Francesco Caselli, Jagjit Chadha, Wouter den Haan 08 July 2014

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The Centre for Macroeconomics (CFM) – an ESRC-funded research centre including the University of Cambridge, the London School of Economics (LSE), University College London (UCL) and the National Institute of Economic and Social Research (NIESR) – is today publishing the results of its fourth monthly survey.1 The surveys are designed to inform the public about the views held by leading UK-based macroeconomists on important questions about macroeconomics and public policy.

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Topics:  Macroeconomic policy

Tags:  UK, housing market, Macroprudential policy

Model risk and the implications for risk management, macroprudential policy, and financial regulations

Jon Danielsson, Kevin James, Marcela Valenzuela, Ilknur Zer 08 June 2014

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Risk forecasting is central to macroprudential policy, financial regulations, and the operations of financial institutions. Therefore, the accuracy of risk forecast models – model risk analysis – should be a key concern for the users of such models. Surprisingly, this does not appear to be the case. Both industry practice and regulatory guidance currently neglect the risk that the models themselves can pose, even though this problem has long been noted in the literature (see for example Hendricks 1996 and Berkowitz and O’Brien 2002).

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Topics:  Financial markets

Tags:  financial crises, financial regulation, forecasting, risk management, Macroprudential policy

Capital controls in the 21st century

Barry Eichengreen, Andrew K Rose 05 June 2014

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Capital controls are back. The IMF (2012) has softened its earlier opposition to their use. Some emerging markets – Brazil, for example – have made renewed use of controls since the global financial crisis of 2008–2009. A number of distinguished economists have now suggested tightening and loosening controls in response to a range of economic and financial issues and problems. While the rationales vary, they tend to have in common the assumption that first-best policies are unavailable and that capital controls can be thought of as a second-best intervention.

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Topics:  International finance

Tags:  IMF, capital flows, global financial crisis, capital controls, capital, Macroprudential policy

Estimating the impact of changes in aggregate bank capital requirements during an upswing

Joseph Noss, Priscilla Toffano 06 April 2014

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The recent financial crisis and economic contraction that followed highlighted the crucial role that banks play in facilitating the extension of credit and enabling economic growth. This underlies the economic rationale for imposing regulations on the banking industry, including minimum capital requirements designed to mitigate risks banks would not otherwise account for in their behaviour.

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Topics:  Financial markets

Tags:  regulations, bank regulation, banking, capital requirements, banks, BASEL III, credit, Macroprudential policy, bank capital

How much is enough? The case of the Resolution Fund in Europe

Thomas Huertas, María J Nieto 18 March 2014

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During the crisis, individual institutions such as Hypo Real Estate required public assistance of €100 billion or more.1 So how can a European Resolution Fund of only €55 billion possibly suffice for all banks in the Eurozone?

It could, provided the Fund is part of a well-designed architecture for regulation, supervision, and resolution, that makes banks not only less likely to fail but also safe to fail – meaning that they can be resolved without cost to the taxpayer and without significant disruption to financial markets or the economy at large.

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Topics:  EU institutions Financial markets International finance

Tags:  eurozone, regulation, banking, systemic risk, microprudential regulation, bank resolution, Macroprudential policy, bail-in, European Resolution Fund

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