Download or read book Asset Prices and Aggregate Demand in a Covid 19 Shock written by Ricardo J. Caballero and published by . This book was released on 2020 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper we: (i) provide a model of the endogenous risk intolerance and severe aggregate demand contractions following a large real (non-financial) shock; and (ii) demonstrate the effectiveness of Large Scale Asset Purchases (LSAPs) in addressing these contractions. The key mechanism stems from heterogeneous risk tolerance: as a recessionary shock hits the economy and brings down asset prices, risk-tolerant agents' wealth share declines and their leverage rises endogenously. This reduces the market's risk tolerance and generates downward pressure on asset prices and aggregate demand. When monetary policy is unconstrained, it can offset the decline in risk tolerance with an interest rate cut that boosts the market's Sharpe ratio. However, if the interest rate policy is constrained, new contractionary feedbacks arise: recessionary shocks lead to further asset price and output drops, which feed the risk-off episode and trigger a downward loop. In this context, LSAPs improve asset prices and aggregate demand by transferring risk to the government's balance sheet, which reduces the market's required Sharpe ratio. Optimal LSAPs are larger when the (consolidated) government has greater future fiscal capacity and the downward spiral is more severe. In an extension, we show how corporate debt overhang problems strengthen our mechanisms. The Covid-19 shock and the large response by all the major central banks provide a vivid illustration of the environment we seek to capture.

Download or read book A Model of Endogenous Risk Intolerance and LSAPs written by Ricardo J. Caballero and published by . This book was released on 2020 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper we: (i) provide a model of the endogenous risk intolerance and severe asset price and aggregate demand contractions following an adverse real (non-financial) shock; and (ii) demonstrate the effectiveness of Large Scale Asset Purchases (LSAPs) in addressing these contractions. The key mechanism stems from heterogeneous risk tolerance: as a recessionary shock hits the economy and brings down asset prices, risk-tolerant agents' wealth share declines and their leverage rises endogenously. This reduces the market's risk tolerance and generates downward pressure on asset prices and aggregate demand. When monetary policy is unconstrained, it can offset the decline in risk tolerance with an interest rate cut that boosts the market's Sharpe ratio. However, if the interest rate policy is constrained, new contractionary feedbacks arise: recessionary shocks lead to further asset price and output drops, which feed the risk-o¤ episode and trigger a downward loop. In this context, LSAPs improve asset prices and aggregate demand by transferring risk to the government's balance sheet, which reduces the market's required Sharpe ratio and reverses the contractionary feedbacks. Quantitatively, we show that aggregate shocks and LSAPs have large impacts on asset prices when the model is calibrated to fit the inelastic demand for aggregate assets uncovered in recent literature. We also show that heterogeneity in risk tolerance explains part of the demand inelasticity in normal times, and further reduces the elasticity after a recessionary shock. The Covid-19 shock and the large response by all major central banks provide a vivid illustration of the environment we seek to capture.

Download or read book A Model of Asset Price Spirals and Aggregate Demand Amplification of a Covid 19 Shock written by Ricardo J. Caballero and published by . This book was released on 2020 with total page 33 pages. Available in PDF, EPUB and Kindle. Book excerpt: We provide a model of endogenous asset price spirals and severe aggregate demand contractions following a large supply shock. The key mechanism stems from the drop in the wealth share of the economy’s risk-tolerant agents: as a recessionary supply shock hits the economy, their wealth declines and their leverage rises endogenously, causing them to offload some risky assets. When monetary policy is unconstrained, it can offset the decline in risk tolerance with an interest rate cut that boosts the market’s Sharpe ratio. However, if the interest rate policy is constrained, new contractionary feedbacks arise: recessionary supply shocks not only feed into reduced risk tolerance but also into further asset price and output drops, which feed the risk-off episode and trigger a downward loop. When pre-shock leverage ratios are high, multiple equilibria are possible, including one where risk-tolerant agents go bankrupt. A large-scale asset purchases (LSAPs) policy can be highly effective in this environment, as it reverses the downward asset price spiral. The Covid-19 shock and the large response by all the major central banks provide a vivid illustration of the environment we seek to capture.

Download or read book A Monetary Policy Asset Pricing Model written by Ricardo J. Caballero and published by . This book was released on 2022 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: We propose a model where monetary policy is the key determinant of aggregate asset prices (financial conditions). Spending decisions are made by a group of agents ("households") that respond to aggregate asset prices, but with noise, delays, and inertia. Asset pricing is determined by a different group of forward-looking agents ("the market"). The central bank ("the Fed") targets asset prices to close the output gap. Our model explains several facts, including why the Fed stabilizes asset price fluctuations driven by financial market shocks ("the Fed put/call"), but destabilizes asset prices in response to aggregate demand or supply shocks that induce macroeconomic imbalances (as in the late stages of the Covid-19 recovery). Although the Fed targets asset prices, it "cooperates" with the market to achieve its desired asset price. When the market and the Fed have different beliefs, the market perceives monetary policy "mistakes" that influence the policy rate the Fed needs to set. These perceived "mistakes" induce a policy risk premium and may generate a "behind the curve" phenomenon.

Download or read book Monetary Policy and Asset Price Overshooting written by Ricardo J. Caballero and published by . This book was released on 2020 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We analyze optimal monetary policy when asset prices influence aggregate demand with a lag (as is well documented). In this context, as long as the central bank's main objective is to minimize the output gap, the central bank optimally induces asset price overshooting in response to the emergence of a negative output gap. In fact, even if there is no output gap in the present but the central bank anticipates a weak recovery dragged down by insufficient demand, the optimal policy is to preemptively support asset prices today. This support is stronger if the acute phase of the recession is expected to be short lived. These dynamic aspects of optimal policy give rise to potentially large temporary gaps between the performance of financial markets and the real economy. One vivid example of this situation is the wide disconnect between the main stock market indices and the state of the real economy in the U.S. following the Fed's powerful response to the Covid-19 shock.

Download or read book COVID 19 and Emerging Markets written by Cem Çakmaklı and published by . This book was released on 2020 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Abstract: We quantify the macroeconomic effects of COVID-19 for a small open economy by calibrating a SIR-multi-sector-macro model to Turkey. Sectoral supply shocks are based on the proximity requirements in each sector and the ability to work from home. Physical proximity determines the supply shock through its effect on infection rates. Sectoral demand shocks incorporate domestic and foreign demand, both of which adjust with infection rates. We calibrate demand shocks during COVID-19 using real-time credit card purchase data. Our results show that the optimal policy, which yields the lowest economic cost and saves the maximum number of lives, can be achieved under a full lockdown of 39 days. Economic costs are much larger for an open economy as the shocks are amplified through the international production network. A decline in foreign demand leads to losses in domestic sectors through international input-output linkages, accounting for a third of the total output loss. In addition, the reduction in capital flows deprives the network from its trade financing needs, where sectors with larger external finance needs experience larger losses. The policy options are limited given sparse fiscal resources to fight the pandemic domestically, while serving the external debt. We present historical evidence from 2001 crisis of Turkey, when fiscal, monetary and exchange rate policies were employed altogether to deal with a triple crisis of balance of payments, banking, and sovereign debt

Download or read book The Keynesian Multiplier written by Claude Gnos and published by Routledge. This book was released on 2008-05-25 with total page 398 pages. Available in PDF, EPUB and Kindle. Book excerpt: The multiplier is a central concept in Keynesian and post-Keynesian economics. It is largely what justifies activist full-employment fiscal policy: an increase in fiscal expenditures contributing to multiple rounds of spending, thereby financing itself. Yet, while a copingstone of post-Keynesian theory, it is not universally accepted by

Download or read book The European Central Bank in the COVID 19 Crisis written by Gregory Claeys and published by . This book was released on 2020 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Central banks have taken drastic steps to keep their economies afloat during the COVID-19 lockdowns. In the euro-area, the European Central Bank (ECB) has eased significantly the conditions of its refinancing operations and has announced a new asset purchase programme. This response has triggered fears of a significant increase in inflation, and concerns about whether the ECB measures are compatible with its price-stability mandate and with the limits set by the EU Treaties. • Accelerating inflation is not an immediate threat, as the euro area will experience in 2020 its deepest recession ever recorded. Initially, the pandemic took the form of a supply shock, but second-round effects have now generated a massive aggregate demand shock. The overall impact on prices will depend on which of these two shocks dominates, but at this stage, it seems that deflationary forces are likely to dominate and bring headline inflation into negative territory in the near future. • An expansionary monetary policy is thus clearly warranted for the ECB to fulfil its price-stability mandate. Moreover, given the severity of the shock, there is currently no trade-off between the ECB's primary mandate and its secondary macroeconomic objec-tives, which all point in the same direction. New measures implemented by the ECB also seem to respect the legal boundaries set by the EU Treaties and the criteria set by the EU Court of Justice in its rulings on previous ECB asset purchase programmes. • However, the legal situation has been complicated by the 5 May 2020 ruling of the German Constitutional Court (GCC) on the ECB's 2015 Public Sector Purchase Programme. The ECB is not under the GCC's jurisdiction and it is difficult to predict how the legal situation will evolve, but from an economic perspective, if the ECB were to abide by the more strin-gent rules dictated by the GCC, it would make it harder for the ECB to fulfil its primary mandate and secondary objectives. • The ECB's current actions and the increase in the size of its balance sheet, even if it were to prove permanent, should not restrict significantly its ability to increase rates to fulfil its price-stability mandate. The ECB would have enough tools at its disposal to counter a surge in inflation if it were to happen. • While the ordering is clear between the ECB's primary price-stability mandate and its secondary objectives, the secondary goals are not ranked by priority, possibly creating difficult trade-offs. Dealing with these is a political task and the ECB should welcome some clear guidance from the European Parliament and EU Council on which secondary objectives are the most relevant for the EU in a particular situation.

Download or read book Hysteresis and Business Cycles written by Ms.Valerie Cerra and published by International Monetary Fund. This book was released on 2020-05-29 with total page 50 pages. Available in PDF, EPUB and Kindle. Book excerpt: Traditionally, economic growth and business cycles have been treated independently. However, the dependence of GDP levels on its history of shocks, what economists refer to as “hysteresis,” argues for unifying the analysis of growth and cycles. In this paper, we review the recent empirical and theoretical literature that motivate this paradigm shift. The renewed interest in hysteresis has been sparked by the persistence of the Global Financial Crisis and fears of a slow recovery from the Covid-19 crisis. The findings of the recent literature have far-reaching conceptual and policy implications. In recessions, monetary and fiscal policies need to be more active to avoid the permanent scars of a downturn. And in good times, running a high-pressure economy could have permanent positive effects.

Download or read book Law and Macroeconomics written by Yair Listokin and published by Harvard University Press. This book was released on 2019-03-11 with total page 281 pages. Available in PDF, EPUB and Kindle. Book excerpt: After 2008, private-sector spending took a decade to recover. Yair Listokin thinks we can respond more quickly to the next meltdown by reviving and refashioning a policy approach, used in the New Deal, to harness law’s ability to function as a macroeconomic tool, stimulating or relieving demand as required under certain crisis conditions.

Download or read book Corporate Liquidity and Solvency in Europe during COVID 19 The Role of Policies written by Mr.Christian H Ebeke and published by International Monetary Fund. This book was released on 2021-03-02 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt: The spread of COVID-19, containment measures, and general uncertainty led to a sharp reduction in activity in the first half of 2020. Europe was hit particularly hard—the economic contraction in 2020 is estimated to have been among the largest in the world—with potentially severe repercussions on its nonfinancial corporations. A wave of corporate bankruptcies would generate mass unemployment, and a loss of productive capacity and firm-specific human capital. With many SMEs in Europe relying primarily on the banking sector for external finance, stress in the corporate sector could easily translate into pressures in the banking system (Aiyar et al., forthcoming).

Download or read book Financial Markets and the Macroeconomy written by Carl Chiarella and published by Routledge. This book was released on 2009-06-02 with total page 513 pages. Available in PDF, EPUB and Kindle. Book excerpt: This important new book from a group of Keynesian, but nonetheless technically-oriented economists explores one of the dominant paradigms in financial economics: the ‘intertemporal general equilibrium approach’.

Download or read book After Effects of the COVID 19 Pandemic Prospects for Medium Term Economic Damage written by Mr. Philip Barrett and published by International Monetary Fund. This book was released on 2021-07-30 with total page 23 pages. Available in PDF, EPUB and Kindle. Book excerpt: The COVID-19 pandemic has led to a severe global recession with differential impacts within and across countries. This paper examines the possible persistent effects (scarring) of the pandemic on the economy and the channels through which they may occur. History suggests that deep recessions often leave long-lived scars, particularly to productivity. Importantly, financial instabilities—typically associated with worse scarring—have been largely avoided in the current crisis so far. While medium-term output losses are anticipated to be lower than after the global financial crisis, they are still expected to be substantial. The degree of expected scarring varies across countries, depending on the structure of economies and the size of the policy response. Emerging market and developing economies are expected to suffer more scarring than advanced economies.

Download or read book A Flow of Funds Perspective on the Financial Crisis Volume I written by B. Winkler and published by Springer. This book was released on 2013-11-29 with total page 346 pages. Available in PDF, EPUB and Kindle. Book excerpt: Provides a comprehensive overview of a broad range of uses of the flow of funds within the central bank community as well as in the academic field, prepared by international experts in the field. Based on the crisis experience, it offers an overview of lessons for macrofinancial analysis and financial stability.

Download or read book Handbook of Economic Forecasting written by Graham Elliott and published by Elsevier. This book was released on 2013-08-23 with total page 667 pages. Available in PDF, EPUB and Kindle. Book excerpt: The highly prized ability to make financial plans with some certainty about the future comes from the core fields of economics. In recent years the availability of more data, analytical tools of greater precision, and ex post studies of business decisions have increased demand for information about economic forecasting. Volumes 2A and 2B, which follows Nobel laureate Clive Granger's Volume 1 (2006), concentrate on two major subjects. Volume 2A covers innovations in methodologies, specifically macroforecasting and forecasting financial variables. Volume 2B investigates commercial applications, with sections on forecasters' objectives and methodologies. Experts provide surveys of a large range of literature scattered across applied and theoretical statistics journals as well as econometrics and empirical economics journals. The Handbook of Economic Forecasting Volumes 2A and 2B provide a unique compilation of chapters giving a coherent overview of forecasting theory and applications in one place and with up-to-date accounts of all major conceptual issues. Focuses on innovation in economic forecasting via industry applications Presents coherent summaries of subjects in economic forecasting that stretch from methodologies to applications Makes details about economic forecasting accessible to scholars in fields outside economics

Download or read book Global Corporate Stress Tests Impact of the COVID 19 Pandemic and Policy Responses written by Mr. Thierry Tressel and published by International Monetary Fund. This book was released on 2021-08-06 with total page 54 pages. Available in PDF, EPUB and Kindle. Book excerpt: Corporate sector vulnerabilities have been a central policy topic since the outset of the COVID-19 pandemic. In this paper, we analyze some 17,000 publicly listed firms in a sample of 24 countries, and assess their ability to withstand shocks induced by the pandemic to their liquidity, viability and solvency. For this purpose, we develop novel multi-factor sensitivity analysis and dynamic scenario-based stress test techniques to assess the impact of shocks on firm’s ability to service their debt, and on their liquidity and solvency positions. Applying the October 2020 WEO baseline and adverse scenarios, we find that a large share of publicly-listed firms become vulnerable as a result of the pandemic shock and additional borrowing needs to overcome cash shortfalls are large, while firm behavioral responses and policies substantially help overcome the impact of the shock in the near term. Looking forward, while interest coverage ratios tend to improve over time after the initial shock as earnings recover in line with projected macroeconomic conditions, liquidity needs remain substantial in many firms across countries and across industries, while insolvencies rise over time in specific industries. To inform policy debates, we offer an approach to a triage between viable and unviable firms, and find that the needs for liquidity support of viable firms remain important beyond 2020, and that medium-term debt restructuring needs and liquidations of firms may be substantial in the medium-term.

Download or read book Policy Advice to Asia in the COVID 19 Era written by Changyong Rhee and published by International Monetary Fund. This book was released on 2021-03-05 with total page 105 pages. Available in PDF, EPUB and Kindle. Book excerpt: The Asia-Pacific region was the first to be hit by the COVID-19 pandemic; it put a strain on its people and economies, and policymaking became exceptionally difficult. This departmental paper contains the assessment of the key challenges facing Asia at this critical juncture and policy advice to the region both to address the current challenges and to build the foundations for a more sustainable and inclusive future. The paper focuses on (1) adjusting to the COVID-19 shock, (2) using unconventional policies when policy space is limited, (3) dealing with debt, and (4) helping the vulnerable and greening the recovery. The paper first presents the different ways countries are adjusting to the COVID-19 shock.