Changing Supply Elasticities and Regional Housing Booms

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Abstract

Developments in U.S. house prices over the past decade mirror those of the 1996–2006 boom. Construction activity has, however, been weak. Using data for 254 U.S. metropolitan areas, we show that housing supply elasticities have fallen markedly in recent years. We find that housing supply elasticities have declined more in areas in which land-use regulation has tightened the most, and in areas that experienced the sharpest housing busts. Consistent with the declining housing supply elasticities, we find that monetary policy shocks have had a stronger effect on house prices during the past decade than during the previous boom. At the same time, building permits respond less.

Monetary Policy, Neutrality, and the Environment

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Abstract

We study the interaction between monetary/fiscal policies in a Ramsey–Sidrauski model augmented with the “Green Golden Rule.” We demonstrate conditions whereby monetary and fiscal policy under different utility and preference assumptions are or are not environmentally neutral. Despite its nonseparability in utility, we demonstrate that money is environmentally neutral. Policy impacts the environment via the marginal rate of transformation rather than the marginal rate of substitution between consumption and environment. Fiscal policies under a balanced budget are environmentally nonneutral. Only under a nonbalanced budget, when deficits are monetized, is money environmentally nonneutral. Under cash-in-advance and transactions costs, money is environmentally nonneutral.

The Fundamental Review of the Trading Book: Implications for Portfolio and Risk Management in the Banking Sector

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Abstract

The Fundamental Review of the Trading Book (FRTB) is the promised overhaul of bankmarket risk regulation. FRTB retains the authorized use of proprietary risk models, however, it introduces two additional criteria: (i) P&L attribution (PLA) tests and (ii) desk-level backtests. We examine empirically whether these additional criteria influence risk management and portfolio management practice, specifically portfolio construction and choice of risk model. We find that the PLA tests demand significant alignment with risk factors, however, the backtests do not incentivize use of superior risk models. This has important implications for the efficacy of the capital-based regulatory system.

Historical Patterns of Inequality and Productivity around Financial Crises

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Abstract

To understand the determinants of financial crises, previous research focused on developments closely related to financial markets. In contrast, this paper considers changes originating in the real economy as drivers of financial instability. To this end, I assemble a novel data set of long-run measures of income inequality, productivity, and other macrofinancial indicators for advanced economies. I find that rising top income inequality and low productivity growth are robust predictors of crises, and their slow-moving trend components largely explain these relations. Moreover, recessions that are preceded by such developments are deeper than recessions without such ex ante trends.

Inflation Expectations, Inflation Target Credibility, and the COVID‐19 Pandemic: Evidence from Germany

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Abstract

Using the exact wording of the European Central Bank's definition of price stability, we started a representative online survey of German citizens in January 2019 that is designed to measure long-term inflation expectations and the credibility of the inflation target. Our results indicate that credibility has decreased in our sample period, particularly in the course of the deep recession implied by the Covid-19 pandemic. Interestingly, even though inflation rates in Germany have been clearly below 2% for several years, credibility has declined mainly because Germans increasingly expect that inflation will be much higher than 2% over the medium term. We investigate how inflation expectations and the impact of the pandemic depend on personal characteristics including age, gender, education, and political attitude.

Self‐sacrifice or empty symbolism: A study of $1 CEOs

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Abstract

We examine whether CEOs' voluntary acceptance of a $1 salary is a credible signal of sacrifice. We find that firms with $1 salary CEOs are: (i) more likely to be associated with income-increasing accrual-based earnings management; (ii) less likely to use real earnings management; and (iii) more likely to engage in corporate tax avoidance. Our results indicate that this performance enhancement is driven by the motivation to restore salaries to their original levels. Our results suggest that extreme salary sacrifice could indicate an empty promise to improve firm performance and should be considered cautiously by investors and regulators.