Ingmar Schumacher

Endogenous discounting via wealth, twin-peaks and the role of technology

The article gives new answers to the two following questions: One, what can be a potential source of the twin-peaks of economic growth? Two, why were some of the countries that were believed to belong to the group of low steady state countries (like Taiwan, South Korea, Japan, etc.) able to reach a convergence path which led them to a high steady state? We endogenize the time preference rate via a broad measure of wealth and provide empirical evidence that wealth affects the discount rate negatively. We provide sufficient conditions for multiplicity of equilibria and demonstrate how endogenous discounting via wealth leads to the twin-peaks of economic growth. We prove that improvements in technology can help avoid the Twin-Peaks.

On technical change in the elasticities of resource inputs

This article analyses growth of an economy where the substitutability between non-renewable and renewable resource inputs changes over time. We allow for exogenous technical change in the elasticity of substitution (EoS) between these two types of resources as well as for biased factor-augmenting technical change. Our main results are: (1) sustained technical change in the EoS is enough to overcome resource constraints; (2) productivity-enhancing technical change is most beneficial when directed to the resource which is currently most important for production; (3) the speed of productivity-enhancing technical change is crucial for its usefulness to overcome resource constraints; (4) sustainability depends critically on the type of technical change.

Bank liquidity risk and monetary policy. Empirical evidence on the impact of Basel III liquidity standards

We extend the literature on the bank lending channel in two aspects. First, rather than following the literature by analyzing the impact of banks’ liquidity (measured via their asset portfolio) on monetary policy transmission, we study the role of banks’ actual liquidity risk, as measured by the Basel III liquidity regulations. Second, we investigate the effect of complying with the Basel III liquidity standards on monetary policy transmission. We use highly detailed bank-level data from Luxembourg for the period 2003q1--2010q4. Our findings are that monetary policy transmission works its way through small banks that also have a large maturity mismatch, as measured by the Net Stable Funding Ratio. In contrast, large banks with a small maturity mismatch increase their lending following a monetary policy shock, which confirms existing results that Luxembourg’s banks are liquidity providers to the European market. Based upon in-sample predictions and upon simulated data from an optimization model that takes the banks’ business models into account, we conclude that the bank lending channel will no longer be effective once banks adhere to the new Basel III liquidity regulations.

Threshold Preferences and the Environment

In this article we study the implication of thresholds in preferences. To model this we extend the basic model of John and Pecchenino (1994) by allowing the current level of environmental quality to have a discrete impact on how an agent trades off future consumption and environmental quality. In other words, we endogenize the semi-elasticity of utility based on a step function. We motivate the existence of the threshold based on research from political science, from arguments based on regulation and standards, cultural economics as well as ecological economics. Our results are that the location of the threshold determines both the potential steady states as well as the dynamics. For low (high) thresholds, environmental quality converges to a low (high) steady state. For intermediate levels it converges to a stable p-cycle, with environmental quality being asymptotically bounded below and above by the low and high steady state. We discuss implications for intergenerational equity and policy making. As policy implications we study shifts in the threshold. Our results are that, in case it is costless to shift the threshold, it is always worthwhile to do so. If it is costly to change the threshold, then it is worthwhile to change the threshold if the threshold originally was su ciently low. Lump-sum taxes may lead to a development trap and should be avoided if there are uncertainties about the threshold or the eff ectiveness of the policy.

Is environmentally induced income variability a driver of human migration

The role of environmentally induced income variability as a determinant of migration has been studied little to none. We provide a theoretical discussion based on a ‘risk aversion channel’ and an overview of the empirical literature on this. We also extend a previous empirical study on 39 sub-Saharan African countries with yearly data from 1960 to 2000 by including income variability and its weather determinants. Our findings lead us to acknowledge that, based on our dataset and methodology, income variability is a negligible driver of migration decisions at the macroeconomic level.

The consequences of a one-sided externality in a dynamic, two-agent framework

We develop a dynamic model where all agents contribute to a global externality, but only those in a specific region suffer from it. We model this in a dynamic setting via a two agent, non-cooperative overlapping generations model and analyze the consequences for economic growth and intertemporal choices. We find that multiple steady states may result from this asymmetry. In particular, if the agent who is affected by the externality has to spend a large share of his income to offset it, then he may be stuck in an environmental poverty trap. We provide conditions for the existence of, and local convergence to, the equilibria, as well as a condition for the global convergence to the poverty trap. While, in addition to maintenance expenditures, externalities tend to be addressed via studying taxes, investment in R&D or alike, we focus on capital market integration. Specifically, agents in the affected region can open up their capital market to enable capital inflows. We investigate whether an open capital market improves or worsens their welfare. While we do find that capital market integration eliminates the environmental poverty trap, we show that capital market integration is not always in both agents’ interest. In particular, we provide conditions under which the agents prefer autarkic or integrated capital markets.