Livio Stracca

Housing, Consumption and Monetary Policy: How Different are the US and the Euro Area?

This paper provides a systematic empirical analysis of the role of the housing market in the macroeconomy in the U.S. and the euro area. First, it establishes some stylised facts concerning key variables in the housing market on the two sides of the Atlantic, such as real house prices, residential investment and mortgage debt. It then presents evidence from Structural Vector Autoregressions (SVAR) by focusing on the effects of monetary policy, credit supply and housing demand shocks on the housing market and the broader economy. The analysis shows that similarities outweigh differences as far as the housing market is concerned. The empirical evidence suggests a stronger role for housing in the transmission of monetary policy shocks in the U.S. The evidence is less clear-cut for housing demand shocks. Finally, credit supply shocks seem to matter more in the euro area.

Behavioral finance and asset prices: Where do we stand?☆

This paper contains a survey of the anomalies identified in the behavioral finance literature, with a particular focus on those which might affect market prices. The anomalies are grouped in five categories, namely (i) decision heuristics, (ii) emotional and visceral factors, (iii) choice bracketing, (iv) unknown preferences, and (v) reference dependence. These anomalies are discussed against the background of the assumptions normally maintained in the standard approach based on expected utility maximization, in order to highlight the difference between the mainstream and the behavioral finance approaches.

Delegated Portfolio Management: A Survey Of The Theoretical Literature

This paper provides a selective review of the theoretical literature on delegated portfolio management as a principal-agent relationship. The main focus of the paper is to review the analytical issues raised by the peculiar nature of the delegated portfolio management relationship within the broader class of principal-agent models. In particular, the paper discusses the performance of linear versus nonlinear compensation contracts in a single-period setting, the possible effects of limited liability of portfolio managers, the role of reputational concerns in a multiperiod framework, and the incentives to noise trading. In addition, the paper deals with some general equilibrium dimensions and asset pricing implications of delegated portfolio management. The paper also suggests some directions for future research. Copyright 2006 The Author Journal compilation

Capital Regulation in a Macroeconomic Model with Three Layers of Default

We develop a dynamic general equilibrium model for the positive and normative analysis of macroprudential policies. Optimizing financial intermediaries allocate their scarce net worth together with funds raised from saving households across two lending activities, mortgage and corporate lending. For all borrowers (households, firms, and banks) external financing takes the form of debt which is subject to default risk. This “3D model” shows the interplay between three interconnected net worth channels that cause financial amplification and the distortions due to deposit insurance. We apply it to the analysis of capital regulation.

What Does a Financial Shock Do? First International Evidence

In this paper we attempt to evaluate the quantitative impact of financial shocks on key indicators of real activity and financial conditions. We focus on financial shocks as they have received wide attention in the recent literature and in the policy debate after the global financial crisis. We estimate a panel VAR for 21 advanced economies based on quarterly data between 1985 and 2011, where financial shocks are identified through sign restrictions. Overall, we find robust evidence that financial shocks can be separately identified from other shock types and that they exert a significant influence on key macroeconomic variables such as GDP and (particularly) investment, but it is unclear whether these shocks are demand or supply shocks from the standpoint of their macroeconomic impact. The financial development and the financial structure of a given country are found not to matter much for the intensity of the propagation of financial shocks. Moreover, we generally find that these shocks play a role not only in crisis times, but also in normal conditions. Finally, we discuss the implications of our findings for monetary policy. JEL Classification: E44, E52, E58, G20

Explaining European Union Citizens’ Trust in the European Central Bank in Normal and Crisis Times

We study the determinants of trust in the European Central Bank (ECB) as measured by the European Commissions Eurobarometer survey, in particular during the global financial crisis and the European sovereign debt crisis. We find that the fall in trust in the ECB in crisis times can be rather well explained based on the pre‐crisis determinants. We also show that the fall in trust reflected the macroeconomic deterioration, a more generalized fall in the trust in European institutions in the wake of the crisis, and the severity of the banking sectors problems, to which the ECB was associated in the public opinion.

Does Money Matter in the IS Curve? The Case of the UK

Narrow and broad money measures (including Divisia aggregates) have been found to have explanatory power for UK output in backward-looking specifications of the IS curve. In this paper, we explore whether or not real balances enter into a forward-looking IS curve for the UK. To do this, we test for additive separability between consumption and money over a sizeable part of the post-Exchange Rate Mechanism period using non-parametric methods. A main finding is that the UK data seem to be broadly consistent with additive separability for the more recent period from 1999 to 2007.

An econometric analysis of the main components of M3 in the Euro area

An Econometric Analysis of the Main Components of M3 in the Euro Area. — The main result is that the four components of M3 in the euro area can be explained in terms of a small set of explanatory variables (nominal GDP and interest rates) for the sample period January 1990 — September 1999 both in terms of levels and as shares of M3. Moreover, overall cointegration tests broadly support the hypothesis of long-run stability of the demand for the components of M3 and for M3 itself in nominal terms. Around the start of Stage Three of Monetary Union significant substitution between the components of M3 is detected. A refinement of the empirical analysis takes into account the correlation of the unexplained movements of the individual components using the SUR technique.ZusammenfassungEine ökonometrische Analyse der Hauptkomponenten von M3 in Euroland. — Das Hauptergebnis ist, dass die vier Komponenten von M3 in Euroland mit nur wenigen Variablen (nominales Bruttoinlandsprodukt und ZinssÄtze) für die Zeit zwischen Januar 1990 und September 1999 erklÄrt werden können, und zwar als Niveaugrö\en und Anteile von M3. überdies bestÄtigen Kointegrationstest grö\tenteils die Hypothese, dass die Nachfrage nach den Komponenten von M3 und nach M3 selbst in nominalen Grö\en langfristig stabil ist. Um den Beginn von Stufe Drei der WÄhrungsunion gab es signifikante Substitutionen zwischen den Komponenten von M3. Die empirische Analyse wird verfeinert, indem die Korrelation der unerklÄrten Bewegungen der individuellen Komponenten berücksichtigt wird und die Substitution der einzelnen Komponenten direkt modelliert wird.

A Note On Liquidity And Real Equilibrium Interest Rates

This note proposes a general equilibrium model with heterogeneous households and a financial market where each financial instrument provides liquidity services in addition to enabling a transfer of purchasing power over time. Importantly, liquidity services may be asymmetric according to whether the financial instrument is held as an asset or as a liability, and are also agent-specific. The main purpose of the study is to develop an analytical framework and a language for evaluating the effect of (broadly defined) liquidity factors on equilibrium rates of return.