Mathias Hoffmann

Financial Globalization, International Business Cycles and Consumption Risk Sharing

In spite of two decades of financial globalization, consumption-based indicators do not seem to signal more international risk sharing. We argue that consumption risk sharing among industrialised countries has actually increased - in particular since the 1990s - but that standard consumption-based measures of risk sharing - such as the volatility of consumption conditional on output or international consumption correlations - have been unable to detect this increase. The reason is that consumption has also been affected by the concurrent decline in the volatility of output growth in most industrialised countries since the 1980s. As a first important driver of this decline we identify a more gradual response of output to permanent idiosyncratic shocks. Since consumption reacts mainly to permanent shocks, it appears more volatile in relation to current changes in output. This effect seems to have offset the tendency of financial globalization to lower the volatility of consumption conditional on output. Secondly, because the variability of permanent global shocks has also fallen, international consumption correlations have also generally not increased as financial markets have become more integrated.

The Swiss Franc Exchange Rate and Deviations from Uncovered Interest Parity: Global vs Domestic Factors

SummaryWe examine the role of global and country-specific factors for the Swiss franc exchange rate in the period 1990–2009. Simple asset pricing theory would predict that exchange rates reflect relative movements in national discount factors and that systematic departures from uncovered interest parity can only be explained by international differences in the exposure to the common (global) component of all national discount factors. We extend the methodology of Lustig, Roussanov and Verdelhan (2009) to allow individual currencies’ exposure to this global factor to vary over time as a function of the interest rate differential. This allows us to study the time-varying risk characteristics of individual currency pairs. We find that the Swiss franc acts as a safe haven against some currencies — notably for dollar-based investors — but not for all, specifically not the euro. Also, the extent to which global factors have weighed on the Swiss franc exchange rate has varied over the sample period and appears more subdued in the global low interest rate environment of the last decade.

What Drives China's Current Account?

The paper offers an empirical taxonomy of the factors driving Chinas current account. A simple present-value model with non-tradeable goods explains more than 70 percent of current account variability over the period 1982-2007, including the persistent surpluses since 2001. Expected increases in the prices of non-tradeables - housing and medical care - are the single most important channel of external adjustment, followed by consumption smoothing. Much of this pattern is driven by a permanent global shock that persistently depresses the world real interest rate and increases the current account, suggesting that shocks to precautionary saving are key in understanding Chinas surplus. These findings are robust to controlling for revaluation expectations in the fixed exchange rate regime and for measurement error in the current account balance.

Balanced growth and empirical proxies of the consumption-wealth ratio

Empirical proxies of the aggregate consumption-wealth ratio in terms of a cointegrating relationship between consumption (c), asset wealth (a) and labour income (y), commonly referred to as cay-residuals, play an important role in recent empirical research in macroeconomics and finance. This paper shows that the balanced-growth assumption made in deriving cay implies a second cointegrating relationship between the three variables; the three great ratios c - a, c - y and a - y should all be individually stationary In U.S. data I find evidence for this second cointegrating relationship once I control for deterministic trends and a structural break. The fact that cay is a linear combination of two stationary great ratios has a number of important implications. First, without additional identifying restrictions, the residual from a cointegrating regression can no longer be interpreted as an approximation of the aggregate consumption-wealth ratio. I discuss an identifying assumption that may still allow to do so. Secondly, predictive regressions of asset prices on a combination of two stationary great ratios, must do at least as well as regressions on cay alone. Still, cay proves remarkably robust as an indicator of aggregate asset price cycles. The findings here also inform a recent debate about the role of look-ahead bias in cay: in order to identify transitory components in asset prices, households do not need to identify the parameters of the cay-relation at all.

Securitization of mortgage debt, domestic lending, and international risk sharing

Securitization makes mortgage‐related risks internationally tradeable and thus contributes considerably to the international diversification of macroeconomic risk: in the years 2003–2008, the increase in international cross‐holdings of securitized mortgage debt has lowered industrialized countries’ conditional consumption volatility (relative to the United States) by about 10–15 percentage points. We turn to the role of domestic credit in explaining this result. Domestic credit leads to better international risk sharing only if debt is securitized and traded internationally. Conversely, the risk‐sharing benefits from securitization seem to evaporate if credit dries up – as it did in the recent financial crisis. La titrisation fait que les risques attaches aux hypotheques peuvent etre transiges internationalement. Voila qui contribue de maniere significative a la diversification internationale des risques macroeconomiques : dans les annees 2003–2008, l’accroissement dans la dette hypothecaire titrisee detenue dans d’autres pays a reduit la volatilite de la consommation relative (par rapport aux Etats‐Unis) des pays industrialises de 10–15 points de pourcentage. On examine le role du credit domestique dans l’explication de ce resultat. On montre que le credit domestique entraine un meilleur partage international du risque seulement si la dette est titrisee et negociee internationalement. A contrario, les avantages de la titrisation semblent s’evaporer si le credit s’asseche – comme ce fut le cas dans la recente crise financiere.