Signe Krogstrup

Women and Budget Deficits

If women have different economic preferences than men, then female economic and political empowerment is likely to change policy and household decisions, and in turn macroeconomic outcomes. We test the hypothesis that female enfranchisement leads to lower government budget deficits due gender differences in preferences over fiscal outcomes. Estimating the impact of womens vote on budget deficits in a differences-in-differences regression for Swiss cantonal panel data, we find that including women in the electorate reduces average per capita budget deficits by a statistically significant amount.

Dealing with the Deficit Bias: Principles and Policies

This chapter formulates a common pool model of fiscal policy-making including both countercyclical and productive spending motives to run deficits, and derives key principles for the optimal design of fiscal restraints. The model is then used to evaluate the welfare and design aspects of fiscal rules and delegation, with a view to the special cases of the recently amended Stability and Growth Pact and national fiscal councils. We find that simple numerical fiscal rules are prone to cause pro-cyclicality and to suppress productive public spending projects in the presence of a deficit bias. The amendments to the Stability and Growth Pact introduced in 2005 are helpful in this respect. National fiscal councils generally satisfy the principles for optimal deficit restraint, but neither councils nor rules are enough to ensure an optimal fiscal outcome, even if optimally conditioned on economic circumstances. Both arrangements must be combined with a budgetary institution allowing for productive public investments and spending projects to take precedence in the budget process.

A Portfolio Model of Quantitative Easing

This paper presents a portfolio model of asset price effects arising from central bank large-scale asset purchases, commonly known as quantitative easing (QE). Two financial frictions—segmentation of the market for central bank reserves and imperfect asset substitutability—give rise to two distinct portfolio effects. One derives from the reduced supply of the purchased assets. The other runs through banks’ portfolio responses to the created reserves and is independent of the assets purchased. The results imply that central bank reserve expansions can affect long-term bond prices even in the absence of long-term bond purchases.

Portfolio balance effects of the SNB's bond purchase program

This paper carries out an empirical investigation of the impact on bond spreads of the announcement, purchases and exit from the SNB’s bond purchase program in 2009-2010. We find evidence in favor of a narrowing yield spread of covered bonds as a result of the program. The effect materialized in the days following the announcement of the SNB’s intention to buy bonds issued by private sector borrowers, as markets learned that the SNB was buying covered bonds. The specification of the bond spreads used allows us to identify this effect as a discounted portfolio balance effect of the expected purchases, as distinct from policy signalling. In contrast, we find no evidence of a further effect of the actual purchases and subsequent sales on bond spreads.

Foreign currency bank funding and global factors

The literature on drivers of capital flows stresses the prominent role of global financial factors. Recent empirical work, however, highlights how this role varies across countries and time, and this heterogeneity is not well understood. We revisit this question by focusing on financial intermediaries funding flows in different currencies. A portfolio model shows that the sign and magnitude of the response of foreign currency funding flows to global risk factors depend on the financial intermediarys pre-existing currency exposure. Analysis of data on European banks aggregate balance sheets lends support to the model predictions, especially in countries outside the euro area.

Lower-Bound Beliefs and Long-Term Interest Rates

We study the transmission of changes in the believed location of the lower bound to longterm interest rates since the introduction of negative interest rate policies. The expectations hypothesis of the term structure combined with a lower bound on policy rates suggests that normal policy transmission is reduced when policy rates approach this lower bound. We show that if market participants revise downward the believed location of the lower bound, this may in itself reduce long-term yields. Moreover, normal policy transmission to long-term rates increases. A cross-country event study suggests that such effects have been empirically relevant during the recent negative interest rate episode.