Central banks

The effect of new housing supply in structural models: a forecasting performance evaluation

01/29/2024 European Central Bank Central banks

This paper investigates the importance of including data on new housing supply in Dynamic Stochastic General Equilibrium (DSGE) models in forecasting the Great Financial Crisis (GFC), focusing on the U.S. While existing models have added a financial sector and real estate sector, they have largely overlooked housing supply. I develop an extended DSGE model that includes both the financial sector and endogenous housing supply and show that forecasting accuracy significantly improves when data on new houses is included.

Quantifying financial stability risks for monetary policy

01/29/2024 European Central Bank Central banks

When inflationary pressures started intensifying in 2022, the world’s major central banks faced a dilemma. They could rapidly tighten monetary policy at the risk of fuelling financial distress after years of ultra-low interest rates and balance sheet expansion. Or they could take a more gradual approach to fighting inflation that would protect the financial system, but risk high inflation becoming entrenched. While severe financial instability may be an unlikely event (or “tail risk”), it can have devastating macroeconomic consequences.

Quantifying financial stability risks for monetary policy

01/29/2024 European Central Bank Central banks

When inflationary pressures started intensifying in 2022, the world’s major central banks faced a dilemma. They could rapidly tighten monetary policy at the risk of fuelling financial distress after years of ultra-low interest rates and balance sheet expansion. Or they could take a more gradual approach to fighting inflation that would protect the financial system, but risk high inflation becoming entrenched. While severe financial instability may be an unlikely event (or “tail risk”), it can have devastating macroeconomic consequences.

Inflation heterogeneity across Austrian households. Evidence from household scanner data

01/26/2024 European Central Bank Central banks

It has been widely documented that households experience different inflation rates which are generally concealed in aggregate price indices. Using scanner data from a large household panel for Austria, we analyse price dynamics faced by individual households and try to explain the causes for the observed inflation differences. Considering not only consumption shares but also the specific product prices paid by households, we find a considerable and persistent degree of heterogeneity among household inflation rates.

I (don’t) owe you: sovereign default and borrowing behavior

01/26/2024 European Central Bank Central banks

Using microdata from a U.S. household survey, we document that immigrants who lived through a sovereign default episode are 6% less likely to hold debt relative to otherwise similar immigrants who reside in the same U.S. state and come from the same foreign country but who did not experience a default. Conditional on holding debt, consumers in the former group borrow less and service lower debt burdens. The negative effect on borrowing behavior of having experienced a sovereign default increases with family size and declines with education.

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