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Research Programme 2012/2013


Introductory Remarks Research Group: Research Group: Research Group: Research Group: Research Group: Research Group: Research Group: Research Group: Monetary Transmission and Monetary Strategy Corporate Finance, Household Finance, Monetary Policy and Financial Stability Public finances: Interactions with the overall economy and sustainability International Integration, international shocks and external imbalances Forecasting, Early Warning and Monetary Policy Financial Stability Banking Regulation and Supervision Banking Structure

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Introductory Remarks The research programme for 2012/2013 attempts to provide an overview of the ongoing and planned research for the coming 2 years. As in the past it is organized according to several informal research groups. Compared to last year's programme a new group on “ Banking structure” has been established. It is a kind of spin off as in former programmes topics which are collected in this group have been included in other groups, in particular in the groups on financial stability and on banking regulation. We think that understanding the banking structure and its consequences for monetary policy, the financial stability and the real economy is important enough to have such a group. Furthermore it is planned to establish an international research network on international banking and this group should also be a platform for related projects. On the other hand we have no longer an explicit “DSGE model” group in our programme. The research centre was successfull to convince departments that DSGEmodels are a useful analytical tool. There exists now a core DSGE model in the Bundesbank and several extensions are underway which should be useful in the day to day business (see the appendix for a description where we stand in this respect). Against this backdrop it seemed sensible to integrate research work which uses DSGE models under the roof of those research groups which seemed most appropriate (like monetary policy or public finance). Also inside the exising research groups the focus has been changed in some cases. For example in the international integration group external imbalances and competitivness issues became more prominent. A second new element of our research programme is the idea to identify a few topics, which are of specific interest for policy makers and researchers. Chosen topics will be handled by a few economists who do related research projects over the horizon of the research programme. Our aim is that the outcome are on the one hand papers of an academic nature. On the other hand the outcome could be the basis for seminars with board members. In fact such board seminars have been installed recently. Proposals for such topics can be found in the Annex.

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Markus A. Björn Kraaz. Against this backdrop the first workstream (monetary transmission) concentrates on the following research questions: Has the monetary transmission process changed during the crisis? In particular. how has lending supply and risk-taking behaviour of banks changed? How should central banks react in an environment of interest rates close to the zero lower bound? How do – conventional and unconventional – monetary policy measures affect other interest rates and financial prices? How to measure financial conditions in the crisis? The second workstream (monetary strategy) aims to contribute to the following issues: Should central banks modify their targets under the specific conditions of the crisis. E3. Nicole Binder. Christina Gerberding*. Michael Krause*. Lilli Zimmermann* Advisors/visitors: Jana Gieck (Goethe University Frankfurt). Jan Scheithauer. Barno Bläs*. E4. C3. for example. Rafael Gerke*. It has become obvious that a better understanding of the interaction of the financial sector with monetary policy on the one hand and the macroeconomy on the other is crucial. Heiko Sopp. the financial crisis evolving into a sovereign debt crisis has revived interest in the interaction between monetary policy and fiscal policy. fiscal policies in a monetary union – and if so how? How does monetary policy influence inflation expectations under the specific conditions of the current crisis? Monetary Transmission Recent Research Arne Halberstadt and Jelena Stapf (2012) analyse in “An affine multifactor model with macro factors for the German term structure: Changing results during the recent crisis” the dynamics of German bond yields and risk premia for the period 1999 to 2010. Jörn Tenhofen*. are at the heart of a central bank’s tasks. Furthermore. Andreas Worms. Manuel Rupprecht. M. Manfred J. Felix Geiger. Melanie Klein*. Nobert Metiu*. Ute Volz. Julia von Borstel. implementation and conduct of monetary policy but also challenged the conventional wisdom that a monetary regime achieving price stability guarantees by itself financial stability. Page 4 of 68 . They 1 A * indicates that this member plans to contribute a paper over the coming two years. aim for higher inflation rates? How should central banks take financial stability into account? Should central banks coordinate with fiscal policy – respectively. The financial crisis has not only raised important questions for transmission. Jelena Stapf*. Schmidt. Jeong-Ryeol Kurz-Kim. Felix Hammermann* (coordinator). Sandra Eickmeier*. Christian Schumacher. Ansgar Rannenberg*. Michael Scharnagl*. Vivien Lewis (Ghent University). E2. the two workstreams of the research group.Research group “Monetary Transmission and Monetary Strategy” JEL Codes: Members: 1 C2. Stefan Ried*. Neumann (Rheinische Friedrich-Wilhelms-University Bonn) General Interest and Policy Relevance Understanding monetary transmission and defining monetary strategy. E5 Petra Adolf. Martin Mandler*. Ulrike Busch.

and another one with a Taylor-type rule comprising a price and a real activity factor drawn from a large macro variable data set as additional driving forces. Looking at the impact of the recent subprime. Claudia M.estimate two model specifications. (ii) The heterogeneity of banks is characterised by idiosyncratic shocks and the asymmetric transmission of common shocks. In the project “In search for yield? Survey-based evidence on bank risk taking” Claudia M. Furthermore. financial and sovereign debt crisis' they conclude that risk aversion of market participants captured in the market price of risk changed most dramatically for the real activity and the price factor.S. These data allow modelling the reactions of banks’ new lending volumes and prices as well as the riskiness of new loans. Sandra Eickmeier and Esteban Prieto (2010) investigate in “Macroeconomic factors and micro-level bank risk” the importance of the interplay between banks and the macroeconomy for financial and economic stability. For loans to non-financial corporations strong cycles are identified and a strong co-movement with GDP is estimated. They find that small domestic banks increase their exposure to risk. They include standard macroeconomic indicators and factors summarising information provided in the Federal Reserve’s Survey of Terms of Business Lending. foreign banks lower risk. They analyse this link using a factor-augmented vector autoregressive model (FAVAR) which extends a standard VAR for the U. and large domestic banks do not change their risk exposure after expansionary monetary and house price shocks.S. loans to the private sector. for the period 1997-2008. Further relevant papers described in more detail under research group International Integration: “How Do Credit Supply Shocks Propagate Internationally? A GVAR Approach” by Page 5 of 68 .500 commercial banks from the U. and average bank lending increases following expansionary shocks. The results suggest that a well-communicated and transparent interest rate target of the central bank is a particularly important condition for a low degree of overnight rate persistence. Macro factors. Sandra Eickmeier and Esteban Prieto (2011) analyse the risk-taking behaviour of banks based on a FAVAR for the U. Buch. one with only latent factors. macroeconomy by a set of factors summarising conditions in the banking sector based on data of more than 1. A liquidity stress factor included into the macro model mirrors this slope influencing effect and leads to smoother forward rates for yield risk premia. these loans lag GDP significantly. The empirical evidence presented in the paper illustrates the financial instability hypothesis. She uses a panel approach based on a unique data set which matches the individual responses of the banks participating in the Eurosystem’s Bank Lending Survey with the corresponding micro data on loan quantities and prices. Offsetting safe haven flows affecting especially shorter maturities explain why yield risk premia increase less at the short end as compared to longer maturities in times of crisis. In “Monetary Policy Implementation and Overnight Rate Persistence” Dieter Nautz and Jan Scheithauer (2011) use fractional integration techniques to explore how the operational framework of four major central banks affects the persistence of overnight rates. loans to private households and housing loans show no significant lead/lag relationship against GDP. Ulrike Busch (2012) investigates in “Credit Cycles and Business Cycles in Germany: A Comovement Analysis” stylised facts of the cyclical nature of four German loan aggregates and of their co-movement with GDP growth. In the project “Bank-related loan supply factors during the crisis: an analysis based on the German bank lending survey” Barno Bläs (2011) analyses the role of bank-related constraints in explaining the sharp slowdown in bank lending to non-financial corporations in Germany during the recent financial crisis. Buch.S. The main findings are: (i) Average bank risk declines. The main finding is that bank-related supply and demand-side indicators were both important in explaining the slowdown of bank lending during the crisis years. notably the real activity factor. In contrast. help to improve the fit of the model and enhance forecasts of future yields. call reports.

Monetary policy implementation and monetary transmission Stefan Ried investigates monetary policy implementation in DSGE models (new). Felix Hammermann and Jörn Tenhofen analyse changes in the monetary transmission mechanism (new). the existing DSGE literature on monetary policy implementation is reviewed and first attempts are made to find out where and how a standard New Keynesian DSGE model can be enriched for some of the elements used for monetary policy implementation these days. extend the prior specification in the sense of discarding the draws which lead to unstable processes and. He extends the existing analysis of Amisano and Fagan (2010) in two directions: (i) Using a threshold model in place of the Markov-switching framework allows for a richer description of inflation dynamics. first.Sandra Eickmeier and Tim Ng (2011) and “The changing international transmission of financial shocks: Evidence from a classical time-varying FAVAR” by Sandra Eickmeier. where the parameters are allowed to change in every quarter. Tenhofen and Gerba (2011) have estimated a time-varying parameter VAR model (TVP-VAR). Wenjuan Chen. A Markov-switching structural vector autoregression is formulated. (ii) Monetary dynamics are allowed to have a direct impact on inflationary developments instead of only triggering switches between regimes. In this paper. where the first addresses implementation of monetary policy and monetary transmission more generally. The validity of various conventional identification schemes which are just-identifying in this framework is tested in a small monetary system for the United States. In particular. from asset purchases to changes in allotment procedures. Based on a TVP-VAR featuring stochastic volatility to model time-variation in the standard deviations of the shocks. Hammermann. Rafael Gerke. Gerke. to move to a more elaborate identification approaches like sign restrictions. whereas the second group concentrates more specifically on the behaviour of financial institutions and on bank lending in particular. Major central banks have made every endeavour to enhance their set of instruments. which exploits a heteroskedasticity feature of the reduced form error covariances to identify empirically plausible structural innovations. she investigates the different transmission channels of unconventional measures such as liquidity injections (quantitative easing) and the repurchase of debt and securities (qualitative easing) in a two-country DSGE model with a banking sector. Norbert Metiu and Anton Velinov combine statistical information with economic theory in “Interactions between monetary policy and the stock market: Evidence from Markov-switching structural vector autoregressions” (new) to achieve identification of monetary policy shocks to the stock market. collateral requirements. Planned and Ongoing Research Projects The planned and ongoing projects broadly related to the monetary transmission mechanism can be subdivided into two groups. Jana Gieck examines the effects of unconventional monetary policy measures in an open economy (new). Martin Mandler uses in “Threshold effects in European inflation dynamics: The role of money” (new) threshold models to study nonlinearities in the inflation process related to monetary dynamics both in individual EU member countries before the introduction of the Euro and for the Euro area. eligible counterparties and the interest rate corridor. Wolfgang Lemke and Massimiliano Marcellino. second. Monetary transmission with a focus on the financial sector Page 6 of 68 . It is intended to. they document the relative stability of the monetary transmission mechanism in the euro area over time.

g. has shown the importance of this first part for the transmission of monetary policy. however. The related project “Retail deposits and funding stability” by Roman Inderst and Tobias Waldenmaier analysing the interest-rate elasticity of deposits in Germany and other projects on the interest rate pass-through are part of the research group Banking Structure. credit aggregates) and real activity variables to monetary shocks. In “Identifying the macroeconomic effects of loan supply shocks in the euro area” (new) Barno Bläs and Michael Scharnagl contribute to the resurgent debate about a possible credit crunch by investigating the effects of financial market shocks on loans and real activity for selected euro area countries. money market and capital market rates) for Germany and the EMU. The project on the “Interest rate channel in Germany” (ongoing) by Melanie Klein aims at investigating the pass-through of monetary policy measures on various banks’ funding costs (deposit rates. identification via sign restrictions) within a VAR. Lilli Zimmermann investigates the effects of monetary policy shocks on the financing behaviour of non-financial corporations (new). provided by the Bundesbank MFI interest rate and capital market statistics. The study is based on quarterly financial accounts data and provides not only valuable insights on the monetary transmission mechanism but is also essential for macroprudential analyses. this first step of the interest rate channel has been widely neglected in research so far. ECB (2009) analyses the lead/lag relationship between changes in real GDP and real loans to households as well as Page 7 of 68 . Using monthly data. also determinants of the passthrough like rigidity of funding costs and the financial structure will play a crucial role in the analysis. Wavelet analysis seems to be an appropriate tool to identify “cycles” of various frequencies in time series. While most former studies focused on the pass-through from market rates to bank lending rates. Using the unique information related to the loan supply determinants from the national Bank Lending Survey data the authors conduct their analysis on the basis of two alternative identification schemes (standard Cholesky vs. A potential explanatory variable may be bank earnings as an indicator of the performance of bankers maximising their reputation. Michael Scharnagl and Falko Fecht examine loans and banking variables (new).Barno Bläs. Michael Scharnagl conducts a wavelet analysis of loans (new). Other variables to be taken into account are the ratio of equity to bank assets and liquidity transformation. Melanie Klein enquires about empirical evidence of the risk-taking channel in Germany (ongoing). The empirical analysis will focus on the link between monetary policy and the risk-taking behaviour of German banks on the basis of banking group data (macro panel) from the prudential database. The analysis will cover in particular to which extent changes in the monetary policy rate impact on the degree of risk in the banks’ portfolio. The relative importance of short-term and long-term effects may change over time. The financial and sovereign debt crisis. Christina Gerberding and Michael Scharnagl use in “Transmission of system monetary policy decisions in the German economy” (ongoing) a Bayesian VAR model based on a large data set to obtain detailed information on reactions of the most important German financial variables (e. inter alia. Based on a variety of mechanisms through which financial markets can affect the real economy the analysis uses wavelet methods to investigate the effects of variables describing banking behaviour on the evolution of loans in Germany. By applying different specifications of a VAR model for a panel of selected euro area countries the study analyses how non-financial corporations respond to a monetary policy shock focusing particularly on their financing behaviour. Estimates are conducted on the basis of static panel models and of a standard VAR.

Monetary strategy: interaction between monetary policy and the financial sector In “asymmetric information in credit markets. This modification amplifies the response of the external finance pre- Page 8 of 68 . Developments of long-term inflation expectations incorporated in break-even-inflation rates derived from a standard Svensson term structure estimation could be benchmarked against the model results and interpreted on a more granular basis. Planned and Ongoing Research Projects Central banks’ monetary policy strategy face with the financial crisis turning into a sovereign debt crisis new challenges on two frontiers: The first group of projects focuses on the interaction between monetary policy and the financial sector and the second group on the interaction with fiscal policy. An empirical example using euro-area data confirms the compatibility of his modification with empirical data. They use a standard New Keynesian model with long-run debt. It reveals that the stability of the long-run European money demand depends on the stock market uncertainty. As this type of analysis has no resolution over time. It turns out that the reduction in the real debt stock achievable after 10 years is at best 30 percent of the crisis-related debt. Gertler and Gilchrist (1999) (BGG). with the aim of providing an explanation of why the (standard) Taylor regression is spurious and. Affine multifactor term structure models cover bond yield movements over time and over the cross section. bank leverage cycles and macroeconomic dynamics” (new) Ansgar Rannenberg (2012) adds a moral hazard problem between banks and depositors as in Gertler and Karadi (2011) to a DSGE model with a costly state verification problem between entrepreneurs and banks as in Bernanke. Deutsche Bundesbank (2011) performs a similar analysis in the frequency domain for data for Germany from 1980 to 2010. structural changes cannot be identified. at the same time. Michael Krause and Stéphane Moyen (2011) analyse in “Public debt and changing inflation targets” the extent to which an increase in the inflation target can help a government to reduce the real debt accumulated during the crisis.real loans to non-financial corporations from 1980 to 2009. The potential effect of surprise increases of inflation depends on the average maturity of debt. In the project “Existence of a nonlinearly stable European money demand function” Jeong-Ryeol Kurz-Kim scrutinises whether a nonlinearly stable European money demand function exists that takes account of stock market uncertainty. Arne Halberstadt and Jelena Stapf build an affine term structure model with inflation data for Germany (new). There is evidence for a lead of GDP with respect to loans to non-financial corporations. The same is true if agents only slowly perceive the inflationary intentions of the government. the lead/lag relationship over time by calculating the wavelet phase difference for various frequency bands. a solution as to how central bank monetary policy can still be described by a more general Taylor rule. Including forward looking inflation data and a real pricing kernel would allow them to derive model-based long-term inflation expectations as well as inflation risk and real risk premia. Recursive analysis of the correlation and the lead of GDP gives some indication of time variation. Monetary Strategy Recent Research Claudia Kurz and Jeong-Ryeol Kurz-Kim (2011) modify in “A nonlinear Taylor rule: from an econometric point of view” the Taylor regression. The “time-varying” correlation is analysed using the concept of wavelet coherency.

based on a Bayesian VAR model with time-varying parameters and a handful of financial indicators. Michael Krause and Stéphane Moyen analyse the jointly optimal monetary and fiscal policies in a model with long-run government debt (new).mium and the overall economy to monetary policy and productivity shocks.S. Rafael Gerke. it addresses the question of dependence of monetary policy transmission on the most important measures of the fiscal stance (e. It is also compared to one which is constructed based on a large financial dataset. Stefan Ried and Oliver Grimm examine macroeconomic policy in a heterogeneous monetary union (new). it also sheds light on problems arising from divergent country-specific developments in the fiscal stance within the EMU that have received little attention until the emergence of the current sovereign debt crisis. They analyse the rivalry between the three authorities in seven static games. Moreover. Page 9 of 68 . Monetary strategy: interaction between monetary policy and fiscal policy / labour markets Barno Bläs. Further. Felix Hammermann and Jörn Tenhofen analyse potential interactions between monetary and macroprudential policy (ongoing). it first lays out a theoretical model in the spirit of the fiscal theory of the price level for understanding the possible fiscal impact on inflation. Comparing a homogeneous with a heterogeneous monetary union. debt to GDP ratio. This FCI is compared to an FCI constructed based on a VAR with constant parameters which has been previously employed in the literature. bank leverage. This added feature complicates the optimal policy problem. Stefan Ried and Michael Scharnagl investigate fiscal and monetary policy interactions (ongoing) for selected EMU countries as well as for the EMU as a whole. because it may affect the optimal steady-state rate of inflation as well as alter the cyclical response to shocks. Another relevant ongoing paper described in more detail under research group International Integration: “Understanding Global Liquidity” by Sandra Eickmeier. Boris Hofmann and Leonardo Gambacorta. government’s interest expense as a fraction of total expenditures) to obtain further insights into a topic that has regained importance recently. the path of inflation may offer an additional channel through which real debt may be stabilised. For example. The amplification allows Rannenberg’s model to match the volatility and correlation with output of the external finance premium.g. Following Sims (2011). They use a two-country model with a central bank maximising union-wide welfare and two fiscal authorities minimising comparable. A reasonably calibrated combination of balance sheet shocks produces a downturn of a magnitude similar to the “Great Recession” caused by the recent financial crisis. they find welfare losses to be significantly larger in the heterogeneous union. primary deficit. Sandra Eickmeier. Of particular interest are the implications from a better understanding of the transmission of changes in capital requirements and the interaction of these changes with the transmission of monetary policy for the design of the monetary strategy. data better than a BGG-type model. entrepreneurial leverage and important real variables in U. but slightly different country-wide losses. Such a model allows them to analyse macroprudential instruments such as time-varying capital requirements. using a Bayesian VAR approach. avoiding the effects of distortionary taxation.S. Cooperation between the fiscal authorities is harmful to both the whole union’s and the country-specific welfare. Krause and Moyen follow the approach used by Schmitt-Grohé and Uribe (2007). Massimiliano Marcellino and Esteban Prieto construct in the project “Financial conditions and the macroeconomy” (ongoing) a new financial conditions index (FCI) for the U. The best-performing scenarios are cooperation between all authorities and monetary leadership. The starting point of the analysis is a DSGE model with bank capital.

C. C. Busch. Series 1: Economic Studies. Deutsche Bundesbank Discussion Paper. procyclical labour productivity acts as a counterweight to labour and capital compensation in determining overall marginal costs. M. The Financial Accelerator in a Quantitative Business Cycle Framework. CESifo Working Paper. October. Deutsche Bundesbank Discussion Paper. 31/2011. labour productivity is strongly procyclical and inflation is more stable than in the US. M. C.. and G.. Prieto (2010). S. F. Blaes. Taylor and Michael Woodford (eds). Gilchrist (1999). 8720. Buch. CESifo Working Paper. 20/2010. and T. 20/2011. Buch. Deutsche Bundesbank (2011). 30. How do credit supply shocks propagate internationally? A GVAR approach. R. Credit Cycles and Business Cycles in Germany: A Comovement Analysis. C. thereby making inflation less volatile. where labour market frictions reduce the variability of inflation relative to the US. Deutsche Bundesbank Discussion Paper. Deutsche Bundesbank Vermerk. In a monetary business cycle model with hiring costs and unobserved effort. Handbook of Macroeconomics. 1207. Amsterdam. S. Eickmeier. S. http://ssrn. September 2011. M. Monthly Bulletin. M. 18-21. U.Maarten Dossche and Vivien Lewis analyse labour hoarding and the zero lower bound on nominal interest rates (new). Bernanke. Loans to the non-financial private sector over the business cycle in the euro area. Page 10 of 68 . Bank-related loan supply factors during the crisis: an analysis based on the German bank lending survey. ECB WP. 1341-1393. Macroeconomic factors and micro-level bank risk. Prieto (2010). S. Elsevier. September. In search for yield? Survey-based evidence on bank risk taking. J. Buch. CEPR Discussion Paper. Eickmeier. Gertler and S. Eickmeier and E. Eickmeier and E. Series 1: Economic Studies. Hammermann. Prieto (2011). in: John Prieto (2011). Money growth and inflation: a regime switching approach.. 59-78. B. In search for yield? Survey-based evidence on bank risk taking. S. Ng (2011). and T. Series 1: Economic Studies. Tenhofen and E. Eickmeier and E. References Amisano. S. (2011). Macroeconomic factors and micro-level bank risk. German banks’ lending to the domestic private sector since summer 2009. S. available at SSRN. Gerke. Fagan (2010). They ask whether the argument that a higher inflation target increases monetary policy effectiveness in the presence of the zero lower bound is appropriate for the euro area. 3375. Gerba (2011).. Deutsche Bundesbank Discussion Paper. B. European Central Bank (2009). Changes in monetary transmission?. These features can explain the empirical finding that in the euro area. M. (2012). G. How do credit supply shocks propagate internationally? A GVAR approach.. Series 1: Economic Studies.. Eickmeier and E. 3194. Monthly Report. 27/2011. Ng (2011). Buch.

Ried (2007). C. Halberstadt. Lütkepohl and K. Nautz. ECB Working Paper. mimeo. H. and J. S. 54(6). Humboldt-Universität zu Berlin. 1702-1725. Schmitt-Grohé. Journal of Monetary Economics. Deutsche Bundesbank. 55(1). Review of Economics and Finance. Lanne. Journal of International Money and Finance. and P. Journal of Economic Dynamics and Control. Stepping on a rake: The role of fiscal policy in the inflation of the 1970s. Public debt and changing inflation targets. 34(2). A. 1375-1386. 48-56. Bank Leverage Cycles and Macroeconomic Dynamics. Moyen (2011). Stapf (2012). Karadi (2011). Kurz-Kim (2011). Structural vector autoregressions with Markov switching. Grimm. and J.. forthcoming.Gertler. 121-131.-R. M. Kurz. 2007-028. 17-34. and S. Scheithauer (2011). 58(1). Deutsche Bundesbank. C. Rannenberg. and S. Sims. A. Krause. D. Uribe (2007). Monetary Policy Implementation and Overnight Rate Persistence. Maciejowska (2010). Optimal Simple and Implementable Monetary and Fiscal Rules. 1(3). M. A. 30(7). and J. Asymmetric Information in Credit Markets. A model of unconventional monetary policy. (2012). mimeo. (2011). Journal of Monetary Economics. Page 11 of 68 . and M. SFB 649 Discussion Paper. O. An affine multifactor model with macro factors for the German term structure: Changing results during the recent crisis’. M. 46-51. Macroeconomic Policy in a Heterogeneous Monetary Union. European Economic Review. A nonlinear Taylor rule: from an econometric point of view.

Their study is one of the analytical cornerstones of monetary policy. and are prone to simultaneity problems that disappear once the reaction of individual decision makers to changes in their economic environment can be observed.* Advisors/visitors/cooperating researchers: Axel Börsch-Supan (University of Mannheim). Oscar Stolper (University Giessen). Wien).* Elena Biewen. In order to analyse the decisions of economic entities. Research on household finance Bundesbank research in this field is supported mainly by two extremely rich and unique sources of data that allow drawing a comprehensive picture of household finance in Germany. The group’s own “product” is the Panel on Household Finance (PHF). Aggregates mask the heterogeneity of agents. This is why the group uses disaggregated data. transfers and socio-economic characteristics.* Markus Baltzer. as well as their own securities holdings. the values.* Julia Le Blanc. saving and consumption are key elements in the transmission of monetary policy. together with a rich array of information on income. labour. Daniela Dimitrova (CFS. imputation and evaluating the survey data. also at other banks or abroad. SecuStat has aggregate information on private households: all securities held. The group has two work streams: household finance and firm finance. The two data sets complement each other. Household Finance.* Anne Koban. PHF has what is missing to SecuStat: detailed information on individual holders and their characteristics. it is insufficient to look at aggregates only.* Kerstin Stahn. It thus will provide vital information for weighting. Wolfgang Sofka (Tilburg).* Junyi Zhu. Daniel Höwer (ZEW Mannheim).* Leonid Silbermann. University of Frankfurt). the quantities. Andreas Walter (Giessen). Second. Page 12 of 68 . Tobias Schmidt. In reverse. the financial decisions they take and the interaction of these decisions with real investment. an integrated part of the Euro Area Household Finance and Consumption Survey (HFCS).* Natalyia Barasinska. Almuth Scholl (University Konstanz ).Research group “Corporate Finance. D2. as the effect of asset price or interest rate changes crucially depends on who holds the asset or the debt. Iris Noack (Saarland University) General interest and policy relevance Financial conditions of firms and households. Monetary Policy and Financial Stability” JEL Codes: Members: D1. Similar arguments apply for financial vulnerability of firms. Steffen Meyer (University of Frankfurt). Any stress-test type of analysis needs distributions as analytic raw material. every financial institution reports the managed quantity by type of investor. A. Dimitris Georgarakos (University of Frankfurt). G3 Ulf von Kalckreuth* (coordinator). attitudes and expectations. old age provision. Furthermore. some of them are being developed by the group itself.* Martin Eisele. Solvejg Wewel (Free University Berlin). a clear theoretical and empirical understanding of firm and household finance is indispensable for any discussion on the evolution of the financial system and financial stability. For each single security. Helmut Stix (OeNB. Michael Haliassos (University of Frankfurt). It collects household level data on the structure and the values of assets and liabilities. the Bundesbank Security Deposit Database (SecuStat) collects data on portfolio structures at the level of the financial institution that manages the portfolio. Falko Fecht (Frankfurt School of Finance and Management).

This includes methodological research in the field of surveys. research plans are taking shape. 1. Currently.The year 2011 was shaped by preparing and supervising the difficult field phase of the PHF (autumn 2010 to summer 2011). The group is committed to do joint research with colleagues in the Household Finance and Consumption Network (HFCN) of the Euro Area. Therefore. In accordance with the work programme of the HFCN. the first wave of the survey is ready to be used as an important data base for research. Le Blanc. it will be possible to look at the importance of institutional factors for household finance patterns. portfolio composition and savings that are mainly descriptive in nature. the emphasis will be on charting the territory of household finance in Germany. in order to make them accessible for scientific analysis. In line with the duties of the network many resources of the group are absorbed by preparing and documenting the PHF data. our project planning for the next two years is by necessity incomplete: some projects will be added.Schmidt. research on household finance can be grouped into eight research areas. and by the need to check and process the incoming raw data. Technical papers will be produced on issues such as variance estimation. giving accounts on household wealth. but the group will be doing scientific research on the basis of preliminary data much earlier. giving a general description and first results. perhaps at the cost of others. Processing and preparation of the survey micro data and a basic statistical evaluation will take until the winter of 2012. Zhu under the heading The PHF: a comprehensive panel survey on household finances and wealth in Germany (ongoing) is directed at a broader audience and provides a general overview on the survey. In addition. by assessing the distributions of absolute amounts and ratios. research will become more analytical. An introductory paper by von Kalckreuth. Le Blanc . Eisele. Eisele. Evaluation will be critical for the path of future evolution and will have to encompass both methodological issues and a comparison of survey results with outside infor- Page 13 of 68 . imputation and evaluation. debt. its variables and uses. imputation and weighting now are mainly finished. the group will contribute research papers along three major topics: • • • Patterns and determinants of household saving Patterns and determinants of wealth and debt distribution among households Pattern and determinants of portfolio choice among households The geographical focus will both be Germany and the Euro-area. Ongoing and new work An important outcome of the years 2011 and 2012 will be documenting and discussing the major characteristics of the PHF. which will be exposed in the following. Initially. but are not yet finalised. In the course of 2013. Documenting the PHF Authors: von Kalckreuth. Given the wealth of comparative data from other countries. After the laborious phases of editing. Within the HFCN. The material will lead to at least one publishable paper and a series of technical papers. a Monthly Report on the survey was published. the group does research in a narrower sense. the field phase and selectivity. Wewel Recent work: In January 2012. Schmidt. Zhu. editing.

This research work is very topical. the group will be able to make informative comparisons regarding the effects of interest rate changes or business cycle downturns on private households. Baltzer. Stolper and Walter (2011) have studied the local bias in the direct stock investment of German households. Le Blanc. the distribution of assets. among other things direct and indirect share ownership and Riester takeup A look at Consumer Debt in Germany (new) by von Kalckreuth and Schmidt shall prepare a stress-test type of analysis: How is debt-burden distributed among the population and what would be the effect of different kinds of shocks: income. This line of work will be a major outcome of the group’s work in 2012. interest and asset prices. In their project Differences in portfolio choice and wealth accumulation in Europe: The Role of Labor Income Risk (ongoing). a study on The Distribution of Wealth among Households in Germany (new) by von Kalckreuth will start the group’s research on household heterogeneity. 4. Baltzer. Tracing major structures of household finance in the Euro area (new) Authors: Schmidt. The HFCN sub-group on development and evaluation will serve as a forum for survey evaluation. von Kalckreuth As a counterpart of the descriptive work for Germany. including distributions. It will be greatly enhanced by ongoing similar work in other countries of the Euro area. Working on Financial wealth in Germany (new) Le Blanc aims at working out the stylised facts of portfolio behaviour. Household portfolio choice and stock market participation Authors: Haliassos. and in a continuation of this work the authors will investigate to what extent the so-called “home bias”− the overweighting of national stocks − is really only a local bias. Georgarakos. The intended pace is fast. The planning of comparative descriptive work is under way. debts and net wealth and stress-testing household finances in Germany (new) Authors: Schmidt. Such models have mostly been calibrated using U. Walter Recent work Using SecuStat data. with an international and comparative perspective. the research group of the HFCN is drawing together the major stylised facts on household finance in Europe.mation on aggregates and distributions. among other things. homeownership and business wealth in Germany. 3. The focus will be on the microstructure of assets and liability. The emphasis in this line of work is comparative – while the analysis of indicators on financial structures and distributions cannot be as detailed as the work on the country level. the major sources of heterogeneity within the Euro area will be worked out. Le Blanc. data. considering.S. first results may be available by the end of this year. Evidence on financial instruments. 2. Stolper. Schmidt is going to look on “Real Wealth in Germany (new)”. Within the context of the HFCN. von Kalckreuth. Fecht. given that the current risks for financial stability are partly rooted in household finances. Natalyia Barasinska. Anne Koban The first step in analytical work with the PHF will be a descriptive exposition of major aggregates of the balance sheet items of private households. Le Blanc. unemployment. A related study by Barasinska and Koban on Households’ Borrowing in Germany and Its Implications for Banks’ Risk Position (new) will focus on microeconometric drivers of indebtedness and debt service using regression analysis. Georgarakos and Le Blanc use panel data for a Page 14 of 68 . Ongoing and new projects Life cycle models of portfolio choice and savings behaviour have become a major analytical tool in research on household finance. Ultimately.

Le Blanc and Scholl (2011) have investigated the optimal retirement savings behaviour. Haliassos. Homeownership Decisions in Europe (new) Authors: HFCN members. Pension and Old Age Provision Authors: Le Blanc. it is intended to calibrate complete life cycle models for each of the countries in the Euro area. While all countries have implemented similar measures to enhance private retirement saving. 5. there are still striking differences in the propensity to save privately for retirement that have to be explained with differences in institutional settings and historical experiences. and it will be interesting to study the corresponding portfolios of customer. Dimitrova Recent work Using SHARE data. by evaluating how far one can get in explaining cross-country differences in participation and portfolio allocation if one single standard life cycle model is calibrated to country-specific parameters and then household-level data are used to simulate the portfolio behaviour of each household in the data set. In a related project. Similar questions will be dealt with on a Euro area level. and Portfolio Composition− new and tentative) intend to investigate the incentives of commercial banks towards giving financial advice to their customers and the resulting composition of assets in banks’ and customers’ portfolios. debts should be paid back in expectation. This project by Georgarakos. with all parameters specific to the country in question. The focus is on savings banks and credit cooperatives. Le Blanc (2011) has presented a micro-econometric analysis of private retirement saving across 11 European countries. 6. from the households’ own perspective. Saving. Based on this work on the national variations in the structure of shocks. It is well established that many elderly save “too much” – but also the opposite may occur. Differences in the fraction of provision income in banks’ total income are large. Household finance is fraught with “puzzles” that put into question the standard model of utility maximization subject to rational expectations. savings and portfolio allocation decisions as well as welfare over the life cycle. Scholl. The data will come from the HFCN data of selected countries once all of these data have been gathered. Financial Advice. such as subsidised pension contracts) and how much is saved. Le Blanc and Fecht (Provision Income. Tobias Schmidt Page 15 of 68 . conditional on are studying the indebtedness of elderly people. an intertemporal budget constraint and a limited life time. The panel data used in this step come from the European Community Household Panel Survey (ECHP). to look for deviations and – if possible – explain them. They employ a lifecycle model with exogenous stochastic labour income to analyze how certain types of taxdeferred individual accounts affect households’ consumption.number of European countries to estimate country-specific labour income profiles and shock processes that are needed as ingredients for the life-cycle model. The resource constraint embedded in the standard model predicts that towards the end of life. given different ways of implementing funded pension accounts. Dimitrova and Le Blanc (Why do households hold debt in old age? . and Le Blanc (Portfolio Choice and Stockholding across Countries: What can we learn from the Life Cycle Model? − ongoing) will put the workhorse life cycle model to a hard test. Ongoing and new Le Blanc (Savings behaviour in Germany: the disaggregated view new) will work out − the stylised facts on savings behaviour in Germany: How is participation distributed over socioeconomic groups (regarding saving in general and concerning important forms of savings.

This may develop into a separate paper. according to ownership status. a multi-country project is foreseen. Zhu (The distribution of income and the incidence of taxation in Germany – evidence from a new large scale panel survey -. Zhu will work out the distributional consequences of a revenue neutral switch from the German type marital status relief (Ehegattensplitting) to a a relief based on the size of the family (Familiensplitting). housing value. It is also linked to substantial mortgage debt. but make it harder for tenants to buy a home. Zhu (An empirical analysis of the interaction of marriage taxation and income heterogeneity within households. In terms of economic theory. Income distribution and the incentive effects from taxes and transfers (new) Authors: Zhu Knowing the sources of income. in turn is the basis for calculating marginal tax rates. one has to deal with the problem that the marginal tax rate is usually strongly correlated with income. as it contains both the information on outcomes and the data necessary to work out incentives and balance sheet constraints on an individual level. They represent a wealth increase for owners. They will allow generating estimated marginal tax and transfers on an individual level. This. The PHF data is rather comprehensive in terms of income and other generic characteristics governing tax burden and transfer entitlements. as there is no taxation of wealth or imputed rents in Germany). Using tax data from one country. Schmidt and others will look at the conditional distribution of wealth. new) aims at exploring the role of family splitting for observed distribution of labour income within households. The PHF database is unique. The high levels of debt associated with buying a home make households that own more vulnerable with respect to interest rate changes than renters. Schmidt. The effects of rising house prices are also different for tenants and owners. This should yield insight into how homeowners can be characterised in different countries and what it is that people own or rent. The HFCN data provide a different sort of identification: the variations of national tax codes. The portfolio of assets and liabilities portfolio is thus starkly different for renters and owners. savings in general. In order to gain insight into the effects and determinants of homeownership in different European countries. As an example of how the data base can be used for tax simulations. Understanding balance sheet structures in Europe thus has much to do with understanding homeownership decisions. Methodological research Authors: will explore the household data along these two dimensions. Noack Page 16 of 68 . 8. demographics. as the amount of the implicit subsidy is a function of income heterogeneity among spouses. The basis for the analysis is micro-data on household finances and housing from several European countries. and housing characteristics. In the future. Important applications range from investment in subsidised private pension schemes (Riester and Rürup pensions) over homeownership (the real returns of homeownership are tax exempt. we will be able to distinguish heterogeneity ex ante (assortative mating) and ex post (division of labour). as the basis for future work. with the help of the panel dimension. 7. the tax incidence can be calculated.Buying a home is usually the largest investment a household makes over his life-time. labour market decisions (participation and hours worked) to family structure. The dispersion of income and characteristics creates much heterogeneity that can be used to identify incentive effects. All these differences are particularly important when comparing households in the EU. individual behaviour is heavily influenced by taxes and transfers that distort the payoff structure of economic choices. given that statistics on homeownership show great variation in the share of renters and owners across countries. so that it is hard to take apart the incentive effects of taxation from various types of income effects. Le Blanc. The German splitting tariff for married couples may encourage negative assortative mating (ex ante) or a division of labour ex post. which is the basis for all work on incentive effects of taxation.

USTAN. This type of research isbeneficial. which may also lead to a separate publication.Interviewers and Unit Non-Response in a Large Wealth Survey -. Le Blanc and Noack (Knocking on Respondents’ Doors . Due to human resource constraints.ongoing) is exploring the role of interviewer effects and stratification for unit non-response and non-contact in the course of the PHF-fieldwork. team members are confronted with a host of methodological problems – work that sometimes leads to novel solutions or interesting evidence on ongoing discussions. monetary transmission and financial stability In the past. there is a separate subgroup on methodological research within the HFCN. as it helps team members to develop expertise and a research profile. It constitutes the largest source of accounting data for nonfinancial firms in Germany. to reduce item-nonresponse and potential reporting bias. he is investigating methods of data driven specification selection in the context of imputation models in complex data environment. Related research can be found in the group on banking regulation and supervision (Kick et al: The relationship of bank distress and household finance) and Financial stability (Barashinska: Households borrowing in Germany and its implication for financial stability). all household members can give either gross or net figures for all types of income. Zhu is participating in a cross validation exercise of multiple imputation models in the HFCN. This may be of value for surveys on income and wealth in general. In the PHF.-run growth pat of an economy as the savings behaviour of household. This database is being used alone. while endogenising the choice of tax classes. Ultimately. Recent work Page 17 of 68 . Junyi Zhu (Conversion of gross and net income figures in household surveys: implementation and evaluation -.In their work on the PHF. Bundesbank research in the group was structured along two major research questions: 1) What determines firm investment and is there a special role of finance? 2) How are firm finance and innovation behaviour interrelated? The investment and innovation behaviour of firms are as important for the long. This generates a secondary type of research −ussi methodological matters. For this reason. by Tobias Schmidt and others. Recent work First outcomes in this vein are the discussion paper by Schmidt (2011) on fatigue in payment diaries. Ongoing and new projects A paper by Schmidt. B. both major topics are currently receiving much less attention than they deserve. to which the Bundesbank is contributing. methodological research may help bridge the potential conflict between the motivation of researchers (both intrinsic and extrinsic) and the need of careful and meticulous data work. A major resource for the work on firm finance is the Bundesbank’s financial statement database. or in combination with other firm level data.ongoing) has worked out an algorithm converting gross income to net income and vice versa. In addition to its immediate contribution for developing the survey as a resource for science. This paper will serve as a nucleus for a broader investigation of this topic within the HFCN. Firm finance.

This is feasible. As a separate endeavor (A joint project on data linkage by Deutsche Bundesbank and Federal Employment Agency) the Bundesbank has joined forces with the Institute for Labour and Employment (IAB) to match their respective firm level information in order to create a new and powerful scientific resource. Kerstin Stahn (Fixed capital adjustment of German firms over the business cycle − ongoing) uses USTAN and the Financial Statements data pool to follow firm fixed investment over the business this database is used by Silbermann (Financial Constraints and Cyclicality of R versus D: Evidence from Germany -. the data base on foreign direct investment. Haselmann.Höwer.see the exposition on KombiFid in the preceding research program 2011/2012) and the project website www. the Bundesbank contributes the micro-databases of MiDi. information on direct investment or labour statistics data. 29-45. R&D and Investment – new) will be using the data base for studying the demand for liquidity by firms: if a firm is financially constrained. At the Bundesbank. subject to availability . Monthly Report. Second. whether the measured sensitivity of fixed investment for changes in the business environment varies with the business cycle. It turns out that information asymmetry regarding the business prospect of firms varies over banks: banks are able to learn from what they observe in other innovative firms of their portfolio. first. Schmidt and Sofka (2011) have completed a paper on the financing of innovation.ongoing) for research on how the cyclicality of R&D depends on firms’ financial constraints. Vig: Real effects of capital supply shocks on capital structure and investment decisions of German corporation). To be seen is. such as the employee structure. USTAN data were matched with survey information on investment and innovation. Apart from USTAN. On the side of the Bundesbank. The PHF: a survey of household wealth and finances in Germany. Financial Structure. Currently. The USTAN data base has been matched to the Mannheim Innovation Panel (MIP) run by the ZEW. as well as of the Trade in Services Statistics. The IAB will contribute establishment level data on employment in general. wages. using firm-level data from the Mannheim Innovation Panel amplified by information on the firms’ house bank. Biewen (KombiFID: a first glimpse of the Bundesbank data ongoing ) assesses the quality of the contribution from the − Bundesbank. this project has been the main responsibility of Biewen. References Deutsche Bundesbank (2012). Further related research can be found in the group banking structure (Bayer. the project intends to investigate the importance of sectoral heterogeneity. Silbermann and Zhu (Liquidity. this work is again mainly the responsibility of Biewen. January. Von Kalckreuth. The large scale KombiFID project has matched all company level data bases held by the German National Statistical Office and the Institute for Labour and Employment (IAB) to USTAN. the payroll etc. in particular the selectivity bias. Page 18 of 68 . In the past. Ongoing and new projects In follow-up work to the KombiFID match. then initiating an R&D project should induce additional demand for liquidity. since the data sets now cover a period of almost 40 years.kombifid. This positive effect of information access needs to be balanced with correlated risk concerns. to ensure that an investment project can be financed in case the R&D is successful.

Kamstra. D. J. Stoney Brooks University New York. 11/2011. J. Series 1: Economic Studies. Le Blanc. Zhu. Deutsche Bundesbank Discussion Paper. Fatigue in payment diaries – empirical evidence from Germany. and A. The Third Pillar in Europe: Institutional Factors and Individual Decisions. unpublished Page 19 of 68 . Wermers (2010). Deutsche Bundesbank Discussion Paper. Kramer. J.Hoewer. Le Blanc. An information economics perspective on main bank relationships and firm R&D. Series 1: Economic Studies. mimeo. Seasonal Asset Allocation: Evidence from Mutual Funds Flows. Series 1: Economic Studies. T.. Asset accumulation and learning: theory and evidence from saving for child’s college. Schmidt. (2011). Schmidt and W. D. 33/2011. M. Sofka (2011). Levi and R. Scholl (2011). (2011).. A. (2010). 19/2011. Deutsche Bundesbank Discussion Paper. Series 1: Economic Studies. T. Deutsche Bundesbank Discussion Paper. Optimal savings for retirement and pension reform: the role of individual accounts and disaster expectations. 09/2011. J. L. M.

On the empirical side. Samad Sarferaz (ETH Zürich). the following research questions are of utmost interest: 1) What are the (short run) effects of fiscal policy. On the one hand. Alexander Kriwoluzky (University of Bonn). These models are frequently applied for example in the analysis of the relationship between public finances and macroeconomic variables like growth or business cycles and in investigations of more disaggregated dynamic budgetary interactions like the responsiveness of a certain tax category to changes in its bases. Nikolai Stähler* (coordinator). policy relevance and outline of the research programme The interactions of fiscal policy and the economy play a key role in public finances. Empirical studies of fiscal policy interactions increasingly rely on the wide range of dynamic time series models. The current debate is highly influenced by the observation of high public debt and increasing fears that sustainability could get lost. Gerhard Kempkes. especially in times of high debt? 2) How to define long run sustainability of public finance? 3) How should a consolidation strategy look like. Frank Somogyi*. but it can as well have a negative and distorting effects. fiscal policy and labour markets as well as public debt and fiscal sustainability. For example. Eric Mayer (University of Würzburg).Research group “Public finances: Interactions with the overall economy and sustainability” JEL Codes: Members: Josef Hollmayr*. fiscal policy can have an important stabilising role in downturns or in times of crises. Thereby fiscal policy can contribute to stable and sustainable developments. we plan to mainly analyse the impact of economic developments on fiscal balances as well as address the issue of long-run sustainability using variations of several VAR approaches. Xiaobei He (University of Frankfurt). Dan Stegarescu Advisors/visitors/co-authors: Anja Baum (University of Cambridge). Therefore. Christoph Priesmeier*. Michael Krause. Niklas Gadatsch (WHU – Otto Beisinger School on Management). the applications of such models include the assessment of temporary versus perma- Page 20 of 68 . Martin Kliem*. including the role of structural reforms (for example of the tax system)? The aim of this research group is to shed light on selected aspects of these questions. capital and labour markets and the real economy. Gerrit B. On the theoretical side. The programme of the group is organized according to the following three workstreams: public finance and the real economy. Koester (ECB). it is of utmost importance that the trust of the public and financial markets in sustainable public finances and adequate monetary policy is preserved. Time series modelling proves particularly useful for taking the crucial dynamic interdependencies of macroeconomic variables into account when theoretical fiscal policy hypotheses and budgetary relationships are analyzed. Tim Schwarzmüller (IfW). Bundesbank’s Public Finance Division General interest. Almuth Scholl (University of Constance). dynamic stochastic general equilibrium (DSGE) models provide a reliable tool for structural fiscal policy analyses and are gaining momentum recently. Stéphane Moyen*. Fiscal policy interacts in various ways with monetary policy. but on the other hand.

Several projects were triggered directly by our experiences during the crisis. we are planning the following papers: Köster and Priesmeier (ongoing) want to evaluate the gradually evolving reaction pattern of German primary deficits to changes in the business cycle in time-varying VAR analyses. First results suggest that. simulate the European Recovery Plan and adopt a model of sovereign default to analyse the economic effects of the assumption of joint liability in an economic union. The latter issue is subject to intense discussions within the euro area. the analysis of fiscal multipliers. Using various DSGE frameworks. The monetary transmission upon a shock to the common Taylor rule yields heterogeneous effects on output and inflation. a finding that applies in particular to the government spending multiplier. They plan to present empirical evidence for the major driving forces of the observable timevariation and want to compare their findings to the fiscal responsiveness in the US. who expand the SVAR approach by Blanchard and Perotti (2002) to a threshold SVAR – building on adoptions of threshold VAR models in monetary policy. This is due to the fact that the interest rate channel dominates the trade channel. fiscal shocks and spillovers seem to be less important than monetary shocks. for the evolution of key macroeconomic variables. if asset Page 21 of 68 . They find that fiscal multipliers have been generally moderate but in times of output below trend substantially higher than on average.nent fiscal stimulus. Gadatsch and Stähler (ongoing) plan to evaluate the economic effects of the European Recovery Plan and the consequences of expansionary fiscal policy conducted in Germany with a special focus on the spillovers to the rest of EMU. In this workstream. Hollmayr (ongoing) plans to establish a two country New-Keynesian model for a currency union building on Hollmayr (2011) estimated with Bayesian methods for data on Ireland and the rest of the euro zone. the perils of high and increasing public debt as well as ways and means to avoid inefficient fiscal stimuli and to ensure the sustainability of public finances. a) Public finance and the real economy Non-linear effects of fiscal policy on GDP growth over the business cycle are analyzed by Baum and Koester (2011). Using a model framework in line with Stähler and Thomas (2012) as well as the Bundesbank’s DSGE model. This setup may result to be appropriate investigating more macroeconomic questions in a currency union. Hollmayr (2011) sets up a New-Keynesian model for each of the eleven original member countries of the Euro area and ties them together with the GVAR methodology of trade weights to obtain a fully structural multi-country model for the whole currency union. He finds that spillovers from a government spending shock in one country are negative. Furthermore the macroeconomic consequences of a race to the bottom in the capital tax rate will be analyzed. A number of questions can be answered with this setup: How does the presence of a financial accelerator affect the distribution of capital within the monetary union upon a shock to the capital tax rate and what stabilizing measures should both the monetary as well as the fiscal side use. we plan to analyse the role of labour market frictions for the effectiveness of fiscal policy. Overall. the assessment of structural changes in public tax and spending policy. the role of private demand and sovereign default as well as fiscal policy’s interaction with monetary policy. Stabilization policy dictates for the central bank to target inflation as aggressively as possible and for the fiscal branch to react heavily to deviations of debt from its steady state. Each country is estimated with Bayesian methods on the same observable variables and with the same priors. Recent work as well as ongoing and planned projects In 2011 the group tackled several projects related to the effects of fiscal policy.

stabilizing tax smoothing stabilizes wages. b) Fiscal policy and labour markets Schwarzmüller and Stähler (2011) extended the medium-scale two-country monetary union model with a frictional labour market developed by Thomas and Stähler (2012) by endogenous hiring and firing decisions of firms. reforms decreasing the workers’ outside options (such as a decrease in unemployment benefits. Furthermore. Second. 2009) have shown in a DSGE model with a search labor market tax smoothing may no longer be optimal in such an environment. He. Weakening trade unions also accomplished these goals. employment and international competitiveness. Moyen and Stähler (ongoing) plan to use the extended model in order to address optimal tax policy across the business cycle. at least when not applied at the right place may be counterproductive. two additional research projects will be pursuit: First. especially. Hence. including a decrease in unemployment compensation. a cut in public employment and wages. in terms of output. Mayer. Given the recent discussion on again using fiscal policy to stimulate the economy. c) Public debt and fiscal sustainability In 2011 we completed one empirical paper inspired by the observation that public debt and expenditures are showing an upward trend which gained additional momentum in the recent crisis and endangers the long-run sustainability of public finances. lowering trade unions’ bargaining power and a reform of the employment protection legislation. Reforming employment protection. wages are tightly connected to fluctuations in aggregated variables and. The analysis finds that. solves the endogeneity problem present in the commonly used IV-approaches. (2010) show that and how liquidity-constrained households and involuntary unemployment resulting from a search labor market can affect the fiscal multiplier. Arseneau and Chugh (2008. it must be analyzed what exactly causes the changes. To address this question. however. Since Tiebout (1956). Extending their model by allowing for a tractable way of introducing heterogeneous agents in lagerscaled DSGE framework. There are two ongoing projects which can be seen as a follow up of this workstream: Mayer et al. This model has been used to analyse several labour market reforms currently under discussion. and the desire to stabilize output by stabilizing the evolution of wage along the cycle must not occur. a better understanding of the effects in presence of heterogeneous agents is of great importance. the link between wages and output is not so strict. The group found it impor2 The key to understanding the tax smoothing result in conventional models without a frictional labor market is that. however at the cost of higher labour turnover.prices in the small country undergo a boom-bust scenario. (2010). thus. fiscal authorities seem to have even less incentives to target asset prices. 2 It is interesting to assess to which extent this results still holds whenever a clear desire for consumption smoothing by liquidity-constrained households exists. the author uses a new micro dataset of the Swiss household panel which allows setting up the empirical problem as a quasi-experiment and. the question how differences in taxation influence the residential location choice is an ongoing issue in public finances. Moyen and Stähler (new) plan to use the extended framework to check how the framework with heterogeneous agents may change the fiscal multiplier derived in Mayer et al. public sector wages and public employment) seem most beneficial to foster output. private-sector employment and competitiveness. Should the results no longer hold. monetary policy should only lean against the wind if it is concerned about output. Page 22 of 68 . In presence of a matching labor market in which firms and worker bargain over wages. The reason for this is that. the consumption path and output. there. in principle. Somogyi (new) assesses the effects of tax competition on income sorting using a regression discontinuity approach. output. there is a huge range of wages which workers and firms would be willing accept in a matching environment.

the fiscal stance and the debt level of the Länder is highly diverging – with some Länder pursuing clearly unsustainable fiscal policies.S. Kriwoluzky and Sarferaz (ongoing) pose the question what the long-run implications of an increase in public debt are.g. we assume the no-bailout clause holding. Despite similar institutions. 2010). we introduce joint-liability of sovereign debt in form of guarantees. for example. extensive federal legislation in most areas and nearly completely equalized per capita revenues. Furthermore. the effects of higher public debt on output growth and inflation. such as contagion. the European Financial Stability Facility (EFSF) and even Eurobonds. Preliminary results of the panel analysis indicate that the ratio of wages and salaries and other operating expenditure (government consumption) to government investment in fixed assets has a debt increasing impact.In particular. not least to be able to develop strategies how to overcome this trend. As a consequence public finances got on an unsustainable path after heavy exogenous shocks on the deficit. Stegarescu (ongoing) is investigating the factors determining government finances of the German Länder over a long period of time (1974-2011). supporting loans and common bonds. and historical changes over time. This will not only apply to the projects directly focusing on public debt and fiscal sus- Page 23 of 68 . Their findings underline that an analysis built on common trends in expenditures and revenues is not sufficient for fiscal sustainability. The current crisis has reawakened interest in sovereign defaults in general as well as in stabilisation measures aimed in particular at preventing the occurrence of such events. Then. There are three ongoing projects in this workstream: Scholl and Stähler (new) plan to use a quantitative model of sovereign default in line with Arellano (2008) extended by a two-country structure in the manner of Lizarazo (2009. the project focuses on the frequency-characteristics of the U. The debate in the euro area shows that such issues are no longer confined to developing countries but are also becoming increasingly more relevant for developed economies. they recall the importance of the German debt brake for re-establishing sustainable public finances in Germany. All these schemes are then compared to the situation with the no-bailout clause holding in terms of default probabilities. have made it onto the agenda (see Arghyrou and Kontonikas. e. the authors analyze the long-run expectations about future public debt evolvement at different points in time. Moreover. interest rate movements and welfare. expenditures and economic development in Germany. The authors estimate a time-varying VAR model consisting of fiscal data for the U.tant to improve our understanding of these developments. Moreover. In a first step. suitable insolvency legislation or a workable – at least partial – assumption of joint liability in the context of the European Stability Mechanism (ESM). whereas expenditure allocation by government functions plays no conclusive role. public debt. 2011). Extending this model class seems promising for developing structural models to assess these questions on a theoretical basis. Stähler (2011) provided a comprehensive overview of the literature on quantitative models of sovereign default. between 1792 and 2010. The latter paper also includes risk-averse investors. Köster and Priesmeier (2011a) studied the relationship between revenues. Kliem. d) Further projects Generally the sustainability of fiscal policy will continue to play a dominant role in the fiscal policy arena and will be an important aspect to be taken into account in future research projects. In their VECM analysis they find evidence that government spending increases with economic development in the long run (Wagner’s law) and also revenue and expenditure developments are closely related.S. Topics.

Koester (2011). A. Default risk and risk averse international investors. Mayer. and A. B. Does Wagner’s law ruin fiscal sustainability in Germany?. E. and R. expectations and contagion. References Arellano. (2010). which can be explained by tax collection lags. Lizarazo. to the design of the ongoing studies of public finance interactions with the real economy and monetary policy. G. forthcoming. 690-712. American Economic Review. Stähler (2010). Page 24 of 68 . Series 1: Economic Studies. Series 1: Economic Studies. J. 35. V.. Entwicklung der Steuereinnahmen in Deutschland und aktuelle steuerpolitische Fragen. They find substantially lower long-run elasticities for profit-related taxes compared to previous studies and slightly lower ones for value-added taxes. and C. Deutsche Bundesbank Discussion Paper. as well as a dynamic reaction pattern spanning several years.and long-run elasticities are especially important with respect to profit-related taxes. Default risk and income fluctuations in emerging economies. mimeo. C. Deutsche Bundesbank (2008). whereas the long-run elasticity for wage tax is close to the consensus estimate in the literature. Deutsche Bundesbank Discussion Paper. Deutsche Bundesbank Discussion Paper. Economic Paper. Series 1: Economic Studies. They plan to allow for asymmetric reaction patterns and to evaluate their findings with respect to tax revenue forecasts. S. S. Series 1: Economic Studies. 18/2010. Government expenditures and unemployment: a DSGE perspective. Blanchard. 98. and G. ITAM Discussion Paper Series.g. 436. 03/2011. 117(4). S. Köster. G. there is evidence that differences between short. Hollmayr. B. O. Additionally. An empirical characterization of the dynamic effects of changes in government spending and taxes on output. Oktober. Moyen and N. G.. M. 09-06. Köster. Baum. (2009). forthcoming. Lizarazo. (2011). European Commission. 20794. wage and value added taxes. MPRA Discussion Paper Series. Fiscal spillovers and monetary policy transmission in the euro area. and C. Contagion of financial crises in sovereign debt markets. Deutsche Bundesbank Discussion Paper. Arghyrou.tainability. Perotti (2002). Economic and Financial Affairs. Monatsbericht. 2009) including a longer and newly compiled data set starting in 1970 for profit-related. S. V. Kontonikas (2011). Here they estimate a far lower contemporaneous response than that currently applied in tax forecasting and cyclical adjustment. The Quarterly Journal of Economics. B. Koester and Priesmeier (2011b) expanded an existing study on the elasticities of profitrelated taxes (see Priesmeier et al. The impact of fiscal policy on economic activity over the business cycle – evidence from a threshold VAR analysis. but as well e. Estimating dynamic tax revenue elasticities in Germany. Priesmeier (2011b). Priesmeier (2011a). 1329-1368. The EMU sovereign-debt crisis: fundamentals. (2008).

Tiebout. Tkacevs (2009). Marino. September. Schwarzmüller. J. Stähler. Kremer (2009). 416-424. C. R. G. Koester and J. Kremer. FiMod – a DSGE model for fiscal policy simulations.. Reforming the labor market and improving competitiveness: an analysis for Spain using FiMod. ECB Working Paper Series. Recent developments in quantitative models of sovereign default. F. B. Deutsche Bundesbank Discussion Paper. Econometric estimation of tax elasticities – Evidence from applications to profit-related taxes in Germany. Schalck and O. Kempkes.Morris. 64(5). Series 1: Economic Studies. Explaining government revenue windfalls and shortfalls: an analysis for selected EU countries. (2011). 28/2011. Stähler (2011). T. 1114. 29(2). Page 25 of 68 . C. Jonk. C. S. Paper prepared for the WGPF methods group. Priesmeier. S. de Castro. A pure theory of local expenditures. Economic Modelling. G. N. M. Journal of Political Economy. Linehan. 239-261. Rodrigues Braz. and N. (1956). M. N. Stähler. Deutsche Bundesbank Discussion Paper. Thomas (2012). R. C. 17/2011. Series 1: Economic Studies. and C..

which deal with a variety of research questions: 1) State of international integration and channels through which it is accomplished: What is the state of international (and European) integration? Do we observe a home bias? What is the role of international banks and multinational firms? What drives trade in services and how does it affect the labour market? 2) External imbalances: Are external imbalances a problem and if yes. Alexander Lipponer*. Christoph Fischer* (coordinator). international shocks and external imbalances” JEL Codes: Members: F02. Cathérine Tahmee Koch (University Zürich). Oliver Hossfeld*. F23. Frank Somogyi*. Cornelia Düwel (University Gießen). C68. F21. C2. F32. Sandra Eickmeier* (coordinator). Mathias Hoffmann*. how can we reduce them? What is the role of the exchange rate (regime)? 3) Effects of international integration: How do shocks propagate internationally? Is international integration helpful for risk diversification? Does international integration foster real convergence? For each of the topics. and the effects of international integration (for example regarding real convergence or price developments). Kerstin Stahn Claudia Buch (University Tübingen). F36. However. Axel Jochem*. F14. it analyzes more carefully the role of the exchange rate (regime). more integration may also mean more unwelcome external shocks. the various channels through which shock transmission works. A full list of references to the papers is provided at the end. A special focus lies on heterogeneity in the euro area. the role of international banks and multinational firms (FDI and of international service trade). Furthermore more integration may foster external imbalances which prove unsustainable in the longer run. Annette Fröhling*. F31.Research group “International Integration. Rainer Frey*. Jörn Kleinert (University Graz). F33. Farid Toubal (University d’Angers) Advisors: General interest and policy relevance Traditionally. Monika Schnitzer (University Munich). Norbert Metiu*. Sven Blank*. such as better risk-sharing or a reduction in transaction costs. Regarding the channels. as external imbalances (worldwide and inside EMU) were blamed as one reason for and international contagion was seen as an important ingredient of the crisis. Iris Kesternich (University Munich). The research programme is organised around three workstreams. The discussion about such drawbacks became more lively in the course of the recent crisis. the research programme briefly presents recent work which has been finalised or published during 2011 as well as ongoing and planned projects. Kirsten Lommatzsch*. F15. Tobias Schmidt*. E3 Elena Biewen*. C3. Sabine Herrmann*. State of international integration and channels through which it is accomplished Page 26 of 68 . Research in the group thus contributes to the “Competitiveness Network” newly established in the Eurosystem. economists have emphasised the beneficial welfare effects of international integration. F4. The group plans to shed more light on the degree of international integration.

ongoing) assess the impact of a rapid decline in locational advantages. Multinational banks increasingly concentrate their intrafunding resources on the important and profitable business fields abroad. Sofka and Schmidt (“Mandates and autonomy in the global banking crisis”. In contrast to earlier work. on German BHC’s foreign affiliates and the extent to which their respective strategic set-ups (mandate and degree of autonomy) have shaped the way foreign affiliates cope with the crisis. as triggered by the crisis. However. A related project focuses rather on the hierarchical structure of bank holding companies (BHCs). Based on a gravity model. Hoffmann and Ortseifer (2010) show that including distribution costs in a general equilibrium model of international portfolio choice helps to explain the “home bias” in international equity investment. on microdata from the External Positions Report of German Banks. in particular on bank-specific factors. their model is able to replicate observed investment positions for a wide range of parameter values. intra-bank funds are rather provided by the parent banks which are well capitalized. The authors identify the determinants of portfolio restructuring in EMU member states since the introduction of the euro and especially during the financial turbulence of the past years. Page 27 of 68 . ongoing) investigate the long-term loan supply by affiliates of large German banks both before and during the financial crisis. but they have not expanded relative to banks not receiving support. First results show that affiliates of large parent banks that collected more deposits and generated more income were more likely to extend credit abroad. the empirical analysis suggests that global as well as country-specific factors are significant determinants of cross-border bank flows. Greater global risk aversion and expected financial market volatility seem to have been the most important factors behind the decrease in cross-border bank flows during the recent crisis. Düwel. Düwel and Frey (“Competition for internal funds within multinational banks. Other explanations for the home bias are examined in more detail in Jochem and Volz (2011). parent banks hold back funding capacities for their lending at home which belongs to their core activities. Besides traditional indicators of information and transaction costs as well as monetary and financial institutions. rising risk aversion among banks curbed cross-border lending during the financial crisis. The study draws. Frey and Lipponer (2011) show that the change in German parent banks' crossborder lending is based almost exclusively on supply-side determinants.a) Home bias Harms. inter alia. Koch. b) The role of globally active banks Herrmann and Mihaljek (2011) study the nature of spill-over effects in bank lending flows from advanced to emerging market economies and identify specific channels through which such effects occur. even if agents have an incentive to hedge labour income risk by purchasing foreign equity. the perception of sovereign risk seems to have become a major determinant of portfolio allocation inducing a retreat into the “home haven” with which the investor is familiar. In case of support. As a further finding. Foreign affiliate lending in the crisis”. In the crisis. One of their findings is that banks covered by rescue measures of the German government have increased their foreign activities after these policy interventions. foreign countries’ demand and risk characteristics become relevant when loans are distributed by affiliates abroad. Koch and Kötter (2011) analyse how the lending and borrowing of foreign affiliates of German banks has responded to domestic and US crisis support schemes. Buch.

Page 28 of 68 . c) The role of trade in services Two further projects exploit Bundesbank micro-level databases on trade in services. they decompose the volume of services traded into different margins. They first show that long-run growth forecasts based on filtering actual productivity growth comove strongly with survey measures of expectations. They proceed in two steps: First. it is planned to augment the database by data from the Research Institute of the German Federal Employment Agency (IAB) which provides detailed information on the employment structure at the firm-level. They aim to examine. the model is shown to be able to explain. they evaluate how internal frictions in terms of a lower sales level (per employee) and external frictions in terms of a reduced availability of credit co-determine the likelihood and the extent of sourcing services from abroad. they ask whether trade volumes and the corresponding margins are driven by country characteristics using macroeconomic and gravity-type variables. Biewen. The novel feature of this study is that they treat the BHC as a portfolio of subsidiaries and look at interdependencies between them.A third project on this topic. External imbalances and exchange rates a) Understanding external imbalances Hoffmann. under standard parameterisations. in a DSGE model with an endogenous production structure. the Balance of Payments statistics will be matched with the Bundesbank’s data on corporate balance sheets as well as data on firms’ foreign direct investment. Including data on US TFP growth and the world real interest rate. Sofka and Koch (“The subsidiary portfolio of international BHC through the crisis”. while the production of other countries (including Germany) is concentrated on exports. The goal of this study is to gain new insights into how BHC’s deal with volatile host country environments and into the effectiveness of responses at different organizational levels. Research in this field will also contribute to the recently started ESCB wide research network on Competitiveness (Compnet) To facilitate further research on trade in services. namely headquarters. portfolio and subsidiary. why some countries’ production is concentrated on services that are mostly sold domestically. Second. In their project “Margins of German trade in services” (ongoing) Biewen and Blank describe the pattern of German firms’ international services trade. In particular. the evolution of the US current account quite closely. Hoffmann and Krause’s project “Explaining cross-country difference in the specialization of production” (new) focuses on heterogeneity in the production structure across countries. In addition. Such a data base will help to realize research on labour effects of international trade of services in the future. Schmidt. new) also uses the External Positions Report of German Banks to analyze the response of German BHCs and their affiliates to the crisis. The authors assess the determinants of service offshoring along the extensive and intensive margins. Harsch and Spies’ study “The determinants of service imports: internal versus external frictions” (ongoing) provides evidence on how German multinational firms restructured their service activities during the last decade. Krause and Laubach (2011) have examined the extent to which the U. This decomposition reveals how much each margin contributes to the cross-sectional variation of service exports and imports as well as to fluctuations over time. current account can be understood in a purely real open-economy DSGE model. More projects on the role of global banks can be found in the group “Banking structure”.S. where agents’ perception of long-run growth evolves over time in response to changes in productivity.

the profitability of the exporting sectors. By this. the paper proposes a novel argument to rationalise systematic deviations from purchasing power parity. ongoing) attempts at isolating the effects of safe haven flows on exchange rate movements. Since it is found that the estimated parameters are consistent with an additive random utility model interpretation. Lommatzsch (“Diverging export performance of euro area member states: the role of price and non-price competitiveness“. They show that these results can be replicated by a two-country open-economy sticky price model under either segmented or complete asset markets. Fischer (2011) considers the two major currency blocs of the present world. a positive link between home bias in portfolio choice and pass-through is generated. Turning to the topic of exchange rate determination. and how does FDI react to policy measures aimed at reducing external imbalances in the euro area? The authors will apply firm-level data in their analysis. where the factors should reflect economic uncertainty. the study goes on to test for each country whether its estimated utility would rise if the country chose an alternative exchange rate regime. He uses nested logit regressions to investigate the long-term structural determination of anchor currency choice. b) The role of the exchange rate regime Hoffmann and Tillmann (2012) provide panel evidence from a large set of advanced and emerging economies that greater financial integration (measured as a greater foreign assets and liabilities-to-GDP ratio) raises national price levels under managed exchange rate regimes and lowers them under floating exchange rates. Page 29 of 68 . In a follow up project (“International investment positions and capital flows: the role of the exchange rate regime choice”. The outcome of this project could also serve as an input to Compnet. participation in vertical specialisation (outsourcing). Hoffmann plans to analyse in a two-country general equilibrium model with endogenous international portfolio choice the repercussions of the exchange rate regime choice for international integration in the form of capital flows and the composition of the international investment position. new). First results indicate that the most relevant additional influences are the extent of innovation and research. retail trade). They explore the effects of financial market integration on the optimal choice of the pricing currency in the context of sticky nominal goods prices and find that price setters optimally move towards more local-currency pricing while the optimal debt portfolio includes more foreign assets following increased financial integration. and alternative business opportunities offered by the domestically oriented sectors (real estate. In the project “Macroeconomicpolicy coordination and microeconomic FDI incentives” (new) Biewen. Buch and Kleinert aim to contribute to two questions: How does FDI react to real rate changes. The analysis will focus on effective exchange rates in order to show how international price competitiveness is affected by safe haven flows. it is planned to combine a factor model and a cointegrated VAR model. construction. A current project which is concerned with the related subject of the choice of a pricing currency is Buzaushina. Hossfeld (“Economic uncertainty and safe haven currencies: a factor augmented CVAR approach”.Turning from current account imbalances in a global context to trade imbalances on a European level. the share of high-technology sectors. a currency bloc equilibrium is derived. Finally. ongoing) investigates whether the consideration of non-price competitiveness factors in export equations helps explain the divergence in export performance observed in the euro area member states since euro inception. as observed in the data. Methodologically. Enders and Hoffmann’s “International financial market’s influence on the pricing currency choice” (ongoing). They will be integrated into an otherwise standard behavioural equilibrium exchange rate model. Thus.

In the last years. They explore the implications of granularity in the banking sector for macroeconomic stability using Bundesbank micro data on German banks. The size of US financial shocks varies strongly over time. Credit and foreign exchange markets are strongly involved. The authors use sign restrictions to identify credit supply shocks and investigate their dynamic international transmission in the GVAR. Eickmeier and Ng (2011) study how shocks in credit supply to the private sector in the US. consistent with financial globalization. The goal of this project is to examine this link. increased food prices led to political instability in developing countries. Eickmeier. Lipponer. They assess heterogeneity across countries in the response to the Chinese shocks and analyze the role of different transmission channels by assessing their impact on unit labor costs. In their current project “Understanding global liquidity” (ongoing). inflation and other financial variables in advanced and emerging economies. monetary and credit aggregates covering lots of advanced and emerging market economies. Trade and different types of financial weights are used to link the countries together. They analyze the temporal evolution of the factors. commodity prices and exposure to foreign competition. In future work they plan to assess in detail the interaction between emerging market and advanced economies’ liquidity. credit supply and credit demand) factors from a large dataset of interest rates. with the `global financial crisis shock´ being very large by historical standards and explaining 30 percent of the variation in GDP growth on average over all countries in 20082009. A link to food prices has. They use a factor-augmented VAR (FAVAR) model which allows for time variation in the parameters. Eickmeier. Gambacorta and Hofmann extract interpretable global liquidity (monetary policy. They use a FAVAR which includes macroeconomic variables from OECD countries and a few Chinese variables which capture Chinese demand and price or wage developments. their importance for individual countries and variables and their predictive content for global growth and inflation. the euro area and Japan are transmitted to other economies. not yet been established. In a related paper. Kühnlenz and Slopek analyze to what extent Chinese supply and demand shocks contributed to global inflation in the past 2 decades. The transmission to GDP growth in European countries has increased gradually since the 1980s. The project of Buch. The project further tries to understand which institutional and economic factors determine the food price pass-through to inflation and political instability in various countries.Effects of international integration a) International shock transmission Eickmeier. Lemke and Marcellino (2011) analyse the changing international transmission of US financial shocks over the period 1971-2009. They use the recently-developed Global VAR approach (GVAR) to model credit to the private sector and credit spreads jointly with output. new) considers more specifically the repercussions of shocks to large banks. The key research questions to be dealt with are: How important are (idiosyncratic) shocks hitting large banks for the real economy? Are shocks hitting those banks abroad transmitted to the domestic real economy? In “China's Role in Global Inflation” (new). It is found that shocks to the supply of US private credit in particular have strong effects on GDP in foreign countries. import and export prices. The relationship between inflation and political instability is well documented in the literature. They find inter alia that positive US financial shocks have a considerable positive impact on growth in other countries. Somogyi is preparing the study “Food prices and political stability” (ongoing). however. Niles-Russ and Schnitzer (“Large banks and regional macroeconomic volatility”. Page 30 of 68 .

Thus. He uses an extremely detailed and comprehensive scanner database on washing machine prices and sales volumes for 17 European countries to perform a hedonic regression which yields country-specific time series for quality-adjusted price differentials. The domestic business cycle is found to be an important determinant of inflation but – given the weak factor structure of disaggregated prices – it is only one among a number of nearly equally important factors. investment in domestic multinational firms may contribute to international portfolio diversification as these firms are less prone to shocks originating at home. The results indicate that two thirds of the items in the euro area HICP are cyclically sensitive. In addition to standard panel estimators. which leads to an endogenously determined portfolio allocation in equilibrium. firms’ operations depend on external finance which is subject to credit constraints. the extensive margin of trade in goods is determined endogenously and responds to unanticipated changes in macroeconomic conditions. They will investigate economic convergence using aggregate macroeconomic variables for European regions and countries with a special focus on members outside the monetary union. The project further investigates whether the financial crisis changed the pre-crisis capital flow structure. They want to shed light on the question to what extent the euro area is “different” and which factors contribute to the fact that in contrast to the global level the neoclassical theory applies quite well in the euro area.Herrmann and Kleinert (“International capital flows: Lucas Paradox. they intend to investigate the extent to which regional characteristics can account for the differences in the speed of convergence between the identified convergence clubs. the framework enables to analyze the interplay of real activity and financial conditions and the impact on international consumption risk sharing. Subsequently. among member states. A more general analysis of convergence patterns in the EMU will be performed in Borsi and Metiu’s project “Regional economic convergence and its determinants” (ongoing). Blank (“The impact of frictions in goods and financial markets on international consumption risk sharing”. A recently developed clustering algorithm and convergence test to form convergence clubs will be employed to estimate the speed of convergence over the last two decades. Small convergence clusters can be identified but they are unrelated to EMU membership. Allocation Puzzle and the financial crisis”. new) examine the Lucas Paradox as well as the Allocation Puzzle of international capital flows by referring to a panel data set of EMU countries as well as major industrialized and emerging economies. They investigate output sensitivity of inflation in the euro area using price indices at the COICOP 4-digit level. Blank and Hoffmann’s project “Risk sharing and the international diversification in production” (ongoing) investigates the impact of firms’ multinational activities on crosscountry risk sharing in a DSGE framework where firms may choose to locate stages or most of the production process abroad. Log t tests firmly reject price convergence among EMU countries. ie a reduction in heterogeneity. Fischer (2012) examines whether the establishment of the EMU caused price convergence. In addition. ongoing) analyses the consequences of frictions in goods and financial markets for the allocation of risk across countries. c) Heterogeneity and convergence in the euro area Fröhling and Lommatzsch (2011) focus on the heterogeneity across product categories. Page 31 of 68 . b) Risk sharing Despite home bias in equities. As firms are heterogeneous in this setup and trade is subject to fixed costs of exporting. spatial econometrics techniques are used to explore spillover effects which depend on trade and financial linkages. Their setup explicitly takes account of households’ international equity investment decisions. inter alia by extracting the first common factor from the disaggregated prices.

Deutsche Bundesbank Discussion Paper. forthcoming. Deutsche Bundesbank Discussion Paper. S. and T. European Economic Review. in: Capital flows to converging European economies – from boom to drought and beyond. European Economy.. Eickmeier. which allows controlling for common shocks. They plan to estimate country-specific macroeconomic shocks and analyse their propagation to individual euro-area countries. Mihaljek (2011). T. Eickmeier. They use a Global VAR model. and K. Ng (2011). S. Ortseifer (2010). Series 1: Economic Studies. 15/2011.. (2011). Hoffmann and C. and policy transmission through international banks. Price convergence in the EMU? Evidence from micro data. Currency blocs in the 21st century. C. Herrmann. Deutsche Bundesbank Discussion Paper. How do credit supply shocks propagate internationally? A GVAR approach. risk aversion and the financial crisis. S. Series 1: Economic Studies. R. The changing international transmission of financial shocks: evidence from a classical time-varying FAVAR. S. rescues. Kötter (2011). A. Fröhling. M. C. and assess whether the transmission has changed with the handover of monetary policy to the ECB and whether the shock adjustment in euro-area and non euro-area countries differs. C. Lipponer (2011). the prevalence and transmission of country-specific shocks will be examined in Eickmeier and Stracca’s project “Has EMU changed the transmission of country-specific shocks in the euro area?” (ongoing). The home bias in equities and distribution costs.. Output sensitivity of inflation in the euro area: indirect evidence from disaggregated consumer prices. Lemke and M. Frey and A. Deutsche Bundesbank Discussion Paper. 8720. 05/2011. 25/2011. Lemke and M.. Page 32 of 68 . S. Occasional Paper. Düwel. Deutsche Bundesbank Discussion Paper. Eickmeier. Marcellino (2011). Series 1: Economic Studies. Fischer. 12/2011.A different aspect of heterogeneity. S. 8341. Harms. (2012). Series 1: Economic Studies. W. CEPR Discussion Paper. How do credit supply shocks propagate internationally? A GVAR approach. Deutsche Bundesbank Discussion Paper. Marcellino (2011). M. P. CEPR Discussion Paper. Mihaljek (2011). Series1: Economic Studies. 75. Determinants of cross-border bank flows to emerging markets – new empirical evidence on the spread of financial crises. References Buch. Fischer. and T. Cross-border bank lending. C. 27/2011. and D. 29/2011. BOFIT Discussion Papers. Koch and M. The changing international transmission of financial shocks: evidence from a classical time-varying FAVAR. W. Lommatzsch (2011). Deutsche Bundesbank Discussion Paper. Proceedings of the Workshop held on 1 October. Herrmann. Determinants of cross-border bank flows to emerging markets – new empirical evidence on the spread of financial crises. Ng (2011). 03/2011. Eickmeier. Crises. and D.. European Commission. Series 1: Economic Studies. Series 1: Economic Studies. C. Brussels. 24/2010.

Hoffmann. domestic and sector-specific factors. Deutsche Bundesbank Discussion Paper. Portfolio holdings in the euro area – home bias and the role of international. Jochem. M. and P.Hoffmann. Krause and T. Page 33 of 68 . Series 1: Economic Studies. Series 1: Economic Studies. A.. M. 01/2011. M. Volz (2011). Laubach (2011). Integration financial integration and national price levels: the role of the exchange rate regime. and U. 07/2011. Tillmann (2012). Long-run growth expectations and “global imbalances”. Deutsche Bundesbank Discussion Paper. Journal of International Money and Finance. forthcoming.

Andreas Einsenbraun. Laura Wichert. Alexander Schulz. Jeong-Ryeol Kurz-Kim* (Coordinator). Vladimir Kuzin. Following these developments. Kai Tänzler. Andreas Röthig. Klemens Hauzenberger*. Michael Scharnagl. Early Warning and Monetary Policy” JEL Codes: Members: C1. The group’s work stream on macroeconomic forecasting focuses on the following topics and research questions: • How can we improve the forecast accuracy of output and inflation? Attempts to answer this question should lead to improvements in the suite of forecast models employed in the regular forecast exercises of the Bundesbank. How can we exploit financial data for forecasting? Furthermore. Phillip Koziol. Specific challenges have emerged from the recent financial crisis. Birgit Uhlenbrock. Jens Mehrhoff. many central banks publish their forecasts in order to increase transparency and to guide expectations of future monetary policy. used in the construction of fan charts. E37. The Bundesbank is also involved in the Early Warning Systems and Systemic Risk Indicators group of the ESCB Macro-prudential Research Network (MaRs). Norbert Metiu*. Christian Schumacher* (Coordinator). which comprises the ECB and the national central banks (NCBs) of all EU Member States. Victoria Galsband. Mark Weth. for example. F41. how can the real effects of crashes in stock markets be identified and quantified? How can we exploit international data for forecasting national developments? How should central banks produce and evaluate probabilistic forecasts? The group investigates forecast uncertainty and forecast risks. F47. Early Warning. the Bundesbank has to contribute to the “Working Group on Forecasting” (WGF) and the “Working Group on Econometric Modelling” (WGEM). The work of the group comprises two work streams: 1) macroeconomic forecasting. and 2) early warning. C61. Guido Schultefrankenfeld*. C46. which are. Malte Knüppel*. research in the Eurosystem has become more focused on the ability of early warning indicators to predict financial market developments. policy relevance and outline of the research programme Forecasting is an indispensable element in the decision-making process of most central banks. G17. In the European System of Central banks (ESCB). Karsten Webel. E47. C5. The “Forecasting. Sandra Eickmeier. In the monetary policy strategy of the Eurosystem. • • Page 34 of 68 .Research group “Forecasting. and Monetary Policy” research group evaluates and develops econometric forecast models and methods relevant for the Bundesbank tasks and the Eurosystem. G33 Dirk Bleich. Mevlud Islami. E58. G01. Michael Fischer. projections of key macroeconomic variables play an integral part. Rafael Zajonz Advisors/visitors: Jörg Breitung (University of Bonn). risks for financial stability and the consequences for the real economy. G12. comprising the ECB and the national central banks of the euro area. The Broad Macroeconomic Projection Exercises (BMPE) are carried out in the context of the Eurosystem. E32. Sylvia Kaufmann (OeNB) General interest. As a part of their communication strategy.

as well as the herding behavior of stock market investors. The work stream on early warning focuses on the following research topics: • Early warning and alarm index: Historically stock market crashes often have triggered serious problems in the real sector and the financial system. Likewise related to the empirical estimation of factor models is the paper by Breitung and Eickmeier (2011). Lemke and Marcellino (2011) explore a FAVAR with smoothly time-varying parameters based on frequentist methods. Eickmeier. Kuzin. and the other one concerned with the German economy. Our early warning model is based on two aspects which are well-founded in the literature: a stable long-run relationship between fundamental values and stock price. Two projects have investigated the role of international data for forecasting. One question is how important the statistical revisions actually are and whether they matter for forecasting. the research group in 2011 continued to work on topics related to nowcasting quarterly GDP. • The group aims to contribute to a better understanding of sharp stock market movements and to what extent regulatory measures can help to reduce the risk of exuberance in stock market price developments. Therefore we aim to develop an early warning model for stock market crashes.• The Bundesbank maintains a real-time database named GERDA. see Knetsch (2010). various econometric and statistical methods are investigated and refined to capture early warning indicators. Both papers show that only sophisticated variable preselection methods help to identify those inter- Page 35 of 68 . Marcellino and Schumacher (2012) have investigated the performance of pooling versus model selection for nowcast models. Marcellino and Schumacher (2011) have discussed unrestricted MIDAS (U-MIDAS) regressions. a variant of MIDAS with more general lag polynomials than in the literature. and found a very robust performance of pooling in six industrialized countries. By doing this. The projects carried out by the group take account of realistic real-time data problems. The group aims to contribute to a better understanding how stock market crashes can affect the real economy. Marcellino and Schumacher (2011) have compared recently developed mixed-data sampling (MIDAS) regressions using single indicators with mixed-frequency VAR models in relation to forecasting euro area GDP using monthly indicators. consisting of historical vintages of German macroeconomic time series. Foroni. • Work stream 1: Macroeconomic forecasting Recent Work at the Bundesbank To improve the forecast performance of the existing methods and models. see Eickmeier and Ng (2011). One project was concerned with New Zealand as a small open economy. which proposes statistical tests for structural breaks in the factor loadings with applications to the United States and the euro area. Nowcasts can be regarded as projections of current-quarter GDP growth using higher frequency data. an alarm index for stock market crashes is provided. Kuzin. These data are important to analyze a variety of open issues in economic analysis and forecasting. The paper assesses changes in the transmission mechanism of monetary policy in the US and evaluates its predictive ability. see Schumacher (2010). such as mixed sampling frequencies and ragged-edge data due to different statistical publication lags. Using the early warning model. The group has also worked on factor-augmented VAR (FAVAR) models.

”Sparse Bayesian Factor Model”. “Nowcasting German GDP using daily indicators”. Page 36 of 68 . “What determines the shape of fan charts?”. One project measures the impact of financial uncertainty shocks on GDP by employing the response surface analysis (Kurz-Kim. In another attempt to improve the forecasting methods. new). the determinants of the shape of fan charts will be studied (Knüppel. More work will be done on density forecasts of central banks. For details. “Nowcasting Euro area GDP using Factor Models”. The group will investigate the role of international data for forecasting in more depth. ongoing). ongoing) when the dataset takes into account a large number of different variables from different countries. “Hierarchical shrinkage in a mixed-frequency time-varying parameter model for forecasting GDP”. Gambacorta. Another project extracts global liquidity indicators from a large dataset comprising interest rates. ongoing). new). ongoing). “Understanding Global Liquidity”. “A short-run forecasting using the response surface analysis”. Another project aims at nowcasting GDP in the euro area by using factor models (Wichert. Partly building on Knüppel and Schultefrankenfeld (2011b). a project explores the information content of daily financial indicators for nowcasting German GDP. Finally. Moreover. “A generalized single equation error correction model”. Schumacher. the team has also contributed to the regular forecast exercises of the Bundesbank by making use of the nowcast methods addressed in the research papers above. ongoing). Further projects investigate the role of financial data and forecasting. A project will consider the estimation of international dynamic factor models using Bayesian techniques (Kaufmann. Together with the staff of the Economics Department. new). The focus of the research is to provide a short-term GDP forecast under high financial uncertainty. monetary and credit aggregates from advanced and emerging market economies and assesses the predictive content of these indicators for global growth and inflation (Eickmeier. Based on Factor-MIDAS models with monthly data that are used in the regular forecast exercises of the Bundesbank. the project evaluates the change in nowcast accuracy when adding daily financial indicators to the dataset (Galsband. Marcellino and Schumacher (2012) also motivate the combination of many models in the regular nowcast exercises of the Bundesbank. the group will explore the performance of shrinkage in Bayesian time-varying parameter models with many predictors and mixed-frequency data (Hauzenberger. The favourable pooling results in Kuzin. To improve the short-run forecasting performance of the usual error correction model (ECM). Schultefrankenfeld. tests for evaluating multi-horizon density forecasts have been proposed in Knüppel (2011).national indicators that improve forecasts in factor model and multiple regression frameworks. In the context of the publication of central bank forecasts as fan charts. Knüppel and Schultefrankenfeld (2011b) investigate the macroeconomic risks assessments of inflation-targeting central banks. another project considers a generalized ECM containing different sampling frequencies of underlying data (Kurz-Kim. see the research group International Integration. Based on these results. Knüppel and Schultefrankenfeld (2011a) investigate how macroeconomic risk forecasts can be evaluated. Hofmann. The project discusses whether aggregated country nowcasts for the euro area perform better than nowcasts based on areawide models estimated on aggregated data for the euro area. Ongoing and future projects Improving the suite of forecast models used at the Bundesbank will remain one of the main goals of the group.

Webel. A third research topic expands on classical revision analyses by focussing on the variance of the published indicator (Mehrhoff. Monitoring current economic developments and forecasting is typically based on seasonally adjusted data. Changes in methodologies and base years lead to different data regimes and different patterns of revisions. For example. “Metadata and data revisions”. ”Evaluating the calibration of density path forecasts”. A theoretical and empirical analysis of fundamentals. ongoing). Using insights from earlier work by Jorda. A project will evaluate the functionalities of the new statistical software package X-13ARIMA-SEATS (Webel. and the team will evaluate these approaches (Schumacher. “The predictability of data revisions in German GDP”. new). ongoing). To this end. The group plans to explore the predictability of statistical data revisions based on the German real-time database GERDA. Work stream 2: Early warning Recent work at the Bundesbank The (Bundesbank) early warning model is continuously being revised. Röthig (2011) studies the lead–lag relationship between speculation and hedging activity in currency futures markets and find that speculators lead hedgers in all markets examined. the expected earning is added in the fundamental sector to test bubbles and critical times. the (Bundesbank) early warning model will be extended for the EuroStoxx 50. Knüppel and Marcellino. the credit default swaps of the countries are analysed and summarised in an alarm index In the field of the statistical methods for early warning. Mehrhoff. and risk analyses regarding the sovereign debt crisis are the topics. The literature provides different ways to exploit the many data vintages available for this purpose. Schultefrankenfeld. Röthig and Chiarella (2011) also analyze the interrelationship between small traders in currency futures markets and speculators and find s strong herding behavior of the small traders. without asking how relevant different assumptions would be. it is planned to propose a method for the joint evaluation of all forecast horizons of the fan chart (Jorda. Therefore the impact of the interest assumptions commonly used in central bank forecasts on forecast accuracy will be investigated (Knüppel. ongoing). ” The Empirical (Ir)Relevance of the Interest Rate Assumption for Central Bank Forecasts”. In the literature. Knüppel and Marcellino (2010). The role of metadata for predicting (conditional) data revisions is a second strand of research (Lorenz. based methodologically on the threshold error correction models To measure the intensity of the bond crisis in the “GIPSI” countries.Central banks have extensively discussed which interest rate assumptions should underly their forecsts. ongoing). Similarly. “Seasonal adjustment with the X-13ARIMA-SEATS package”. Furthermore. in addition to the government bond rates. Page 37 of 68 . The impact of these changes on business cycle analysis and forecasting will be investigated. Kurz-Kim (2012) applied the log-periodic power law for capturing early warning indicators. “On the loss of accuracy of economic indicators released too early”. updated and improved. the evaluation of multi-period density forecasts is often carried out separately for each singe forecast horizon. new). Dietrich. the lower degree of “hard” data in early estimates is treated theoretically and empirically from a sampling point of view. Ongoing and future projects A survey paper on the Bundesbank early warning model is being considered as a possible contribution for the MaRs. By doing this. a couple of research papers for the various submodels will be also written separately. Schultefrankenfeld. herding behaviour.

71-84. Marcellino (2011). new) analyse the corresponding empirical data and develop a model to measure the impact on stock markets of a ban on uncovered short-selling. S. to develop an early warning indicator for credit crunch is of important to predict its impact on the real economic activity and/or on stock markets. In the line with the current political and economic discussion on prohibiting (uncovered) short-selling. which is expressed in terms of its conditional quantiles. mimeo. Page 38 of 68 . new) test for the existence of a bubble which is assumed as random walk with trend breaks under alternative hypothesis. Series 1: Economic Studies. 496-511. 163(1). Deutsche Bundesbank Discussion Paper. and S. Gambacorta (2012). 27. J. new) investigate the causal relationship between international financial markets during calm and crisis periods. Eickmeier.Islami and Kurz-Kim (“A financial stress indicator and the real impact of financial uncertainty”. Eickmeier (2011). U-MIDAS: MIDAS regressions with unrestricted lag polynomials. Using the standard likelihood ratio test. A credit crunch indicator will be constructed by using credit volume and its risk. Deutsche Bundesbank Discussion Paper.. 04/2011. Forecasting National Activity Using lots of International Predictors: An Application to New Zealand. Schumacher (2011). Kurz-Kim and Tänzler (“The impact on volatility of a ban on uncovered short-selling”.. Quantile regressions are employed to test for Granger causality in the distribution of financial returns. International Journal of Forecasting. Classical time-varying FAVAR models – Estimation. S. Kurz-Kim and Scharnagl (“Testing bubbles as a random walk with trend breaks”. References Breitung. M. new) analyse the causal relationship between the financial crisis and the banking/sovereign debt crisis. especially in critical times. Therefore. C. W. B. Foroni. Using various economic/financial indicators. This sentiment indicator should help us to explain the short-run dynamics of stock prices. Eickmeier. 35/2011. forecasting and structural analysis. We propose a test of shift-contagion based on the observation that financial markets usually move closer together as returns become more extreme. Eickmeier. whereas under the alternative the process switches from a random walk to a mildly explosive process. S and T.. Our approach entails testing for a shift in the quantile range at which the Granger-causal relationship holds at some point in time. Marcellino and C. Kurz-Kim and Metiu (“Contagion and tail dependence”. They also provide a financial stress indicator which is able to forecast financial crises and banking/sovereign debt crises alike. Ng (2011). They also compare their test with the modified Dickey-Fuller test by which the null hypothesis assumes that the underlying stochastic process is a random walk over the full sample. Kurz-Kim and Schultefrankenfeld (“Rational panic and a stock market sentiment indicator”. new) construct a stock market sentiment indicator. Series 1: Economic Studies. Testing for structural breaks in dynamic factor models. Understanding Global Liquidity. The recent financial crisis showed that a banking crisis causes a credit crunch which again can cause an economic contraction/crisis. Koziol and Kurz-Kim (“A credit crunch indicator based on credit volume and its risk”. Hofmann and L. new) consider an early warning indicator for credit crunch based on a large micro banking data. Journal of Econometrics. Lemke and M.

Deutsche Bundesbank Discussion Paper. (2012). Kuzin. (2011). C. Series 1: Economic Studies. 06/2010. Knüppel. Schumacher.. Page 39 of 68 . Evaluating the calibration of multi-step-ahead density forecasts using raw moments.. Economics Letters. 95-98. Kuzin. Schumacher. 1465-1469. 130. 14/2011. M. Early warning financial crashes using the log periodic power law. International Journal of Central Banking. A. Series 1: Economic Studies. M. Deutsche Bundesbank Discussion Paper. and G. 898-914. Series 1: Economic Studies. O. and C. Deutsche Bundesbank Discussion Paper.-R. Empirical simultaneous confidence regions for path-forecasts. Marcellino (2010). 63-69. How informative are central bank assessments of macroeconomic risk?. Schmollers Jahrbuch. and G. Chiarella (2011). 32/2011. A. M. Schultefrankenfeld (2011a). MIDAS vs. (2010). (2010). Schumacher (2011). Kurz-Kim. Factor forecasting using international targeted predictors: The case of German GDP. Schumacher (2012). M. 107. Marcellino and C. 16. (2010). Röthig. Röthig. 529-542. 107. mixed-frequency VAR: Nowcasting GDP in the Euro Area. J. 95-98. Factor forecasting using international targeted predictors: The case of German GDP. Small traders in currency futures markets. Applied Economics Letters. V. Knüppel. (2011). 31. V. T. International Journal of Forecasting. On speculators and hedgers in currency futures markets: who leads whom?. Journal of Futures Markets. Evaluating macroeconomic risk forecasts. forthcoming. Economics Letters. International Journal of Finance and Economics. 27. C. Journal of Applied Econometrics. Schultefrankenfeld (2011b). 19.Jorda. M. Knüppel. forthcoming. Marcellino and C. Knetsch. 241-252. The Bundesbank’s Macroeconomic Real-time Database for the German Economy (Gerda).. Knüppel and M. Pooling versus model selection for nowcasting GDP with many predictors: Empirical evidence for six industrialized countries. M.

However. Niels Schulze*. In particular. Our research questions are: What are proper tools to measure interconnectedness and resulting contagious effect among financial market segments more accurately? How do market failures foster contagion and what are the consequences for bank behaviour? This avenue of research is also highly important for future regulation as it provides insights on how to account for various incentive schemes and market failures. deficient incentives as deeper causes of financial stability issues and regulation as a measure to avoid or reduce financial stability problems. E4. Claudia Buch (Eberhard Karls Universität Tübingen). Michael Kötter (Rijksuniversiteit Groningen) General interest and Policy Relevance The events of the recent past have vividly shown that the understanding of a stable and sound financial system is still hampered by the absent comprehension of the underlying sources and amplification mechanisms challenging the stability of broader financial markets. stocks constitute only a comparatively small fraction of total margineligible assets. Recent Research Projects Johannes Brumm. Michael Grill*. a series of new projects have been launched to improve our understanding of the underlying dynamics endangering financial stability. G3 Puriya Abbassi*. A first workstream deals with frictions in financial markets (for example as a result of asymmetric information). contributions on the extent to which frictions and deficient incentives have aggravated stability problems are still rare. They consider a Lucas-style infinite-horizon exchange economy with heterogeneous agents and endogenous collateral constraints. Till Förstemann*. Felix Kubler. Jana Ohls*. Arne Halberstadt*. Natalia Puzanova*. G1. Nataliya Barasinska*. A second workstream discusses various contagion aspects in financial systems (and the interbank market in particular).Research group “Financial Stability” JEL Codes: Members: D1. Barbara Meller*. Björn Hilberg*. Falko Fecht (European Business School). Michael Grill. empirical evidence shows that the regulation of margin requirements for stocks does little to reduce stock market volatility. Florian Hett (Johannes Gutenberg-Universität Mainz). Peggy Lehnert (Universität Siegen). G0. the research programme is centred on two workstreams. Alexander Schulz*. Anne Koban*. Frank Heid* (coordinator). and Karl Schmedders (2011) examine in ‘Collateral Requirements and Asset Prices’ the effect of collateral constraints and margin requirements on asset prices in a general equilibrium setup. Thomas Hildebrand (European School of Management and Technology). On the basis of recent work. G2. Ben Craig (Federal Reserve Bank of Cleveland). Jörg Rocholl (European School of Management and Technology). In their model with different collateralizable assets. Leonid Silbermann* Advisors/visitors: Günter Beck (Universität Siegen). For instance. the volatility of other assets decreas- Page 40 of 68 . While theoretical contributions imply that collateralized borrowing contributes to market volatility. Their main contribution is to resolve the apparent contradiction between theoretical and empirical results. Natalia Podlich*. The regulation of margin requirements on this fraction of collateralizable assets has no significant impact on its volatility. which may act as an accelerator and hence induce systemic instability. Norbert Metiu*. Matthias Köhler*. E5. Ulrich Krüger*.

do not reduce moral hazard. To test if safety nets create moral hazard in the banking industry. This model accounts for the major drivers of banks’ systemic relevance: size. they address two related questions in their simulation study: How do business fluctuations affect capital requirements and bank lending? To what extent does the capital buffer absorb fluctuations in the level of minimum required capital? In ‘Asset prices. According to their results. Page 41 of 68 . Within this framework they analyze a situation where increased liquidity supply by the central bank is only partially passed on to the interbank market. and moral hazard’ a simultaneous structural two-equations model that specifies the probability of a bailout and banks’ risk taking. default risk and correlation of banks’ assets as a proxy for interconnectedness. Under the assumption of a stochastic LGD. which takes into account banks’ potential adjustment strategies. They combine a unique data set on the LGD of interbank loans with data on interbank exposures. The sample includes all observed capital preservation measures and distressed exits in the German banking industry during 1995-2006. They measure systemic risk in terms of the portfolio expected shortfall (ES).2% to 9. penalties are found to mitigate moral hazard. Angelika Sachs. collateral and unconventional monetary policy in a DSGE model’ Björn Hilberg and Josef Hollmayr (2011) set up a New-Keynesian model that features the interaction of heterogenous agents on an interbank market for collateralized lending. Weak interventions. They compare the performance of an importance sampling algorithm with a fast analytical approximation of the ES and the marginal risk contributions. they explore a time-varying confidence level of the ES. Only interventions directly targeting bank management and. These important spillover effects have been neglected in much of the previous literature as well as in the policy debate. Furthermore. They find that size alone is not a reliable proxy for the systemic importance of a bank in this framework. They develop a dynamic model of bank lending behavior and simulate different regulatory frameworks and macroeconomic scenarios. They identify the effect of expected bailout probabilities on risk taking using exclusion restrictions based on regional political. They find that the frequency distribution of the LGD is u-shaped. supervisor.9%. In particular. they show empirically for a portfolio of large international banks how their approach could be implemented to compute bank-specific capital surcharges for systemic risk or stabilization fees. In order to smooth cyclical fluctuations of the risk measure. to a lesser extent. such as warnings. Banks’ (marginal) risk contributions are calculated based on partial derivatives of the ES in order to ensure a full risk allocation among institutions. the marginal effect of risk with respect to bailout expectations is 7. and Ingrid Stein (2011) investigates contagion at the German interbank market under the assumption of a stochastic loss given default (LGD). In ‘Systemic risk contributions: a credit portfolio approach’ Klaus Düllmann and Natalia Puzanova (2011) put forward a Merton-type multi-factor portfolio model for assessing banks’ contributions to systemic risk. In ‘Do capital buffers mitigate volatility of bank lending? A simulation study’ Frank Heid and Ulrich Krüger (2011) address the question of the pro-cyclical effects of capital requirements in a general framework. interventions. They show that by varying haircuts on eligible assets in repurchase agreements the central bank is able to reduce the tension on the interbank market and propose an “exit strategy” from such an unconventional monetary policy tool after the interbank market stress subsided. The project on ‘Contagion at the interbank market with stochastic LGD’ by Christoph Memmel. A change of bailout expectations by two standard deviations increases the probability of official distress from 6. simulation results show a more fragile banking system than under the assumption of a constant LGD. Lammertjan Dam and Michael Koetter (2011) develop in ‘Bank bailouts.2 basis monotonically as margins on stocks are increased. and banking market traits.

Natalia Podlich and Michael Wedow (2011) study contagion effects from a broader perspective by focusing on the interlinkages between different financial systems instead of between individual institutions. It also takes into account possible adverse selection problems arising from the ongoing shift from a book reserve system to funded pensions in Germany. In another project ‘Credit contagion between financial systems’. To isolate the effect of systemic importance on funding costs. and Alexander Schulz investigate how banks react to the financial crisis and a deteriorating solvency and liquidity condition in their invest- Page 42 of 68 . which in turn has widespread implications for the stability of broader financial markets and financial intermediation. to changes in bail-out expectations and to the implementation of rescue measures. This approach takes both the variation between countries over time and the variation between banks with different exposures to sovereign bonds into account. the focus will rely on the relationship between their measure and the level of volatility of credit premiums in the money market in order to separate periods with and without adverse selection as postulated by the efficient market hypothesis. they intend to derive a measure that accurately reflects asymmetric information prevailing in the German banking sector.Adverse selection and concentration risk’ (new) Till Förstemann and Ferdinand Mager will empirically analyze the risk profile of the Pensions-Sicherungs-Verein (PSVaG) with respect to concentrations risks. A more thorough understanding of the significance of contagion between financial systems is important from a financial stability perspective to obtain a measure of how systemic risk is transmitted internationally and to adopt adequate policy measures. He finds evidence for significant contagion effects among long-term bond yield premiums between 1. Jörg Rocholl. and Jana Ohls study the link between ‘Banks and sovereign risk’ (new) by empirically analyzing how banks respond to risks and returns on government bond markets. Michael Kötter. their contribution is to provide an empirical framework to measure the strength of contagion effects emanating from the financial systems of the US and Europe on the German financial system. In a second step. In a first step. February 2012. Björn Hilberg and Barbara Meller assess in ‘Refinancing advantage of systemic important financial institutions in Germany’ (ongoing) the size of the implicit too-big-to-failsubsidy in Germany to have a sound base for the implementation of macroprudential policies. where they control for macroeconomic as well as for bankspecific factors. The empirical approach employs a difference-in-difference methodology and uses a quarterly dataset on the government bond holdings of German banks since 2005 and bank supervisory data. they intend to use a threshold regression proposed by Hansen (1999). which aim at reducing the benefit of a bank to be systemically important. January 2008 and 1. More specifically.Norbert Metiu (2011) extends in his project on ‘Sovereign risk contagion in the eurozone’ the canonical model of contagion proposed by Pesaran and Pick (2007) in order to test for contagion of credit events in euro area sovereign bond markets. The financial crisis has shown that this might severely impair the functioning of interbank markets. Ongoing and Planned Research Projects Frictions in financial markets and regulation The project on ‘Adverse selection in interbank markets’ (new) by Puriya Abbassi and Florian Hett intends to identify empirically the severity of asymmetric information in the interbank money market and the associated costs for the German banking sector. In ‘The cost of insuring defined benefit plans in germany . Claudia Buch. In ‘Flight to where? – Evidence from bank investments during the financial crisis’ (ongoing) Thomas Hildebrand.

the authors aim at analyzing whether the effect of the risk-taking channel is different depending on the business model and the ownership structure of the bank. The study employs the unique panel of household finance (PHF) data collected by the Deutsche Bundesbank. Households’ debt service behavior may thus have a significant impact on the risk position of banks and ultimately affect the financial stability. and Ulrich Krüger investigate the empirical evidence for contagious effects arising from interbank market linkages (ongoing) during distressed periods. they focus on whether and how banks use sales and purchases of these securities as the most direct and immediate way to change their overall asset structure. Managers may also want to increase risk-taking if their compensation is linked to performance or if shareholders use short-term returns to evaluate their performance (Shleifer and Vishny. Loans to private households in Germany make the largest part of the domestic lending of German banks. and Niels Schulze aims to analyze systemic risk. The project on ‘Optimal regulation of margin requirements’ (ongoing) by Johannes Brumm. To explore how margin regulation affects welfare and volatility. Michael Kötter. degree of indebtedness. Rajan (2005) argues that banks have incentives to increase risk if interest rates are low because managers search for yield. The project ‘Impact of financial integration on lending behavior of financial institutions’ (new) by Falko Fecht. In ‘Households’ borrowing in Germany and its implications for financial stability’ (ongoing) Nataliya Barasinska and Anne Koban investigate the determinants of German households’ borrowing and debt service behavior using micro data on household finances. this project implies that liquidity spirals exist. Employing a spatial lag regression model this project uses bilateral claims and liability positions to assess the degree of interdependence among German banks.ment decisions and the composition of their financial assets. Natalia Podlich. Allen and Gale (2004) and Brunnermeier and Pedersen (2009). Felix Kubler. see e. which could possibly arise from the nature of the lending behavior of financial institutions. debt structure) depend on household-specific characteristics? 2) Which households’ characteristics play the key role in debt service behavior? While focusing on the effects of household-specific variables. 2010). They first consider margin requirements that are determined endogenously by market forces to introduce then a regulator. they consider a Lucas-style infinite-horizon exchange economy with heterogeneous agents and collateral constraints. Together with Nyborg and Östberg (2010). they look into the German interbank market and examine the lending behavior Page 43 of 68 .e. In the project ‘Is there a risk-taking channel in the banking sector? Evidence from German banks’ (new). and Karl Schmedders asks whether the regulation of margin requirements can contribute to stability in financial markets. 1987). Matthias Köhler and Peggy Lehnert analyze the existance of a risk-taking channel in Germany. Michael Grill.g. Contagion in financial systems In ‘Liquidity in Financial Markets and Demand for Reserves’ (ongoing) Puriya Abbassi and Falko Fecht empirically show that a dry-up of asset market liquidity associated with a higher price volatility indeed increases banks’ demand for liquidity as suggested by banking theory. the project addresses two questions: 1) How does borrowing behavior (i. Günter Beck. In using the securities deposit statistics of the Deutsche Bundesbank that comprises all security investments by all German banks on a security-by-security basis between 2006 and 2011. which can set margin requirements exogenously. probability of borrowing. they also take into account macroeconomic factors and examine how debt behavior of households with different socio-economic characteristics responds to the changing economic environment. For this purpose. Low monetary policy rates are said to be among the reasons that have led to excessive risktaking by banks in the period before the financial crisis (Allen and Carletti. Using this data. In addition to the existing literature. Ben Craig. different corporate sectors to test empirically whether financial institutions. this paper aims at identifying also indirect interlinkages and possible transmission channels for contagion from similar investments. and Leonid Silbermann maps the network structure of German banks’security portfolios. he can account for the systemic meaning of sector developments for the overall financial system. One advantage of the DHFM procedure is a higher efficiency in the aggregation. 11-10. In her project ‘The follow-up work on systemic risk contributions’ (new) Natalia Puzanova models a financial system as a portfolio of assets. 72(4). and Stein. Most notably. 10(1). Thus.g. 2201-2238. Brumm. H. 1023-1061. macro factors and liquidity premia for Germany’ by Arne Halberstadt and Jelena Stapf. Pedersen (2009). Grill. In his project on ‘Financial stability indicators: The meaning of sector developments for the overall system’ (new) Arne Halberstadt develops a set of financial stability indicators using a dynamic hierarchical factor model. Review of Financial Studies. to incorporate stochastic loss given default. They use nonlinear impulse response functions and historical decompositions to evaluate the dynamic linkages within their system. An Overview of the Crisis: Causes. H. Financial Intermediaries and Markets. Björn Hilberg. he first extracts sector-specific indicators from a set of observable time series. Kubler and K. References Allen. M. 22(6). This exercise is complementary to anlysing the interbank loan network (e. F. These sector-indicators (representing for example banking risk. F. Collateral Requirements and Asset Prices. Allen. Consequences and Solutions. Schmedders (2011). K. Carletti (2010). Jörg Rocholl. to refine the definition of the expected of default. Another relevant ongoing project described in more detail is under the research group Monetary Transmission and Monetary Strategy: ‘An affine structure model with inflation data. and E. The project on ‘Non-linear effects of international financial shocks on the German economy’ (new) by Michael Grill. she intends to design the systemic risk measure as to have an early warning indicator. Swiss Finance Institute Research Paper. and to estimate time-varying asset correlations using DCC-GARCH. and Norbert Metiu empirically examines whether conditions in the financial sector play a role as a nonlinear propagator of structural shocks. Memmel. The second contribution of her project would be the inclusion of contagion effects. Econometrica. As a third contribution. Brunnermeier. By that. M. The project on ‘The network structure of Banks’security holdings’ (new) by Thomas Hildebrand. and L. market risk) are condensed into an overall indicator. credit risk. Page 44 of 68 . 1-26. While counterparty risks are routinely monitored in banks’risk management common exposures –and the subsequent risk of being affected by potential asset fire sales of other parties –cannot be assessed on an individual level. it allows tracing the relevance of a sector-indicator for the overall indicator dynamically over time. 2011). the assets being financial institutions. however. and to assess the contribution of financial frictions to economic fluctuations. F. Sachs. Market Liquidity and Funding Liquidity. Gale (2004). and D. which are strongly connected via the interbank market are less diversified in their lending to corporate sectors than those with no or only small interbank linkages. In this framework.. International Review of Finance. J. They analyze the joint dynamics of the world economy in a dynamic system comprised of the euro area/Germany and the US economy using a structural threshold vector autoregression (STVAR). Alexander Schulz.

Systemic risk contributions: A credit portfolio approach. Pick (2007). Journal of Econometrics. Bank bailouts. Series 2: Banking and Financial Studies. A. Maastricht: METEOR.Dam. Memmel. A. Vishny (1997). Stein (2011). Credit Contagion between Financial Systems. 11728. ECB Working Paper Series. Series 2: Banking and Financial Studies. and moral hazard. B. (2011). E. Money and Liquidity in Financial Markets. Shleifer. Hollmayr (2011). Deutsche Bundesbank Discussion Paper. CEPR Discussion Papers. Deutsche Bundesbank Discussion Paper. interventions. Wedow (2011). Podlich. testing. Series 2: Banking and Financial Studies. Has Financial Development Made the World Riskier?. collateral and unconventional monetary policy in a DSGE model. and U. N. (1999). H. Deutsche Bundesbank Discussion Paper. Journal of Finance. Threshold effects in non-dynamic panels: Estimation. Koetter (2011). and P. Hilberg. Series 2: Banking and Financial Studies. Series 2: Banking and Financial Studies. Asset prices. Deutsche Bundesbank Discussion Paper. 1245-1277. K. and M. 08/2011. Düllmann. and M. Heid. (2005). Rajan. 345-368. R. 52. C.. K. The Limits of Arbitrage. 15/2011. Metiu N. 7905. 31(4). 93(2). Contagion at the Interbank Market with stochastic LGD. L. Research Memoranda 004. Page 45 of 68 . 03/2011. Financial contagion in developed sovereign bond markets. M. 06/2011. 10/2011. and inference. Krüger (2011). and A. 35-55. and N. Deutsche Bundesbank Discussion Paper. and J. Econometric issues in the analysis of contagion. Do capital buffers mitigate volatility of bank lending? A simulation study. Östberg (2010). Journal of Economic Dynamics and Control. Puzanova (2011). NBER Working Paper. and R. B. Nyborg. F. Sachs and I. Hansen. G. 1373. Pesaran.

Esteban Prieto (University of Tübingen). Or they address requests on topical issues in the ongoing development or implementation of new regulation. Rainer Haselmann (University of Bonn). Ben Craig (Federal Reserve Bank of Cleveland). Sven Bornemann (Finance Center Münster). Co-Pierre Georg*. Enrico Onali (Bangor Business School). in particular in the national and international committees of banking regulation where the Bundesbank is involved. Eberhard Mayerhofer* (Marie-Curie Network). Berger (University of South Carolina). As the case may be. R1 Klaus Düllmann* (coordinator). Christine Fremdt*. Yalin Gündüz*. Andrea Schertler (Leuphana University Lüneburg) Co-authors: Visitors: General interest. Peter Raupach* Markus Behn (University of Bonn). C5. in particular banking regulation and oversight. Marcus Pramor*. Marcel Bluhm (Xiamen University and Goethe University Frankfurt). F4. Michael Koetter (University of Groningen). The research group is organized in three work streams. H2. C2. Caroline Liesegang*. Tobias Berg (Humboldt-Universität zu Berlin). Thilo Pausch*. F3. G2. Thomas Kick*. Benedikt Ruprecht (University of Augsburg). Wolfgang Gick (Harvard University). It also assists the supervisory oversight function of the Bundesbank. Andreas Pfingsten (Finance Center Münster). M4. G3. policy relevance. C4. Armin Eder (Helvetia Insurance). Vu Nguyen* (Marie-Curie Network). G0. C7. Till Förstemann (University of Paderborn. Monika Trapp (University of Cologne). Falko Fecht (European Business School). Isabelle Thomazeau (Banque de France). Julia Nasev (University of Cologne). Gunter Löffler (University of Ulm). Part of this work is carried out jointly with economists in other central banks and supervisory authorities under the umbrella of the Research Task Force of the Basel Committee on Banking Supervision. Daniel Foos*. L5. and outline of the research programme of the group Research conducted in this group is intended to support the development of regulation. Orcun Kaya (Goethe University Frankfurt). Peter Welzel (University of Augsburg). the group supports interaction with economists in academia working on banking issues. and the evaluation of its economic impact. C3. Marco Wilkens (University of Augsburg) Adrian Alter (University of Konstanz). Nadja Jahn (University of Münster). projects take a more long-term and forward looking perspective in order to identify issues that may become relevant for banking regulation in the future. implementation issues of new regulation. C6. The first work stream focuses on research on banking regulation in order to support the development of new regulatory initiatives. Furthermore.Research on ”Banking Regulation and Supervision“ JEL Codes: Members: C1. Klaus Schaeck (Bangor Business School). Oliver Entrop (University of Passau). Christoph Memmel*. Philippe Durand (Banque de France). Allen N. Important research questions addressed in this work stream are the following: • How should regulation be designed? How should regulatory minimum capital requirements be calibrated? Page 46 of 68 . now Bundesbank). Vikrant Vig (London Business School). Marliese Uhrig-Homburg (Karlsruhe Institute of Technology). Philipp Koziol*. G1.

concentration. The remaining 20 projects are either ongoing or will be started over the next two years. Several papers have already been published in refereed journals (see reference list at the end of this section). Page 47 of 68 . and regional differences in the banking sector affect bank stability? A list of individual projects in these work streams is presented in the following section which includes ongoing projects as well as projects that will be started in the next two years. 8 projects (+ 4 completed) belong to the work stream on risk modelling/stress testing and 7 projects (+ 3 completed) have been assigned to the work stream on economics of banking contains. It also includes three projects that are carried out under the aegis of the Marie-Curie-project on “Risk Assessment and Measurement” (RISK). For this purpose it is concerned inter alia with the following research questions: • • • • How can existing risk indicators for individual banks be improved? Which lessons can be drawn from the financial crisis for the modelling of credit risk. A special emphasis is on the work stream on banking regulation that comprises 12 projects (+ 1 completed). These numbers do not include 9 projects which are co-authored by members of the financial stability department and presented in the sections of the research groups on financial stability and banking structure. market risk and liquidity risk? Which role do new financial instruments play? How should stress tests of funding liquidity risks in banks be designed? How can supervisory off-site stress tests be improved? How can. for example. The project list comprises in total 35 assigned projects of which 8 projects are already completed 3 and 7 projects will be completed in the 2nd quarter 2012. contagion effects be incorporated? The third work stream comprises a range of projects that deal with the economics of banking. which was established in 2009 and in which the Bundesbank is responsible for coordinating research activities on “Regulatory Requirements and Risk Modelling Frameworks”. Relevant research questions of this work stream are the following: • • • Where are the differences in risk management practices in banks? How are bank distress and household finance related (see also the program of the research group on household finance)? How do competition. Banking Regulation 3 “Completed” means that these projects have been submitted or have been published in the Discussion paper Series of the Bundesbank.• • • How does regulation affect bank management and risk-taking behaviour? How do accounting rules and taxation interact with capital and liquidity regulation? Which regulatory instruments are well suited to contain systemic risk? The second work stream on risk modelling and stress testing includes the assessment of risks in the financial system and advancing methodologies for stress tests.

This may bring banks to holding a liquidity buffer to prepare for future financial crises. for example the requirement of capital buffers for systemic risk on top of the minimum regulatory capital requirements. This extends the existing theoretical literature which typically assumes that financial crises do not affect banks’ decisions ex-ante. Recent work The project Regulation. In contrast to the existing literature. The following projects consecutively refer to four research strands: (i) The relationship of regulation and bank behaviour. fully or under-hedge its total exposure to credit risk conditional on the CDS price being downward biased. Page 48 of 68 . bank behaviour is analysed taking into account a positive probability of a future financial crisis. a fifth strand on the role of taxation and accounting rules is envisaged. The important and often complex issue of intended and unintended incentives of regulatory rules is therefore a central theme of research on the design of prudential banking regulation. weakens the tendency to overhedge or under-hedge in biased CDS markets. (iii) The assessment of cyclical effects from regulatory minimum capital requirements. In the framework asset price deteriorations due to fire sales of assets by one bank may induce contagious bank runs. The authors. and bank lending by Thilo Pausch and Peter Welzel has been just completed. considering a positive probability for future financial crises allows for an analysis when a liquidity buffer may be optimal from a bank’s point of view and which determinants affect this decision. As resources become available. conclude that the substitution approach conveys the intention of Basel regulations to “strengthen the soundness and stability of banks” on the bank level. however. A risk neutral bank decides to over-. true with reactive interventions in crisis periods. therefore. Moreover.Regulatory and supervisory interventions may have both intended and unintended consequences. (ii) The assessment of regulatory tools for systemic risk. Based on these insights policy implications regarding regulatory minimum liquidity requirements will be stated. The substitution approach. The authors integrate Basel II and Basel III regulations into the industrial organisation approach to banking and analyse the interaction between capital adequacy regulation and credit risk transfer with credit default swaps (CDS) including its effect on lending decisions and risk sensitivity of a risk neutral bank. The first strand of projects is concerned with the relationship between regulation and bank behaviour. Ongoing and new research can draw from results of recently completed projects. however. in which deposittaking banks and a financial market coexist. unbiased or upward biased. (iv) The regulation of the trading book and counterparty credit risk. which is the case under the substitution approach in Basel II and Basel III regulations. This is. Ongoing projects Armin Eder. in particular the consequences of regulatory requirements such as minimum capital rules and of regulatory interventions. in particular. Falko Fecht. In a theoretical model of the Diamond-Dybvig style. Regulation is found to increase risk-sensitivity of banks: Compared to a situation without regulation the optimal loan volume decreases more the higher the riskiness of loans. and Thilo Pausch consider the relationship between liquidity and solvency risks. CDS trading is found to interact with the former effect when regulation accounts for the risk mitigating effect of credit risk transfer with CDS. Bundesbank research considers various fields of this taxonomy as a core area from an empirical as well as a theoretical perspective. credit risk transfer with CDS.

.The behaviour of a bank under the liquidity regulation of Basel III is analyzed by Thilo Pausch. it is in their own best interest to accurately assess the creditworthiness of (potential) borrowers. Tobias Berg and Philipp Koziol explore on adverse selection in banks’ loan granting process. This hypothesis can be investigated by looking at lead-lag relationships and the link between capital adequacy and changes to internal probability-of-default estimates in the cross section of banks. Inaccurate ratings can lead to adverse selection and therefore lower returns. The question of this project is to analyze whether adverse selection plays a role in the loan granting process.e. in particular the consequences of a regulatory capital charge for systemic risk. The recent financial crisis has revealed the importance of the systemic dimension of financial risk. (ii) whether the availability of a buoyant interbank market makes a bank ignore the interaction between credit risk and liquidity risk in optimal decision making. etc. An extended version of the industrial organization approach to banking is applied to (theoretically) analyze: (i) whether the interaction of credit risk and liquidity risk make a per se risk neutral bank effectively behave risk averse when taking a long-term perspective on optimal behavior. Robustness and informativeness of systemic risk measures is the topic of Gunter Löffler and Peter Raupach. Adding option positions to a portfolio that is linear in the market portfolio can easily create situations in which systemic risk is consistently misestimated. The estimation problems are illustrated for portfolios with standard equity options but they carry over to credit risk. (iii) whether and in which way current liquidity standards included in Basel III help to recover riskadjusted bank behavior. i. or – in particular during the crisis – by the government. one explanation could be adverse selection. For banks. Markus Behn. This raises doubts about the information content of the proposed measures. The following two projects address regulatory tools for systemic risk. They focus on bank lending in the most disaggregated way that is on the bank-customer level. Fourth. Page 49 of 68 . and whether they are eligible to support regional economic growth. In particular. The research questions are as follows: First. internal ratings play a crucial role for regulatory purposes. its monitoring ability. extreme tail risk can be masked by buying protection against less extreme events. they focus on the regions (county level) and determine the effect these measures have on the regional credit supply. a direct application to regulatory capital surcharges for systemic risk could create wrong incentives for banks. regional macroeconomic variables. Rainer Haselmann. it will be analyzed whether probability-of-default estimates are negatively correlated to loan volume (changes) in the cross section of borrowers. If this is the case. Recent literature has proposed new methods for measuring the systemic risk of financial institutions based on observed stock returns. banks with lower probability-of-default estimates are more likely to provide the most competitive interest rate to a client. Since the introduction of Basel II. On the other hand. its ability to provide customer services (number of bank branches). they are interested whether regulatory interventions can mitigate the moral hazard arising from excessive bank bailouts. Protective put strategies that are immune against extreme shocks are judged to have high systemic risk because estimation methods rely on less extreme return realizations in which option premia depress returns relative to unprotected institutions. Second. This paper examines the reliability and robustness of such risk measures. Third. they aim to determine which economic and also political factors trigger capital support measures by the deposit insurance fund. A third project by Puzanova/Duellmann on the allocation of systemic risk in a banking system is carried out together with the research group on financial stability and listed there. they control for bank-specific characteristics of interest like a bank's market power. In particular. and Vikrant Vig investigate how the political economy affects bank bailouts and regional lending. the equity holders. Thomas Kick.

if bailed out. Here. Mitigation of cyclicality can ideally be achieved by a capital buffer that expands and contracts with the cycle and ensures a timely build-up and release. The third building block conveys various network theoretic measures that directly rely on interbank lending. Christine Fremdt and Peter Raupach ask: Are building block approaches suitable for the risk measurement of trading book positions? They analyze the effect of the regulatory practice to capture credit risk by the Incremental Risk Charge instead of using multifactor models. Ben Craig and Peter Raupach consider Centrality-adjusted capital requirements. The first building block is a risk engine that produces exogenous shocks to the non-bank exposures of all German banks on which we have precise data. For this purpose the formation of interbank market connections over time will be investigated and statistical methods will be used to identify micro. Capital charges are defined based on these measures which provides grounds for an analysis of whether corresponding capital reallocations in the system make the system more stable. The focus of the project is on two basic risk factors: credit risk (represented by a rating) and the risk premia paid for it (represented by corporate spread indices). then. after several rounds. They find empirically supported setups where it is not conservative to calculate spread risk and credit Page 50 of 68 . try to optimize the reduction. The next two projects of this work stream focus on the assessment of cyclical effects from regulatory minimum capital requirements and their mitigation. These shocks feed into the second building block.and macro-based factors which can explain the results.Adrian Alter.e. securitization). Given the very short time dimension of available data and the fact that the sample period is dominated by the financial crisis. retail. indicators for interbank market access and systemic risk in the banking sector can be developed. The research project On the determinants of interbank networks by Marcel Bluhm and Co-Pierre Georg aims to empirically investigate network formation on the German interbank market. Furthermore. and exposures under Basel II. This setup should provide a countercyclical buffer that performs well throughout the cycle and that ideally operates without the need of a manual “switch-off” at the beginning of a crisis in order to avoid an adverse signaling effect. that have been significantly revised in the Basel III framework. The analysis will allow to statistically identify determinants of network formation at the individual bank level. Work on the first project is quite advanced whereas the other two projects are at a relatively early stage. a panel data model will compare the dynamics of minimum required capital. The Cyclical behaviour of capital requirements for German banks will be ex-amined by Marcus Pramor. The following three projects could provide useful insights in two areas of capital regulation. The analysis is based on an index of centrality measures from the network topology of the interbank lending and borrowing market. The authors. They test whether the building blocks can be used to capture the systemic importance of banks in the system. The objective of this project is to develop a model and to evaluate the appropriate macro or financial indicator variables that determine the size of the buffer over time. to the public. The focus will be on co-movements with the macro-economy and on disentangling the role of risk parameters and the contribution from individual portfolios (corporate. namely the treatment of credit risk in the trading book and counterparty credit risk. the total of interbank lending. cause losses to bank debtors or. defaults of banks may carry over to other banks and. The aim of this project is to determine a function that maps individual-banksystemic contributions into capital requirements. risk-weighted assets. whether they reduce the losses to the public. Building on bank-level data. achieving consistent and dependable estimation results will be a challenge. The performance of a counter-cyclical capital buffer regime that mitigates potential (pro-) cyclical effects of the risk-based capital requirements under Basel II is examined by Klaus Düllmann. i.

This finding calls for a joint modelling and raises doubts about the reliability of the IRC. Intertemporal models for the credit risk of trading book positions is a project planned by Peter Raupach. The freedom to choose the stochastic processes underlying the portfolio credit risk is suspected of giving banks large discretion over resulting capital. Banks may use an internal model. for example. The assessment of CVA risk is complicated and depends very much on portfolio composition. This project addresses fundamental questions on current market practice of modelling and pricing counterparty risk.risk separately even for very simple and widespread positions like corporate bonds. Furthermore. the trading book and the evaluation of instruments that could control potential pro-cyclical effects of risk-based regulatory capital requirements. an assessment of the impact of mark-to-market accounting on bank behaviour and risk taking appears to be warranted since it has often been named as a fire accelerant in the recent financial crisis. the socalled incremental risk charge. shift more attention on disclosure policies rather than on refining minimum capital requirements? The overall calibration of the minimum capital requirements poses a related research question. which Bundesbank is a member of. How can model risk be taken into account in risk-based regulation? Interest rate risk in the banking book is arguably the most important risk category of a bank that is not addressed by the capital and liquidity regulation forthcoming in the Basel III framework. which has to assume that positions are held over one year and rebalanced within the year after their credit risk has changed. The objective of this study is to assess this discretion within a consistent framework and to discuss the appropriateness of different approaches. this asks for proper alternatives. rules for netting of counterparty exposures and the managment of collateral. Should regulators. The interaction of these regulatory requirements with the relevant accounting rules and tax regimes also opens a promising avenue for further research. the constant-levelof-risk assumption seems inadequate especially for high-risk positions such as equity. Furthermore. for example. towards a “constant level of risk”. as well as the justification of new regulatory requirements imposed by Basel III. In a project funded by the EU Marie-Curie Network “Risk and Risk Reporting”. In this context. The inter-action of these three regulatory concepts and its consequences for the behaviour of banks offer a scope for further research. the impact of fair-value accounting on the volatility Page 51 of 68 . Basel III has introduced the first internationally harmonized regulatory framework for liquidity risk and an internationally harmonized leverage ratio as a complement to the risk-based minimum capital requirements of Basel II. Recent developments in the application of monetary policy may be indicative that interest rate risk may play a more important role in the future which would advocate more research on the regulation of this risk category. Of particular interest are. Open issues for further research on regulation (new projects) Considering the extent of the recent financial crisis after a long history of financial regulation that dates back in many countries to the Great Depression of the previous century the question of an optimal design of regulation should be newly addressed. should the error be large. the balance between the level of minimum capital requirements for the banking book vs. ac-cording to which banks are required to hold a capital buffer against the credit risk of trading book positions. It builds on new capital rules for the trading book. Banks are required to hold additional capital against the risk that the credit quality of a counterparty in a financial contract worsens during its lifetime. Eberhard Mayerhofer will focus on the risk measurement and regulatory capital requirements for counterparty credit risk. This risk is typically reflected in uncertainty what concerns the evolution of so-called Credit Value Adjustment (CVA) of the otherwise fair price.

or simply duplicate the quantitative information.e. The importance of qualitative risk assessment in banking supervision before and during the crisis (2011) is a completed project by Thomas Kick and Andreas Pfingsten. i. and Peter Raupach explores if industry and regional factors drive German banks' credit portfolio risk. The project took advantage of a balance sheet database in the Bundesbank. In the following we distinguish between (i) risk measurement and modelling. Using a unique data set about the German banks' loans to the German real economy. It is still an open question whether supervisors provide information. which makes it possible to analyse the industry and regional factors driving the credit risk. and (iii) credit risk and liquidity risk in financial markets. Ongoing projects Finally. and liquidity risks has been an important focus area of this research group. the authors plan to investigate the banks' credit portfolio risk. and other qualitative risk components that play an equally important role. A further analysis of unexplained risks deals with the assumption of conditional independence made in credit portfolio models. how micro and macro level shocks affect the financial and corporate sector. banks try to keep their capital ratio close to a bank-specific target ratio. Following Memmel and Raupach (2010). indeed. ICAAP. business model) and analyze by how far the weighted average of nation-wide and regional industry factors explain the rate of a bank's write-off in its credit portfolio. or even overrule it by their impressions gained through visits. an increase in the volatility of earnings due to the cyclicality of mark-to-market accounting may impact the sensitivity of banks to changes in the economic environment and affect credit-supply. especially during the financial crisis. (ii) stress testing. which includes enough observations to deliver robust estimates even after being split into subsamples. which is not yet known from the numbers. Recent work Improvements in rating models for the German corporate sector (2011) has been a project by Till Förstemann on common statistical rating models for commercial debt that are based on one global estimation. The first strand of research on risk measurement and modelling focuses on rating methodologies and how key financial risks drive the markets and affect the pricing of financial instruments in bank portfolios. Stress testing builds the second strand of research and has gained in importance in surpervisory practice in recent years. market. region. This data set includes the volume of loans per bank and industry as well as the corresponding write-offs. Research on stress testing has focused on how to derive stress scenarios that ought to parallel the real life circum- Page 52 of 68 .of banks’ earnings should be evaluated. Risk modelling and stress testing Identifying and measuring credit. it is. If so. also qualitative information on a bank’s internal governance. It turns out that not only the quantitative CAMEL vector is clearly important for the final supervisory risk assessment. interest risk. an early-stage project by Yalin Gündüz. i. Christoph Memmel. A partial proportional odds model is applied to explain the supervisor’s ordinal grading (risk profile) by a CAMEL covariate vector that contains only quantitative information.e. based on on-site inspections. The authors control for bank-specific factors (size. The author analysed whether and to what extent their predictive power could be ameliorated by using group-specific estimations. and also the bank inspector’s qualitative risk assessment is included into the model. how key financial risks drive the markets and affect the pricing of financial instruments in bank portfolios.

As in times of stress the relationship between macroeconomic variables and financial stability indicators can tremendously change. It is an ex-tension of the work by Schechtman and Gaglianone (2010) who stress-test credit risk in the Brazilian household sector combining a macroeconomic VAR and a time-series quantile regression model. Page 53 of 68 .stances. there is need to focus on the right tail of the distribution and not simply on the conditional mean as it is done in traditional stress tests. Optimally designed stress tests are. Marcus Pramor und Natalia Puzanova. cross-country effects can be endogenised. The main focus is on the role of supervisory stress tests in the banking sector. Bank supervisors. Thomas Kick and Philipp Koziol that builds on the work by Düllmann and Kick (2012). and on how macroeconomic conditions should be fed into the risk parameters of bank portfolios. Building on the model of systemic risk contributions by Düllmann and Puzanova (2011). First. which is of particular importance in analysing systemic risk. Besides its focus on the link between the macroeconometric model and the portfolio risk model. Ongoing projects Multi-period stress tests of banks’ credit portfolios is a project proposed by Klaus Düllmann. The authors investigate the impact of a global cost-of-capital shock on the credit portfolios of 24 large German banks. instead of non-performing loans ratios. Furthermore it will extend the stress scenario by including also the impact on recovery rates and revisit the static dependence structure of the model. Second. using the “sign-restrictions approach” to generate macroeconomic stress more consistently. are shown to be able to design stress testing exercises and disclosure mechanisms in a way that is beneficial for both supervisors and bank investors as well. Optimal disclosure of supervisory information in the banking sector is the topic of an ongoing project of Wolfgang Gick and Thilo Pausch. Macroeconomic capital stress tests focused on the tail of the distribution is an ongoing project carried out by Thomas Kick and Caroline Liesegang. A new approach of stress testing systemic risk contributions of large international banks is developed by Klaus Düllmann. Recent work Stress testing German banks against a global cost-of-capital shock is a project carried out by Klaus Düllmann and Thomas Kick and completed in January 2012. Based on the recent literature on cheap-talk signalling games the paper analyses in which way the publication of information regarding the design and the results of stress tests affect investor behaviour in the banking sector. This project differs from Schechtman and Gaglianone (2010) in three aspects. the new paper develops stress scenarios in a macroeconomic VAR model that drives the default probabilities of large and internationally active banks. quantile regression is applied in a panel (instead of a time-series) context. the analysis is also set apart by the highly granular information on the composition of banks' real portfolios. namely the loan volumes and banks' internal estimates of default probabilities. a structural SVARmodel is applied. For this purpose they integrate two models: A macroeconometric model which is used to forecast the impact of a global credit crunch on selected industry sectors and a multifactor portfolio model of credit risk that is an extension of Düllmann and Erdelmeier (2009). By using the Global VAR (GVAR) framework. It will generalize the model in a dynamic setting that allows a stress scenario encompassing multiple years. Third. The resulting changes in the level of risk and the contributions by individual banks will give an indication of the sensitivity of systemic risk to different stress scenarios. the authors focus directly on banks’ capital ratios (capital adequacy ratios and leverage) as banking stability indicators. which are aware of this effect. hence. found welfare enhancing.

The next four projects which build the third strand of research address credit risk and liquidity risk in financial markets. Recent work Yalin Gündüz and Marliese Uhrig-Homburg (2011a) perform a comparative study of structural and reduced-form models of credit default swaps (CDS). The completed study provides a rigorous empirical comparison of structural and reduced-form credit risk frameworks and provides an extension to Gündüz and Uhrig-Homburg (2011b). As major difference the authors focus on the discriminative modelling of the default time. In contrast to previous literature, both approaches are calibrated to bond and equity prices. By using the same input data, applying comparable estimation techniques, and assessing the out-of-sample prediction quality on the same time series of CDS prices the authors are able to judge whether empirically the model structure itself makes an important difference. Interestingly, the models' prediction power is quite close on average. Ongoing projects Yalin Gündüz and Orcun Kaya use sovereign CDS returns and return volatilities as a proxy for informational efficiency of the sovereign markets and persistence of country risks. They apply two semi-parametric methods and a parametric dual memory model of long memory to the sovereign CDSs of 11 Euro area countries with particular attention to the post-credit-crunch period. The analysis reveals that there is no evidence of long memory for the return series of Euro area countries, which indicates that the price discovery process functions efficiently for sovereign CDS markets. On the other hand, both semi-parametric methods and the parametric model imply persistent behavior in volatility of CDS returns for highly indebted economies. Endogenous liquidity is estimated by Philippe Durand, Yalin Gündüz and Isabelle Thomazeau using transaction and order-book information. The term “endogenous liquidity” refers to the impact of liquidity on market prices in case of a liquidation of large positions. The authors apply their model, based on a concept of endogenous liquidity, to the order book of equity prices in order to reveal any “unrealized” endogenous liquidity effects; i.e. any effects that have not (yet) happened due to liquidity constraints. Moreover, they apply the model to a set of credit default swap (CDS) transactions, in order to find a “realized” endogenous liquidity component. Nevertheless, dealers in CDS markets might be slicing the large transactions into several small pieces to avoid liquidity constraints. Yalin Gündüz, Julia Nasev and Monika Trapp look at inventory effects in trader portfolios. CDS traders that are worried about their inventory might adjust quotes to minimize inventory risk and maximize trading profits. The authors analyze the relation between the traded volume and CDS premia for a variety of reference entities. In a final step, inventory characteristics are analyzed via regressions. Open issues in risk modeling and stress testing (new projects) In the context of managing and regulating liquidity risk in banks, a highly relevant question concerns the optimal design of stress tests. Related questions are: which is the relation between liquidity risk and credit risk? How can second-round and network effects be incorporated? How can stress tests be used to define optimal liquidity buffers? Economics of Banking The third research work stream focuses on the economics of banking. Research in this work stream is conducted both theoretically and empirically.

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The first strand of research on risk management, performance and governance in the banking sector analyses the link between banks’ risk management policies and performance from a micro-perspective. Recent work In order to identify leading macroeconomic indicators for the stability of the banking system Nadya Jahn and Thomas Kick have carried out an (already completed) project on Earlywarning Indicators for the German Banking System: A Macro-Prudential Analysis. Hereby, they introduce a continuous and forward-looking stability indicator for the banking system based on information on all financial institutions in Germany between 1995 and 2010. Explaining this measure by means of panel regression techniques, the authors identify significant macroprudential early warning indicators (such as asset price indicators, leading indicators for the business cycle and money market indicators) and spillovers. Whereas international spillover effects play a significant role across all banking sectors, regional spillover effects and the credit-to-GDP ratio are most important for cooperative banks and less relevant for commercial banks. The manuscript has been submitted to the Bundesbank Discussion Paper Series. Ongoing projects Entrop, Kick, Ruprecht and Wilkens focus on In terest Rate Derivates and Risk Management. They use the model of Froot and Stein and analyze whether the probability that a bank defaults drives on-balance and off-balance interest rate risk management decisions. In the first step of the analysis, the probability of default is estimated using a Hazard-Rate Model. Furthermore, the Z-Score („Distance to Default“) is used as an alternative estimate for the probability that a bank defaults. In the second step, the probability of default and further bank and macro variables are regressed on the decision to use derivates for hedging and onbalance sheet interest rate risk management. The relationship of bank distress and household finance is analysed by Thomas Kick, Klaus Schaeck, and Enrico Onali. The extensive involvement of households in financial markets and their role in the building up of risk that led to the 2007-2009 financial crisis has substantially raised the interest in household financing patterns. In an ongoing project, they investigate the relationships between bank distress and households’ income and portfolio allocation. This question is very important due to the crucial role of households for asset bubbles and subsequent recessions. Specifically, the authors estimate the impact of bank distress (instrumented by regulatory interventions) on the loan supply to households. Regulatory interventions are correlated with bank distress, but are exogenous with respect to household income and portfolio choices. By homing in on the impact of a reduction in loan supply to households due to bank distress, the authors are able to identify the dynamics of bank distress on households finance. Further, they can address the impact of bank distress on borrowing constraints, and the impact that these constraints may have on consumption (amount and composition) of households. In the context of Related relationship lending: When the supply of credit becomes personal, Thomas Kick and Klaus Schaeck investigate relationship lending from the most personal perspective. Observing the credit relationship a bank has with a firm in which bank board member(s) also hold positions in the (supervisory) board of the borrower firm, they answer the following questions: How frequent is this kind of relationship? What happens to the lending relationship in the case of a board turnover; that is, does the relationship remain with the previous bank, or does the board member take it to a new employer? Is there a moral hazard problem with this kind of relationship lending, i.e., is there a higher default risk for the respective loans?

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Domikowsky, Düllmann and Pfingsten examine the cyclicality of loan loss provisions in German banks. This project seeks to answer the empirical research question if loan loss provisions predominantly amplify the economic cycle because they increase in an economic downturn or if they primarily mitigate this cycle because they are already built in the up-turn as a forward-looking buffer. The results will be informative, for example, for the discussion on an “expected loass” approach in the IFRS accounting rules. Finally, Thomas Kick and Esteban Prieto analyze Bank Risk, Competition and the Macroeconomy: Evidence from Regional Banking Markets. Their study investigates the bank competition-stability nexus using a unique regulatory data set for the period 1994 to 2010. First, they use outright bank defaults as the most direct measure of bank risk available and contrast the results to weaker forms of bank distress. Second, they control for a wide array of different time-varying characteristics of banks which are likely to influence the competitionrisk taking channel. Third, the authors include different measures of competition, contestability and concentration, each corresponding to a different contextual level of a bank’s competitive environment. From a policy perspective, the results indicate that a competitionreducing regulation does not necessarily enhance the stability of individual banks. Instead, current results indicate that the degree of competition affects bank risk in a manifold number of ways: some of them with stability-enhancing effects, but others apparently not. The next four papers are primarily concerned with the impact of different governance mechanisms on bank performance and risk taking. Recent work Does it pay to have friends? Social ties and executive appointments in banking is a research question asked by Allen Berger, Thomas Kick, Michael Koetter, and Klaus Schaeck. Hereby, the authors exploit a unique sample to analyze how similarities and social ties affect career outcomes in banking based on age, education, gender, and employment history to examine if homophily and connectedness increase the probability that the appointee to an executive board is an outsider (an individual without previous employment at the bank) compared to being an insider. The results show that homophily based on age and gender raises the chance of the successful candidate being an outsider, whereas similar educational backgrounds reduce the chance that the appointee comes from outside. When examining performance effects, the authors find weak evidence that social ties are associated with reduced profitability. The project has been completed in the end of 2011 (see Berger et al., 2011). The Impact of Executive Board Composition on Bank Risk Taking is evaluated by Allen N. Berger, Thomas Kick, and Klaus Schaeck. Exploiting a unique dataset from Germany which operates a two-tier system of corporate governance that separates inside directors (i.e., executives that run the bank) into a management board, and outside directors into a supervisory board, the authors show how age, gender, and education composition of executive teams affect risk taking. They use difference-in-difference estimations that focus on mandatory executive retirements and find that younger executive teams increase risk taking, as do board changes that result in a higher proportion of female executives; in contrast, if board changes increase the representation of executives holding Ph.D. degrees, risk taking declines. The project has been completed in the beginning of 2012 (see Berger et al., 2012). Ongoing projects In a subsequent project the impact of board structure on performance is addressed by Thomas Kick and Andrea Schertler in their project on Bank Mergers, Board Composition, and Efficiency. Hereby, mergers in the German banking market are investigated from a board perspective. Following regular mergers (“economies of scale mergers”) or restructuring mergers (“distressed mergers”) the authors answer the following questions related to board

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K. Deutsche Bundesbank Discussion Paper. this holds even when controlling for the incoming CEO's objective to cure shortages in the existing stock of risk provisions. Puzanova (2011). Does it pay to have friends? Social ties and executive appointments in banking. Deutsche Bundesbank Discussion Paper. K. Schaeck (2011). and T. engage in big bath accounting. The results of this research are important to supervisors in assessing the impact of structural developments in the banking sector on bank behaviour and the real sector. The second strand of the work stream concentrates on structural issues in banking. Research in this area focuses on the link between bank lending and structural developments arising from internationalization and competition in the banking sector. which may otherwise provide an alternative explanation for observing extraordinary amounts of discretionary expenses in turnover years. (3) the propensity to engage in big bath accounting does not depend much on whether the incumbent CEO retires or departs for any other reason. Koetter and K. 03/2012. These projects are included in the work stream “Banking Structure”. and N. 18/2011. M. Kick. Düllmann. Series 2: Banking and Financial Studies. Series 2: Banking and Financial Studies. in a project Taking a Bath while Receiving the Baton . Schaeck (2012). Berger. References Berger. N. i. Deutsche Bundesbank Discussion Paper. Systemic risk contributions: a credit portfolio approach. Executive board composition and bank risk taking. Series 2: Banking and Financial Studies. Düllmann. Düllmann. T. Kick and K. 04/2012. The findings are robust to several modifications. 08/2011. Deutsche Bundesbank Discussion Paper. Stress testing German banks in a downturn in the automobile industry. Open issues in economics of banking (new projects) There are currently no research issues beyond the projects listed above that require immediate research attention.composition: What happens to the bank management in the aftermath of a merger? Is it the management of the acquired bank that is laid off? Are rather less experienced or older managers the ones who are dismissed? The project also aims at examining bank performance and efficiency following regular and distressed mergers: Does RoE and risk-adjusted RoE improve after a merger if the bank’s supervisory board dismisses redundant managers faster and what happens to bank efficiency? Finally. K... during their first (partial) year in charge. Kick (2012). and Andrea Schertler. 02/2009.An Empirical Analysis of CEO Behavior during Turnovers in Banks the development of income-decreasing discretionary expenses around CEO turnovers in banks is investigated by Sven Bornemann. they document that (1) incoming CEOs increase discretionary expenses. For a sample of German banks over the period 1993-2009. Deutsche Bundesbank Discussion Paper. (2) incoming CEOs from outside the bank take a larger earnings bath than the ones from the inside. Thomas Kick. The authors expect incoming executives to take an earnings bath during the initial stage of their tenure. N. e. Stress testing German banks against a global cost-ofcapital shock. and M. T. Erdelmeier (2009). Andreas Pfingsten. Page 57 of 68 .

Deutsche Bundesbank Discussion Paper. Gündüz. Pfingsten (2011).Förstemann. Y. Deutsche Bundesbank Discussion Paper. Series 2: Banking and Financial Studies. Gaglianone (2010). credit risk transfer with CDS. The importance of qualitative risk assessment in banking supervision before and during the crisis. Series 2: Banking and Financial Studies. 509– 11(12). 1709-1727. Raupach (2010). and bank lending. Welzel (2012).pdf. and M. Pausch. Series 2: Banking and Financial Studies. Regulation. 09/2011. 05/2011. Journal of Financial Intermediation. Memmel. Predicting credit default swap prices with financial and pure data-driven approaches. 05/2012. Gündüz. Does modeling framework matter? A Comparative study of structural and reduced-form models. BIS Working Paper. Y. T.bis. Kick. and P. Uhrig-Homburg (2011a). and P. 19(4). Uhrig-Homburg (2011b). (2011) Improvements in rating models for the German corporate sector. How do banks adjust their capital ratios?. and W. T. and A. 11/2011. T. http://www. Macro stress testing of credit risk focused on the tails. C. R. Deutsche Bundesbank Discussion Paper. P. Deutsche Bundesbank Discussion Paper. Schechtman. Quantitative Finance. and M. Page 58 of 68 .

Important research questions are therefore: What determines the foreign business of banks? Do foreign branches and subsidiaries behave differently compared to foreign activities of domestic banks? What is the role of the internal capital market? All projects of this group rely on (German) bank micro-data. Therefore. sustainable growth of the real economy is only possible when the financial system functions properly. Research Projects Workstream Behavior of banks Page 59 of 68 . André Ebner. including their interconnectedness. Till Förstemann*. Björn Hilberg*. In particular countries where foreign banks played an important role were concerned whether they will be hit strongly by the reluctance of these banks to grant new loans. A good understanding of the financial system. Falko Fecht (European Business School). Matthias Köhler*. Against this backdrop. Daniel Foos*. makes it possible to anticipate the long-run effects of government interventions. the research in this group primarily focuses on these intermediaries. The German financial system is much bank-orientated. Thomas Kick*. Therefore. G21 Puriya Abbassi*. influence the banks’ funding and lending behavior? What are the effects of public support on the banks’ behavior (including on potential competitors)? What are the consequences for the real economy? This research is carried out in a first workstream “Behavior of banks”. on the other. a subset of research questions are the following: How do bank characteristics. A serious concern in many countries was whether a strong reduction in the willingness and ability of banks to lend to the private sector during the crisis constrains the financing of the real sector with serious consequences for the economy as a whole. Michael Kötter (Rijksuniversiteit Groningen). Björn Kraaz. Günseli Tümer-Alkan (VU University Amsterdam). policy relevance and outline of the research programme The financial system contributes to the efficient allocation of the economy’s resources. Michael Grill*. Eva Söbbeke. On the one hand. Christoph Memmel (coordinator). Michael Wedow (European Central Bank) General interest. and to assess the impact of structural developments in the banking sector. German large banks in particular are strongly engaged in international banking. it is important to better understand the intermediation processes in the financial system. Rainer Frey*. such as laws and financial regulations. A second workstream concentrates on the “international business of banks”. the international integration may also be an important propagator of international shocks. for instance. the international orientation allows them to diversify risk. G18.Research group “Banking Structure” JEL Codes: Members: G15. Nicolai Stähler Advisors/visitors: Ban Craig (Federal Reserve Bank of Cleveland). Melanie Klein. Tobias Schmidt. which is not accessible to the general public. Heiko Sopp. Rainer Haselmann (Rheinische Friedrich-WilhelmsUniversität Bonn).

Memmel and Schertler (2011) have recently investigated how banks manage their net interest income and show that strategic decisions concerning the bank’s business model have a huge impact and that derivatives are mainly used for hedging purposes. Retail Deposits & Funding Stability (planned) Authors: Roman Inderst. several projects have dealt with this income. in particular. both in terms of liquidity and stability. The theoretical predictions will be tested by conducting empirical research. Outside “bank runs”. 2011) has analyzed the impact of term transformation on the banks’ net interest income and finds that the banks’ balance sheet composition explains a substantial part of the changes in the net interest income and that banks behave procyclical.and market interest rates to bank interest rates research is sticky and to some extent incomplete for retail products of banking institutions. both in the aggregate (“deposits vs. retail based financing. Böve. Tobias Schlüter. Sönke Sievers There is empirical evidence that the pass-through of official. The proposed study aims to shed light. i. Ongoing and new projects Retail. one of the lessons drawn from the financial crisis is the importance of banks’ funding sources. which serve as the basis for fixedincome securities throughout the economy. Abbassi and Linzert (2011) investigate the financial market effects of non-conventional monetary policy measures on euro area term money market rates. in particular in light of considerable changes in competition over time and considerable heterogeneity between banks in Germany. Stein (2011) analyses how relationship lending affects the interest rate and finds that firms with a close banking relationship have lower interest rate expenses. The authors also intend to analyze separately the impact of the crisis. The analysis of the financial crisis during 2008 and 2009 will be of special interest regarding disturbed and illiquid capital markets hindering market based funding and shifting institution’s funding to more stable. Memmel (2008. The research attempts to clarify and quantify this view. which models the pass through process using vector autoregressive models and an error correction framework by taking into account the three distinctive groups in Germany. the net interest income is the most important source of banks’ revenues. probably due to better monitoring abilities.Recent work The behavior of banks has been the subject of many Bundesbank research projects. Ramona Busch. Based on new theoretical considerations this project analyzes factors explaining different pass through behavior across institutions and especially incorporates the German specialty of a disjoint banking system being divided into the three pillars “private banks”. “savings banks” and “cooperative banks”. Tobias Waldenmaier For many. They show that banks with a concentrated credit portfolio have lower expected losses.e.and Corporate Interest Rates Charged By German Banks (ongoing) Authors: Thomas Hartmann-Wendels. Düllmann and Pfingsten (2010) study the sectoral concentration in the banks’ credit portfolio. on the following questions: 1) Demand side: How “elastic” is retail deposit finance. Accordingly. Busch and Kick (2009) investigate to what extent the banks’ interest and the non-interest income interact and find that the banks’ riskadjusted return goes up when the banks increase the share of fee-based income. outside good”) as well as between banks (“market share”)? What Page 60 of 68 . that they increase their exposure to term transformation risk when the term structure becomes steeper. Their findings show that crisis-related monetary policy has been effective in addressing inefficiencies surrounding the money market and in reducing longer-term interest rates. Other projects investigated the banks’ lending decisions. retail deposits generally seem to be considered as “relatively” stable. Typically.

they take risks. Using a multivariate regression framework with panel data on German banks’ lending behavior. Tracing the effect of shocks is empirically challenging since banks shocks are often accompanied by changes in firms’ investment opportunities. More specifically. Real effects of capital supply shocks on capital structure and investment decisions of German corporations (ongoing) Authors: Christian Bayer. through higher market share or interest rate margins. a formal analysis backing up this line of argument is still due. Marco Wilkens Banks transform long-term. While these measures have been carefully evaluated and finally approved by the European Commission to ensure the competitive playing field.are the determinants of this elasticity? 2) Supply side: How do banks/different bank types manage retail deposits over time? How “stable” is this part of their overall financing? 3) Interest pass-through: How does this depend. capital injections or asset protection. the authors explore how the bank rates depend on the costs. Rainer Haselmann and Vikrant Vig The project investigates the real effects of a bank shock on borrowing firms in the context of Germany. find that the real effects of the capital supply shock are modest. Government support of ailing banks: a distortion of the competitive landscape in loan markets? (planned) Authors: Puriya Abbassi. In a theoretical model. surprisingly. Finally. Benedikt Ruprecht. on bank characteristics as well as prevailing competition? (See also the related project on the interest rate pass through process in the Group “Monetary Transmission and Monetary Strategy”. The focus of this paper is therefore to investigate the impact of state support measures on banks’ loan provision. including both the pricing and the volume. and the banks’ market power. Christoph Memmel. for which they are remunerated.) Determinants of Bank Interest Margins: Impact of Maturity Transformation (nearly completed) Authors: Oliver Entrop. the first aim of the paper is to analyze the impact of government support on the supported bank’s funding provision in the loan market. a developed economy with well-developed financial markets. In addition. Michael Wedow During the financial crisis. the competitor of a supported bank may lose market share when it is not able to compete on prices. In doing so. they can generate income by making use of their market power and by setting their credit and deposit conditions accordingly.e. The hypotheses derived from the theoretical model are checked in an empirical study of all German universal banks. illiquid and risky loans into safe deposits that are due within short notice. The authors identify the fraction of loans German corporations receive from banks that have been affected by the crisis. in both a panel and cross-sectional perspective. numerous eurozone financial intermediaries received public support either in form of liability guarantees. the authors intend to identify the potential effect(s) on the competitors of the supported banks. Impact of social networks on lending relationships and capital allocation (nearly completed) Authors: Rainer Haselmann and Vikrant Vig Page 61 of 68 . smaller in particular and. the authors document real effects on firms. credit and interest rate risk. In a next step. Using a differences-indifferences research design. they document considerable changes to the debt structure of firms – firms reduce the usage of debt and debt becomes concentrated. conditional of the initial direct effect competitors benefit when a supported bank has to back out of a market i. Alternatively.

the authors want to use this event to observe how entrance of bank branches affects the external finance provision of corporations. the authors want to use the German tax reform on capital gains in 2000 as an exogenous shock to banks’ equity holdings. thereby hinting to their reduced ability to monitor the company? Which types of credit do banks grant to affected companies. They further exploit somewhat exogenous entrance of borrowers to social networks to rule out selection concerns that may bias the findings. as potential determinants of lending relationships are social networks. In this study. Page 62 of 68 . German Unification as a Natural Experiment to Study Financial Development and Regional Economic Growth (ongoing) Authors: Rainer Haselmann. which prevented companies from selling their holdings in other companies. The authors find that firms borrow significantly more from networks banks than they do from outside banks. it may be able to derive additional information on the company and to influence its decisions. being part of a social network seems to relax financial constraints for these firms. the results from this study are suggestive of a favoritism story rather than an information story. which makes bank monitoring more relevant. even if there was no economic reason to hold on to the stake. and the Impact of Bank Ownership (ongoing) Author: Daniel Foos Using panel data of more than 850 German banks from the years 1987-2005. the authors allow for a heterogeneous reaction of branch entrance on local loan supply. This can have positive effects as it reduces the asymmetric information problem and the risk shifting problem due to increased monitoring. Macroeconomic Fluctuations. On the other hand.The authors construct measures for social proximity between banks and their lenders. the bank can use its influence to promote its own business with potential negative effects on the borrowing firm. Before the reform. Lending Conditions. capital gains at the corporate level were subject to a 50% tax. and do they require additional collateral to be pledged after the divestiture? Do banks engage in additional hedging through credit derivatives after divesting the monitoring stake? Finally. to test the effect of a regional bank branch network on firms external finance possibilities and/or different indicators of firms’ performances. Bastian von Beschwitz If a bank holds an equity stake in one of its borrowers. they incorporate micro-level firm data. especially credit relationships. The causal effect of banks’ equity holdings on the lending relationship: Evidence from Germany (planned) Authors: Daniel Foos. The authors plan to study the following aspects: Do banks lend less to a company of which they sold a holding. Instead. thus analyzing the relevant factors of borrowers’ opaqueness. they examine in how far this reaction depends on the size and concentration of the local banking market. Third. Especially German financial institutions were holding very large minority stakes in unrelated companies. the author observes that savings and cooperative banks adjust their lending volume and conditions less cyclically than private commercial banks. This result and the intensity of the link between macroeconomic fluctuations and bank behavior are not driven by bank size or capitalization. these findings may result from the specific business model of savings and cooperative banks. On examining the mechanisms that generate this increase in equilibrium level borrowing. the authors will look at different subsets of borrowing firms. that is. Thomas Kick and David Schönherr The idea is to study the development of bank branches in the New German states (“Bundesländer”) on county level after the Reunification. Second. Therefore. which depends on strong and stable bank-borrower relationships. The focus of this project is on explaining the determinants of banking expansion (and contraction) in Eastern Germany.

Moreover. Andreas Pfingsten In this project. Thus. they examine which factors affect the choice of diversification mode and how the institutional variables explain cross-border lending. is that banks with a concentrated credit portfolio develop a sector-specific knowledge. the authors investigate portfolio diversification with respect to potential substitution effects between different forms of foreign lending options such as cross-border lending or domestic lending by foreign branches and subsidiaries. Christoph Memmel. Günseli Tümer-Alkan This project contributes to a more profound understanding of the interbank market structure and the liquidity supply in this market. making use of the sectoral breakdown of the write-downs in this data set. the authors investigate the write-downs in the banks‘ credit portfolio. Using the External Position Reports of German Banks. please refer to the research group “International integration”. Banks.Preliminary results also indicate that a more stable loan growth policy leads to higher individual bank profitability. This finding is robust regarding different measures of business activity. including regional economic conditions. Consequently the lower is banks’ interest income and the interest rate they can pay on deposits. empirically backed in earlier studies. Nicolai Stähler The authors use a search theoretic framework to study the interaction between the liquidity of financial markets and the liquidity insurance provided by the banking sector. Workstream Banks’ foreign business For existing work. which improves the bank’s screening and monitoring skills. thereby leading to lower write-downs. But the more likely it is for firms to find financing in the markets. This interaction gives rise to multiple equilibria. The authors study to what extent peer monitoring (or more precisely relationship lending) prevails in the German interbank market. In one equilibrium financial market are very liquid but bank financing is less relevant whereas in the other equilibrium financial markets are fairly illiquid while bank intermediation plays an important role. Diversification and Determinants of Credit Portfolios – Evidence from German Banks (ongoing) Authors: Benjamin Böninghausen. Falko Fecht. They explore whether banks with a high sectoral concentration in the credit portfolio have lower or higher write-downs compared to banks with a less concentrated portfolio. Controlling for the position of the bank in the network topology of the system. the authors find that banks with a more concentrated borrowing structure bid significantly more aggressively in the ECB’s refinancing operations. Credit concentration and write-offs (ongoing) Authors: Nadya Jahn. concentrated borrowers have to pay a premium when they require funding from other interbank lenders other than their relationship lender. The hypothesis being tested. Matthias Köhler The authors analyze in their project the geographical loan distribution of internationally active banks in Germany. the authors use the borrowers statistics. Page 63 of 68 . the more preferable it is for investors to withdraw money from the banking sector in order to invest directly. The more firms search for direct finance in financial markets. The Role of Interbank Relationships and Liquidity Needs (ongoing) Authors: Ben Craig. To analyse this question. Markets and the Endogeneity of Liquidity Risks (ongoing) Authors: Falko Fecht. the lower is their demand for bank loans.

Do specialization benefits outweigh concentration risks in credit portfolios of German banks?. Pfingsten (2010). C. Kick (2009). C. 1328. P. (2011). R. Banks’ management of the net interest margin: Evidence from Germany. Series 2: Banking and Financial Studies. Linzert (2011). Sofka and Schmidt and Düwel. and A. C. Sofka and Schmidt. Memmel. Memmel. International Journal of Banking. The effectiveness of monetary policy in steering money market rates during the recent financial crisis. R. Page 64 of 68 . References Abbassi. Böve. Recently developed theories in international economics show that the choice whether and how banks engage abroad depends on their productivity relative to peers (Melitz. Michael Koetter. Banks’ exposure to interest rate risk. (2011). their earnings from term transformation and the dynamics of term structure. Deutsche Bundesbank Discussion Paper. Series 2: Banking and Financial Studies. 2003). Journal of Banking and Finance. heterogeneous firm-level productivity as explanation for international trade mostly focuses on manufacturing. the export of financial services may also affect the productivity of domestic firms. Price impact of lending relationships. For the projects of Koch. K. Frey and Lipponer.. and T. Which interest rate scenario is the worst one for a bank? Evidence from a tracking bank approach for German savings and cooperative banks. However. Caroline Liesegang The authors investigate trade in financial services using a micro perspective and bankspecific data on foreign activities from the External Position Reports of German Banks. In turn.Markups and International Trade in Financial Services: Disentangling Market Power from Productivity (ongoing) Authors: Rients Galema. 04/2011. European Central Bank Working Paper. (2008). 09/2009. I. Series 2: Banking and Financial Studies. 1. 10/2010. and T. The main parts of the project have been conducted and finalized end of 2011. Income diversification in the German banking industry. Busch. 35. Series 2: Banking and Financial Studies. Deutsche Bundesbank Discussion Paper. Düllmann and A. 85-104. Schertler (2011). Deutsche Bundesbank Discussion Paper. Stein. Accounting and Finance. 13/2011. 282-289. Deutsche Bundesbank Discussion Paper. please refer to the research group “International Integration”. Memmel.

for example. and synthesize the work of their members into a more comprehensive understanding of the relevant issues. Z. Lombardi (The transmission of monetary policy to commodity prices: speculation vs. Eickmeier. Even if currently inflationary pressures in industrial countries appear low. The goal of this research task force would be to (i) gain a better understanding of inflation developments and outlook in the aftermath of the financial crisis and to (ii) assess alternative policy strategies in light of the findings. fundamentals) analyze the role of monetary policy on various commodity prices via speculation vs. The currently planned projects comprise: S. interest rates and inflation. where monetary policy becomes irrelevant as a stabilization tool. There is also a clear theoretical possibility that the expectation of low (or zero) interest rates over a long horizon may result in an economy to settle at a deflationary equilibrium. Gambacorta (Understanding global liquidity) plan to extract interpretable global liquidity indicators and assess their role for global inflation. M. M. These may be triggered by the ample liquidity or the expansionary policies in emerging markets. Hofmann (Analyzing the effects of liquidity shocks from advanced and emerging economies) separate global liquidity shocks from advanced and emerging economies and look at their dynamic transmission on international asset and commodity prices. there is considerable concern that high public debt and liquidity provision by the ECB and other important central banks will lead to higher inflation in Europe and worldwide. A case in point is Japan. but prices are falling rather than rising. A. M. Hoffmann (International financial integration Page 65 of 68 . Enders. (See also the research programme). There are several researchers planning and working on projects that take different empirical and theoretical angles to shed light on the causes of inflation. U. Eickmeier. Kühnlenz. L. S. Eickmeier. fundamental channels. S. However.Topic 1: Inflation perspectives after the crisis In the aftermath of the crisis of 2008/9. (See. Alternative proposals actually advocate a higher inflation target (higher than 2%) as a tool to reduce the risk of deflation and at the same time alleviate imbalances on households and governments balance sheets. The task force will in addition provide a unified perspective on the relevant literature. it is not universally accepted that high public debt and liquidity need to lead to high inflation. whose public debt is high and rising. Eickmeier. B. S. there is fear that inflation will come in through the backdoor via commodity and oil prices increases. Slopek (China's role in global inflation) look more carefully on the role of China as a (possible) exporter of inflation after many years during which China has helped to keep price developments under control. B. Buzaushina. That work is the core of the task force’s research effort. The interaction of the task force members will ideally also lead to the identification of joint projects that go beyond the work already planned. the proposals by Rogoff or Blanchard). Hofmann. Key to avoid such a deflationary scenario is the credible expectation of future inflation. The output of the task force will be both high-level academic research output and a synthesis of the state of policy-relevant research that aids policy makers in their deliberations. and where monetary policy is loose.

Banks can be roughly classified into two groups according to their business model: Banks that are large and often internationally active and banks that are small or medium sized and whose focus is on the region where they are located. The selection of the relevant variables is based on a study by Yalin Gündüz. the stress test methods can still be improved. is related to inflation and output. Sarferaz (Long-run implications of an increase in public debt) investigate empirically how. Thomas Kick. Kriwoluzky. (2) How robust are banks to macroeconomic shocks? Klaus Düllmann. Second. in particular. Moreover. A. Lewis (Labour hoarding and the zero lower bound for interest rates) questions the argument that a higher inflation target is needed to avoid the zero lower bound problem in Europe. Christoph Memmel. Kliem. but plausible and that capture all the relevant risk drivers for the banks’ credit portfolio? Michael Grill. M. and Philipp Koziol investigate banks’ ability to withstand macroeconomic stress scenarios. public debt in the U. Krause and S. the task force confines itself to the direct effects and neglects possible stress amplifications within in the financial system. where the focus is on linear relationships. S. Finally. V. For reasons of manageability. a. Taking fiscal policy into the picture M. and Norbert Metiu design a stress scenario using nonlinear relationships between different economic and financial variables. by using additional data sources and new analytical tools. and Peter Raupach who use the banks’ actual provisioning data for different industry sectors of the German real economy. Topic 2: Stress tests against macroeconomic shocks This task force develops and implements methods to assess the impact of macroeconomic shocks on banks’ credit portfolios. This refined procedure is in contrast to previous methods. Mandler (Threshold effects in European inflation dynamics: the role of money) looks after the role of money as a driver of inflation. over the long run. a macro-econometric model is used to forecast the impact of a substantial increase of the user cost of business capital for firms worldwide on three particularly export-oriented industry sectors in Germany. the impact of this economic multiPage 66 of 68 . Björn Hilberg.S. M. For the first step the task force will work on the design of the stress scenarios and.and the falling exchange rate path-through) develop a framework to understand the changing transmission of international shocks on inflation. this procedure makes it possible to incorporate additional relevant economic and financial variables (apart from the traditional ones like GDP growth and interest rates). in the second step on the link between the economic conditions and the banks’ credit portfolio. (1) How to design stress scenarios that are exceptional. How vulnerable are large and domestically systemically important banks? This approach comprises two steps: First. to understand the link between public debt and the optimal target inflation rate. and yet. Stress tests concerning the banks’ credit risk have been investigated for several years. Moyen (Optimal monetary and fiscal policy in a model with long-run government debt) take a normative view in analysing the interaction of fiscal and monetary policy.

From a macro-prudential perspective.. and cooperative banks). this finding may result from differences between the business models of savings and cooperative banks.sector stress on banks’ credit portfolios is captured by an asset value portfolio model. Stress testing German banks against a global cost-of-capital shock. The German credit register provides access to highly granular risk information on loans which is necessary to capture name concentrations and sectoral concentrations as accurate as possible. capital regulation. As the intensity of the link between macroeconomic fluctuations and bank behavior is not driven by bank size or capitalization. Reference: Düllmann. bank earnings) on the evolution of loans. The results will be informative also for the design of future stress tests that are coordinated on the European level. The application of wavelet methods helps to identify ‘cycles’ of various frequencies (short and long term) in the time series of data. How do credit cycles and business cycles interact? Michael Scharnagl and Falko Fecht examine the mechanism through which financial markets can affect the real economy. This project is based on the borrowers’ statistics which provides a better coverage than the credit register because of the 1. in particular with regard to potential pro-cyclical consequences. Capital Regulation. T. How can single or groups of regional banks withstand macroeconomic shocks? This approach will focus on regional banks of small and medium size (i.g. and the Business Cycle The recent financial crisis. K. How does the regulatory regime interact with the cyclicality in the real sector? Page 67 of 68 . Furthermore. (2012). Bundesbank Discussion Paper Series No 04/2012. and potentially followed by a severe contraction of credit volumes and conditions in some countries. concerns have been raised that riskbased capital requirements evolve pro-cyclically. In order to investigate the nexus between bank lending. thereby amplifying economic cycles. the task force will focus on addressing the following questions: 1. and their dependency on strong and stable bank-borrower relationships. Topic 3: Bank Lending. analyzing the impact of variables describing bank behavior (e. small private banks. und Kick. the international Basel II framework for banking regulation and its substantial revisions in response to the crisis call for a thorough assessment of their impact. savings banks. and to compare their relative importance over time. - 2. In a comparative analysis of cyclical bank behavior in Germany. being preceded by a large expansion of bank lending. attracts new interest to the interactions between bank lending behavior and the business cycle.5 m € minimum threshold for exposures included in the credit register.e. Daniel Foos observes that savings banks in the public sector adjust loan volumes and conditions less cyclically than banks with cooperative or private owners. b. and the business cycle.

disentangling the role of risk parameters and the contribution from individual portfolios.- A current project by Klaus Düllmann and Philipp Koziol deals with the evaluation of minimum capital Requirements for bank loans to Small and Medium Enterprises (SMEs). The systematic risk in SME exposures is analyzed relative to other asset classes in order to discover whether the level of required capital under Basel II / III adequately reflects the risks in SME lending. Marcus Pramor is seeking to analyze the co-movements of minimum required capital. Page 68 of 68 . and exposures under Basel II with the macro-economy. risk-weighted assets. Which instruments could mitigate the pro-cyclical implications of bank behavior? Klaus Düllmann and Daniel Foos evaluate whether and how a countercyclical capital buffer regime can mitigate potential (pro-) cyclical effects of the risk-based capital requirements under Basel II. The envisaged theoretical set-up aims to provide a buffer framework that performs well throughout the entire cycle. - 3. without the need for any ‘manual’ adjustments by regulators (neither in boom nor at the beginning of bust phases).