Arbeitspapiere

Abstract

This paper examines the impact of extreme weather events on the term structure of sovereign bond yields in a global panel. Using local projections to estimate the dynamic response of yields and their expected short rate and term premium components to such events, we uncover significant heterogeneity across countries. We show that differentiating between strong and weak fiscal regimes helps explain variations in both yield and inflation responses. Among advanced economies, countries with low debt levels experience a significant rise in short rate expectations as investors anticipate tighter monetary policy in response to inflationary pressures. Advanced economies with high levels of debt primarily exhibit a rise in term premiums, consistent with investors pricing in more issuance. While fiscally constrained emerging economies exhibit muted yield responses, their higher-rated peers experience a decline in expected short rates and an increase in term premiums, potentially suggesting that investors anticipate monetary easing and increased debt issuance following disasters.

Abstract

We use restrictions derived from frontier models of directed technical change to identify green and non-green technology shocks in a Bayesian structural VAR of the U.S. economy. We require that both shocks jointly explain the bulk of the longer-run variation of total factor productivity and fossil fuel energy intensity. In addition, the fossil energy income share is restricted to decline following a green and to increase after a non-green technology shock. We find that green technology shocks are associated with a persistent reduction of the carbon emission intensity of output but a substantial rebound of per capita emissions. The reason is that these shocks lead to a delayed but pronounced increase of output which gives rise to substantial additional fossil fuel consumption and new emissions. Green technology shocks are associated with a substitution of fossil fuel end- use to electricity, much of which has historically been generated using fossil fuels.

Abstract

During the post-pandemic inflation surge, many central banks actively used communication about the inflation outlook as a policy tool to limit spillovers from realized to expected inflation. We present novel survey evidence showing that the ECB's guidance about the projected inflation path substantially lowers households' inflation expectations in times of unusually high inflation. A reassuring, positively framed non-quantitative communication style has the largest treatment effects on short-term expected inflation. Providing simple visualizations of the ECB's projected inflation path also significantly lowered inflation expectations across horizons. We document substantial heterogeneity of these effects along key socio-demographic characteristics. Our findings suggest that, regarding their communication, central banks should 'keep it sophisticatedly simple (KISS)'.

Abstract

We study the implications of Bitcoin's security model for its market valuation. We identify mining shocks by exploiting exogenous variation in mining intensity using a narrative approach in a structural Vector Autoregression. While their impact on transaction speed is short-lived, mining shocks persistently affect trading volumes and market valuations, explaining up to 15 percent of Bitcoin's substantial price variation. Our findings can be rationalized in a theoretical framework where mining shocks affect the likelihood to withstand potential attacks and as such impact investor beliefs about the future state of the network and thus Bitcoin’s usefulness as a means of payment.

Abstract

Equity returns follow a pronounced v-shape pattern around the onset of recessions. They sharply drop into negative territory just before business cycle peaks and then strongly recover as the recession unfolds. Recessions are typically preceded by a flat yield curve. Probit models relying on the term spread as a predictor therefore time the beginning of recessions well. We show that model-implied recession probabilities based on the term spread strongly improve equity premium prediction in- and out-of-sample and outperform several benchmark predictors. Correcting for a structural break in the mean of the term spread in 1982 further strengthens the forecast performance.

Abstract

Using a novel and unique panel dataset of individual-level professional forecasts at short, medium, and very-long horizons, we provide new stylized facts about survey forecasts. We present direct evidence that forecasters use multivariate models in an environment with imperfect information about the current state, leading to heterogenous non-stationary expectations about the long run. We show forecast revisions are consistent with the predictions of a multivariate unobserved trend and cycle model. Our results suggest models of expectations formation which are either univariate, stationary, or both, are inherently misspecified and that macroeconomic modelling should reconsider the conventional assumption that agents operate in a well-understood stationary environment.

Abstract

We study beliefs about fiscal dominance in a survey of German households. We first use a randomized controlled trial to identify how fiscal news impact individual debt-to-GDP and inflation expectations. We document that the link between debt and inflation crucially depends on individuals’ views about the fiscal space. News leading individuals to expect higher debt-to-GDP ratios make them more likely to revise upward their inflation expectations. These average effects are due to individuals who think that fiscal resources are more stretched than others. In contrast, individuals who think there is fiscal space do not associate debt with inflation. We then rationalize these results in a New Keynesian model where agents have heterogeneous beliefs about the fiscal space. We show that the heterogeneity of beliefs implies a policy tradeoff for the central bank. Agents who expect fiscal dominance in the future exert upward pressure on inflation. An active central bank may choose to partially tolerate this higher inflation due to the real costs of completely stabilizing prices.

Abstract

Quantitative easing contributes to safe asset scarcity and repo market specialness. We show that banks respond to scarcity induced by Eurosystem bond purchases by increasing their reuse of these bonds as collateral. While reuse is low, additional reuse dampens scarcity effects. However, repo rates become increasingly sensitive to asset purchases when reuse is high. Elevated reuse also impairs market functioning: it leads to more failures to deliver specific bonds, a higher volatility of repo rates and more pronounced mispricing in the cash bond market. Our results highlight a trade-off between the shock absorption and shock amplification effects of collateral reuse.

Abstract

We use restrictions derived from frontier models of directed technical change to identify green and non-green technology shocks in a Bayesian structural VAR of the U.S. economy. We require that both shocks jointly explain the bulk of the longer-run variation of total factor productivity and fossil fuel energy intensity. In addition, the fossil energy income share is restricted to decline following a green and to increase after a non-green technology shock. We find that green technology shocks are associated with a persistent reduction of the carbon emission intensity of output but a substantial rebound of per capita emissions. The reason is that these shocks lead to a delayed but pronounced increase of output, which gives rise to substantial additional fossil fuel consumption and new emissions. Green technology shocks are associated with a substitution of fossil fuel end- use to electricity, much of which has historically been generated using fossil fuels.

Abstract

Most macroeconomic models impose a tight link between expected future short rates and the term structure of interest rates via the expectations hypothesis (EH). While systematically rejected in the data, existing work evaluating the EH generally assumes either full-information rational expectations or stationarity of beliefs, or both. As such, these analyses are ill-equipped to refute the EH when these assumptions fail to hold, leaving the door open for a “resurrection” of the EH. We introduce a model of expectations formation which features time-varying means and accommodates deviations from rationality. This model tightly matches the entire joint term structure of expectations for output growth, inflation, and the short-term interest rate from all surveys of professional forecasters in the U.S. We show that deviations from rationality and drifting long-run beliefs consistent with observed measures of expectations, while sizable, do not come close to bridging the gap between the term structure of expectations and the term structure of interest rates. Not only is the EH decisively rejected in the data, but model-implied short-rate expectations generally display, at best, only a weak co-movement with the forward rates of corresponding maturities.

Abstract

Using data on equity mutual fund portfolio allocations and transactions, we show that a rise in short-term interest rates via contractionary monetary policy leads fund managers to tilt their portfolios towards stocks with higher market exposure. This Reaching for Beta is persistent and increases the net buying pressure of high-beta stocks. Funds that actively reach for beta experience more inflows when monetary policy is restrictive, while they deliver higher raw returns but no significant alpha after controlling for market and other risk factors. Funds' demand for high beta stocks induces systematic price pressures, which take several months to dissipate. In contrast to reaching for yield, which associates low interest rates with risk-shifting, reaching for beta implies that tighter monetary policy increases risk-taking in the equity market.

Abstract

We document that U.S. monetary policy shocks have highly persistent but asymmetric effects on U.S. Treasury and global bond yields, with a clear break around the Great Financial Crisis (GFC). Prior to the GFC, tightening shocks used to lead to a pronounced hump-shaped increase of Treasury yields across maturities. Yields used to respond little to easing shocks as term premiums would rise strongly, offsetting the associated decline of expected policy rates. Since the GFC, term premiums have been declining persistently following both tightening and easing shocks. As a result, post-GFC tightening shocks only have transitory positive effects on yields, which reverse later. The response of advanced-economy and emerging market sovereign yields essentially mimics the pattern observed for Treasury yields. Consistent with recent work by Kekre et al. (2022) we find that changes in the duration of primary dealer Treasury portfolios pre- and post-GFC are highly informative about the sign of the term premium response to policy shocks, but cannot explain the full picture. The observed puzzling persistence of returns is likely to stem at least in part from slow and persistent mutual fund flows following monetary policy surprises.

Abstract

We study how households adjust their medium-term inflation expectations under the new ECB strategy. We find that survey respondents make little difference between the previous strategy of targeting inflation rates close to but below 2% and the new strategy with a symmetric 2% target. Yet, participants informed that the ECB might tolerate rates exceeding the target for some time, expect somewhat higher medium-term inflation. Respondents asked to assume inflation currently running below target place a significantly higher probability on outcomes above 2% in the medium term. Participants do not expect an undershooting when inflation is currently running above target.

Abstract

Using a unique data set of individual professional forecasts, we document disagreement about the future path of monetary policy, particularly at longer horizons. The stark differences in short rate forecasts imply strong disagreement about the risk-return trade-off of longer-term bonds. Longer-horizon short rate disagreement co-moves with term premiums. We estimate an affine term structure model in which investors hold heterogeneous beliefs about the long-run level of rates. Our model fits Treasury yields and the short rate paths predicted by different groups of investors and thus matches the observed differences in expected return profiles. Investors who correctly anticipated the secular decline in rates became increasingly important for the marginal pricing of risk in the Treasury market. Accounting for heterogeneity in investment performance eliminates the downward trend in the term premium.