OPUS 4 | Universitätspublikationen

Central banks – paradise lost (2012)

Otmar Issing

A dynamic programming approach to constrained portfolios (2012)

Holger Kraft Mogens Steffensen

This paper studies constrained portfolio problems that may involve constraints on the probability or the expected size of a shortfall of wealth or consumption. Our first contribution is that we solve the problems by dynamic programming, which is in contrast to the existing literature that applies the martingale method. More precisely, we construct the non-separable value function by formalizing the optimal constrained terminal wealth to be a (conjectured) contingent claim on the optimal non-constrained terminal wealth. This is relevant by itself, but also opens up the opportunity to derive new solutions to constrained problems. As a second contribution, we thus derive new results for non-strict constraints on the shortfall of inter¬mediate wealth and/or consumption.

Financial sophistication in the older population (2012)

Annamaria Lusardi Olivia S. Mitchell Vilsa Curto

This paper examines data on financial sophistication among the U.S. older population, using a special-purpose module implemented in the Health and Retirement Study. We show that financial sophistication is deficient for older respondents (aged 55+). Specifically, many in this group lack a basic grasp of asset pricing, risk diversification, portfolio choice, and investment fees. Subpopulations with particular deficits include women, the least educated, persons over the age of 75, and non-Whites. In view of the fact that people are increasingly being asked to take on responsibility for their own retirement security, such lack of knowledge can have serious implications.

Academic faculty governance and recruitment decisions (2011)

Jens Prüfer Uwe Walz

We analyze the implications of the governance structure in academic faculties for their recruitment decisions when competing for new researchers. The value to individual members through social interaction within the faculty depends on the average status of their fellow members. In recruitment decisions, incumbent members trade off the effect of entry on average faculty status against alternative uses of the recruitment budget if no entry takes place. We show that the best candidates join the best faculties but that they receive lower wages than some lesser ranking candidates. We also study the allocation of surplus created by the entry of a new faculty member and show that faculties with symmetric status distributions maximize their joint surplus under majority voting.

Die Krise der Europäischen Währungsunion : einige Lösungsvorschläge missachten demokratische Prozesse und geltendes Recht (2012)

Otmar Issing

Wie in der Medizin muss der Therapie die Diagnose vorausgehen. Allzu viele Vorschläge zur Lösung der Krise gehen nicht zuletzt deshalb in die falsche Richtung, weil sie eine adäquate Ursachenanalyse vermissen lassen. Wird der Fiskalpakt Europa aus der Krise führen? Die Europäische Währungsordnung ist ein Produkt politischer Entscheidungen, gegossen in europäisches und nationales Recht. Wie glaubwürdig ist das Versprechen, durch neues Recht, härtere vertragliche Bestimmungen, Fehlverhalten in Zukunft zu verhindern, wenn das geltende Recht so gering geachtet wird?

The dynamics of spillover effects during the european sovereign debt turmoil (2012)

Adrian Alter Andreas Beyer

In this paper we develop empirical measures for the strength of spillover effects. Modifying and extending the framework by Diebold and Yilmaz (2011), we quantify spillovers between sovereign credit markets and banks in the euro area. Spillovers are estimated recursively from a vector autoregressive model of daily CDS spread changes, with exogenous common factors. We account for interdependencies between sovereign and bank CDS spreads and we derive generalised impulse response functions. Specifically, we assess the systemic effect of an unexpected shock to the creditworthiness of a particular sovereign or country-specific bank index to other sovereign or bank CDSs between October 2009 and July 2012. Channels of transmission from or to sovereigns and banks are aggregated as a Contagion index (CI). This index is disentangled into four components, the average potential spillover: i) amongst sovereigns, ii) amongst banks, iii) from sovereigns to banks, and iv) vice-versa. We highlight the impact of policy-related events along the different components of the contagion index. The systemic contribution of each sovereign or banking group is quantified as the net spillover weight in the total net-spillover measure. Finally, the captured time-varying interdependence between banks and sovereigns emphasises the evolution of their strong nexus.

On the importance of sectoral and regional shocks for price setting (2012)

Guenter W. Beck Kirstin Hubrich Massimiliano Marcellino

We use a novel disaggregate sectoral euro area data set with a regional breakdown to investigate price changes and suggest a new method to extract factors from over-lapping data blocks. This allows us to separately estimate aggregate, sectoral, country-specific and regional components of price changes. We thereby provide an improved estimate of the sectoral factor in comparison with previous literature, which decomposes price changes into an aggregate and idiosyncratic component only, and interprets the latter as sectoral. We find that the sectoral component explains much less of the variation in sectoral regional inflation rates and exhibits much less volatility than previous findings for the US indicate. We further contribute to the literature on price setting by providing evidence that country- and region-specific factors play an important role in addition to the sector-specific factors, emphasising heterogeneity of inflation dynamics along different dimensions. We also conclude that sectoral price changes have a “geographical” dimension, that leads to new insights regarding the properties of sectoral price changes.

Test of the German Resilience (2012)

Fabian Bornhorst Ashoka Mody

From its early post-war catch-up phase, Germany’s formidable export engine has been its consistent driver of growth. But Germany has almost equally consistently run current account surpluses. Exports have powered the dynamic phases and helped emerge from stagnation. Volatile external demand, in turn, has elevated German GDP growth volatility by advanced countries’ standards, keeping domestic consumption growth at surprisingly low levels. As a consequence, despite the size of its economy and important labor market reforms, Germany’s ability to act as global locomotive has been limited. With increasing competition in its traditional areas of manufacturing, a more domestically-driven growth dynamic, especially in the production and delivery of services, will be good for Germany and for the global economy. Absent such an effort, German growth will remain constrained, and Germany will play only a modest role in spurring growth elsewhere.

Fiscal consolidation strategy (2012)

John F. Cogan John B. Taylor Volker Wieland Maik H. Wolters

n the aftermath of the global financial crisis and great recession, many countries face substantial deficits and growing debts. In the United States, federal government outlays as a ratio to GDP rose substantially from about 19.5 percent before the crisis to over 24 percent after the crisis. In this paper we consider a fiscal consolidation strategy that brings the budget to balance by gradually reducing this spending ratio over time to the level that prevailed prior to the crisis. A crucial issue is the impact of such a consolidation strategy on the economy. We use structural macroeconomic models to estimate this impact focussing primarily on a dynamic stochastic general equilibrium model with price and wage rigidities and adjustment costs. We separate out the impact of reductions in government purchases and transfers, and we allow for a reduction in both distortionary taxes and government debt relative to the baseline of no consolidation. According to the model simulations GDP rises in the short run upon announcement and implementation of this fiscal consolidation strategy and remains higher than the baseline in the long run. We explore the role of the mix of expenditure cuts and tax reductions as well as gradualism in achieving this policy outcome. Finally, we conduct sensitivity studies regarding the type of model used and its parameterization.

Are risk preferences dynamic? : Within-subject variation in risk-taking as a function of background music (2012)

Marja Liisa Halko Markku Kaustia

This paper investigates whether preference interactions can explain why risk preferences change over time and across contexts. We conduct an experiment in which subjects accept or reject gambles involving real money gains and losses. We introduce within-subject variation by alternating subjectively liked music and disliked music in the background. We find that favourite music increases risk-taking, and disliked music suppresses risk-taking, compared to a baseline of no music. Several theories in psychology propose mechanisms by which mood affects risktaking, but none of them fully explain our results. The results are, however, consistent with preference complementarities that extend to risk preference.

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