Post on 17-Sep-2020
Asset Prices, Collateral and UnconventionalMonetary Policy in a DSGE model
Bjorn Hilberg and Josef Hollmayr
Bundesbank and Goethe-University FrankfurtDepartment of Money and Macroeconomics
January 24th, 2012
Bank of England
IntroductionModel
CalibrationResults
MotivationPreliminary ResultsLiterature Review
Motivation
What appears to be in substance a direct transfer of mortgage and mortgage-backed
securities of questionable pedigree from an investment bank to the Federal Reserve
seems to test the time honored central bank mantra in time of crisis-”lend freely at
high rates against good collateral”-to the point of no return, (Volcker (April 8, 2008),
Remarks by Paul Volcker at a Luncheon of the Economic Club of New York)
Bjorn Hilberg and Josef Hollmayr Asset Prices, Collateral and Unconv. Monetary Policy in a DSGE model
IntroductionModel
CalibrationResults
MotivationPreliminary ResultsLiterature Review
Motivating Questions
Is a certain ”collateral policy” of the central bank effective to stimulatethe interbank market
Does it have negative consequences and if yes, which ones?
Should the central bank use this type of policy to react to asset prices
Bjorn Hilberg and Josef Hollmayr Asset Prices, Collateral and Unconv. Monetary Policy in a DSGE model
IntroductionModel
CalibrationResults
MotivationPreliminary ResultsLiterature Review
The Approach
We are taking the basic set up of a DSGE model with financial frictionsand add a microfounded interbank market
Analysis of (un-)conventional monetary policy by the means of anadditional instrument: haircut rule
Simulating Boom-Bust cycles to examine ”leaning against the wind”
Deriving exit strategies for the central bank after a recession
Bjorn Hilberg and Josef Hollmayr Asset Prices, Collateral and Unconv. Monetary Policy in a DSGE model
IntroductionModel
CalibrationResults
MotivationPreliminary ResultsLiterature Review
Results to take away
Central banks can use the institutional instrument of a haircut policy tostimulate the interbank market and therefore also the real economy
this comes at the cost of higher inflation
If the central bank wants to react to asset prices, it should use this rule tolean against the wind and not the interest rate rule
an interbank market in the economy dampens certain shocks and amplifiesothers
the optimal exit for the central bank is to announce a date beforehandand then credibly stick to it
Bjorn Hilberg and Josef Hollmayr Asset Prices, Collateral and Unconv. Monetary Policy in a DSGE model
IntroductionModel
CalibrationResults
MotivationPreliminary ResultsLiterature Review
Related Papers
1 DSGE with Financial Sector
Angeloni,Faia (2009) include Diamond,Rajan(2001) into DSGEmodelGertler,Karadi (2009) simple banking structureGerali et al.(2009) only include one representative bankDeWalque et al.(2009) have interbank market
2 ”Leaning against the wind”
Bernanke,Gertler (1999) are against targeting asset pricesCecchetti (2000) is in favor of the central bank targeting asset pricesEichengreen et al. (2011) ”Rethinking Central Bank”
3 Unconventional monetary policy
Ashcroft (2009) uses also a haircut ruleSchabert (2010) lets CB lend to households directly
Bjorn Hilberg and Josef Hollmayr Asset Prices, Collateral and Unconv. Monetary Policy in a DSGE model
IntroductionModel
CalibrationResults
MotivationPreliminary ResultsLiterature Review
Outline of Talk and Procedure
1 Model description
2 Calibration
3 Results
Bjorn Hilberg and Josef Hollmayr Asset Prices, Collateral and Unconv. Monetary Policy in a DSGE model
IntroductionModel
CalibrationResults
Overview
Central Bank
Investment Banks
Commercial Banks
Households
Intermediate
Housing Production
Final Good Producer
Liquidity
Collateral portfolio
(riskless and risky)
Interbank liquidity
Collateralportfolio (risky)
Retailers Capital Produers
Real Economy
Deposits Collateral Loans
The real economy consistsof households, firms, retailersand capital producers. Thisframework is rather standardin the financial acceleratorliterature. New in our set upis the way we model the in-terbank market and the rela-tion to the central bank. Asa result there are many differ-ent interest rates in the econ-omy.
Bjorn Hilberg and Josef Hollmayr Asset Prices, Collateral and Unconv. Monetary Policy in a DSGE model
IntroductionModel
CalibrationResults
Households
The instantaneous utility function has the following form:
Ut =Ct(h)1−γc
1− γc+
(1− Lt(h))1−γh
1− γh(1)
The infinite sum of discounted utility is maximized by the householdsunder the following budget constraint:
Ct(h) + Dt(h) = WtLt(h) +RD
t−1
πtDt−1(h) + Pt(h)− Tt(h) (2)
Bjorn Hilberg and Josef Hollmayr Asset Prices, Collateral and Unconv. Monetary Policy in a DSGE model
IntroductionModel
CalibrationResults
Firms
The production function is of the Cobb-Douglas type
Yt = AtKαt L1−α
t (3)
Bt = QtKt+1 − Nt (4)
The size of the markup for external financing depends on the ratio of themarket value of capital over the net worth and is given by the followingfunction:
RSt+1 =
RBt
πt+1
(StKt+1
Nt
)ψ(5)
The evolution of net worth and the provision of capital by capitalproducers as well as the retailer’s problem follow the standardassumptions.
Bjorn Hilberg and Josef Hollmayr Asset Prices, Collateral and Unconv. Monetary Policy in a DSGE model
IntroductionModel
CalibrationResults
Commercial Banks I
Table: Balance sheet of commercial bank j
Assets Liabilities
Loans to Entr. Bt(j) Deposits Dt(j)Interbank Loans IBt(j)
The demand for deposits and loans is given by:
Dt(j) =
(RD
t (j)
RDt
)εd
Dt Bt(j) =
(RH
t (j)
RHt
)−εh
Bt
Each commercial bank j maximizes then its profit which is given by thefollowing equation:
ΠCoBt =
RBt−1
πtBt−1(j) − RD
t−1
πtDt−1(j) − R IB
t−1
πtIBt−1(j)
− κd
2
(RD
t−1
RDt−2
− 1
)2RD
t−1
πtDt−1(j) − κb
2
(RB
t−1
RBt−2
− 1
)2RB
t−1
πtBt−1(j)
Bjorn Hilberg and Josef Hollmayr Asset Prices, Collateral and Unconv. Monetary Policy in a DSGE model
IntroductionModel
CalibrationResults
Commercial Banks II
Asset-backed securities are then defined as
ABSCoBt (j) = (Kt(j)Et (St+1(j)))τ − (Nt(j))1−τ
The Commercial bank is also constraint with respect to the investmentbank:
R IBt IBt(j) ≤ mtABSCoB
t (j) (6)
where mt denotes the loan-to-value ratio.
Bjorn Hilberg and Josef Hollmayr Asset Prices, Collateral and Unconv. Monetary Policy in a DSGE model
IntroductionModel
CalibrationResults
Investment Banks
Table: Balance sheet of the Investment Bank k
Assets Liabilities
Interbank Loans IBt(k) Loans from CB MDt (k)
Excess Reserves Xt(k)Government Bonds Gt(k)
The profit function takes the following form:
ΠPDt (k) = RSpread
t
(IBt(k) + MD
t (k) − Xt(k))
+ Rt IBt(k) − R IBt MD
t (k) + R IBt Xt(k)
investment bank’s demand for central bank liquidity (kind of an inverseProduction function):
Mt(k) = IBt(k)ζXt(k)1−ζ
The investment bank also faces a constraint when taking out a Repo loan fromthe central bank.
MDt (k) = Gt(k) + (1 − HCt)ABSPD
t (k)
Bjorn Hilberg and Josef Hollmayr Asset Prices, Collateral and Unconv. Monetary Policy in a DSGE model
IntroductionModel
CalibrationResults
The Central Bank
Table: Balance sheet of the Central Bank
Assets Liabilities
Government Bonds Gt Money in circulation MCBt
(Asset-backed securities ABSCBt ) Equity ECB
t
The haircut ht follows the following rule
HCt = ρhHCt−1 + cSt
The interest rate follows the usual one proposed by Taylor (1993)
Rt = ρrRt−1 + φπ(πt+1 − π) + φy (Y − Y )
The profit function of the central bank is as follows:
Πcbt =
Rt−1
πtMcb
t−1 −RDF
t−1
πtXt−1.
Bjorn Hilberg and Josef Hollmayr Asset Prices, Collateral and Unconv. Monetary Policy in a DSGE model
IntroductionModel
CalibrationResults
Exogenous Processes
Shock to the Loan-to-value ratio:
mt = ρmmt−1 + εmt
Shock to Technology:At = ρaAt−1 + εAt
Shock to Government Spending:
Gt = ρgGt−1 + εGt
Shock to the fundamental value of the Asset:
Ut = bRQ
ss
(1 − δ)Ut−1 + εUt
Shock to the Haircut rule:
HCt = ρhHCt−1 + cSt − εHCt
Shock to the Interest Rate Rule:
Rt = φrRt−1 + φππt + φyYt + εRt
Bjorn Hilberg and Josef Hollmayr Asset Prices, Collateral and Unconv. Monetary Policy in a DSGE model
IntroductionModel
CalibrationResults
Calibrated Parameters I
Challenge: Real economy and financial sector in one model; Compromise:Calibration to monthly frequency
Real Economy:
Parameters Description Values
β Degree of Impatience 0.997α Capital Intensity 0.33δ Depreciation Rate 0.008ψ Fin. Accelerator 0.0506ν Survival Probability 0.95εy Elasticity of Price 6ξp Calvo Parameter 0.85Ω Mass of Entrepreneurial Labor 0.01
Lev Leverage 2G ss
Y ss Government Expenditure over GDP 0.2
Bjorn Hilberg and Josef Hollmayr Asset Prices, Collateral and Unconv. Monetary Policy in a DSGE model
IntroductionModel
CalibrationResults
Calibrated Parameters II
Financial Economy:
Parameters Description Values
a AR parameter Market Value 0.98HC ss Steady State Haircut 0.2
b = a · (1 − δ) AR parameter Market Value 0.9722ζ IB ratio in Prod.function 0.95κd Adj. Costs Deposits 540κb Adj. Costs Loans 1125εd Elasticity of Deposit demand 852εb Elasticity of Loan demand 759ρm AR parameter loan-to-value ratio 0.9ρr AR parameter Interest Rate 0.99ρh AR parameter Haircut 0.99φπ Inflation Coefficient 1.5
Bjorn Hilberg and Josef Hollmayr Asset Prices, Collateral and Unconv. Monetary Policy in a DSGE model
IntroductionModel
CalibrationResults
Dynamic AnalysisReaction to Asset Prices?Exit Strategies
Order of results
Dynamic Analysis
Shock to TechnologyShock to the Interest RateShock to the Haircut RuleRole of the Interbank Market
What instrument should lean against the wind
”Boom-Bust” cycles with Haircut rule”Boom-Bust” cycles with Interest rate rule
Exit strategies
Exit from haircut ruleExit from haircut rule and interest rate ruleExit from loan-to-value ratio
Bjorn Hilberg and Josef Hollmayr Asset Prices, Collateral and Unconv. Monetary Policy in a DSGE model
IntroductionModel
CalibrationResults
Dynamic AnalysisReaction to Asset Prices?Exit Strategies
Shock to the haircut
0 20 400
0.05
0.1
0.15
0.2Interest Rate
time0 20 40
−0.2
−0.15
−0.1
−0.05
0Spread
time
0 20 40−0.02
0
0.02
0.04
0.06
0.08Consumption
time
0 20 40−0.05
0
0.05
0.1
0.15Fundamental Price
time
0 20 40−5
0
5
10x 10
−3 Inflation
time
0 20 40−0.05
−0.04
−0.03
−0.02
−0.01
0Interbank Rate
time
0 20 400
0.2
0.4
0.6
0.8
1Excess Reserves
time
0 20 400
0.05
0.1
0.15
0.2Asset Backed Securities
time0 20 40
−0.05
0
0.05
0.1
0.15Market Price
time
0 20 400
0.05
0.1
0.15
0.2Liquidity
time
0 20 400
0.02
0.04
0.06
0.08
0.1Output
time
Haircut Shock
0 20 400
0.05
0.1
0.15
0.2Interbank Lending
time
Impulse Responses aftera 10% decrease in thehaircut rule
The interbank market isstimulated
→ Interbank lendingand excess reservesboth increase
Also the real sectorprofits
The disadvantage is ahigher inflation rate onimpact
Bjorn Hilberg and Josef Hollmayr Asset Prices, Collateral and Unconv. Monetary Policy in a DSGE model
IntroductionModel
CalibrationResults
Dynamic AnalysisReaction to Asset Prices?Exit Strategies
Shock to the interest rate
0 20 400
0.02
0.04
0.06Interest Rate
time
0 20 40−4
−2
0
2
4x 10
−3 Inflation
time
0 20 400
0.005
0.01
0.015
0.02Interbank Rate
time
0 20 400
0.2
0.4
0.6
0.8Excess Reserves
time
0 20 40−0.1
−0.08
−0.06
−0.04
−0.02
0Asset Backed Securities
time0 20 40
−0.1
−0.05
0
0.05
0.1Fundamental Price
time
0 20 40−0.08
−0.06
−0.04
−0.02
0Output
time
Interbank Market
No Interbank Market
0 20 40−0.06
−0.04
−0.02
0
0.02Consumption
time
0 20 40−0.04
−0.03
−0.02
−0.01
0Liquidity
time0 20 40
−0.1
−0.08
−0.06
−0.04
−0.02
0Interbank Loans
time
0 20 40−0.04
−0.03
−0.02
−0.01
0Spread
time
0 20 40−0.1
−0.05
0
0.05
0.1Market Price
time
Impulse Responses aftera 25bp positive shockto the Interest Rate
The real economy(inflation, output) isdampened as is theinterbank market
Interbank lendingdecreases and excessreserves go up
The interbank marketdampens the shock
Bjorn Hilberg and Josef Hollmayr Asset Prices, Collateral and Unconv. Monetary Policy in a DSGE model
IntroductionModel
CalibrationResults
Dynamic AnalysisReaction to Asset Prices?Exit Strategies
Shock to technology
0 20 40−0.03
−0.02
−0.01
0Interest Rate
time
0 20 40−0.025
−0.02
−0.015
−0.01
−0.005
0Inflation
time
0 20 40−0.025
−0.02
−0.015
−0.01
−0.005
0Interbank Rate
time
0 20 40−0.25
−0.2
−0.15
−0.1
−0.05
0Excess Reserves
time
0 20 400
0.01
0.02
0.03
0.04Asset Backed Securities
time0 20 40
−0.01
0
0.01
0.02
0.03Fundamental Price
time
0 20 400
0.02
0.04
0.06Output
time
Interbank Market
No Interbank Market
0 20 400
0.02
0.04
0.06
0.08Consumption
time
0 20 400
0.005
0.01
0.015Liquidity
time0 20 40
0
0.01
0.02
0.03
0.04Interbank Loans
time
0 20 40−5
0
5
10x 10
−3 Spread
time
0 20 40−0.01
0
0.01
0.02
0.03Market Price
time
A positive (1%) shockto technology
The real sector isstimulated
This positive shocktranslates itself also onthe interbank market,which is also increasingits lending
The Interbank is ifanything dampeningthe shock, mostvariables react equally
Bjorn Hilberg and Josef Hollmayr Asset Prices, Collateral and Unconv. Monetary Policy in a DSGE model
IntroductionModel
CalibrationResults
Dynamic AnalysisReaction to Asset Prices?Exit Strategies
Responding with Interest Rates?
0 10 20 30 40−1.5
−1
−0.5
0
0.5Spread
time
0 10 20 30 40−0.4
−0.2
0
0.2
0.4Inflation
time0 10 20 30 40
−0.4
−0.3
−0.2
−0.1
0
0.1
0.2
0.3Output
time
Case1
Case2
Case3
Case4
0 10 20 30 40−1
−0.5
0
0.5
1Fundamental Price
time
0 10 20 30 40−5
0
5
10
15Excess Reserves
time
0 10 20 30 40−1.5
−1
−0.5
0
0.5
1
1.5Market Price
time
Simulating Boom-Bustcycles a laBernanke,Gertler (1999)
the smaller the deviationsthe better thestabilization policy of theCB
Interest rates reacting toasset prices does not yieldbig stabilization
confirmingBernanke,Gertler
Bjorn Hilberg and Josef Hollmayr Asset Prices, Collateral and Unconv. Monetary Policy in a DSGE model
IntroductionModel
CalibrationResults
Dynamic AnalysisReaction to Asset Prices?Exit Strategies
Respond with the haircut?
0 10 20 30 40−1.5
−1
−0.5
0
0.5Spread
time
0 10 20 30 40−0.4
−0.3
−0.2
−0.1
0
0.1
0.2
0.3Inflation
time0 10 20 30 40
−0.4
−0.3
−0.2
−0.1
0
0.1
0.2
0.3Output
time
Case5
Case6
Case7
Case8
0 10 20 30 40−1
−0.5
0
0.5
1Fundamental Price
time
0 10 20 30 40−5
0
5
10
15Excess Reserves
time
0 10 20 30 40−1.5
−1
−0.5
0
0.5
1
1.5Market Price
time
Here the haircut ruleserves as instrument forthe response to assetprices
Much better stabilizationif haircut is allowed toreact to asset prices
confirming both Cecchettiand BG: Central Banksshould lean against thewind, but not withinterest rate, betterinstrument is haircut
Bjorn Hilberg and Josef Hollmayr Asset Prices, Collateral and Unconv. Monetary Policy in a DSGE model
IntroductionModel
CalibrationResults
Dynamic AnalysisReaction to Asset Prices?Exit Strategies
Exit Strategy from Haircut
0 10 20 30 40−12
−10
−8
−6
−4
−2
0
2Haircut
time
0 10 20 30 40−0.8
−0.6
−0.4
−0.2
0
0.2Inflation
time0 10 20 30 40
−8
−6
−4
−2
0
2Output
time
no exit
anticipated exit
unanticipated exit
0 10 20 30 40−15
−10
−5
0
5Fundamental Price
time
0 10 20 30 40−150
−100
−50
0
50Policy Rate
time
0 10 20 30 40−15
−10
−5
0
5Market Price
time
Exit strategy along thelines of Angeloni, Faia,Winkler (2010)
here only exit from a toolow haircut
the asset price isnegatively shocked(corresponding to a bust)
three different paths: noexit, unanticipated andanticipated exit
the economy wide costsare least if the centralbank announces the exitprematurely
Bjorn Hilberg and Josef Hollmayr Asset Prices, Collateral and Unconv. Monetary Policy in a DSGE model
IntroductionModel
CalibrationResults
Dynamic AnalysisReaction to Asset Prices?Exit Strategies
Exit Strategy from Haircut and Interest Rate Rule
0 10 20 30 40−20
−10
0
10
20
30Policy Rate
time
0 10 20 30 40−5
0
5
10
15Inflation
time0 10 20 30 40
−6
−4
−2
0
2
4
6Output
time
no exit
anticipated exit
unanticipated exit
0 10 20 30 40−20
−15
−10
−5
0
5Fundamental Price
time
0 10 20 30 40−25
−20
−15
−10
−5
0
5Haircut
time
0 10 20 30 40−20
−15
−10
−5
0
5Market Price
time
In this case exit from atoo low haircut and theinterest rate at thezero-lower bound
negative shock to theasset price
here the results are moremixed
less volatility in inflationcomes at the cost ofmore volatility in theother variables.
Bjorn Hilberg and Josef Hollmayr Asset Prices, Collateral and Unconv. Monetary Policy in a DSGE model
IntroductionModel
CalibrationResults
Dynamic AnalysisReaction to Asset Prices?Exit Strategies
Exit Strategy from Loan-to-Value Ratio
0 10 20 30 400
5
10
15
20Loan−to−Value Ratio
time
0 10 20 30 40−0.4
−0.2
0
0.2
0.4
0.6
0.8
1Inflation
time0 10 20 30 40
−1
0
1
2
3
4
5Output
time
no exit
anticipated exit
unanticipated exit
0 10 20 30 40−2
0
2
4
6
8Fundamental Price
time
0 10 20 30 40−50
0
50
100
150Policy Rate
time
0 10 20 30 40−2
0
2
4
6Market Price
time
Think of macroprudentialauthority (eg. within thecentral bank) that exitsfrom a higherloan-to-value ration
once again the exampleof an asset price bust
very little macro-volatilityin the no exit case
if the exit wasanticipated, the reactionof output and andinflation is stronger
in an unanticipated exitoutput and the price ofcapital even increase
Bjorn Hilberg and Josef Hollmayr Asset Prices, Collateral and Unconv. Monetary Policy in a DSGE model
IntroductionModel
CalibrationResults
Dynamic AnalysisReaction to Asset Prices?Exit Strategies
Concluding Thoughts
Extends the existing literature along two lines:1 Proposing a different new-keynesian model with an interbank market2 analyzing various monetary and economic questions
interbank market has influence (amplifying or dampening) on realeconomy
haircut is the appropriate instrument to target asset prices
losses from exit strategy are minimized if exit date is announced inadvanced and central bank sticks to it
Bjorn Hilberg and Josef Hollmayr Asset Prices, Collateral and Unconv. Monetary Policy in a DSGE model
IntroductionModel
CalibrationResults
Dynamic AnalysisReaction to Asset Prices?Exit Strategies
Further Research
Estimating the DSGE model/taking it to the data and comparingthe fit with other specifications of the interbank market
business cycle analysis in more detail with this set up
other micro-foundations for this banking structure
Complementing the model with a complete fiscal sector
... implementing default risk?
Bjorn Hilberg and Josef Hollmayr Asset Prices, Collateral and Unconv. Monetary Policy in a DSGE model