Skip to main content

Summary

Answering the Queen: Machine Learning and Financial Crises
Author(s):
Jeremy Fouliard, London Business School
Michael Howell, CrossBorder Capital
Hélène Rey, London Business School and NBER
Discussant(s):
Francis X. Diebold, University of Pennsylvania and NBER
Abstract:

Financial crises cause economic, social and political havoc. Fouliard, Howell, and Rey use the general framework of sequential predictions also called online machine learning to forecast crises out-of-sample. Their methodology is based on model averaging and is "meta-statistic"since we can incorporate any predictive model of crises in our set of experts and test its ability to add information. They are able to predict systemic financial crises 12 quarters ahead in quasi-real time with very high signal to noise ratio. The researchers also analyse which models and variables provide the most information for their predictions at each point in time, allowing them to gain some insights into economic mechanisms underlying the building of risk in economies.

Downloads:

In addition to the conference paper, the research was distributed as NBER Working Paper w28302, which may be a more recent version.

Are Intermediary Constraints Priced?
Author(s):
Wenxin Du, University of Chicago and NBER
Benjamin M. Hébert, Stanford University and NBER
Amy Wang Huber, Stanford University
Discussant(s):
Gordon Y. Liao, Federal Reserve Board
Abstract:

Violations of no-arbitrage conditions measure the shadow cost of constraints on intermediaries, and the risk that these constraints tighten is priced. Du, Hébert, and Wang Huber demonstrate in an intermediary-based asset pricing model that violations of no-arbitrage such as covered interest rate parity (CIP) violations, along with intermediary wealth returns, can be used to price assets. They describe a "forward CIP trading strategy" that bets on CIP violations becoming smaller, and show that its returns help identify the price of the risk that the shadow cost of intermediary constraints increases. This risk contributes substantially to the volatility of the stochastic discount factor, and appears to be priced consistently in U.S. treasury, emerging market sovereign bond, and foreign exchange portfolios.

Downloads:
The Macroeconomics of the Greek Depression
Author(s):
Gabriel Chodorow-Reich, Harvard University and NBER
Loukas Karabarbounis, University of Minnesota and NBER
Rohan Kekre, University of Chicago and NBER
Discussant(s):
Stephanie Schmitt-Grohé, Columbia University and NBER
Abstract:

The Greek economy experienced a boom until 2007, followed by a prolonged depression resulting in a 25 percent shortfall of GDP by 2016. Informed by a detailed analysis of macroeconomic patterns in Greece, Chodorow-Reich, Karabarbounis, and Kekre estimate a rich dynamic general equilibrium model to assess quantitatively the sources of the boom and bust. Lower external demand for traded goods and contractionary fiscal policies account for the largest fraction of the Greek depression. A decline in total factor productivity, due primarily to lower factor utilization, substantially amplifies the depression. Given the significant adjustment of prices and wages observed throughout the cycle, a nominal devaluation would only have short-lived stabilizing effects. By contrast, shifting the burden of adjustment away from taxes toward spending or away from capital taxes toward other taxes would generate longer-term production and consumption gains. Eliminating the rise in transfers to households during the boom would significantly reduce the burden of tax adjustment in the bust and the magnitude of the depression.

Downloads:

In addition to the conference paper, the research was distributed as NBER Working Paper w25900, which may be a more recent version.

Uncovered Interest Parity, Forward Guidance and the Exchange Rate
Author(s):
Jordi Galí, CREI and NBER
Discussant(s):
Michael B. Devereux, University of British Columbia and NBER
Abstract:

Galí analyze the effectiveness of forward guidance policies in open economies, focusing on the role played by the exchange rate in their transmission. Under uncovered interest parity (UIP), the effect on the real exchange rate of an anticipated change in the real interest rate does not decline with the horizon. Empirical evidence using U.S., euro area and UK data points to a substantial deviation from that invariance prediction: expectations of interest rate differentials in the near (distant) future are shown to have much larger (smaller) effects on the real exchange rate than is implied by UIP. Some possible explanations are discussed.

Downloads:
Reserve Accumulation, Macroeconomic Stabilization and Sovereign Risk
Author(s):
Javier Bianchi, Federal Reserve Bank of Minneapolis
César Sosa-Padilla, University of Notre Dame and NBER
Discussant(s):
Yan Bai, University of Rochester and NBER
Abstract:

Bianchi and Sosa-Padilla study the use of foreign reserves for macroeconomic stabilization purposes in a small open economy. Three key features characterize our model economy: (i) nominal rigidities, (ii) fixed exchange rates, and (iii) sovereign default risk. The researchers argue that these features are prevalent in a large number of emerging economies. In this setup, reserve accumulation not only serves a precautionary role (hedging against roll-over risk) but it is also useful for macro-stabilization goals: in bad times, when aggregate demand is low, involuntary unemployment arises and output is low, the country can use (i.e. run down) its reserves to boost aggregate demand and output. Bianchi and Sosa-Padilla study the country's optimal external portfolio composition (debt and reserves), how the stabilization property of reserves interacts with the typical precautionary role, and how this affects the country's default incentives.

Downloads:
Reshaping Global Trade: The Immediate and Long-Run Effects of Bank Failures
Author(s):
Chenzi Xu, Stanford University
Discussant(s):
Kilian Huber, University of Chicago and NBER
Abstract:

Xu provides evidence from the most severe banking crisis in British history that financial shocks can have a long-lasting impact on the patterns of international trade. The setting for the study is the unexpected failure in May 1866 of Overend and Gurney, London's largest interbank lender. Overend's failure led to widespread bank runs in London that caused 12 percent of British multinational banks to fail. These multinational banks played a dominant role in financing international trade during the 19th century. Using detailed archival records, Xu documents that 10 percent exposure to these failed banks led to 5.6 percent fewer exports the following year. Strikingly, the impact on international trade patterns persisted for almost four decades despite a rapid recovery of the banking sector following the crisis. There was limited within-country substitution, leading to permanent divergence in exports levels across countries: those more exposed to bank failures had 1.8 percent lower annual export growth from 1866-1914. Countries that faced high export competition and those that had little access to alternative forms of credit experienced more persistent effects.

Downloads:
Optimal Foreign Reserves and Central Bank Policy Under Financial Stress
Author(s):
Luis Felipe Céspedes, Universidad de Chile
Roberto Chang, Rutgers University and NBER
Discussant(s):
Alp Simsek, Massachusetts Institute of Technology and NBER
Abstract:

Cespedes and Chang study the interaction between optimal foreign reserves accumulation and central bank international liquidity provision in a small open economy under financial stress. Firms and households finance investment and consumption by borrowing from domestic financial intermediaries (banks), which in turn borrow from abroad. Binding financial constraints can cause the domestic rate of interest to raise above the world rate and the real exchange rate to depreciate, leading to inefficiently low investment and consumption. A role then emerges for a central bank that accumulates reserves in order to provide liquidity if financial frictions bind. The optimal level of international reserves in this context depends, among other variables, on the term premium, the depth of financial markets, ex ante financial uncertainty and the precise way the central bank intervenes. The model is consistent with both the increase in international reserves observed during the period 2004-2008 and with policy intervention after the Lehman bankruptcy.

Downloads:

Participants

More from NBER

In addition to working papers, the NBER disseminates affiliates’ latest findings through a range of free periodicals — the NBER Reporter, the NBER Digest, the Bulletin on Retirement and Disability, and the Bulletin on Health — as well as online conference reports, video lectures, and interviews.

Economics of Digitization Figure 1
  • Article
The NBER Economics of Digitization Project, established in 2010 with support from the Alfred P. Sloan Foundation,...
claudiagoldinpromoimagelecture.png
  • Lecture
Claudia Goldin, the Henry Lee Professor of Economics at Harvard University and a past president of the American...
2020 Methods Lecture Promo Image
  • Lecture
The extent to which individual responses to household surveys are protected from discovery by outside parties depends...