Egle Jakucionyte (University of Amsterdam)
Macroeconomics of Currency Carry Trade and Debt
Abstract: The depreciation of the Hungarian forint in 2009 left Hungarian borrowers with the skyrocketing value of foreign currency debt. The resulting allocation of currency mismatch losses to debt-ridden firms worsened debt overhang in Hungary and reduced bank returns. Therefore, even though Hungarian banks isolated their balance sheets from the exchange rate risk to some extent, they could not avoid elevated credit risk. This motivates the analysis of currency mismatch losses in different sectors in the economy: what are the macroeconomic consequences of shifting exchange rate risk from borrowers to banks? We develop a small open economy New Keynesian DSGE model that accounts for the implications of domestic currency depreciation for corporate debt overhang and a leveraged banking sector. The model, calibrated to the Hungarian economy, shows that, in periods of unanticipated depreciation, allocating currency mismatch losses to the banking sector can generate milder recession than if currency mismatch is placed at credit constrained firms. The government can intervene to reduce aggregate losses even further by recapitalizing banks and thus mitigating the effects of currency mismatch losses on credit. (Joint with Sweder van Wijnbergen)
Robin Doettling (University of Amsterdam)
Bank Risk Taking at the Zero Lower Bound
Abstract: I study the impact of the zero lower bound (ZLB) on the risk taking behavior of banks. Banks compete monopolistically for deposits, passing on reductions in lending rates to depositors. Their market power guarantees a stable net interest margin, that in combination with adequate capital requirements results in prudent lending decisions. However, at the ZLB the market power of banks breaks, as depositors are unwilling to accept negative interest rates. Further reductions in lending rates now result in falling margins, increasing incentives to take on excessive risk in a search for yield.
To curb risk taking incentives the regulator needs to tighten capital requirements. However, a rising regulatory burden constitutes an additional drag on bank viability, and when margins become too small banks eventually scale down their lending. At this point the regulator is in a dilemma: to escape a liquidity trap aggregate demand needs to be stimulated, but this can only be achieved at the cost of excessive risk taking, undermining the goals of prudential regulation.
The model contributes to our understanding under what circumstances unconventional monetary policies may be effective. Quantitative easing is no panacea to the ZLB problem, since it can only stimulate lending as long as interest margins are not too compressed.
The seminar with Oana Furtuna (University of Amsterdam) has been re-scheduled. New date to be announced.