Essays on Macroeconomics, Collateral, and Default Risk

The introductory chapter one of the dissertation "Essays on Macroeconomics, Collateral, and Default Risk" argues that the interaction of collateral premia and default risk on the corporate and government bond market is an important issue, both from a macroeconomic and a policymaker's perspective. Different aspects of this interaction are discussed in four distinct chapters. Chapter two asks how the eligibility of corporate sector assets as collateral affects collateral supply and risk-taking by the corporate sector. Since banks are willing to pay collateral premia on eligible assets, this makes debt financing cheaper for all firms satisfying eligibility requirements, which are best thought of minimum ratings. We provide a novel analytical characterization of heterogeneous firm responses to collateral easing, i.e., relaxing eligibility requirements. While high-quality firms respond by increasing their debt issuance, some low-quality firms are incentivized to reduce their debt outstanding to benefit from collateral premia. If risk-taking effects are sufficiently large, firm responses increase the resources losses from corporate default. Applying the model to the ECB's collateral easing policy during the 2008 financial crisis, our results suggest that firm responses introduce a central bank trade-off between collateral supply and resource losses of default. The preferential treatment of green bonds in the central bank collateral framework as an environmental policy instrument is discussed in Chapter three. Green and conventional firms issue corporate bonds to banks that use them as collateral. The associated collateral premium induces firms to increase bond issuance, investment, leverage, and default risk. Collateral policy solves a trade-off between increasing collateral supply, adverse effects on firm risk-taking, and subsidizing green investment. Due to these adverse effects, optimal collateral policy is characterized by modest preferential treatment, thereby increasing the green bond share and, to a smaller extent, the green investment share, which reduces pollution. The limited response of green investment is directly related to higher risk-taking of green firms. Chapter four studies how convenience yield interacts with sovereign risk and the supply of government bonds? This chapter builds a quantitative model of sovereign debt and default, in which convenience yield arises because investors derive non-pecuniary benefits from holding risky government bonds. Convenience yield depends on government bond supply and on haircuts that increase in sovereign risk, reflecting mark-to-market practice on financial markets. The model can replicate observed properties of financial market variables and public debt management. To understand convenience yield through the lenses of our model, we provide a decomposition of it into individual components. Counterfactual experiments suggest that the elasticity of a collateral valuation component and a haircut component with respect to government bond supply and default risk can have sizable effects on debt and default dynamics. The European debt crisis of 2011 has been characterized by an unprecedented divergence in borrowing costs for euro area members. While 'peripheral' government bond yields increased to unprecedented levels, yields on German and other 'core' bonds strongly declined, even though their CDS-spreads reached an all-time high in 2011. To reconcile this flight-to-quality, Chapter five propose a model of a financially integrated monetary union in which heterogeneous sovereign borrowers issue bonds subject to default risk. Investors value the collateral service of government bonds, which decreases in haircuts that are specified by the central bank in its collateral framework. In a union-wide fiscal crisis, larger haircuts increase the yields of riskier government bonds and also imply a contraction of aggregate collateral supply. This makes the collateral service of the safest available bonds more valuable to investors: yields on the safest bonds decline, even though their default risk increases. Using the calibrated model, I show that a full collateral backstop policy accepting all bonds with zero haircuts during a fiscal crisis reduces the dispersion of government bond spreads and reduces sovereign risk in the monetary union

Increased Resistance of Bt Aspens to Phratora vitellinae (Coleoptera) Leads to Increased Plant Growth under Experimental Conditions

One main aim with genetic modification (GM) of trees is to produce plants that are resistant to various types of pests. The effectiveness of GM-introduced toxins against specific pest species on trees has been shown in the laboratory. However, few attempts have been made to determine if the production of these toxins and reduced herbivory will translate into increased tree productivity. We established an experiment with two lines of potted aspens (Populus tremula×Populus tremuloides) which express Bt (Bacillus thuringiensis) toxins and the isogenic wildtype (Wt) in the lab. The goal was to explore how experimentally controlled levels of a targeted leaf beetle Phratora vitellinae (Coleoptera; Chrysomelidae) influenced leaf damage severity, leaf beetle performance and the growth of aspen. Four patterns emerged. Firstly, we found clear evidence that Bt toxins reduce leaf damage. The damage on the Bt lines was significantly lower than for the Wt line in high and low herbivory treatment, respectively. Secondly, Bt toxins had a significant negative effect on leaf beetle survival. Thirdly, the significant decrease in height of the Wt line with increasing herbivory and the relative increase in height of one of the Bt lines compared with the Wt line in the presence of herbivores suggest that this also might translate into increased biomass production of Bt trees. This realized benefit was context-dependent and is likely to be manifested only if herbivore pressure is sufficiently high. However, these herbivore induced patterns did not translate into significant affect on biomass, instead one Bt line overall produced less biomass than the Wt. Fourthly, compiled results suggest that the growth reduction in one Bt line as indicated here is likely due to events in the transformation process and that a hypothesized cost of producing Bt toxins is of subordinate significance

Arsenic-phosphorus interactions in the soil-plant-microbe system: dynamics of uptake, suppression and toxicity to plants

High arsenic (As) concentrations in the soil, water and plant systems can pose a direct health risk to humans and ecosystems. Phosphate (Pi) ions strongly influence As availability in soil, its uptake and toxicity to plants. Better understanding of As(V)-Pi interactions in soils and plants will facilitate a potential remediation strategy for As contaminated soils, reducing As uptake by crop plants and toxicity to human populations via manipulation of soil Pi content. However, the As(V)-Pi interactions in soil-plant systems are complex, leading to contradictory findings among different studies. Therefore, this review investigates the role of soil type, soil properties, minerals, Pi levels in soil and plant, Pi transporters, mycorrhizal association and microbial activities on As-Pi interactions in soils and hydroponics, and uptake by plants, elucidate the key mechanisms, identify key knowledge gaps and recommend new research directions. Although Pi suppresses As uptake by plants in hydroponic systems, in soils it could either increase or decrease As availability and toxicity to plants depending on the soil types, properties and charge characteristics. In soil, As(V) availability is typically increased by the addition of Pi. At the root surface, the Pi transport system has high affinity for Pi over As(V). However, Pi concentration in plant influences the As transport from roots to shoots. Mycorrhizal association may reduce As uptake via a physiological shift to the mycorrhizal uptake pathway, which has a greater affinity for Pi over As(V) than the root epidermal uptake pathway

Testing constant cross-sectional dependence with time-varying marginal distributions in parametric models

This paper proposes parametric two-step procedures for assessing the stability of cross-sectional dependency measures in the presence of potential breaks in the marginal distributions. The procedures are based on formerly proposed sup-LR tests in which restricted and unrestricted likelihood functions are compared with each other. First, we show theoretically that standard asymptotics do not hold in this situation. We propose a suitable bootstrap scheme and derive test statistics in different commonly used settings. The properties of the test statistics and precision of the associated change-point estimator are analysed and compared with existing non-parametric methods in various Monte Carlo simulations. These studies reveal advantages in test power for higher-dimensional data and an almost uniform superiority of the sup-LR test in terms of precision of the change-point estimator. We then apply this method to equity returns of European banks during the financial crisis of 2008

Monetary Policy and Climate Change

Abstract Without a doubt, climate change will have a strong impact on both the European and the global economy. This report examines to what extent this requires action from central banks such as the ECB. While it is not contested that central banks need to undertake necessary steps to ensure price and financial stability within their mandates, some commentators suggested that central banks should also actively support the transition to a low-carbon economy through their impact on financial markets. Our report draws a rather pessimistic conclusion regarding the effectiveness and desirability of such active policies. Even if the discussion around the central bank’s primary mandate is excluded, existing research shows that using monetary policy instruments to support the green transition might involve sizeable adverse side effects and is moreover much less effective than fiscal policy instruments