A Heterogenous Agents Model Usable for the Analysis of Currency Transaction Taxes

We extend the model by DeGrauwe and Grimaldi (2006, EER) by currency transaction taxes. This model explains the exchange rate behavior by the interaction of heterogeneous traders who display either trend chasing behavior or rely on a return of the exchange rate back to its arbitrage free fundamental value. Within this model framework we can show analytically that the steady-state of the original model is unaffected by the transaction tax rate. We inferred from numerical simulations that the transaction tax is able to reduce the number of speculative equilibria to zero. Moreover, we show that the tax will lead to a faster convergence of the system back to its fundamental steady state. --Currency Transaction Taxes,Exchange Rates,Financial Market Volatility,Heterogenous Agents Model,Numerical Simulation

The Link between Output, Inflation, Monetary Policy and Housing Price Dynamics

This study analyses empirically the link between real house prices and key macro variables like prices, output and interest rates for ten OECD countries. We find out that a monetary policy shock lowers real house prices in all ten countries, where the interest rate shock explains between 12 and 24 percent of the fluctuations in house prices. Impulse responses indicate that house prices rise after an output shock in nine of ten countries. But we also find evidence that real estate prices have a large impact on these key macroeconomic variables. We find out that the house price shock is a germane aggregate demand shock because it raises output and prices and leads to increasing money market rates in all countries. The story behind this finding is that increasing house prices lead to an increase in households' net worth which leads to increasing consumption expentitures and thereby stimulates aggregate demand. This stimulus on aggregate demand leads to increasing output and inflationary pressures on which the central bank reacts by tightening monetary policy. We find out that 12 to 20 percent of output fluctuations and around 10 to 20 percent of price fluctuations can be traced back to the housing demand shock. Moreover, we find that these housing demand shocks are a key driver of money market rates. We conclude that this channel is empirically relevant.Inflation, Monetary Policy, Housing Prices, Vectorautoregressions

Transaction taxes, traders' behavior and exchange rate risks

We propose a new model of chartist-fundamentalist-interaction in which both groups of traders are allowed to select endogenously between different forecasting models and different investment horizons. Stochastic interest rates in both countries and different behavioral assumptions for trend-extrapolating and fundamental based forecasts determine the agents? market orders which drive the exchange rate. A numerical analysis of the model shows that it is able to replicate stylized facts of observed financial return time series like excess kurtosis and volatility clustering. Within this framework we study the effects of transaction taxes on exchange rate volatil- ity and traders? behavior measured by their population fractions. Simula- tions yield the result that on the macroscopic level these taxes reduce the variance of exchange rate returns, but also increase their kurtosis. Moreover, on the microscopic level the tax harms short-term speculation in favor of long-term investment, while it also harms trading rules based on economic fundamentals in favor to trend extrapolating trading rules. --Chartist-Fundamentalist-Interaction,Exchange Rates,Financial Market Volatility,Transaction Taxes

Why the ECB is not to blame for low interest rates

In the latest set of EU stress tests, several German lenders performed poorly. As Markus Demary writes, some of this performance has been blamed on low interest rates squeezing the profitability of lenders. He argues that while the ECB has frequently been blamed for this situation, the reality is more complex and instead reflects long-term trends which can only be addressed by lasting structural reforms

Will the review of the Dodd-Frank Act start a regulatory competition with the EU?

A race to the bottom in regulation would weaken the global financial system and make crises more likely, writes Markus Demar

Why European firms need more securitised bonds (not bank loans)

They share credit risk more efficiently; and that leaves bank loans available for small and medium-sized firms, writes Markus Demar

The US should not roll back financial regulation

In the United States, the House of Representatives has passed the Financial CHOICE Act (Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs Act). This bill is intended to replace the financial market regulation of the Obama era, the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was a response to the global financial market crisis of 2008

How high will inflation rise and how long will it last?

After a longer period of low inflation – way below most central banks’ targets – prices have started to rise again. Based on his research with colleagues Anna-Lena Herforth and Jonas Zdrzalek, Markus Demary looks at the drivers of the higher inflationary environment and draws conclusions about how persistent it will be

How high will inflation rise and how long will it last?

After a longer period of low inflation – way below most central banks’ targets – prices have started to rise again. Based on his research with colleagues Anna-Lena Herforth and Jonas Zdrzalek, Markus Demary looks at the drivers of the higher inflationary environment and draws conclusions about how persistent it will be

Transaction taxes, traders’ behavior and exchange rate risks

We propose a new model of chartist-fundamentalist-interaction in which both groups of traders are allowed to select endogenously between different forecasting models and different investment horizons. Stochastic interest rates in both countries and different behavioral assumptions for trend-extrapolating and fundamental based forecasts determine the agents’ market orders which drive the exchange rate. A numerical analysis of the model shows that it is able to replicate stylized facts of observed financial return time series like excess kurtosis and volatility clustering. Within this framework we study the effects of transaction taxes on exchange rate volatility and traders’ behavior measured by their population fractions. Simulations yield the result that on the macroscopic level these taxes reduce the variance of exchange rate returns, but also increase their kurtosis. Moreover, on the microscopic level the tax harms short-term speculation in favor of long-term investment, while it also harms trading rules based on economic fundamentals in favor to trend extrapolating trading rules