Evaluating Macroeconometric Modelling with Regard to Usefulness: a Survey

Macroeconometric models have during the last 40 years played an important role as a tool to guide decision making in public as well as private macroeconomic institutions. However, such models have not been much used in academic circles. We argue that macroeconometric models have problems both with regard to internal and external validity. Although the science of econometrics has partly answered the problem of internal validity, macroeconometric modelling is still dismissed by theorists as inappropriate for theoretical development. We find that the argument over how to evaluate macroeconometric modelling can be viewed as a result of the relationship between observed economic variables and economic theory.econometric models, theory of science

What do banks lose money on during crises?

We look at a wide range of national and international crises to identify banks' exposures to losses during banking crises. We find that banks generally sustain greater losses on corporate loans than on household loans. Even after sharp falls in house prices, losses on household loans were often moderate. The most prominent exception is the losses incurred in US banks during the 2008 financial crisis. In most of the crises we study, the main cause of bank losses appears to have been property-related corporate lending, particularly commercial property loans. In a box, we also summarise characteristics of developments in the banking industry ahead of banking crises.publishedVersio

Liquidity provision in the overnight foreign exchange market

We presents evidence that non-financial customers are the main liquidity providers in the overnight foreign exchange market using a unique daily data set covering almost all transactions in the SEK/EUR market over almost ten years. Two main findings support this: (i) The net position of non-financial customers is negatively correlated with the exchange rate, opposed to the positive correlation found for financial customers; (ii) Changes in net position of non-financial customers are forecasted by changes in net position of financial customers, indicating that non-financial customers take a passive role consistent with liquidity provision.Microstructure, International finance, Liquidity

Volume and Volatility in the FX Market: Does it matter who you are?

The relationship between volume and volatility has received much attention in the literature on financial markets. However, due to the lack of data, few results have been presented for the foreign exchange (FX) market. Furthermore, most studies contain only aggregate series, and cannot distinguish between the impact of different participants or instruments. We study the impact of volume on volatility in the FX market using a unique data set of daily trading in the Swedish krona (SEK) market. The data set covers 95 percent of worldwide SEK trading, and is disaggregated on a number of reporting banks' buying and selling in five different instruments on a daily basis from 1995 until 2002. We find that volume in general show a positive correlation with volatility. However, the strength of the relationship depends on the instrument traded and the identity of the reporting bank. In particular, we find that trading tends to concentrate around the largest banks during periods of high volatility. These banks are probably also best informed. This is especially the case when volatility is high. We interpret this as evidence that heterogeneous expectations are important to an understanding of the volume- volatility relationship.Volume-volatility relation; microstructure; exchange rates

Volume and Volatility in the FX-Market: Does it matter who you are?

The relationship between volume and volatility has received much attention in the the literature of financial markets. However, due to the lack of data, few results have been presented for the foreign exchange market. Further, most studies contain only aggregate series, and can not distinguish between the impact of different instruments or participants.We study the impact of volume on volatility in the the FX-market using a unique data set of daily trading in the Swedish krona (SEK) market. The data set covers 95 per cent of worldwide SEK-trading, and is disaggregated on a number of reporting banks’ buying and selling in five different instruments on a daily basis over a period of nine years. We find that volume in general depict a positive correlation with volatility. However, the strength of the relationship depends on the instrument used and the identity of the reporting bank. In particular we find that it is the large Swedish banks that dominate the relationship. These banks are probably also the best informed banks. We interpret this is as evidence that heterogeneous expectations are important to understand the volume-volatility relationship.volume volatility relation, microstructure, exchange rates.

An Independent Review of Monetary Policy and Institutions in Norway

The Centre for Monetary Economics (CME) at the Norwegian School of Management BI has for the third time invited a committee of economists for Norges Bank Watch, with the objective to evaluate the monetary-policy regime in Norway and Norges Bank’s conduct of monetary policy. The new committee for Norges Bank Watch 2002 consists of Professor Lars E.O. Svensson (chair), Princeton University, Chief Economist Kjetil Houg, Alfred Berg, Doctorate Student Haakon O.Aa. Solheim, Norwegian School of Management BI, and Professor Erling Steigum, Norwegian School of Management BI. The aim of Norges Bank Watch is to contribute to the general discussion on monetary policy and institutions among the political system, the academic community and other interested parties. Two years ago, Norges Bank Watch 2000 suggested that the Bank’s actual interpretation of its stable exchange-rate mandate should be formalized as a flexible inflation-targeting regime. In March 2001, the government introduced a formal inflation target regime. As was the case in last year’s report, we do not have the ambitions to suggest another major change of the system, but we hope to highlight important aspects of the present regime and we recommend a number of possible improvements of the regime.

“Large” vs. “small” players: A closer look at the dynamics of speculative attacks

What is the role of “large players” like hedge funds and other highly leveraged institutions in speculative attacks? In recent theoretical work, large players may induce an attack by an early move, providing information to smaller agents. In contrast, many observers argue that large players are in the rear. We propose a model that allows both the large player to move early in order to induce speculation by small players, or wait so as to benefit from a high interest rate prior to the attack. Using data on net positions of “large” (foreigners) and “small” (locals) players,we find that large players moved last in three attacks on the Norwegian krone (NOK) during the1990s: The ERM-crisis of 1992, the NOK-pressure in 1997, and after the Russian moratorium in1998. In 1998 there was a contemporaneous attack on the Swedish krona (SEK) in which large players moved early. Interest rates did not increase in Sweden so there was little to gain by a delayed attack.Speculative attacks, microstructure, international finance, large players

Assessing Monetary Policy in Norway

We evaluate the policy of flexible inflation targeting implemented by the Norges Bank since March 2001. We discuss the reasons why the real interest rates are significantly higher in Norway than in the rest of Europe. Finally we propose some institutional changes that can improve the policy making process.

Norwegian homeowners’ debt-servicing capacity is adequate

Debt-servicing capacity is a function of both available cash flow and the size of obligatory expenses. We use household level information to calculate normal expenses that cover food, other general consumption, electricity and fixed housing expences, as well as interest expenses. We link this to information on household income, debt, financial wealth and housing wealth. Just over 1 percent of home-owning households lacked income to cover normal expenses and interest in 2020. Half of these had the opportunity to cover the liquidity deficit by drawing on financial wealth or increasing their mortgages. We show how higher food and electricity prices, and also higher interest rates, affect the number of households with weak debt-servicing capacity and the share of debt held by this group. The share of households that might experience debt servicing problems will increase with a rapid and marked increase in interest rates. Given the debt-to-income ratio in 2020, it is only when the interest rate rises above 5 percent that the share facing problems rises markedly in groups other than those with the lowest income.publishedVersio

Hvor mye koster ukoordinert klimapolitikk? : To modeller – to svar

Scenarioer er det mest brukte verktøyet for å forstå hvordan verden kan gjennomføre en overgang til et lavutslippssamfunn. Network for Greening the Financial System (NGFS) har gjort et utvalg av slike "klimascenarioer" tilgjengelige for allmennheten. Håpet er at disse scenarioene skal gjøre det enklere for sentralbanker, finanstilsyn og aktører i finansmarkedet å ha et felles utgangspunkt for diskusjon av konsekvensene av klimapolitikk. En innsikt fra slike scenarioer er at nødvendige tiltak blir dyrere hvis tiltakene ikke koordineres på tvers av land. Med ukoordinert politikk øker også usikkerheten om den økonomiske kostnaden betydelig. Det ser vi blant annet ved at ulike modeller gir veldig forskjellige svar på hvor høy karbonpris som skal til for å nå klimamålene. De mest pessimistiske framskrivningene innebærer et betydelig fall i samlet produksjon målt ved BNP.publishedVersio