A Climate for Investors. Climate Scenarios in the Network for Greening the Financial System

How has mainstream academic economic discourse evolved to regain its epistemic authority after the financial crisis of 2008 revealed serious blind spots in economic modelling that shattered the profession’s claim to be able to predict and control macroeconomic variables? To answer this question, we combine content with bibliometric analyses of nearly 70,000 papers on macroeconomics and finance published in academic journals from 1990 to 2019. These analyses reveal how a structural rapprochement between macroeconomics and finance created the new subfield of macro-finance. We show that contributions by central bank economists, driven by central banks’ newly acquired macroprudential mandate, were key to its establishment. Acting within the space of regulatory science, they connected macroeconomic and financial knowledge to satisfy their employers’ administrative needs, while also helping to bridge the gaping hole in economic discourse, thereby taking on an important stabilizing role for the epistemic authority of economics.

Changes in the shape of the yield curve have traditionally been one of the key macroeconomic indicators of a likely change in economic outlook. However, the recent financial crises have created a challenge to the management of monetary policy, demanding a revision in the way that policymakers model expected changes in the economy. This volume brings together central bank economists and leading academic monetary economists to propose new methods for modelling the behaviour of interest rates. Topics covered include: the analysis and extraction of expectations of future monetary policy and inflation; the analysis of the short-term dynamics of money market interest rates; the reliability of existing models in periods of extreme market volatility and how to adjust them accordingly; and the role of government debt and deficits in affecting sovereign bond yields and spreads. This book will interest financial researchers and practitioners as well as academic and central bank economists.

The Bundelkhand region in Central India is facing several environmental issues since the last decade including recurrent droughts, dominant land use changes due to many influencing factors including over exploitation of the natural resources and its degradation, climatic variability and decreased agricultural productivity. The agriculture of the region is mostly rain-fed which has now become a non-lucrative livelihood option for the local population due to the vagaries of the climate and its variability. The threat of climate change which now seems to be real is likely to aggravate the already precarious scenario, which therefore calls for a detailed investigation into the impacts of climate change on the water resources of the region. The Ur river basin has been selected as a pilot basin in Bundelkhand for the development of a decision support system (DSS) integrating climate change, hydrology and livelihood. An attempt has been made to study the impact of climate change by forcing hypothetical climate scenarios on a conceptual water balance model setup for the watershed. The analysis reveals that a 10% reduction in precipitation results in more than 40% reduction in surface runoff whereas a 1 °C increase in temperature results in 6% reduction in surface runoff. A 1 °C rise in temperature coupled with a 10% reduction in rainfall leads to a further 50% reduction in surface runoff whereas a 2 °C rise in temperature coupled with a 10% reduction in rainfall leads to reduction in surface runoff by 59%. This analysis is being used in the development of a DSS for making effective policy recommendations to assist the decision makers and stakeholders in selecting appropriate water management practices on a sustainable basis.

The paradigm of “knowledge economy” influences socio-economic and political processes within national economies. The primary role of knowledge, wide reproduction of the elements of technical interaction of innovational goods, quick growth of high-tech sector of economy, and qualitative development of human capital – these elements are the main requirements set to the countries that implement the projects of “knowledge economy”. At that, the existing difficulties of implementing the paradigm of “knowledge economy” are related to old ideas of effective development of economy, science, and technological spheres. This problem lies in the system of higher education, which needs substantial modernization. According to this thesis, the purpose of the research is stage-by-stage evaluation of formation of the “knowledge economy” formation through modernization of education system. In order to achieve this goal, it is necessary to solve the following tasks: study “knowledge economy” from the positions of determining the theoretical regularities and the essence of this category; conduct analysis of genesis of “knowledge economy” at various stages of society’s development; determine peculiarities of “knowledge economy” in the system of higher education; form the system of “knowledge economy” according to the authors’ ideas. Scientific novelty of the research consists in studying the issue of “knowledge economy” through the prism of modernization of the system of higher education. Besides, the authors perform comparative evaluation of the levels of higher education of the USA and the Russian Federation and determine the final results of “knowledge economy” formation in each of the above models. The result of the research is formed proprietary system of interaction within “knowledge economy”, between the institutional environment of higher education, R&D system, market structures, state, and human. This research is interesting from the position of application of the new approach to studying the peculiarities of “knowledge economy” formation. According to this, the article will be interesting for specialists that participate in implementation of strategic projects in the sphere of formation of a new economic model of the country’s development.

Real time monitoring of asset markets: Bubbles and crises

The financial crisis of 2007–10 has presented a number of key policy challenges for those concerned with the long-term stability of the euro area. It has shown that price stability as provided by the European Central Bank is not enough to guarantee financial stability, and exposed fault lines in governance and deficiencies in the architecture of the financial supervisory and regulatory framework. This book addresses these and other issues, including why the crisis affected some countries more than others, whether the euro is still attractive for new EU states, and what policy changes and structural reforms, both macro and micro, should be undertaken to ensure its future viability. Written by a team of leading academic and central bank economists, the book also includes chapters on the cross-country incidence of the crisis, the Irish crisis and ECB monetary policy during the crisis, and studies on Spain, the Baltics, Slovakia and Slovenia.

The Changing Shape of Fixed Income Markets

Distributions Implied by Exchange Traded Options: A Ghost’s Smile?

Proper conduct of monetary policy requires understanding the monetary transmission mechanism, to monitor the economy, make decisions on the stance of policy, and explain the policy actions to the public. Hence, gathering evidence on the monetary transmission mechanism in the euro area has been a priority for the Eurosystem. This 2003 book presents the results of a multi-year collaborative project conducted by the European Central Bank and the other Eurosystem central banks. First, macro data are consistently investigated with both VARs and structural models for the area as a whole and for individual countries. Second, the book contains an unprecedented set of studies on the effects of monetary policy using bank and firm panel data. The results described in country case studies and overview essays by central bank economists, along with a discussion chapter by eminent academics, provide an essential contribution to research on the subject.

Real Time Monitoring of Asset Markets: Bubbles and Crises

Both academic thinking about monetary economics and the practice of monetary policy have changed dramatically since 1971–3, when the rational expectations revolution was beginning and the Bretton Woods system was crumbling. The present paper considers whether the various changes that have taken place were influenced primarily by economic theory or by empirical evidence - or by a combination of the two. Monetary economics, like macroeconomics more generally, passed through the rational expectations period into one dominated by real business cycle (RBC) analysis, which denies monetary policy any significant role in the generation or the dampening of cyclical fluctuations in crucial real variables. Recently, however, the analysis of monetary policy by both academic and central bank economists has been increasingly conducted in small quantitative structural models that combine the optimizing aspect of RBC analysis with various assumptions implying real effects of monetary policy actions due to slow adjustment of nominal prices. These models therefore attempt to combine rather strict theoretical discipline with features that permit an enhanced degree of empirical veracity. It is apparent, accordingly, that both theoretical and empirical analysis have been essential in bringing about alterations in monetary policy analysis between 1971–3 and 1998.

The articles contained in this special section are substantially revised and updated versions of papers, which were originally presented at the Annual Conference of the Western Economic Association in Vancouver in 2004. They are written by central bank economists and deal with important theoretical and policy issues from the point of view of two new European Union (EU) member states (NMSs), the Czech Republic and Hungary, as well as a EU candidate country, Croatia. The insights gained by policy makers in these countries can translate into policy recommendations for other countries. As a consequence, these articles are of interest to a much broader audience. According to the EU Accession Treaty, all the NMSs are required to adopt the euro at some stage. However, the timing of the adoption of the euro is conditional on the fulfillment the Maastricht Convergence Criteria. Hence, while there is a presumption regarding the euro conversion date that is contained in government programs, there remains some uncertainty regarding that date. Furthermore, within the constraints of the EU Treaty requirement of stability-oriented monetary policies, EU member countries that have not yet adopted the euro have some degree of freedom regarding the monetary policy strategy in the period up to the introduction of the euro. Finally, historical legacies such as a high degree of dollarization have an important impact on monetary policy at the present stage. Csajbok and Rezessy (C & R) deal with the first of the issues noted above from a Hungarian (financial market) perspective. Using an uncovered interest rate parity framework, the authors study the potential impact of a shift in market expectations regarding a country's euro area entry date on long-term yields and the spot exchange rate. By comparing implied forward interest rates, which are obtained from zero-coupon yield curves and the euro area, C & R are able to deduce the markets expectations for Hungary's euro conversion date. They conclude that an outward revision of the presumed euro conversion date, say, due to weaker economic fundamentals, such as higher budget deficits, or a decline in the credibility of the convergence process in general will immediately be reflected in the long-term yields and in a depreciation of the exchange rate. As a tentative policy conclusion it emerges that the NMSs should only join the exchange rate mechanism II (ERM II) once a credible (Maastricht) convergence process is on track and the presumed euro adoption date is credible. While seven of the 10 NMSs already decided to enter the ERM II, which is a requirement for the eventual adoption of the euro under the Maastricht Economic Convergence Criteria, the remaining three NMSs (Czech Republic, Hungary, and Poland), for the time being, opted for a floating exchange rate regime, anchored by inflation targeting, relying on an inflation target that is at or near the price stability definition of the European System of Central Banks (below but close to 2 percent). …

Macroprudential regulation is a set of economic and policy tools that aim to mitigate risk in the financial and banking systems. It was largely developed in response to the financial crisis of 2007-08, turning central banks into de facto financial policemen. Taming the Cycles of Finance traces the post-crisis rise of macroprudential regulation and argues that, despite its original aims, it typically supports finance in times of crisis but fails to curb it in times of booms. Investigating how different macroprudential frameworks developed in the UK, the USA and the Eurozone, the book explains how central bank economists went about building early warning systems to identify fragilities in the financial system. It then shows how administrative and political constraints limited the effects of this shift, as central banks were wary of intervening in a discretionary manner and policymakers were opposed to measures to limit credit growth.

Both academic thinking about monetary economics and the practice of monetary policy have changed dramatically since 1971–3, when the rational expectations revolution was beginning and the Bretton Woods system was crumbling. The present paper considers whether the various changes that have taken place were influenced primarily by economic theory or by empirical evidence - or by a combination of the two. Monetary economics, like macroeconomics more generally, passed through the rational expectations period into one dominated by real business cycle (RBC) analysis, which denies monetary policy any significant role in the generation or the dampening of cyclical fluctuations in crucial real variables. Recently, however, the analysis of monetary policy by both academic and central bank economists has been increasingly conducted in small quantitative structural models that combine the optimizing aspect of RBC analysis with various assumptions implying real effects of monetary policy actions due to slow adjustment...

The Changing Shape of Fixed Income Markets: A Collection of Studies by Central Bank Economists