Alexander Haas

With inflation reaching levels not seen in more than thirty years, central banks in many advanced economies have embarked on a rapid tightening cycle over the past eighteen months. Interest rate hikes impose capital losses on bank balance sheets. As net worth declines, risks to financial stability grow. In recent months, this has reignited a debate on a potential trade-off between monetary and financial stability. In this paper, I set up a new-Keynesian model of savers and borrowers with banks subject to a principal-agent friction and the risk of a run on deposits. In the model, a contractionary rates policy depresses bank net worth and increases the risk of a run. I show that a limited expansion of the central bank balance sheet can address concerns about financial stability with little to no costs for the pursuit of monetary stability. Differences in the transmission of both monetary instruments are key for this result. A decomposition of bank net worth illustrates this and the financial sector implications of monetary policy. Further, a U.S. ‘pandemic era inflation’ scenario is used as a laboratory to analyse policy counterfactuals against the backdrop of heightened inflation and declining bank net worth. In this environment, a temporary balance sheet expansion successfully stabilizes bank net worth without adding significant inflationary pressure.

Upcoming presentations University of Melbourne, 3 October 2024    |    Melbourne Annual Macro Policy Meeting, 24-25 October 2024
Australasian Macroeconomics Society (WAMS), Perth, 27-29 Nov 2024    |    Econometric Society Australasia Meeting, Melbourne, 4-6 Dec 2024

Negative policy rates can convince markets that deposit rates will remain lower-for-longer, even when current deposit rates are constrained by zero. This is the signalling channel of negative interest rates. We analyse the optimality and effectiveness of negative rates in the context of this novel transmission channel. In a stylized model, we prove two necessary conditions for optimality: time-consistency and a preference for policy smoothing. In an estimated model, we show the signalling channel dominates banks’ costly interest margin channel. However, the effectiveness of negative rates depends sensitively on the degree of policy inertia, level of reserves, and ZLB duration.

• Economics Observatory (August 2020): Should the Bank of England Use Negative Interest Rates in response to the Crisis?
• VoxEU (June 2020): Negative Interest Rate Policies Can Signal a Commitment to Prolonged Monetary Accommodation
• CESifo Forum (April 2020): The Negative Interest Rate Policy Experiment
• The European Parliament's Monetary Dialogue (September 2018): Negative Interest Rates and the Signalling Channel

Non-technical summaries of previous versions on the Royal Economic Society's homepage (April 2019) & the LSE Business Review (May 2019).

This paper builds on two empirical observations: (i) financial conditions are relevant drivers of the business cycle, and (ii) early stages of the 2007/08 financial crisis, in particular, were driven by an erosion of safety and a dry-up of liquidity. Liquidity and safety are broad and interlinked notions, difficult to disentangle empirically. Their distinction is crucial for monetary and fiscal policy design though. In this paper, we endogenize the liquidity and safety of private assets in a medium-scale new-Keynesian model with heterogeneous firms and two financial frictions (on resaleability and quality paired with asymmetric information). Using U.S. macro and financial data, we estimate this model to (i) identify the structural drivers of liquidity and safety premia, (ii) study the role of both types of financial shocks over the business cycle, (iii) revisit the 2007/08 financial crisis in detail, and (iv) provide several further results on policy, fiscal multipliers, and the so called liquidity puzzle.

Most recent presentations Bank of Spain, Madrid, 18 July 2024    |    RES Annual Conference, Belfast, 25-27 March 2024

We analyze the implications of policy interventions - in particular emergency liquidity provisions by the central bank in times of crisis - in a tractable structural model of financial panics with efficient but run-prone non-bank financial intermediaries (NBFI). In the model, central bank liquidity interventions in times of crisis have the potential to avert runs on NBFI (stabilizing fire sale asset prices) but also come with ex-ante moral hazard implications as non-bank financial intermediaries anticipate crisis interventions and optimally increase leverage, thereby exacerbating the risk of future financial panics. Our preliminary results indicate that in anticipation of liquidity interventions non-banks increase leverage and assume a larger share of financial intermediation. However, in our calibrated model, this effect does not lead to a higher run frequency as emergency liquidity interventions are successful in preventing all but the worst financial panics. Asset prices are permanently higher and welfare in consumption-equivalent units increases.

Most recent presentations SUERF & OeNB Annual Conference, Vienna, 22-23 May 2023    |    CEF Annual Conference, Nice, 3-6 July 2023