Volume 22, Issue 4

The global financial crisis (GFC) has shown that monetary policy focused on a stable price level may negatively affect the stability of the financial system. Therefore, achieving price and financial stability using interest rates as the main tool is difficult. In this paper, we analyse how often monetary policy strengthened imbalances in the financial system in 20 countries from 1999Q1 to 2020Q2. To this end, we compare monetary policy stance with a novel financial imbalance index (FII). We find that monetary policy is material in aggravating financial imbalances mostly in Eurozone countries. We attribute this finding to the ECB’s “ too loose, too long ” monetary policy and to difficulties with applying single monetary policies in countries with different economic conditions and in different phases of credit and financial cycles. Our results point to a need for a proactive macroprudential policy in the environment of low interest rates.

The Austrian ski resort of Ischgl is commonly claimed to be ground zero for the diffusion of the SARS-CoV-2 virus in the first wave of infections experienced by Germany. Drawing on data for 401 German counties, we find that conditional on geographical latitude and testing behavior by health authorities, road distance to Ischgl is indeed an important predictor of infection cases, but – in line with expectations – not of fatality rates. Were all German counties located as far from Ischgl as the most distant county of Vorpommern-Rügen, Germany would have seen about 45 % fewer COVID-19 cases. A simple diffusion model predicts that the absolute value of the distance-to-Ischgl elasticity should fall over time when inter- and intra-county mobility are unrestricted. We test this hypothesis and conclude that the German lockdown measures have halted the spread of the virus.

A growing body of literature highlights the importance of financial literacy in affecting household choices. However, much fewer studies focus on understanding the determinants of different levels of financial literacy. Our paper contributes to filling this gap by analyzing a specific determinant, i. e., the educational system, to explain the heterogeneity of financial literacy scores across Germany. The results suggest that the lower financial literacy observed in East Germany can be partially attributed to the different institutional framework experienced during the Cold War, more specifically, to the socialist educational system experienced in East Germany, which affected specific cohorts of individuals. By exploiting the unique set-up of the German reunification, we identify education as a channel through which institutions and financial literacy are related in the German context. In support of this hypothesis, we find that individuals exposed to the Eastern educational system exhibit 12 %12\hspace{0.1667em}\% to 21 %21\hspace{0.1667em}\% lower financial literacy scores compared with the households in the control group, not exposed to such system.

Empirically, revenues of public pension systems are more volatile than expenditures. Therefore, the question arises how the social security authority should buffer its revenues and adjust its contributions over the business cycle. This paper studies the corresponding effects on the life cycle of households and the business cycle in a large-scale overlapping generations model. In particular, the labor supply is endogenous and takes the intertemporal links between contributions and pension benefits into account. Sluggish adjustments of contribution rates that are implemented by adjusting a financial buffer stock both stabilize an economy and decrease the volatility of lifetime utilities of most workers and retirees, in contrast to sole adjustments of contribution rates. However, changes of consumption, capital income, or lump sum taxes, which aim to balance public pension budgets, improve the allocation of aggregate risk across cohorts for people up to an age of at least 71 years.