Sören Radde

Bio: Sören Radde is an academic researcher from German Institute for Economic Research. The author has contributed to research in topics: Market liquidity & Liquidity crisis. The author has an hindex of 5, co-authored 16 publications receiving 116 citations. Previous affiliations of Sören Radde include Goldman Sachs.

Tracing the impact of the ECB’s asset purchase programme on the yield curve

Abstract: We trace the impact of the ECB’s asset purchase programme (APP) on the sovereign yield curve. Exploiting granular information on sectoral asset holdings and ECB asset purchases, we construct a novel measure of the “free-float of duration risk” borne by price-sensitive investors. We include this supply variable in an arbitrage-free term structure model in which central bank purchases reduce the free-float of duration risk and hence compress term premia of yields. We estimate the stock of current and expected future APP holdings to reduce the 10y term premium by 95 bps. This reduction is persistent, with a half-life of five years. The expected length of the reinvestment period after APP net purchases is found to have a significant impact on term premia. JEL Classification: C5, E43, E52, E58, G12

Search-based endogenous illiquidity and the macroeconomy

Abstract: We endogenize asset liquidity in a dynamic general equilibrium model with search frictions on asset markets. In the model, asset liquidity is tantamount to the ease of issuance and resaleability of private financial claims, which is driven by investors' participation on the search market. Limited market liquidity of private claims creates a role for liquid assets, such as government bonds or fiat money, to ease financing constraints. We show that endogenising liquidity is essential to generate positive comovement between asset (re)saleability and asset prices. When the capacity of the asset market to channel funds to entrepreneurs deteriorates, investment falls while the hedging value of liquid assets increases, driving up liquidity premia. Our model, thus, demonstrates that shocks to the cost of financial intermediation can be an important source of fight-to-liquidity dynamics and macroeconomic fluctuations, matching key business cycle characteristics of the U.S. economy.

Savings and investment behaviour in the euro area

Abstract: Although monetary union created the conditions for improving economic and financial integration in the euro area, in the context of the financial and sovereign crises, it has also been accompanied by the emergence of severe imbalances in savings and investment, credit and housing booms in some countries and the allocation of resources towards less productive sectors. The global financial crisis and the euro area sovereign debt crisis then led to major and abrupt adjustments as the risks posed by the large imbalances materialised. Although the institutional shortcomings in the EU that permitted the emergence of imbalances have been largely addressed since 2008, the adjustment process is not yet complete. From a macroeconomic perspective, the imbalances in the external accounts have led to the accumulation of high levels of external liabilities that need to be reduced, which, in turn, is weakening investment and therefore weighing on growth prospects and growth potential. From a macroprudential perspective, the lingering imbalances have added to systemic risk and rendered the euro area more vulnerable to risks. This Occasional Paper analyses the dynamic patterns in macroeconomic imbalances primarily from the former perspective, addressing in particular the connections between macroeconomic and sectoral adjustments of imbalances and the challenges for economic growth and performance over a longer horizon. JEL Classification: E21, E22, F32, F41

Flight to Liquidity and the Great Recession

Abstract: This paper argues that counter-cyclical liquidity hoarding by financial intermediaries may strongly amplify business cycles. It develops a dynamic stochastic general equilibrium model in which banks operate subject to financial frictions and idiosyncratic funding liquidity risk in their intermediation activity. Importantly, the amount of liquidity reserves held in the financial sector is determined endogenously: Balance sheet constraints force banks to trade off insurance against funding outflows with loan scale. The model shows that an aggregate shock to the collateral value of bank assets triggers a flight to liquidity, which amplifies the initial shock and induces credit crunch dynamics sharing key features with the Great Recession. The paper thus develops a new balance sheet channel of shock transmission that works through the composition of banks' asset portfolios rather than fluctuations in borrower net worth as in the financial accelerator literature.

Flight to liquidity and the Great Recession

Abstract: This paper argues that counter-cyclical liquidity hoarding by financial intermediaries may strongly amplify business cycles. It develops a dynamic stochastic general equilibrium model in which banks operate subject to agency problems and funding liquidity risk in their intermediation activity. Importantly, the amount of liquidity reserves held in the financial sector is determined endogenously: Balance sheet constraints force banks to trade off insurance against funding outflows with loan scale. A financial crisis, simulated as an abrupt decline in the collateral value of bank assets, triggers a flight to liquidity, which strongly amplifies the initial shock and induces credit crunch dynamics sharing key features with the Great Recession. The paper thus develops a new balance sheet channel of shock transmission that works through the composition of banks’ asset portfolios.

The great escape? A quantitative evaluation of the Fed's liquidity facilities

Abstract: We introduce liquidity frictions into an otherwise standard DSGE model with nominal and real rigidities and ask: can a shock to the liquidity of private paper lead to a collapse in short-term nominal interest rates and a recession like the one associated with the 2008 US financial crisis? Once the nominal interest rate reaches the zero bound, what are the effects of interventions in which the government provides liquidity in exchange for illiquid private paper? We find that the effects of the liquidity shock can be large, and show some numerical examples in which the liquidity facilities of the Federal Reserve prevented a repeat of the Great Depression in the period 2008–2009. (JEL E13, E31, E43, E44, E52, E58, G01)

Safety, Liquidity, and the Natural Rate of Interest

Abstract: Why are interest rates so low in the Unites States? We find that they are low primarily because the premium for safety and liquidity has increased since the late 1990s, and to a lesser extent because economic growth has slowed. We reach this conclusion using two complementary perspectives: a flexible time series model of trends in Treasury and corporate yields, inflation, and long-term survey expectations; and a medium-scale dynamic stochastic general equilibrium model. We discuss the implications of this finding for the natural rate of interest.

Labor Markets and Business Cycles

Abstract: Labor Markets and Business Cycles integrates search and matching theory with the neoclassical growth model to better understand labor market outcomes. Robert Shimer shows analytically and quantitatively that rigid wages are important for explaining the volatile behavior of the unemployment rate in business cycles. The book focuses on the labor wedge that arises when the marginal rate of substitution between consumption and leisure does not equal the marginal product of labor. According to competitive models of the labor market, the labor wedge should be constant and equal to the labor income tax rate. But in U.S. data, the wedge is strongly countercyclical, making it seem as if recessions are periods when workers are dissuaded from working and firms are dissuaded from hiring because of an increase in the labor income tax rate. When job searches are time consuming and wages are flexible, search frictions--the cost of a job search--act like labor adjustment costs, further exacerbating inconsistencies between the competitive model and data. The book shows that wage rigidities can reconcile the search model with the data, providing a quantitatively more accurate depiction of labor markets, consumption, and investment dynamics. Developing detailed search and matching models, Labor Markets and Business Cycles will be the main reference for those interested in the intersection of labor market dynamics and business cycle research.

A tale of two decades: The ECB's monetary policy at 20

Abstract: The 20th anniversary of Economic and Monetary Union (EMU) offers an opportunity to look back on the ECB’s record and learn lessons that can improve the conduct of policy in the future. This paper charts the way the ECB has defined, interpreted and applied its monetary policy framework – its strategy – over the years from its inception, in search of evidence and lessons that can inform those reflections. Our “Tale of Two Decades” is largely a tale of “two regimes”: one – stretching slightly beyond the ECB’s mid-point – marked by decent growth in real incomes and a distribution of shocks to inflation almost universally to the upside; and the second – starting well into the post-Lehman period – characterised by endemic instability and crisis, with the distribution of shocks eventually switching from inflationary to continuously disinflationary. We show how the most defining element of the ECB’s monetary policy framework, its characteristic definition of price stability with a hard 2% ceiling, functioned as a key shock-absorber in the relatively high-inflation years prior to the crisis, but offered a softer defence in the face of the disinflationary forces that hit the euro area in its aftermath. The imperative to halt persistent disinflation in the post-crisis era therefore called for a radical, unprecedented policy response, comprising negative policy rates, enhanced forms of forward guidance, a large asset purchase programme and targeted long-term loans to banks. We study the multidimensional interactions among these four instruments and quantify their impact on inflation and economic activity. JEL Classification: E50, E51, E52

The Market for Used Capital: Endogenous Irreversibility and Reallocation Over the Business Cycle

Abstract: Capital reallocation is strongly procyclical in the data, but in standard business-cycle models with heterogeneous firms it is countercyclical. In this paper I argue that endogenizing the price of used capital solves this puzzle. First, I show empirically that for several sectors the price of used investment goods relative to new is procyclical. Second, I build an equilibrium model of endogenous partial irreversibility, with heterogeneous firms facing aggregate and idiosyncratic productivity shocks. Used investment goods are imperfect substitutes for new investment because of firm-level capital specificity and this creates a downward-sloping demand for used capital that shifts in response to aggregate shocks. The model generates a procyclical resale price and procyclical reallocation. In a recession, when the price of used capital is low, both static and dynamic real-options effects induce unproductive firms to sell fewer assets to more productive firms. This generates an amplification mechanism for measured aggregate TFP. Finally, the model shows that endogenous irreversibility smooths aggregate investment and generates a countercyclical cross-sectional dispersion of returns from capital, consistent with the empirical evidence.