The Credit Channel in Monetary Policy Transmission at the Zero Lower Bound. A FAVAR Approach

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2014. The project is a required component of every master program.


The Credit Channel in Monetary Policy Transmission at the Zero Lower Bound. A FAVAR Approach

Authors:

Alexandru Barbu, Zymantas Budrys, Thomas Walsh

Master Program:

Economics

Paper Abstract:

This paper aims to provide a methodology for identifying the credit channel in US monetary policy transmission, consistent with periods at the zero lower bound. We follow Ciccarelli, Maddaloni and Peydro (2011) in identifying credit shocks through quarterly responses in the Federal Reserve’s Senior Loan Officer Survey, but augment their identification strategy in two key ways. First, we use the credit variables inside a Factor Augmented Vector Autoregression, to summarize the information contained in a set of 110 US macroeconomic and financial series. Second, we adopt the shadow rate developed by Wu & Xia (2013) as an alternative to the effective federal funds rate at the zero lower bound. We present our results through impulse response functions and carefully designed counterfactuals. We find that monetary policy shocks have considerably larger effects through the credit supply side than the credit demand side. Building counterfactual analyses, we find the macroeconomic effects arising from the supply side of the credit channel to be sizable. When focusing on the recent unconventional policies, our counterfactuals show only very modest movements in credit variables, suggesting that the positive effects of unconventional monetary policy during the crisis may not have acted strongly through the credit channels.

Read the full paper

Too-many-to-fail: a theoretical approach

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2014. The project is a required component of every master program.


Too-many-to-fail: a theoretical approach

Author:

Jaume Martí

Master Program:

Finance

Paper Abstract:

The recent financial crisis has generated enormous economic and human costs. New regulatory framework has been proposed in order to provide banks with better incentives.

My goal in this project is to theoretically explain several market failures that happened prior to the financial crisis and propose a model that captures these phenomena in the banking sector. To end up, I suggest different macroprudential measures that could be undertaken with the ultimate objective of providing a more stable financial system.

Alumni reflections for the Barcelona GSE Class of 2015

alumniNicola Cofelice ’14

Macroeconomic Policy and Financial Markets
Research Assistant, CaixaBank (Barcelona)

Nicola gave the following remarks to the new students in the Barcelona GSE Class of 2015 earlier this fall at a welcome reception in Bellaterra.

 

 

Before I begin, let me join the faculty and the School staff and congratulate all of you for having been accepted to the Barcelona Graduate School of Economics; I have to admit that it’s a pleasure to give you the welcome speech as Alumni speaker from the previous year.

I remember sitting where you are now exactly 1 year ago: I had no idea what lay ahead of me, what challenges I was going to face and the new friends I was going to make. Like all of you, I was at the beginning of a new path: in my case, I had been working as an engineer for 5 years when I decided to join the master in Macro. But still, I had plenty of questions in my mind: am I going to be up to the level of the School? What am I going to learn? Will I have time to go back home from time to time or is the rhythm of the Master going to destroy me J?

Now, after 1 year, I have been asked to share with you my experience at Barcelona GSE, and I will do my best to give you a few pieces of advice that may help you during this year:

First: Be open to sharing your knowledge and experience!

One of the main assets of the Master is not only what you can learn from the professors, but also what you can learn from your classmates, and what your classmates can learn from you. Some of you may already have working experience, some of you may come from a different background (political science, mathematics, physics, engineering, etc.) and you must take advantage of this cultural mix. The faculty will encourage you to study and carry out the assignments in small groups and after studying Game Theory, I understood that cooperating and helping each other is better than competing against each other (well, at least not during an exam, where you are not allowed to do that J). So my advice is to be open-minded and share your knowledge with others.

Second: Don’t be scared to work with data analysis software!

The Barcelona GSE is well known not only for the rigorous mathematical and statistical approach but also for the computational skills that you are going to acquire. You will have the possibility to work with different software (i.e. Matlab, Gretl, Stata, to mention only a few) and the knowledge of this software may help you find a job afterwards: companies and universities are strongly interested in candidates who are able to perform data analysis and work with numbers. If you work in a company, your future manager may ask you to help him or her in taking the right decision under uncertainty; and you will need to be able to process the information that you have available, both quantitative and qualitative. If you opt for a career at the University, you may develop a model to better understand the phenomena that you are investigating; in both cases you will need the programming skills that you can learn and develop this year. So, again, my advice is: don’t be afraid to get your hands “dirty” with data analysis software.

Third: Get involved!

This is once in a life opportunity, and you must take fully advantage of it! You have the unique chance to share this experience with people from all around the world, with different cultures, ages and backgrounds. This is something I found fascinating and my advice is to enjoy this opportunity. Although the Master is demanding, having a day off in a city like Barcelona will help you to recover your energy, and I am sure you will spend some unforgettable evenings and nights with your classmates.

All right, that’s all from my side. Once again, congratulations to everyone and good luck.

Mexican Energy Reform: A trigger for competition in the Mexican energy sector – Antonio Massieu ’13

Editor’s note: The following post was written by Barcelona GSE alumnus Antonio Massieu (Competition and Market Regulation ’13). Antonio is Senior Associate at Santamarina & Steta S.C. in Mexico City. 

Flickr / CC
Mexico City illuminated at night / Flickr / CC

The energy industry in Mexico is experiencing the biggest paradigm shift in the past seven decades, since the oil expropriation in the late 30’s. The energy reform that was recently enacted will dramatically change the way the energy sector is developed in Mexico, meaning the most significant economic happening since the execution of NAFTA, in 1994. Said reform will shake the Mexican energy industry vigorously, transforming a monopolistic sector operated by two state companies that performs the vast majority of the productive sector activities, into an open-market industry where players can freely participate through clear and transparent rules, under the regulation of operators and agencies endowed with broad powers. The profound changes brought by the reform occurred both in the substantive areas of the industry and in the institutional structures that shape the energy sector. In one hand, the new legal framework redefined the way the activities that constitute the productive chains of the hydrocarbons and electricity sectors are carried out; in the other hand, the institutions responsible for supervising and regulating the market performance were considerably strengthened.

Naturally, as a new market emerges, market problems also emerge. Therefore, it will be essential that the new Mexican energy market is wrapped by rules and institutions that seek to correct eventual market failures that arise, and that through their actions, establish an appropriate competitive process that yields benefits to competitors, to final consumers, and of course, to the Mexican State.

Oil&Gas

Modifications made to the Mexican Oil&Gas sector meant undoubtedly, the most important change in the whole energy industry, as a result of the energy reform. Said sector becomes an open market, where Petroleos Mexicanos (Pemex) –formerly the State-owned company that carried out all Oil&Gas exploration and exploration (E&E) activities, will compete against other players from the private sector. This competitive process is implemented through tenders conducted by the federal government, where both the private sector and Pemex will freely participate, in order to be granted with contracts for substantive E&E activities. Transparency will be an element of the utmost importance during the bidding rounds, since it will secure that Pemex and the private sector compete on equal grounds; in other words, a fair and clean competition process will only be possible as long as the federal government does not favor Pemex –which despite its participation in the open market, will remain as a state owned company- or any other bidder in the development and further resolution of the aforementioned bidding rounds, or allow any anti-competitive practices to take place (such as collusive behaviors among the bidders).

pemex
A fair and clean competition process will only be possible as long as the federal government does not favor Pemex / Flickr / CC

As for midstream activities, the energy reform introduced a new market dynamic that will foster a more effective and fair competition process. Currently, the activities of transport, storage and distribution that are developed through the pipeline grid will be operated and managed by a new government agency, the National Center for Control of Natural Gas (CENAGAS). This entity will assume control and ownership of all pipeline infrastructure that today belongs to Pemex[1] – which, due to its economic features, constitutes a natural monopoly-, and administer the activities carried out there. The CENAGAS will operate as a figure internationally known as an “ISO” (independent system operator), and will be obliged to fulfill important mandates, such as granting open and non-discriminatory access to the grid to all participants (including Pemex) and avoid problems of vertical integration in regulated activities, among others.

[1] More the 75% of the pipelines in Mexico belong to Pemex.

Electricity

The electricity sector in Mexico will also be transformed significantly by means of the energy reform, since it will stop being a vertically integrated industry where a State-owned company (Federal Electricity Commission “CFE”) conducts all activities of the productive chain industry, in order to be transformed into a liberalized sector where undertakings (both public and private) will compete against each other in an open market, aiming to satisfy the needs of consumers.

For such purpose, a wholesale spot market will be put into place. Said spot market will seek to replicate international models in order to foster competition among different companies that will be able to generate, trade and supply energy to final users. Domestic supply will be carried out by CFE –at a regulated tariff-, acquiring energy through tender processes, while industrial supply will happen through a free competition process, where generators, suppliers and consumers will complete transactions at market, non-regulated prices. In order to regulate the new market structure, the Government created the National Center of Energy Control (CENACE), which will serve as an ISO, aiming to operate and control the electric grid.

CENACE will be in charge of different relevant tasks, such as the granting of open access to undertakings participating in the electric industry, controlling the allocation of power into the grid (both demand and supply), surveilling the continuous bids posed by market participants into the spot market (in order to avoid coordinated anti-competitive effects) and coordinating the transactions executed by the market players, as well as the configuration of the market, in terms of possible vertical integration in the performance of activities by companies. This market will be particularly interesting in terms of competition policy, since CENACE will be in charge of regulating the operation of a natural monopoly –the electric grid- which is owned by one of the participants of the market, the CFE, which will compete against other undertaking in the activities of generation and supply of power; this represents a very unique case in the world, and will be added as one of the main challenges that Mexican authorities will face with the implementation of the energy reform.

CENACE  operates and controls Mexico's electric grid. / photo
CENACE operates and controls Mexico’s electric grid. / photo credit

Regulators and entities of the energy sector

One of the great challenges of the reform is to establish an institutional framework capable of operating the new emerging energy markets in Mexico, in which various companies (public and private) will interact in a competitive environment, hitherto unknown for the country. Of course, in order to accomplish this goal, it is imperative to create strong institutions, with high degrees of independence, able to issue clear regulations and impose heavy penalties to regulated undertakings.

Both regulatory agencies[1] and ISO’s will need to follow closely the development of the energy markets, and make sure that competition is achieved. Unlike what happened with the IFETEL, which is the independent body responsible for regulating the telecommunications market in Mexico, regulators and ISO’s in the energy sector were not endowed with broad powers in competition policy matters. In this sense, and despite some of its powers seek to create conditions of competition, these institutions will have to interact closely with the Federal Competition Commission, in order to timely detect and punish anti-competitive practices in the industry, in order to correct market failures and increase consumer welfare.

[1] Regulatory Commission of Energy and National Hydrocarbons Commission

Conclusions

Energy reform emerges as a great opportunity for Mexico to join the global trailblazers in the sector. At first glance, the work has been done satisfactorily, as sufficient legal and institutional conditions for implementing competitive markets were generated, where agents will interact correctly, generating consumer welfare. However, the correct development of the industry will depend not just on the rules and the institutions itself, but on the right behavior of both authorities and undertakings. Possibly the only advantage that Mexico has to be the second-to-last country in the world to undertake an opening process of this nature, is that it had the opportunity to study similar processes, and learn from positive and negative experiences in other countries. Now the challenge is to test that knowledge, and build a successful energy sector that can boost growth in the country.

Listen to a radio interview with Antonio Massieu on hydrocarbons in the Mexican energy sector (in Spanish, September 2014)


1 More than 75% of the pipelines in Mexico belong to Pemex.

2 Regulatory Commission of Energy and National Hydrocarbons Commission

Europe out of balance: an analysis of current accounts in Europe

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2014. The project is a required component of every master program.


Europe out of balance: an analysis of current accounts in Europe

Author:

Michel Carlo Nies

Master Program:

Economics

Paper Abstract:

The European sovereign debt crisis should not only be seen as the simple failure to manage public finances, but also as the consequence of divergent balance of payment positions. This paper attempts to shed light on this line of argument by analysing empirically the determinants of current accounts. The principal conclusion is that divergent developments in labour costs and misallocation of capital are behind the developments that led to the sovereign debt crisis. Given these results, this paper also evaluates different policy measures designed to address the issue of diverging current accounts.

Read the full paper or view slides below:

Collusion in auctions and the role of communication to sustain it: a microeconomic approach

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2014. The project is a required component of every master program.


Collusion in auctions and the role of communication to sustain it: a microeconomic approach

Author:

Giuseppe Leonello

Master Program:

Competition and Market Regulation

Paper Abstract:

Collusion among bidders in auctions is an important topic in competition economics since it decreases the seller’s revenues and the social welfare. In this project the focus will be on the role of communication among bidders for the incentives to collude.

In the literature, communication among bidders has always been treated as an exogenous variable. This assumption will be relaxed and the choice of communicate will be endogenous and function of the expected collusive profits and the expected costs of collusion represented by the risk to be catch and punished.

The auctioneer can monitor the market and the auction process to discover the collusive agreement, exerting a costly effort.

The model will find the minimum level of effort needed to make bidders not having incentives to communicate and collude. However, the auctioneer will exert this level of effort only when the expected gains are higher than expected costs. For this reason, in some case the optimal choice for the auctioneer will be to lead bidders to collude even if this will not maximize the social welfare.

Government interventions to reach the not collusive equilibrium will be discussed. In particular, they will take the form of an increase in the punishment when bidders are discovered to collude and the subsidization of the cost needed to exert the optimal level of effort.

Effectiveness of primary care ValCRÒNIC teleHealth program

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2014. The project is a required component of every master program.


Effectiveness of primary care ValCRÒNIC teleHealth program: outcome findings on mortality and healthcare service consumption in patients with high-risk chronic conditions. A cohort study with matched controls in Valencia community, Spain.

Author:

Sherman Kong

Master Program:

Health Economics and Policy

Paper Abstract:

We analyze the mortality and hospitalization level of 512 patients enrolled in the ValCRÒNIC teleHealth program in Valencia public health region with a matched control of 1023 patients with same risk profiles. We obtain medical records of patient sample for 12 months before start of trial and follow-up on consumption level from hospital and primary care facilities for 12 months during program. We observed utilization level before and after trial and found an increase in primary care nurse and home care visitations. We used logistic and zero-inflated Poisson models to estimate effect of program enrollment to intense acute hospital use, deaths and avoidable hospitalization rate. We found insignificant benefits to reducing mortality and intense acute hospital use.

Author’s note: This paper is a work in progress, pending revision of results.

Read the full paper or view slides below:

Government spending news and the term structure of interest rates

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2014. The project is a required component of every master program.


Government spending news and the term structure of interest rates

Authors:

Nicola Cofelice and Sarah Zoi

Master Program:

Macroeconomic Policy and Financial Markets

Paper Abstract:

Studying the effect of a fiscal policy shock on the term structure of interest rates has long been a controversial issue. On the one hand, economic theory predicts that government spending should drive up interest rates; on the other hand, many empirical analyses found negative or not significant responses of the yield curve to different types of fiscal shocks. A recent stream of literature on fiscal foresight showed how news about future fiscal policy may anticipate the effects of public expenditure and pose a challenge for the recovery of structural shocks due to a problem of non-fundamentalness. We study the effect of a “foresight shock” on the term structure of interest rates using an identification strategy based on the information contained in the projections by the Survey of Professional Forecasters. Our results support the evidence of fiscal foresight and show how changes in expectations stimulate positive responses of the term structure anticipating the effects of a government spending shock.

Read the full paper or view slides below:

Does Extended Time Improve Students’ Performance?

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2014. The project is a required component of every master program.


Does Extended Time Improve Students’ Performance? Evidence from Catalonia

Authors:

Ana María Costa Ramón, Laia Navarro-Sola, Patricia de Cea Sarabia

Master Program:

Economics

Project Summary:

Education is one of the main priorities of developed societies, and countries are investing huge amounts of resources in this area. However, little is known about the effectiveness of the inputs used in the education production function, leaving the final decision of investment to ideological or political reasons. In this context, there is an increasing support of extending class time among politicians and policy-makers as a way of improving education. Our paper is an investigation of the effect of an increase in the number of hours per day of class on the performance of the students.

As identification strategy, we exploit the exogenous variation generated by a policy change in Catalonia (a region of Spain), known as the “sixth hour policy”. This reform introduced one extra hour per day, representing an increase of 20% of the total number of hours per year. It involved an important investment for Catalonia and thus, knowing the effects of the policy is needed in order to assess whether it was effective or if there exists other alternatives. The specific characteristics of the policy implementation provide three different sources of variation: variation between cohorts, generated by the sudden implementation, variation between types of schools, since the policy was only addressed to public schools (leaving private schools timetable unchanged) and in last term, variation across regions, as the reform only affected public schools in Catalonia. These features allow us to take the policy implementation as a natural experiment and thus, to investigate more deeply the effects of extending school time.

Using the PISA database and the econometric specification of differences-in-differences, we find that there is no conclusive evidence of the causal relationship between extending school time and performance improvement. This difficulty comes from the implementation of the policy itself which was done simultaneously with other major educational changes, and thus it is hard to identify the channel through which this effect could be operating.

However, we face this lack of evidence on this causality introducing an innovative methodology in the study of extending time at school. To solve specific concerns about the suitability of the control group we construct a “synthetic control” group (an artificial control group), which is a weighted combination of other Spanish regions chosen to resemble education characteristics of Catalonia before the introduction of the “sixth hour policy” as much as possible. However, the particularities of the region of the study make it very hard to predict its behavior.

All in all, we believe that the use of the synthetic control approach can help to shed light on these issues in different case studies or with more detailed data. The analysis of time as an input in the education production function still requires a lot of research but as we have seen with our case study, natural experiments by themselves could be an imperfect tool. Maybe it is time to use more innovative approaches to this old topic.

Read the full paper or view slides below: