We show that experienced stock market returns exert statistically significant and economically su... more We show that experienced stock market returns exert statistically significant and economically substantial effects on households ’ risk aversion and portfolio decisions: better experiences lower risk aversion and increase stock market participation along the intensive and the extensive margin. We find that more distant experiences receive a somewhat lower (but still substantial) weight than the corresponding findings for the United States. Furthermore, there are additional effects stemming from the experience of extreme stock market downturns. Households in countries that witnessed a particularly severe 2008 stock market crash give substantially more weight to the most recent experience, suggesting that in these countries an even more pronounced underinvestment in the stock market should be expected in the years to come. The paper follows the methodology used by Malmendier and Nagel (2011) and it applies it to a novel dataset on household finances covering European households.
In several economies, household debt had risen substantially prior to the financial crisis, and t... more In several economies, household debt had risen substantially prior to the financial crisis, and the subsequent household deleveraging has strongly affected their macroeconomic performance. At the same time, there are large cross-country differences in the number of households participating in debt markets and in the amounts of debt held. Against this background, this paper uses internationally comparable household-level data for the United States and 11 European economies to decompose cross-country differences in debt holdings into differences due to household characteristics and those arising from different economic environments. The data come from the US Survey of Consumer Finances and the newly available Household Finance and Consumption Survey. The paper finds that US households show the highest prevalence of both collateralized and non-collateralized debt, and have comparatively large amounts of loans outstanding. Differences in household characteristics contribute relatively l...
Die ZBW räumt Ihnen als Nutzerin/Nutzer das unentgeltliche, räumlich unbeschränkte und zeitlich a... more Die ZBW räumt Ihnen als Nutzerin/Nutzer das unentgeltliche, räumlich unbeschränkte und zeitlich auf die Dauer des Schutzrechts beschränkte einfache Recht ein, das ausgewählte Werk im Rahmen der unter
1 This paper presents the authors ’ personal opinions and does not necessarily reflect the views ... more 1 This paper presents the authors ’ personal opinions and does not necessarily reflect the views of the European Central Bank � We would like to thank Anna Maria Agresti, Sandrine Corvoisier, Jose Moreno and Jean Rodriguez for their assistance, as well as Francis Diebold, Simone Manganelli, an anonymous referee and seminar participants at the ECB for comments and discussions � We are grateful to Flemming Würtz, Reuters and S&P for providing some of the data series � The opinions expressed herein are those of the authors and do not necessarily represent those of the European Central Bank � This paper can be downloaded without charge from
The conduct of monetary policy has changed dramatically since the financial crisis in several dim... more The conduct of monetary policy has changed dramatically since the financial crisis in several dimensions. This article asks whether these changes will be temporary or permanent based on surveys of central bank heads and academic economists. JEL Classification: E52, E58
The paper assesses the communication strategies of the Federal Reserve, the Bank of England and t... more The paper assesses the communication strategies of the Federal Reserve, the Bank of England and the European Central Bank and their effectiveness. We find that the effectiveness of communication is not independent from the decisionmaking process in the committee. The paper shows that the Federal Reserve has been pursuing a highly individualistic communication strategy amid a collegial approach to decision-making, while the Bank of England is using a collegial communication strategy and highly individualistic decision-making. The ECB has chosen a collegial approach both in its communication and in its decisionmaking. Assessing these strategies, we find that predictability of policy decisions and the responsiveness of financial markets to communication are equally good for the Federal Reserve and the ECB. This suggests that there may not be a single best approach to designing a central bank communication and decisionmaking strategy.
Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwe... more Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in Abstract We study the determinants of trust in the ECB as measured by the European Commission's Eurobarometer survey in particular during the global financial crisis and the European sovereign debt crisis. We find that the fall in trust in the ECB in crisis times can be rather well explained based on the precrisis determinants, and show that the fall in trust reflected the macroeconomic dete...
Forward guidance, i.e. communication by a central bank about the likely future path of interest r... more Forward guidance, i.e. communication by a central bank about the likely future path of interest rates, usually reduces uncertainty. But it matters how this is done in practice, because forward guidance with a short time horizon can raise uncertainty. This occurs if the forward guidance impairs the aggregation of private information in financial markets, thus making market prices less informative. JEL Classification: D83, E43, E52, E58
The paper analyses the degree of financial integration between money markets, bond markets, equit... more The paper analyses the degree of financial integration between money markets, bond markets, equity markets and exchange rates within and between the United States and the euro area. We find that asset prices react strongest to other domestic asset price shocks, but also present some significant differences in the financial transmission mechanisms within the two economies. For the international transmission of financial shocks, we find significant cross-market spillovers. Overall, the results underline the importance of US markets in global financial markets: US financial markets explain, on average, more than 25% of movements in euro area financial markets, whereas euro area markets account only for about 8% of US asset price changes. The international propagation of shocks is strengthened in times of recession, and has most likely changed in recent years: prior to EMU, the paper finds smaller international spillovers. JEL classification number: E44, F3, C5
The paper shows that there is a substantial degree of heterogeneity in the ability of Fed watcher... more The paper shows that there is a substantial degree of heterogeneity in the ability of Fed watchers to forecast US monetary policy decisions. Based on a novel database for 268 professional forecasters since 1999, the average forecast error of FOMC decisions varies 5 to 10 basis points between the best and worst-performers across the sample. This heterogeneity is found to be related to both the skills of analysts – such as their educational and employment backgrounds – and to geography. In particular, forecasters located in regions which experience more idiosyncratic economic conditions perform worse in anticipating monetary policy. This evidence is indicative that limited attention and heterogeneous priors are present even for anticipating important events such as monetary policy decisions. Moreover, the paper shows that such heterogeneity is economically important as it leads to greater financial market volatility after FOMC meetings. Finally, policy-makers are not impotent in influ...
This paper reports the results of a survey of former members of the Governing Council of the Euro... more This paper reports the results of a survey of former members of the Governing Council of the European Central Bank, which sought their views on monetary policy communication practices, the related challenges and the road ahead. Pronounced differences across the respondent groups are rare, suggesting that there is broad consensus on the various issues. Respondents view enhancing credibility and trust as the most important objective of central bank communication. They judge communication with financial markets and experts as extremely important and adequate, but see substantial room for improvement in the communication with the general public. The central bank objective is widely seen as the most important topic for monetary policy communication, and several respondents perceived a need for clarification of the ECB’s inflation aim, citing the ambiguity of the “below, but close to, 2%” formulation that was in place at the time of the survey. JEL Codes: E52, E58.
We show that experienced stock market returns exert statistically significant and economically su... more We show that experienced stock market returns exert statistically significant and economically substantial effects on households ’ risk aversion and portfolio decisions: better experiences lower risk aversion and increase stock market participation along the intensive and the extensive margin. We find that more distant experiences receive a somewhat lower (but still substantial) weight than the corresponding findings for the United States. Furthermore, there are additional effects stemming from the experience of extreme stock market downturns. Households in countries that witnessed a particularly severe 2008 stock market crash give substantially more weight to the most recent experience, suggesting that in these countries an even more pronounced underinvestment in the stock market should be expected in the years to come. The paper follows the methodology used by Malmendier and Nagel (2011) and it applies it to a novel dataset on household finances covering European households.
In several economies, household debt had risen substantially prior to the financial crisis, and t... more In several economies, household debt had risen substantially prior to the financial crisis, and the subsequent household deleveraging has strongly affected their macroeconomic performance. At the same time, there are large cross-country differences in the number of households participating in debt markets and in the amounts of debt held. Against this background, this paper uses internationally comparable household-level data for the United States and 11 European economies to decompose cross-country differences in debt holdings into differences due to household characteristics and those arising from different economic environments. The data come from the US Survey of Consumer Finances and the newly available Household Finance and Consumption Survey. The paper finds that US households show the highest prevalence of both collateralized and non-collateralized debt, and have comparatively large amounts of loans outstanding. Differences in household characteristics contribute relatively l...
Die ZBW räumt Ihnen als Nutzerin/Nutzer das unentgeltliche, räumlich unbeschränkte und zeitlich a... more Die ZBW räumt Ihnen als Nutzerin/Nutzer das unentgeltliche, räumlich unbeschränkte und zeitlich auf die Dauer des Schutzrechts beschränkte einfache Recht ein, das ausgewählte Werk im Rahmen der unter
1 This paper presents the authors ’ personal opinions and does not necessarily reflect the views ... more 1 This paper presents the authors ’ personal opinions and does not necessarily reflect the views of the European Central Bank � We would like to thank Anna Maria Agresti, Sandrine Corvoisier, Jose Moreno and Jean Rodriguez for their assistance, as well as Francis Diebold, Simone Manganelli, an anonymous referee and seminar participants at the ECB for comments and discussions � We are grateful to Flemming Würtz, Reuters and S&P for providing some of the data series � The opinions expressed herein are those of the authors and do not necessarily represent those of the European Central Bank � This paper can be downloaded without charge from
The conduct of monetary policy has changed dramatically since the financial crisis in several dim... more The conduct of monetary policy has changed dramatically since the financial crisis in several dimensions. This article asks whether these changes will be temporary or permanent based on surveys of central bank heads and academic economists. JEL Classification: E52, E58
The paper assesses the communication strategies of the Federal Reserve, the Bank of England and t... more The paper assesses the communication strategies of the Federal Reserve, the Bank of England and the European Central Bank and their effectiveness. We find that the effectiveness of communication is not independent from the decisionmaking process in the committee. The paper shows that the Federal Reserve has been pursuing a highly individualistic communication strategy amid a collegial approach to decision-making, while the Bank of England is using a collegial communication strategy and highly individualistic decision-making. The ECB has chosen a collegial approach both in its communication and in its decisionmaking. Assessing these strategies, we find that predictability of policy decisions and the responsiveness of financial markets to communication are equally good for the Federal Reserve and the ECB. This suggests that there may not be a single best approach to designing a central bank communication and decisionmaking strategy.
Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwe... more Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in Abstract We study the determinants of trust in the ECB as measured by the European Commission's Eurobarometer survey in particular during the global financial crisis and the European sovereign debt crisis. We find that the fall in trust in the ECB in crisis times can be rather well explained based on the precrisis determinants, and show that the fall in trust reflected the macroeconomic dete...
Forward guidance, i.e. communication by a central bank about the likely future path of interest r... more Forward guidance, i.e. communication by a central bank about the likely future path of interest rates, usually reduces uncertainty. But it matters how this is done in practice, because forward guidance with a short time horizon can raise uncertainty. This occurs if the forward guidance impairs the aggregation of private information in financial markets, thus making market prices less informative. JEL Classification: D83, E43, E52, E58
The paper analyses the degree of financial integration between money markets, bond markets, equit... more The paper analyses the degree of financial integration between money markets, bond markets, equity markets and exchange rates within and between the United States and the euro area. We find that asset prices react strongest to other domestic asset price shocks, but also present some significant differences in the financial transmission mechanisms within the two economies. For the international transmission of financial shocks, we find significant cross-market spillovers. Overall, the results underline the importance of US markets in global financial markets: US financial markets explain, on average, more than 25% of movements in euro area financial markets, whereas euro area markets account only for about 8% of US asset price changes. The international propagation of shocks is strengthened in times of recession, and has most likely changed in recent years: prior to EMU, the paper finds smaller international spillovers. JEL classification number: E44, F3, C5
The paper shows that there is a substantial degree of heterogeneity in the ability of Fed watcher... more The paper shows that there is a substantial degree of heterogeneity in the ability of Fed watchers to forecast US monetary policy decisions. Based on a novel database for 268 professional forecasters since 1999, the average forecast error of FOMC decisions varies 5 to 10 basis points between the best and worst-performers across the sample. This heterogeneity is found to be related to both the skills of analysts – such as their educational and employment backgrounds – and to geography. In particular, forecasters located in regions which experience more idiosyncratic economic conditions perform worse in anticipating monetary policy. This evidence is indicative that limited attention and heterogeneous priors are present even for anticipating important events such as monetary policy decisions. Moreover, the paper shows that such heterogeneity is economically important as it leads to greater financial market volatility after FOMC meetings. Finally, policy-makers are not impotent in influ...
This paper reports the results of a survey of former members of the Governing Council of the Euro... more This paper reports the results of a survey of former members of the Governing Council of the European Central Bank, which sought their views on monetary policy communication practices, the related challenges and the road ahead. Pronounced differences across the respondent groups are rare, suggesting that there is broad consensus on the various issues. Respondents view enhancing credibility and trust as the most important objective of central bank communication. They judge communication with financial markets and experts as extremely important and adequate, but see substantial room for improvement in the communication with the general public. The central bank objective is widely seen as the most important topic for monetary policy communication, and several respondents perceived a need for clarification of the ECB’s inflation aim, citing the ambiguity of the “below, but close to, 2%” formulation that was in place at the time of the survey. JEL Codes: E52, E58.
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