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                                                  March 2016

The ADEMU Project Launches the Working Papers Series


This month, the ADEMU Project launched its working papers series. The series will continue to grow over the course of the project and the first two working papers that appear in the series are listed below with a link to the full paper.

Breaking the Spell with Credit-Easing

Abstract
We show that credit crises can be Self-Confirming Equilibria (SCE), which provides a new rationale for policy interventions like, for example, the FRB’s TALF credit-easing program in 2009. We introduce SCE in competitive credit markets with directed search. These markets are efficient when lenders have correct beliefs about borrowers’ reactions to their offers. Nevertheless, credit crises – where high interest rates self-confirm high credit risk - can arise when lenders have correct beliefs only locally around equilibrium outcomes. Policy is needed because competition deters the socially optimal degree of information acquisition via individual experiments at low interest rates. A policy maker with the same beliefs as lenders will find it optimal to implement a targeted subsidy to induce low interest rates and, as a by-product, generate new information for the market. We provide evidence that the 2009 TALF was an example of such Credit Easing policy. We collect new micro-data on the ABS auto loans in the US before and after the policy intervention, and we test, successfully, our theory in this case.

Gaballo and Marimon, (2016), Breaking the Spell with Credit-Easing; Self-Confirming Credit Crises in Competitive Search Economies, ADEMU Working Papers Series
Read the full article here

Bank Opacity and Financial Crises

Abstract
This paper studies a model of endogenous bank opacity. In the model, bank opacity is costly for society because it reduces market discipline and encourages banks to take on too much risk. This is true even in the absence of agency problems between banks and the ultimate bearers of the risk. Banks choose to be inefficiently opaque if the composition of a bank’s balance sheet is proprietary information. Strategic behavior reduces transparency and increases the risk of a banking crisis. The model can explain why empirically a higher degree of bank competition leads to increased transparency. Optimal public disclosure requirements may make banks more vulnerable to a run for a given investment policy, but they reduce the risk of a run through an improvement in market discipline. The option of public stress tests is beneficial if the policy maker has access to public information only. This option can be harmful if the policy maker has access to banks’ private information.

Joachim Jungherr (2016), Bank Opacity and Financial Crises, ADEMU Working Paper series
Read the full article here
ADEMU Lecture

Nobel laureate in Economics, Robert E. Lucas Jr, delivered a lecture for ADEMU on “Growth and the Industrial Revolution" on March 21, 2016 at the European University Institute in Florence, Italy.

Read a review of the lecture here.
ADEMU Webinar

On March 14, ADEMU held it's first webinar which discussed the past euro crisis with the aim of extracting policy lessons and research questions that could serve to promote a Euro Area consolidation.
View a recording of the webinar here. 

Upcoming Events

ADEMU Sessions

Sovereign Debt
April 21-22, University of Sussex UK

ADEMU Workshops

Macroeconomic Imbalances and Spillovers
April 29-30, CERGE-EI in Prague, Czech Republic.  More information here.

Risk Sharing Mechanisms for the EU
May 20-21, EUI in Florence. More information here.

Mini Conferences

Macroeconomics of Financial Frictions
April 19, University of Cambridge. Register here.

Heterogeneous Agents and Macroeconomic Modeling 
May 10, University of Cambridge. Register here.
The activities section of the ADEMU website will be continuously updated with all future ADEMU events as they are announced.
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A Dynamic Economic and Monetary Union (ADEMU) · Ramon Trias Fargas 25-27 · Barcelona, 08001 · Spain

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