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Banque Nationale De Belgique Sa — Technical Presentation (June 2014)
34 slides from Banque Nationale De Belgique Sa's technical presentation, Jun 18, 2014
Slide 1: Structural Reforms in a Debt Overhang
Structural Reforms in a Debt Overhang Javier Andrés1 , Óscar Arce2 and Carlos Thomas3 National Bank of Belgium, June 18 2014 1 Universidad de Valencia, Banco de España 2 Banco de España 3 Banco de España National Bank of Belgium, June 18 2014 Andrés, Arce & Thomas () Reforms in a Debt Overhang / 34
Slide 2: Motivation (I)
Motivation (I) High levels of private debt and need to deleverage act as a drag on growth in the EMU periphery National Bank of Belgium, June 18 2014 Andrés, Arce & Thomas () Reforms in a Debt Overhang / 34
Slide 3: Motivation (II)
Motivation (II) In the short term, little room for …scal policy (large de…cits) (conventional) monetary policy (ZLB). Much of the focus is on structural reforms, mainly in product and labor markets. Most o¢ cial views (e.g. OECD, IMF, ECB) support reforms. Reforms are clearly positive in the long ru
Slide 4: Framework
Framework DSGE model, small open economy inside monetary union Lenders & borrowers, collateral constraints à la Kiyotaki & Moore (1997). As in Iacoviello (2005), real estate is the only collateral. Key point of departure: long-term debt ) double debt regime: a) In normal times: debt restricted by va
Slide 5: Preview of results
Preview of results Structural reforms (reductions in desired price & wage markups) boost output in long run (as expected), but also in short run. Particularly true for product market reform Brings forward the (endogenous) end of deleveraging phase/recession Labor market reform creates modest short-r
Slide 6: Recent literature
Recent literature Some recent work on the impact of reforms: Eggertsson, Ferrero & Ra¤o (2014): if monetary policy is at ZLB, de‡ationary structural reforms increase real interest rate ! depress aggregate demand this channel may dominate positive income e¤ect (from long-run gains) in the short run G
Slide 7: Model structure
Model structure Small open economy in a monetary union ) monetary policy exogenous ZLB Three consumer types Patient households (lenders) Impatient households (borrowers) (Impatient) entrepreneurs (borrowers) Three production sectors Consumption goods (entrepreneurs + retailers) Equipment capital pro
Slide 8: Impatient households
Impatient households Maximize ( Z 1 C ) ∞ nt ( i ) 1 + ϕ E0 ∑ β t log (ct ) + ϑ log ht χ di , t =0 0 1+ϕ subject to Z 1 Rt 1 Wt (i ) C ct + pth [ht (1 δ h ) ht 1 ] = bt bt 1 + nt (i ) di. πt 0 Pt and an asymmetric debt constraint... National Bank of Belgium, June 18 2014 Andrés, Arce & Thomas () Ref
Slide 9: Asymmetric debt constraint
Asymmetric debt constraint We assume long run debt A constant fraction 1 γ of nominal outstanding principal is amortized each period (Woodford, 2001) Dynamics of real outstanding debt, bt 1 1 γ γ bt = + btnew bt 1 = bt 1 + btnew . πt πt πt btnew : gross new credit If collateral value < γ bπt t 1 , s
Slide 10: Asymmetric debt constraint (cont'd)
Asymmetric debt constraint (cont’d) This implies a double debt regime: in ’normal’times, borrowing is restricted by expected discounted value of collateral, 1 mt Et π t +1 pth+1 ht , Rt mt : exogenous loan-to-value (LTV) ratio when collateral values fall below contractual amortization path, γbt 1 /π
Slide 11: Entrepreneurs
Entrepreneurs Maximize ∞ E0 ∑ βt log cte , t =0 subject to cte + pth [hte (1 δh ) hte 1 ] + qt [kt (1 δk ) kt 1 ] Wt e Rt 1 e = mct yte n + bte b + ∑ Πr , Pt t π t t 1 s =r ,h,k t yte = At ktαk 1 (hte 1 )αh (nte )1 α αk , ( e 1 e h e 1 eE π h he e bt 1 bte R t mt Et π t + e 1 pt + 1 ht , Rt mt t t +
Slide 12: Calibration
Calibration We target key ratios of the Spain in 2007: Ratio Data (%) Model (%) construction share of GDP 12.45 15.11 construction share of employment 13.39 15.44 labor share of GDP 61.59 64.84 corporate debt / annual GDP 125.36 128.85 household debt / annual GDP 80.22 79.94 net foreign debt / annua
Slide 13: Calibration (2)
Calibration (2) Parameters not pinned down by targets are set to standard values within NK-DSGE literature Parameters a¤ecting debt constraints LTV ratios: households m = 0.85, entrepreneurs me = 0.71 Amortization rates: households 1 γ = 0.02, entrepreneurs 1 γe = 0.04 ) average debt maturity: 1/ (1
Slide 14: Baseline scenario: a deleveraging shock
Baseline scenario: a deleveraging shock We simulate a deleveraging shock for entrepreneurs and constrained households: Gradual, permanent fall (10pp) in loan-to-value (LTV) ratios: mt , mte National Bank of Belgium, June 18 2014 Andrés, Arce & Thomas () Reforms in a Debt Overhang / 34
Slide 15: Deleveraging shock: LTV ratios
Deleveraging shock: LTV ratios LTV households (m) LTV entrepreneurs (me) 0.85 0.72 0.84 0.7 0.83 0.82 0.68 0.81 0.8 0.66 0.79 0.64 0.78 0.77 0.62 0.76 0.75 0.6 0 10 20 30 40 50 60 0 10 20 30 40 50 60 quarters quarters National Bank of Belgium, June 18 2014 Andrés, Arce & Thomas () Reforms in a Debt
Slide 16: Deleveraging shock: regime changes
Deleveraging shock: regime changes Entrepreneur debt Household debt 14 γbt-1/πt γebet-1/πt 18 12 m ph π h /R meph π he/R t t+1 t+1 t t 16 t t+1 t+1 t t b be 10 t t T** 14 T* 8 12 6 10 4 8 2 0 10 20 30 40 50 60 0 10 20 30 40 50 60 quarters quarters National Bank of Belgium, June 18 2014 Andrés, Arce
Slide 17: Baseline scenario: a deleveraging shock
Baseline scenario: a deleveraging shock Large initial shock and asymmetric debt limits produce a double regime change: For t = 1, ..., T , value of entrepreneurs’collateral falls below γe bte 1 /π t For t = 1, ..., T , value of households’collateral falls below γbt 1 /π t γe < γ ) T < T : faster amo
Slide 18: Deleveraging shock: macroeconomic effects
Deleveraging shock: macroeconomic e¤ects GDP employment household debt / GDP entrepreneurial debt / GDP 5 5 100 140 0 0 80 120 pp pp % % -5 -5 60 100 -10 -10 40 80 0 20 40 60 0 20 40 60 0 20 40 60 0 20 40 60 quarters quarters quarters quarters real estate prices total investment total consumption CP
Slide 19: Deleveraging shock: long vs short-term debt
Deleveraging shock: long vs short-term debt Long run debt produces a more realistic deleveraging path and (critically) allows for endogenous regime change GDP employment household debt / GDP entrepreneurial debt / GDP 10 10 100 140 0 80 0 120 pp pp % % -10 60 -10 long-run debt 100 -20 40 short-run d
Slide 20: Deleveraging shock: Debt, consumption and investment
Deleveraging shock Debt, consumption and investment Two phases in the dynamics of debt: Until T (T ), smooth deleveraging at rate γe /π t (γ/π t ) After T (T ), debt picks up quickly: real estate is again valuable as collateral ) asset prices, credit and investment "virtuous circle" Consumption foll
Slide 21: Product market reform
Product market reform We simulate a sudden, permanent fall in desired price markups (5%) National Bank of Belgium, June 18 2014 Andrés, Arce & Thomas () Reforms in a Debt Overhang / 34
Slide 22: Product market reform
Product market reform GDP employment household debt / GDP entrepreneurial debt / GDP 5 5 100 140 0 0 80 120 pp pp % % -5 baseline -5 60 100 reform -10 -10 40 80 0 20 40 60 0 20 40 60 0 20 40 60 0 20 40 60 quarters quarters quarters quarters real estate prices total investment total consumption CPI i
Slide 23: Product market reform: macro effects
Product market reform: macro e¤ects Long run: GDP goes up, employment remains stable (real wages and labour share go up) Short/medium run: GDP and employment fall by less than in the baseline Investment behaves signi…cantly better, anticipating higher future demand. Consumption falls slightly below
Slide 24: Product market reform: positive effect on investment
Product market reform: positive e¤ect on investment Key question: How is the additional investment …nanced in the short term? - On the one hand, Entrepreneurs current unit pro…ts drop as markups fall De‡ationary e¤ect of reform raises the real value of debt repayments - On the other hand, Higher ass
Slide 25: Product market reform: deleveraging ends earlier
Product market reform: deleveraging ends earlier Reform brings forward the end of the deleveraging phase: T and T both go down. Focus on T (entrepreneurs): Higher initial net worth allows for more investment in the short term Higher investment today implies higher net worth and investment tomorrow,
Slide 26: Labor market reform
Labor market reform We simulate a sudden, permanent fall in desired wage markups (5%). Model proxy for unions’bargaining power. National Bank of Belgium, June 18 2014 Andrés, Arce & Thomas () Reforms in a Debt Overhang / 34
Slide 27: Labor market reform
Labor market reform GDP employment household debt / GDP entrepreneurial debt / GDP 5 5 100 140 0 0 80 120 pp pp % % -5 baseline -5 60 100 reform -10 -10 40 80 0 20 40 60 0 20 40 60 0 20 40 60 0 20 40 60 quarters quarters quarters quarters real estate prices total investment total consumption CPI inf
Slide 28: Labor market reform (cont'd)
Labor market reform (cont’d) Long-run gains in GDP and employment Short/medium-run e¤ects: No e¤ect on GDP on impact, then gradual improvement Similar e¤ect on employment (main variable targeted by such a reform) Positive short/medium-run e¤ects smaller than those of product market reform: Investmen
Slide 29: Broader labor market reform
Broader labor market reform Reduction in desired wage markups must overcome a double layer of nominal rigidities (wages and prices) before a¤ecting price competitiveness Typically, labor market reforms a¤ect not only markups, but also speed of nominal wage adjustment Spain’s 2012 reform a clear exam
Slide 30: Broader labor market reform
Broader labor market reform GDP employment household debt / GDP entrepreneurial debt / GDP 5 5 100 140 0 0 80 120 pp pp % % -5 baseline -5 60 100 reform -10 -10 40 80 0 20 40 60 0 20 40 60 0 20 40 60 0 20 40 60 quarters quarters quarters quarters real estate prices total investment total consumption
Slide 31: Further analysis
Further analysis Two important channels for understanding the positive short-run e¤ects of reforms: The role of the external sector The role of long-term debt National Bank of Belgium, June 18 2014 Andrés, Arce & Thomas () Reforms in a Debt Overhang / 34
Slide 32: The role of the external sector
The role of the external sector Responsiveness of net exports to reform-driven depreciation in terms of trade is key Product market reform, export elasticity Labor market reform, export elasticity 4 1.2 3.5 ε F = 1 (baseline) 1 3 ε F = 0.5 0.8 2.5 ε F = 1.5 0.6 2 % % 0.4 1.5 1 0.2 ε F = 1 (baseline)
Slide 33: The role of long-run debt
The role of long-run debt Entrepreneurial net debt ‡ows (gross of interest payments) during deleveraging phase (bte = γe bte 1 /π t , t T ): Rt 1 e Rt 1 γe e b bte = bt 1 πt t 1 πt net interest rate amortization rate z }| { z }| { (Rt 1 1) + (1 γe ) = bte 1 . πt Long-run debt ) amortization rate 1 γ
Slide 34: Concluding remarks
Concluding remarks Structural reforms may boost GDP and employment already in the short run... ... even without monetary accommodation Especially true for product market reform (brings forward end of deleveraging/recession) Also true for a broad labor market reform that includes higher wage ‡exibili
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