We develop a theoretical model to study the implications of liquidity regulations and monetary policy on deposit-making and risk-taking. Banks give risky loans by creating deposits that firms use to pay suppliers. Firms and banks can take more or less risk. In equilibrium, higher liquidity requirements always lower risk at the cost of lower investment. Nevertheless, a positive liquidity requirement is always optimal. Monetary conditions affect the optimal size of liquidity requirements, and the optimal size is countercyclical. It is only optimal to impose a 100% liquidity requirement when the nominal interest rate is sufficiently low.
This paper develops a formal strategy to calculate current accounts with retained earnings (RE) on equity investment and analyzes their adjustment during the global financial crisis. RE are the part of companies' profits which are reinvested and not distributed to shareholders as dividends. International statistical standards treat RE on foreign direct investment and RE on portfolio investment differently: while the former enter the current and financial account, the latter do not. We show that this differential treatment strongly affects current accounts of several advanced economies, frequently referred to as financial centers, with large positions in equity (portfolio) investment. Our empirical analysis finds that the differential treatment of RE alters the interpretation of current account adjustment for the global financial crisis.
Expectations are key in modern macroeconomics. However, due to their scant measurability, policymakers often rely on survey data. It is thus of critical importance to know the limits of survey data use. We look at inflation expectations as measured through the Deloitte CFO Survey Switzerland and respondents' sensitivity to question ordering thereof. In particular, we investigate whether forecast inconsistencies - the discrepancies between point forecasts and measures of central tendency derived from density forecasts - change significantly depending on whether the point forecast or the density forecast is asked first. We find that a) forecast inconsistencies are sizeable in the data and b) question ordering matters. Specifically, both parametric and non-parametric evaluations of consistency show that c) point forecasts tend to be significantly higher than density forecasts only for those respondents who give a density forecast first. In addition, d) characteristics such as uncertainty, firm size and economic sector relate to inconsistencies.
