The role of heterogeneities in an integrated global economy Research Areas and Programme
The COVID-19 pandemic, climate change and advances in digital technology all add to already existing heterogeneities in the world economy and pose new challenges to central banks around the world. In Europe, the institutional design of the European economic and monetary union is still incomplete and is characterised by considerable heterogeneities between Member States. At the international level, current account balances, capital flows, exchange rate dynamics and trade barriers play an important role for the global transmission of shocks. Moreover, heterogeneities among households and firms are increasingly viewed as important for macroeconomic dynamics. Bundesbank research accounts for both a micro- and macroeconomic perspective and investigates all of these issues based on a range of data and methods, in order to contribute to a better understanding of the role of heterogeneities in an integrated world economy.
Topics of the Research Area
Several research projects address heterogeneities at the macroeconomic, multi-country level. The institutional design of the European economic and monetary union aims to reduce the risk of a debt crisis, mitigate negative spillovers between Member States and ensure that member countries’ debt remains sustainable, amongst other objectives. The COVID-19 pandemic and the ensuing economic policy responses have led to considerably higher public debt levels. This has further narrowed the margins for fiscal policy, which in some countries is still dealing with the fallout from previous crises. As a result, the efficacy of countercyclical policies may be impaired and existing imbalances amplified. As such, the COVID-19 pandemic laid bare that the institutional design of the euro area remains incomplete. Faced with the largest recession since the great depression, the sharp rise in public debt across euro area Member States led to renewed stress in sovereign debt markets to which the ECB responded with various unconventional policy measures.
To gain a better understanding of how the institutional design of the euro area could be improved, Bundesbank research examines its fiscal framework. For example, current research focuses on investigating the potential consequences of moving towards a fiscal union through increased risk sharing, and the design of sustainable fiscal rules and fiscal policies within the EMU. The Bundesbank also believes it is important to study how the construction of the European recovery fund, the advancement of the capital markets union and the introduction of a common deposit insurance scheme would have to be implemented to support the institutional design and, hence, resilience to large and possibly asymmetric shocks within the euro area.
The combination of high levels of public debt and low economic growth will likely have repercussions for some euro area member countries. Bundesbank research analyses how COVID-19 fiscal packages are affecting current account balances and labour market developments within the euro area. Moreover, current work investigates whether the access to refinancing facilities of the central banks and the redistribution of liquidity via TARGET mechanisms serve as a buffer against adverse shocks.
Possible strains in the euro area’s sovereign debt markets have the potential to trigger capital flow reversals in the euro area. Those reversals are potentially more harmful to economic growth when frictions in goods and labour markets inhibit necessary adjustments across member states. Structural reforms can help to mitigate those negative effects. Bundesbank research investigates the implications of structural policies, such as the German Hartz reforms, on the labour market and the current account.
Differences in competitiveness across countries and trade restrictions can also give rise to current account imbalances. Bundesbank research contributes to the debate on competitiveness in various ways. It analyses how increases in tariffs and trade policy uncertainty affect competitiveness, international capital movements across countries, and exchange rates. An important question in this context is whether and to what extent multinational companies are more productive than their national peers, and how this affects growth prospects and foreign direct investment flows across countries. Almost all sectors in the euro area economy engage in cross-border service trade, which has been less affected than trade in goods in the aftermath of the global financial crisis. Bundesbank research investigates countries’ competitiveness by focusing not only on their export performance, but also on their ability to trade in services, making use of detailed Bundesbank firm-level data. However, competitiveness is difficult to measure. Bundesbank research therefore looks beyond conventional measures such as unit labour costs and acknowledges the importance of global value chains.
Identifying ex-ante whether capital flows are sustainable is no simple task. Bundesbank research seeks to analyse to what extent capital flows and, hence, current account dynamics are driven by fundamental factors such as relative growth expectations across countries. However, large capital flows are not only a source of distress. They also act as buffers against macroeconomic risk. Bundesbank research assesses whether fiscal measures taken to cushion the impact of the COVID-19 crisis led to private capital inflows, which may contribute to a dampening of business cycle fluctuations across countries.
Large capital movements across firms, sectors or countries may, in future, also result from the increasing demand for sustainable investment, aiming at supporting the transition to a carbon-free economy and reducing climate-related economic risks. Heterogeneities across firms and countries with respect to their exposure to climate-related physical and transition risks is likely to play an increasingly important role. In coming years, Bundesbank research will study the importance of these heterogeneities, inter alia by developing multisector, multi-country environmental DSGE models. Bundesbank research will further analyse how climate-related physical and transition risks propagate through global supply chains and how this affects firms’ ability to compete.
The external capital structure is a key determinant of international capital flows. Research at the Bundesbank aims to better understand how income inequality within an economy affects the build-up of external liabilities and changes the external capital structure across countries. Bundesbank research also shows that innovations in payment technologies are important drivers of gross capital movements and exchange rates.
At the microeconomic level, understanding the heterogeneity of households and firms is key to assessing the macroeconomic impact of shocks and supporting the calibration of monetary and other policy responses. To facilitate the analysis of micro-level heterogeneity, the Bundesbank recently complemented its existing survey on household finances with two monthly surveys on household and firm expectations. Bundesbank researchers use data from all three surveys to better understand households’ consumption and firms’ investment and employment decisions as well as their expectation formation process (see also research area 1 above). As an example, based on the “Bundesbank Online Panel Households“ (BOP-HH), researchers analyse the short-term impact of the COVID-19 pandemic and (fiscal) policy measures, such as the temporary lowering of the VAT or child-related benefits, on households’ financial conditions and consumption.
The BOP-HH survey data, along with granular consumption data from external sources, are also used to investigate how climate change and climate-related risks affect households’ consumption behaviour and expectations. Specifically, Bundesbank research analyses how the cross-sectional dispersion of households’ expectations interacts with heterogeneities in their exposure to climate-related risks.
The COVID-19 pandemic has revealed important data gaps related to the actual and expected situation of firms across industries, regions, and firm sizes. The newly established “Bundesbank Online Panel Firms” (BOP-F) allows researchers to closely track firms’ expectations regarding the economic impact of the pandemic and their access to credit. Future research aims at analysing the impact of the pandemic on firms’ productivity and price setting behaviour and the role of macroeconomic uncertainty for firms’ decisions, amongst other things.
The digitalisation of the global economy has further accelerated with the COVID-19 pandemic. Based on firm-level data, Bundesbank research assesses how digital technologies and their transformation affect firms’ returns to scale and whether this leads to increasing market concentration across sectors. Bundesbank research also investigates the drivers behind German households’ adoption of fintech products and new payment instruments.
To better understand the importance of heterogeneity for the transmission of monetary policy and to assess the impact of monetary policy on inequality, research at the Bundesbank continues to investigate the relation between households’ consumption, savings and investment decisions. Several of the projects in this area use household-level data from the Bundesbank’s wealth survey “Panel on Household Finances” (PHF), which is collected every three years and focuses on the wealth and income of households. Based on this unique granular dataset, Bundesbank research analyses, inter alia, the drivers of changes in wealth and income, and the impact of uncertainty on households’ portfolio choice. Other topics addressed are the redistributive consequences of interest rate changes on households’ balance sheets, time preferences over the life cycle, peer effects in evaluating the relative position in net wealth distribution, inequality at the top of the wealth and income distribution as well as gender differences with regard to labour market and financial decisions.
Demographic trends – first and foremost the rapid aging of the population – pose a number of challenges to the German economy and the other euro area economies. Bundesbank research analyses the implications of these trends for the fiscal stance, pension systems, households’ labour force participation rates as well as their saving and investment decisions. The persistent low interest rate environment, demographic and other trends have contributed to strong demand for housing in some euro area countries. Yet our understanding of housing market dynamics is still limited. Therefore, Bundesbank research investigates how homeownership, savings, indebtedness and wealth accumulation are interlinked and why homeownership is relatively low in Germany.
Note that the BOP-HH, BOP-F, and PHF data are not only useful for studying heterogeneities. Their granular nature also provides important microeconomic information for research projects in other research areas, which are geared towards the macroeconomic perspective.