2021

Sumit Agarwal, National University of Singapore
"Illicit Wealth Inflows and House Prices: What can we learn from Panama Papers data?"

Video (Youtube)

Real estate markets are particularly frequent targets of money laundering. In an IMFS Policy Webinar on November 11, Sumit Agarwal, Professor of Finance and Real Estate at the National University of Singapore, illustrated the impact of money laundering on the real estate market by the example of Singapore. Agarwal, an expert in behavioral finance and co-author of several textbooks, including „Kiasunomics,“ used the Panama Papers as a starting point to examine suspicious money flows in real estate transactions. He analyzed how individuals whose names were published in the Panama Papers behaved in real estate transactions and, based on this, draws conclusions on the consequences for the real estate market.

Recent investigations published in September 2020, the FinCEN Files, showed that there were about than 2 trillion US dollars of illicit global banking assets that were being move around. However, this was only the part that had been detected. „People engaged in illegal activities know how to cover their tracks. Usually you don’t get datasets,“ Agarwal explained the problem of scarce evidence of the phenomenon of money laundering.
Based on the information released in the Panama Papers, Agarwal an his colleagues examined the price premiums in transaction on the housing market connected to suspicious financial flows and investigated the channels behind the movements. They also explored the effects of two regulatory enforcements on such purchase activities and finally quantified the spillovers on the housing market.

Agarwal started by matching the names of people listed in the Panama Papers with the names of people involved in real estate transactions. Again, this process only revealed a fraction. „The real smart people don’t buy in their own name but in the name of others such as family members,“ Agarwal said.

An average real estate transaction in Singpore is about 2 million dollars (SGD), he told the audience. In his research, Agarwal comes to the conclusion that Panama-linked buyers purchase properties at a 3.8 percent premium. However, he also finds out that these premiums are much higher in luxury properties. In the process of whitewashing money, several mechanisms come into play. As the buyers are looking for a safe haven for their money, the purchase prices in the offshore vehicle increase, local buyers e.g. real estate agents become involved via straw purchasing, and property values are manipulated as the selling prices are 4.2 percent higher. „The whitewashing of the money only happens when I sell the property and put that money on the bank account or use it for other activities,“ Agarwal explained.

By taking into account various variables such as the home countries of buyers or the employment status and matching this with data from the Panama Papers, Agarwal comes to the conclusion that the spillover effect is quite large. Purchase prices of properties within the same building increased by 5.1 percent. Prices in the same neighboorhood even increased by 7.3 percent. According to a back-of-the-envelope analysis, he calculates that the aggregate value of illicit wealth in Singapore’s housing market is about 3.72 billion dollars.

Volker Wieland, IMFS und Sachverständigenrat
“Transformation gestalten: Bildung, Digitalisierung und Nachhaltigkeit”

Video (Youtube)

The German Council of Economic Experts sees Germany facing major challenges: the effects of the coronavirus pandemic, the transformation of the economy towards climate neutrality and, at the same time, the challenges and opportunities of digitalization. In an IMFS Policy Webinar on November 10, Prof. Volker Wieland explained the most important proposals from the 2021/22 annual report, which the panel presented to Chancellor Merkel and the outgoing German government on the same day in Berlin.

Wieland believes that the current economic development is dominated by many supply-side bottlenecks. “On the one hand, the faster, stronger recovery of the global economy than predicted is surprising, but at the same time industrial production is being held back by bottlenecks,” summarized Wieland. Due to postponements, the German Council of Economic Experts expects strong growth of 4.6 percent in the coming year. For the current year, the Council of Experts has lowered its forecast from 3.1 to 2.7 percent. Wieland warned that vaccination campaigns should be pushed ahead globally. The risk of renewed restrictions remains. In terms of inflation, the German Council of Economic Experts has made a “bold forecast” of 2.6% in Germany and 2.1% in the eurozone for 2022, according to Wieland. The recovery has led to an increase in commodity and energy prices and producer prices, which is reflected in consumer prices. Wieland sees a risk that inflation will remain high in the longer term - not only due to the loose monetary and fiscal policy, but also due to the increase in the broad money supply as a result of credit programs.

"Shaping transformation: Education, digitalization and sustainability" is the title of the more than 500-page annual report. “The education sector was particularly close to our hearts,” continued Wieland. Due to school closures, children had been able to learn significantly less. The economics of education show that this has major consequences for the economy as a whole. The Expert Council therefore also makes suggestions on how to make up for structural learning and development deficits.

In the report, the aspect of sustainability encompasses both fiscal and ecological sustainability. According to Wieland, demographic trends make it more difficult to achieve positive growth in the long term. It is important to create good framework conditions for private investment, as investment by private companies is significantly higher than public investment. Wieland and his colleague Veronika Grimm therefore want to stick to the debt brake. The other two members of the Council of Experts, Monika Schnitzer and Achim Truger, take a different view. They spoke out in favor of the use of public investment companies.

The Council of Experts is unanimous in its view on monetary policy. It calls for the European Central Bank (ECB) to communicate an exit strategy from the loose monetary policy in the near future. “Monetary policy can only be protected from fiscal dominance if there is a normalization of monetary policy,” said Wieland. Fiscal dominance exists when the budgetary policy of states determines the direction of monetary policy. “The best thing monetary policy can do for sustainable growth is to maintain price stability,” said Wieland.

Philip R. Lane, European Central Bank
“The ECB's Monetary Policy Strategy Review”

Video (Youtube)

The recent strategy review of the European Central Bank (ECB) was the topic of the IMFS Policy Webinar with Philip R. Lane on September 15. The ECB Chief Economist illustrated the outcome of the review presented in July. In this process, 13 Eurosystem workstreams covered key topics, such as inflation measurement, monetary policy instruments, employment or digitalization. While the results are summarized in the new monetary policy statement, the overview note and a climate change action plan, more information will be available in 18 occasional papers, Lane announced. The IMFS conference "The ECB and Its Watchers" one year ago also served as a listening events with academics within this context.

The strategy review takes the ECB’s mandate as given. The Governing Council is bound by the ECB’s primary mandate of price stability as enshrined in Article 127(1) of the Treaty on the Functioning of the European Union. The ECB’s original monetary policy strategy was adopted in 1998 and reviewed in 2003. Since then, the world has seen major changes that present central banks with numerous new challenges, the ECB described in a statement.

According to the new strategy, the headline Harmonized Index of Consumer Prices (HICP) remains the appropriate index for quantifying the price stability objective for the euro area and will be retained as the price index used to measure euro area inflation. The Governing Council considers that price stability is best maintained by aiming for a two per cent inflation target over the medium term. The previous double-key formulation featured a definition of price stability in terms of "below, but close to two per cent". However, the Governing Council has decided to recommend a roadmap to include owner-occupied housing (OOH) in the HICP. The roadmap foresees four main stages for moving to an HICP including OOH costs.

Regarding monetary policy instruments, Lane pointed out that borrowing costs, not the volume of asset purchases, are the best indicator of the ECB‘s policy stance. "It’s not a good idea to identify the monetary policy stance with the volume of asset purchases because the mappings from the volume of asset purchase to the monetary policy stance essentially goes through the yield curve, and we assess that the yield curve remains pretty low," Lane told the audience. The previous week, the ECB had decided to reduce bond purchases moderately as the economy was improving.

Lane also stressed the integrated analytical framework: "My personal view is that in the end we have to bring together the analyses. We only make one decision." Also central bank communication was one of the key issues and is supposed to be expanded. "We think it is important to communicate with the wider public," Lane said. "You have already seen some of the communication revision, we will publish more of our background thinking."

The recent strategy review won’t be the last over the coming years. "It is important to have a regular review cycle, otherwise starting a review is already a signal," Lane explained. The next review is scheduled for 2025.

More information on the strategy review of the ECB

John Y. Campbell, Harvard University
“Portfolio Choice with Sustainable Spending: A Model of Reaching for Yield”

Video (Youtube)
Slides (PDF)

How investors are reaching for yield in a period of large and persistent decline in real interest rates was the question Prof. John Y. Campbell addressed during his IMFS Policy Webinar on June 10. Campbell, Professor of Economics at Harvard University and renowned expert in the field of finance and macroeconomics, pointed out that this was a question also much discussed by central bankers as this situation can create incentives for investors to take on risk or to employ additional financial leverage. However, the standard finance theory does not predict reaching for yield. „Normally, risktaking depends on risk premium, risk, and risk aversion but not riskfree interest rates, „ Campbell pointed out. Looking at the approach among endowments and sovereign wealth fund, Campbell, in his joint research with Roman Sigalov, added a sustainable spending constraint to the standard model. „This implies that wealth is expected to remain constant: the investor cannot plan to run down or accumulate wealth.“ As Campbell explained, this is also applicable to individuals. „Many individuals have a reluctance to run down wealth by dissaving but are willing to take risk“. "The reaching for yield gets stronger when interest rates are low“

Usually, the risky share of an investor’s portfolio depends on the reward for taking risk and on risk aversion but not on the riskfree interest rate. Campbell analyzed whether lower riskfree rate or greater impatience lead investors to want higher consumption (lower marginal utility) today relative to expected future consumption (marginal utility). In the standard model, this is achieved by dissaving.With a sustainable spending constraint, it is achieved by taking risk.This allows higher spending today, and the negative consequence, the riskier consumption, is realized in the future.

Campbell comes to the conclusion that investors take risk as a way to increase current consumption at the cost of more volatile future consumption. „The model predicts  that reaching for yield gets stronger when the riskfree rate is low, and the more risk the investor is willing to take.“

Harald Uhlig, University of Chicago
“Digital Currencies: What Does the Future Hold?”

Video (Youtube)
Slides (PDF)

The development of the bitcoin price is like a roller coaster ride. After reaching a new high of 60,000 US dollars in April, by the end of May the bitcoin trades at above 30,000 US dollars. Despite such fluctuations, digital currencies currently meet with high interest. In his IMFS Policy Webinar, Prof. Harald Uhlig of the University of Chicago gave an overview about current developments in this area. Since the mysterious inventor of bitcoin, Sakashi Nakamoto, has come up with the concept of a digital curreny in 2008, many more digital currencies have emerged. Ethereum, Tether, Ripple or Litecoin are just a few more names on the list of crypto currencies. Although Facebook had to trim its plans for its blockchain digitial currency Libra and moved from Switzerland to the U.S. to get regulators on board, Uhlig showed himself convinced that this trend will continue. „There will be more players to come. The technology is simple“.

Whereas the European Central Bank is still exploring the possibilities of designing a digital euro, a central bank digital currency (CBDC) has already been put into practive on the Bahamas and in the Eastern Carribean. With the CBDC, Uhlig sees the central banks in a trilemma. „Of the three central bank objectives price stability, financial stability and efficiency, central banks can only achieve two and then have to chose which.“

Summing up, Uhlig remained optimistic. In a currency landscape that is changing dramatically, central banks face competition and will have to act. On the other hand, he argued that CBDC offer central banks lots of new tools that ought to be explored. „In the last decade of negative nominal interest rates, central banks were stuck at the zero lower bound. CBDC bring new opportunities to stimulate the economy.“ Overall, Uhlig sees the technology still at an infant stage. „There are lots of technological possibilities but they’re not yet on our fingertips. It’s like when the iPad appeared.“

Volker Wieland, IMFS und Sachverständigenrat
“Corona-Krise: Wirtschaftliche Erholung und neue Herausforderungen”

Video (Youtube)
Slides (PDF)

While the global economy as a whole is developing well and Germany has also seen a strong recovery in some areas, in view of the third wave of Corona infection, the vaccination strategy in particular is crucial for the further course of the economy. This is the current assessment of Prof. Volker Wieland. In an IMFS Policy Webinar, Wieland provided an outlook on further economic development and the challenges the German economy is facing, based on the updated economic forecast of the German Council of Economic Experts. According to the report, global trade has already returned to pre-crisis levels by the turn of the year and the manufacturing sector has recovered strongly in the United States, China and the euro area. "Demand for consumer goods and medical protective equipment were the main drivers." As a result, ocean freight costs have already risen significantly and supply bottlenecks are making themselves felt. For the United States and China, the Council of Economic Experts expects economic growth to increase by 6.3 and 8.5 percent, respectively, this year.

Currently, Wieland is already seeing effects on price development. "Inflation is back and will remain higher". According to Wieland, in addition to the base effect caused by the increase in value-added tax at the turn of the year, the rise in oil prices and food prices are also having an impact on price development.

For the German economy, the Corona restrictions create a clear dichotomy. "While manufacturing is above pre-crisis levels, consumer-related services are severely impacted. Viewing the risks of the current third wave of Corona, Wieland warns, "Production for foreign demand should be maintained at all costs." For now, Wieland believes the economy is on track. "We are running at 95 percent". The closures in retail, restaurants, events and the restrictions on travel result in a gross value added of just under five percent below pre-crisis levels. In the coming year, Wieland expects full capacity utilization to return, and for the current year, the Council of Economic Experts anticipates a plus of 3.1 percent.

The course of the third Corona wave will be decisive for further development. For its economic forecast, the German Council of Economic Experts has therefore looked closely at various simulations of vaccination progress and is betting on a significant increase in supply volumes in the second quarter. "If the general practitioners were involved, enough people could already have been vaccinated by mid-September." In comparison with countries such as Israel or even Chile, however, Germany could not score points with this. "We are not among the best internationally".

The consequences of the Corona pandemic can be seen, among other things, in insolvencies and the debt ratio. While the suspension of the obligation to file for insolvency in 2020 led to a decline in corporate bankruptcies, a significant increase is expected after the end of the exemption. In the case of the debt-to-GDP ratio, the Council of Economic Experts expects an increase from around 60 to around 70 percent in Germany this year. For countries such as Spain, an increase to around 120 percent is even to be expected. While the debt brake has been suspended this year due to the exceptional emergency situation, Wieland is confident about the coming year. "If the federal government uses its reserves, a return to the debt brake would be possible again in 2022." The good thing is that there is no need to decide now.

IMF-IMFS Webinar
“Negative Interest Rates: Taking Stock of the Experience So Far”

Video (Youtube)
Slides Gaston Gelos (PDF)
Slides Silvana Tenreyro (PDF)
Slides Jörg Krämer (PDF)

What is the impact of negative interest rates and which side effects do they have? This was the topic of a joint IMF-IMFS Webinar where economists and central bank watchers took stock of this experience during a discussion moderated by Prof. Volker Wieland. In a joint paper with IMF researchers, Gaston Gelos, Assistant Director and Chief of the Monetary and Macroprudential Policies Division in the Monetary and Capital Markets Department of the International Monetary Fund (IMF), finds that there is no evidence for cash hoarding. On the other hand, they observe an effective transmission to asset prices as money market rates respond almost one-to-one. In his opinion, the negative interest rate policy poses communication challenges. „There are still some lessons to learn for central banks“. He argues that central banks need to express that they will monitor potential side effects and also should highlight the difference between nominal and real interest rates. According to Gelos, further research is needed on the impact on non-banks or cross-border spillovers.

Silvana Tenreyro, Professor for Economics at the London School of Economics, argued that there was no clear evidence that negative rates have reduced bank profits overall. She pointed out that financial-market channels of monetary policy have worked effectively under negative rates and bank-lending channels have also been effective. However, „communication with the public is important“, Tenreyro said.

According to Jörg Krämer, chief economist of Commerzbank, the negative interest rate policy has only a small impact on inflation. „But over time, the negative side effects become more prominent,“ he warned. He also argued that the expansionary impact is to decline over time. „Consumers cannot bring consumption forward forever“. In his view, zombifiaction of firms is also an important aspect. Furthermore, he warned that the institutional investors‘ hunt for yields may end up in a bubble. Krämer also emphasized the importance of an exit strategy. „Before you raise interest rates, you have to put an end to Quantitative Easing“, which will be difficult for the European Central Bank (ECB), Krämer said. He also sees a risk to trigger bankruptcies. „The ECB is fully aware of that but nevertheless might be hesitant to raise rates“, he concluded.

Charles Goodhart, Manoj Pradhan, Peter Praet
"The Great Demographic Reversal. Ageing Societies, Waning Inequality, and an Inflation Revival"

Video (Youtube)

Why the world is steering toward a rise in inflation and which global trends bring about this shift was the topic of the IMFS Webinar with Charles Goodhart and Manoj Pradhan together with Peter Praet on January 25. In their book „The Great Demographic Reversal. Ageing Societies, Waning Inequality, and an Inflation Revival“, Goodhart and Pradhan describe global trends of the future which in their opinion cause a significant rise in prices.

In the virtual discussion moderated by Volker Wieland, Peter Praet, former Chief Economist of the European Central Bank, doubted that this reversal would happen in the near future. However, he emphasized the need to prepare for such a situation although he wasn’t convinced that societies were willing to do so.

According to Goodhart and Pradhan, the rise of China, the subsequent speed up in globalization and the growing number of workers were the decisive factors of the last seventy years. During that time, the integration of China  led to an increase in the working age population. This was reenforced by a higher participation of women. The combination of all these factors led to a decline in inflation. But as the British economists pointed out, „the future will be nothing like the past“.

With the so-called baby boomers beginning to retire, the work force is going to decline in many countries. While workers by definition are disinflationary, younger and older people are inflationary with the elder ones consuming a lot more than younger people, Goodhart explained. For the society as a whole, the authors consider that ageing will lead to a massive rise in deficits and borrowing. Already before the Coronavirus pandemic, they identified an upward exponential trend in the public sector debt ratio. At the same time, they predict a modest productivity – the continuation of a global phenomenon that has already been observed in advanced economies.

Although there might be mitigating factors, such as Africa and India and the technological developments, the consequence is clear. According to Goodhart and Pradhan, politicians would have to raise taxes. „This is unattractive, so there will be inflation“. In their book, they warn against this development. „Neither financial markets nor policymakers are prepared for a significant rise in inflation and wages, or a rise in nominal interest rates.“ Regarding inequality, Goodhart and Pradhan find that the world as a whole is becoming less inequal. From 2010 world inequality started declining, however, they observe that inequality has sharply increased within a country.

Praet gave credit to the authors for coming up with a competing narrative and recognized the link between the demographic factors and the inflation development in many countries. He warned that the reversal could lead to a big shock – „if it happens suddenly“. In order to prepare for this, he called for changes in the solvency law, stress tests, and asked to make financial institutions more resiliant. On the other hand, Praet did not expect an imminent change.

„In many ways, our book is a statement which trends we see and what could happen,“ Goodhart and Pradhan concluded. „The world should try to be ready when this comes true.“