This paper develops a model featuring both a macroeconomic and a financial friction that speaks to the interaction between monetary and macro-prudential policy and to the role of US monetary and regulatory policy in the run up to the Subprime mortgage crisis. There are two main results. First, interest rate rigidities in a monopolistic banking system increase the probability of a financial crisis (relative to the case of flexible interest rate) in response to contractionary shocks to the economy, while they act as automatic macro-prudential stabilizers in response to expansionary shocks. Second, when the interest rate is the only available instrument, monetary policy faces a trade-off between macroeconomic and financial stability. This trade off is both qualitative and quantitative in response to contractionary shocks, while it is only quantitative in response to positive shocks. We show that a second instrument, such as a Pigouvian tax on credit to households on the demand side of the market, is needed to restore efficiency in the economy when both frictions are at work.

We develop an asset pricing model with heterogeneous exposure to a persistent world growth factor to identify global growth and financial shocks in a multicountry panel VAR in volatility and output growth. The econometric estimates yield three sets of empirical results about (1) the importance of global growth for the interpretation of the correlation between volatility and growth over the business cycle and the possible presence of omitted variable bias in single-country VAR studies, (2) the extent to which output shocks drive volatility, and (3) the transmission of volatility shocks to output growth. Authors have furnished data, code, and an Internet Appendix, which are available on the Oxford University Press Web site next to the link to the final published paper online.

We study how capital flows affects German cities’ GDP growth depending on the state of their real estate markets. Identification exploits a policy framework assigning refugees to cities on a quasi-random basis and variation in nondevelopable area for the construction of an exposure measure to real estate market tightness. We estimate that the most exposed cities to real estate market tightness grew at least 1.9 percentage points more than the least exposed ones, cumulatively, from 2009 to 2014. Capital inflows shift credit to firms with more collateral, which leads firms to hire and invest more in response to these shocks.