Jan Wenzelburger

Professor of Economics, Institute for Public Policy and Management

Biography

Jan Wenzelburger holds degrees in Mathematics from the University of Karlsruhe and the University of Mannheim and a habilitation in economics from the University of Bielefeld (2002). He joined Keele in September 2006. He has been a member of the French German research training group on Economic Behavior and Interaction Models (EBIM) jointly between Bielefeld University and Université Paris 1 Panthéon-Sorbonne.

Research Group: Centre for Economic Research.

Research Interests: Banking Theory, Financial Markets, Micro- and Macroeconomic Dynamics, Growth Theory.

JEL Codes: D81, D84, E44, G11, G21.

Collaborators: Hans Gersbach (ETH Zurich), Ulrich Horst (Humboldt University, Berlin) Marten Hillebrand (University of Karlsruhe)

Selected publications

Current working papers

 

Current Research

Summary of Research and Outline of Future Projects

The overall topic of my research is to investigate the systemic stability of economic and financial systems. I am currently working in four research areas. Firstly, stability of banking systems. Secondly, financial markets with heterogeneous interacting agents. Thirdly, sustainability of pension systems. Finally, the theory of expectations formation.

1)The stability of banking systems is at the centre of today's policy agendas. In a joint paper with Hans Gersbach (CESifo 2003) we have shown that the insolvency of a banking system can be avoided by deposit-rate ceilings. Although the microeconomics of banking is well understood, macroeconomic models that allow to investigate the stability of banking systems from a systemic perspective are rare. Most existing models are static so that dynamic models describing the interaction of commercial banks remain to be established. Hans Gersbach (ETH Zürich) and I have integrated a competitive banking sector into a macroeconomic model with overlapping generations which channels consumers’ deposits to productive investments that are subject to exogenous macroeconomic productivity shocks. A banking crisis occurs when banks fail to meet capital requirements or are insolvent. The novelty of the approach is that such crises are triggered by negative productivity shocks rather than by bank runs in the sense of Diamond & Dybvig. We show that a series of negative shocks will cause a banking crisis with certainty if the profitability of the banking sector is too low. Banking crises along with insolvencies will occur with certainty even if macroeconomic risks are incorporated into the risk premia charged by banks. This reason is that risk premia may become arbitrarily small when its capital base diminishes. Insolvencies of banks can be avoided by deposit rate ceilings.

A main conclusion is that regulatory intervention is necessary to prevent recessions if the banking sector is not profitable enough. While strict enforcement of capital-adequacy rules suffices in prosperous periods, capital requirements indicate when crisis intervention is needed to a recapitalise the banking system. Possible crisis intervention measures may require liquidity assistance, interest-rate controls, quantitative easing, and restructuring of the banking industry. Our work provides a first step towards a dynamic macroeconomic perspective of handling banking crises. Our findings call for a comprehensive analysis of the competitive environment of a banking sector, its prudential supervision, and its work-out schemes.

A main issue is to identify those structures of a financial system that are best suited to cope with financial distress. Clearly, a banking system that must be capable to protect itself against negative shocks and regulatory frameworks such as Basle II should help a banking system to do so. However, it is not at all obvious which competitive environments are the most robust ones and which crises-intervention policies will help an economy to recover when large losses occur nevertheless. Welfare distributional effects of bank regulation including their work-out schemes are on our agenda as well.

2) Financial Markets . Two main lines of research are being pursued both relating to systemic risk and the stability of financial markets with heterogeneous interacting agents.

(a) Strategic interaction between agents has not yet been incorporated into this strand of dynamic models. Agents in these models are usually assumed to be price takers. This stands quite in contrast to the fact that investors with large portfolio holdings such as pension funds do not behave as price takers when trading in a stock market. One aim of this project is to investigate how market information may strategically be exploited to influence stock prices and returns. The focus will be on effects of the resulting portfolio allocations and the volatility of prices and allocations. At a later stage, the results of this project will be linked to the one on pension systems as the safety of funded pension systems relies on stable stock prices. Of particular interest are electronic stock markets and currency markets. Firstly, an open issue is the extent to which order-book information can be exploited strategically to manipulate stock prices when agents use computer interfaces to trade. With the immense trading volume which is processed by electronic trading platforms such as the Xetra system of the German stock exchange in Frankfurt, the current banking crises shows that electronic markets might incur a significant amount of systemic risk in a financial system. Secondly, the framework will be applied to investigate the extent to which central banks are capable of controlling exchange rates in the presence of speculators. The exchange-rate risk in a world with global markets constitutes a another major systemic risk for an economy.

(b) In the context of pension funds, financial derivatives (e.g., options and futures) are used as financial instruments to safeguard investments. In this project, financial derivatives will be incorporated into the class of models. It is well known that in a static general equilibrium, primary and derivative asset markets interact generically and that investors will hold a portfolio mix consisting options and the underlying asset. This result stands in contrast to the arbitrage pricing theory and seems to have been overlooked by the literature so far. An extension to a dynamic setup that allows to investigate the effects of option markets on asset prices and allocations remains to be developed. Moreover, empirical evidence suggests that the Black and Scholes formula is not an accurate enough pricing tool for derivatives. One issue is to what extent endogenously formed market prices of derivatives differ from the classical arbitrage-free prices and whether or not incorrect beliefs may create arbitrage opportunities. Another issue is to explore the extent to which prices on derivative markets drive prices in the market for the underlying asset. The price dynamics will be investigated when asset markets and markets for derivatives are linked in an agent-based model. Extensions to future markets with applications to resource markets such as the oil market are planned.

3) Sustainability of pension systems. In recent years considerable attention has focused on the impact of demographic changes on pension and social security systems. The sustainability of pension systems constitutes a major systemic risk for most societies. To offset the effect that more and more pensioners have to be financed by fewer and fewer contributors, many countries give incentives to invest into pension funds. The economic literature has expressed concerns that a retiring baby boom generation could cause an asset price meltdown (i.e., a sudden loss of market value for a large proportion of assets) by selling their asset holdings. Unfortunately the empirical evidence to date and simulation results are not conclusive. It remains unclear whether an additional capital-based pillar to an otherwise unfunded pension system can resolve the current pension crisis of the pay-as-you-go systems. In fact, empirical investigations in the United Kingdom which to a large extent relies on a funded pension system show that sustaining a sufficient level of old-age consumption is not always feasible. The models used to examine the effect are far too simple. For example, they either lack a proper integration of an asset market or do not allow for exogenous stochastic perturbations. Most of the literature finds that a fully funded system is more efficient than a pay-as-you-go system. However, the reasons for these findings are not entirely clear. At first sight the vulnerabilities of both systems differ. While a fully-funded system has to rely on a stable asset market, a pay-as-you-go system has to rely on a balanced demography in which the ratio of pensioners and contributors becomes not to high. Intuitively, if asset markets are stable and consumers are wealthy enough to save for old-age consumption, then a fully-funded system should outperform a pay-as-go system, since in the former system all funds will be channelled throughout a production process before consumption. What will happen to either system when demographic booms and busts occur is to a large extent unresolved.

4) Theory of Expectations Formation. Monetary and fiscal policies in macroeconomics whether in theory or in practice are based on forecasts about the future evolution of an economy. Recent contributions in the literature, however, are concerned with behavioural aspects of forecasting rather than with the success of a particular forecasting method in terms of providing accurate forecasts. Yet, successful policy making hinges on the accuracy of forecasts. I would like to apply the non-parametric approach of my Habilitation thesis to standard models of the economics literature, current agent-based models and to a game theoretic settings. As a policy application in macroeconomics, I would like to use my framework which allows to select between multiple so-called rational-expectations solutions during an estimation process using economic criteria. With the current methods, the success of implementation is beyond the control of the policy maker if multiple solutions exist. This attempts to resolve a ongoing debate in monetary economics between to what extent particular solutions are learnable. The original intention of introducing learning was to justify the rational-expectations hypothesis. For non-linear models this issue is not entirely resolved as regards concrete and applicable estimation techniques..