Modern Financial Market Theory – A Critique Based on the Logic of Human Action

The modern financial market theory (MFMT) – based on the efficient market hypothesis, rational expectation theory, and modern portfolio theory – has become the standard approach in financial market economics. In this article, the MFMT will be critically ­reviewed using the logic of human action (or: praxeology) as an epistemological meta­theory. It will be shown that the MFMT exhibits (praxeo-)logical deficiencies so that it cannot provide investors with well-founded decision-making support in real-world financial markets.

Cryptocurrencies, Evolution of Means of Payments and Validity of Monetary Principles

The paper explores the role, evolution and ruling principles of the concept of “money” in the 21st Century. In this continuously evolving context, cryptocurrencies and Blockchain technology are widely considered the most relevant monetary innovations of the last decades. By means of a macro-founded logical-analytical approach combined with statistical evidence, the paper provides arguments: 1. dismissing the “innovation myth” behind cryptocurrencies because of de facto representing a comeback of the private issue of means of payments and, more problematically, seigniorage at its best; 2. confirming that crypto-tokens do not comply with basic, still ruling monetary principles; 3. suggesting that excess liquidity is already invested in crypto-markets (which are themselves “inflationary”, namely not backed by real value (i.e. GDP). The concrete risk is, once again in economic history, represented by facing a financial bubble.

Interest Rates and Macroeconomic Investment under Uncertainty

The interest rate is generally considered as an important driver of macroeconomic investment characterised by a particular form of path dependency, “hysteresis”. At the same time, the interest rate channel is a central ingredient of monetary policy transmission. In this context, we shed light on the issue (which currently is a matter of concern for many central banks) whether uncertainty over future interest rates at the zero lower bound hampers monetary policy transmission. As an innovation we derive the exact shape of the “hysteretic” impact of rate changes on macroeconomic investment under different sorts of uncertainty. Starting with hysteresis effects on the micro level, we apply an adequate aggregation procedure to derive the interest rate effects on a macro level. Our results may serve as a guideline for future central banks’ policies on how to stimulate investment in times of low or even zero interest rates and uncertainty.

Macroeconomic Policy Making and Current Account Imbalances in the Euro Area

The paper analyses the role of fiscal and monetary policy for the development of the current account imbalances in the euro area, including the most recent developments during the coronavirus crisis. Several financial transmission channels such as international bank lending, changes in TARGET2 balances, international rescue credit and government bond purchases of euro area central banks are identified. It is found that differing fiscal policy stances which have interacted differently with the ECB’s monetary policy have been at roots of first diverging and then converging current account positions in the euro area. Since the European financial and debt crisis, public financing mechanisms and the unconventional monetary of the ECB have contributed to the persistence of intra-euro area current account imbalances.

Sudden Stops and Asset Purchase Programmes in the Euro Area

This paper analyses the incidence and severity of sudden stops in euro area countries before and after the introduction of the ECB’s asset purchase programmes. We define sudden stops as abrupt declines in private net financial inflows, i.e. total flows adjusted for EU and IMF loans and changes in TARGET2 balances. We document that sudden stop were more frequent and more severe in euro area countries compared to other OECD economies over the period 1999–2020. We find that the susceptibility of euro area countries to severe sudden stops mainly reflects domestic fundamentals whereas there is no clear evidence of an adverse direct effect of being part of the euro area. Moreover, our econometric analysis suggests that the ECB asset purchase programmes have overall almost halved the risk of severe sudden stops in euro area countries. We find tentative evidence that this effect operates through confidence channels.

Monetary Policy and Foreign Denominated Debt by Non-Bank Borrowers

This paper analyzes cross border credit from a new perspective: We assess globally aggregated foreign-denominated credit to non-bank borrowers (provided by the BIS) and analyze which factors drive debt denominated in yen, euro and US dollar between 2003 and 2020. The determinants we analyze include global economic activity, global commodity prices and the evolution of assets in the FED balance sheet. We also consider assets in the ECB and the BOJ Balance in a second step. Our results show that global economic activity is the main driver of dollar debt only before the financial crisis while the Fed balance sheet drives dollar debt afterwards. We also identify a crowding-out effect of FED balance activities on debt denominated in yen and euro. On the other hand, effects of changes in the ECB and BOJ balance are qualitatively less important and more stable.