Discussion Paper No. 578
July 5, 2026
Different Consumption Responses to Equivalent Changes in the Real Interest Rate
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We study how individuals adjust consumption in response to changes in the real interest rate using a large, preregistered, within-subject survey experiment on a representative sample of the German population. Respondents evaluate hypothetical scenarios in which the real interest rate rises by five percentage points through either an increase in the nominal interest rate or an equivalent decline in inflation. While classic intertemporal choice models predict identical responses across these scenarios, we find a clear asymmetry: respondents plan sizable cuts in consumption, higher saving, and lower borrowing when nominal rates increase, yet adjust these margins much less when inflation falls. Differences in perceived wealth effects may contribute to this asymmetry, but they cannot fully explain it. Rising nominal interest rates appear to provide stronger incentives to increase saving and avoid borrowing than does declining inflation. Declining inflation is also associated with more contradictory choices, for example, reporting higher consumption and higher saving while leaving borrowing unchanged. Together, these findings suggest that respondents more readily internalize the consequences of nominal interest rate changes than of disinflation, which has implications for the design and communication of monetary policy.
Keywords:
consumption; real interest rate; inflation expectations; survey;
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Discussion Paper No. 577
June 14, 2026
Matching for Risk-Taking: Overconfident Bankers and Government-Protected Banks
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We set up a simple theoretical model in which banks with varying degrees of government support are matched with CEOs that have different degrees of overconfidence. The channel through which the matching occurs is the share of bonus payments offered by banks in their profit-maximizing contracts. This yields a sequence of hypotheses when CEOs can freely choose risk levels: banks with more government support incentivize their CEOs more and this disproportionately attracts overconfident CEOs. In equilibrium this in turn leads to an assortative matching between overconfident managers and banks with a larger bailout probability. We then test the hypotheses derived from this model for U.S. data spanning both the Great Financial Crisis and the Covid Crisis. Our results confirm the hypotheses from our theoretical model for normal years, but not during crises and periods of enhanced regulation.
Keywords:
matching; overconfidence; incentive contracts; bailouts;
JEL-Classification:
G21; G28; H32;
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Discussion Paper No. 516
December 7, 2024
A Global Minimum Tax for Large Firms Only: Implications for Tax Competition
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The Global Minimum Tax (GMT) is applied only to firms above a certain size threshold, permitting countries to set differential tax rates for small and large firms. We analyze tax competition among multiple tax havens and a non-haven country for heterogeneous multinationals to evaluate the effects of this partial coverage of GMT. Upon the introduction of a moderately low GMT rate, the havens commit to the single uniform GMT rate for all multinationals. However, gradual increases in the GMT rate induce the havens, and subsequently the non-haven, to adopt discriminatory, lower tax rates for small multinationals. Our calibration exercise shows that the implementation of a 15% GMT rate results in a regime where only the havens adopt split tax rates. Upon GMT introduction, welfare and tax revenues fall in the tax havens but rise in the non-haven, yielding a positive net gain worldwide.
Keywords:
global minimum tax; profit shifting; multinational firms;
JEL-Classification:
F23; H25; H87;
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Discussion Paper No. 426
September 15, 2023
Banking Crises under a Central Bank Digital Currency (CBDC)
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One of the main concerns associated with central bank digital currencies (CBDC) is the disintermediating effect on the banking sector in general, and the risk of bank runs in times of crisis in particular. This paper examines the implications of an interest-bearing CBDC on banking crises in a dynamic bank run model with a financial accelerator. The analysis distinguishes between bank failures due to illiquidity and due to insolvency. In a numerical exercise, CBDC leads to a reduction in the net worth of banks in normal times but mitigates the risk of a bank run in times of crisis. The financial stability implications also depend on how CBDC is accounted for on the asset side of the central bank balance sheet: if CBDC issuance is offset by asset purchases, it delays the onset of both types of bank failures to larger shocks. In contrast, if CBDC issuance is offset by loans to banks, it substantially impedes failures due to illiquidity, but only marginally affects bank failures due to insolvency.
Keywords:
central bank digital currency; financial intermediation; financial stability; bank runs;
JEL-Classification:
E42; E58; G01; G21;
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Discussion Paper No. 385
February 16, 2023
Non-Standard Errors*
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In statistics, samples are drawn from a population in a data-generating process (DGP). Standard errors measure the uncertainty in estimates of population parameters. In science, evidence is generated to test hypotheses in an evidence-generating process (EGP). We claim that EGP variation across researchers adds uncertainty: Non-standard errors (NSEs). We study NSEs by letting 164 teams test the same hypotheses on the same data. NSEs turn out to be sizable, but smaller for better reproducible or higher rated research. Adding peer-review stages reduces NSEs. We further find that this type of uncertainty is underestimated by participants.
Keywords:
uncertainty; standard errors; reproducibility; hypotheses;
JEL-Classification:
C13; C18; C10;
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Discussion Paper No. 375
January 27, 2023
Taming Overconfident CEOs Through Stricter Financial Regulation
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A large body of literature finds that managerial overconfidence increases risk-taking by financial institutions. This paper shows that financial regulation can be effective at mitigating this type of risk. Exploiting regulatory changes introduced after the financial crisis as a natural experiment, I find that overconfidence-induced risk-taking decreases in financial institutions subject to stricter regulation. Following the easing of these regulations, overconfidence-induced risk-taking increases again. These findings confirm the effectiveness of financial regulation at correcting overconfident behavior, but also suggest that the impact fades away quickly once removed.
Keywords:
overconfidence; risk; regulation; financial sector;
JEL-Classification:
G28; G32; G38; G40;
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Discussion Paper No. 367
January 20, 2023
An Experimental Test of the Global-Game Selection in Coordination Games with Asymmetric Players
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In symmetric binary-choice coordination games, the global-game selection (GGS) has been proven to predict a high proportion of observed choices correctly. In these games, the GGS is identical to the best response to Laplacian beliefs about the fraction of players choosing either action. This paper presents an experiment on asymmetric games in which the GGS differs from the best response to Laplacian beliefs. It shows that the best response to Laplacian beliefs is a better predictor of behavior in these games than the GGS. In the considered games, the GGS provides poor guidance and also fails to give the right qualitative comparative statics predictions. Simple cognitive hierarchy models yield better predictions. The best response to a Laplacian belief about the distribution of other players' actions yields the best prediction. Comparing maximum likelihood estimates for four probabilistic models shows that an estimated global-game equilibrium fits worse than a rather simple level-k or Laplacian-belief model combined with a standard error-response function.
Keywords:
coordination games; equilibrium selection; global game; Laplacian beliefs; private information; network effects;
JEL-Classification:
C72; C91; D81;
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Discussion Paper No. 360
January 4, 2023
Sufficient Statistics for Nonlinear Tax Systems with General Across-income Heterogeneity
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This paper provides general and empirically implementable sufficient statistics formulas for optimal nonlinear tax systems in the presence of across-income heterogeneity in preferences, inheritances, income-shifting capabilities, and other sources. We study unrestricted tax systems on income and savings (or other commodities) that implement the optimal direct-revelation mechanism, as well as simpler tax systems that impose common restrictions like separability between earnings and savings taxes. We characterize the optimum using familiar elasticity concepts and a sufficient statistic for general across-income heterogeneity: the difference between the cross-sectional variation of savings with income, and the causal effect of income on savings. The Atkinson-Stiglitz Theorem is a knife-edge case corresponding to zero difference, and a number of other key results in optimal tax theory are subsumed as special cases. We provide tractable extensions of these results that include multidimensional heterogeneity, additional efficiency rationales for taxing heterogeneous returns, and corrective motives to encourage more saving. Applying these formulas in a calibrated model of the U.S. economy, we find that the optimal savings tax is positive and progressive.
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Discussion Paper No. 357
Voluntary Equity, Project Risk, and Capital Requirements
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We introduce a model of the banking sector that formally incorporates a buffer function of capital. Heterogeneous banks choose their portfolio risk, bank size, and capital holdings. Banks voluntarily hold equity when the buffer effect against the risk of default outweighs the cost advantages of debt financing. In this setting, banks with lower monitoring costs are larger, choose riskier portfolios, and have less equity. Moreover, binding capital requirements or levies on bank borrowing are shown to make higher-risk portfolios more attractive. Accounting for banks' interior capital choices can thus explain why higher capital ratios incentivize banks to undertake riskier projects.
Keywords:
voluntary equity; capital requirements; bank heterogeneity;
JEL-Classification:
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Discussion Paper No. 345
November 30, 2022
Redistribution and Unemployment Insurance
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This paper analyzes the interactions between redistribution and unemployment insurance policies and their implications for the optimal design of tax-benefit systems. In a setting where individuals with different earnings abilities are exposed to unemployment risk on the labor market, I characterize the optimal income tax schedule and the optimal unemployment benefit schedule in terms of empirically estimable sufficient statistics. I provide a Pareto-efficiency condition for tax-benefit systems that implies a tight link between optimal redistribution and optimal unemployment insurance: the steeper the profile of income taxes is, the flatter the profile of unemployment benefits should be, and vice versa. Optimal replacement rates are therefore monotonically decreasing with earnings, from 1 at the bottom of the earnings distribution to 0 at the top, and redistribution through unemployment benefits is efficient. Empirical applications show that these interactions between redistribution and unemployment insurance have important quantitative implications.
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