Working papers published in 2015

In-depth studies for experts

Our Working Paper Series (WPS) disseminates economic research relevant to the various tasks and functions of the ECB, and provides a conceptual and empirical basis for policy-making. The Working Papers constitute “work in progress”. They are published to stimulate discussion and contribute to the advancement of our knowledge of economic matters. They are addressed to experts, so readers should be knowledgeable in economics.

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No. 1873
15 December 2015
Dating systemic financial stress episodes in the EU countries

Abstract

JEL Classification

C54 : Mathematical and Quantitative Methods→Econometric Modeling→Quantitative Policy Modeling

G01 : Financial Economics→General→Financial Crises

G15 : Financial Economics→General Financial Markets→International Financial Markets

Abstract

This paper introduces a new methodology to date systemic financial stress events in a transparent, objective and reproducible way. The financial cycle is captured by a monthly country-specific financial stress index. Based on a Markov Switching model, high financial stress regimes are identified and a simple algorithm is used to select those episodes of financial stress that are associated with a substantial negative impact on the real economy. By applying this framework to 27 EU countries, the paper is a first attempt to provide a chronology of systemic financial stress episodes in addition to the expert-detected events available so far.

No. 1872
15 December 2015
Fiscal rules, fiscal space and procyclical fiscal policy

Abstract

JEL Classification

E61 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Policy Objectives, Policy Designs and Consistency, Policy Coordination

E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy

H60 : Public Economics→National Budget, Deficit, and Debt→General

Abstract

In this paper we analyse the interaction of fiscal rules and fiscal space. We find strong evidence for fiscal rules being associated with higher fiscal space. Furthermore, the analysis shows that countries with more fiscal space tend to have higher discretionary expenditures, but that this effect is significantly reduced if fiscal rules are in place. A similar effect can be observed for the procyclicality of fiscal policy, which is significantly higher in an environment of ample fiscal space, while this difference is reduced with fiscal rules. Regarding the different types of fiscal rules, we find the strongest results for expenditure rules and to a lesser extent for balanced budget rules, but none for debt rules.

No. 1871
14 December 2015
How do speed and security influence consumers' payment behavior?

Abstract

JEL Classification

D12 : Microeconomics→Household Behavior and Family Economics→Consumer Economics: Empirical Analysis

D14 : Microeconomics→Household Behavior and Family Economics→Household Saving; Personal Finance

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

Abstract

The Federal Reserve named improvements in the speed and security of the payment system as two of its policy initiatives for 2012

No. 1870
14 December 2015
Regional dynamics of economic performance in the EU: To what extent spatial spillovers matter?

Abstract

JEL Classification

O17 : Economic Development, Technological Change, and Growth→Economic Development→Formal and Informal Sectors, Shadow Economy, Institutional Arrangements

O31 : Economic Development, Technological Change, and Growth→Technological Change, Research and Development, Intellectual Property Rights→Innovation and Invention: Processes and Incentives

O18 : Economic Development, Technological Change, and Growth→Economic Development→Urban, Rural, Regional, and Transportation Analysis, Housing, Infrastructure

R12 : Urban, Rural, Regional, Real Estate, and Transportation Economics→General Regional Economics→Size and Spatial Distributions of Regional Economic Activity

Abstract

This paper investigates the main determinants of economic performance in the EU from a regional perspective, covering 253 regions over the period 2001-2008. In addition to the traditional determinants of economic performance, measured by GDP per capita, the analysis accounts for spatial effects related to externalities from neighbouring regions. The spatial Durbin random-effect panel specification captures spatial feedback effects from the neighbours through spatially lagged dependent and independent variables. Social-economic environment and traditional determinants of GDP per capita (distance from innovation frontier, physical and human capital and innovation) are found to be significant. Overall, our findings confirm the significance of spatial spillovers, as business investment and human capital of neighbouring regions have a positive impact

No. 1869
25 November 2015
Spillovers from the ECB's non-standard monetary policies on non-euro area EU countries: evidence from an event-study analysis

Abstract

JEL Classification

C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes

E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

Abstract

Using event-study techniques we investigate the presence and the magnitude of spillovers from the ECB

No. 1868
24 November 2015
To bi, or not to bi? Differences in spillover estimates from bilateral and multilateral multi-country models
Published in: Federal Reserve Bank of Dallas Globalization and Monetary Policy Institute, Working Paper 256: "To Bi, or not to Bi? Differences in Spillover Estimates from Bilateral and Multilateral Multi-country Models"

Abstract

JEL Classification

F44 : International Economics→Macroeconomic Aspects of International Trade and Finance→International Business Cycles

C33 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Panel Data Models, Spatio-temporal Models

Abstract

Asymptotic analysis and Monte Carlo simulations show that spillover estimates obtained from widely-used bilateral (such as two-country VAR) models are significantly less accurate than those obtained from multilateral (such as global VAR) models. In particular, the accuracy of spillover estimates obtained from bilateral models depends on two aspects of economies

No. 1867
16 November 2015
A note on implementing the Durbin and Koopman simulation smoother
Published in: Computational Statistics & Data Analysis, Vol 91, November 2015: pp 1-3

Abstract

JEL Classification

C3 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables

C15 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→Statistical Simulation Methods: General

Abstract

The correct implementation of the Durbin and Koopman simulation smoother is explained. A possible misunderstanding is pointed out and clarified for both the basic state space model with a non-zero mean of the initial state and with time-varying intercepts (mean adjustments).

No. 1866
16 November 2015
Interconnectedness of the banking sector as a vulnerability to crises

Abstract

JEL Classification

F36 : International Economics→International Finance→Financial Aspects of Economic Integration

G20 : Financial Economics→Financial Institutions and Services→General

Abstract

This paper uses domestic and cross-border linkages to measure the interconnectedness of the banking sector, and relates it to banking crises in Europe. Beyond cross-border financial linkages of the banking sector, we also account for financial linkages to the other main financial and non-financial sectors within the economy. We enrich conventional early-warning models using macro-financial vulnerabilities, by including measures of banking sector centrality as potential determinants of banking crises. Our results show that a more central position of the banking sector in these so-called macro-networks significantly increases the probability of a banking crisis. By analyzing the different types of risk exposures, our evidence shows that credit as well as market risks are important sources of vulnerabilities. Finally, the results show that early-warning models augmented with interconnectedness measures outperform traditional models in terms of out-of-sample predictions of recent banking crises in Europe.

No. 1865
6 November 2015
Inflation forecasts: Are market-based and survey-based measures informative?

Abstract

JEL Classification

E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation

E37 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Forecasting and Simulation: Models and Applications

G13 : Financial Economics→General Financial Markets→Contingent Pricing, Futures Pricing

Abstract

This paper analyses the predictive power of market-based and survey-based inflation expectations for actual inflation. We use the data on inflation swaps and the forecasts from the Survey of Professional Forecasters for the euro area and United States. The results show that both, market-based and survey-based measures have a non-negligible predictive power for inflation developments, as compared to statistical benchmark models. Therefore, for horizons of one and two years ahead, market-based and survey-based inflation expectations actually convey information on future inflation developments.

No. 1864
5 November 2015
Asset purchase programmes and financial markets: lessons from the euro area

Abstract

JEL Classification

E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects

E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy

E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

E65 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Studies of Particular Policy Episodes

G14 : Financial Economics→General Financial Markets→Information and Market Efficiency, Event Studies, Insider Trading

Abstract

We evaluate the effects on asset prices of the ECB asset purchase programme (APP) announced in January 2015 and assess its main transmission channels. We do so by first extending a term structure model with bond supply effects to account for assets with different types of risk premia. We then derive model-based predictions for cross-asset price movements associated with the transmission channels identified in the model. We finally validate empirically these predictions by means of an event- study methodology, reaching the following conclusions: The impact of the APP on asset prices is sizeable albeit the programme was announced at a time of low financial distress. This may appear puzzling in light of existing literature that finds a large impact of asset purchases only in periods of high financial distress. Consistent with the model, we explain this apparent puzzle by showing how the low financial distress, while indeed weakening certain transmission channels, has reinforced other channels because of its interplay with the asset composition of the programme. Targeting assets at long maturity and spanning the investment-grade space have supported the duration and the credit channels. At the same time, the low degree of financial stress prevailing at announcement of the programme, while weakening the local supply channel, has facilitated spill-overs to non-targeted assets.

No. 1863
28 October 2015
Fiscal multipliers during consolidation: evidence from the European Union

Abstract

JEL Classification

C33 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Panel Data Models, Spatio-temporal Models

E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy

Abstract

This paper investigates the impact of fiscal consolidation on economic growth in European Union countries, between 2004 and 2013. We construct a new dataset of exogenous fiscal adjustments, relying on legally binding recommendations issued to countries under Excessive Deficit Procedure, and we identify exogenous policy changes by using this dataset as instrumental variable in a GMM framework. We estimate the size of the fiscal multiplier both in a linear setting as well as in a state-dependent setting, considering four different circumstances: the state of the business cycle, the degree of openness to trade, the composition of the fiscal adjustment and the presence of a stressed credit market, as manifested by an impaired monetary policy transmission. We find that the size of the multiplier varies significantly under the various states: the distribution of multipliers is quite asymmetric, and a few consolidation episodes yield multipliers above one. We find that the composition of the fiscal adjustments is crucial in containing the output cost of consolidation, and in determining its persistence. Fiscal adjustments made via cuts to transfers and subsidies, or via tax increases, are usually associated with multipliers at or below unity, even when the economy is in recession. We also find evidence of confidence effects when consolidation is made under stressed credit markets and high interest rates. In a small number of episodes, involving open economies benefitting from confidence effects, we find that fiscal adjustments seem to be expansionary.

No. 1862
27 October 2015
Worker flows in the European Union during the Great Recession

Abstract

JEL Classification

J6 : Labor and Demographic Economics→Mobility, Unemployment, Vacancies, and Immigrant Workers

E24 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Employment, Unemployment, Wages, Intergenerational Income Distribution, Aggregate Human Capital

C25 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Discrete Regression and Qualitative Choice Models, Discrete Regressors, Proportions

Abstract

We measure the contribution of worker flows across employment, unemployment, and non-participation to the change in unemployment in eleven EU countries during the period 2006-2012, paying special attention to which socio-demographic groups in each of the countries were mostly affected by job creation and job destruction during the crisis. We find that age, to a larger extent than educational attainments, is the main determinant of flows from employment into unemployment, particularly in those countries where unemployment increased by most. Secondly, we highlight some institutional features of the labour market (employment protection legislation, unemployment insurance, and the incidence of active labor market policies) that help to explain the cross-country differences in flows between employment and unemployment and in their socio-demographic composition. Finally, we examine if the crisis has led to some employment reallocation across sectors, finding that, so far, there is no clear evidence in favor of cleansing effects.

No. 1861
27 October 2015
Loan supply, credit markets and the euro area financial crisis

Abstract

JEL Classification

E51 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Money Supply, Credit, Money Multipliers

E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy

C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes

Abstract

We use bank-level information on lending practices from the euro area Bank Lending Survey to construct a new indicator of loans

No. 1860
21 October 2015
What drives forbearance - evidence from the ECB Comprehensive Assessment

Abstract

JEL Classification

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

Abstract

Forbearance is a practice of granting concessions to troubled borrowers, typically in the form of prolongation of maturity or refinancing of the loan. While economically useful in some circumstances, it can be used by banks in order to reduce the need for provisions and conceal potential losses. If forbearance is widespread in the banking system, it may result in systemic risk, increasing uncertainty about the quality of banks

No. 1859
21 October 2015
Corporate investment and bank-dependent borrowers during the recent financial crisis

Abstract

JEL Classification

E22 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Capital, Investment, Capacity

E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy

G01 : Financial Economics→General→Financial Crises

Abstract

We use the recent financial crisis period to analyse the effect of bank credit tightening on real firm investment. We derive a new set of credit tightening indexes from the ECB Bank Lending Survey. Combining these with annual balance sheet data from Germany, France, Italy, Spain, Belgium and Portugal, we exploit the heterogeneity in the dependence on bank finance of different industries to identify real effects of credit tightening. We show that in response to tightening, investment falls substantially more in bank-dependent industries.

No. 1858
9 October 2015
Fiscal policy adjustments in the euro area stressed countries: new evidence from non-linear models with state-varying thresholds

Abstract

JEL Classification

H63 : Public Economics→National Budget, Deficit, and Debt→Debt, Debt Management, Sovereign Debt

H20 : Public Economics→Taxation, Subsidies, and Revenue→General

H60 : Public Economics→National Budget, Deficit, and Debt→General

C22 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models &bull Diffusion Processes

Abstract

We introduce a non-linear model to study the adjustment of fiscal policy variables in Greece, Ireland, Portugal and Spain over the last 50 years, based on endogenously estimated budget deficit-to-GDP thresholds, which vary with fiscal disequilibria, the economic cycle and financial market conditions. We find that the budget deficit-to-GDP thresholds were rather high for Greece and Portugal particularly after 1999 and that the fiscal adjustments in "good" times were very different from the adjustments that took place in "bad" times. We also found that only in Spain fiscal deficits were reduced in expansionary times. Finally, we provide evidence that, under financial market pressure, fiscal authorities relaxed the fiscal deficit-to-GDP threshold for the adjustment in Ireland and Spain and reduced such threshold for the adjustment in Portugal.

No. 1857
8 October 2015
International spillovers in inflation expectations

Abstract

JEL Classification

C11 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→Bayesian Analysis: General

C52 : Mathematical and Quantitative Methods→Econometric Modeling→Model Evaluation, Validation, and Selection

E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation

Abstract

This paper investigates the factors behind developments in inflation expectations in euro area, the U.S. and the U.K. over the sample 2005-2015. Our analysis unveils the presence of a quantitatively important spillover from euro area long-term inflation expectations onto international ones, in particular the U.S., since August 2014. This finding has some important implications. From a policy perspective, it contributes to explain the somewhat puzzling declines in financial indicators of inflation expectations since the autumn 2014 (Yellen, 2015). From a research perspective, our findings suggest that the relatively weak performance of term-structure models (and other econometric models) to explain developments in long-term inflation expectations in major economic areas over 2014-15 may be due to the omission of international factors. These two dimensions may well carry a significant weight on the on-going and future debate on monetary policy normalisation in major central banks.

No. 1856
8 October 2015
Combining time-variation and mixed-frequencies: an analysis of government spending multipliers in Italy

Abstract

JEL Classification

C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes

E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy

H30 : Public Economics→Fiscal Policies and Behavior of Economic Agents→General

H50 : Public Economics→National Government Expenditures and Related Policies→General

Abstract

In this paper, we propose a time-varying parameter VAR model with stochastic volatility which allows for estimation on data sampled at different frequencies. Our contribution is twofold. First, we extend the methodology developed by Cogley and Sargent (2005), and Primiceri (2005), to a mixed-frequency setting. In particular, our approach allows for the inclusion of two different categories of variables (high-frequency and low-frequency) into the same time varying model. Second, we use this model to study the macroeconomic effects of government spending shocks in Italy over the 1988Q4-2013Q3 period. Italy - as well as most other euro area economies - is characterised by short quarterly time series for fiscal variables, whereas annual data are generally available for a longer sample before 1999. Our results show that the proposed time-varying mixed-frequency model improves on the performance of a simple linear interpolation model in generating the true path of the missing observations. Second, our empirical analysis suggests that government spending shocks tend to have positive effects on output in Italy. The fiscal multiplier, which is maximized at the one year horizon, follows a U-shape over the sample considered: it peaks at around 1.5 at the beginning of the sample, it then stabilizes between 0.8 and 0.9 from the mid-1990s to the late 2000s, before rising again to above unity during of the recent crisis.

No. 1855
25 September 2015
Quantitative effects of the shale oil revolution

Abstract

JEL Classification

Q41 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Energy→Demand and Supply, Prices

Q47 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Energy→Energy Forecasting

E17 : Macroeconomics and Monetary Economics→General Aggregative Models→Forecasting and Simulation: Models and Applications

Abstract

The aim of this paper is to analyze the impact of the so-called

No. 1854
25 September 2015
Determinants of global spillovers from US monetary policy

Abstract

JEL Classification

F4 : International Economics→Macroeconomic Aspects of International Trade and Finance

E5 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit

C3 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables

Abstract

This paper assesses the global spillovers from identified US monetary policy shocks in a global VAR model. US monetary policy generates sizable output spillovers to the rest of the world, which are larger than the domestic effects in the US for many economies. The magnitude of spillovers depends on the receiving country

No. 1853
24 September 2015
Price level changes and the redistribution of nominal wealth across the euro area

Abstract

JEL Classification

E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation

D31 : Microeconomics→Distribution→Personal Income, Wealth, and Their Distributions

D14 : Microeconomics→Household Behavior and Family Economics→Household Saving; Personal Finance

Abstract

We show that unexpected price level movements generate sizable wealth redistribution in the Euro Area (EA), using sectoral accounts and newly available data from the Household Finance and Consumption Survey. The EA as a whole is a net loser of unexpected price level decreases, with Italy, Greece, Portugal and Spain losing most in per capita terms, and Belgium and Malta being net winners. Governments are net losers of deflation, while the household (HH) sector is a net winner in the EA as a whole. HHs in Belgium, Ireland, Malta and Germany experience the biggest per capita gains, while HHs in Finland and Spain turn out to be net losers. Considerable heterogeneity exists also within the HH sector: relatively young middle class HHs are net losers of deflation, while older and richer HHs are winners. As a result, wealth inequality in the EA increases with unexpected deflation, although in some countries (Austria, Germany and Malta) inequality decreases due to the presence of relatively few young borrowing HHs. We document that HHs inflation exposure varies systematically across countries, with HHs in high inflation EA countries holding systematically lower nominal exposures.

No. 1852
24 September 2015
Financial literacy and savings account returns

Abstract

JEL Classification

D12 : Microeconomics→Household Behavior and Family Economics→Consumer Economics: Empirical Analysis

E21 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Consumption, Saving, Wealth

G11 : Financial Economics→General Financial Markets→Portfolio Choice, Investment Decisions

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

Abstract

Savings accounts are owned by most households, but little is known about the performance of households

No. 1851
23 September 2015
A rotated Dynamic Nelson-Siegel model with macro-financial applications

Abstract

JEL Classification

G1 : Financial Economics→General Financial Markets

E4 : Macroeconomics and Monetary Economics→Money and Interest Rates

C5 : Mathematical and Quantitative Methods→Econometric Modeling

Abstract

A factor rotation scheme is applied to the well-known Dynamic Nelson-Siegel model facilitating direct parametrization of the short rate process. The model-implied term structure of term premia is derived in closed-form, and macroeconomic variables are included in a Taylor-rule- type fashion. Four empirical experiments are performed on US data covering the period from 1990 to 2014. It is found that macroeconomic variables impact the evolution of the short rate until 2002, after which their effects become insignificant in a statistical sense. The calculated term structure of term premia is robust to the tested parameterzations, and traces out the interest rate cycles present in the data.

No. 1850
18 September 2015
Jagged cliffs and stumbling blocks: interest rate pass-through fragmentation during the Euro area crisis

Abstract

JEL Classification

E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

G01 : Financial Economics→General→Financial Crises

G20 : Financial Economics→Financial Institutions and Services→General

E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects

Abstract

The financial crisis has been characterised by fragmentation in the transmission of monetary policy, reflected in high dispersion in the cost of bank finance for euro area firms. Using micro-level bank data across a number of euro area countries, we identify individual bank balance sheet characteristics that contributed to this fragmentation. Interest rate pass-through heterogeneity is estimated using an error correction framework, which captures banks' funding constraints and balance sheet structures. Results show incomplete pass-through of changes in money market rates targeted by the central bank to firms' lending rates, with increases in sovereign bond yields affecting the cost of finance for firms, particularly in stressed countries. Individual bank characteristics have an effect on pass-through during the crisis, even after controlling for changes in macroeconomic conditions. The effect is greatest when looking at characteristics that capture bank funding difficulties, suggesting that a recovery in banks' funding capacities is an important element in reducing fragmentation in the transmission of monetary policy.

No. 1849
18 September 2015
Drivers of banks' cost of debt and long-term benefits of regulation - an empirical analysis based on EU banks

Abstract

JEL Classification

G01 : Financial Economics→General→Financial Crises

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

Abstract

Based on a sample of EU listed banks, we estimate the sensitivity of banks

No. 1848
17 September 2015
Systemic risk rankings and network centrality in the European banking sector

Abstract

JEL Classification

C52 : Mathematical and Quantitative Methods→Econometric Modeling→Model Evaluation, Validation, and Selection

C58 : Mathematical and Quantitative Methods→Econometric Modeling→Financial Econometrics

G15 : Financial Economics→General Financial Markets→International Financial Markets

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

Abstract

This paper presents a methodology to calculate the Systemic Risk Ranking of financial institutions in the European banking sector using publicly available information. The pro- posed model makes use of the network structure of financial institutions by including the stock return series of all listed banks in the financial system. Furthermore, a wide set of common risk factors (macroeconomic risk factors, sovereign risk, financial risk and housing price risk) is included to allow these factors to affect the banks. The model uses Bayesian Model Averaging (BMA) of Locally Weighted Regression models (LOESS), i.e. BMA-LOESS. The network structure of the financial sector is analysed by computing measures of network centrality (degree, closeness and betweenness) and it is shown that this information can be used to provide measures of the systemic importance of institutions. Using data from 2005 (2nd quarter) to 2013 (3rd quarter), this paper provides further insight into the time-varying importance of risk factors and it is shown that the model produces superior conditional out-of-sample forecasts (i.e. projections) than a classical linear Bayesian multi-factor model.

No. 1847
17 September 2015
Private wealth across European countries: the role of income, inheritance and the welfare state

Abstract

JEL Classification

D30 : Microeconomics→Distribution→General

D31 : Microeconomics→Distribution→Personal Income, Wealth, and Their Distributions

Abstract

Using microdata from the Household Finance and Consumption Survey (HFCS), this study examines the role of inheritance, income and welfare state policies in explaining differences in household net wealth within and between euro area countries. First, about one third of the households in the 13 European countries we study report having received an inheritance, and these households have considerably higher net wealth than those which did not inherit. Second, regression analyses on households' relative wealth position show that, on average, having received an inheritance lifts a household by about 14 net wealth percentiles. At the same time, each additional percentile in the income distribution is associated with about 0.4 net wealth percentiles. These results are consistent across countries. Third, multilevel cross-country regressions show that the degree of welfare state spending across countries is negatively correlated with household net wealth. These findings suggest that social services provided by the state are substitutes for private wealth accumulation and partly explain observed differences in levels of household net wealth across European countries. In particular, the effect of substitution relative to net wealth decreases with growing wealth levels. This implies that an increase in welfare state spending goes along with an increase - rather than a decrease - of observed wealth inequality.

No. 1846
14 September 2015
Characterising the financial cycle: a multivariate and time-varying approach

Abstract

JEL Classification

E30 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→General

E40 : Macroeconomics and Monetary Economics→Money and Interest Rates→General

C54 : Mathematical and Quantitative Methods→Econometric Modeling→Quantitative Policy Modeling

Abstract

We introduce a methodology to characterise financial cycles combining a novel multivariate spectral approach to identifying common cycle frequencies across a set of indicators, and a time varying aggregation emphasising systemic developments. The methodology is applied to 13 European Union countries as well a synthetic euro area aggregate, based on a quarterly dataset spanning 1970-2013. Results suggest that credit and asset prices share cyclical similarities, which, captured by a synthetic financial cycle, outperform the credit-to-GDP gap in predicting systemic banking crises on a horizon of up to three years. Financial cycles tend to be long, particularly in upswing phases and with important dispersion across country cases. Concordance of financial and business cycles is observed only 2/3 of the time. While a similar degree of concordance for financial cycles is apparent across countries, heterogeneity is high

No. 1845
7 September 2015
A false sense of security in applying handpicked equations for stress test purposes

Abstract

JEL Classification

C11 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→Bayesian Analysis: General

C22 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models &bull Diffusion Processes

C51 : Mathematical and Quantitative Methods→Econometric Modeling→Model Construction and Estimation

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

Abstract

The purpose of this paper is to promote the use of Bayesian model averaging for the design of satellite models that financial institutions employ for stress testing. Banks employing

No. 1844
25 August 2015
Domestic and multilateral effects of capital controls in emerging markets

Abstract

JEL Classification

F32 : International Economics→International Finance→Current Account Adjustment, Short-Term Capital Movements

F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics

F42 : International Economics→Macroeconomic Aspects of International Trade and Finance→International Policy Coordination and Transmission

Abstract

Using a novel dataset on changes in capital controls and currency-based prudential measures in 17 major emerging market economies (EMEs) over the period 2001-2011, this paper provides new evidence on domestic and multilateral (or spillover) effects of capital controls before and after the global financial crisis. Our results, based on panel VARs, suggest that capital control actions do not allow countries to avoid the trade-offs of the monetary policy trilemma. Where they have a desired impact on the trilemma variables

No. 1843
24 August 2015
Debt overhang and deleveraging in the US household sector: gauging the impact on consumption

Abstract

JEL Classification

C13 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→Estimation: General

C23 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Panel Data Models, Spatio-temporal Models

C52 : Mathematical and Quantitative Methods→Econometric Modeling→Model Evaluation, Validation, and Selection

D12 : Microeconomics→Household Behavior and Family Economics→Consumer Economics: Empirical Analysis

H31 : Public Economics→Fiscal Policies and Behavior of Economic Agents→Household

Abstract

Using a novel dataset for the US states, this paper examines whether household debt and the protracted debt deleveraging help explain the dismal performance of US consumption since 2007 in the aftermath of the housing bubble. By separating the concepts of deleveraging and debt overhang - a flow and a stock effect - we find that excessive indebtedness exerted a meaningful drag on consumption over and beyond income and wealth effects. The overall impact, however, is modest - around one-sixth of the slowdown in consumption between 2000-06 and 2007-12 - and mostly driven by states with particularly large imbalances in their household sector. This might be indicative of non-linearities, whereby indebtedness begins to bite only when misalignments from sustainable debt dynamics become excessive.

No. 1842
24 August 2015
The real effects of credit constraints: evidence from discouraged borrowers in the euro area

Abstract

JEL Classification

G01 : Financial Economics→General→Financial Crises

G10 : Financial Economics→General Financial Markets→General

G30 : Financial Economics→Corporate Finance and Governance→General

G32 : Financial Economics→Corporate Finance and Governance→Financing Policy, Financial Risk and Risk Management, Capital and Ownership Structure, Value of Firms, Goodwill

Abstract

This paper uses a new survey-based data set and a model with strong theoretical under-pinnings to explain the characteristics and behaviour of discouraged borrowers in the euro area. The results show that more borrowers are discouraged when the average interest rate charged by banks in a country is higher. Higher corporate tax rates, on the other hand, lead to lower discouragement. We show that discouragement has strong negative effects on in- vestment growth (-4.7pp), employment growth (-2.7pp) and asset growth (-2.9pp) due to the lack of access to bank finance in the two years following the discouragement. Furthermore, we estimate that the majority of discouraged borrowers would be unable to get a loan if they would apply. Consistent with this low loan approval likelihood, discouraged borrowers tend to be relatively risky firms.

No. 1841
21 August 2015
Inattention to rare events

Abstract

JEL Classification

D83 : Microeconomics→Information, Knowledge, and Uncertainty→Search, Learning, Information and Knowledge, Communication, Belief

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

E60 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→General

Abstract

The world recently experienced several rare events with disastrous consequences: the global financial crisis, the European sovereign debt crisis, and the Fukushima nuclear accident. These events have in common that key decision-makers were unprepared for them, which aggravated these events. We develop a model in which agents make state-contingent plans

No. 1840
21 August 2015
Sovereign risk, interbank freezes, and aggregate fluctuations

Abstract

JEL Classification

E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects

E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy

F34 : International Economics→International Finance→International Lending and Debt Problems

H63 : Public Economics→National Budget, Deficit, and Debt→Debt, Debt Management, Sovereign Debt

Abstract

This paper studies the bank-sovereign link in a dynamic stochastic general equilibrium set-up with strategic default on public debt. Heterogeneous banks give rise to an interbank market where government bonds are used as collateral. A default penalty arises from a breakdown of interbank intermediation that induces a credit crunch. Government borrowing under limited commitment is costly ex ante as bank funding conditions tighten when the quality of collateral drops. This lowers the penalty from an interbank freeze and feeds back into default risk. The arising amplification mechanism propagates aggregate shocks to the macro-economy. The model is calibrated using Spanish data and is capable of reproducing key business cycle statistics alongside stylized facts during the European sovereign debt crisis.

No. 1839
7 August 2015
The geography of the great rebalancing in euro area bond markets during the sovereign debt crisis

Abstract

JEL Classification

F34 : International Economics→International Finance→International Lending and Debt Problems

F36 : International Economics→International Finance→Financial Aspects of Economic Integration

G15 : Financial Economics→General Financial Markets→International Financial Markets

Abstract

During the sovereign debt crisis investors rebalanced out of stressed and into non-stressed euro area countries, thereby contributing to the tensions in euro area financial markets. This paper examines the geographical pattern of this great rebalancing. Specifically, we test whether euro area and non-euro area investors adjusted their holdings of debt securities of euro area stressed and non-stressed countries dis-proportionately relative to benchmarks derived from a standard gravity model for portfolio choice. We find that non-euro area investors under-invested in stressed euro area countries, but did not over-invest in non-stressed euro area countries. As regards intra-euro area flows, we do not find evidence for a disproportionate slowdown of capital flows from non-stressed into stressed euro area countries. Instead, our results suggest that investors in stressed euro area countries disproportionately shifted capital into debt securities of non-stressed euro area countries. Finally, we find that both non-euro area investors' under-investment in stressed countries and stressed euro area investors' over-investment in non-stressed euro area countries ceased after the announcement of the ECB's OMT programme.

No. 1838
7 August 2015
Estimation of linear dynamic panel data models with time-invariant regressors

Abstract

JEL Classification

C13 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→Estimation: General

C23 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Panel Data Models, Spatio-temporal Models

F23 : International Economics→International Factor Movements and International Business→Multinational Firms, International Business

Abstract

We propose a two-stage estimation procedure to identify the effects of time-invariant regressors in a dynamic version of the Hausman-Taylor model. We first estimate the coefficients of the time-varying regressors and subsequently regress the first-stage residuals on the time-invariant regressors providing analytical standard error adjustments for the second-stage coefficients. The two-stage approach is more robust against misspecification than GMM estimators that obtain all parameter estimates simultaneously. In addition, it allows exploiting advantages of estimators relying on transformations to eliminate the unit-specific heterogeneity. We analytically demonstrate under which conditions the one-stage and two-stage GMM estimators are equivalent. Monte Carlo results highlight the advantages of the two-stage approach infinite samples. Finally, the approach is illustrated with the estimation of a dynamic gravity equation for U.S. outward foreign direct investment.

No. 1837
6 August 2015
Modeling financial sector joint tail risk in the euro area

Abstract

JEL Classification

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes

Abstract

We develop a novel high-dimensional non-Gaussian modeling framework to infer measures of conditional and joint default risk for numerous financial sector firms. The model is based on a dynamic Generalized Hyperbolic Skewed-t block-equicorrelation copula with time-varying volatility and dependence parameters that naturally accommodates asymmetries, heavy tails, as well as non-linear and time-varying default dependence. We apply a conditional law of large numbers in this setting to define joint and conditional risk measures that can be evaluated quickly and reliably. We apply the modeling framework to assess the joint risk from multiple defaults in the euro area during the 2008-2012 financial and sovereign debt crisis. We document unprecedented tail risks between 2011-2012, as well as their steep decline following subsequent policy actions.

No. 1836
6 August 2015
Assessing the financial and financing conditions of firms in Europe: the financial module in CompNet

Abstract

JEL Classification

D22 : Microeconomics→Production and Organizations→Firm Behavior: Empirical Analysis

D24 : Microeconomics→Production and Organizations→Production, Cost, Capital, Capital, Total Factor, and Multifactor Productivity, Capacity

D92 : Microeconomics→Intertemporal Choice→Intertemporal Firm Choice, Investment, Capacity, and Financing

G32 : Financial Economics→Corporate Finance and Governance→Financing Policy, Financial Risk and Risk Management, Capital and Ownership Structure, Value of Firms, Goodwill

Abstract

This paper provides an encompassing description of the various indicators compiled in the financial module of CompNet using balance sheet information of European firms. We investigate whether and to which extent the heterogeneous financial positions of firms have affected firms

No. 1835
5 August 2015
Between capture and discretion - The determinants of distressed bank treatment and expected government support

Abstract

JEL Classification

D72 : Microeconomics→Analysis of Collective Decision-Making→Political Processes: Rent-Seeking, Lobbying, Elections, Legislatures, and Voting Behavior

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

Abstract

In this paper, we analyze how sources of political influence relate to the actual regulatory treatment of distressed banks and to the expectation of bank support provided by the government. We assemble a unique dataset that links U.S. banks

No. 1834
5 August 2015
Fiscal targets. A guide to forecasters?

Abstract

JEL Classification

C54 : Mathematical and Quantitative Methods→Econometric Modeling→Quantitative Policy Modeling

H30 : Public Economics→Fiscal Policies and Behavior of Economic Agents→General

H68 : Public Economics→National Budget, Deficit, and Debt→Forecasts of Budgets, Deficits, and Debt

E61 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Policy Objectives, Policy Designs and Consistency, Policy Coordination

E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy

Abstract

Should rational agents take into consideration government policy announcements? A skilled agent (an econometrician) could set up a model to combine the following two pieces of information in order to anticipate the future course of fiscal policy in real-time: (i) the ex-ante path of policy as published/announced by the government; (ii) incoming, observed data on the actual degree of implementation of ongoing plans. We formulate and estimate empirical models for a number of EU countries (Germany, France, Italy, and Spain) to show that government (consumption) targets convey useful information about ex-post policy developments when policy changes significantly (even if past credibility is low) and when there is limited information about the implementation of plans (e.g. at the beginning of a fiscal year). In addition, our models are instrumental to unveil the current course of policy in real-time. Our approach complements a well-established branch of the literature that finds politically-motivated biases in policy targets.

No. 1833
15 July 2015
The great collapse in value added trade

Abstract

JEL Classification

F1 : International Economics→Trade

F2 : International Economics→International Factor Movements and International Business

C67 : Mathematical and Quantitative Methods→Mathematical Methods, Programming Models, Mathematical and Simulation Modeling→Input?Output Models

R15 : Urban, Rural, Regional, Real Estate, and Transportation Economics→General Regional Economics→Econometric and Input?Output Models, Other Models

Abstract

This paper studies the great collapse in value added trade using a structural decomposition analysis. We show that changes in vertical specialisation accounted for almost half of the great trade collapse, while the previous literature on gross trade has mainly focused on final expenditure, inventory adjustment and adverse credit supply conditions. The decline in international production sharing during the crisis may partially account for the observed decrease in global trade elasticities in recent years. Second, we find that the drop in the overall level of demand accounted for roughly a quarter of the decline in value added exports while just under one third was due to compositional changes in final demand. Finally, we demonstrate that the dichotomy between services and manufacturing sectors observed in gross exports during the great trade collapse is not apparent in value added trade data.

No. 1832
15 July 2015
Long-lasting consequences of the European crisis

Abstract

JEL Classification

E20 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→General

E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects

E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy

E66 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→General Outlook and Conditions

Abstract

The Great Recession and the subsequent European crisis may have long-lasting effects on aggregate demand, aggregate supply, and, hence, on macroeconomic performance over the medium and long-run. Besides the fact that financial crisis last longer and are succeeded by slower recoveries, and apart from the hysteresis effects that may operate after episodes of long-term unemployment, the combination of high (public and private) debt and low population and productivity growth may create significant constraints for monetary and fiscal policies. In this paper I develop an OLG model, one earlier used by Eggertsson and Mehrotra (2014) to rationalize the "secular stagnation hypothesis", to show how high debt, and low population and productivity growth may condition the macroeconomic performance of some European countries over the medium and long-run.

No. 1831
14 July 2015
Credit ratings and cross-border bond market spillovers
Published in: Journal of International Money and Finance, Vol 53, May 2015: pp 115-136

Abstract

JEL Classification

G15 : Financial Economics→General Financial Markets→International Financial Markets

F36 : International Economics→International Finance→Financial Aspects of Economic Integration

Abstract

This paper studies spillovers across sovereign debt markets in the wake of sovereign rating changes. We compile an extensive dataset covering all announcements by the three major agencies (Standard & Poor

No. 1830
14 July 2015
Optimal capital requirements over the business and financial cycles
ECB Lamfalussy Fellowship Programme

Abstract

JEL Classification

E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy

G01 : Financial Economics→General→Financial Crises

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

Abstract

I study economies where banks do not fully internalize the social costs of default, which distorts their lending decisions. In all these economies, a common general equilibrium effect leads to aggregate over-investment. As a result, under laissez-faire, crises are too frequent and too costly from a social point of view. In response, the regulator sets a capital requirement to trade off expected output against financial stability. The capital requirement that ensures investment efficiency depends on the state of the economy. Because of the general equilibrium effect, the more aggregate banking capital the tighter the optimal requirement. A regulation that fails to take this effect into account exacerbates economic fluctuations and allows for excessive build-up of risk in the financial sector during booms. Government guarantees amplify this mechanism and, at the peak of a boom, even a small adverse shock can trigger a banking sector collapse, followed by an excessively severe credit crunch.

No. 1829
13 July 2015
Creditor protection, judicial enforcement and credit access

Abstract

JEL Classification

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

K41 : Law and Economics→Legal Procedure, the Legal System, and Illegal Behavior→Litigation Process

Abstract

We investigate the role of the judicial system on whether or not the firms obtain the credit they applied for, by looking at the strength of the creditor protection, the strength of property rights, the time for resolving a dispute, its costs and the number of procedures the plaintiff faces. We use data about 48,590 firms from eleven countries collected via the Survey on the Access to Finance of Enterprises (European Central Bank) and data from the World Bank, the Heritage Foundation and Eurostat. The results suggest that the better the judicial enforcement system is (reduced costs, reduced time, and limited number of procedures) and the higher the creditor protection is (high overall strength of the legal system, high property rights protection), the lower the probability that the firms are credit constrained. Our results are robust to selection bias (Heckman selection) as well as different controls and different estimation techniques. More importantly, we find that these variables have considerable economic impact: the probability to obtain credit is up to 40% higher in countries with a better legal system.

No. 1828
13 July 2015
Network linkages to predict bank distress

Abstract

JEL Classification

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G33 : Financial Economics→Corporate Finance and Governance→Bankruptcy, Liquidation

C54 : Mathematical and Quantitative Methods→Econometric Modeling→Quantitative Policy Modeling

D85 : Microeconomics→Information, Knowledge, and Uncertainty→Network Formation and Analysis: Theory

Abstract

Building on the literature on systemic risk and financial contagion, the paper introduces estimated network linkages into an early-warning model to predict bank distress among European banks. We use multivariate extreme value theory to estimate equity-based tail-dependence networks, whose links proxy for the markets' view of bank interconnectedness in case of elevated financial stress. The paper finds that early warning models including estimated tail dependencies consistently outperform bank-specific benchmark models with- out networks. The results are robust to variation in model specification and also hold in relation to simpler benchmarks of contagion. Generally, this paper gives direct support for measures of interconnectedness in early-warning models, and moves toward a unified representation of cyclical and cross-sectional dimensions of systemic risk.

No. 1827
9 July 2015
Capital regulation in a macroeconomic model with three layers of default

Abstract

JEL Classification

E3 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles

E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy

G01 : Financial Economics→General→Financial Crises

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

Abstract

We develop a dynamic general equilibrium model for the positive and normative analysis of macroprudential policies. Optimizing financial intermediaries allocate their scarce net worth together with funds raised from saving households across two lending activities, mortgage and corporate lending. For all borrowers (households, firms, and banks) external financing takes the form of debt which is subject to default risk. This

No. 1826
9 July 2015
Virtual proximity and audiovisual services trade
Published in: European Economic Review, Vol. 77, pp. 82-101

Abstract

JEL Classification

F12 : International Economics→Trade→Models of Trade with Imperfect Competition and Scale Economies, Fragmentation

F15 : International Economics→Trade→Economic Integration

Z10 : Other Special Topics→Cultural Economics, Economic Sociology, Economic Anthropology→General

Abstract

Audiovisual services such as music and movies in digital formats have gained substantial importance over the last decade. This paper analyses audiovisual services in a gravity model framework. In particular, we explore the role of virtual proximity - a new proxy for cultural proximity based on bilateral hyperlinks and bilateral website visits between countries - and find that

No. 1825
8 July 2015
Uncertainty shocks, banking frictions and economic activity

Abstract

JEL Classification

E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles

E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy

Abstract

In this paper we investigate the effects of uncertainty shocks on economic activity in the euro area by using a Dynamic Stochastic General Equilibrium (DSGE) model with heterogeneous agents and a stylized banking sector. We show that frictions in credit supply amplify the effects of uncertainty shocks on economic activity. This amplification channel stems mainly from the stickiness in banking retail interest rates. This stickiness reduces the effectiveness in the transmission mechanism of monetary policy.

No. 1824
8 July 2015
Shoe-leather costs in the euro area and the foreign demand for euro banknotes

Abstract

JEL Classification

E41 : Macroeconomics and Monetary Economics→Money and Interest Rates→Demand for Money

C22 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models &bull Diffusion Processes

Abstract

We estimate the shoe-leather costs of inflation in the euro area using monetary data adjusted for holdings of euro banknotes abroad. While we find evidence of marginally negative shoe-leather costs for very low levels of the nominal interest rate, our estimates suggest that the shoe-leather costs are non-negligible even for relatively moderate levels of anticipated inflation. We conclude that, despite the increased circulation of euro banknotes abroad, in the euro area the inflation tax is still predominantly borne by domestic agents, with transfers of resources from abroad remaining small.

No. 1823
7 July 2015
Financial constraints and productivity: evidence from euro area companies

Abstract

JEL Classification

D24 : Microeconomics→Production and Organizations→Production, Cost, Capital, Capital, Total Factor, and Multifactor Productivity, Capacity

G32 : Financial Economics→Corporate Finance and Governance→Financing Policy, Financial Risk and Risk Management, Capital and Ownership Structure, Value of Firms, Goodwill

O16 : Economic Development, Technological Change, and Growth→Economic Development→Financial Markets, Saving and Capital Investment, Corporate Finance and Governance

Abstract

In this paper we consider the relation between firms

No. 1822
7 July 2015
Gender bias and credit access

Abstract

JEL Classification

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

J16 : Labor and Demographic Economics→Demographic Economics→Economics of Gender, Non-labor Discrimination

N32 : Economic History→Labor and Consumers, Demography, Education, Health, Welfare, Income, Wealth, Religion, and Philanthropy→U.S., Canada: 1913-

Z13 : Other Special Topics→Cultural Economics, Economic Sociology, Economic Anthropology→Economic Sociology, Economic Anthropology, Social and Economic Stratification

Abstract

This paper studies the causal effect of gender bias on access to bank credit. We extract an exogenous measure of gender bias from survey responses by descendants of US immigrants on questions about the role of women in society. We then use data on 6,000 small business firms from 17 countries and find that in countries with higher gender bias, female-owned firms are more frequently discouraged from applying for bank credit and more likely to rely on informal finance. At the same time, loan rejection rates and terms on granted loans do not vary between male and female firm owners. These results are not driven by credit risk differences between female- and male-owned firms or by any idiosyncrasies in the set of countries in our sample. Overall, the evidence suggests that in high-gender bias countries, female entrepreneurs are more likely to opt out of the loan application process, even though banks do not appear to discriminate against females that apply for credit.

No. 1821
26 June 2015
Financing constraints, employment, and labor compensation: evidence from the subprime mortgage crisis

Abstract

JEL Classification

D92 : Microeconomics→Intertemporal Choice→Intertemporal Firm Choice, Investment, Capacity, and Financing

G01 : Financial Economics→General→Financial Crises

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

J23 : Labor and Demographic Economics→Demand and Supply of Labor→Labor Demand

J31 : Labor and Demographic Economics→Wages, Compensation, and Labor Costs→Wage Level and Structure, Wage Differentials

Abstract

This paper identifies the effect of financing constraints on firms

No. 1820
26 June 2015
Sovereign stress, unconventional monetary policy, and SME access to finance

Abstract

JEL Classification

D22 : Microeconomics→Production and Organizations→Firm Behavior: Empirical Analysis

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

H63 : Public Economics→National Budget, Deficit, and Debt→Debt, Debt Management, Sovereign Debt

Abstract

We investigate the effect of sovereign stress and of unconventional monetary policy on small firms

No. 1819
26 June 2015
Euro area business cycles in turbulent times: convergence or decoupling?
Published in: Applied Economics, Vol 47 (34-35): pp. 3791-3815

Abstract

JEL Classification

C51 : Mathematical and Quantitative Methods→Econometric Modeling→Model Construction and Estimation

E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles

O52 : Economic Development, Technological Change, and Growth→Economywide Country Studies→Europe

Abstract

We study the business cycle properties of the four largest euro area economies in the wake of the recent recession episodes. The analysis is based on the factors estimated from a multi-country and multi-sector data-rich environment. We measure alikeness of business cycles by studying the synchronization of up and down phases, the convergence properties of country fluctuations towards the euro area cycles and the contribution of the euro area factor to national GDP volatilities. While the economic fluctuations of the four euro area member states were similar before the global financial turmoil, we gather compelling evidence of an asymmetric behaviour of Spanish fluctuations relative to the euro area one.

No. 1818
25 June 2015
An alternative view of exchange market pressure episodes in emerging Europe: an analysis using Extreme Value Theory (EVT)

Abstract

JEL Classification

C10 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→General

E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy

F37 : International Economics→International Finance→International Finance Forecasting and Simulation: Models and Applications

F32 : International Economics→International Finance→Current Account Adjustment, Short-Term Capital Movements

G01 : Financial Economics→General→Financial Crises

Abstract

Using extreme value theory tools, we demonstrate that the distributions of the exchange market pressure (EMP) series for most of twelve emerging Europe countries have heavy tails, and disregarding their tail properties may lead to substantial underestimation of the probability of tail events. Using an extreme-value-based EMP crisis definition leads to a different set of crisis determinants compared to a definition based on standard errors. The probability of extreme EMP periods in our sample is affected by global risk aversion, regional contagion, the level of international reserves, foreign direct investment, history of past crises and accumulated domestic credit and real exchange rate related imbalances.

No. 1817
25 June 2015
Wealth effects on consumption across the wealth distribution: empirical evidence

Abstract

JEL Classification

D12 : Microeconomics→Household Behavior and Family Economics→Consumer Economics: Empirical Analysis

E21 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Consumption, Saving, Wealth

C21 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Cross-Sectional Models, Spatial Models, Treatment Effect Models, Quantile Regressions

Abstract

This paper studies the heterogeneity of the marginal propensity to consume out of wealth using French household surveys. We find decreasing marginal propensity to consume out of wealth across the wealth distribution for all net wealth components. The marginal propensity to consume out of financial assets tends to be higher compared with the effect of housing assets, except in the top of the wealth distribution. Consumption is less sensitive to the value of the main residence than to other housing assets. We also investigate the heterogeneity arising from indebtedness and from the role of housing assets as collateral.

No. 1816
19 June 2015
Conservatism and liquidity traps

Abstract

JEL Classification

E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy

E61 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Policy Objectives, Policy Designs and Consistency, Policy Coordination

Abstract

In an economy with an occasionally binding zero lower bound (ZLB) constraint, the anticipation of future ZLB episodes creates a trade-off for discretionary central banks between inflation and output stabilization. As a consequence, inflation systematically falls below target even when the policy rate is above zero. Appointing Rogoff

No. 1815
19 June 2015
Spillovers and euroscepticism

Abstract

JEL Classification

D72 : Microeconomics→Analysis of Collective Decision-Making→Political Processes: Rent-Seeking, Lobbying, Elections, Legislatures, and Voting Behavior

E02 : Macroeconomics and Monetary Economics→General→Institutions and the Macroeconomy

F15 : International Economics→Trade→Economic Integration

H63 : Public Economics→National Budget, Deficit, and Debt→Debt, Debt Management, Sovereign Debt

J64 : Labor and Demographic Economics→Mobility, Unemployment, Vacancies, and Immigrant Workers→Unemployment: Models, Duration, Incidence, and Job Search

Abstract

During the crisis, support for the EU has declined noticeably in many European Union member states. While previous research on European public opinion has mainly focused on the impact of domestic country- and individual-level factors on public attitudes towards the EU, this paper argues that developments in other EU member states can also have a significant impact on domestic euroscepticism. Specifically, deteriorating economic and fiscal conditions in other member states can lead to concerns in domestic publics about possible negative spillovers on the domestic economy and the ability of the EU to deliver positive economic outcomes. This in turn may lead to rising euroscepticism at the domestic level. The analysis of a panel data set for the EU as a whole and the euro area countries lends support to these arguments by showing that higher unemployment rates and government debt levels in other European countries are systematically related to lower levels of trust in the EU domestically.

No. 1814
18 June 2015
VAR for VaR: measuring tail dependence using multivariate regression quantiles
Published in: Journal of Econometrics, Vol 187, Iss. 1: pp 169-188

Abstract

JEL Classification

C13 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→Estimation: General

C14 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→Semiparametric and Nonparametric Methods: General

C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes

Abstract

This paper proposes methods for estimation and inference in multivariate, multi-quantile models. The theory can simultaneously accommodate models with multiple random variables, multiple confidence levels, and multiple lags of the associated quantiles. The proposed framework can be conveniently thought of as a vector autoregressive (VAR) extension to quantile models. We estimate a simple version of the model using market equity returns data to analyse spillovers in the values at risk (VaR) between a market index and financial institutions. We construct impulse-response functions for the quantiles of a sample of 230 financial institutions around the world and study how financial institution-specific and system-wide shocks are absorbed by the system. We show how the long-run risk of the largest and most leveraged financial institutions is very sensitive to market wide shocks in situations of financial distress, suggesting that our methodology can prove a valuable addition to the traditional toolkit of policy makers and supervisors.

No. 1813
18 June 2015
A new identification of fiscal shocks based on the information flow

Abstract

JEL Classification

C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes

E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles

E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy

Abstract

Can discretionary increases in government spending stimulate the economy? We answer this question by taking into account both the information flow on fiscal measures and the role played by information frictions. Using a novel set of empirical proxies for fiscal news and agents

No. 1812
17 June 2015
The relationship between structural and cyclical features of the EU financial sector

Abstract

JEL Classification

E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy

E61 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Policy Objectives, Policy Designs and Consistency, Policy Coordination

G18 : Financial Economics→General Financial Markets→Government Policy and Regulation

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

Abstract

In this study, we explore the relationship between certain structural features of the banking sectors in EU Member States and the performance of the respective banking sectors over the financial cycle. Using the financial cycle indicator developed by Stremmel (2015), we estimate the impact of the structural features of the banking sector on the amplitude of the financial cycle. Our results suggest that the concentration of the banking sector, the share of foreign banks, the size and stability of financial institutions, the share of foreign currency loans and financial inter-linkages contribute to the amplitude and hence the variability of financial cycles. This study provides important insights into the appropriate design of various structural and cyclical policy instruments as well.

No. 1811
17 June 2015
Capturing the financial cycle in Europe

Abstract

JEL Classification

E30 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→General

E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy

E61 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Policy Objectives, Policy Designs and Consistency, Policy Coordination

G18 : Financial Economics→General Financial Markets→Government Policy and Regulation

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

Abstract

In this study, we approximate the financial cycle in Europe by combining potential common and relevant financial indicators. We consider different credit aggregates and asset prices but also incorporate banking sector indicators for 11 European countries. We develop seven different synthetic financial cycle measures in order to best capture the characteristics of the financial cycle. We assess the various financial cycle measures using both graphical and statistical investigation techniques. The best fitted financial cycle measure includes the following financial ingredients: credit to GDP ratio, credit growth and house prices to income ratio. This study also highlights potential applications for the financial cycle measure in the macro-prudential policy context.

No. 1810
16 June 2015
Banking and currency crises: differential diagnostics for developed countries

Abstract

JEL Classification

C14 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→Semiparametric and Nonparametric Methods: General

E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy

F37 : International Economics→International Finance→International Finance Forecasting and Simulation: Models and Applications

F47 : International Economics→Macroeconomic Aspects of International Trade and Finance→Forecasting and Simulation: Models and Applications

G01 : Financial Economics→General→Financial Crises

Abstract

We identify a set of

No. 1809
16 June 2015
Do banks’ overnight borrowing rates lead their CDS Price? Evidence from the Eurosystem
Published in: Journal of Financial Intermediation (forthcoming)

Abstract

JEL Classification

G01 : Financial Economics→General→Financial Crises

G14 : Financial Economics→General Financial Markets→Information and Market Efficiency, Event Studies, Insider Trading

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

Abstract

We construct a measure of a banks relative creditworthiness from Eurosystem’s proprietary overnight loan data: the bank’s “average overnight borrowing rate spread, relative to overnight rate index” (AOR). We investigate the dynamic relationship between the AOR and the credit default swap spread (CDS) of 60 banks in years 2008 - 2013. We find that in daily differences the AOR leads the CDS at least by one day. The lead is concentrated on days of market stress for banks which mainly borrow from “relationship” lender banks. Such borrower banks are typically smaller, have weak ratings, and likely reside in crisis countries. In longer differences, up to several weeks, both the AOR and the CDS have some predictive power over one another. In sum, overnight borrowing rates may provide additional early-warning indications on certain banks’ deteriorating financial health over and above bank CDS spreads.

No. 1808
15 June 2015
Has the publication of minutes helped markets to predict the monetary policy decisions of the Bank of England's MPC?
Published in: European Journal of Political Economy, Vol 39, September 2015: pp 222-234 as "Have minutes helped markets to predict the MPC's monetary policy decisions"

Abstract

JEL Classification

C34 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Truncated and Censored Models, Switching Regression Models

D78 : Microeconomics→Analysis of Collective Decision-Making→Positive Analysis of Policy Formulation and Implementation

E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

Abstract

This paper examines whether the minutes of the Bank of England

No. 1807
15 June 2015
Does uncertainty affect participation in the European Central Bank's Survey of Professional Forecasters?

Abstract

JEL Classification

D81 : Microeconomics→Information, Knowledge, and Uncertainty→Criteria for Decision-Making under Risk and Uncertainty

D84 : Microeconomics→Information, Knowledge, and Uncertainty→Expectations, Speculations

E66 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→General Outlook and Conditions

Abstract

This paper explores how changes in macroeconomic uncertainty have affected the decision to participate in the European Central Bank

No. 1806
12 June 2015
Will the true labor share stand up?

Abstract

JEL Classification

C82 : Mathematical and Quantitative Methods→Data Collection and Data Estimation Methodology, Computer Programs→Methodology for Collecting, Estimating, and Organizing Macroeconomic Data, Data Access

E25 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Aggregate Factor Income Distribution

E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles

Abstract

We document the consequences of ambiguity in the empirical definition of the macroeconomic labor share. Depending on its definition, the properties of short-run fluctuations, medium-run swings, and long-run stochastic trends of the labor share may vary substantially. Based on a range of historical US time series, we carry out a systematic exploration of discrepancies between the alternative labor share definitions in terms of the observed stochastic trends, shares of short-, medium- and long-run variation in total volatility of the series, degree of persistence, mean-reversion properties, and susceptibility to structural breaks. We conclude that while short-run properties of the labor shares (represented by cyclical variation below 8 years) are relatively consistent across all definitions, their medium-run swings (8-50 years) and long-run trends ( 50 years) diverge substantially. As important applications, we document the implications of our findings for growth accounting, the identification of short-run responses of the labor share to technology shocks and for estimating inflation.

No. 1805
12 June 2015
Credit market disequilibrium in Greece (2003-2011) - a Bayesian approach

Abstract

JEL Classification

D50 : Microeconomics→General Equilibrium and Disequilibrium→General

E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy

E42 : Macroeconomics and Monetary Economics→Money and Interest Rates→Monetary Systems, Standards, Regimes, Government and the Monetary System, Payment Systems

C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

P00 : Economic Systems→General→General

Abstract

Motivated by the linkage between credit and growth in the Greek economy, and the deceleration of credit since the financial crisis, this paper studies the evolution of credit demand and supply in Greece. A disequilibrium model of demand and supply is estimated spanning the period 2003M1-2011M3. The adopted specification allows for stochastic shocks on both supply and demand. A Bayesian estimation methodology with data augmentation for the latent variables is used. The analysis is carried out separately for each type of loan (short- and long-term business loans, consumer loans and mortgages) enabling the comparative study of the credit rationing and supply constraint effects among loan categories. The results indicate that, for all loan categories, excess demand characterized the boom period. After the intensification of the debt crisis, evidence is provided for the existence of excess demand due to binding constraints on supply. However, demand for short-term business loans has slowed down more than supply, reflecting businesses

No. 1804
11 June 2015
Bank bailouts and competition - Did TARP distort competition among sound banks?

Abstract

JEL Classification

C30 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→General

C78 : Mathematical and Quantitative Methods→Game Theory and Bargaining Theory→Bargaining Theory, Matching Theory

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

L51 : Industrial Organization→Regulation and Industrial Policy→Economics of Regulation

Abstract

This study investigates if the Troubled Asset Relief Program (TARP) distorted price competition in U.S. banking. Political indicators reveal bailout expectations after 2009, manifested as beliefs about the predicted probability of receiving equity support relative to failing during the TARP disbursement period. In addition, the TARP affected the competitive conduct of unsupported banks after the program stopped in the fourth quarter of 2009. The risk premium required by depositors was lower, and loan rates were higher for banks with higher bailout expectations. The interest margins of unsupported banks increased in the immediate aftermath of the TARP disbursement but not after 2010. These effects are economically very small though. No effects emerged for loan or deposit growth, which suggests that protected banks did not increase their market shares at the expense of less protected banks.

No. 1803
11 June 2015
The information content of money and credit for US activity

Abstract

JEL Classification

E41 : Macroeconomics and Monetary Economics→Money and Interest Rates→Demand for Money

E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

Abstract

We analyse the forecasting power of different monetary aggregates and credit variables for US GDP. Special attention is paid to the influence of the recent financial market crisis. For that purpose, in the first step we use a three-variable single-equation framework with real GDP, an interest rate spread and a monetary or credit variable, in forecasting horizons of one to eight quarters. This first stage thus serves to pre-select the variables with the highest forecasting content. In a second step, we use the selected monetary and credit variables within different VAR models, and compare their forecasting properties against a benchmark VAR model with GDP and the term spread. Our findings suggest that narrow monetary aggregates, as well as different credit variables, comprise useful predictive information for economic dynamics beyond that contained in the term spread. However, this finding only holds true in a sample that includes the most recent financial crisis. Looking forward, an open question is whether this change in the relationship between money, credit, the term spread and economic activity has been the result of a permanent structural break or whether we might go back to the previous relationships.

No. 1802
10 June 2015
What has driven inflation dynamics in the Euro area, the United Kingdom and the United States

Abstract

JEL Classification

C22 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models &bull Diffusion Processes

C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes

E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation

E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy

Abstract

This paper studies factors behind inflation dynamics in the euro area, the UK and the US. It introduces a factor-augmented vector autoregression (FAVAR) framework with sign restrictions to study the effects of fundamental macroeconomic shocks on inflation in the three economies. The FAVAR model framework is also applied to study the effects on inflation subcomponents in the more recent past. The FAVAR models suggest that headline inflation in the three economies has reacted in a relatively similar fashion to macroeconomic shocks over the last four decades, with demand shocks causing the most persistent effects on inflation. According to the subcomponent FAVAR models, the responses of inflation subcomponents to macroeconomic shocks have also been relatively similar in the three economies. However, there is evidence of a stronger foreign exchange channel of monetary policy transmission as well as supply shocks in the responses of non-energy tradable goods prices in the UK than the other two economies, while the reaction of services inflation has been more muted to all types of shocks in the euro area than the other two economies.

No. 1801
9 June 2015
The exchange rate, asymmetric shocks and asymmetric distributions

Abstract

JEL Classification

F14 : International Economics→Trade→Empirical Studies of Trade

F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics

F31 : International Economics→International Finance→Foreign Exchange

Abstract

The elasticity of exports to exchange rate fluctuations has been the subject of a large literature without a clear consensus emerging. Using a novel sector level dataset based on firm level information, we show that exchange rate elasticities double in size when the country and sector specific firm productivity distribution is taken into account in empirical estimates. In addition, exports appear to be sensitive to appreciation episodes, but rather unaffected by depreciations. Finally, only rather large changes in the exchange rate appear to matter.

No. 1800
9 June 2015
Unraveling the skill premium

Abstract

JEL Classification

J01 : Labor and Demographic Economics→General→Labor Economics: General

J31 : Labor and Demographic Economics→Wages, Compensation, and Labor Costs→Wage Level and Structure, Wage Differentials

O4 : Economic Development, Technological Change, and Growth→Economic Growth and Aggregate Productivity

Abstract

For the US the supply and wages of skilled labor relative to those of unskilled labor have grown over the postwar period. The literature has tended to explain this through

No. 1799
8 June 2015
Financial exposure to the euro area before and after the crisis: home bias and institutions at home

Abstract

JEL Classification

E2 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy

F3 : International Economics→International Finance

G11 : Financial Economics→General Financial Markets→Portfolio Choice, Investment Decisions

G15 : Financial Economics→General Financial Markets→International Financial Markets

Abstract

This paper investigates whether global investors are over or under exposed to- wards the euro area and the role of home bias and institutions at home in shaping this exposure. According to a simple benchmark from standard portfolio theory, euro area investors - in particular those from euro area low-rating economies - are overexposed to euro area securities. Instead, investors outside the EU are underexposed to euro area securities in their total portfolio, proportionally to their degree of home bias, but not in their foreign portfolio. Nevertheless, once we account for gravity factors, the largest foreign investors overweigh euro area securities, especially debt of euro area high rating economies. Crucially, this overexposure was resilient to the euro area crisis. Moreover, we show that institutions at home are important to explain exposure to euro area securities. In particular, the higher the standards of governance at home, the greater the exposure to the euro area debt.

No. 1798
8 June 2015
Capital inflows and euro area long-term interest rates
Published in: Journal of International Money and Finance, Elsevier, Vol 54(C): pp 186-204

Abstract

JEL Classification

E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects

E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy

F21 : International Economics→International Factor Movements and International Business→International Investment, Long-Term Capital Movements

F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics

G15 : Financial Economics→General Financial Markets→International Financial Markets

Abstract

Capital flows into the euro area were particularly large in the mid-2000s and the share of foreign holdings of euro area securities increased substantially between the introduction of the euro and the outbreak of the global financial crisis. We show that the increase in foreign holdings of euro area bonds in this period is associated with a reduction of euro area long-term interest rates by about 1.55 percentage points, which is in line with previous studies that document a similar impact of foreign bond buying on US Treasury yields. These results are relevant both from a euro area and a global perspective, as they show that the phenomenon of lower long-term interest rates due to foreign bond buying is not exclusive to the United States and foreign inflows into euro area debt securities may have added to increased risk appetite and hunt-for-yield at the global level.

No. 1797
28 May 2015
Bank bias in Europe: effects on systemic risk and growth

Abstract

JEL Classification

G1 : Financial Economics→General Financial Markets

G2 : Financial Economics→Financial Institutions and Services

Abstract

Europe

No. 1796
28 May 2015
Real estate markets and macroprudential policy in Europe

Abstract

JEL Classification

G01 : Financial Economics→General→Financial Crises

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

R39 : Urban, Rural, Regional, Real Estate, and Transportation Economics→Real Estate Markets, Spatial Production Analysis, and Firm Location→Other

G17 : Financial Economics→General Financial Markets→Financial Forecasting and Simulation

E5 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit

Abstract

Boom-bust cycles in real estate markets have been major factors in systemic financial crises and therefore need to be at the forefront of macroprudential policy. The geographically differentiated nature of real estate market fluctuations implies that these policies need to be granular across regions and countries. Before the financial crisis that started in 2007 property markets were overvalued in a range of European countries, but much like in other constituencies active policies addressing this were an exception. An increasing number of studies suggest that borrower-based regulatory policies, such as reductions in loan-to-value or debt-to-income limits, can be effective in leaning against real estate booms. But many of the new macroprudential policy authorities in Europe do not have clear powers to determine them. Moreover, the cross-border spillovers they may give rise to suggest the establishment of a well-defined macroprudential coordination mechanism for the single European market.

No. 1795
27 May 2015
Lack of confidence, the zero lower bound, and the virtue of fiscal rules

Abstract

JEL Classification

E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy

E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy

Abstract

In the presence of the zero lower bound, standard business cycle models with a Taylor-type monetary policy rule are prone to equilibrium multiplicity. A drop in confidence can drive the economy into a liquidity trap without any change in fundamentals. Using a prototypical sticky-price model, I show that Ricardian fiscal spending rules that prevent real marginal costs from declining in the face of a confidence shock insulate the economy from such expectations-driven liquidity traps.

No. 1794
22 May 2015
Granger causality and regime inference in Bayesian Markov-Switching VARs

Abstract

JEL Classification

C11 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→Bayesian Analysis: General

C12 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→Hypothesis Testing: General

C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes

C53 : Mathematical and Quantitative Methods→Econometric Modeling→Forecasting and Prediction Methods, Simulation Methods

E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles

Abstract

We derive restrictions for Granger noncausality in Markov-switching vector autoregressive models and also show under which conditions a variable does not affect the forecast of the hidden Markov process. Based on Bayesian approach to evaluating the hypotheses, the computational tools for posterior inference include a novel block Metropolis-Hastings sampling algorithm for the estimation of the restricted models. We analyze a system of monthly US data on money and income. The test results in MS-VARs contradict those in linear VARs: the money aggregate M1 is useful for forecasting income and for predicting the next period

No. 1793
22 May 2015
Collateral damage? Micro-simulation of transaction cost shocks on the value of central bank collateral

Abstract

JEL Classification

C15 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→Statistical Simulation Methods: General

E59 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Other

G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates

Abstract

Transaction cost shocks in financial markets are known to affect asset prices. This paper analyses how changes in transaction costs may affect the value of assets that banks use to collateralise borrowings in monetary policy operations. Based on a simple asset pricing model and employing a dataset of hypothetical Eurosystem collateral positions, we simulate and quantify the resulting change in collateral value pledged by counterparties to the Eurosystem, resulting from a transaction cost shock. A 10 basis point increase in transaction costs entails a direct -0.30% decrease of collateral value and a -0.07% decrease when adjusted for the expected reduction in the number of trades of each asset. We conclude that banks will on average suffer small collateral losses while selected institutions could face a considerably larger collateral decrease.

No. 1792
20 May 2015
The risk management approach to monetary policy, nonlinearity and aggressiveness: the case of the US Fed

Abstract

JEL Classification

C24 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Truncated and Censored Models, Switching Regression Models

C51 : Mathematical and Quantitative Methods→Econometric Modeling→Model Construction and Estimation

E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy

Abstract

We estimate regime switching models where the strength of the response of monetary policy to macroeconomic conditions depends on the level of risk associated with the inflation outlook and risk in financial markets. Using quarterly data for the Greenspan period we find that: i) risk in the inflation outlook and volatility in financial markets are a powerful driver of monetary policy regime changes in the U.S.; ii) the response of the US Fed to the inflation outlook is invariant across policy regimes; iii) however, in periods of high economic risk, monetary policy tends to respond more aggressively to the output gap and the degree of inertia tends to be lower than in normal circumstances; and iv) the US Fed is estimated to have responded aggressively to the output gap in the late 1980s and begging of the 1990s, and in the late 1990s and early 2000s.

No. 1791
19 May 2015
Interest rates, money, and banks in an estimated euro area model
Published in: Journal of Banking & Finance, Vol 55, June 2015: pp 281-294

Abstract

JEL Classification

C54 : Mathematical and Quantitative Methods→Econometric Modeling→Quantitative Policy Modeling

E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy

E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles

Abstract

This paper examines monetary transmission and macroeconomic shocks in a medium scale macroeconomic model with costly banking estimated for euro area data. In addition to data on measures of real activity and prices, we include data on bank loans, loan rates, and reserves for the estimation of the model with Bayesian techniques. We find that loans and holdings of reserves affect banking costs to a small but significant extent. Furthermore, shocks to reserve holdings are found to contribute more to variations in the policy rate, inflation and output than shocks to the feedback rule for the policy rate. Hence, holdings of central bank money, which is typically neglected in the literature, plays a substantial role for macroeconomics dynamics. The analysis further shows that exogenous shifts in banking costs hardly play a role for fluctuations in real activity and prices, even during the recent financial crisis.

No. 1790
19 May 2015
Household saving behaviour and credit constraints in the euro area

Abstract

JEL Classification

C8 : Mathematical and Quantitative Methods→Data Collection and Data Estimation Methodology, Computer Programs

D12 : Microeconomics→Household Behavior and Family Economics→Consumer Economics: Empirical Analysis

D14 : Microeconomics→Household Behavior and Family Economics→Household Saving; Personal Finance

D91 : Microeconomics→Intertemporal Choice→Intertemporal Household Choice, Life Cycle Models and Saving

Abstract

We study the role of household saving behaviour, of individual motives for saving and that of perceived liquidity constraints in 15 Euro Area countries. The empirical analysis is based on the Household Finance and Consumption Survey, a new harmonized data set collecting detailed information on wealth holdings, consumption and income at the household level. Since the data is from 2010-2011, strong conclusions as regards the present are difficult to draw. This is because the crisis may have affected the data, especially in countries that were severely hit. Nevertheless we find evidence of some degree of homogeneity across countries with respect to saving preferences and the relative importance of different motives for saving. In addition, credit constraints are more heterogeneous across geographic regions and perceived to be binding for specific groups of respondents. Households living in Mediterranean countries report to be more subject to binding liquidity constraints than households living in Continental Europe. Household characteristics and institutional macroeconomic variables are significant and economically important determinants of household saving preferences and credit constraints.

No. 1789
4 May 2015
Exploring price and non-price determinants of trade flows in the largest euro-area countries

Abstract

JEL Classification

F14 : International Economics→Trade→Empirical Studies of Trade

F62 : International Economics→Economic Impacts of Globalization→Macroeconomic Impacts

Abstract

Since the mid-2000s price-competitiveness indicators for some euro-area countries have been providing conflicting signals. Against a stability of the producer price (PPI)-based measure, the manufacturing unit labour cost (ULCM)-deflated indicator points to a major competitiveness loss in Italy; we argue that the discrepancy mostly reflects a divergence of ULCM and PPI trends in competitor countries. Owing to the fading representativeness of labour on overall costs, price-based indicators appear to be more appropriate than those based on ULCMs to assess external competitiveness. In Italy ULC-based indicators play a less relevant role relative to price-deflated measures in explaining exports; the opposite holds true for Germany and France, whereas in Spain exports are insensitive to prices. Non-price competitiveness proves important in explaining Italian, German and, in particular, Spanish exports. Imports react to price-competitiveness dynamics only in Italy; considering the participation in global value chains is useful to correctly identify import sensitivity to domestic and foreign demand.

No. 1788
4 May 2015
Assessing European firms' exports and productivity distributions: the CompNet trade module

Abstract

JEL Classification

F10 : International Economics→Trade→General

F14 : International Economics→Trade→Empirical Studies of Trade

Abstract

This paper provides a new cross-country evaluation of competitiveness, focusing on the linkages between productivity and export performance among European economies. We use the information compiled in the Trade module of CompNet to establish new stylized facts regarding the joint distributions of the firm-level exports performance and productivity in a panel of 15 countries, 23 manufacturing sectors during the 2000

No. 1787
29 April 2015
"Made in China" - How does it affect our understanding of global market shares?

Abstract

JEL Classification

C43 : Mathematical and Quantitative Methods→Econometric and Statistical Methods: Special Topics→Index Numbers and Aggregation

F12 : International Economics→Trade→Models of Trade with Imperfect Competition and Scale Economies, Fragmentation

F15 : International Economics→Trade→Economic Integration

L15 : Industrial Organization→Market Structure, Firm Strategy, and Market Performance→Information and Product Quality, Standardization and Compatibility

O47 : Economic Development, Technological Change, and Growth→Economic Growth and Aggregate Productivity→Measurement of Economic Growth, Aggregate Productivity, Cross-Country Output Convergence

Abstract

We propose a comprehensive decomposition of changes in a country

No. 1786
29 April 2015
Optimal supervisory architecture and financial integration in a banking union

Abstract

JEL Classification

D53 : Microeconomics→General Equilibrium and Disequilibrium→Financial Markets

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

G33 : Financial Economics→Corporate Finance and Governance→Bankruptcy, Liquidation

G38 : Financial Economics→Corporate Finance and Governance→Government Policy and Regulation

L51 : Industrial Organization→Regulation and Industrial Policy→Economics of Regulation

Abstract

Both in the United States and in the Euro area, bank supervision is the joint responsibility of local and central/federal supervisors. I study how such a system can optimally balance the lower inspection costs of local supervisors with the ability of the central level to internalize cross-border or interstate externalities. The model predicts that centralised supervision endogenously increases market integration and cross-border externalities, further strengthening the need for centralised supervision. This complementarity implies that, for some parameterizations of the model, the economy can be trapped in a local supervision equilibrium with low supervision and integration. In such a case, the forward-looking introduction of a centralized supervisory architecture achieves a superior equilibrium.

No. 1785
27 April 2015
A measure of redenomination risk

Abstract

JEL Classification

C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes

F36 : International Economics→International Finance→Financial Aspects of Economic Integration

G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates

G15 : Financial Economics→General Financial Markets→International Financial Markets

Abstract

Euro redenomination risk is the risk that a euro asset will be redenominated into a devalued legacy currency. We propose a time-varying, country-specific market perception of intra-euro area redenomination risk measure, defined as the quanto CDS of a member country relative to the quanto CDS of a benchmark member country. Focusing on Italy, Spain and France and using Germany as benchmark, we show that the redenomination risk shocks, defined as the unexplained component of the market perception of redenomination risk orthogonal to exchange rate, global, regional and liquidity risks, significantly affect sovereign yield spreads, with Italy and Spain being the countries most adversely affected, followed by France. Finally, foreign redenomination risk shocks spill over and above local redenomination risk shocks, corroborating the fact that this risk is systemic.

No. 1784
27 April 2015
Policy mandates for macro-prudential and monetary policies in a new Keynesian framework

Abstract

JEL Classification

E30 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→General

E50 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→General

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

Abstract

In the aftermath of the financial crisis, the role of monetary policy and macro-prudential regulation in promoting financial stability is under discussion. The old debate concerning whether monetary policy should respond to credit and asset price bubbles was revived, whereas macro-prudential regulation is being assessed as an alternative macroeconomic tool to deal with financial imbalances. The paper explores both sides of the debate in a New Keynesian framework with financial frictions by comparing the welfare and stabilisation impacts of distinct policy regimes. First, we investigate whether there is a welfare benefit from monetary policy leaning against financial instability. We show that monetary policy rules of this type perform better than conventional monetary rules. Second, by introducing macro-prudential regulation in the model, results from optimal policy analysis suggest also that there are welfare gains, even in the case in which monetary and macro-prudential authorities are independent and react to their own policy goal.

No. 1783
23 April 2015
Monetary and macroprudential policy with foreign currency loans

Abstract

JEL Classification

E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles

E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

Abstract

In a number of countries a substantial proportion of mortgage loans is denominated in foreign currency. In this paper we demonstrate how their presence affects economic policy and agents' welfare. To this end we construct a small open economy model with housing loans denominated in domestic or foreign currency. The model is calibrated for Poland - a typical small open economy with a large share of foreign currency loans (FCL). We show that FCLs negatively affect the transmission of monetary policy. In contrast, their impact on the effectiveness of macroprudential policy is much weaker but positive. We also demonstrate that FCLs increase welfare when domestic interest rate shocks prevail and decrease it when risk premium (exchange rate) shocks dominate. Under a realistic calibration of the stochastic environment FCLs are welfare reducing. Finally, we show that regulatory policies that correct the share of FCLs may cause a short term slowdown.

No. 1782
22 April 2015
The impact of fiscal policy announcements by the Italian government on the sovereign spread: a comparative analysis
Published in: European Journal of Political Economy, Vol 39, September 2015: pp 288-304

Abstract

JEL Classification

E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects

E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy

G01 : Financial Economics→General→Financial Crises

G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates

Abstract

This paper attempts to evaluate the impact of fiscal policy announcements by the Italian government on the long-term sovereign bond spread of Italy relative to Germany. After collecting data on relevant fiscal policy announcements, we perform an econometric comparative analysis between the three administrations that followed one another during the period 2009-2013. The results indicate that only fiscal policy announcements made by members of Monti's cabinet had a significant impact on the Italian spread. We argue that these findings may be partly explained by a credibility gap between Monti's technocratic administration and Berlusconi's and Letta's governments.

No. 1781
22 April 2015
The determinants of sovereign bond yield spreads in the EMU

Abstract

JEL Classification

C23 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Panel Data Models, Spatio-temporal Models

E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy

H50 : Public Economics→National Government Expenditures and Related Policies→General

Abstract

We use a panel of euro area countries to assess the determinants of long-term sovereign bond yield spreads over the period 1999.01-2010.12. We find that, on top of the fundamentals themselves, changes in the sensitivity of bond prices to fundamentals are also necessary to explain yields over the crisis period. We also find that the menu of macro and fiscal risks priced by markets has been significantly enriched since March 2009, including international financial risk and liquidity risk. Finally, we find that sovereign credit ratings are statistically significant in explaining spreads, yet compared to macro- and fiscal fundamentals their role is limited.

No. 1780
8 April 2015
Do financial reforms help stabilize inequality?

Abstract

JEL Classification

C01 : Mathematical and Quantitative Methods→General→Econometrics

C12 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→Hypothesis Testing: General

D63 : Microeconomics→Welfare Economics→Equity, Justice, Inequality, and Other Normative Criteria and Measurement

G15 : Financial Economics→General Financial Markets→International Financial Markets

Abstract

We explore the relationship between financial reforms and income inequality using a panel of 29 countries over 1975-2005. We extend panel unit root tests to allow for the presence of some financial-reform covariates and further suggest an associated but novel, semi-parametric approach. Results demonstrate that although both gross and net Gini indices follow a unit root process, this picture can change when financial reform indices are accounted for. In particular, whilst gross Gini coefficients are generally not stabilized by financial reforms, net measures are (more likely to be). Thus financial reforms enacted in the presence of a strong safety net would seem preferable.

No. 1779
8 April 2015
Commercial bank failures during the Great Recession: the real (estate) story

Abstract

JEL Classification

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

Abstract

The primary driver of commercial bank failures during the Great Recession was exposure to the real estate sector, not aggregate funding strains. The main \toxic" exposure was credit to non-household real estate borrowers, not traditional home mortgages or agency-issued MBS. Private-label MBS contributed to the failure of large banks only. Failed banks skewed their portfolios towards product categories that performed poorly on aggregate, and within each category invested in assets of lower quality than survivor banks did. They expanded more rapidly into real estate during the pre-crisis period, but rapid growth alone cannot explain differences in asset performance.

No. 1778
7 April 2015
European firm adjustment during times of economic crisis

Abstract

JEL Classification

J30 : Labor and Demographic Economics→Wages, Compensation, and Labor Costs→General

J32 : Labor and Demographic Economics→Wages, Compensation, and Labor Costs→Nonwage Labor Costs and Benefits, Retirement Plans, Private Pensions

J33 : Labor and Demographic Economics→Wages, Compensation, and Labor Costs→Compensation Packages, Payment Methods

J51 : Labor and Demographic Economics→Labor?Management Relations, Trade Unions, and Collective Bargaining→Trade Unions: Objectives, Structure, and Effects

Abstract

This paper exploits a unique cross-country, firm-level survey to study the responses of European firms to the sharp demand and credit contraction triggered by the global Great Recession of 2009. The analysis reveals that cost reduction

No. 1777
7 April 2015
Exports and domestic demand pressure: a dynamic panel data model for the euro area countries

Abstract

JEL Classification

C22 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models &bull Diffusion Processes

C50 : Mathematical and Quantitative Methods→Econometric Modeling→General

F10 : International Economics→Trade→General

Abstract

The paper investigates the link between domestic demand pressure and exports by considering an error correction dynamic panel model for eleven euro area countries over the last two decades. The results suggest that there is a statistically significant substitution effect between domestic and foreign sales. Furthermore, this relationship appears to be asymmetric, as the link is much stronger when domestic demand falls than when it increases. Weakness in the domestic market translates into increased efforts to serve markets abroad, but, conversely, during times of boom, exports are not negatively affected by increasing domestic sales. This reorientation towards foreign markets was particularly important during the crisis period, and thus could represent a new adjustment channel to strong negative domestic shocks. The results have important policy implications, as this substitution effect between domestic and external markets might allow the euro area countries under stress to improve their trade outcomes with a relatively small downward pressure on domestic prices.

No. 1776
2 April 2015
Expectation-driven cycles: time-varying effects

Abstract

JEL Classification

C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes

E24 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Employment, Unemployment, Wages, Intergenerational Income Distribution, Aggregate Human Capital

E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles

Abstract

This paper provides new insights into expectation-driven cycles by estimating a structural VAR with time-varying coefficients and stochastic volatility, as in Cogley and Sargent (2005) and Primiceri (2005). We use survey-based expectations of the unemployment rate to measure expectations of future developments in economic activity. We find that the effect of expectation shocks on the realized unemployment rate have been particularly large during the most recent recession. Unanticipated changes in expectations contributed to the gradual increase in the persistence of the unemployment rate and to the decline in the correlation between the inflation and the unemployment rate over time. Our results are robust to the introduction of financial variables in the model.

No. 1775
2 April 2015
Housing market dynamics: Any news?

Abstract

JEL Classification

C50 : Mathematical and Quantitative Methods→Econometric Modeling→General

E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles

E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy

Abstract

This paper explores the link between agent expectations and housing market dynamics. We focus on shifts in the fundamental driving forces of the economy that are anticipated by rational forward-looking agents, i.e. news shocks. Using Bayesian methods and U.S. data, we find that news-shock-driven-cycles account for a sizable fraction of the variability in house prices and other macroeconomic variables over the business cycle and have also contributed to run-ups in house prices over the last three decades. By exploring the link between news shocks and agent expectations, we show that house price growth was positively related to inflation expectations during the boom of the late 1970

No. 1774
1 April 2015
Does fiscal austerity affect public opinion?

Abstract

JEL Classification

H2 : Public Economics→Taxation, Subsidies, and Revenue

H3 : Public Economics→Fiscal Policies and Behavior of Economic Agents

H5 : Public Economics→National Government Expenditures and Related Policies

H6 : Public Economics→National Budget, Deficit, and Debt

Abstract

In this paper we explore the impact of fiscal austerity on three different dimensions of public opinion (overall life satisfaction and confidence, attitude towards national authorities, and European institutions). Based on a panel of 26 EU countries, we find that, overall, fiscal consolidation episodes tend to have little and inconsistent impact on our measures of public opinion once we include macro controls (real GDP growth, inflation, unemployment, and whether a country is in a EU/IMF program). Some of the circumstances under which consolidation is undertaken are significant in explaining the effect on public opinion, but also these effects are neither strong nor consistent throughout. We conclude that the effect of fiscal consolidation measures on public opinion mainly operates through their effect on the macroeconomy.

No. 1773
1 April 2015
An automatic leading indicator, variable reduction and variable selection methods using small and large datasets: Forecasting the industrial production growth for euro area economies

Abstract

JEL Classification

C11 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→Bayesian Analysis: General

C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes

C52 : Mathematical and Quantitative Methods→Econometric Modeling→Model Evaluation, Validation, and Selection

Abstract

This paper assesses the forecasting performance of various variable reduction and variable selection methods. A small and a large set of wisely chosen variables are used in forecasting the industrial production growth for four Euro Area economies. The results indicate that the Automatic Leading Indicator (ALI) model performs well compared to other variable reduction methods in small datasets. However, Partial Least Squares and variable selection using heuristic optimisations of information criteria along with the ALI could be used in model averaging methodologies.

No. 1772
26 March 2015
Fragility in money marketfunds: sponsor support and regulation
ECB Lamfalussy Fellowship Programme

Abstract

JEL Classification

G01 : Financial Economics→General→Financial Crises

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

Abstract

I develop a model of money market funds (MMFs) to study the ability of sponsor support to provide stability to the industry. I find that strategic complementarities in the sponsors

No. 1771
26 March 2015
Governments' payment discipline: the macroeconomic impact of public payment delays and arrears
Published in: Journal of Macroeconomics, January 2016

Abstract

JEL Classification

E6 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

H6 : Public Economics→National Budget, Deficit, and Debt

H8 : Public Economics→Miscellaneous Issues

Abstract

This paper considers the impact of changes in governments' payment discipline on the private sector. We argue that increased delays in public payments can affect private sector liquidity and profits and hence ultimately economic growth. We test this prediction empirically for European Union countries using two complementary approaches. First, we use annual panel data, including a newly constructed proxy for government arrears. Using panel data techniques, including methods that allow for endogeneity, we find that payment delays and to some extent estimated arrears lead to a higher likelihood of bankruptcy, lower profits, and lower economic growth. While this approach allows a broad set of variables to be included, it restricts the number of time periods. We therefore complement it with a Bayesian VAR approach on quarterly data for selected countries faced with significant payment delays. With this second approach, we also find that the likelihood of bankruptcies rises when the governments increase the average payment period.

No. 1770
24 March 2015
The confidence effects of fiscal consolidations

Abstract

JEL Classification

H60 : Public Economics→National Budget, Deficit, and Debt→General

H61 : Public Economics→National Budget, Deficit, and Debt→Budget, Budget Systems

H62 : Public Economics→National Budget, Deficit, and Debt→Deficit, Surplus

Abstract

We explore how fiscal consolidations affect private sector confidence, a possible channel for the fiscal transmission that has received particular attention recently as a result of governments embarking on austerity trajectories in the aftermath of the crisis. Panel regressions based on the action-based datasets of De Vries et al. (2011) and Alesina et al. (2014) show that consolidations, and in particular their unanticipated components affect confidence negatively. The effects are stronger for revenue-based measures and when institutional arrangements, such as fiscal rules, are weak. To obtain a more accurate picture of how consolidations affect confidence, we construct a monthly dataset of consolidation announcements based on the aforementioned datasets, so that we can study the confidence effects in real time using an event study. Consumer confidence falls around announcements of consolidation measures, an effect driven by revenue-based measures. Moreover, the effects are most relevant for European countries with weak institutional arrangements, as measured by the tightness of fiscal rules or budgetary transparency. The effects on producer confidence are generally similar, but weaker than for consumer confidence. Long-term interest rates, as a measure of confidence in the sovereign, tend to fall around spending-based consolidation announcements that take place in slump periods. Overall, if confidence is a concern and consolidation is unavoidable, spending-based measures seem preferable. Slump periods are not necessarily bad moments for such measures, while strengthening institutional arrangements may help in mitigating adverse confidence effects.

No. 1769
24 March 2015
Ending over-lending: assessing systemic risk with debt to cash flow

Abstract

JEL Classification

E21 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Consumption, Saving, Wealth

F34 : International Economics→International Finance→International Lending and Debt Problems

G01 : Financial Economics→General→Financial Crises

H63 : Public Economics→National Budget, Deficit, and Debt→Debt, Debt Management, Sovereign Debt

Abstract

This paper introduces the ratio of debt to cash flow (D/CF) of nations and their economic sectors to macroprudential analysis, particularly as an indicator of systemic risk and vulnerabilities. While leverage is oftentimes linked to the vulnerability of a nation, the stock of total debt and the flow of gross savings is a less explored measure. Cash flows certainly have a well-known connection to corporations' ability to service debt. This paper investigates whether the D/CF provides a means for understanding systemic risks. For a panel of 33 nations, we explore historic D/CF trends, and apply the same procedure to economic sectors. In terms of an early-warning indicator, we show that the D/CF ratio provides a useful additional measure of vulnerability to systemic banking and sovereign crises, relative to more conventional indicators. As a conceptual framework, the assessment of financial stability is arranged for presentation within four vulnerability zones, and exemplified with a number of illustrative case studies.

No. 1768
23 March 2015
Macroprudential oversight, risk communication and visualization

Abstract

JEL Classification

G01 : Financial Economics→General→Financial Crises

G15 : Financial Economics→General Financial Markets→International Financial Markets

F37 : International Economics→International Finance→International Finance Forecasting and Simulation: Models and Applications

F38 : International Economics→International Finance→International Financial Policy: Financial Transactions Tax; Capital Controls

F47 : International Economics→Macroeconomic Aspects of International Trade and Finance→Forecasting and Simulation: Models and Applications

Abstract

This paper discusses the role of risk communication in macroprudential oversight and of visualization in risk communication. Beyond the soar in data availability and precision, the transition from firm-centric to system-wide supervision imposes vast data needs. Moreover, in addition to internal communication as in any organization, broad and effective external communication of timely information related to systemic risks is a key mandate of macroprudential supervisors. This further stresses the importance of simple representations of complex data. The present paper focuses on the background and theory of information visualization and visual analytics, as well as techniques within these fields, as potential means for risk communication. We define the task of visualization in risk communication, discuss the structure of macroprudential data, and review visualization techniques applied to systemic risk. We conclude that two essential, yet rare, features for supporting the analysis of big data and communication of risks are analytical visualizations and interactive interfaces. For visualizing the so-called macroprudential data cube, we provide the VisRisk platform with three modules: plots, maps and networks. While VisRisk is herein illustrated with five web-based interactive visualizations of systemic risk indicators and models, the platform enables and is open to the visualization of any data from the macroprudential data cube.

No. 1767
23 March 2015
Labour market adjustments in Europe and the US: How different?
Published in: Economic Policy, Vol 30 (84), 2015: pp 643-682

Abstract

JEL Classification

F2 : International Economics→International Factor Movements and International Business

J6 : Labor and Demographic Economics→Mobility, Unemployment, Vacancies, and Immigrant Workers

R23 : Urban, Rural, Regional, Real Estate, and Transportation Economics→Household Analysis→Regional Migration, Regional Labor Markets, Population, Neighborhood Characteristics

R30 : Urban, Rural, Regional, Real Estate, and Transportation Economics→Real Estate Markets, Spatial Production Analysis, and Firm Location→General

Abstract

We compare the labour market response to region-specific shocks in Europe and the US and to national shocks in Europe and investigate changes over time. We employ a multi-level factor model to decompose regional labour market variables and then estimate the dynamic response of the employment level, the employment rate and the participation rate using the region-specific variables and the country factors. We find that both in Europe and the US labour mobility accounts for about 50% of the long run adjustment to region-specific labour demand shocks and only a little more in the US than in Europe, where adjustment takes twice as long. In Europe labour mobility is a less important adjustment mechanism in response to country-specific labour demand shocks that cause stronger and more persistent reactions of the employment and the participation rate. However, we detect a convergence of the adjustment processes in Europe and the US, reflecting both a fall in interstate migration in the US and a rise in the role of migration in Europe. Finally, we show that part of the difference between Europe and the US in previous studies may be due to the use of different data sources.

No. 1766
17 March 2015
Shifting horizons: assessing macro trends before, during, and following systemic banking crises

Abstract

JEL Classification

C23 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Panel Data Models, Spatio-temporal Models

C51 : Mathematical and Quantitative Methods→Econometric Modeling→Model Construction and Estimation

E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects

E51 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Money Supply, Credit, Money Multipliers

G01 : Financial Economics→General→Financial Crises

Abstract

This paper assesses the trends of some main macroeconomic and macro-financial variables across different time horizons related to systemic banking crises. Specifically, by gradually shifting the observation horizon of the same statistical model across time, it observes how these variables are associated with banking crises in the past, present and future. The associations vary considerably when shifting horizons. Domestic house price growth increases the probability of observing a crisis in the future, but its effect disappears when moving closer to a crisis. The inverse holds true for the effect of the global credit gap, while global credit growth consistently and significantly increases the probability of a future banking crisis. Also, banking crises seem to be spatially correlated in the very short run. In all, the results can help policy makers by shedding light on the temporal horizon of the variables they monitor in addition to evaluating their predictive power.

No. 1765
16 March 2015
Endogenous labor share cycles: theory and evidence

Abstract

JEL Classification

E25 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Aggregate Factor Income Distribution

E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles

O33 : Economic Development, Technological Change, and Growth→Technological Change, Research and Development, Intellectual Property Rights→Technological Change: Choices and Consequences, Diffusion Processes

O41 : Economic Development, Technological Change, and Growth→Economic Growth and Aggregate Productivity→One, Two, and Multisector Growth Models

Abstract

Based on long US time series we document a range of empirical properties of the labor

No. 1764
16 March 2015
Assessing European competitiveness: the new CompNet microbased database

Abstract

JEL Classification

L11 : Industrial Organization→Market Structure, Firm Strategy, and Market Performance→Production, Pricing, and Market Structure, Size Distribution of Firms

L25 : Industrial Organization→Firm Objectives, Organization, and Behavior→Firm Performance: Size, Diversification, and Scope

D24 : Microeconomics→Production and Organizations→Production, Cost, Capital, Capital, Total Factor, and Multifactor Productivity, Capacity

O4 : Economic Development, Technological Change, and Growth→Economic Growth and Aggregate Productivity

O57 : Economic Development, Technological Change, and Growth→Economywide Country Studies→Comparative Studies of Countries

Abstract

Drawing from confidential firm-level balance sheets for 17 European countries (13 Euro-Area), the paper documents the newly expanded database of cross-country comparable competitiveness-related indicators built by the Competitiveness Research Network (CompNet). The new database provides information on the distribution of labour productivity, TFP, ULC or size of firms in detailed 2-digit industries but also within broad macrosectors or considering the full economy. Most importantly, the expanded database includes detailed information on critical determinants of competitiveness such as the financial position of the firm, its exporting intensity, employment creation or price-cost margins. Both the distribution of all those variables, within each industry, but also their joint analysis with the productivity of the firm provides critical insights to both policy-makers and researchers regarding aggregate trends dynamics. The current database comprises 17 EU countries, with information for 56 industries, including both manufacturing and services, over the period 1995-2012. The paper aims at analysing the structure and characteristics of this novel database, pointing out a number of results that are relevant to study productivity developments and its drivers. For instance, by using covariances between productivity and employment the paper shows that the drop in employment which occurred during the recent crisis appears to have had

No. 1763
10 March 2015
Do professional forecasters behave as if they believed in the new Keynesian Phillips Curve for the euro area?

Abstract

JEL Classification

E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation

J30 : Labor and Demographic Economics→Wages, Compensation, and Labor Costs→General

Abstract

This paper finds that participants in the European Central Bank

No. 1762
10 March 2015
Wealth shocks, unemployment shocks and consumption in the wake of the Great Recession
Published in: Journal of Monetary Economics

Abstract

JEL Classification

E21 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Consumption, Saving, Wealth

D91 : Microeconomics→Intertemporal Choice→Intertemporal Household Choice, Life Cycle Models and Saving

Abstract

Data from the 2009 Internet Survey of the Health and Retirement Study show that many U.S. households experienced large capital losses in housing and financial wealth, and that 5% of respondents lost their job during the Great Recession. As a consequence of these shocks, many households reduced substantially their expenditures. For every 10% loss in housing and financial wealth, the estimated drop in household expenditure is about 0.56% and 0.9%, respectively. In addition, those who became unemployed reduced spending by 10%. We also distinguish the effect of perceived transitory and permanent wealth shocks, splitting the sample between households who think that the stock market is likely to recover in a year

No. 1761
9 March 2015
Global value chains: a view from the euro area

Abstract

JEL Classification

F1 : International Economics→Trade

F14 : International Economics→Trade→Empirical Studies of Trade

F15 : International Economics→Trade→Economic Integration

Abstract

This paper describes the main features of Global Value Chains (GVCs) in the euro area taken as a whole and compares with other large trade players like the US, China and Japan. In addition, the perspective of individual euro area countries is considered, with a focus on intra euro area linkages. The analysis relies primarily on the concept of foreign value added in exports, as a way to assess the pervasiveness of GVCs, it covers the period 2000-2011 and bases on the World Input-Output Database (WIOD). The paper finds that GVCs are important for the euro area as whole and they have rebounded after the great trade collapse. Moreover, there is a strong relevance of regional production linkages in Europe, with Germany playing a key role.

No. 1760
9 March 2015
Comparing fiscal multipliers across models and countries in Europe

Abstract

JEL Classification

E12 : Macroeconomics and Monetary Economics→General Aggregative Models→Keynes, Keynesian, Post-Keynesian

E13 : Macroeconomics and Monetary Economics→General Aggregative Models→Neoclassical

E17 : Macroeconomics and Monetary Economics→General Aggregative Models→Forecasting and Simulation: Models and Applications

E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy

E63 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Comparative or Joint Analysis of Fiscal and Monetary Policy, Stabilization, Treasury Policy

Abstract

This paper employs fifteen dynamic macroeconomic models maintained within the European System of Central Banks to assess the size of fiscal multipliers in European countries. Using a set of common simulations, we consider transitory and permanent shocks to government expenditures and different taxes. We investigate how the baseline multipliers change when monetary policy is transitorily constrained by the zero nominal interest rate bound, certain crisis-related structural features of the economy such as the share of liquidity-constrained households change, and the endogenous fiscal rule that ensures fiscal sustainability in the long run is specified in terms of labour income taxes instead of lump-sum taxes.

No. 1759
12 February 2015
Corporate Debt Structure and the Financial Crisis

Abstract

JEL Classification

E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles

E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy

C68 : Mathematical and Quantitative Methods→Mathematical Methods, Programming Models, Mathematical and Simulation Modeling→Computable General Equilibrium Models

G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors

Abstract

We present a DSGE model where firms optimally choose among alternative instruments of external finance. The model is used to explain the evolving composition of corporate debt during the financial crisis of 2008-09, namely the observed shift from bank finance to bond finance, at a time when the cost of market debt rose above the cost of bank loans. We show that the flexibility offered by banks on the terms of their loans and firms

No. 1758
12 February 2015
Leading indicators of systemic banking crises: Finland in a panel of EU countries

Abstract

JEL Classification

E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy

F30 : International Economics→International Finance→General

G01 : Financial Economics→General→Financial Crises

G15 : Financial Economics→General Financial Markets→International Financial Markets

C43 : Mathematical and Quantitative Methods→Econometric and Statistical Methods: Special Topics→Index Numbers and Aggregation

Abstract

This paper investigates leading indicators of systemic banking crises in a panel of 11 EU countries, with a particular focus on Finland. We use quarterly data from 1980Q1 to 2013Q2, in order to create a large number of macro-financial indicators, as well as their various transformations. We make use of univariate signal extraction and multivariate logit analysis to assess what factors lead the occurrence of a crisis and with what horizon the indicators lead a crisis. We find that loans-to-deposits and house price growth are the best leading indicators. Growth rates and trend deviations of loan stock variables also yield useful signals of impending crises. While the optimal lead horizon is three years, indicators generally perform well with lead times ranging from one to four years. We also tap into unique long time-series of the Finnish economy to perform historical explorations into macro-financial vulnerabilities.

No. 1757
10 February 2015
Efficiency, Inefficiency and the MENA Frontier

Abstract

JEL Classification

C33 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Panel Data Models, Spatio-temporal Models

C38 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Classification Methods, Cluster Analysis, Principal Components, Factor Models

C55 : Mathematical and Quantitative Methods→Econometric Modeling→Modeling with Large Data Sets?

D24 : Microeconomics→Production and Organizations→Production, Cost, Capital, Capital, Total Factor, and Multifactor Productivity, Capacity

E23 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Production

O11 : Economic Development, Technological Change, and Growth→Economic Development→Macroeconomic Analyses of Economic Development

Abstract

In a stochastic frontier setting, we examine technical efficiency in the Middle East and North Africa (MENA). Evidence suggests that in addition to economic indicators, political and social ones play a key role in development and frontier technical efficiency profiles. The MENA have been characterized by increasing economic efficiency over time but with marked polarization. The paper analyses and nest many key hypotheses in the literature e.g., the contributions of religion, of natural resources, demographic pressures, human capital etc. The originality of our contribution is the use of a large data set (including principal components), and extensive robustness checks. The paper should set a comprehensive benchmark and cross check for related studies of development technical efficiency.

Disclaimer: Please keep in mind that the papers are published in the name of the author(s). Their views do not necessarily reflect those of the ECB.