http://www.frankfurt-main-finance.com/ de-de Frankfurt Main Finance http://www.frankfurt-main-finance.com Aktuelles Sat, 04 Feb 2012 12:00:29 +0100 (JEL: G21, G30, F34) Based on survey data covering 8,387 firms in 20 countries we compare credit demand and credit supply for firms in Eastern Europe to those for firms in selected Western European countries. We find that firms in Eastern Europe have a higher need for credit than firms in Western Europe, and that a higher share of firms is discouraged from applying for a loan. The higher rate of discouraged firms in Eastern Europe is driven more by the presence of foreign banks than by the macroeconomic environment or the lack of creditor protection. We find no evidence that foreign bank presence leads to stricter loan approval decisions. Finally, credit constraints do have a real cost in that firms which are denied credit or discouraged from applying are less likely to invest in R&D and introduce new products. Thu, 02 Feb 2012 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-who-needs-credit-and-who-gets-credit-in-eastern-europe-by-martin-brown-steven-ongena-alexander-popov-pinar-yesin-2a15.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-who-needs-credit-and-who-gets-credit-in-eastern-europe-by-martin-brown-steven-ongena-alexander-popov-pinar-yesin-2a15.php (JEL: E31, C53, C11) This paper uses forecasts from the European Central Bank’s Survey of Professional Forecasters to investigate the relationship between inflation and inflation expectations in the euro area. We use theoretical structures based on the New Keynesian and Neoclassical Phillips curves to inform our empirical work and dynamic model averaging in order to ensure an econometric specification capturing potential changes. We use both regression-based and VAR-based methods. The paper confirms that there have been shifts in the Phillips curve and identifies three sub-periods in the EMU: an initial period of price stability, a few years where inflation was driven mainly by external shocks, and the financial crisis, where the New Keynesian Phillips curve outperforms alternative formulations. This finding underlines the importance of introducing informed judgment in forecasting models and is also important for the conduct of monetary policy, as the crisis entails changes in the effect of expectations on inflation and a resurgence of the “sacrifice ratio”. Thu, 02 Feb 2012 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-estimating-phillips-curves-in-turbulent-times-using-the-ecb-s-survey-of-professional-forecasters-by-gary-koop-luca-onorante-2a15.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-estimating-phillips-curves-in-turbulent-times-using-the-ecb-s-survey-of-professional-forecasters-by-gary-koop-luca-onorante-2a15.php (JEL: E21, E43, E51) This paper applies a life-cycle model with individual income uncertainty to investigate the determinants of credit to households. We show that the value of household credit to GDP ratio depends on (i) the lending-deposit interest rate spread, (ii) individual income uncertainty, (iii) individual productivity persistence, and (iv) the generosity of the pension system. Subsequently, we provide empirical evidence for the predictions of the theoretical model on the basis of data for OECD and EU countries. Thu, 02 Feb 2012 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-determinants-of-credit-to-households-in-a-life-cycle-model-by-michal-rubaszek-dobromil-serwa-2a15.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-determinants-of-credit-to-households-in-a-life-cycle-model-by-michal-rubaszek-dobromil-serwa-2a15.php (JEL: G15, F36) Since the intensification of the crisis in September 2008, all euro area long-term government bond yields relative to the German Bund have been characterised by highly persistent processes with upward trends for countries with weaker fiscal fundamentals. Looking at the daily period 1 September 2008 - 4 August 2011, we find that three factors can explain the recorded developments in sovereign spreads: (i) an aggregate regional risk factor, (ii) the country-specific credit risk and (iii) the spillover effect from Greece. Specifically, higher risk aversion has increased the demand for the Bund and this is behind the pricing of all euro area spreads, including those for Austria, Finland and the Netherlands. Country-specific credit ratings have played a key role in the developments of the spreads for Greece, Ireland, Portugal and Spain. Finally, the rating downgrade in Greece has contributed to developments in spreads of countries with weaker fiscal fundamentals: Ireland, Portugal, Italy, Spain, Belgium and France. Wed, 01 Feb 2012 00:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/253d-no-1419-the-euro-area-sovereign-debt-crisis-safe-haven-credit-rating-agencies-and-the-spread-of-the-fever-from-greece-ireland-and-portugal-by-roberto-a-de-santis-aadc.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/253d-no-1419-the-euro-area-sovereign-debt-crisis-safe-haven-credit-rating-agencies-and-the-spread-of-the-fever-from-greece-ireland-and-portugal-by-roberto-a-de-santis-aadc.php (JEL: F31, G10) This paper provides an empirical test of the scapegoat theory of exchange rates (Bacchetta and van Wincoop 2004, 2011), as an attempt to evaluate its potential for explaining the poor empirical performance of traditional exchange rate models. This theory suggests that market participants may at times attach significantly more weight to individual economic fundamentals to rationalize the pricing of currencies, which are partly driven by unobservable shocks. Using novel survey data which directly measure foreign exchange scapegoats for 12 currencies and a decade of proprietary data on order flow, we find empirical evidence that strongly supports the empirical implications of the scapegoat theory of exchange rates, with the resulting models explaining a large fraction of the variation and directional changes in exchange rates. The findings have implications for exchange rate modelling, suggesting that a more accurate understanding of exchange rates requires taking into account the role of scapegoat factors and their time-varying nature. Wed, 01 Feb 2012 00:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/253d-no-1418-the-scapegoat-theory-of-exchange-rates-the-first-tests-by-marcel-fratzscher-lucio-sarno-gabriele-zinna-aadc.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/253d-no-1418-the-scapegoat-theory-of-exchange-rates-the-first-tests-by-marcel-fratzscher-lucio-sarno-gabriele-zinna-aadc.php (JEL: C18, E27) The survey based monthly US ISM production index and Eurozone manufacturing PMI output index provide early information on industrial output growth before the release of the official industrial production index. I use the Carlson and Parkin probability method to construct monthly growth estimates from the qualitative responses of the US ISM production index and the Eurozone manufacturing PMI output index. I apply the method under different assumptions on the cross-sectional distribution of output growth using the uniform, logistic and Laplace distribution. I show that alternative distribution assumptions lead to very similar estimates. I also test the performance of the different growth estimates in an out of sample forecasting exercise of actual industrial production growth. All growth estimates beat a simple autoregressive model of output growth. Distribution assumptions again matter little most of the time except during the financial crisis when the estimates constructed using the Laplace distributional assumption perform the best. My findings are consistent with recent findings of Bottazzi and Sechi (2006) that the distribution of firm growth rates has a Laplace distribution. Wed, 01 Feb 2012 00:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/253d-no-1417-quantifying-the-qualitative-responses-of-the-output-purchasing-managers-index-in-the-us-and-the-euro-area-by-philip-vermeulen-aadc.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/253d-no-1417-quantifying-the-qualitative-responses-of-the-output-purchasing-managers-index-in-the-us-and-the-euro-area-by-philip-vermeulen-aadc.php (JEL: E44, F3, C5) The paper analyses the transmission of liquidity shocks and risk shocks to global financial markets. Using a Global VAR methodology, the findings reveal fundamental differences in the transmission strength and pattern between the 2007-08 financial crisis and the 2010-11 sovereign debt crisis. Unlike in the former crisis, emerging market economies have become much more resilient to adverse shocks in 2010-11. Moreover, a flight-to-safety phenomenon across asset classes has become particularly strong during the 2010-11 sovereign debt crisis, with risk shocks driving down bond yields in key advanced economies. The paper relates this evolving transmission pattern to portfolio choice decisions by investors and finds that countries' sovereign rating, quality of institutions and their financial exposure are determinants of cross-country differences in the transmission. Wed, 01 Feb 2012 00:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/253d-no-1416-liquidity-risk-and-the-global-transmission-of-the-2007-08-financial-crisis-and-the-2010-2011-sovereign-debt-crisis-by-alexander-chudik-marcel-fratzscher-aadc.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/253d-no-1416-liquidity-risk-and-the-global-transmission-of-the-2007-08-financial-crisis-and-the-2010-2011-sovereign-debt-crisis-by-alexander-chudik-marcel-fratzscher-aadc.php (JEL: F30, F31) The empirical analysis of the paper suggests that an FX policy objective and concerns about an overheating of the domestic economy have been the two main motives for the (re-)introduction and persistence of capital controls over the past decade. Capital controls are strongly associated with countries having significantly undervalued exchange rates. Capital controls also appear to be less motivated by worries about financial market volatility or fickle capital flows per se, but rather by concerns about capital inflows triggering an overheating of the economy – in the form of high credit growth, rising inflation and output volatility. Moreover, countries with a high level of capital controls, and those actively implementing controls, tend to be those that have fixed exchange rate regimes, a non-IT monetary policy regime and shallow financial markets. This evidence is consistent with capital controls being used, at least in part, to compensate for the absence of autonomous macroeconomic and prudential policies and effective adjustment mechanisms for dealing with capital flows. Wed, 01 Feb 2012 00:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/253d-no-1415-capital-controls-and-foreign-exchange-policy-by-marcel-fratzscher-aadc.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/253d-no-1415-capital-controls-and-foreign-exchange-policy-by-marcel-fratzscher-aadc.php (JEL: E44, F3, C5) The paper analyses the transmission of liquidity shocks and risk shocks to global financial markets. Using a Global VAR methodology, the findings reveal fundamental differences in the transmission strength and pattern between the 2007-08 financial crisis and the 2010-11 sovereign debt crisis. Unlike in the former crisis, emerging market economies have become much more resilient to adverse shocks in 2010-11. Moreover, a flight-to-safety phenomenon across asset classes has become particularly strong during the 2010-11 sovereign debt crisis, with risk shocks driving down bond yields in key advanced economies. The paper relates this evolving transmission pattern to portfolio choice decisions by investors and finds that countries' sovereign rating, quality of institutions and their financial exposure are determinants of cross-country differences in the transmission. Tue, 31 Jan 2012 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/64ee-ecb-risk-and-the-global-transmission-of-the-2007-08-financial-crisis-and-the-2010-2011-sovereign-debt-crisis-by-alexander-chudik-marcel-fratzscher-a9aa.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/64ee-ecb-risk-and-the-global-transmission-of-the-2007-08-financial-crisis-and-the-2010-2011-sovereign-debt-crisis-by-alexander-chudik-marcel-fratzscher-a9aa.php (JEL: F30, F31) The empirical analysis of the paper suggests that an FX policy objective and concerns about an overheating of the domestic economy have been the two main motives for the (re-)introduction and persistence of capital controls over the past decade. Capital controls are strongly associated with countries having significantly undervalued exchange rates. Capital controls also appear to be less motivated by worries about financial market volatility or fickle capital flows per se, but rather by concerns about capital inflows triggering an overheating of the economy – in the form of high credit growth, rising inflation and output volatility. Moreover, countries with a high level of capital controls, and those actively implementing controls, tend to be those that have fixed exchange rate regimes, a non-IT monetary policy regime and shallow financial markets. This evidence is consistent with capital controls being used, at least in part, to compensate for the absence of autonomous macroeconomic and prudential policies and effective adjustment mechanisms for dealing with capital flows. Tue, 31 Jan 2012 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/64ee-ecb-ontrols-and-foreign-exchange-policy-by-marcel-fratzscher-a9aa.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/64ee-ecb-ontrols-and-foreign-exchange-policy-by-marcel-fratzscher-a9aa.php (JEL: C18, E27) The survey based monthly US ISM production index and Eurozone manufacturing PMI output index provide early information on industrial output growth before the release of the official industrial production index. I use the Carlson and Parkin probability method to construct monthly growth estimates from the qualitative responses of the US ISM production index and the Eurozone manufacturing PMI output index. I apply the method under different assumptions on the cross-sectional distribution of output growth using the uniform, logistic and Laplace distribution. I show that alternative distribution assumptions lead to very similar estimates. I also test the performance of the different growth estimates in an out of sample forecasting exercise of actual industrial production growth. All growth estimates beat a simple autoregressive model of output growth. Distribution assumptions again matter little most of the time except during the financial crisis when the estimates constructed using the Laplace distributional assumption perform the best. My findings are consistent with recent findings of Bottazzi and Sechi (2006) that the distribution of firm growth rates has a Laplace distribution. Tue, 31 Jan 2012 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/64ee-ecb-ng-the-qualitative-responses-of-the-output-purchasing-managers-index-in-the-us-and-the-euro-area-by-philip-vermeulen-a9aa.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/64ee-ecb-ng-the-qualitative-responses-of-the-output-purchasing-managers-index-in-the-us-and-the-euro-area-by-philip-vermeulen-a9aa.php (JEL: F31, G10) This paper provides an empirical test of the scapegoat theory of exchange rates (Bacchetta and van Wincoop 2004, 2011), as an attempt to evaluate its potential for explaining the poor empirical performance of traditional exchange rate models. This theory suggests that market participants may at times attach significantly more weight to individual economic fundamentals to rationalize the pricing of currencies, which are partly driven by unobservable shocks. Using novel survey data which directly measure foreign exchange scapegoats for 12 currencies and a decade of proprietary data on order flow, we find empirical evidence that strongly supports the empirical implications of the scapegoat theory of exchange rates, with the resulting models explaining a large fraction of the variation and directional changes in exchange rates. The findings have implications for exchange rate modelling, suggesting that a more accurate understanding of exchange rates requires taking into account the role of scapegoat factors and their time-varying nature. Tue, 31 Jan 2012 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/64ee-ecb-goat-theory-of-exchange-rates-the-first-tests-by-marcel-fratzscher-lucio-sarno-gabriele-zinna-a9aa.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/64ee-ecb-goat-theory-of-exchange-rates-the-first-tests-by-marcel-fratzscher-lucio-sarno-gabriele-zinna-a9aa.php (JEL: G15, F36) Since the intensification of the crisis in September 2008, all euro area long-term government bond yields relative to the German Bund have been characterised by highly persistent processes with upward trends for countries with weaker fiscal fundamentals. Looking at the daily period 1 September 2008 - 4 August 2011, we find that three factors can explain the recorded developments in sovereign spreads: (i) an aggregate regional risk factor, (ii) the country-specific credit risk and (iii) the spillover effect from Greece. Specifically, higher risk aversion has increased the demand for the Bund and this is behind the pricing of all euro area spreads, including those for Austria, Finland and the Netherlands. Country-specific credit ratings have played a key role in the developments of the spreads for Greece, Ireland, Portugal and Spain. Finally, the rating downgrade in Greece has contributed to developments in spreads of countries with weaker fiscal fundamentals: Ireland, Portugal, Italy, Spain, Belgium and France. Tue, 31 Jan 2012 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/64ee-ecb-area-sovereign-debt-crisis-safe-haven-credit-rating-agencies-and-the-spread-of-the-fever-from-greece-ireland-and-portugal-by-roberto-a-de-santis-a9aa.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/64ee-ecb-area-sovereign-debt-crisis-safe-haven-credit-rating-agencies-and-the-spread-of-the-fever-from-greece-ireland-and-portugal-by-roberto-a-de-santis-a9aa.php (JEL: F31, G10) This paper provides an empirical test of the scapegoat theory of exchange rates (Bacchetta and van Wincoop 2004, 2011), as an attempt to evaluate its potential for explaining the poor empirical performance of traditional exchange rate models. This theory suggests that market participants may at times attach significantly more weight to individual economic fundamentals to rationalize the pricing of currencies, which are partly driven by unobservable shocks. Using novel survey data which directly measure foreign exchange scapegoats for 12 currencies and a decade of proprietary data on order flow, we find empirical evidence that strongly supports the empirical implications of the scapegoat theory of exchange rates, with the resulting models explaining a large fraction of the variation and directional changes in exchange rates. The findings have implications for exchange rate modelling, suggesting that a more accurate understanding of exchange rates requires taking into account the role of scapegoat factors and their time-varying nature. Tue, 31 Jan 2012 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-the-scapegoat-theory-of-exchange-rates-the-first-tests-by-marcel-fratzscher-lucio-sarno-gabriele-zinna-a9aa.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-the-scapegoat-theory-of-exchange-rates-the-first-tests-by-marcel-fratzscher-lucio-sarno-gabriele-zinna-a9aa.php (JEL: G15, F36) Since the intensification of the crisis in September 2008, all euro area long-term government bond yields relative to the German Bund have been characterised by highly persistent processes with upward trends for countries with weaker fiscal fundamentals. Looking at the daily period 1 September 2008 - 4 August 2011, we find that three factors can explain the recorded developments in sovereign spreads: (i) an aggregate regional risk factor, (ii) the country-specific credit risk and (iii) the spillover effect from Greece. Specifically, higher risk aversion has increased the demand for the Bund and this is behind the pricing of all euro area spreads, including those for Austria, Finland and the Netherlands. Country-specific credit ratings have played a key role in the developments of the spreads for Greece, Ireland, Portugal and Spain. Finally, the rating downgrade in Greece has contributed to developments in spreads of countries with weaker fiscal fundamentals: Ireland, Portugal, Italy, Spain, Belgium and France. Tue, 31 Jan 2012 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-the-euro-area-sovereign-debt-crisis-safe-haven-credit-rating-agencies-and-the-spread-of-the-fever-from-greece-ireland-and-portugal-by-roberto-a-de-santis-a9aa.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-the-euro-area-sovereign-debt-crisis-safe-haven-credit-rating-agencies-and-the-spread-of-the-fever-from-greece-ireland-and-portugal-by-roberto-a-de-santis-a9aa.php (JEL: E44, F3, C5) The paper analyses the transmission of liquidity shocks and risk shocks to global financial markets. Using a Global VAR methodology, the findings reveal fundamental differences in the transmission strength and pattern between the 2007-08 financial crisis and the 2010-11 sovereign debt crisis. Unlike in the former crisis, emerging market economies have become much more resilient to adverse shocks in 2010-11. Moreover, a flight-to-safety phenomenon across asset classes has become particularly strong during the 2010-11 sovereign debt crisis, with risk shocks driving down bond yields in key advanced economies. The paper relates this evolving transmission pattern to portfolio choice decisions by investors and finds that countries' sovereign rating, quality of institutions and their financial exposure are determinants of cross-country differences in the transmission. Tue, 31 Jan 2012 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-risk-and-the-global-transmission-of-the-2007-08-financial-crisis-and-the-2010-2011-sovereign-debt-crisis-by-alexander-chudik-marcel-fratzscher-a9aa.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-risk-and-the-global-transmission-of-the-2007-08-financial-crisis-and-the-2010-2011-sovereign-debt-crisis-by-alexander-chudik-marcel-fratzscher-a9aa.php (JEL: C18, E27) The survey based monthly US ISM production index and Eurozone manufacturing PMI output index provide early information on industrial output growth before the release of the official industrial production index. I use the Carlson and Parkin probability method to construct monthly growth estimates from the qualitative responses of the US ISM production index and the Eurozone manufacturing PMI output index. I apply the method under different assumptions on the cross-sectional distribution of output growth using the uniform, logistic and Laplace distribution. I show that alternative distribution assumptions lead to very similar estimates. I also test the performance of the different growth estimates in an out of sample forecasting exercise of actual industrial production growth. All growth estimates beat a simple autoregressive model of output growth. Distribution assumptions again matter little most of the time except during the financial crisis when the estimates constructed using the Laplace distributional assumption perform the best. My findings are consistent with recent findings of Bottazzi and Sechi (2006) that the distribution of firm growth rates has a Laplace distribution. Tue, 31 Jan 2012 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-quantifying-the-qualitative-responses-of-the-output-purchasing-managers-index-in-the-us-and-the-euro-area-by-philip-vermeulen-a9aa.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-quantifying-the-qualitative-responses-of-the-output-purchasing-managers-index-in-the-us-and-the-euro-area-by-philip-vermeulen-a9aa.php (JEL: F30, F31) The empirical analysis of the paper suggests that an FX policy objective and concerns about an overheating of the domestic economy have been the two main motives for the (re-)introduction and persistence of capital controls over the past decade. Capital controls are strongly associated with countries having significantly undervalued exchange rates. Capital controls also appear to be less motivated by worries about financial market volatility or fickle capital flows per se, but rather by concerns about capital inflows triggering an overheating of the economy – in the form of high credit growth, rising inflation and output volatility. Moreover, countries with a high level of capital controls, and those actively implementing controls, tend to be those that have fixed exchange rate regimes, a non-IT monetary policy regime and shallow financial markets. This evidence is consistent with capital controls being used, at least in part, to compensate for the absence of autonomous macroeconomic and prudential policies and effective adjustment mechanisms for dealing with capital flows. Tue, 31 Jan 2012 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-ontrols-and-foreign-exchange-policy-by-marcel-fratzscher-a9aa.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-ontrols-and-foreign-exchange-policy-by-marcel-fratzscher-a9aa.php (JEL: C18, E27) The survey based monthly US ISM production index and Eurozone manufacturing PMI output index provide early information on industrial output growth before the release of the official industrial production index. I use the Carlson and Parkin probability method to construct monthly growth estimates from the qualitative responses of the US ISM production index and the Eurozone manufacturing PMI output index. I apply the method under different assumptions on the cross-sectional distribution of output growth using the uniform, logistic and Laplace distribution. I show that alternative distribution assumptions lead to very similar estimates. I also test the performance of the different growth estimates in an out of sample forecasting exercise of actual industrial production growth. All growth estimates beat a simple autoregressive model of output growth. Distribution assumptions again matter little most of the time except during the financial crisis when the estimates constructed using the Laplace distributional assumption perform the best. My findings are consistent with recent findings of Bottazzi and Sechi (2006) that the distribution of firm growth rates has a Laplace distribution. Tue, 31 Jan 2012 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-ng-the-qualitative-responses-of-the-output-purchasing-managers-index-in-the-us-and-the-euro-area-by-philip-vermeulen-a9aa.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-ng-the-qualitative-responses-of-the-output-purchasing-managers-index-in-the-us-and-the-euro-area-by-philip-vermeulen-a9aa.php (JEL: E44, F3, C5) The paper analyses the transmission of liquidity shocks and risk shocks to global financial markets. Using a Global VAR methodology, the findings reveal fundamental differences in the transmission strength and pattern between the 2007-08 financial crisis and the 2010-11 sovereign debt crisis. Unlike in the former crisis, emerging market economies have become much more resilient to adverse shocks in 2010-11. Moreover, a flight-to-safety phenomenon across asset classes has become particularly strong during the 2010-11 sovereign debt crisis, with risk shocks driving down bond yields in key advanced economies. The paper relates this evolving transmission pattern to portfolio choice decisions by investors and finds that countries' sovereign rating, quality of institutions and their financial exposure are determinants of cross-country differences in the transmission. Tue, 31 Jan 2012 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-liquidity-risk-and-the-global-transmission-of-the-2007-08-financial-crisis-and-the-2010-2011-sovereign-debt-crisis-by-alexander-chudik-marcel-fratzscher-a9aa.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-liquidity-risk-and-the-global-transmission-of-the-2007-08-financial-crisis-and-the-2010-2011-sovereign-debt-crisis-by-alexander-chudik-marcel-fratzscher-a9aa.php (JEL: F31, G10) This paper provides an empirical test of the scapegoat theory of exchange rates (Bacchetta and van Wincoop 2004, 2011), as an attempt to evaluate its potential for explaining the poor empirical performance of traditional exchange rate models. This theory suggests that market participants may at times attach significantly more weight to individual economic fundamentals to rationalize the pricing of currencies, which are partly driven by unobservable shocks. Using novel survey data which directly measure foreign exchange scapegoats for 12 currencies and a decade of proprietary data on order flow, we find empirical evidence that strongly supports the empirical implications of the scapegoat theory of exchange rates, with the resulting models explaining a large fraction of the variation and directional changes in exchange rates. The findings have implications for exchange rate modelling, suggesting that a more accurate understanding of exchange rates requires taking into account the role of scapegoat factors and their time-varying nature. Tue, 31 Jan 2012 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-goat-theory-of-exchange-rates-the-first-tests-by-marcel-fratzscher-lucio-sarno-gabriele-zinna-a9aa.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-goat-theory-of-exchange-rates-the-first-tests-by-marcel-fratzscher-lucio-sarno-gabriele-zinna-a9aa.php (JEL: F30, F31) The empirical analysis of the paper suggests that an FX policy objective and concerns about an overheating of the domestic economy have been the two main motives for the (re-)introduction and persistence of capital controls over the past decade. Capital controls are strongly associated with countries having significantly undervalued exchange rates. Capital controls also appear to be less motivated by worries about financial market volatility or fickle capital flows per se, but rather by concerns about capital inflows triggering an overheating of the economy – in the form of high credit growth, rising inflation and output volatility. Moreover, countries with a high level of capital controls, and those actively implementing controls, tend to be those that have fixed exchange rate regimes, a non-IT monetary policy regime and shallow financial markets. This evidence is consistent with capital controls being used, at least in part, to compensate for the absence of autonomous macroeconomic and prudential policies and effective adjustment mechanisms for dealing with capital flows. Tue, 31 Jan 2012 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-capital-controls-and-foreign-exchange-policy-by-marcel-fratzscher-a9aa.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-capital-controls-and-foreign-exchange-policy-by-marcel-fratzscher-a9aa.php (JEL: G15, F36) Since the intensification of the crisis in September 2008, all euro area long-term government bond yields relative to the German Bund have been characterised by highly persistent processes with upward trends for countries with weaker fiscal fundamentals. Looking at the daily period 1 September 2008 - 4 August 2011, we find that three factors can explain the recorded developments in sovereign spreads: (i) an aggregate regional risk factor, (ii) the country-specific credit risk and (iii) the spillover effect from Greece. Specifically, higher risk aversion has increased the demand for the Bund and this is behind the pricing of all euro area spreads, including those for Austria, Finland and the Netherlands. Country-specific credit ratings have played a key role in the developments of the spreads for Greece, Ireland, Portugal and Spain. Finally, the rating downgrade in Greece has contributed to developments in spreads of countries with weaker fiscal fundamentals: Ireland, Portugal, Italy, Spain, Belgium and France. Tue, 31 Jan 2012 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-area-sovereign-debt-crisis-safe-haven-credit-rating-agencies-and-the-spread-of-the-fever-from-greece-ireland-and-portugal-by-roberto-a-de-santis-a9aa.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-area-sovereign-debt-crisis-safe-haven-credit-rating-agencies-and-the-spread-of-the-fever-from-greece-ireland-and-portugal-by-roberto-a-de-santis-a9aa.php Greece, Ireland and Portugal require economic growth, increased productivity and more innovations. All three countries have pronounced weaknesses in business innovation activity. The conditions for corporate innovations could be improved via measures such as developing technology centres, ameliorating innovation funding and enhancing entrepreneurial expertise. The regional policy competence of administrative authorities also needs to be upgraded. While Ireland’s innovation system is already well developed, Portugal occupies a lower mid-table position in a European ranking of innovation systems. There is little potential in Greece to leverage the development of fast-growing industries with high productivity levels. Therefore, the upgrading of traditional industries and services is of major importance. Thu, 26 Jan 2012 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/64ee-db-research-greece-ireland-portugal-more-growth-via-innovation-3458.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/64ee-db-research-greece-ireland-portugal-more-growth-via-innovation-3458.php The US car market is recovering from its deep crisis. Unit sales and production are likely to increase further in 2012 und 2013. In the medium term, previous record levels will be reached again or even exceeded. German producers should benefit from this development. Their market share in light vehicle sales will grow further. This is due to the attractive product range and the bolstering of production facilities in the US. Diesel and hybrid vehicles will expand their market shares in the US over the next few years. Growth in the diesel market in particular would benefit German companies. Thu, 19 Jan 2012 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/64ee-db-research-us-car-market-returning-to-its-previous-size-58ce.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/64ee-db-research-us-car-market-returning-to-its-previous-size-58ce.php While only very few countries have actually succeeded in joining the group of high-income economies over the past few decades, partial income convergence is a reality. Of the 24 countries with a population of 60 m or more, nine countries have a per capita income of USD 5,000 or less. Of these nine, a full seven are located in a geographically almost contiguous crescent stretching from Pakistan in the West to Indonesia in the East. With a combined population of 2 bn, these Indian Ocean economies are bound to emerge as a major centre of economic gravity over the course of this century. Thu, 19 Jan 2012 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/64ee-db-research-income-convergence-and-the-rise-of-the-indian-ocean-economies-58ce.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/64ee-db-research-income-convergence-and-the-rise-of-the-indian-ocean-economies-58ce.php (JEL: F33, F41, F42, E31, C25) We present a new approach to study empirically the effect of the introduction of the euro on the pattern of currency invoicing. Our approach uses a compositional multinomial logit model, in which currency choice is explained by both currency-specific and country-specific determinants. We use unique quarterly panel data on the invoicing of Norwegian imports from OECD countries for the 1996-2006 period. We find that eurozone countries have substantially increased their share of home currency invoicing after the introduction of the euro, whereas the home currency share of non-eurozone countries fell slightly. In addition, the euro as a vehicle currency has overtaken the role of the US dollar in Norwegian imports. The substantial rise in producer currency invoicing by eurozone countries is primarily caused by a drop in inflation volatility and can only to a small extent be explained by an unobserved euro effect. Wed, 18 Jan 2012 00:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/253d-no-1414-has-the-euro-affected-the-choice-of-invoicing-currency-by-jenny-e-ligthart-sebastian-e-v-werner-f676.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/253d-no-1414-has-the-euro-affected-the-choice-of-invoicing-currency-by-jenny-e-ligthart-sebastian-e-v-werner-f676.php (JEL: F33, F41, F42, E31, C25) We present a new approach to study empirically the effect of the introduction of the euro on the pattern of currency invoicing. Our approach uses a compositional multinomial logit model, in which currency choice is explained by both currency-specific and country-specific determinants. We use unique quarterly panel data on the invoicing of Norwegian imports from OECD countries for the 1996-2006 period. We find that eurozone countries have substantially increased their share of home currency invoicing after the introduction of the euro, whereas the home currency share of non-eurozone countries fell slightly. In addition, the euro as a vehicle currency has overtaken the role of the US dollar in Norwegian imports. The substantial rise in producer currency invoicing by eurozone countries is primarily caused by a drop in inflation volatility and can only to a small extent be explained by an unobserved euro effect. Tue, 17 Jan 2012 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/64ee-ecb-uro-affected-the-choice-of-invoicing-currency-by-jenny-e-ligthart-sebastian-e-v-werner-6ba7.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/64ee-ecb-uro-affected-the-choice-of-invoicing-currency-by-jenny-e-ligthart-sebastian-e-v-werner-6ba7.php The start of the transition to a retirement age of 67 at the beginning of the year set the ball rolling on one of the major reform projects approved in Germany in the previous decade. This initiative refutes the widely held preconception that policymakers lack the ability to implement substantial reforms. It shows that in this case politicians certainly are prepared to take farsighted and unpopular action. Sun, 15 Jan 2012 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/64ee-db-research-raising-the-retirement-age-in-germany-to-67-policymakers-must-stick-to-reform-course-f2c3.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/64ee-db-research-raising-the-retirement-age-in-germany-to-67-policymakers-must-stick-to-reform-course-f2c3.php Heightened uncertainty about the ongoing European sovereign debt crisis and the intensifying grip of fiscal consolidation across the eurozone will weigh on the German economy in 2012. These factors will not only curb exports but also dampen the propensity to invest. By contrast, there should be moderate growth stimuli from private consumption. Nevertheless, Germany is likely to slide into a (technical) recession in the first half of the year. Progress in managing the debt crisis could then breathe new life into the economy – net exports in particular – in the second half. All in all, 2012 will probably see flat GDP growth. Thu, 12 Jan 2012 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/64ee-db-research-european-sovereign-debt-crisis-triggers-technical-recession-in-germany-1bd6.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/64ee-db-research-european-sovereign-debt-crisis-triggers-technical-recession-in-germany-1bd6.php The aim of the paper is to study the relation between the demand for human rights and for economic prosperity. It analyzes the demand not, as it is often done in the literature, from the 'voice' perspective (political activity), but rather looks at the 'exit' perspective (migration patterns). Given the difficulties associated with identification in international samples we study the intra-national migration in a federation with significant economic and political differences between states – Indi Thu, 12 Jan 2012 05:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/64ee-fs-are-human-rights-and-economic-well-being-substitutes-evidence-from-migration-patterns-across-the-in-4740.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/64ee-fs-are-human-rights-and-economic-well-being-substitutes-evidence-from-migration-patterns-across-the-in-4740.php We examine the use of credit default swaps (CDS) in the U.S. mutual fund industry. We find that among the largest 100 corporate bond funds the use of CDS has increased from 20% in 2004 to 60% in 2008. Among CDS users, the average size of CDS positions (measured by their notional values) increased from 2% to almost 14% of a fund’s net asset value. Some funds exceed this level by a wide margin. CDS are predominantly used to increase a fund’s exposure to credit risks rather than to hedge credit ris Tue, 10 Jan 2012 05:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/64ee-ebs-the-use-of-credit-default-swaps-by-u-s-fixed-income-mutual-funds-d562.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/64ee-ebs-the-use-of-credit-default-swaps-by-u-s-fixed-income-mutual-funds-d562.php (JEL: G21, G22, D82) We analyze optimal hedging contracts and show that although hedging aims at sharing risk, it can lead to more risk-taking. News implying that a hedge is likely to be loss-making undermines the risk-prevention incentives of the protection seller. This incentive problem limits the capacity to share risks and generates endogenous counterparty risk. Optimal hedging can therefore lead to contagion from news about insured risks to the balance sheet of insurers. Such endogenous risk is more likely to materialize ex post when the ex ante probability of counterparty default is low. Variation margins emerge as an optimal mechanism to enhance risk-sharing capacity. Paradoxically, they can also induce more risk-taking. Initial margins address the market failure caused by unregulated trading of hedging contracts among protection sellers. Tue, 10 Jan 2012 00:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/253d-no-1413-risk-sharing-or-risk-taking-counterparty-risk-incentives-and-margins-by-bruno-biais-florian-heider-marie-hoerova-670d.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/253d-no-1413-risk-sharing-or-risk-taking-counterparty-risk-incentives-and-margins-by-bruno-biais-florian-heider-marie-hoerova-670d.php (JEL: G21, G22, D82) We analyze optimal hedging contracts and show that although hedging aims at sharing risk, it can lead to more risk-taking. News implying that a hedge is likely to be loss-making undermines the risk-prevention incentives of the protection seller. This incentive problem limits the capacity to share risks and generates endogenous counterparty risk. Optimal hedging can therefore lead to contagion from news about insured risks to the balance sheet of insurers. Such endogenous risk is more likely to materialize ex post when the ex ante probability of counterparty default is low. Variation margins emerge as an optimal mechanism to enhance risk-sharing capacity. Paradoxically, they can also induce more risk-taking. Initial margins address the market failure caused by unregulated trading of hedging contracts among protection sellers. Mon, 09 Jan 2012 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/64ee-ecb-ing-or-risk-taking-counterparty-risk-incentives-and-margins-by-bruno-biais-florian-heider-marie-hoerova-3d47.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/64ee-ecb-ing-or-risk-taking-counterparty-risk-incentives-and-margins-by-bruno-biais-florian-heider-marie-hoerova-3d47.php (JEL: F23, F15, L22) This paper analyzes the performance of global value chains during the trade collapse. To do so, it exploits a unique transaction-level dataset on French firms containing information on cross-border monthly transactions matched with data on worldwide intrafirm linkages as defined by property rights (multinational business groups, hierarchies of firms). This newly assembled dataset allows us to distinguish firm-level transactions among two alternative organizational modes of global value chains: internalization of activities (intragroup trade/trade among related parties) or establishment of supply contracts (arm's length trade/trade among unrelated parties). After an overall assessment of the role of global value chains during the trade collapse, we document that intra-group trade in intermediates was characterized by a faster drop followed by a faster recovery than arm's length trade. Amplified fluctuations in terms of trade elasticities by value chains have been referred to as the "bullwhip effect" and have been attributed to the adjustment of inventories within supply chains. In this paper we first confirm the existence of such an effect due to trade in intermediates, and we underline the role that different organizational modes can play in driving this adjustment. Wed, 04 Jan 2012 00:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/253d-no-1412-global-value-chains-during-the-great-trade-collapse-a-bullwhip-effect-by-carlo-altomonte-filippo-di-mauro-gianmarco-ottaviano-armando-rungi-vincent-vicard-9e91.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/253d-no-1412-global-value-chains-during-the-great-trade-collapse-a-bullwhip-effect-by-carlo-altomonte-filippo-di-mauro-gianmarco-ottaviano-armando-rungi-vincent-vicard-9e91.php (JEL: F23, F15, L22) This paper analyzes the performance of global value chains during the trade collapse. To do so, it exploits a unique transaction-level dataset on French firms containing information on cross-border monthly transactions matched with data on worldwide intrafirm linkages as defined by property rights (multinational business groups, hierarchies of firms). This newly assembled dataset allows us to distinguish firm-level transactions among two alternative organizational modes of global value chains: internalization of activities (intragroup trade/trade among related parties) or establishment of supply contracts (arm's length trade/trade among unrelated parties). After an overall assessment of the role of global value chains during the trade collapse, we document that intra-group trade in intermediates was characterized by a faster drop followed by a faster recovery than arm's length trade. Amplified fluctuations in terms of trade elasticities by value chains have been referred to as the "bullwhip effect" and have been attributed to the adjustment of inventories within supply chains. In this paper we first confirm the existence of such an effect due to trade in intermediates, and we underline the role that different organizational modes can play in driving this adjustment. Tue, 03 Jan 2012 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/64ee-ecb-lue-chains-during-the-great-trade-collapse-a-bullwhip-effect-by-carlo-altomonte-filippo-di-mauro-gianmarco-ottaviano-armando-rungi-vincent-vicard-4762.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/64ee-ecb-lue-chains-during-the-great-trade-collapse-a-bullwhip-effect-by-carlo-altomonte-filippo-di-mauro-gianmarco-ottaviano-armando-rungi-vincent-vicard-4762.php (JEL: E5, E6, G1) We introduce a specification of habit formation featuring non-separability between consumption and leisure into an otherwise standard New Keynesian model. The model can be estimated with standard Bayesian techniques and the bond pricing implications are evaluated using higher-order approximations. The model is able to reproduce a sizeable risk premium on long-term bonds and the cyclicality of fiscal policy has an impact on the bond premium that is quantitatively important. Technology, government spending, and mark-up shocks are the main drivers of the time-variation in bond premia. Tue, 20 Dec 2011 00:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/253d-no-1411-government-bond-risk-premia-and-the-cyclicality-of-fiscal-policy-by-kai-christoffel-ivan-jaccard-juha-kilponen-924a.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/253d-no-1411-government-bond-risk-premia-and-the-cyclicality-of-fiscal-policy-by-kai-christoffel-ivan-jaccard-juha-kilponen-924a.php (JEL: C32, E23, E25) This paper explores the behavior of profits in the four largest euro area countries (Germany, France, Italy and Spain) and the euro area as a whole, while at the same time considering three main sectors (manufacturing, construction and services) in each economy over the period 1988–2010. The paper presents stylized facts about profit developments and, applying a vector autoregressive modeling framework, discusses the sensitivity of profits to four distinctive structural shocks (a demand shock, an employment shock, a wage and price mark-up shocks). In addition, it provides the shock decomposition of historical developments in profits across countries and sectors. Tue, 20 Dec 2011 00:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/253d-no-1410-profit-dynamics-across-the-largest-euro-area-countries-and-sectors-by-laurent-maurin-moreno-roma-igor-vetlov-924a.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/253d-no-1410-profit-dynamics-across-the-largest-euro-area-countries-and-sectors-by-laurent-maurin-moreno-roma-igor-vetlov-924a.php (JEL: C11, C53) This paper develops a multi-way analysis of variance for non-Gaussian multivariate distributions and provides a practical simulation algorithm to estimate the corresponding components of variance. It specifically addresses variance in Bayesian predictive distributions, showing that it may be decomposed into the sum of extrinsic variance, arising from posterior uncertainty about parameters, and intrinsic variance, which would exist even if parameters were known. Depending on the application at hand, further decomposition of extrinsic or intrinsic variance (or both) may be useful. The paper shows how to produce simulation-consistent estimates of all of these components, and the method demands little additional effort or computing time beyond that already invested in the posterior simulator. It illustrates the methods using a dynamic stochastic general equilibrium model of the US economy, both before and during the global financial crisis. Tue, 20 Dec 2011 00:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/253d-no-1409-analysis-of-variance-for-bayesian-inference-by-john-geweke-gianni-amisano-924a.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/253d-no-1409-analysis-of-variance-for-bayesian-inference-by-john-geweke-gianni-amisano-924a.php (JEL: E5, E6, G1) We introduce a specification of habit formation featuring non-separability between consumption and leisure into an otherwise standard New Keynesian model. The model can be estimated with standard Bayesian techniques and the bond pricing implications are evaluated using higher-order approximations. The model is able to reproduce a sizeable risk premium on long-term bonds and the cyclicality of fiscal policy has an impact on the bond premium that is quantitatively important. Technology, government spending, and mark-up shocks are the main drivers of the time-variation in bond premia. Mon, 19 Dec 2011 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-ecb-t-bond-risk-premia-and-the-cyclicality-of-fiscal-policy-by-kai-christoffel-ivan-jaccard-juha-kilponen-d9ab.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-ecb-t-bond-risk-premia-and-the-cyclicality-of-fiscal-policy-by-kai-christoffel-ivan-jaccard-juha-kilponen-d9ab.php (JEL: C11, C53) This paper develops a multi-way analysis of variance for non-Gaussian multivariate distributions and provides a practical simulation algorithm to estimate the corresponding components of variance. It specifically addresses variance in Bayesian predictive distributions, showing that it may be decomposed into the sum of extrinsic variance, arising from posterior uncertainty about parameters, and intrinsic variance, which would exist even if parameters were known. Depending on the application at hand, further decomposition of extrinsic or intrinsic variance (or both) may be useful. The paper shows how to produce simulation-consistent estimates of all of these components, and the method demands little additional effort or computing time beyond that already invested in the posterior simulator. It illustrates the methods using a dynamic stochastic general equilibrium model of the US economy, both before and during the global financial crisis. Mon, 19 Dec 2011 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-ecb-of-variance-for-bayesian-inference-by-john-geweke-gianni-amisano-d9ab.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-ecb-of-variance-for-bayesian-inference-by-john-geweke-gianni-amisano-d9ab.php (JEL: C32, E23, E25) This paper explores the behavior of profits in the four largest euro area countries (Germany, France, Italy and Spain) and the euro area as a whole, while at the same time considering three main sectors (manufacturing, construction and services) in each economy over the period 1988–2010. The paper presents stylized facts about profit developments and, applying a vector autoregressive modeling framework, discusses the sensitivity of profits to four distinctive structural shocks (a demand shock, an employment shock, a wage and price mark-up shocks). In addition, it provides the shock decomposition of historical developments in profits across countries and sectors. Mon, 19 Dec 2011 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-ecb-namics-across-the-largest-euro-area-countries-and-sectors-by-laurent-maurin-moreno-roma-igor-vetlov-d9ab.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-ecb-namics-across-the-largest-euro-area-countries-and-sectors-by-laurent-maurin-moreno-roma-igor-vetlov-d9ab.php Since its introduction the Renewable Energy Sources Act (EEG) has been highly controversial. Its opponents can be found at all levels, ranging from the scientific community and consumer associations right through to the political parties. As long as alternatives such as emissions trading still fail to gain global acceptance, the German government is well advised to stick with the principle of the incentive programme. Sun, 18 Dec 2011 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-germany-s-eeg-2012-lots-of-enemies-few-alternatives-02a5.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-germany-s-eeg-2012-lots-of-enemies-few-alternatives-02a5.php Following the 2000-01 crisis, Turkey implemented far-reaching economic reforms, resulting in a significant improvement of economic fundamentals and higher economic growth. Turkey’s economic and demographic weight relative to the EU-27 will increase over the coming decades. However, relatively rapid population ageing, a slowdown in the growth of the working-age population and declining outward migration will limit the “demographic dividend” the EU will reap in case of Turkish membership. While there are many reasons – political, economic and strategic – that make Turkish EU membership desirable for both the EU and Turkey, it would do little to alter the fundamental economic and demographic dynamics of the EU. Wed, 14 Dec 2011 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-turkey-and-the-eu-27-a-medium-term-perspective-084a.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-turkey-and-the-eu-27-a-medium-term-perspective-084a.php Can shorter maturity European options be statically hedged with longer maturity plain vanilla options? This problem appears when analyzing options on forwards in relation to liquid options on the spot underlying. Under mild assumptions on the underlying security prices process and on the option's payoff function we show that approximate static hedges exist und provide a recipe for constructing them. Examples illustrate the power of the hedge and its sensitivity to modelling assumptions. Wed, 14 Dec 2011 05:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-fs-static-hedging-under-maturity-mismatch-ee6a.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-fs-static-hedging-under-maturity-mismatch-ee6a.php (JEL: E62, H60, H68) This paper surveys the empirical research on fiscal policy analysis based on real-time data. This literature can be broadly divided in three groups that focus on: (1) the statistical properties of revisions in fiscal data; (2) the political and institutional determinants of projection errors by governments and (3) the reaction of fiscal policies to the business cycle. It emerges that, first, fiscal data revisions are large and initial releases are biased estimates of final values. Second, the presence of strong fiscal rules and institutions leads to relatively more accurate releases of fiscal data and small deviations of fiscal outcomes from government plans. Third, the cyclical stance of fiscal policies is estimated to be more ‘counter-cyclical’ when real-time data are used instead of ex-post data. Finally, more work is needed for the development of real-time datasets for fiscal policy analysis. In particular, a comprehensive real-time dataset including fiscal variables for industrialized (and possibly developing) countries, published and maintained by central banks or other institutions, is still missing. Tue, 13 Dec 2011 00:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/253d-no-1408-real-time-data-and-fiscal-analysis-a-survey-of-the-literature-by-jacopo-cimadomo-88bc.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/253d-no-1408-real-time-data-and-fiscal-analysis-a-survey-of-the-literature-by-jacopo-cimadomo-88bc.php (JEL: C53, D8, E32) In this paper we discuss the role of the cross-sectional heterogeneity of beliefs in the context of understanding and assessing macroeconomic vulnerability. Emphasis lies on the potential of changing levels of disagreement in expectations to influence the propensity of the economy to switch between different regimes, a hypothesis that finds robust empirical support from a regime-switching model with endogenous transition probabilities for output growth and realized stock market volatility in the US. Tue, 13 Dec 2011 00:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/253d-no-1407-macroeconomic-vulnerability-and-disagreement-in-expectations-by-cristian-badarinza-marco-buchmann-88bc.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/253d-no-1407-macroeconomic-vulnerability-and-disagreement-in-expectations-by-cristian-badarinza-marco-buchmann-88bc.php (JEL: J310, J450, O520) We investigate the public-private wage differentials in ten euro area countries (Austria, Belgium, France, Germany, Greece, Ireland, Italy, Portugal, Slovenia and Spain). To account for differences in employment characteristics between the two sectors, we focus on micro data taken from EU-SILC. The results point to a conditional pay differential in favour of the public sector that is generally higher for women, at the low tail of the wage distribution, in the Education and the Public administration sectors rather than in the Health sector. Notable differences emerge across countries, with Greece, Ireland, Italy, Portugal and Spain exhibiting higher public sector premia than other countries. Tue, 13 Dec 2011 00:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/253d-no-1406-the-public-sector-pay-gap-in-a-selection-of-euro-area-countries-by-raffaela-giordano-domenico-depalo-manuel-coutinho-pereira-bruno-eug-ne-evangelia-papapetrou-javier-j-perez-lukas-reiss-mojca-roter-88bc.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/253d-no-1406-the-public-sector-pay-gap-in-a-selection-of-euro-area-countries-by-raffaela-giordano-domenico-depalo-manuel-coutinho-pereira-bruno-eug-ne-evangelia-papapetrou-javier-j-perez-lukas-reiss-mojca-roter-88bc.php (JEL: E31, E43, E44, F31, C58) Since the end of the fixed rates in 1973 and after the EMS sterling dismissal in 1992, the value of the pound has undergone large cyclical fluctuations on average. Of particular interest to policy makers is the understanding of whether such movements are consistent with the lack or not of a correction mechanism to some long-run equilibrium. The purpose of the present study is to understand those dynamics, how the external value of the British sterling relative to the USD evolved during the recent floating experiences, and what have been the driving forces. In this paper we assume the real exchange rate to be determined by forces relating to the goods and capital market in a general equilibrium framework. This entails testing the purchasing power parity and the uncovered interest parity together. Our findings have two important implications, both for monetary policy. First, we show that some of the observed changes in the real exchange rates can not be solely attributed to changes in inflation rates, but, possibly, also to investors’ behavior. Secondly, we show that the special US dollar status of World reserve currency results into a weaker behavior of the US bond rate on international markets. Tue, 13 Dec 2011 00:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/253d-no-1405-bond-market-co-movements-expected-inflation-and-the-equilibrium-real-exchange-rate-by-corrado-macchiarelli-88bc.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/253d-no-1405-bond-market-co-movements-expected-inflation-and-the-equilibrium-real-exchange-rate-by-corrado-macchiarelli-88bc.php (JEL: E31, E43, E44, F31, C58) This study revisits the relation between the uncovered interest parity (UIP), the ex ante purchasing power parity (EXPPP) and the real interest parity (RIP) using a VAR approach for the US dollar, the British sterling and the Japanese yen interest rates, exchange rates and changes in prices. The original contribution is on developing some joint coefficient-based tests for the three parities conditions at a long horizon. Particularly, test results are derived by rewriting the UIP, the EXPPP and the RIP as a set of cross-equation restrictions in the VAR (see also Campbell and Shiller, 1987; Bekaert and Hodrick, 2001; and Bekaert et al., 2007; King and Kurmann, 2002). Consistent with the idea of some form of proportionality among the above three parities, we find a ”forward premium” bias in both the UIP - as it is normally found in empirical analysis (e.g. Fama, 1987) - and the ex ante PPP. The latter result is new in the literature and stems from testing the PPP in expectational terms, thus assuming agents to bear on the uncertainty of future exchange rate changes and inflation dynamics. The overall results confirm the UIP to be currency-based (see also Bekaert et al., 2007) and the EXPPP to be horizon-dependent (see also Lothian and Taylor, 1996; Taylor, 2002). Moreover, we find (weak) evidence that conditioning the VAR on variables having a strong forward-looking component (i.e. share prices) helps recover a unitary coefficient in the UIP equation. Tue, 13 Dec 2011 00:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/253d-no-1404-a-var-analysis-for-the-uncovered-interest-parity-and-the-ex-ante-purchasing-power-parity-the-role-of-marcoeconomic-and-financial-information-by-corrado-macchiarelli-88bc.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/253d-no-1404-a-var-analysis-for-the-uncovered-interest-parity-and-the-ex-ante-purchasing-power-parity-the-role-of-marcoeconomic-and-financial-information-by-corrado-macchiarelli-88bc.php (JEL: R11, R12, C23, J20) Despite its rather broad goal of promoting “economic, social and territorial cohesion”, the existing literature has mainly focused on investigating the Cohesion Policy’s growth effects. This ignores the fact that part of the EU expenditures is directly aimed at reducing disparities in the employment sector. Against this background, the paper analyses the impact of EU structural funds on employment drawing on a panel dataset of 130 European NUTS regions over the time period 1999-2007. Compared to previous studies we (i) explicitly take into account the unambiguous theoretical propositions by testing the conditional impact of structural funds on the educational attainment of the regional labour supply, (ii) use more precise measures of structural funds for an extended time horizon and (iii) examine the robustness of our results by comparing different dynamic panel econometric approaches to control for heteroscedasticity, serial and spatial correlation as well as for endogeneity. Our results indicate that high-skilled population in particular benefits from EU structural funds. Tue, 13 Dec 2011 00:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/253d-no-1403-do-eu-structural-funds-promote-regional-employment-evidence-from-dynamic-panel-data-by-philipp-mohl-tobias-hagen-88bc.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/253d-no-1403-do-eu-structural-funds-promote-regional-employment-evidence-from-dynamic-panel-data-by-philipp-mohl-tobias-hagen-88bc.php (JEL: E32, E4, E52, G11) This paper provides new evidence on the transmission of monetary policy in the euro area, assessing the impact of an unexpected increase of the short-term interest on the lending and borrowing activity of the different economic sectors. We exploit the information content of the flow-of-funds statistics, that provide the most appropriate framework to analyse the flowing of funds from one sector (the lender) to the other (the borrower). We proceed in two steps. First, we estimate a small VAR model for the euro area over the period 1991Q1 to 2009Q2. Then, we extend the benchmark VAR model in order to include the flow-of-funds series and analyse the response of the latter variables to a contractionary monetary policy shock. We find that the policy tightening is followed by a worsening of the budget deficit; firms cut on their demand for bank loans, partially replacing them with inter-company loans, and draw on their liquidity to try to offset the fall of revenues associated with the slowdown of economic activity; households reduce net borrowing and increase precautionary saving in the short run. Consistent with the bank lending channel of monetary policy at work, the interest rate hike is followed by a short-run deceleration of credit growth, mainly driven by the response of banks. Tue, 13 Dec 2011 00:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/253d-no-1402-monetary-policy-and-the-flow-of-funds-in-the-euro-area-by-riccardo-bonci-88bc.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/253d-no-1402-monetary-policy-and-the-flow-of-funds-in-the-euro-area-by-riccardo-bonci-88bc.php (JEL: R11, R12, C23, J20) Despite its rather broad goal of promoting “economic, social and territorial cohesion”, the existing literature has mainly focused on investigating the Cohesion Policy’s growth effects. This ignores the fact that part of the EU expenditures is directly aimed at reducing disparities in the employment sector. Against this background, the paper analyses the impact of EU structural funds on employment drawing on a panel dataset of 130 European NUTS regions over the time period 1999-2007. Compared to previous studies we (i) explicitly take into account the unambiguous theoretical propositions by testing the conditional impact of structural funds on the educational attainment of the regional labour supply, (ii) use more precise measures of structural funds for an extended time horizon and (iii) examine the robustness of our results by comparing different dynamic panel econometric approaches to control for heteroscedasticity, serial and spatial correlation as well as for endogeneity. Our results indicate that high-skilled population in particular benefits from EU structural funds. Mon, 12 Dec 2011 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-ecb-uctural-funds-promote-regional-employment-evidence-from-dynamic-panel-data-by-philipp-mohl-tobias-hagen-d9f1.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-ecb-uctural-funds-promote-regional-employment-evidence-from-dynamic-panel-data-by-philipp-mohl-tobias-hagen-d9f1.php (JEL: E32, E4, E52, G11) This paper provides new evidence on the transmission of monetary policy in the euro area, assessing the impact of an unexpected increase of the short-term interest on the lending and borrowing activity of the different economic sectors. We exploit the information content of the flow-of-funds statistics, that provide the most appropriate framework to analyse the flowing of funds from one sector (the lender) to the other (the borrower). We proceed in two steps. First, we estimate a small VAR model for the euro area over the period 1991Q1 to 2009Q2. Then, we extend the benchmark VAR model in order to include the flow-of-funds series and analyse the response of the latter variables to a contractionary monetary policy shock. We find that the policy tightening is followed by a worsening of the budget deficit; firms cut on their demand for bank loans, partially replacing them with inter-company loans, and draw on their liquidity to try to offset the fall of revenues associated with the slowdown of economic activity; households reduce net borrowing and increase precautionary saving in the short run. Consistent with the bank lending channel of monetary policy at work, the interest rate hike is followed by a short-run deceleration of credit growth, mainly driven by the response of banks. Mon, 12 Dec 2011 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-ecb-policy-and-the-flow-of-funds-in-the-euro-area-by-riccardo-bonci-d9f1.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-ecb-policy-and-the-flow-of-funds-in-the-euro-area-by-riccardo-bonci-d9f1.php (JEL: C53, D8, E32) In this paper we discuss the role of the cross-sectional heterogeneity of beliefs in the context of understanding and assessing macroeconomic vulnerability. Emphasis lies on the potential of changing levels of disagreement in expectations to influence the propensity of the economy to switch between different regimes, a hypothesis that finds robust empirical support from a regime-switching model with endogenous transition probabilities for output growth and realized stock market volatility in the US. Mon, 12 Dec 2011 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-ecb-omic-vulnerability-and-disagreement-in-expectations-by-cristian-badarinza-marco-buchmann-d9f1.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-ecb-omic-vulnerability-and-disagreement-in-expectations-by-cristian-badarinza-marco-buchmann-d9f1.php (JEL: E31, E43, E44, F31, C58) This study revisits the relation between the uncovered interest parity (UIP), the ex ante purchasing power parity (EXPPP) and the real interest parity (RIP) using a VAR approach for the US dollar, the British sterling and the Japanese yen interest rates, exchange rates and changes in prices. The original contribution is on developing some joint coefficient-based tests for the three parities conditions at a long horizon. Particularly, test results are derived by rewriting the UIP, the EXPPP and the RIP as a set of cross-equation restrictions in the VAR (see also Campbell and Shiller, 1987; Bekaert and Hodrick, 2001; and Bekaert et al., 2007; King and Kurmann, 2002). Consistent with the idea of some form of proportionality among the above three parities, we find a ”forward premium” bias in both the UIP - as it is normally found in empirical analysis (e.g. Fama, 1987) - and the ex ante PPP. The latter result is new in the literature and stems from testing the PPP in expectational terms, thus assuming agents to bear on the uncertainty of future exchange rate changes and inflation dynamics. The overall results confirm the UIP to be currency-based (see also Bekaert et al., 2007) and the EXPPP to be horizon-dependent (see also Lothian and Taylor, 1996; Taylor, 2002). Moreover, we find (weak) evidence that conditioning the VAR on variables having a strong forward-looking component (i.e. share prices) helps recover a unitary coefficient in the UIP equation. Mon, 12 Dec 2011 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-ecb-lysis-for-the-uncovered-interest-parity-and-the-ex-ante-purchasing-power-parity-the-role-of-marcoeconomic-and-financial-information-by-corrado-macchiarelli-d9f1.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-ecb-lysis-for-the-uncovered-interest-parity-and-the-ex-ante-purchasing-power-parity-the-role-of-marcoeconomic-and-financial-information-by-corrado-macchiarelli-d9f1.php (JEL: E31, E43, E44, F31, C58) Since the end of the fixed rates in 1973 and after the EMS sterling dismissal in 1992, the value of the pound has undergone large cyclical fluctuations on average. Of particular interest to policy makers is the understanding of whether such movements are consistent with the lack or not of a correction mechanism to some long-run equilibrium. The purpose of the present study is to understand those dynamics, how the external value of the British sterling relative to the USD evolved during the recent floating experiences, and what have been the driving forces. In this paper we assume the real exchange rate to be determined by forces relating to the goods and capital market in a general equilibrium framework. This entails testing the purchasing power parity and the uncovered interest parity together. Our findings have two important implications, both for monetary policy. First, we show that some of the observed changes in the real exchange rates can not be solely attributed to changes in inflation rates, but, possibly, also to investors’ behavior. Secondly, we show that the special US dollar status of World reserve currency results into a weaker behavior of the US bond rate on international markets. Mon, 12 Dec 2011 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-ecb-et-co-movements-expected-inflation-and-the-equilibrium-real-exchange-rate-by-corrado-macchiarelli-d9f1.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-ecb-et-co-movements-expected-inflation-and-the-equilibrium-real-exchange-rate-by-corrado-macchiarelli-d9f1.php (JEL: E62, H60, H68) This paper surveys the empirical research on fiscal policy analysis based on real-time data. This literature can be broadly divided in three groups that focus on: (1) the statistical properties of revisions in fiscal data; (2) the political and institutional determinants of projection errors by governments and (3) the reaction of fiscal policies to the business cycle. It emerges that, first, fiscal data revisions are large and initial releases are biased estimates of final values. Second, the presence of strong fiscal rules and institutions leads to relatively more accurate releases of fiscal data and small deviations of fiscal outcomes from government plans. Third, the cyclical stance of fiscal policies is estimated to be more ‘counter-cyclical’ when real-time data are used instead of ex-post data. Finally, more work is needed for the development of real-time datasets for fiscal policy analysis. In particular, a comprehensive real-time dataset including fiscal variables for industrialized (and possibly developing) countries, published and maintained by central banks or other institutions, is still missing. Mon, 12 Dec 2011 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-ecb-data-and-fiscal-analysis-a-survey-of-the-literature-by-jacopo-cimadomo-d9f1.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-ecb-data-and-fiscal-analysis-a-survey-of-the-literature-by-jacopo-cimadomo-d9f1.php (JEL: J310, J450, O520) We investigate the public-private wage differentials in ten euro area countries (Austria, Belgium, France, Germany, Greece, Ireland, Italy, Portugal, Slovenia and Spain). To account for differences in employment characteristics between the two sectors, we focus on micro data taken from EU-SILC. The results point to a conditional pay differential in favour of the public sector that is generally higher for women, at the low tail of the wage distribution, in the Education and the Public administration sectors rather than in the Health sector. Notable differences emerge across countries, with Greece, Ireland, Italy, Portugal and Spain exhibiting higher public sector premia than other countries. Mon, 12 Dec 2011 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-ecb-c-sector-pay-gap-in-a-selection-of-euro-area-countries-by-raffaela-giordano-domenico-depalo-manuel-coutinho-pereira-bruno-eug-ne-evangelia-papapetrou-javier-j-perez-lukas-reiss-mojca-roter-d9f1.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-ecb-c-sector-pay-gap-in-a-selection-of-euro-area-countries-by-raffaela-giordano-domenico-depalo-manuel-coutinho-pereira-bruno-eug-ne-evangelia-papapetrou-javier-j-perez-lukas-reiss-mojca-roter-d9f1.php The low expectations for the climate change conference in Durban were justified. Not only was there a failure to come to a legally binding climate change agreement containing substantial emission reduction targets, but the prospect of reaching such an agreement also appears to be unrealistic for the foreseeable future. Despite a myriad of investments in energy efficiency and renewable energies it is becoming increasingly unlikely that the 2°C target can be achieved. The world has thus made a de facto decision in favour of more adaptation. Sun, 11 Dec 2011 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-international-climate-change-policy-the-world-chooses-adaptation-433c.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-international-climate-change-policy-the-world-chooses-adaptation-433c.php Pricing and hedging structured credit products poses major challenges to financial institutions. This has become very clear during the recent credit crisis. This paper puts several valuation approaches through a crucial test: How did these models perform in one of the worst periods of economic history, September 2008, when Lehman Brothers went down? Did they produce reasonable hedging strategies? We study several bottom-up and top-down credit portfolio models and compute the resulting delta he Thu, 08 Dec 2011 05:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-hof-hedging-structured-credit-products-during-the-credit-crunch-a-horse-race-of-10-models-225d.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-hof-hedging-structured-credit-products-during-the-credit-crunch-a-horse-race-of-10-models-225d.php This paper studies constrained portfolio problems that may involve constraints on the probability or the expected size of a shortfall of wealth or consumption. Our first contribution is that we solve the problems by stochastic controls, which is in contrast to the existing literature that applies the martingale method. More precisely, we construct the non-separable value function by formalizing the optimal constrained terminal wealth to be a (conjectured) contingent claim on the optimal non- con Thu, 08 Dec 2011 05:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-hof-a-dynamic-programming-approach-to-constrained-portfolios-225d.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-hof-a-dynamic-programming-approach-to-constrained-portfolios-225d.php The U.S. state and local government sector undoubtedly faced significant short-run challenges brought about by the 2007-2009 recession which are likely to partly persist over the next few fiscal years. Yet, warnings of state bankruptcies and mass defaults at the local level are unduly exaggerated. All in all, a satisfactory assessment requires the separation of cyclical revenue problems from looming long-term challenges in pensions and healthcare. Although they do not pose an imminent threat yet, state and local pension funds and retiree healthcare commitments are in dire need of reform in order to keep them affordable. Moreover, to improve their finances, subnational jurisdictions need to correct the structural flaws in their revenue systems and budget processes and increase the effectiveness of spending to curtail the unsustainable ballooning of costs. Wed, 07 Dec 2011 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-fiscal-policy-in-us-states-d150.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-fiscal-policy-in-us-states-d150.php China's renminbi (RMB) has seen some downward pressure in recent months. The People's Bank of China turned net seller of foreign assets for the first time in four years in October and FX reserves declined in September. These developments were mostly the reflection of higher global risk aversion. The outlook for China and the RMB will likely continue to be marred by uncertainty over the global economy and the eurozone crisis, leading to slower GDP growth and lower earnings for Chinese companies. Nevertheless, a sharp depreciation of the RMB or a one-off devaluation is unlikely, with the key mitigants being the relative outperformance of the Chinese economy vis-à-vis G-3 and China’s USD 3.2 tr in foreign reserves. Sun, 04 Dec 2011 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-rmb-no-longer-a-one-way-bet-201d.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-rmb-no-longer-a-one-way-bet-201d.php Privatisation can make a major contribution to the consolidation of public budgets required in much of the euro area. It is not only a matter of raising new revenues in the short term to tackle an increasing debt load. Rather, countries that are determined to bite the bullet inspire investor confidence, which should have a positive impact on sovereign funding costs. Moreover, this is a way for a government to bolster growth capacities and expand opportunities for private-sector companies. Even though the topic has been on the economic policy agenda for at least twenty years there is still considerable privatisation potential in a number of EU countries, and this is likely to be worth 3-6% of their GDP. Wed, 30 Nov 2011 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-revenue-competition-growth-potential-for-privatisation-in-the-euro-area-df48.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-revenue-competition-growth-potential-for-privatisation-in-the-euro-area-df48.php Migration can be an effective way of reducing geographical imbalances on the labour markets. Together with politicians and the larger society, companies have a key role to play in integrating migrant workers. It is also in the interest of companies to make good use of the international pool of qualified labor. With 20% of the population being either immigrants themselves (10%) or second-generation immigrants (another 10% according to the EU Commission) – both in Germany and France – the costs of not fully integrating this potential are high, both for business and society. Tue, 29 Nov 2011 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-integration-of-migrant-workers-the-important-role-of-companies-e6b1.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-integration-of-migrant-workers-the-important-role-of-companies-e6b1.php (JEL: F01, F10) Trade is measured on a gross sales basis while GDP is measured on a net sales basis, i.e. value added. The rapid internationalisation of production in the last two decades has meant that gross trade flows are increasingly unrepresentative of value added flows. This fact has important implications for the estimation of the gravity equation. We present empirical evidence that the standard gravity equation performs poorly by some measures when it is applied to bilateral flows where parts and components trade is important. We also provide a simple theoretical foundation for a modified gravity equation that is suited to explaining trade where international supply chains are important. Mon, 28 Nov 2011 00:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/253d-no-1401-gravity-chains-estimating-bilateral-trade-flows-when-parts-and-components-trade-is-important-by-richard-baldwin-daria-taglioni-43e7.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/253d-no-1401-gravity-chains-estimating-bilateral-trade-flows-when-parts-and-components-trade-is-important-by-richard-baldwin-daria-taglioni-43e7.php (JEL: E25, J23, J24, O40) We examine the two-level nested Constant Elasticity of Substitution production function where both capital and labor are disaggregated in two classes. We propose a normalized system estimation method to retrieve estimates of the inter- and intra-class elasticities of substitution and factoraugmenting technical progress coefficients. The system is estimated for US data for the 1963-2006 period. Our findings reveal that skilled and unskilled labor classes are gross substitutes, capital structures and equipment are gross complements, and aggregate capital and aggregate labor are gross complements with an elasticity of substitution close to 0.5. We discuss the implications of our findings and methodology for the analysis of the causes of the increase in the skill premium and, by implication, inequality in a growing economy. Mon, 28 Nov 2011 00:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/253d-no-1400-aggregation-the-skill-premium-and-the-two-level-production-function-by-miguel-a-le-n-ledesma-peter-mcadam-alpo-willman-43e7.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/253d-no-1400-aggregation-the-skill-premium-and-the-two-level-production-function-by-miguel-a-le-n-ledesma-peter-mcadam-alpo-willman-43e7.php (JEL: C10, C23, H11, H30, O40) We construct a growth model with an explicit government role, where more government resources reduce the optimal level of private consumption and of output per worker. In the empirical analysis, for a panel of 108 countries from 1970-2008, we use different proxies for government size and institutional quality. Our results, consistent with the presented growth model, show a negative effect of the size of government on growth. Similarly, institutional quality has a positive impact on real growth, and government consumption is consistently detrimental to growth. Moreover, the negative effect of government size on growth is stronger the lower institutional quality, and the positive effect of institutional quality on growth increases with smaller governments. The negative effect on growth of the government size variables is more mitigated for Scandinavian legal origins, and stronger at lower levels of civil liberties and political rights. Finally, for the EU, better overall fiscal and expenditure rules improve growth. Mon, 28 Nov 2011 00:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/253d-no-1399-economic-performance-and-government-size-by-antonio-afonso-jo-o-tovar-jalles-43e7.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/253d-no-1399-economic-performance-and-government-size-by-antonio-afonso-jo-o-tovar-jalles-43e7.php (JEL: C32, E30, E44, E51, E52) I find that the Eurosystem can stimulate the economy beyond the policy rate by increasing the size of its balance sheet or the monetary base. The transmission mechanism turns out to be different compared to traditional interest rate innovations: (i) whilst the effects on economic activity and consumer prices reach a peak after about one year for an interest rate innovation, this is more than six months later for a shift in the monetary base that is orthogonal to the policy rate (ii) interest rate spreads charged by banks decline persistently after a rise in the monetary base, whereas the spreads increase significantly after a fall in the policy rate (iii) there is no significant short-run liquidity effect after an interest rate innovation, that is additional bank loans are generated by a greater credit multiplier. In contrast, the multiplier declines considerably after an expansion of the Eurosystem’s balance sheet. Mon, 28 Nov 2011 00:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/253d-no-1397-macroeconomic-effects-of-unconventional-monetary-policy-in-the-euro-area-by-gert-peersman-43e7.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/253d-no-1397-macroeconomic-effects-of-unconventional-monetary-policy-in-the-euro-area-by-gert-peersman-43e7.php (JEL: G12, D83, D84) We study the dynamics of a Lucas-tree model with finitely lived agents who "learn from experience." Individuals update expectations by Bayesian learning based on observations from their own lifetimes. In this model, the stock price exhibits stochastic boom-and-bust fluctuations around the rational expectations equilibrium. This heterogeneous-agents economy can be approximated by a representative-agent model with constant-gain learning, where the gain parameter is related to the survival rate. Mon, 28 Nov 2011 00:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/253d-no-1396-learning-from-experience-in-the-stock-market-by-anton-nakov-galo-nu-o-43e7.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/253d-no-1396-learning-from-experience-in-the-stock-market-by-anton-nakov-galo-nu-o-43e7.php (JEL: C10, C23, H11, H30, O40) We construct a growth model with an explicit government role, where more government resources reduce the optimal level of private consumption and of output per worker. In the empirical analysis, for a panel of 108 countries from 1970-2008, we use different proxies for government size and institutional quality. Our results, consistent with the presented growth model, show a negative effect of the size of government on growth. Similarly, institutional quality has a positive impact on real growth, and government consumption is consistently detrimental to growth. Moreover, the negative effect of government size on growth is stronger the lower institutional quality, and the positive effect of institutional quality on growth increases with smaller governments. The negative effect on growth of the government size variables is more mitigated for Scandinavian legal origins, and stronger at lower levels of civil liberties and political rights. Finally, for the EU, better overall fiscal and expenditure rules improve growth. Sun, 27 Nov 2011 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-ecb-performance-and-government-size-by-antonio-afonso-jo-o-tovar-jalles-8d6a.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-ecb-performance-and-government-size-by-antonio-afonso-jo-o-tovar-jalles-8d6a.php (JEL: E25, J23, J24, O40) We examine the two-level nested Constant Elasticity of Substitution production function where both capital and labor are disaggregated in two classes. We propose a normalized system estimation method to retrieve estimates of the inter- and intra-class elasticities of substitution and factoraugmenting technical progress coefficients. The system is estimated for US data for the 1963-2006 period. Our findings reveal that skilled and unskilled labor classes are gross substitutes, capital structures and equipment are gross complements, and aggregate capital and aggregate labor are gross complements with an elasticity of substitution close to 0.5. We discuss the implications of our findings and methodology for the analysis of the causes of the increase in the skill premium and, by implication, inequality in a growing economy. Sun, 27 Nov 2011 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-ecb-on-the-skill-premium-and-the-two-level-production-function-by-miguel-a-le-n-ledesma-peter-mcadam-alpo-willman-8d6a.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-ecb-on-the-skill-premium-and-the-two-level-production-function-by-miguel-a-le-n-ledesma-peter-mcadam-alpo-willman-8d6a.php (JEL: C32, E30, E44, E51, E52) I find that the Eurosystem can stimulate the economy beyond the policy rate by increasing the size of its balance sheet or the monetary base. The transmission mechanism turns out to be different compared to traditional interest rate innovations: (i) whilst the effects on economic activity and consumer prices reach a peak after about one year for an interest rate innovation, this is more than six months later for a shift in the monetary base that is orthogonal to the policy rate (ii) interest rate spreads charged by banks decline persistently after a rise in the monetary base, whereas the spreads increase significantly after a fall in the policy rate (iii) there is no significant short-run liquidity effect after an interest rate innovation, that is additional bank loans are generated by a greater credit multiplier. In contrast, the multiplier declines considerably after an expansion of the Eurosystem’s balance sheet. Sun, 27 Nov 2011 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-ecb-omic-effects-of-unconventional-monetary-policy-in-the-euro-area-by-gert-peersman-8d6a.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-ecb-omic-effects-of-unconventional-monetary-policy-in-the-euro-area-by-gert-peersman-8d6a.php (JEL: F01, F10) Trade is measured on a gross sales basis while GDP is measured on a net sales basis, i.e. value added. The rapid internationalisation of production in the last two decades has meant that gross trade flows are increasingly unrepresentative of value added flows. This fact has important implications for the estimation of the gravity equation. We present empirical evidence that the standard gravity equation performs poorly by some measures when it is applied to bilateral flows where parts and components trade is important. We also provide a simple theoretical foundation for a modified gravity equation that is suited to explaining trade where international supply chains are important. Sun, 27 Nov 2011 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-ecb-hains-estimating-bilateral-trade-flows-when-parts-and-components-trade-is-important-by-richard-baldwin-daria-taglioni-8d6a.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-ecb-hains-estimating-bilateral-trade-flows-when-parts-and-components-trade-is-important-by-richard-baldwin-daria-taglioni-8d6a.php (JEL: G12, D83, D84) We study the dynamics of a Lucas-tree model with finitely lived agents who "learn from experience." Individuals update expectations by Bayesian learning based on observations from their own lifetimes. In this model, the stock price exhibits stochastic boom-and-bust fluctuations around the rational expectations equilibrium. This heterogeneous-agents economy can be approximated by a representative-agent model with constant-gain learning, where the gain parameter is related to the survival rate. Sun, 27 Nov 2011 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-ecb-from-experience-in-the-stock-market-by-anton-nakov-galo-nu-o-8d6a.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-ecb-from-experience-in-the-stock-market-by-anton-nakov-galo-nu-o-8d6a.php Global FX reserves are denominated in only a handful of currencies. For a currency to become a major reserve currency, it has to be underpinned by liquid, large and highly-rated bond markets. None of the BRIC can at present aspire to major reserve currency status given global FX reserves worth USD 10 tr. Only the RMB has the potential to become a major, albeit not the dominant, reserve currency by 2030. The USD will continue to benefit from incumbency, and is therefore unlikely to be displaced as the “dominant” reserve currency, assuming the government manages to put debt back on a sustainable path. Sun, 27 Nov 2011 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-are-the-bric-currencies-set-to-become-reserve-currencies-8d6a.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-are-the-bric-currencies-set-to-become-reserve-currencies-8d6a.php Forest conservation can help mitigate the effects of climate change and facilitate adaptation to new climatic conditions. It plays a particularly important role for the water balance. The clearing and overexploitation of “old” woodland leads to accelerated desertification and exacerbated flooding. International climate negotiations aim to foster the protection and sustainable use of forests. Mon, 21 Nov 2011 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-climate-change-forest-conservation-must-be-given-higher-priority-83e7.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-climate-change-forest-conservation-must-be-given-higher-priority-83e7.php Only rarely since 1975 have summit meetings of the world’s major economic powers seen such long documents approved as was the case in Cannes. The summit conclusions could also be published as a book, but readers would find the content difficult to fathom. That wasn’t how it was meant to be. Such summits are supposed to provide political leadership, enable compromises to be reached between the leading powers and boost the momentum behind the technical work of the specialist committees. Sometimes miracles do happen at such meetings, sometimes the homework does at least get completed, and sometimes both things fail to be achieved. Cannes will probably go down in history as a summit that sought to achieve a growth turnaround – but failed – and where there was no trace of a miracle. Thu, 17 Nov 2011 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-the-g20-in-cannes-they-came-in-search-of-growth-and-didn-t-find-it-b9fa.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-the-g20-in-cannes-they-came-in-search-of-growth-and-didn-t-find-it-b9fa.php (JEL: G20, G21) This paper analyzes the importance of retail consumers’ banking relationships for loan defaults using a unique, comprehensive dataset of over one million loans by savings banks in Germany. We find that loans of retail customers, who have a relationship with their savings bank prior to applying for a loan, default significantly less than customers with no prior relationship. We find relationships matter in different forms, scope, and depth. Importantly, though, even the simplest forms of relationships such as transaction accounts are economically meaningful in reducing defaults, even after controlling for other borrower characteristics as well as internal and external credit scores. Our results suggest that relationships of all kinds have inherent private information and are valuable in screening, in monitoring, and in reducing consumers’ incentives to default. Thu, 17 Nov 2011 00:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/253d-no-1395-on-the-importance-of-prior-relationships-in-bank-loans-to-retail-customers-by-manju-puri-joerg-rocholl-sascha-steffen-d771.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/253d-no-1395-on-the-importance-of-prior-relationships-in-bank-loans-to-retail-customers-by-manju-puri-joerg-rocholl-sascha-steffen-d771.php The expansion of communications infrastructure worldwide entails huge investments and in the European Union alone these will undoubtedly exceed EUR 200 bn by 2020. But the commercial success of the politically desired expansion of high-performance broadband networks in a competitive market environment is closely linked with the issue of the socially correct degree of investment protection. This protection should on the one hand be as strong as necessary, so that the required network investments can be sufficiently profitable. On the other hand, however, the investment protection must not be too extensive, thereby enabling a network operator to systematically exclude (potential) competitors from the market and in turn also resulting in insufficient infrastructure investment from a social point of view. The frequently emotional debates on this subject show that although the experience gathered in other countries can help, it is essential that the desired regulations concerning net neutrality address the country-specific technical and economic conditions – that is, there should definitely be no wholesale adoption of the lessons from other economic areas. Wed, 16 Nov 2011 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-net-neutrality-innovation-and-differentiation-are-not-polar-opposites-f575.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-net-neutrality-innovation-and-differentiation-are-not-polar-opposites-f575.php Shortened product life cycles, rapidly changing consumer preferences, global competitive pressures and digital structural change are compelling businesses to continually improve their products and services. Open innovation, i.e. the interactive integration of external agents, is one way of partially externalising innovation processes in order to tap outside innovation potential. Wed, 16 Nov 2011 04:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-open-businesses-52c4.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-open-businesses-52c4.php The world economic crisis has seriously weakened potential economic growth in many industrialised countries for the coming years. And new regulatory requirements in the financial sector are likely to deal it a further blow. This has made economic policy measures to stimulate economic growth in the wake of structural reform an absolutely essential complement to macroeconomic measures, especially in the big industrial nations. Even at a time when the scope has narrowed for fiscal policy, this still holds true. It is precisely in periods of consolidation that structural reforms are vital to sustained success. Mon, 14 Nov 2011 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-in-search-of-growth-148a.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-in-search-of-growth-148a.php In the public debate over the need for reform in Italy one of the main issues is Italy’s statutory pension system. There are good reasons for this. Pension adjustments should, however, be accompanied by more labour market flexibility so employment will become a realistic alternative to the common practice of early retirement for more seniors. Wed, 09 Nov 2011 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-italy-s-early-retirement-system-is-a-curb-on-growth-e456.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-italy-s-early-retirement-system-is-a-curb-on-growth-e456.php The boom experienced by Germany’s industrial sector over the last two years has been the subject of many reports. By contrast, little attention has been paid to the large discrepancy between the dynamic growth of industrial output in Germany and the meagre growth rates registered in the rest of Europe. Moreover, a closer look at the figures shows that German manufacturing stands a better chance of coping with the looming slowdown than the industrial sectors of many other eurozone countries. Mon, 07 Nov 2011 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-german-industry-well-equipped-to-cope-with-low-growth-cffa.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-german-industry-well-equipped-to-cope-with-low-growth-cffa.php (JEL: G21, G15, E58, G32) We exploit the 2007-2009 financial crisis to analyze how risk relates to bank business models. Institutions with higher risk exposure had less capital, larger size, greater reliance on short-term market funding, and aggressive credit growth. Business models related to significantly reduced bank risk were characterized by a strong deposit base and greater income diversification. The effect of business models is non-linear: it has a different impact on riskier banks. Finally, it is difficult to establish in real time whether greater stock market capitalization involves real value creation or the accumulation of latent risk. Fri, 04 Nov 2011 00:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/253d-no-1394-bank-risk-during-the-financial-crisis-do-business-models-matter-by-yener-altunbas-simone-manganelli-david-marqu-s-ib-ez-ee2b.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/253d-no-1394-bank-risk-during-the-financial-crisis-do-business-models-matter-by-yener-altunbas-simone-manganelli-david-marqu-s-ib-ez-ee2b.php 40% of all household wealth in the eurozone is held as financial assets in the form of deposits and investment products – around EUR 19 trillion. A European Commission proposal for a directive (“MiFID 2”) will change this market: in future banks are to inform consumers whether the advice they offer is independent or restricted. If the advice is independent, charging commission is to be banned. The paying of commission is, however, in most member states the standard model of remuneration for the investment advice provided by banks. Irrespective of this practical aspect there is the question of whether the “independent” label will promise the consumer more than the individual advisor is capable of delivering. Thu, 03 Nov 2011 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-mifid-2-investment-advice-in-europe-to-be-redefined-5c84.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-mifid-2-investment-advice-in-europe-to-be-redefined-5c84.php More than 40% of Europeans will use online banking in 2012. For Germany, the figure will probably be 47%. This new issue examines current developments in online and mobile banking in more depth. It looks particularly at one important driver of online banking adoption: financial literacy. It is perhaps a worrying - albeit unsurprising - trend that many consumers have become less confident when taking financial decisions. But therein also lies a responsibility for financial firms to explain what is going on. Wed, 02 Nov 2011 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-update-on-online-and-mobile-banking-47-of-germans-will-use-online-banking-in-2012-f90c.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-update-on-online-and-mobile-banking-47-of-germans-will-use-online-banking-in-2012-f90c.php The recent signing of Germany’s first raw materials partnership agreement heralds a new era in the country’s raw materials policy. In the last few years competition has intensified significantly at the international level. The new strategy opens up business opportunities and promises a more stable supply of raw materials. Sun, 30 Oct 2011 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-germany-s-new-raw-materials-policy-late-but-not-too-late-aa21.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-germany-s-new-raw-materials-policy-late-but-not-too-late-aa21.php (JEL: Z12, D72, H23, N33) We investigate the effect of Reformed Protestantism, relative to Catholicism, on preferences for leisure and for redistribution and intervention in the economy. With a Fuzzy Spatial Regression Discontinuity Design, we exploit a historical quasiexperiment in Western Switzerland, where in the 16th century a so far homogeneous region was split and one part assigned to convert to Protestantism. We find that Reformed Protestantism reduces the fraction of citizens voting for more leisure by 13, and that voting for more redistribution and government intervention by respectively 3 and 11 percentage points. These preferences are found to translate into greater income inequality, but we find no robust effect on average income. Fri, 28 Oct 2011 00:00:00 +0200 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/253d-no-1393-marx-vs-weber-does-religion-affect-politics-and-the-economy-by-christoph-basten-frank-betz-3b05.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/253d-no-1393-marx-vs-weber-does-religion-affect-politics-and-the-economy-by-christoph-basten-frank-betz-3b05.php (JEL: F30, F31, F33, N20) This paper assesses whether the international monetary system is already tripolar and centred around the US dollar, the euro and the Chinese renminbi (RMB). It focuses on what we call China’s “dominance hypothesis”, i.e. whether the renminbi is already the dominant currency in Asia, exerting a large influence on exchange rate and monetary policies in the region, a direct reference to the old “German dominance hypothesis” which ascribed to the German mark a dominant role in Europe in the 1980s-1990s. Using a global factor model of exchange rates and a complementary event study, we find evidence that the RMB has become a key driver of currency movements in emerging Asia since the mid-2000s, and even more so since the global financial crisis. These results are consistent with China’s dominance hypothesis and with the view that the international monetary system is already tri-polar. However, we also find that China’s currency movements are to some extent affected by those in the rest of Asia. Fri, 28 Oct 2011 00:00:00 +0200 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/253d-no-1392-china-s-dominance-hypothesis-and-the-emergence-of-a-tri-polar-global-currency-system-by-marcel-fratzscher-arnaud-mehl-3b05.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/253d-no-1392-china-s-dominance-hypothesis-and-the-emergence-of-a-tri-polar-global-currency-system-by-marcel-fratzscher-arnaud-mehl-3b05.php (JEL: C14, E43, E52, E58, E61) This paper analyses changes in short-term interest rate expectations and uncertainty during ECB Governing Council days. For this purpose, it first extends the estimation of risk-neutral probability density functions up to tick frequency. In particular, the non-parametric estimator of these densities, which is based on fitting implied volatility curves, is applied to estimate intraday expectations of threemonth EURIBOR three months ahead. The estimator proves to be robust to market microstructure noise and able to capture meaningful changes in expectations. Estimates of the noise impact on the statistical moments of the densities further enhance the interpretation. In addition, the paper assesses the impact of the ECB communication during Governing Council days. The results show that the whole density may react to the communication and that such repositioning of market participants’ expectations will contain information beyond that of changes in the consensus view already observed in forward rates. The results also point out the relevance of the press conference in providing extra information and triggering an adjustment process for interest rate expectations. Fri, 28 Oct 2011 00:00:00 +0200 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/253d-no-1391-interest-rate-expectations-and-uncertainty-during-ecb-governing-council-days-evidence-from-intraday-implied-densities-of-3-month-euribor-by-olivier-vergote-josep-maria-puigvert-guti-rrez-3b05.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/253d-no-1391-interest-rate-expectations-and-uncertainty-during-ecb-governing-council-days-evidence-from-intraday-implied-densities-of-3-month-euribor-by-olivier-vergote-josep-maria-puigvert-guti-rrez-3b05.php Below the surface of the euro area’s public debt and banking crisis lies a balance-of-payments crisis caused by the misalignment of internal real exchange rates. The path of least resistance seems to be an appreciation in creditor countries through the inflation of goods, services and asset prices. But will the electorates in the creditor countries accept a policy of easy money and exchange rate depreciation or push an exit from EMU? The authorities in creditor countries could insure their population against inflation and a soft currency policy by offering them index-linked securities that would convert into a new currency should these governments eventually decide to abandon the euro. Alternatively, authorities could aim at generating a combination of intra-EMU transfers, deflation in the debtor countries and inflation in the creditor countries such that the economic pain felt in each country group is shared between them in a way that leaves it below the level triggering a break-up of EMU. Tue, 25 Oct 2011 22:00:00 +0200 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-euroland-s-hidden-balance-of-payments-crisis-9cc4.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-euroland-s-hidden-balance-of-payments-crisis-9cc4.php Tomorrow, the European Commission will publish a proposal for a Regulation (“MiFIR”) and a Directive (“MiFID 2”) that will extend what is currently regulated by the existing Directive on markets in financial instruments (“MiFID“). The existing MiFID created a regulatory framework for investment services in the EU. Some of the new proposals are necessary considering changed market circumstances. Others are at least worth discussing regarding their design. There is a broad consensus on the overall objectives: more transparency and a comprehensive regulation of all market participants and instruments are globally agreed principles. But will the new proposals be able to efficiently eliminate the identified shortcomings? Tue, 18 Oct 2011 22:00:00 +0200 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-mifid-2-the-script-for-part-two-of-the-integration-of-european-markets-in-financial-instruments-18ab.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-mifid-2-the-script-for-part-two-of-the-integration-of-european-markets-in-financial-instruments-18ab.php At present the issue of electromobility (E-mobility) is electrifying the public. Why is public discussion focusing so intently on E-mobility right now? Why are many governments supporting the technology just now, and why have carmakers chosen precisely this time to intensify their research and development in this area? In this report we analyse how realistic the expectations of E-mobility are. We also examine the market-based and regulative instruments with which governments intend and are able to support E-mobility. Additionally, we estimate the market potential for electric vehicles in Germany in the year 2020 on the basis of various different scenarios. Tue, 18 Oct 2011 22:00:00 +0200 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-electromobility-falling-costs-are-a-must-18ab.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-electromobility-falling-costs-are-a-must-18ab.php Rapid commodity-intensive industrialisation, population growth and rising per capita incomes in the emerging markets should continue benefit the Brazilian economy over the medium term. An over-reliance on commodity exports, if not skillfully managed, tends to have a number of detrimental effects, however. Creating a solid framework for dealing with the expected pre-salt-related revenue windfall, reforms targeting productivity growth and a strong fiscal adjustment are necessary if a potentially risky shift towards an economic model that relies too much on domestic consumption and improving terms-of-trade is to be avoided. Sun, 16 Oct 2011 22:00:00 +0200 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-brazil-as-a-commodity-exporter-opportunities-amp-risks-156f.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-brazil-as-a-commodity-exporter-opportunities-amp-risks-156f.php Developing a strategy for online channels requires knowledge about the effects of online use on customer revenues and costs to serve, which ultimately influence customer profitability. The authors theoretically discuss and empirically examine these effects. The results of an empirical study, with information about retail banking customers, reveal that online use affects customer profitability positively by increasing customer revenues and decreasing costs to serve. Moreover, the revenue effects Thu, 13 Oct 2011 04:00:00 +0200 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-e-financial-lab-impact-of-online-channel-use-on-customer-revenues-and-costs-to-serve-considering-product-portfolios-e9c0.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-e-financial-lab-impact-of-online-channel-use-on-customer-revenues-and-costs-to-serve-considering-product-portfolios-e9c0.php After Greece, Ireland, Portugal and Spain, Italy is increasingly also taking centre-stage in the European sovereign debt crisis. As the world's fourth-largest borrower with its sovereign debt running to almost EUR 2 trillion, Italy is vulnerable to a cooling of economic growth, increases in market interest rates or the materialisation of contingent liabilities from the banking sector. At roughly 119% of GDP, Italy has the second-highest gross debt ratio of any sovereign in EMU after Greece. If Italy were to lose access to the capital markets, the EUR 440 bn funding of the European Financial Stability Facility (EFSF) would probably not suffice (without further enhancements such as a leveraging of the funds) to bail out the euro area's third-largest economy. The downgrading of Italy's credit rating by S&P's, Moody's and Fitch should therefore be seen as a warning to the Italian government to shore up the long-term sustainability of its sovereign debt. Tue, 11 Oct 2011 22:00:00 +0200 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-italy-2020-debt-reduction-is-the-order-of-the-day-6101.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-italy-2020-debt-reduction-is-the-order-of-the-day-6101.php The first half of 2011 was marked by a sense of optimism in the private equity industry – especially in Germany. This confidence was borne of the strong performance of the corporate sector to date, the increasing availability of borrowing, and the cash flows earned from successful exits. However, the plunge in share prices since the beginning of August triggered a more sceptical assessment of general growth prospects. The fragile state of the economy will hit portfolio companies’ profits and make lucrative exits more difficult. However, this situation also presents opportunities. Private equity funds that are launched in economically challenging times usually generate the highest rates of return. Mon, 10 Oct 2011 22:00:00 +0200 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-private-equity-opportunities-in-turbulent-times-3a51.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-private-equity-opportunities-in-turbulent-times-3a51.php The European Commission is seeking to introduce rules to promote more responsible mortgage lending in Europe. One of its objectives is to cut default rates and thus also reduce the number of real estate foreclosures. According to the “better regulation” standards, the Commission has pledged to draw up impact assessments. It is this very area, however, that has proved difficult with regard to home loan default rates and foreclosures. Corresponding statistical data is only sparsely available, which makes meaningful analysis virtually impossible. Tue, 04 Oct 2011 22:00:00 +0200 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-residential-mortgages-can-an-obligation-to-deny-credit-reduce-default-rates-80fb.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2011-rss/64ee-db-research-residential-mortgages-can-an-obligation-to-deny-credit-reduce-default-rates-80fb.php