http://www.frankfurt-main-finance.com/ de-de Frankfurt Main Finance http://www.frankfurt-main-finance.com Aktuelles Sat, 19 May 2012 00:00:51 +0200 (JEL: C33, O47, J24, L60, L80) Sizable prevailing real economic disparities among countries in a currency union potentially involve costs for those countries for which the aggregate policy stance is not appropriate. This paper contributes to the literature by testing for productivity convergence among euro area countries. While no convergence can be found on the aggregate level, selected service sectors and manufacturing sub-industries indicate evidence of convergence. In a search for factors influencing productivity, investments in research and development as well as a high skill level of employees are shown to be beneficial whereas regulations constitute a burden. Consequently, euro area countries should engage in structural reforms where necessary to provide a more competitive environment, eventually facilitating economic convergence. Sat, 26 May 2012 22:00:00 +0200 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-productivity-in-the-euro-area-any-evidence-of-convergence-by-david-sondermann-0c8d.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-productivity-in-the-euro-area-any-evidence-of-convergence-by-david-sondermann-0c8d.php (JEL: E31, E41, E51, E52, G58, F40) We challenge the view that the relationship between money and prices is too loose in countries with low inflation rates and argue that cross-border portfolio shifts are the root cause of the volatility in real money balances. The novelty of this paper is that we model jointly in the euro area and the United States (i) the equilibrium in the money market that takes into account the cross-border portfolio shifts, and (ii) the equilibrium in the domestic asset markets, by finding a no-arbitrage relation between domestic long-horizon expected stock and bond returns. We estimate a stable money demand in the long-run and find that the short-run correlation between annual inflation and model-based excess money growth is not statistically different from unity in both the euro area and the United States. We also find that the resulting long-run equity risk premium comoves counter-cyclically with quarterly real GDP growth in both economies. Sun, 13 May 2012 22:00:00 +0200 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-quantity-theory-is-alive-the-role-of-international-portfolio-shifts-by-roberto-a-de-santis-3319.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-quantity-theory-is-alive-the-role-of-international-portfolio-shifts-by-roberto-a-de-santis-3319.php (JEL: D71, D78, D81, E58) How large should a monetary policy committee be? Which voting rule should a monetary policy committee adopt? This paper builds on Condorcet's jury threorem to analyse the relationships between committee size and voting rules in a model where policy discussions are subject to a time constraint. It suggests that in large committees majority voting is likely to enhance policy outcomes. Under unanimity (consensus) it is preferable to limit the size of the committee. Finally, supermajority voting rules are social contrivances that contribute to policy performance in a more uncertain environment, when initial policy proposals are less likely to be correct, or when payoffs are asymmetric. Sun, 13 May 2012 22:00:00 +0200 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-monetary-policy-deliberations-committee-size-and-voting-rules-by-vincent-maurin-jean-pierre-vidal-3319.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-monetary-policy-deliberations-committee-size-and-voting-rules-by-vincent-maurin-jean-pierre-vidal-3319.php Electronic Money (e-money) is the digital equivalent of cash. It can be used for making payments without involving bank accounts in the transactions and always acts as a prepaid bearer instrument. So far, e-money still is a niche market. However, innovative mobile payment systems, the digitalisation of financial services and virtual e-money might boost the usage of e-money and might thus support its importance as a payments instrument in the near future. Thu, 10 May 2012 22:00:00 +0200 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-db-research-e-money-niche-market-that-might-be-expanding-bab4.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-db-research-e-money-niche-market-that-might-be-expanding-bab4.php The internet provides people with access to multimedia communication tools, interactive processes for collaboration and participation as well as social platforms for sharing content or joining together to pursue a variety of causes. In recent years the internet has also developed from a predominantly passive entertainment medium into a serious platform for the economically and politically active. The internet has matured. Increasing online transparency ensures that thought-provoking topics generate their own momentum – depending on whether they strike a chord – spreading virally at breakneck speed and can thereby gain major relevance. Mon, 07 May 2012 06:00:00 +0200 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-db-research-homo-wikipedicus-new-ways-of-participating-online-d127.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-db-research-homo-wikipedicus-new-ways-of-participating-online-d127.php (JEL: F30, N20) This paper offers new evidence on the emergence of the dollar as the leading international currency, focusing on its role as currency of denomination in global bond markets. We show that the dollar overtook sterling much earlier than commonly supposed, as early as in 1929. Financial market development appears to have been the main factor helping the dollar to surmount sterling’s head start. The finding that a shift from a unipolar to a multipolar international monetary and financial system has happened before suggests that it can happen again. That the shift occurred earlier than commonly believed suggests that the advantages of incumbency are not all they are cracked up to be. And that financial deepening was a key determinant of the dollar’s emergence points to the challenges facing currencies aspiring to international status. Sun, 06 May 2012 22:00:00 +0200 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-when-did-the-dollar-overtake-sterling-as-the-leading-international-currency-evidence-from-the-bond-markets-by-livia-chi-u-barry-eichengreen-arnaud-mehl-630e.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-when-did-the-dollar-overtake-sterling-as-the-leading-international-currency-evidence-from-the-bond-markets-by-livia-chi-u-barry-eichengreen-arnaud-mehl-630e.php (JEL: C01, C32, E32) This paper studies oil market and other macroeconomic shocks in a structural vector autoregression with sign restrictions. It introduces a new indicator for oil demand, and uniquely, performs a sign restriction set-up with a penalty function approach in an oil market vector autoregression. The model also allows for macroeconomic shocks in the US. The results underline the importance of the source of an oil shock for its macroeconomic consequences. Oil supply shocks have been less relevant in driving real oil prices, and had less of an effect on US inflation than demand shocks. Overall, the effects of oil shocks on US real activity have been relatively limited, as also highlighted by a counterfactual experiment of recent oil market developments. Thu, 03 May 2012 22:00:00 +0200 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-macroeconomic-shocks-in-an-oil-market-var-by-marko-melolinna-5ada.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-macroeconomic-shocks-in-an-oil-market-var-by-marko-melolinna-5ada.php Since the May 6th, 2010 flash crash in the U.S., appropriate measures ensuring safe, fair and reliable markets become more relevant from the perspective of investors and regulators. Circuit breakers in various forms are already implemented for individual markets to ensure price continuity and prevent potential market failure and crash scenarios. However, coordinated inter-market safeguards have been partly adopted only, but are essential in a fragmented environment to prevent situations, where m Thu, 03 May 2012 04:00:00 +0200 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-e-financial-lab-circuit-breakers-in-fragmented-markets-an-assessment-9431.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-e-financial-lab-circuit-breakers-in-fragmented-markets-an-assessment-9431.php Over-the-counter (OTC) derivatives are an important means to hedge risks in financial markets and are therefore key tools for companies, authorities and financial institutions in managing their exposure to risks linked with interest rates, exchange rates, commodity prices etc. Prior to the financial crisis, OTC derivatives markets were largely unregulated. In 2009, the G20 leaders agreed that all standardised OTC derivative contracts should be cleared through CCPs, that all derivative contracts should be reported to trade repositories and that non-centrally cleared contracts should be subject to higher capital requirements. In the EU, the G20 commitment is implemented by the EMIR which was finalised in February 2012 and approved by the European Parliament in March 2012. Wed, 02 May 2012 22:00:00 +0200 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-db-research-european-commission-finalises-otc-derivatives-market-reform-15eb.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-db-research-european-commission-finalises-otc-derivatives-market-reform-15eb.php Deposits are the most important source of funding for European banks, providing about 60% of the total. At the same time, private-sector deposits tend to be less volatile than other funding instruments. The importance of deposits is set to increase even further in the medium term because of new regulatory requirements and higher levels of risk aversion at banks. Boosting deposit volumes could enable moderate growth in bank assets and thus also an increase in lending to the private sector over the coming years. However, this would require that households hold a larger share of their savings in the form of deposits and invest a smaller proportion in insurance policies. Tue, 01 May 2012 22:00:00 +0200 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-db-research-poised-for-a-comeback-bank-deposits-8f46.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-db-research-poised-for-a-comeback-bank-deposits-8f46.php The second largest economy on the African continent has big plans for the period up until 2020. Within the next eight years Nigeria aims to propel itself into the club of the world’s 20 largest economies. Furthermore, the rating agency Fitch recently compared Nigeria with countries such as Indonesia, Azerbaijan and Russia which have become investment-grade countries in the space of eight years. Sun, 29 Apr 2012 22:00:00 +0200 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-db-research-nigeria-african-oil-giant-forging-ahead-with-reforms-54ed.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-db-research-nigeria-african-oil-giant-forging-ahead-with-reforms-54ed.php (JEL: F12, F15, F23) In this paper we provide a new explanation for the increase in world trade over the last two decades. We show analytically in a general equilibrium model with heterogeneous firms that a fall in variable offshoring costs boosts trade in differentiated final goods through an intra-industry reallocation of resources towards the more productive firms. That is what we call the export-magnification effect of offshoring. More specifically, lower barriers to offshoring reduce the average costs of inputs for offshoring firms and allow more firms to source cheap foreign intermediates, which improves firm-level price competitiveness. This, in turn, translates into higher export quantities of incumbent exporters (intensive margin) and the entry of new exporters (extensive margin). The increase in final goods trade comes on top of the boost to trade in intermediates. Hence the mechanism proposed in this paper is consistent with the fact that the share of intermediate goods in international trade has remained broadly stable over recent years. Thu, 26 Apr 2012 22:00:00 +0200 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-the-export-magnification-effect-of-offshoring-by-joern-kleinert-nico-zorell-a31c.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-the-export-magnification-effect-of-offshoring-by-joern-kleinert-nico-zorell-a31c.php Brazil’s economy has been benefiting from a positive balance-of-payments shock, namely rising commodity prices and strong capital inflows. This has allowed it to pursue a policy of domestic-consumption-oriented economic growth. Unless the world economy is being in the midst of a protracted commodity super-cycle, Brazil will not be able to rely on improving terms-of-trade forever. Sooner rather than later, Brazil will need to shift to a more investment-oriented growth strategy – not least because it will need to deal with the adverse consequences of gradually, but inevitably deteriorating demographic trends. Sun, 22 Apr 2012 22:00:00 +0200 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-db-research-brazil-time-to-move-towards-a-new-growth-strategy-9e13.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-db-research-brazil-time-to-move-towards-a-new-growth-strategy-9e13.php Natural gas continues to lead a niche existence as a fuel for road vehicles despite offering many advantages. The variable costs for a car that runs on natural gas are much lower than those for petrol or diesel engined cars. Besides, it also causes fewer emissions of CO2 and other pollutants. But, so far, natural gas passenger cars are in short supply. Furthermore, the premium charged is still too high for many customers. The filling station network would need to be expanded. However, the problems can generally be managed. On balance, natural gas vehicles have good prospects of growing their market share in the years ahead. Thu, 12 Apr 2012 22:00:00 +0200 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-db-research-natural-gas-as-a-fuel-for-road-vehicles-the-underrated-alternative-d4b9.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-db-research-natural-gas-as-a-fuel-for-road-vehicles-the-underrated-alternative-d4b9.php The Financial Stability Oversight Council (FSOC) is the newly created macro-prudential supervisory agency in the US, charged with safeguarding the US economy from future financial crises. It has made important strides in developing this newly defined policy field. Moving forward, the FSOC has an important responsibility to develop macro-prudential policy in coordination with international and domestic regulatory institutions. This cooperation is essential given the interconnected nature of global financial institutions and cross-border systemic risks. Eventually, macro-prudential supervisors around the world will greatly benefit from a global understanding of the global markets they are confronted with and the international distribution of financial risks. The FSOC’s work will be a key element in achieving a global perspective. Wed, 11 Apr 2012 22:00:00 +0200 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-db-research-macro-prudential-financial-supervision-in-the-us-the-financial-stability-oversight-council-fsoc-7f0e.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-db-research-macro-prudential-financial-supervision-in-the-us-the-financial-stability-oversight-council-fsoc-7f0e.php Remuneration drives incentives. This applies to both commission-based as well as fee-based remuneration. However, remuneration is only one of several factors which influence the quality of investment advice. Other factors are the (financial) literacy of consumers, cost transparency, handling of complex products, advisor qualification and other internal incentive systems. So quality assurance requires a holistic approach, both for the regulatory regime and for internal bank management procedures. Fee-based and commission-based models have their advantages and disadvantages, depending on the investment objective, holding period and other client preferences. For this reason, the coexistence of differing remuneration models would appear to be the most suitable way to guarantee proper provision of investment advice for all consumers. Mon, 26 Mar 2012 22:00:00 +0200 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-db-research-fee-vs-commission-quality-of-advice-is-not-only-determined-by-remuneration-5c47.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-db-research-fee-vs-commission-quality-of-advice-is-not-only-determined-by-remuneration-5c47.php (JEL: C11, E32, E62) How much did fiscal policy contribute to euro area real GDP growth during the Great Recession? We estimate that discretionary fiscal measures have increased annualized quarterly real GDP growth during the crisis by up to 1.6 percentage points. We obtain our result by using an extended version of the European Central Bank’s New Area-Wide Model with a rich specification of the fiscal sector. A detailed modeling of the fiscal sector and the incorporation of as many as eight fiscal time series appear pivotal for our result. Sun, 25 Mar 2012 22:00:00 +0200 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-fiscal-policy-and-the-great-recession-in-the-euro-area-by-guenter-coenen-roland-straub-mathias-trabandt-8f37.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-fiscal-policy-and-the-great-recession-in-the-euro-area-by-guenter-coenen-roland-straub-mathias-trabandt-8f37.php Real estate prices for private residential properties in Asia (ex-Japan) were resilient during most of 2011 despite slowing economic growth, higher interest rates and a few rounds of administrative tightening. The resilience reflects strong underlying demand for private housing in many countries and high household savings rates. Nevertheless, some markets are especially exposed to global downside risks in 2012, reminiscent of the 2008-09 downturn. Sun, 25 Mar 2012 22:00:00 +0200 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-db-research-asian-property-sector-how-resilient-to-global-risks-8f37.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-db-research-asian-property-sector-how-resilient-to-global-risks-8f37.php According to a Eurobarometer survey in 2011 only 5% of account holders had experienced difficulties in switching their accounts during the previous five years – a resounding minority compared with the 88% who said that they did not need to switch their account. A recently published European Commission report now suggests exactly the opposite, with 81% of the test consumers having had problems with switching their bank account. How difficult is it really to switch accounts, and why is this even important? Tue, 20 Mar 2012 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-db-research-switching-bank-accounts-in-the-eu-easy-or-not-6556.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-db-research-switching-bank-accounts-in-the-eu-easy-or-not-6556.php Very few studies have considered the comprehensive measurement of individual investors’ investment performance, finding neither significant out- nor underperformance (before trading costs and expenses). However, extensive research has been conducted on biases and investment mistakes potentially inducing negative α – such as the disposition effect, security selection bias and lacking ability of market timing. It appears counterintuitive that aside from such biases and mistakes, abnormal returns o Tue, 20 Mar 2012 05:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-e-financial-lab-no-skill-mere-luck-an-analysis-of-individual-investors-investment-performance-7488.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-e-financial-lab-no-skill-mere-luck-an-analysis-of-individual-investors-investment-performance-7488.php (JEL: C50, C53, E37, E47) While the usefulness of factor models has been acknowledged over recent years, little attention has been devoted to the forecasting power of these models for the Japanese economy. In this paper, we aim at assessing the relative performance of factor models over different samples, including the recent financial crisis. To do so, we construct factor models to forecast Japanese GDP and its subcomponents, using 38 data series (including daily, monthly and quarterly variables) over the period 1991 to 2010. Overall, we find that factor models perform well at tracking GDP movements and anticipating turning points. For most of the components, we report that factor models yield lower forecasting errors than a simple AR process or an indicator model based on Purchasing Managers' Indicators (PMIs). In line with previous studies, we conclude that the largest improvements in terms of forecasting accuracy are found for more volatile periods, such as the recent financial crisis. However, unlike previous studies, we do not find evident links between the volatility of the components and the relative advantage of using factor models. Finally, we show that adding the PMI index as an independent explanatory variable improves the forecasting properties of the factor models. Mon, 19 Mar 2012 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-short-term-forecasting-of-the-japanese-economy-using-factor-models-by-claudia-godbout-marco-j-lombardi-aef1.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-short-term-forecasting-of-the-japanese-economy-using-factor-models-by-claudia-godbout-marco-j-lombardi-aef1.php The German federal government plans to promote start-up financing for young innovative companies. An investment grant for business angels as well as a further tax privileges for venture capital funds and their investors are under debate. The idea is praiseworthy, but a real investment boom also requires highly developed stock markets where innovative companies achieve high prices. Thu, 15 Mar 2012 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-db-research-venture-capital-investment-boom-requires-effective-stock-markets-a3b2.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-db-research-venture-capital-investment-boom-requires-effective-stock-markets-a3b2.php Index-linked securities (like index mutual funds and passive ETFs) have been one of the most successful investment products in the last twenty years. But do they benefit individual investors? Using data from one of the largest brokerages in Germany, we find that retail users of these securities, compared to a matching sample of non-users, do not improve their portfolio performance. Further analysis reveals why. Their ability to do factor timing, which becomes easier with these securities, worsen Thu, 15 Mar 2012 05:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-e-financial-lab-passive-aggressive-index-linked-securities-and-individual-investors-7526.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-e-financial-lab-passive-aggressive-index-linked-securities-and-individual-investors-7526.php (JEL: E44, E52, G21) We analyze whether the impact of monetary policy on bank risk depends upon bank characteristics. We relate the materialization of bank risk during the financial crisis to differences in the monetary policy stance and bank characteristics in the pre-crisis period for a large sample of listed banks operating in the European Union and the United States. We find that the insulation effect produced by capital and liquidity buffers on bank risk was lower for banks operating in countries that, prior to the crisis, experienced a particularly prolonged period of low interest rates. Wed, 14 Mar 2012 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-do-bank-characteristics-influence-the-effect-of-monetary-policy-on-bank-risk-economic-letters-2012-forthcoming-by-yener-altunbas-leonardo-gambacorta-david-marqu-s-ib-ez-6fbe.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-do-bank-characteristics-influence-the-effect-of-monetary-policy-on-bank-risk-economic-letters-2012-forthcoming-by-yener-altunbas-leonardo-gambacorta-david-marqu-s-ib-ez-6fbe.php (JEL: E44, E52, G21) We analyze whether the impact of monetary policy on bank risk depends upon bank characteristics. We relate the materialization of bank risk during the financial crisis to differences in the monetary policy stance and bank characteristics in the pre-crisis period for a large sample of listed banks operating in the European Union and the United States. We find that the insulation effect produced by capital and liquidity buffers on bank risk was lower for banks operating in countries that, prior to the crisis, experienced a particularly prolonged period of low interest rates. Wed, 14 Mar 2012 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-do-bank-characteristics-influence-the-effect-of-monetary-policy-on-bank-risk-by-yener-altunbas-leonardo-gambacorta-david-marqu-s-ib-ez-6fbe.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-do-bank-characteristics-influence-the-effect-of-monetary-policy-on-bank-risk-by-yener-altunbas-leonardo-gambacorta-david-marqu-s-ib-ez-6fbe.php End-February, the ECB provided banks with EUR 530 bn of liquidity for three years via its longer-term refinancing operations (LTRO). As with the first three-year LTRO in December 2011, the provision of liquidity is designed to avert tensions over bank lending. The first three-year tender has also had an effect on European government bond markets. As mainly Italian and Spanish banks increased their exposure, yield curves for Spanish and Italian bonds shifted downwards at the short end. Mon, 12 Mar 2012 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-db-research-three-year-refinancing-operations-ecb-kills-two-birds-with-one-stone-d5f5.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-db-research-three-year-refinancing-operations-ecb-kills-two-birds-with-one-stone-d5f5.php (JEL: ) This paper introduces a new indicator of contemporaneous stress in the financial system named Composite Indicator of Systemic Stress (CISS). Its specific statistical design is shaped according to standard definitions of systemic risk. The main methodological innovation of the CISS is the application of basic portfolio theory to the aggregation of five market-specific subindices created from a total of 15 individual financial stress measures. The aggregation accordingly takes into account the time-varying cross-correlations between the subindices. As a result, the CISS puts relatively more weight on situations in which stress prevails in several market segments at the same time, capturing the idea that financial stress is more systemic and thus more dangerous for the economy as a whole if financial instability spreads more widely across the whole financial system. Applied to euro area data, we determine within a threshold VAR model a systemic crisis-level of the CISS at which financial stress tends to depress real economic activity. Sun, 11 Mar 2012 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-ciss-a-composite-indicator-of-systemic-stress-in-the-financial-system-by-d-niel-holl-manfred-kremer-marco-lo-duca-e77e.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-ciss-a-composite-indicator-of-systemic-stress-in-the-financial-system-by-d-niel-holl-manfred-kremer-marco-lo-duca-e77e.php This study analyses the extent to which the growing volume of regenerative electricity and thus the disparity between power production and power consumption can lead to the loss of the electricity produced and jeopardise an assured electricity supply. First, the structure and size of the problem will be outlined; and then the requirements for solutions and their possible market potential will be deduced. The basic question to be examined is whether modern electricity storage systems are capable of matching the dynamic structural change to energy supplies. Various technical approaches, including pumped storage systems and pumped storage hydropower stations, compressed air energy storage, and hydrogen and methane storage will be discussed and evaluated against efficiency and cost criteria. Wed, 07 Mar 2012 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-db-research-state-of-the-art-electricity-storage-systems-indispensable-elements-of-the-energy-revolution-5e2f.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-db-research-state-of-the-art-electricity-storage-systems-indispensable-elements-of-the-energy-revolution-5e2f.php Lending trends in Europe and the US are currently diverging. Indicators point to a further slowdown in the euro area, even though a credit crunch has so far not materialised. In the US, by contrast, the outlook has considerably improved in recent quarters and loan volumes are growing again. Tue, 06 Mar 2012 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-db-research-five-years-after-subprime-lending-trends-in-europe-and-the-us-70bd.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-db-research-five-years-after-subprime-lending-trends-in-europe-and-the-us-70bd.php The race for skilled labour is intensifying worldwide. Excellence in education and research is a key factor for the competitiveness of companies and countries. If you want to find out more about how the race and the current dash for higher education attainment and excellence can be assessed from an economic perspective, and how well the BRIC countries and Germany are able to compete in this race, then this Current Issue will put you on the inside track. Sun, 04 Mar 2012 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-db-research-the-global-race-for-excellence-and-skilled-labour-a-status-report-b961.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-db-research-the-global-race-for-excellence-and-skilled-labour-a-status-report-b961.php Currently, there is an ongoing debate about the pace, scope and damage potential of climate change as well as about the influence of humankind on this phenomenon. This may come as a surprise to casual observers of the debate, for over the past few years most people have been given the impression that scientists agreed that, first of all, climate change is proceeding rapidly, that, secondly, humankind has been a major contributor because of anthropogenic greenhouse gas emissions and that, thirdly, climate change will bring with it serious damage. This “climate conflict” is not at all new, however. Rather, it as old as the climate debate itself. Thu, 01 Mar 2012 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-db-research-the-climate-conflict-and-its-economic-and-political-implications-0bca.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-db-research-the-climate-conflict-and-its-economic-and-political-implications-0bca.php Cloud service providers advertise with their ability to deliver memory capacity and software over the Web whatever the user’s location and device, claiming they can rapidly adapt this to requirements. That way, users can concentrate on their core competences and farm out peripheral business activities to specialised service providers. On the whole, the introduction of cloud computing is making slower headway than the term’s media presence would suggest. Among the reasons causing potential users to hold back at present are security concerns and uncertainty over which technical version will ultimately assert itself. But in the medium term the basic idea behind cloud computing stands a good chance of being implemented more broadly in a world of globally organised value chains. Wed, 29 Feb 2012 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-db-research-cloud-computing-clear-skies-ahead-2c7d.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-db-research-cloud-computing-clear-skies-ahead-2c7d.php After years of stagnation or decline, prices of residential real estate in Germany picked up markedly in 2011 (as in 2010). Single-family homes rose by an average 2.5% yoy and condominium apartments even by around 4%, i.e. considerably faster than inflation (2.3%). Probably the main reason for the increase in prices is the persistent uncertainty in the financial markets. However, there are a number of other factors contributing to this development which will probably support the real estate market over the next few years. Mon, 27 Feb 2012 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-db-research-concrete-gold-helps-calm-nerves-2bf9.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-db-research-concrete-gold-helps-calm-nerves-2bf9.php On February 18, the People’s Bank of China (PBOC) announced it would lower the reserve requirement ratio by half a percentage point to 20.5% for larger financial institutions in an effort at “fine tuning”, as Premier Wen Jiabao said a week ago. It’s a move intended to maintain economic growth by pumping substantial amounts of liquidity into the financial system while keeping inflation in check. Wed, 22 Feb 2012 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-db-research-china-managing-inflation-expectations-requires-structural-changes-in-the-domestic-economy-9c79.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-db-research-china-managing-inflation-expectations-requires-structural-changes-in-the-domestic-economy-9c79.php Many western industrial nations are faced with high and rapidly rising debt-to-GDP ratios. This makes it necessary to consolidate public finances even while economic growth is weak. Among economic theorists, however, there is a dispute about how different consolidation measures impact on growth. Keynesian theory predicts negative short-term growth effects, whereas the non-Keynesian view considers positive effects to be possible in the short term as well. It is against this background that we shall analyse the 'Emergency Budget' of the UK’s coalition government. Mon, 20 Feb 2012 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-db-research-the-english-patient-e187.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-db-research-the-english-patient-e187.php Surveillance of macroeconomic imbalances in the EU and the euro area is taking shape. On February 14, the European Commission published its Alert Mechanism Report (AMR), for the first time assessing macroeconomic imbalances within the framework of a structured procedure. What should one make of this report? Sun, 19 Feb 2012 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-db-research-european-commission-publishes-first-alert-mechanism-report-on-macroeconomic-surveillance-8dc2.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-db-research-european-commission-publishes-first-alert-mechanism-report-on-macroeconomic-surveillance-8dc2.php (JEL: D61, E44, G21) This paper studies the implications of cross-border financial integration for financial stability when banks' loan portfolios adjust endogenously. Banks can be subject to sectoral and aggregate domestic shocks. After integration they can share these risks in a complete interbank market. When banks have a comparative advantage in providing credit to certain industries, financial integration may induce banks to specialize in lending. An enhanced concentration in lending does not necessarily increase risk, because a well-functioning interbank market allows to achieve the necessary diversification. This greater need for risk sharing, though, increases the risk of cross-border contagion and the likelihood of widespread banking crises. However, even though integration increases the risk of contagion it improves welfare if it permits banks to realize specialization benefits. Tue, 14 Feb 2012 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-financial-integration-specialization-and-systemic-risk-journal-of-international-economics-forthcoming-by-falko-fecht-hans-peter-gruener-philipp-hartmann-9432.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-financial-integration-specialization-and-systemic-risk-journal-of-international-economics-forthcoming-by-falko-fecht-hans-peter-gruener-philipp-hartmann-9432.php (JEL: G12, G14, G15) At the 2010 FIFA World Cup in South Africa, many soccer matches were played during stock market trading hours, providing us with a natural experiment to analyze fluctuations in investor attention. Using minute‐by‐minute trading data for fifteen international stock exchanges, we present three key findings. First, when the national team was playing, the number of trades dropped by 45%, while volumes were 55% lower. Second, market activity was influenced by match events. For instance, a goal caused an additional drop in trading activity by 5%. The magnitude of this reduction resembles what is observed during lunchtime, and as such might not be indicative for shifts in attention. However, our third finding is that the comovement between national and global stock market returns decreased by over 20% during World Cup matches, whereas no comparable decoupling can be found during lunchtime. We conclude that stock markets were following developments on the soccer pitch rather than in the trading pit, leading to a changed price formation process. Sun, 12 Feb 2012 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-the-pitch-rather-than-the-pit-investor-inattention-during-fifa-world-cup-matches-by-michael-ehrmann-david-jan-jansen-8baf.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-the-pitch-rather-than-the-pit-investor-inattention-during-fifa-world-cup-matches-by-michael-ehrmann-david-jan-jansen-8baf.php German industry can look back to two all in all strong years with high growth rates. 2012, however, will be a markedly weaker year, in which industrial production should stagnate – albeit at a high level. The downswing has been perceptible since mid-2011: the eurozone crisis and the international growth slowdown are having a dampening effect on German industry as well. Sun, 12 Feb 2012 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-db-research-german-industry-stagnation-in-2012-8baf.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-db-research-german-industry-stagnation-in-2012-8baf.php (JEL: C11, C32, E32, E37) We build a model of the euro area incorporating financial market frictions at the level of firms and households. Entrepreneurs borrow from financial intermediaries in order to purchase business capital, in the spirit of the "financial accelerator" literature. We also introduce two types of households that differ in their degree of time preference. All households have preferences for housing services. The impatient households are faced with a collateral constraint that is a function of the value of their housing stock. Our aim is to provide a unified framework for policy analysis that emphasizes financial market frictions alongside the more traditional model channels. The model is estimated by Bayesian methods using euro area aggregate data and model properties are illustrated with simulation and conditional variance and historical shock decomposition. Thu, 09 Feb 2012 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-financial-market-frictions-in-a-model-of-the-euro-area-by-giovanni-lombardo-peter-mcadam-5a04.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-ecb-financial-market-frictions-in-a-model-of-the-euro-area-by-giovanni-lombardo-peter-mcadam-5a04.php In Europe, the most frequent users of online banking are found in the Nordic countries. In online banking there are stringent security standards, giving rise to the question as to whether internet users in countries with high online banking adoption rates also have computers equipped with above-average levels of security software. Tue, 07 Feb 2012 23:00:00 +0100 http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-db-research-growing-need-for-security-in-online-banking-biometrics-enjoy-remarkable-degree-of-acceptance-5ef1.php http://www.frankfurt-main-finance.com/en/toolbox/knowledge/2012-rss/51c1-db-research-growing-need-for-security-in-online-banking-biometrics-enjoy-remarkable-degree-of-acceptance-5ef1.php (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