(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.
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(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.
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(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”.
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(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.
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(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.
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(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.
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(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 signi…cantly 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 ‡ow, we …nd 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 …ndings 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.
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(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 e¤ect 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.
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Procurement: Contract Award Notice: Provision of Personnel Placement and Supply Services Relating to IT Operational and Support Activities (2012/S 13-019534).
Issue date: 24/01/2012.
Closing date: 24/04/2012.
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Procurement: Voluntary Contract Notice for Upcoming Procurement Procedure: Freelance Lawyer-Linguists for Danish (ECB/21391/2011).
Issue date: 23/01/2012.
Closing date: 27/02/2012.
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