http://www.bis.org/cbhub/list/country/country_eu/index.rss Latest research hub papers from EU en http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1542.pdf European Central Bank Working papers by Ulrich Bindseil, Juliusz Jablecki Central bank liquidity provision, risk-taking and economic efficiency, 2013-05-03T17:34:00Z After the Lehman default, but also during the euro area sovereign debt crisis, central banks have tended to extend the ability of banks to take recourse to central bank credit operations through changes of the collateral framework (e.g. CGFS, 2008 - in consistence with previous narratives, such as Bagehot, 1873). We provide a simple four sector model of the economy in which we illustrate the relevant trade-offs, derive optimal central bank collateral policies, and show why in a financial crisis, in which liquidity shocks become more erratic and the total costs of defaults increase, central banks may want to allow for greater potential recourse of banks to central bank credit. The model also illustrates that the credit riskiness of counterparties and issuers is endogenous to the central bank's credit policies and related risk control framework. Finally, the model allows identifying the circumstances under which the counterintuitive case arises in which a relaxation of the central bank collateral policy may reduce its expected losses. Central bank liquidity provision, risk-taking and economic efficiency, 2013-05-03T17:34:00Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1542.pdf Juliusz Jablecki Ulrich Bindseil Ulrich Bindseil, Juliusz Jablecki 2013-05-03 European Central Bank Working papers http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1543.pdf European Central Bank Working papers by Livio Stracca Financial imbalances and household welfare: empirical evidence from the EU, 2013-05-03T17:34:00Z This paper uses Eurobarometer survey data from 26 EU countries to evaluate whether the general public cares about financial stability and imbalances over and above their effects on key macroeconomic variables such as unemployment and inflation. I confirm previous results in the literature that life satisfaction - a widely used measure of household welfare - negatively depends on the unemployment rate. In addition to previous results in the literature, I establish a strong empirical link between life satisfaction and consumer confidence as measured by the European Commission consumer survey. The main result of the paper is that life satisfaction generally does not systematically depend on a number of measures of financial imbalance based on credit and asset prices once the other macroeconomic controls are included. Financial imbalances and household welfare: empirical evidence from the EU, 2013-05-03T17:34:00Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1543.pdf Livio Stracca Livio Stracca 2013-05-03 European Central Bank Working papers http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1541.pdf European Central Bank Working papers by Eleni Angelopoulou, Hiona Balfoussia, Heather Gibson Building a financial conditions index for the euro area and selected euro area countries: what does it tell us about the crisis?, 2013-05-02T17:34:00Z In this paper we construct Financial Conditions Indices (FCIs) for the euro area, for the period 2003 to 2011, using a wide range of prices, quantities, spreads and survey data, grounded in the theoretical literature. One FCI includes monetary policy variables, while two versions without monetary policy are also constructed, enabling us to study the impact of monetary policy on financial conditions. The FCIs constructed fit in well with a narrative of financial conditions since the creation of the monetary union. FCIs for individual euro area countries are also provided, with a view to comparing financial conditions in core and periphery countries. There is evidence of significant divergence both before and during the crisis, which becomes less pronounced when monetary policy variables are included in the FCI. However, the impact of monetary policy on financial conditions appears not to be entirely symmetric across the euro area. Building a financial conditions index for the euro area and selected euro area countries: what does it tell us about the crisis?, 2013-05-02T17:34:00Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1541.pdf Hiona Balfoussia Heather Gibson Eleni Angelopoulou Eleni Angelopoulou, Hiona Balfoussia, Heather Gibson 2013-05-02 European Central Bank Working papers http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1540.pdf European Central Bank Working papers by Geoff Kenny, Thomas Kostka, Federico Masera Can macroeconomists forecast risk? Event-based evidence from the euro area SPF 2013-04-26T12:35:00Z We propose methods to evaluate the risk assessments collected as part of the ECB Survey of Professional Forecasters (SPF). Our approach focuses on direction-of-change predictions as well as the prediction of relatively more extreme macroeconomic outcomes located in the upper and lower regions of the predictive densities. For inflation and GDP growth, we find such surveyed densities are informative about future direction of change. Regarding more extreme high and low outcome events, the surveys are really only informative about GDP growth outcomes and at short-horizons. The upper and lower regions of the predictive densities for inflation are much less informative. Can macroeconomists forecast risk? Event-based evidence from the euro area SPF 2013-04-26T12:35:00Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1540.pdf Federico Masera Thomas Kostka Geoff Kenny Geoff Kenny, Thomas Kostka, Federico Masera 2013-04-26 European Central Bank Working papers C22 C53 http://www.ecb.europa.eu/pub/pdf/scpops/ecbocp145.pdf European Central Bank Occasional papers by Jean-Marc Israël, Patrick Sandars, Aurel Schubert and Björn Fischer Statistics and indicators for financial stability analysis and policy 2013-04-25T17:34:59Z Timely and accurate data are key to the preparation of macro-prudential policy recommendations and decisions by the ESRB, as well as to monitoring policy decisions in terms of their impact on, or transmission to, the financial and non-financial economy. This paper illustrates the work that has been carried out by the European Central Bank, the European Systemic Risk Board and the European Supervisory Authorities over a period of more than two years from 2010 to 2012 to prepare, develop, implement and manage the initial set of statistical and supervisory information necessary to support the European Systemic Risk Board, from its inception in January 2011. The paper also touches on the statistical information that is provided to support the financial stability function of the European Central Bank. Statistics and indicators for financial stability analysis and policy 2013-04-25T17:34:59Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpops/ecbocp145.pdf Björn Fischer Patrick Sandars Aurel Schubert Jean-Marc Israël Jean-Marc Israël, Patrick Sandars, Aurel Schubert and Björn Fischer 2013-04 European Central Bank Occasional papers E60 G21 G22 G28 http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1538.pdf European Central Bank Working papers by Anna Sarkisyan, Barbara Casu Retained interest in securitisations and implications for bank solvency, 2013-04-24T17:34:00Z Using US bank holding company data for the period 2001 to 2007, this paper examines the relationship between banks' retained interests in securitisations and insolvency risk. We find that the provision of credit enhancements and guarantees significantly increases bank insolvency risk, albeit this varies for different levels of securitisation outstanding. Specifically, retained interests increase insolvency risk for "large-scale" securitisers while having a risk-reducing effect for "small-scale" and/or first-time securitisers. In addition, we find that the type of facility provided has implications for bank risk, with those with the most subordinated (first-loss) position having the greater impact on banks' default risk. Finally, we find that engagement in third-party securitisations has no significant effect on bank risk. Retained interest in securitisations and implications for bank solvency, 2013-04-24T17:34:00Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1538.pdf Barbara Casu Anna Sarkisyan Anna Sarkisyan, Barbara Casu 2013-04-24 European Central Bank Working papers http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1539.pdf European Central Bank Working papers by Wilko Bolt, David Humphrey Competition in bank-provided payment services 2013-04-24T17:34:00Z Banks supply payment services that underpin the smooth operation of the economy. To ensure an efficient payment system, it is important to maintain competition among payment service providers but data available to gauge the degree of competition are quite limited. We propose and implement a frontierbased method to assess relative competition in bank-provided payment services. Billion dollar banks account for around ninety percent of assets in the US and those with around to billion in assets turn out to be both the most and the least competitive in payment services, not the very largest banks. Competition in bank-provided payment services 2013-04-24T17:34:00Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1539.pdf David Humphrey Wilko Bolt Wilko Bolt, David Humphrey 2013-04-24 European Central Bank Working papers G21 L00 L80 http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1537.pdf European Central Bank Working papers by Gianni Amisano, John Geweke Prediction using several macroeconomic models 2013-04-23T12:35:00Z Prediction of macroeconomic aggregates is one of the primary functions of macroeconometric models, including dynamic factor models, dynamic stochastic general equilibrium models, and vector autoregressions. This study establishes methods that improve the predictions of these models, using a representative model from each class and a canonical 7-variable postwar US data set. It focuses on prediction over the period 1966 through 2011. It measures the quality of prediction by the probability densities assigned to the actual values of these variables, one quarter ahead, by the predictive distributions of the models in real time. Two steps lead to substantial improvement. The first is to use full Bayesian predictive distributions rather than substitute a "plug-in" posterior mode for parameters. Across models and quarters, this leads to a mean improvement in probability of 50.4%. The second is to use an equally-weighted pool of predictive densities from the three models, which leads to a mean improvement in probability of 41.9% over the full Bayesian predictive distributions of the individual models. This improvement is much better than that a¤orded by Bayesian model averaging. The study uses several analytical tools, including pooling, analysis of predictive variance, and probability integral transform tests, to understand and interpret the improvements. Prediction using several macroeconomic models 2013-04-23T12:35:00Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1537.pdf John Geweke Gianni Amisano Gianni Amisano, John Geweke 2013-04-23 European Central Bank Working papers C11 C51 C53 http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1536.pdf European Central Bank Working papers by Anders Warne, Günter Coenen, Kai Christoffel Predictive likelihood comparisons with DSGE and DSGE-VAR models 2013-04-23T12:35:00Z This paper shows how to compute the h-step-ahead predictive likelihood for any subset of the observed variables in parametric discrete time series models estimated with Bayesian methods. The subset of variables may vary across forecast horizons and the problem thereby covers marginal and joint predictive likelihoods for a fixed subset as special cases. The basic idea is to utilize well-known techniques for handling missing data when computing the likelihood function, such as a missing observations consistent Kalman filter for linear Gaussian models, but it also extends to nonlinear, nonnormal state-space models. The predictive likelihood can thereafter be calculated via Monte Carlo integration using draws from the posterior distribution. As an empirical illustration, we use euro area data and compare the forecasting performance of the New Area-Wide Model, a small-open-economy DSGE model, to DSGEVARs, and to reduced-form linear Gaussian models. Predictive likelihood comparisons with DSGE and DSGE-VAR models 2013-04-23T12:35:00Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1536.pdf Anders Warne Kai Christoffel Gunter Coenen Anders Warne, Günter Coenen, Kai Christoffel 2013-04-23 European Central Bank Working papers C11 C32 C52 C53 E37 http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1534.pdf European Central Bank Working papers by Michele Ca' Zorzi, Alexander Chudik Spatial considerations on the PPP debate 2013-04-16T17:34:00Z This paper studies the influence of aggregating across space when (i) testing the PPP theory or more generally pair-wise cointegration and (ii) evaluating the PPP puzzle. Our contribution is threefold: we show that aggregating foreign data and applying an ADF test may lead to erroneously reject the PPP hypothesis. We then show, on the basis of theoretical arguments as well as Monte Carlo experiments, that a sizable bias in the estimates of half-life deviations to PPP may be due to the effect of aggregation across space. We finally illustrate empirically the importance of spatial considerations when estimating the speed of price convergence among euro area countries. Spatial considerations on the PPP debate 2013-04-16T17:34:00Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1534.pdf Alexander Chudik Michele Ca' Zorzi Michele Ca' Zorzi, Alexander Chudik 2013-04-16 European Central Bank Working papers C23 F41 http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1535.pdf European Central Bank Working papers by Vesna Corbo, Chiara Osbat Trade adjustment in the European Union - a structural estimation approach 2013-04-16T17:34:00Z We estimate the elasticity of substitution of a country's imports, and that of its exports on the world market, for EU countries using sector level trade data. We present a new empirical strategy based on the identification scheme by Feenstra (1994), which enables the estimation of elasticities from data on exports. Moreover, our use of bootstrap methods allows us to obtain better elasticity measures, and to better characterize their accuracy. Our results show much heterogeneity in the estimates of the elasticity of substitution across industrial sectors. This, in turn, points to heterogeneity across countries, due to different production and trade structures. We obtain aggregate elasticities for the EU27 countries, with a mean of 3.5 for imports and 4.0 for exports, bringing us closer to traditional estimates and bridging the gap between the newer micro data estimates and the more traditional estimates found in the macroeconomic literature. Trade adjustment in the European Union - a structural estimation approach 2013-04-16T17:34:00Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1535.pdf Vesna Corbo Chiara Osbat Vesna Corbo, Chiara Osbat 2013-04-16 European Central Bank Working papers C23 F14 F47 http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1532.pdf European Central Bank Working papers by Michael Ehrmann, Chiara Osbat, Jan Stráský, Lenno Uusküla The euro exchange rate during the European sovereign debt crisis - dancing to its own tune? 2013-04-15T17:34:59Z This paper studies the determinants of the euro exchange rate during the European sovereign debt crisis, allowing a role for macroeconomic fundamentals, policy actions and the public debate by policy makers. It finds that the euro exchange rate mainly danced to its own tune, with a particularly low explanatory power for macroeconomic fundamentals. Among the few factors that are found to have affected changes in exchanges rate levels are policy actions at the EU level and by the ECB. The findings of the paper also suggest that financial markets might have been less reactive to the public debate by policy makers than previously feared. Still, there are instances where exchange rate volatility was increasing in response to news, such as on days when several politicians from AAA-rated countries went public with negative statements, suggesting that communication by policy makers at times of crisis should be cautious about triggering undesirable financial market reactions. The euro exchange rate during the European sovereign debt crisis - dancing to its own tune? 2013-04-15T17:34:59Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1532.pdf Chiara Osbat Michael Ehrmann Jan Strasky Lenno Uusküla Michael Ehrmann, Chiara Osbat, Jan Stráský, Lenno Uusküla 2013-04-15 European Central Bank Working papers E52 E62 F31 F42 G14 http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1533.pdf European Central Bank Working papers by Grzegorz Halaj Optimal asset structure of a bank - bank reactions to stressful market conditions 2013-04-15T17:34:59Z The aim of the paper is to propose a model of banks' asset portfolios to account for the strategic and optimising behavior of banks under adverse economic conditions. In the proposed modelling framework, banks are assumed to respond in an optimising manner to changes in their economic environment (e.g. interest rate and credit risk shocks, funding disruptions, etc.). The modelling approach is based on the risk-return optimal program in which banks aim at a particular composition of their assets to maximise risk-adjusted returns while taking into account regulatory capital and liquidity constraints. The approach is designed for applications in banks' stress testing context, as an alternative to the typical static balance sheet assumption. The stress testing applications are illustrated for a large sample of European banks. Optimal asset structure of a bank - bank reactions to stressful market conditions 2013-04-15T17:34:59Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1533.pdf Grzegorz Halaj Grzegorz Halaj 2013-04-15 European Central Bank Working papers http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1530.pdf European Central Bank Working papers by Daria Taglioni, Veronika Zavacka Innocent bystanders: how foreign uncertainty shocks harm exporters, 2013-04-10T17:34:00Z The failure of trade economists to anticipate the extreme drop in trade post Lehman Brothers bankruptcy suggests that the behavior of trade in exceptional circumstances may still be poorly understood. This paper explores whether uncertainty shocks have explanatory power for movements in trade. VAR estimations on United States data suggest that domestic uncertainty is a strong predictor of movements in imports, but has little effect on exports. Guided by these results, the paper estimates a bilateral model with focus on the impact of importer uncertainty on foreign suppliers. It finds that there is a strong negative relationship between uncertainty and trade and that this relationship is non-linear. Uncertainty matters most when its levels are exceptionally high. The paper does not find evidence of learning from past turmoils, suggesting that prior experience with major uncertainty shocks does not reduce the effect on trade. In line with the expectations, the negative effect of uncertainty shocks on trade is higher for trade relationships more intensive in durable goods. Surprisingly, however, the effect of durability is non-linear. Supply chain considerations or the possibility that the relationships with the highest durability lead to important compositional effects may have a bearing on the results. The results are robust to excluding the post Lehman shock, suggesting that the trade response during the 2008-2009 crisis has been similar to past uncertainty events. Innocent bystanders: how foreign uncertainty shocks harm exporters, 2013-04-10T17:34:00Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1530.pdf Daria Taglioni Veronika Zavacka Daria Taglioni, Veronika Zavacka 2013-04-10 European Central Bank Working papers http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1531.pdf European Central Bank Working papers by Robert Kelly, Kieran McQuinn, Rebecca Stuart Exploring the steady-state relationship between credit and GDP for a small open economy: the case of Ireland, 2013-04-10T17:34:00Z The rapid increase in credit in an economy is now commonly perceived to be one of the leading indicators of financial instability. This view has been reinforced by the aftermath of the international financial crisis, which commenced mid 2007. A key policy response has been to focus on the ratio of private sector credit to GDP for an economy, observing, in particular, significant deviations between the actual and long-run trends of the ratio. This paper examines the issue of the steady-state relationship between private sector credit and GDP in the case of Ireland, a country which, even by international standards, experienced a sizeable expansion in credit over the past 10 years. Exploring the steady-state relationship between credit and GDP for a small open economy: the case of Ireland, 2013-04-10T17:34:00Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1531.pdf Rebecca Stuart Kieran McQuinn Robert Kelly Robert Kelly, Kieran McQuinn, Rebecca Stuart 2013-04-10 European Central Bank Working papers http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1528.pdf European Central Bank Working papers by Philippine Cour-Thimann, Bernhard Winkler The ECB's non-standard monetary policy measures: the role of institutional factors and financial structure, 2013-04-08T12:37:00Z This paper aims to make two contributions: to review the ECB's non-standard monetary policy measures in response to the financial and sovereign debt crisis against the background of the institutional framework and financial structure of the euro area; and to interpret this response from a flow-of-funds perspective. The paper highlights how the rationale behind the ECB's nonstandard measures differs from that underlying quantitative easing policies. As a complement to rather than a substitute for standard interest rate decisions, the non-standard measures are aimed at supporting the effective transmission of monetary policy to the economy rather than at delivering additional direct monetary stimulus. The flow-of-funds analysis proposes an interpretation of central banks' crisis responses as fulfilling their traditional role as lender of last resort to the banking system and, more broadly, reflecting their capacity to act as the "ultimate sector" that can take on leverage when other sectors are under pressure to deleverage. It also provides examples that trace the impact of non-standard measures across different sectors and markets. The ECB's non-standard monetary policy measures: the role of institutional factors and financial structure, 2013-04-08T12:37:00Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1528.pdf Philippine Cour-Thimann Bernhard Winkler Philippine Cour-Thimann, Bernhard Winkler 2013-04-08 European Central Bank Working papers http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1529.pdf European Central Bank Working papers by António Afonso, Priscilla Toffano Fiscal regimes in the EU 2013-04-08T12:37:00Z We assess the existence of fiscal regime shifts in the U.K., Germany, and Italy, using Markov switching fiscal rules. On the basis of a newly built quarterly data set, our results show the existence of fiscal regimes shifts, sometimes coupled with regime switches also regarding monetary developments. While in the UK "active" and "passive" (Leeper, 1991) fiscal regimes are somewhat clearer cut, in Germany fiscal regimes have been overall less active, supporting more fiscal sustainability. For Italy, a more passive fiscal behaviour is uncovered in the run-up to EMU. Fiscal regimes in the EU 2013-04-08T12:37:00Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1529.pdf Priscilla Toffano António Afonso António Afonso, Priscilla Toffano 2013-04-08 European Central Bank Working papers http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1527.pdf European Central Bank Working papers by Matteo Ciccarelli, Angela Maddaloni, José-Luis Peydró Heterogeneous transmission mechanism: monetary policy and financial fragility in the euro area, 2013-03-26T06:19:59Z The Euro area economic activity and banking sector have shown substantial fragility over the last years with remarkable country heterogeneity. Using detailed data on lending conditions and standards, we analyse how financial fragility has affected the transmission mechanism of the single Euro area monetary policy during the crisis until the end of 2011. The analysis shows that the monetary transmission mechanism has been time-varying and influenced by the financial fragility of the sovereigns, banks, firms and households. The impact of monetary policy on aggregate output is stronger during the financial crisis, especially in countries facing increased sovereign financial distress. This amplification mechanism, moreover, operates mainly through the credit channel, both the bank lending and the non-financial borrower balance-sheet channel. Our results suggest that the bank-lending channel has been partly mitigated by the ECB nonstandard monetary policy interventions. At the same time, when looking at the transmission through banks of different sizes, it seems that, until the end of 2011, the impact of credit frictions of borrowers have not been significantly reduced, especially in distressed countries. Since small banks tend to lend primarily to SME, we infer that the policies adopted until the end of 2011 might have fall short of reducing credit availability problems stemming from deteriorated firm net worth and risk conditions, especially for small firms in countries under stress. Heterogeneous transmission mechanism: monetary policy and financial fragility in the euro area, 2013-03-26T06:19:59Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1527.pdf José-Luis Peydró Angela Maddaloni Matteo Ciccarelli Matteo Ciccarelli, Angela Maddaloni, José-Luis Peydró 2013-03-25 European Central Bank Working papers http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1526.pdf European Central Bank Working papers by Peter Hoffmann A dynamic limit order market with fast and slow traders, 2013-03-13T17:34:59Z We study the role of high-frequency trading in a dynamic limit order market. Being fast is valuable because it enables traders to revise outstanding limit orders upon news arrivals when interacting with slow market participants. On the one hand, the existence of fast traders can help to reduce the inefficiency that is rooted in the risk of being "picked off" after unfavourable price movements and therefore allows more gains from trade to be realized. On the other hand, slow traders face a relative loss in bargaining power which leads them to strategically submit limit orders with a lower execution probability, thereby reducing trade. Due to this negative externality, the equilibrium level of investment is always welfare-reducing. The model generates additional testable implications regarding the e¤ects of high-frequency trading on order flow statistics. A dynamic limit order market with fast and slow traders, 2013-03-13T17:34:59Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1526.pdf Peter Hoffmann Peter Hoffmann 2013-03-13 European Central Bank Working papers http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1521.pdf European Central Bank Working papers by Stefania Villa Financial frictions in the euro area: a Bayesian assessment, 2013-03-07T12:35:59Z This paper compares from a Bayesian perspective three dynamic stochastic general equilibrium models in order to analyse whether financial frictions are empirically relevant in the Euro Area (EA) and, if so, which type of financial frictions is preferred by the data. The models are: (i) Smets and Wouters (2007) (SW); (ii) a SW model with financial frictions originating in non-financial firms à la Bernanke et al. (1999), (SWBGG); and (iii) a SW model with financial frictions originating in financial intermediaries, à la Gertler and Karadi (2011), (SWGK). The comparison between the three estimated models is made along different dimensions: (i) the Bayes factor; (ii) business cycle moments; and (iii) impulse response functions. The analysis of the Bayes factor and of simulated moments provides evidence in favour of the SWGK model. This paper also finds that the SWGK model outperforms the SWBGG model in forecasting EA inflationary pressures in a Phillips curve specification. Financial frictions in the euro area: a Bayesian assessment, 2013-03-07T12:35:59Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1521.pdf Stefania Villa Stefania Villa 2013-03-05 European Central Bank Working papers http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1525.pdf European Central Bank Working papers by Ivan Jaccard Liquidity constraints, risk premia, and themacroeconomic effects of liquidity shocks, 2013-03-07T12:35:59Z We study the transmission of liquidity shocks in a dynamic general equilibrium model where firms and households are subject to liquidity risk. The provision of liquidity services is undertaken by financial intermediaries that allocate the stock of liquid asset between the different sectors of the economy. We find that the macroeconomic effects of liquidity shocks are considerably larger in the model economy that generates a realistic equity premium. Liquidity constraints amplify business cycle volatility and have nonlinear effects on risk premia. Our empirical analysis suggests that the Great Recession was primarily caused by liquidity factors. Liquidity constraints, risk premia, and themacroeconomic effects of liquidity shocks, 2013-03-07T12:35:59Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1525.pdf Ivan Jaccard Ivan Jaccard 2013-03-07 European Central Bank Working papers http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1520.pdf European Central Bank Working papers by Antonello D'Agostino, Michael Ehrmann The pricing of G7 sovereign bond spreads: the times, they are a-changin, 2013-03-07T12:35:59Z Against the background of the current debate about fiscal sustainability in several advanced economies, this paper estimates determinants of G7 sovereign bond spreads, using high-frequency proxies for market expectations about macroeconomic fundamentals and allowing for time-varying parameters. The paper finds substantial asymmetry in the importance of country fundamentals and considerable time variations in the pricing of risks. There has been a reduced pricing of several risk factors in the years preceding the financial crisis, and either an overpricing of risk or the pricing of a re-denomination risk of euro area bonds during the European sovereign debt crisis. The pricing of G7 sovereign bond spreads: the times, they are a-changin, 2013-03-07T12:35:59Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1520.pdf Antonello D Agostino Michael Ehrmann Antonello D'Agostino, Michael Ehrmann 2013-03-05 European Central Bank Working papers http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1522.pdf European Central Bank Working papers by Fabio Fornari, Livio Stracca What does a financial shock do? First international evidence, 2013-03-07T12:35:59Z In this paper we attempt to evaluate the quantitative impact of financial shocks on key indicators of real activity and financial conditions. We focus on financial shocks as they have received wide attention in the recent literature and in the policy debate after the global financial crisis. We estimate a panel VAR for 21 advanced economies based on quarterly data between 1985 and 2011, where financial shocks are identified through sign restrictions. Overall, we find robust evidence that financial shocks can be separately identified from other shock types and that they exert a significant influence on key macroeconomic variables such as GDP and (particularly) investment, but it is unclear whether these shocks are demand or supply shocks from the standpoint of their macroeconomic impact. The financial development and the financial structure of a given country are found not to matter much for the intensity of the propagation of financial shocks. Moreover, we generally find that these shocks play a role not only in crisis times, but also in normal conditions. Finally, we discuss the implications of our findings for monetary policy. What does a financial shock do? First international evidence, 2013-03-07T12:35:59Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1522.pdf Livio Stracca Fabio Fornari Fabio Fornari, Livio Stracca 2013-03-06 European Central Bank Working papers http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1524.pdf European Central Bank Working papers by Galo Nuño, Carlos Thomas Bank leverage cycles, 2013-03-07T12:35:59Z We document the cyclical dynamics in the balance sheets of US leveraged financial intermediaries in the post-war period. Leverage has contributed more than equity to fluctuations in total assets. All three variables are several times more volatile than GDP. Leverage has been positively correlated with assets and (to a lesser extent) GDP, and negatively correlated with equity. These findings are robust across financial subsectors. We then build a general equilibrium model with banks subject to endogenous leverage constraints, and assess its ability to replicate the facts. In the model, banks borrow in the form of collateralized risky debt. The presence of moral hazard creates a link between the volatility in bank asset returns and bank leverage. We find that, while standard TFP shocks fail to replicate the volatility and cyclicality of leverage, volatility shocks are relatively successful in doing so. Bank leverage cycles, 2013-03-07T12:35:59Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1524.pdf Carlos Thomas Galo Nuño Galo Nuño, Carlos Thomas 2013-03-07 European Central Bank Working papers http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1523.pdf European Central Bank Working papers by Marco Gross Estimating GVAR weight matrices, 2013-03-07T12:35:59Z This paper aims to illustrate how weight matrices that are needed to construct foreign variable vectors in Global Vector Autoregressive (GVAR) models can be estimated jointly with the GVAR's parameters. An application to real GDP and consumption expenditure price inflation as well as a controlled Monte Carlo simulation serve to highlight that 1) In the application at hand, the estimated weights differ for some countries significantly from trade-based ones that are traditionally employed in that context; 2) misspecified weights might bias the GVAR estimate and therefore distort its dynamics; 3) using estimated GVAR weights instead of trade-based ones (to the extent that they differ and the latter bias the global model estimates) shall enhance the out-of-sample forecast performance of the GVAR. Devising a method for estimating GVAR weights is particularly useful for contexts in which it is not obvious how weights could otherwise be constructed from data. Estimating GVAR weight matrices, 2013-03-07T12:35:59Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1523.pdf Marco Gross Marco Gross 2013-03-06 European Central Bank Working papers