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/ecbwp1429.pdf European Central Bank Working papers by Günter Coenen, Roland Straub, Mathias Trabandt Fiscal policy and the great recession in the Euro area, 2012-03-27T12:35:00Z 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. Fiscal policy and the great recession in the Euro area, 2012-03-27T12:35:00Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1429.pdf Günter Coenen Roland Straub Mathias Trabandt Günter Coenen, Roland Straub, Mathias Trabandt 2012-03-26 European Central Bank Working papers C11 E32 E62 http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1428.pdf European Central Bank Working papers by Claudia Godbout, Marco J. Lombardi Short-term forecasting of the Japanese economy using factor models, 2012-03-20T17:36:00Z 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. Short-term forecasting of the Japanese economy using factor models, 2012-03-20T17:36:00Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1428.pdf Claudia Godbout Marco J. Lombardi Claudia Godbout, Marco J. Lombardi 2012-03-20 European Central Bank Working papers C50 C53 E37 E47 http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1427.pdf European Central Bank Working papers by Yener Altunbas, Leonardo Gambacorta, David Marqués-Ibáñez Do bank characteristics influence the effect of monetary policy on bank risk?, 2012-03-16T17:36:00Z 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. Do bank characteristics influence the effect of monetary policy on bank risk?, 2012-03-16T17:36:00Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1427.pdf Yener Altunbas Leonardo Gambacorta David Marqués-Ibáñez Yener Altunbas, Leonardo Gambacorta, David Marqués-Ibáñez 2012-03-15 European Central Bank Working papers E44 E52 G21 http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1426.pdf European Central Bank Working papers by Dániel Holló, Manfred Kremer, Marco Lo Duca CISS - a composite indicator of systemic stress in the financial system, 2012-03-12T12:35:00Z 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. CISS - a composite indicator of systemic stress in the financial system, 2012-03-12T12:35:00Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1426.pdf Dániel Holló Manfred Kremer Marco Lo Duca Dániel Holló, Manfred Kremer, Marco Lo Duca 2012-03-12 European Central Bank Working papers E44 G01 G10 G20 http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1425.pdf European Central Bank Working papers by Falko Fecht, Hans Peter Grüner, Philipp Hartmann Financial integration, specialization and systemic risk, Journal of International Economics (forthcoming), 2012-02-15T17:34:59Z 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. Financial integration, specialization and systemic risk, Journal of International Economics (forthcoming), 2012-02-15T17:34:59Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1425.pdf Hans Peter Grüner Falko Fecht Philipp Hartmann Falko Fecht, Hans Peter Grüner, Philipp Hartmann 2012-02-15 European Central Bank Working papers http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1424.pdf European Central Bank Working papers by Michael Ehrmann, David-Jan Jansen The pitch rather than the pit: investor inattention during FIFA world cup matches, 2012-02-13T17:34:59Z 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. The pitch rather than the pit: investor inattention during FIFA world cup matches, 2012-02-13T17:34:59Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1424.pdf Michael Ehrmann David-Jan Jansen Michael Ehrmann, David-Jan Jansen 2012-02-13 European Central Bank Working papers http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1423.pdf European Central Bank Working papers by Giovanni Lombardo, Peter McAdam Financial market frictions in a model of the euro area, 2012-02-10T17:36:00Z 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. Financial market frictions in a model of the euro area, 2012-02-10T17:36:00Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1423.pdf Peter McAdam Giovanni Lombardo Giovanni Lombardo, Peter McAdam 2012-02-10 European Central Bank Working papers http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1420.pdf European Central Bank Working papers by Michal Rubaszek, Dobromil Serwa Determinants of credit to households in a life-cycle model, 2012-02-03T17:34:00Z 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. Determinants of credit to households in a life-cycle model, 2012-02-03T17:34:00Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1420.pdf Michal Rubaszek Dobromil Serwa Michal Rubaszek, Dobromil Serwa 2012-02-03 European Central Bank Working papers http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1421.pdf European Central Bank Working papers by Martin Brown, Steven Ongena, Alexander Popov, Pinar Yesin Who needs credit and who gets credit in Eastern Europe?, 2012-02-03T17:34:00Z 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. Who needs credit and who gets credit in Eastern Europe?, 2012-02-03T17:34:00Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1421.pdf Steven Ongena Pinar Yesin Martin Brown Alexander Popov Martin Brown, Steven Ongena, Alexander Popov, Pinar Yesin 2012-02-03 European Central Bank Working papers http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1422.pdf European Central Bank Working papers by Gary Koop, Luca Onorante Estimating Phillips curves in turbulent times using the ECB's survey of professional forecasters, 2012-02-03T17:34:00Z 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". Estimating Phillips curves in turbulent times using the ECB's survey of professional forecasters, 2012-02-03T17:34:00Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1422.pdf Luca Onorante Gary Koop Gary Koop, Luca Onorante 2012-02-03 European Central Bank Working papers http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1415.pdf European Central Bank Working papers by Marcel Fratzscher Capital controls and foreign exchange policy, 2012-02-01T12:35:59Z 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. Capital controls and foreign exchange policy, 2012-02-01T12:35:59Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1415.pdf Marcel Fratzscher Marcel Fratzscher 2012-02-01 European Central Bank Working papers http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1417.pdf European Central Bank Working papers by Philip Vermeulen Quantifying the qualitative responses of the output purchasing managers index in the US and the Euro area, 2012-02-01T12:35:59Z 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. Quantifying the qualitative responses of the output purchasing managers index in the US and the Euro area, 2012-02-01T12:35:59Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1417.pdf Philip Vermeulen Philip Vermeulen 2012-02-01 European Central Bank Working papers http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1419.pdf European Central Bank Working papers by Roberto A. De Santis The Euro area sovereign debt crisis: safe haven, credit rating agencies and the spread of the fever from Greece, Ireland and Portugal, 2012-02-01T12:35:59Z 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. The Euro area sovereign debt crisis: safe haven, credit rating agencies and the spread of the fever from Greece, Ireland and Portugal, 2012-02-01T12:35:59Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1419.pdf Roberto A. De Santis Roberto A. De Santis 2012-02-01 European Central Bank Working papers http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1418.pdf European Central Bank Working papers by Marcel Fratzscher, Lucio Sarno, Gabriele Zinna The scapegoat theory of exchange rates: the first tests, 2012-02-01T12:35:59Z 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. The scapegoat theory of exchange rates: the first tests, 2012-02-01T12:35:59Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1418.pdf Marcel Fratzscher Gabriele Zinna Lucio Sarno Marcel Fratzscher, Lucio Sarno, Gabriele Zinna 2012-02-01 European Central Bank Working papers http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1416.pdf European Central Bank Working papers by Alexander Chudik, Marcel Fratzscher Liquidity, risk and the global transmission of the 2007-08 financial crisis and the 2010-2011 sovereign debt crisis, 2012-02-01T12:35:59Z 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. Liquidity, risk and the global transmission of the 2007-08 financial crisis and the 2010-2011 sovereign debt crisis, 2012-02-01T12:35:59Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1416.pdf Alexander Chudik Marcel Fratzscher Alexander Chudik, Marcel Fratzscher 2012-02-01 European Central Bank Working papers http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1414.pdf European Central Bank Working papers by Jenny E. Ligthart, Sebastian E. V. Werner Has the Euro affected the choice of invoicing currency?, 2012-01-18T12:33:59Z 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. Has the Euro affected the choice of invoicing currency?, 2012-01-18T12:33:59Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1414.pdf Jenny E. Ligthart Sebastian E. V. Werner Jenny E. Ligthart, Sebastian E. V. Werner 2012-01-18 European Central Bank Working papers http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1413.pdf European Central Bank Working papers by Bruno Biais, Florian Heider, Marie Hoerova Risk-sharing or risk-taking? Counterparty risk, incentives and margins, 2012-01-10T12:35:59Z 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. Risk-sharing or risk-taking? Counterparty risk, incentives and margins, 2012-01-10T12:35:59Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1413.pdf Marie Hoerova Florian Heider Bruno Biais Bruno Biais, Florian Heider, Marie Hoerova 2012-01-10 European Central Bank Working papers http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1412.pdf European Central Bank Working papers by Carlo Altomonte, Filippo di Mauro, Gianmarco Ottaviano, Armando Rungi, Vincent Vicard Global value chains during the great trade collapse: a bullwhip effect? 2012-01-05T12:35:59Z 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. Global value chains during the great trade collapse: a bullwhip effect? 2012-01-05T12:35:59Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1412.pdf Carlo Altomonte Vincent Vicard Gianmarco Ottaviano Armando Rungi Filippo di Mauro Carlo Altomonte, Filippo di Mauro, Gianmarco Ottaviano, Armando Rungi, Vincent Vicard 2012-01-04 European Central Bank Working papers http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1409.pdf European Central Bank Working papers by John Geweke, Gianni Amisano Analysis of variance for bayesian inference, 2011-12-21T12:37:00Z 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. Analysis of variance for bayesian inference, 2011-12-21T12:37:00Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1409.pdf John Geweke Gianni Amisano John Geweke, Gianni Amisano 2011-12-20 European Central Bank Working papers http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1410.pdf European Central Bank Working papers by Laurent Maurin, Moreno Roma, Igor Vetlov Profit dynamics across the largest euro area countries and sectors, 2011-12-21T12:37:00Z 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. Profit dynamics across the largest euro area countries and sectors, 2011-12-21T12:37:00Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1410.pdf Laurent Maurin Moreno Roma Igor Vetlov Laurent Maurin, Moreno Roma, Igor Vetlov 2011-12-20 European Central Bank Working papers http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1411.pdf European Central Bank Working papers by Kai Christoffel, Ivan Jaccard, Juha Kilponen Government bond risk premia and the cyclicality of fiscal policy, 2011-12-21T12:37:00Z 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. Government bond risk premia and the cyclicality of fiscal policy, 2011-12-21T12:37:00Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1411.pdf Kai Christoffel Juha Kilponen Ivan Jaccard Kai Christoffel, Ivan Jaccard, Juha Kilponen 2011-12-20 European Central Bank Working papers http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1406.pdf European Central Bank Working papers by Raffaela Giordano, Domenico Depalo, Manuel Coutinho Pereira, Bruno Eugène, Evangelia Papapetrou, Javier J. Perez, Lukas Reiss, Mojca Roter The public sector pay gap in a selection of Euro area countries, 2011-12-13T17:34:59Z 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. The public sector pay gap in a selection of Euro area countries, 2011-12-13T17:34:59Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1406.pdf Lukas Reiss Mojca Roter Manuel Coutinho Pereira Domenico Depalo Javier J. Perez Bruno Eugène Evangelia Papapetrou Raffaela Giordano Raffaela Giordano, Domenico Depalo, Manuel Coutinho Pereira, Bruno Eugène, Evangelia Papapetrou, Javier J. Perez, Lukas Reiss, Mojca Roter 2011-12-13 European Central Bank Working papers http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1407.pdf European Central Bank Working papers by Cristian Badarinza, Marco Buchmann Macroeconomics vulnerability and disagreement in expectations, 2011-12-13T17:34:59Z 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. Macroeconomics vulnerability and disagreement in expectations, 2011-12-13T17:34:59Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1407.pdf Marco Buchmann Cristian Badarinza Cristian Badarinza, Marco Buchmann 2011-12-13 European Central Bank Working papers http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1405.pdf European Central Bank Working papers by Corrado Macchiarelli Bond market co-movements, expected inflation and the equilibrium real exchange rate, 2011-12-13T17:34:59Z 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. Bond market co-movements, expected inflation and the equilibrium real exchange rate, 2011-12-13T17:34:59Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1405.pdf Corrado Macchiarelli Corrado Macchiarelli 2011-12-13 European Central Bank Working papers http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1404.pdf European Central Bank Working papers by Corrado Macchiarelli A VAR analysis for the uncovered interest parity and the ex-ante purchasing power parity: the role of marcoeconomic and financial information, 2011-12-13T17:34:59Z 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. A VAR analysis for the uncovered interest parity and the ex-ante purchasing power parity: the role of marcoeconomic and financial information, 2011-12-13T17:34:59Z ECB Full text http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1404.pdf Corrado Macchiarelli Corrado Macchiarelli 2011-12-13 European Central Bank Working papers