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on European Economics |
| By: | Carmen Broto (Banco de España); Gabriel Perez-Quiros (Banco de España) |
| Abstract: | During the last crisis, developed economies’ sovereign Credit Default Swap (hereafter CDS) premia have gained in importance as a tool for approximating credit risk. In this paper, we fit a dynamic factor model to decompose the sovereign CDS spreads of ten OECD economies into three components: a common factor, a second factor driven by European peripheral countries and an idiosyncratic component. We use this decomposition to propose a novel methodology based on the real-time estimates of the model to characterize contagion among the ten series. Our procedure allows the country that triggers contagion in each period, which can be any peripheral economy, to be disentangled. According to our findings, since the onset of the sovereign debt crisis, contagion has played a non-negligible role in the European peripheral countries, which confirms the existence of signifi cant financial linkages between these economies. |
| Keywords: | sovereign Credit Default Swaps, contagion, dynamic factor models, credit risk |
| JEL: | C32 G01 G15 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1314&r=eec |
| By: | van Suntum, Ulrich |
| Abstract: | It is argued that the stronger member states of the European Monetary Union should find their way out of the Euro in order to avoid being dragged into a disastrous course of inflation and over-indebtedness by the weaker members. A sudden exit would presumably cause financial turmoil as well as political damage and is, thus, no realistic option. However, by creating a parallel currency called Hard-Euro as an intermediate solution, there would indeed be a way of separating the EMU into two parts, with a weaker Euro in the southern countries and a stronger Euro in the northern countries. Using a small macro-model, the paper discusses this idea and its economic consequences in more detail. Following the early idea of separating the functions of money by Eisler (1932), the Hard-Euro is invented in the form of a pure book-money, while the Euro is still the only cash money until further notice. The Hard-Euro is designed as an index-currency such that its exchange rate exactly compensates for the inflation rate of the common Euro. Hence, it is absolutely stable in terms of consumer prices, and at the same time the exchange rate can never overshoot. By this means, savers in the stronger member states are protected from both inflation and financial repression, while the weaker member states can improve their competitiveness by inflating the Euro. It is shown, that this approach is likely to increase both investment and total output in the EMU. Later on, this intermediate regime could be substituted by the definite separation of the Euro-Zone into a stronger northern and a weaker southern part. -- |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cawmdp:64n&r=eec |
| By: | Nidhaleddine Ben Cheikh (CREM - Centre de Recherche en Economie et Management - CNRS : UMR6211 - Université de Rennes 1 - Université de Caen Basse-Normandie) |
| Abstract: | This paper analyzes the exchange rate pass-through (ERPT) into consumer prices for 12 EA countries within a CVAR framework. Using the Johansen cointegration procedure, results indicate the existence of one cointegrating vectors at least for each EA country of our sample. When measuring the long-run effect of exchange rate changes on consumer prices, we found a wide dispersion of ERPT elasticities, especially between "peripheral" and "core EA" economies. For instance, consumer prices rise by 84% in Portugal following one percent depreciation of exchange rate, while for the German economy the extent of pass-through is not exceeding 0.20%. Besides, the loading factors point out a very slow adjustment of consumer prices towards their long-run equilibrium across EA countries. This would explain the weakness of ERPT estimates in the short-run. |
| Keywords: | Exchange Rate Pass-Through; Inflation; Cointegration |
| Date: | 2013–10–25 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00879270&r=eec |
| By: | Beatrice Pataracchia; Rafal Raciborski; Marco Ratto; Werner Roeger |
| Abstract: | The paper provides an extension to first generation DSGE models with a financial sector – for which QUEST III would be a typical example – by explicitly modelling (mortgage) loan demand and supply decisions. We estimate a DSGE model with a housing sector where housing capital is used as collateral against which impatient consumers borrow from more patient lenders. While in existing estimated models with a construction sector the Loan-to-Value (LTV) ratio is imposed exogenously and constant (e.g., Iacoviello and Neri, 2010, In’t Veld et al., 2011), we introduce an endogenous LTV ratio by explicitly modelling the riskiness of loans in order to capture changing credit conditions. Using data of the Euro Area, we show that, compared to similar models with an exogenous LTV ratio, the business cycle properties of our model improve. The endogenous default mechanism allows estimating an important amplification mechanism driven by the riskiness of collateral values and propagating, in turn, into the real economy. Housing market-related shocks appear to be the main driver of the pre-crisis growth of mortgage-backed loans and a subsequent reversal of the sentiment on the housing market may have been a trigger that led to a credit crunch, house price bubble burst and a collapse in the construction sector. Shocks on the housing market had also a substantial impact on several demand aggregates, in particular, consumption. |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0505&r=eec |
| By: | Dumitriu, Ramona; Stefanescu, Răzvan |
| Abstract: | After the fall of communist regime the Romanian current account passed from exceeds to substantial and persistent deficits. This evolution raised concerns over the country external sustainability. Since 2007, in the Romanian foreign trade dramatic changes occurred, being induced by the adhesion to European Union and by the global crisis. The adhesion to European Union stimulated both exports and imports. However, because the exports growth was much less consistent than the imports growth, the deficits of current account widened. Beginning with the end of 2008, the national economy was affected by the global crisis which discouraged both exports and imports. This time, because the decline of exports was less sharp than the decline of imports, the deficits of the Romanian current account narrowed. However, the country external sustainability is still an actual problem in the circumstances of the new challenges of a changing international context. In this paper we investigate the sustainability of the Romanian current account from January 2007 to January 2013. In our analysis we employ monthly values of the main components of the current account. We also use unit root and cointegration tests that allow taking into consideration the structural breaks. Our results suggest the deficits of the current account are not sustainable. |
| Keywords: | Romanian Current Account, Sustainability, Adhesion to European Union |
| JEL: | F10 F15 F40 |
| Date: | 2013–04–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:51244&r=eec |
| By: | Brun , Matthieu; Fraisse , Henri; Thesmar , David |
| Abstract: | We measure the impact of bank capital requirements on corporate borrowing and expansion. We use French loan-level data and take advantage of the transition from Basel I to Basel II. While under Basel I the capital charge was the same for all firms, under Basel II, it depends in a predictable way on both the bank's model and the firm's risk. We exploit this two-way variation to empirically estimate the sensitivity of bank lending to capital requirement. This rich identification allows us to control for firm-level credit demand shocks and bank-level credit supply shocks. We find very large effects of capital requirements on bank lending: A 1 percentage point decrease in capital requirement leads to an increase in loan size by about 5%. At the firm level, borrowing also responds strongly although a bit less, consistent with some limited between-bank substitutability. Investment and employment also increase strongly. Overall, because the transition to Basel II led to an average reduction by 2 percentage points of capital requirements, we estimate that the new regulation led, in France, to an increase in average loan size by 10%, an increase in aggregate corporate lending by 1.5%, an increase in aggregate investment by 0.5%, and the creation or preservation of 235,000 jobs. |
| Keywords: | Bank capital ratios; Bank regulation; Credit supply |
| JEL: | E51 G21 G28 |
| Date: | 2013–07–04 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:heccah:0988&r=eec |