nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2016‒11‒13
four papers chosen by
Iulia Igescu
Ministry of Presidential Affairs

  1. Use of unit root methods in early warning of financial crises By Virtanen, Timo; Tölö, Eero; Virén, Matti; Taipalus, Katja
  2. Changes in the relationship between the financial and the real sector and the present financial crisis in the European Union By Amaia Altuzarra; Patricia Peinado; Carlos Rodriguez; Felipe Serrano
  3. Abductive reasoning in macroeconomics By Ashima Goyal
  4. The European Stability Mechanism - bastion of calm or crisis accelerant? By Alexandra M. D. Hild; Bernhard Herz; Christian Bauer

  1. By: Virtanen, Timo; Tölö, Eero; Virén, Matti; Taipalus, Katja
    Abstract: Unit root methods have long been used in detection of financial bubbles in asset prices. The basic idea is that fundamental changes in the autocorrelation structure of relevant time series imply the presence of a rational price bubble. We provide cross-country evidence for performance of unit-root-based early warning systems in ex-ante prediction of financial crises in 15 EU countries over the past three decades. We then combine the identified early warning signals from multiple time series into a composite indicator. We also show that a mix of data with different frequencies may be useful in providing timely warning signals. Our results suggest and an early warning tool based on unit root methods provides be a valuable accessory in financial stability supervision.
    Keywords: financial crises, unit root, combination of forecasts
    JEL: G01 G14 G21
    Date: 2016–11–03
  2. By: Amaia Altuzarra (Department of Applied Economics V, University of the Basque Country UPV/EHU); Patricia Peinado (Department of Applied Economics V, University of the Basque Country UPV/EHU); Carlos Rodriguez (Department of Applied Economics V, University of the Basque Country UPV/EHU); Felipe Serrano (Department of Applied Economics V, University of the Basque Country UPV/EHU)
    Abstract: In the first part of the paper we confirm the existence of a financial “vanishing effect” for the Eurozone countries since the 90s. In the 70s and 80s -when credit over GDP was still moderate- credit growth still had a positive effect on real growth, but thereafter during the financialization heydays when credit reached a high level, that link broke apart. In the second part we put forward that a main reason explaining why increasing financial deepening stopped to have a positive effect on growth might be due to NFCs having used an important part of their external resources for the acquisition of securities instead of financing real investment. This process of NFC finacialization and the observed increase in their selffinancing ability are two key reassuring indicators showing the disconnection of NFC financial behaviour with their investment decisions
    Keywords: bank credit, economic growth, NFC financing gap, NFC investment
    JEL: O47 G01 G21 C33
    Date: 2016–06–30
  3. By: Ashima Goyal (Indira Gandhi Institute of Development Research)
    Abstract: Macroeconomic analytical frameworks change with events they are unable to explain. The process is closer to abductive reasoning that is based on both events and analysis, unlike induction which is data-based and deduction where analysis dominates. Abduction reasons backwards from the outcome, to deduce the framework with which it is compatible. Therefore it is useful to study how macroeconomic conceptual frameworks evolve after anomalous outcomes such as crises. The post-crisis churning is assessed from this perspective using criteria such as greater generality, systemic feedback, and structural aspects. Abductive reasoning is also used to extract the structure of aggregate demand and supply consistent with the observed negative correlation inflation and growth in India. If prolonged growth slowdowns do not reduce inflation, it suggests underlying aggregate supply is elastic but volatile, so that supply-side issues, not excess demand, are primary inflation drivers. Monetary and fiscal policy need to focus on elements that reduce costs, while avoiding sharp cuts in aggregate demand.
    Keywords: Abduction; Evolution of macroeconomics; Global financial crisis; Aggregate demand and supply
    JEL: E10 E44 E32
    Date: 2016–07
  4. By: Alexandra M. D. Hild; Bernhard Herz; Christian Bauer
    Abstract: The European Stability Mechanism (ESM) is the permanent crisis resolution mechanism for euro area countries. We analyze the costs of the current (suboptimal) refinancing design of the ESM and evaluate an alternative asset-backed securities (ABS) structure under different scenarios. Our simulation results indicate that switching to an ABS structure could substantially lower ESM refunding costs by up to 3.5%. Moreover, the current structure severely limits the ESM’s potential to stabilize financial markets. In particular, in the most likely type of future crises, namely medium-sized requests for financial support from distressed ESM members accompanied by other ESM countries unwilling or unable to provide new capital, the ESM is likely to unintentionally act as a crisis accelerant rather than a stabilizer.
    Keywords: European Stability Mechanism (ESM), financial instruments, euro area, ABS
    JEL: E6 F34 F55 G15
    Date: 2016

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