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on Financial Markets |
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Issue of 2010‒07‒10
five papers chosen by |
| By: | Jan Hatzius; Peter Hooper; Frederic S. Mishkin; Kermit L. Schoenholtz; Mark W. Watson |
| Abstract: | This paper explores the link between financial conditions and economic activity. We first review existing measures, including both single indicators and composite financial conditions indexes (FCIs). We then build a new FCI that features three key innovations. First, besides interest rates and asset prices, it includes a broad range of quantitative and survey-based indicators. Second, our use of unbalanced panel estimation techniques results in a longer time series (back to 1970) than available for other indexes. Third, we control for past GDP growth and inflation and thus focus on the predictive power of financial conditions for future economic activity. During most of the past two decades for which comparisons are possible, including the last five years, our FCI shows a tighter link with future economic activity than existing indexes, although some of this undoubtedly reflects the fact that we selected the variables partly based on our observation of the recent financial crisis. As of the end of 2009, our FCI showed financial conditions at somewhat worse-than-normal levels. The main reason is that various quantitative credit measures (especially issuance of asset backed securities) remained unusually weak for an economy that had resumed expanding. Thus, our analysis is consistent with an ongoing modest drag from financial conditions on economic growth in 2010. |
| JEL: | E17 E44 E5 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16150&r=fmk |
| By: | Ansgar Belke |
| Abstract: | We develop a roadmap of how the ECB should further reduce the volume of money (money supply) and roll back credit easing in order to prevent inflation. The exits should be step-by-step rather than one-off . Communicating about the exit strategy must be an integral part of the exit strategy. Price stability should take precedence in all decisions. Due to vagabonding global liquidity, there is a strong case for globally coordinating monetary exit strategies. Given unsurmountable practical problems of coordinating exit with asymmetric country interests, however, the ECB should go ahead – perhaps joint with some Far Eastern economies. Coordination of monetary and fiscal exit would undermine ECB independence and is also technically out of reach within the euro area. |
| Keywords: | Exit strategies; international policy coordination and transmission; open market operations; unorthodox monetary policy |
| JEL: | E52 E58 F42 E63 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0183&r=fmk |
| By: | Albrecht Ritschl; Samad Salferaz |
| Abstract: | This paper examines the role of currency and banking in the German financial crisis of 1931for both Germany and the U.S. We specify a structural dynamic factor model to identifyfinancial and monetary factors separately for each of the two economies. We find thatmonetary transmission through the Gold Standard played only a minor role in causing andpropagating the crisis, while financial distress was important. We also find evidence of crisispropagation from Germany to the U.S. via the banking channel. Banking distress in botheconomies was apparently not endogenous to monetary policy. Results confirm Bernanke's(1983) conjecture that an independent, non-monetary financial channel of crisis propagationwas operative in the Great Depression. |
| Keywords: | Great Depression, 1931 financial crisis, international business cycle transmission,Bayesian factor analysis, currency, banking |
| JEL: | N12 N13 E37 E47 C53 |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp0977&r=fmk |
| By: | John Beirne; Guglielmo Maria Caporale; Nicola Spagnolo |
| Abstract: | In this paper we model the volatility of the spread between the overnight interest rate and the central bank policy rate (the policy spread) for the euro area and the UK during the two main phases of the financial crisis that began in late 2007. During the crisis, the policy spread exhibited signs of volatility, owing to the breakdown in interbank market activity. The determinants of this volatility are assessed using Stochastic Volatility models to gauge the role played by liquidity risk, credit risk (financial and sovereign), and interest rate expectations. Our results suggest that liquidity risk is the main determinant of the volatility of the policy spread, but also that private bank credit risk has become more apparent in the post-Lehman collapse phase of the crisis for the euro area as financial CDS premia rose due to possible default fears. In addition, the ECB appears to have been more effective in addressing liquidity risk since the onset of the crisis, and this may be related to its greater direct access to a broader range of counterparties and its acceptance of a broader range of eligible collateral. The main implication is that, in crisis times, a sufficiently flexible operational framework for monetary policy implementation produces the most timely response to market tensions. |
| Keywords: | Overnight Interest Rate Spread, Liquidity Risk, Credit Risk, Stochastic Volatility |
| JEL: | C32 E52 E58 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1029&r=fmk |
| By: | Christophe J. Godlewski; Bulat Sanditov; Thierry Burger-Helmchen |
| Abstract: | We investigate the network structure of syndicated lending markets and evaluate the impact of lenders’ network centrality, considered as measures of their experience and reputation, on borrowing costs. We show that the market for syndicated loans is a “small world” characterized by large local density and short social distances between lenders. Such a network structure allows for better information and resources flows between banks thus enhancing their social capital. We then show that lenders’ experience and reputation play a significant role in reducing loan spreads and thus increasing borrower’s wealth. |
| Keywords: | agency costs, bank syndicate, experience, loan syndication, reputation, small world, social network analysis. |
| JEL: | G21 G24 L14 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2010-16&r=fmk |