nep-mac New Economics Papers
on Macroeconomics
Issue of 2009‒09‒05
23 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Expectations, Monetary Policy, and Labor Markets: Lessons from the Great Depression By Christopher P. Reicher
  2. Wage, inflation and employment dynamics with labour market matching By Kai Christoffel; James Costain; Gregory de Walque; Keith Kuester; Tobias Linzert; Stephen Millard; Olivier Pierrard
  3. On the (de)stabilizing effects of news shocks By Roland Winkler; Hans-Werner Wohltmann
  4. A Financial Conditions Index for the United States By Kimberly Beaton; René Lalonde; Corinne Luu
  5. The role of structural common and country-specific shocks in the business cycle dynamics of the G7 countries By Seymen, Atilim; Kappler, Marcus
  6. Expectational stability under non-zero trend inflation By Kobayashi, Teruyoshi; Muto, Ichiro
  7. Is there a Case for Price-level Targeting? By Boris Cournède; Diego Moccero
  8. Inflation dynamics with labour market matching: assessing alternative specifications By Christoffel, Kai; Costain, James; de Walque, Gregory; Kuester, Keith; Linzert, Tobias; Millard, Stephen; Pierrard, Olivier
  9. Market Forecasts in Brazil: performance and determinants By Fabia A. de Carvalho; André Minella
  10. Analysis of the Dynamics of Mexican Inflation Using Wavelets. By Carla Ysusi
  11. Shocking aspects of monetary integration (SVAR approach) By Mirdala, Rajmund
  12. Inequality and Volatility Moderation in Russia: Evidence from Micro-Level Panel Data on Consumption and Income By Yuriy Gorodnichenko; Klara Sabirianova Peter; Dmitriy Stolyarov
  13. Macroeconomic Impact of the Financial Crisis on Armenia By King Banaian
  14. The Puzzling Divergence of Rents and User Costs, 1980-2004 By Randal Verbrugge
  15. Long-Run Impacts of Inflation Tax in the Presence of Multiple Capital Goods By Fujisaki , Seiya; Mino, Kazuo
  16. Credit Rationing and Exchange-Rate Stabilization: Examining the Relation between Financial Frictions, Exchange-Rate Volatility, Lending Rates, and Capital Inflows By Gabriel Martinez
  17. Measures of labor underutilization from the Current Population Survey By Steven E. Haugen
  18. Pakistan Tax Policy Report: Tapping Tax Bases for Development By Jorge Martinez-Vazquez; Kaspar Richter
  19. Exchange-rate regime and economic growth: a review of the theoretical and empirical literature By Petreski, Marjan
  20. Linking Financial and Macroeconomic Factors to Credit Risk Indicators of Brazilian Banks By Marcos Souto; Benjamin M. Tabak; Francisco Vazquez
  21. Shocks at large banks and banking sector distress: the Banking Granular Residual By Blank, Sven; Buch, Claudia M.; Neugebauer, Katja
  22. Intra-Regional Trade in East Asia: The Decoupling Fallacy, Crisis, and Policy Challenges By Prema-chandra Athukorala; Archanun Kohpaiboon
  23. Factor Decomposition of Sectoral Growth in South Africa, 1970-2007 By Tregenna, F.

  1. By: Christopher P. Reicher
    Abstract: This paper estimates a series of shocks to hit the US economy during the Great Depression, using a New Keynesian model with unemployment and bargaining frictions. Shocks to long-run inflation expectations appear to account for much of the cyclical behavior of employment, while an increase in labor’s bargaining power also played an important role in deepening and lengthening the Depression. Government spending played very little role during the Hoover Administration and New Deal, until the rise in military spending effectively brought an end to the Depression in 1941. With the economy at or near the zero interest rate bound, interest rates and monetary aggregates provided a misleading indicator as to the true stance of inflation expectations; in fact, conditions were deflationary all throughout the 1930s in spite of high money growth and low interest rates. The experience of the 1930s offers lessons to modern policymakers who find themselves in a similar situation
    Keywords: Great Depression, expectations, deflation, zero bound, liquidity trap
    JEL: E24 E31 E52 E65
    Date: 2009–08
  2. By: Kai Christoffel (European Central Bank); James Costain (Banco de España); Gregory de Walque (Banque Nationale de Belgique); Keith Kuester (Federal Reserve Bank of Philadelphia); Tobias Linzert (European Central Bank); Stephen Millard (Bank of England); Olivier Pierrard (Banque Centrale du Luxembourg)
    Abstract: In a search and matching environment, this paper assesses a range of modeling setups against macro evidence for the monetary transmission mechanism in the euro area. In particular, we assess right-to-manage vs. efficient bargaining, flexible vs. sticky wages, interactions at the firm level between price and wage-setting, alternative forms of hiring frictions, search on-the-job and endogenous job separation. Models with wage stickiness and right-to-manage bargaining or with firm-specific labour imply a sufficient degree of real rigidity, and so can reproduce inflation dynamics well. However, they imply too small a response on the employment margin. The other model variants fit employment dynamics better, but then imply too little real rigidity and, so, too volatile inflation, owing to strong responses of marginal wages and hours per employee. Further sources of real rigidities - possibly from outside of the labour market - seem to be needed to simultaneously explain the responses of wages, inflation and employment.
    Keywords: Inflation Dynamics, Labour Market, Business Cycle, Real Rigidities
    JEL: E31 E32 E24 J64
    Date: 2009–08
  3. By: Roland Winkler; Hans-Werner Wohltmann
    Abstract: This paper analyzes the impacts of news shocks on macroeconomic volatility. Whereas anticipation amplifies volatility in any purely forward-looking model, such as the baseline New Keynesian model, the results are ambiguous when including a backward-looking component. In addition to these theoretical findings, we use the estimated model of Smets and Wouters (2003) to provide numerical evidence that news shocks increase the volatility of key macroeconomic variables in the euro area when compared to unanticipated shocks.
    Keywords: Anticipated Shocks, Business Cycles, Volatility
    JEL: E32
    Date: 2009–08
  4. By: Kimberly Beaton; René Lalonde; Corinne Luu
    Abstract: The financial crisis of 2007-09 has highlighted the importance of developments in financial conditions for real economic activity. The authors estimate the effect of current and past shocks to financial variables on U.S. GDP growth by constructing two growthbased financial conditions indexes (FCIs) that measure the contribution to quarterly (annualized) GDP growth from financial conditions. One FCI is constructed using a structural vector-error correction model and the other is constructed using a large-scale macroeconomic model. The authors' results suggest that financial factors subtracted around 5 percentage points from quarterly annualized real GDP growth in the United States in 2008Q4 and 2009Q1 and should subtract another 5 percentage points from growth in 2009Q2. Moreover, to assess the effect of financial shocks in terms of policy interest rate equivalent units, the authors convert the effect of financial developments on growth into the number of basis points by which the federal funds rate has been tightened. The authors show that the tightening of financial conditions since mid-2007 is equivalent to about 300 basis points of tightening in terms of the federal funds rate. Thus, the aggressive monetary easing undertaken by the Federal Reserve over the financial crisis has not been sufficient to offset the tightening of financial conditions. Finally, in a key contribution to the literature, the authors assess the relationship between financial shocks and real activity in the context of the zero lower bound. They find that the effect of the tightening of financial conditions on GDP growth in the current crisis may have been amplified by as much as 40 per cent due to the fact that policy interest rates reached the zero lower bound.
    Keywords: Business fluctuations and cycles; Monetary conditions index; Monetary and financial indicators; Recent economic and financial developments
    JEL: E32 E44 E47 E51
    Date: 2009
  5. By: Seymen, Atilim; Kappler, Marcus
    Abstract: The study analyses the business cycles of the G7 countries in a structural vector autoregression(SVAR) framework comprising output, nominal interest rate and inflation. Common and country-specific supply, demand and nominal shocks of each G7 country are identified, and the corresponding shock propagation channels are computed. We establish the statistical properties of the cyclical fluctuations and investigate the role of each structural common and country-specific shock in the cyclical fluctuations of the variables of interest as well as the business cycle co-movement in the G7 group of countries.
    Keywords: International Business Cycles,Common and Country-Specific Structural Shocks,Structural Vector Autoregression Models
    JEL: C32 E32
    Date: 2009
  6. By: Kobayashi, Teruyoshi; Muto, Ichiro
    Abstract: This study examines the expectational stability of the rational expectation equilibria(REE) under Taylor rules when trend inflation is non-zero. We find that whether or not a higher (lower) trend inflation makes the REE more (less) unstable depends largely on the data (such as contemporaneous data, forecasts and lagged data) used in the conduct of monetary policy.
    Keywords: adaptive learning; E-stability; Taylor rule; trend inflation
    JEL: D84 E31 E52
    Date: 2009–09–03
  7. By: Boris Cournède; Diego Moccero
    Abstract: There is a case, but there are also counter-arguments. With sufficient forward-looking behaviour among firms and households, price-level targeting can act as a powerful built-in stabiliser through automatic shifts in inflation expectations. This stabilisation mechanism reduces the need for large shifts in policy rates, alleviating the risk of hitting the zero lower bound of nominal interest rates and falling into a liquidity trap. Furthermore, credible price-level targeting can support capital accumulation by protecting the long-run purchasing power of money and reducing the inflation risk premium embedded in actual long-term real interest rates. However, price-level targeting can imply welfare-reducing policy-induced output volatility in situations where the degree of forward-looking behaviour is very low. The self-regulating capacity of price-level targeting can be undermined if central banks are not fully credible. Besides, aggressive inflation targeting can replicate some of (but not all) the benefits of price-level targeting. On balance, the case for adopting price-level targeting is not clear-cut, all the more so since transition costs are likely to be significant.<P>Y a-t-il beaucoup à dire en faveur du ciblage du niveau des prix ?<BR>Oui, mais il y a aussi de sérieux contre-arguments. Si une part suffisante des entreprises et des ménages présente un comportement tourné vers l’avenir, le ciblage du niveau des prix peut fonctionner comme un puissant outil de stabilisation autonome grâce aux ajustements automatiques des anticipations des inflations. Ce mécanisme limite le besoin d’opérer de larges mouvements des taux directeurs, ce qui réduit le risque de heurter la borne zéro sur les taux d’intérêt et de tomber dans une trappe à liquidités. Qui plus est, grâce à la manière dont elle protège le pouvoir d’achat de la monnaie, une politique crédible de ciblage du niveau des prix peut encourager l’accumulation de capital en réduisant la prime contre le risque d’inflation qui est incorporée aux taux d’intérêts réels effectifs. Néanmoins, le ciblage du niveau des prix peut entraîner une volatilité de l’activité préjudiciable au bien-être social si la part des ménages et des entreprises qui sont tournés vers l’avenir est très faible. La capacité de stabilisation automatique d’un régime de ciblage du niveau des prix peut aussi être moindrie si la banque centrale manque de crédibilité. Par ailleurs, une stratégie de ciblage agressif du taux d’inflation peut reproduire une partie (mais non pas l’ensemble) des avantages du ciblage du niveau des prix. Tout bien pesé, les arguments en faveur du ciblage du niveau des prix ne justifient pas de manière nette un changement de stratégie monétaire, d’autant plus que les coûts de transition risquent d’être élevés.
    Keywords: monetary policy, politique monétaire, central bank, banque centrale, inflation targeting, ciblage d’inflation, zero lower bound, borne zéro des taux d’intérêt, monetary systems, régimes monétaires, price level targeting, ciblage du niveau des prix, price stability, stabilité des prix, trappe à liquidités, liquidity trap
    JEL: E42 E52
    Date: 2009–08–24
  8. By: Christoffel, Kai (European Central Bank); Costain, James (Banco de Espana); de Walque, Gregory (National Bank of Belgium); Kuester, Keith (Federal Reserve Bank of Philadelphia); Linzert, Tobias (European Central Bank); Millard, Stephen (Bank of England); Pierrard, Olivier (Banque Centrale du Luxembourg)
    Abstract: This paper reviews recent approaches to modelling the labour market, and assesses their implications for inflation dynamics through both their effect on marginal cost and on price-setting behaviour. In a search and matching environment, we consider the following modelling set-ups: right-to-manage bargaining versus efficient bargaining, wage stickiness in new and existing matches, interactions at the firm level between price and wage-setting, alternative forms of hiring frictions, search on-the-job and endogenous job separation. We find that most specifications imply too little real rigidity relative to the data and, so, too volatile inflation. Models with wage stickiness and right-to-manage bargaining, or with firm-specific labour emerge as the most promising candidates.
    Keywords: Inflation dynamics; labour market; business cycle; real rigidities
    JEL: E24 E31 E32 J64
    Date: 2009–08–24
  9. By: Fabia A. de Carvalho; André Minella
    Abstract: This paper assesses a wide set of aspects of market forecasts in Brazil: rationality, predictive power, joint performance, epidemiology and determinants. Using the survey conducted by the Central Bank of Brazil (CBB) among professional forecasters during the inflation targeting period, the main results are as follows: i) credibility in Brazilian monetary policy has increased over time, since inflation targets are important to explain inflation expectations, and private agents perceive the CBB as following a Taylor-type rule that is consistent with the inflation targeting framework; ii) market inflation forecasts had similar or better forecast performance than ARMA-, VAR- and BVAR-based forecasts with standard information sets; iii) the joint performance of market forecasts has improved over the past years; iv) in the decomposition of forecast errors for inflation, interest rate and exchange rate, the common forecast error component prevails over the idiosyncratic component across survey respondents; v) top-five forecasters published by the CBB are influential in other respondents’ forecasts; vi) inflation forecasts are unbiased but not fully efficient; and vii) inflation forecast uncertainty is positively related to increasing inflation and to country-risk premium.
    Date: 2009–04
  10. By: Carla Ysusi
    Abstract: This paper studies the dynamics of Mexican inflation by using a wavelet multiresolution analysis on 16 indexes of the Mexican Consumer Price Index. This enables us to estimate the long-term trend, seasonality, and local shocks of the inflation series, even when the series are non-stationary. The energy distribution between the high frequency, seasonal, and trend components, as well as its evolution through time, are compared. In particular, headline and core inflations show a more stable behavior in all the scales since 2001. Also, an increase in the proportion of variance explained by short-term variations is detected in the inflation series. In relative terms, the short run is becoming as important for headline inflation as the medium and long run, and more important for non-core inflation. These results are in line with previous studies documenting the reduction in the Mexican inflation persistence.
    Keywords: Inflation dynamics, wavelets, multiresolution analysis, energy decomposition.
    JEL: C19 C49 E31
    Date: 2009–09
  11. By: Mirdala, Rajmund
    Abstract: One of the most challenging areas relating to the European Monetary Union (EMU) enlargement is the question of new member countries’ vulnerability to exogenous shocks related to euro adoption. Even if well prepared, and also considering the business cycles of the EMU candidate countries became more correlated as the result of persisting convergence toward the old EU member countries, their real output will be still vulnerable to the exogenous structural disturbances. The responsiveness of the new EMU member countries’ real output to the exogenous shocks may of course differ in intensity and durability. If we also assume a possibly low shocks correlation in these countries, the overall short-term wealth effect of the EMU membership may be rather low or even negative at all. In the paper we analyze the impact of three common exogenous structural shocks on the real output development in the new EMU member countries (Cyprus, Malta, the Slovak Republic and Slovenia) in the period 1999-2008 using SVAR (structural vector autoregression) approach. In order to meet this objective we decompose the variability of the real GDP in these countries to permanent and temporary shocks (we assume three types of shocks - nominal (liquidity), demand and supply shocks). Impulse-response functions will be also computed so that we can estimate the behaviour of the real output after structural one standard deviation innovations. The relevant outcomes of the analysis we compare with the results of the tests for the whole euro area (represented here by old EU member countries - EU-12 group). This approach helps us to understand the common as well as differing features of the real output determination in the new EMU member countries and old EU member countries.
    Keywords: exogenous shocks; real output; structural vector autoregression; variance decomposition; impulseresponse function
    JEL: C32 E52
    Date: 2009–06
  12. By: Yuriy Gorodnichenko; Klara Sabirianova Peter (Andrew Young School of Policy Studies, Georgia State University); Dmitriy Stolyarov
    Abstract: We construct key household and individual economic variables using a panel micro data set from the Russia Longitudinal Monitoring Survey (RLMS) for 1994-2005. We analyze cross-sectional income and consumption inequality and find that inequality decreased during the 2000-2005 economic recovery. The decrease appears to be driven by falling volatility of transitory income shocks. The response of consumption to permanent and transitory income shocks becomes weaker later in the sample, consistent with greater self-insurance against permanent shocks and greater smoothing of transitory shocks. Comparisons of RLMS data with official macroeconomic statistics reveal that national accounts may underestimate the extent of unofficial economic activity, and that the official consumer price index may overstate inflation and be prone to quality bias.
    Keywords: inequality, income, consumption, transition, Russia.
    Date: 2009–06–01
  13. By: King Banaian (Department of Economics, St. Cloud State University)
    Abstract: As a small, open economy with a small export sector, Armenia has experienced a large amount of stress from the financial crisis. The government exited a peg-like exchange rate regime after a drain of foreign reserves. The loss of reserves was put to loss of revenues from mining exports, but can also be put to the effects of global financial crisis on remittance inflows. Worldwide, the World Bank expects remittances to fall from US$305 billion in 2008 to $290 billion in 2009. In this paper I explore the effect of global crisis on the loss of reserves supporting the monetary system. Bank balance sheets expanded rapidly and, though small relative to GDP, accepted many assets tied to real estate. Banks’ asset-liability mismatches have their root cause in changes to the flow of hard currency brought on by the crisis.
    Keywords: Armenia; financial crisis; monetary policy; exchange rates
    JEL: E58 O53
    Date: 2009–07–01
  14. By: Randal Verbrugge (U.S. Bureau of Labor Statistics)
    Abstract: This paper demonstrates that, in the context of U.S. housing data, rents and ex ante user costs diverge markedly—in both growth rates and levels—for extended periods of time, a seeming failure of arbitrage and a puzzle from the perspective of standard capital theory. The tremendous volatility of even appropriately-smoothed ex ante annual user cost measures implies that such measures are unsuitable for inclusion in official price statistics. The divergence holds not only at the aggregate level, but at the metropolitan-market level as well, and is robust across different house price and rent measures. But transactions costs matter: the large persistent divergences did not imply the presence of unexploited profit opportunities. In particular, even though detached housing is readily moved between owner and renter markets, and the detached-unit rental market is surprisingly thick, transactions costs would have prevented risk-neutral investors from earning expected profits by buying a property to rent out for a year, and would have prevented risk-neutral homeowners from earning expected profits by selling their homes and becoming renters for a year. Finally, computing implied appreciation as a residual yields a house price forecast with huge errors; but either longer-horizon or no-real-capital-gains forecasts— which turn out to have similar forecast errors—imply a far less divergent user cost measure which might ultimately be useful for official price statistics. Some conjectures are offered.
    Keywords: user costs; arbitrage; transactions costs; house price appreciation; forecasting; inflation stickiness; rental equivalence; CPI
    JEL: R31 R21 E31 C81 C82 O47
    Date: 2009–03
  15. By: Fujisaki , Seiya; Mino, Kazuo
    Abstract: This paper examines the long-run impact of inflation tax in the context of a generalized Ak growth model in which the production technology uses two types of capital stocks under a constant-returns-to-scale technology. We find hat unless investment expenditure for each type of capital is subject to the same degree of cash-in-advance constraint, a change in the money growth rate affects the steady-state level of factor intensity. It is shown that if the balanced-growth path is uniquely given, we still have a negative long-run relationship between money growth and the growth rate of real income. However, due to the endogenous determination of the factor intensity, the negative relation between the velocity of money and the rate of inflation may not be established.
    Keywords: maintenance expenditures; endogenous Growth; cash-in-advance constraint; inflation tax
    JEL: O42 E31 E52
    Date: 2009–06
  16. By: Gabriel Martinez (Department of Economics, Ave Maria University)
    Abstract: This paper develops and tests a model of the relation between the volatility of the exchange rate, default rates, the level of interest rates on loans, and the availability of credit, laying emphasis on frictions in the financial market, specifically foreclosure costs to collecting bad debts. On the assumption that foreign sources of funds are crucial for domestic finance, the paper tests the hypothesis of a high positive relation between the volatility of the exchange rate and the lending rate, and between the volatility of the exchange rate and capital inflows, on a sample of 54 countries over 1980-2000. The paper finds that exchange-rate and macroeconomic volatility are strong predictors of capital inflows (but not of lending rates) and that there may be an important role for financial frictions in the transmission process. Moreover, the paper finds that episodes of disinflation that rely on a reduction of the rate of depreciation tend to be accompanied by lower exchange rate volatility (in addition to simply lower rates of devaluation). Both effects, but principally the latter through financial frictions, suggest a solution to the lack of connection between the theory and the stylized facts of exchange rate-based stabilizations: ERBS programs may lead to initial booms through should cause a significant rise in the availability of credit, even if the cost of credit does not fall by much.
    Keywords: interest rates, exchange rate volatility, financial frictions, creditor rights, exchange rate based stabilization
    JEL: E43 E44 E50 F41 G14 E31 E63
    Date: 2009–08
  17. By: Steven E. Haugen (U.S. Bureau of Labor Statistics)
    Abstract: The Current Population Survey (CPS) has been the source of official labor force statistics for the U.S. since its inception in March 1940. The best-known statistic calculated from CPS data is the unemployment rate. To be classified as unemployed, a person must have had no employment during the survey reference week, been available for work, and made specific efforts to find employment during the 4-week period ending with the reference week. The unemployment rate represents the number unemployed as a percent of the labor force. The unemployment rate has proven to be a reliable indicator of overall labor market conditions and has performed quite well as a business cycle indicator. That does not mean, however, that everyone has been completely satisfied with the official figures. As a result, in the 1970s, a range of unemployment indicators known as U-1 through U-7 was introduced. In 1994, a redesigned CPS was fielded, and some of the survey changes affected series used as inputs in several of the U-1—U-7 measures. Consequently, BLS introduced a new set of “U’s” in 1995. The new U-1—U-6 range of alternative measures of labor underutilization offered an updated set of indicators that took advantage of newly collected information in the redesigned survey. This paper summarizes the rationale for the original and current ranges of alternative indicators. The paper also concludes that while the five alternatives to the official unemployment rate in the current U-1—U-6 range may represent varying views of labor resource underutilization, they show very similar patterns of change across the course of the business cycle.
    Keywords: Employment, unemployment, unemployment rate, underemployment
    JEL: E24
    Date: 2009–04
  18. By: Jorge Martinez-Vazquez (International Studies Program. Andrew Young School of Policy Studies, Georgia State University); Kaspar Richter
    Abstract: Pakistan’s economic development is once again threatened by macroeconomic imbalances. Broadly speaking, high growth in the 1960s was followed by low growth in the 1970s, and high growth in the 1980s by low growth in the 1990s, as macroeconomic vulnerabilities derailed development. Supported by a favorable global environment, Pakistan returned to a strong development record for much of this decade. Growth accelerated and fiscal and social indicators improved. But as in the past, the gains proved unsustainable, as economic policies adjusted too little and too late to a deterioration in the external environment. The looming crisis is threatening to undo much of the recent development progress.
    Keywords: Pakistan, Tax policy, Tax Bases
    Date: 2009–08–01
  19. By: Petreski, Marjan
    Abstract: The aim of this paper is to examine the theoretical and empirical arguments for the relationship between the exchange-rate regime and economic growth. As a nominal variable, the exchange rate (regime) might not affect the long-run economic growth. However, there is no unambiguous theoretical evidence what impacts the exchange-rate target exhibits on growth. The channel through which the regime might influence growth is trade, investment and productivity. Theoretical considerations relate the exchange-rate effect on growth to the level of uncertainty imposed by flexible option of the rate. However, while reduced policy uncertainty under a peg promotes an environment which is conductive to production factor growth, trade and hence to output, such targets do not provide an adjustment mechanism in times of shocks, thus stimulating protectionist behaviour, price distortion signals and therefore misallocation of resources in the economy. Consequently, the relationship remains blurred and requires in-depth empirical investigation. The empirical research offers divergent result though. A big part of the studies focuses on the parameter of the exchange-rate dummy, but does not appropriately control for other country-characteristics nor apply appropriate growth framework. Also, the issue of endogeneity is not treated at all or inappropriate instruments are repeatedly used. Very few studies disgracedly pay small attention to the capital controls, an issue closely related to the exchange-rate regime and only one study puts the issue in the context of monetary regimes. Overall, the empirical evidence is condemned because of growth-framework, endogeneity, sample-selection bias and the so-called peso problem. An empirical investigation which will consider all those aspects might reveal clear and robust suggestion of the relationship between exchange-rate regime and growth.
    Keywords: Exchange rate regime,economic grow
    JEL: E42 F31
    Date: 2009
  20. By: Marcos Souto; Benjamin M. Tabak; Francisco Vazquez
    Abstract: This study constructs a set of credit risk indicators for 39 Brazilian banks, using the Merton framework and balance sheet information on the banks’ total assets and liabilities. Despite the simplifying assumptions, the methodology captures well several stylized facts in the recent history of Brazil. In particular, it identifies deterioration in the credit risk indicators of the banking sector, following the crisis in the early 2000s. The risk indicators were regressed against a number of macro-financial variables at both individual and systemic level, showing that an increase in the system EDF, interest rates, and CDS spreads will lead to a deterioration of the individual expected default probability.
    Date: 2009–07
  21. By: Blank, Sven; Buch, Claudia M.; Neugebauer, Katja
    Abstract: Size matters in banking. In this paper, we explore whether shocks originating at large banks affect the probability of distress of smaller banks and thus the stability of the banking system. Our analysis proceeds in two steps. In a first step, we follow Gabaix (2008a) and construct a measure of idiosyncratic shocks at large banks, the so-called Banking Granular Residual. This measure documents the importance of size effects for the German banking system. In a second step, we incorporate this measure of idiosyncratic shocks at large banks into an integrated stress-testing model for the German banking system following De Graeve et al. (2007). We find that positive shocks at large banks reduce the probability of distress of small banks.
    Keywords: Banking sector distress,size effects,shock propagation,Granular Residual
    JEL: E44 E52 E32 G21
    Date: 2009
  22. By: Prema-chandra Athukorala; Archanun Kohpaiboon
    Abstract: This paper examines the export experience of East Asian economies in the aftermaths of the global financial crisis against the backdrop of pre-crisis trade patterns. The analysis is motivated by the ‘decoupling’ thesis, which was a popular theme in the Asian policy circles in the lead-up to the onset of the recent financial crisis, and aims to probe three key issues: Was the East Asian trade integration story that underpinned the decoupling thesis simply a statistical artifact or the massive export contraction caused by an overreaction of traders to the global economic crisis and/or by the drying up of trade credit, which overpowered the cushion provided by intra-regional trade? What are the new policy challenges faced by the East Asian economies? Is there room for an integrated policy response that marks a clear departure from the pre-crisis policy stance favoring export-oriented growth? The findings caution against a possible policy backlash against openness to foreign trade arising from the new-found enthusiasm for rebalancing growth, and make a strong case for a long-term commitment to non-discriminatory multilateral and unilateral trade liberalization.
    Keywords: production networks, trade patterns, global financial crisis
    JEL: E32 F15 F40 O53
    Date: 2009
  23. By: Tregenna, F.
    Abstract: Chenery’s factor decomposition method is used to analyse the sources of growth, by sector, in South Africa from 1970 to 2007. Using input-output data, the growth of each sector is decomposed into components associated with export growth; import substitution; growth in domestic demand; and growth in intermediate demand. The results highlight the dependence on domestic demand expansion as a source of growth in the period since 2000, especially for manufacturing. However, subsectors which relied exclusively or primarily on domestic demand expansion generally performed relatively poorly. The technological change component of growth is the only component with a consistently positive and statistically significant correlation with sectoral growth. The only two manufacturing subsectors for which all four components were positive in the period since 2000, were also the two fastest growing subsectors of the whole economy. The analysis also enables a typology of the subsectors of each of manufacturing and services, according to the relative importance of each of the four components.
    Keywords: growth, sectors, factor decomposition, South Africa
    JEL: E20 O11 O14 O40
    Date: 2009–07–30

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