Monetary and financial stability in the euro area: Pro-cyclicality versus trade-off

This paper investigates the nexus between monetary stability and financial stability. We examine, in the experience of EMU between 1994 and 2008, first, the response of the term structure of interest rates, share prices, exchange rates, property price inflation and the deposit–loan ratio of the banking sector (our proxies for financial stability) to changes in the consumer price level and ECB policy rate (our proxies for monetary stability); second, whether and to what extent lower inflation has caused share price stability and how ECB policy rate has reacted to inflation. Using a sign-restriction-based VAR approach, we find that there is a pro-cyclical relationship between monetary and financial stability in the long-run. With a positive inflation shock, we find on average a 2% estimated decline in share prices. This suggests that the interest rate instrument used for inflation targeting is conducive to financial stability.     

Liquidity and valuation in an uncertain world

During the 2007–2009 financial crisis there was little or no trading in a variety of financial assets, even though bid and ask prices existed for many of these assets. We develop a model in which this illiquidity arises from uncertainty, and we argue that this new form of illiquidity makes bid and ask prices unsuitable as metrics for establishing “fair value” for these assets. We show how the extreme uncertainty that traders face can be characterized by incomplete preferences over portfolios, and we use Bewley's (2002) model of decision making under uncertainty to derive equilibrium quotes and the nonexistence of trading at these quotes. We then suggest alternatives for valuing assets in illiquid markets.     

The determination and international transmission of stock market volatility

This paper extends the literature on low-frequency analysis of the causes and transmission of stock market volatility. It uses end-monthly data on stock market returns, interest rates, exchange rates, inflation, and industrial production for five countries (Britain, France, Germany, Japan, and the US) from July 1973 to December 1994. Efficient portfolios of world, European, and Japanese/US equity are first constructed, the existence of multivariate cointegrating relationships between them is demonstrated, and the transmission of conditional volatility between them is described. The transmission of conditional volatility from world equity markets and national business cycle variables to national stock markets is then modeled. Among the main findings are: first, world equity market volatility is caused mostly by volatility in Japanese/US markets and transmitted to European markets, and second, changes in the volatility of inflation are associated with changes of the opposite sign in stock market volatility in all markets where a significant effect is found to exist. To the extent that the volatility of inflation is positively related to its level, this implies that low inflation tends to be associated with high stock market volatility.     

Temporal Patterns in Foreign Exchange Returns and Options

Although the foreign exchange market is believed to be one of the most efficient financial markets in the world, there is significant evidence that technical analysis is profitable in this market. In this study we investigate the ability of information from the options market to supplement the commonly used information on past prices to predict temporal patterns in foreign exchange returns. We find that strategies using information from at-the-money options were more consistently profitable than the commonly used strategies based on only historical spot exchange rates (past prices). Consequently, options appear to contain information regarding future spot exchange rate movements.     

Overreaction and underreaction in the foreign exchange market

Research has documented overreaction and underreaction for stocks and stock market indices, but it has not yet analyzed these phenomena with regard to currency exchange rates. This paper examines exchange rate changes following extreme 1-day fluctuations for currencies in industrialized and emerging markets. In this study, the exchange rate is defined as the number of foreign currency units per US dollar. An overreaction phenomenon for currencies in emerging markets and an underreaction phenomenon for currencies in industrial markets are found. Each extreme 1-day currency fluctuation event is classified according to the type of underlying reason as described in the Wall Street Journal. Events for which no announcements (undefined events) were found are associated with a stronger tendency toward overreaction than those events for which an explanation was given (defined events). This suggests that investors overreact more when the source of the extreme fluctuation is largely unknown. The defined events are classified into two groups: economic events and political events. There is some evidence that political events are associated with a stronger tendency toward overreaction than economic events. These findings can be attributed to uncertainty. Political events (e.g., civil uprising) should be more difficult to assess than economic events (e.g., the release of an inflation report), and undefined events should be associated with the largest degree of uncertainty. Cross-sectional analysis is used to relate post-event exchange rate changes to the magnitude of the initial exchange rate change, leakage, day of the week effects, type of currency (from emerging or industrial market), and the type of announcement (economic, political, or undefined) that appeared in the Wall Street Journal. The cross-sectional analysis confirms that currencies in emerging markets experience stronger degrees of overreaction than those of industrial markets, even after controlling for potentially confounding factors. Moreover, it confirms that undefined events experience stronger degrees of overreaction than defined events, even when controlling for other factors.     

On the Transmission of World Agricultural Prices

Two questions are asked about the relationship between domesticprices and world prices of agricultural commodities: are variationsin world prices transmitted to domestic prices, and do thesevariations in world prices constitute an important componentof variations in domestic prices? Domestic prices are regressedon world prices in various forms, taking into account the possibleeffects of exchange rates and inflation. The empirical analysisis based on data from the Food and Agriculture Organizationof the United Nations for 58 countries for 1968–78 andfor the countries of the European Community for 1961–85.The results show that most of the variations in world pricesare transmitted and that they constitute the dominant componentin the variations of domestic prices.     

Oil prices implied volatility or direction: Which matters more to financial markets?

We examine the impact of oil price uncertainty on US stock returns by industry using the US Oil Fund options implied volatility OVX index and a GJR-GARCH model. We test the effect of the implied volatility of oil on a wide array of domestic industries’ returns using daily data from 2007 to 2016, controlling for a variety of variables such as aggregate market returns, market volatility, exchange rates, interest rates, and inflation expectations. Our main finding is that the implied volatility of oil prices has a consistent and statistically significant negative impact on nine out of the ten industries defined in the Fama and French (J Financ Econ 43:153–193, 1997) 10-industry classification. Oil prices, on the other hand, yield mixed results, with only three industries showing a positive and significant effect, and two industries exhibiting a negative and significant effect. These findings are an indication that the volatility of oil has now surpassed oil prices themselves in terms of influence on financial markets. Furthermore, we show that both oil prices and their volatility have a positive and significant effect on corporate bond credit spreads. Overall, our results indicate that oil price uncertainty increases the risk of future cash flows for goods and services, resulting in negative stock market returns and higher corporate bond credit spreads.     

我国资产价格与通货膨胀的关系研究——基于ARDL的技术分析

随着资产市场投资品种日益丰富,居民参与资产投资的程度不断深入,资产通过财富效应和投资效应对经济的影响越来越大,资产价格对一般物价水平的影响不断增强,因此资产价格波动是否会影响通货膨胀率就成为当前理论和实务界关注的焦点。为了检验我国资产价格与通货膨胀的关系,本文选择股票、汇率、房地产价格以及其他影响通货膨胀的因素,运用ARDL模型对我国资产价格和通货膨胀的关系进行经验分析。经验分析结果表明:资产价格波动影响通货膨胀,但各因素对通货膨胀的影响差异较大,即房地产价格和汇率两个指标作用显著,股票作用较弱。     

Exchange rate pass-through in emerging countries: Do the inflation environment,monetary policy regime and central bank behavior matter?

In this paper, we estimate the exchange rate pass-through (ERPT) to import and consumer prices for a sample of 14 emerging countries over the 1994Q1-2015Q3 period. To this end, we augment the traditional bivariate relationship between the nominal effective exchange rate and inflation by accounting for monetary stability proxied by the inflation environment, monetary policy regime and central bank behavior. We show that both the level and volatility of inflation, as well as adopting an inflation target or the transparency of monetary policy decisions clearly reduce ERPT to consumer prices. However, uncertainty about domestic monetary policy seems less relevant in explaining the pass-through to the price of imports.     

Lessons from Experiences with High Inflation

In economies where price control has been the rule, the mostserious concern may be recognition of the inflation problem.Beyond the initial correction of subsidies there is the broaderissue of the risk of a serious inflation. This article looksat the problem of high inflation in developing countries inEurope and Latin America and draws lessons from historical experience.It analyzes the dynamics of the interaction among deficit finance,institutional innovation in financial markets, dollarization,and the shortening of wage contracts in high-inflation situations.When stabilization is undertaken, there is neither immediate,spontaneous resumption of longer adjustment periods for wagesand prices nor instant increase of real money demand to noninflationarylevels. Incomes policy—freezing exchange rates, wages,and prices—is advocated as an effective supplement tothe inevitable budget cut to make up for institutional inertiaand facilitate the start of the stabilization process.     

Accounting for Foreign Business

The currency translation problem is the same in kind as the inflation accounting problem. No demonstrable connection may be made between financial information and evaluation or choice unless the components of the information are derived uniformly in a dated setting. Proposals hitherto suffer in different degrees from heterotemporal aggregation and cross-temporal translation. By recourse to four examples of different relations between an investor company and foreign investees, an integral method is described for dealing with foreign transactions and investments, where prices and inflation rates are different and exchange rates may vary. The essence of the process is that the components of financial statements shall be made to correspond with their factual or factually based features from time to time.     

经济复苏进程中国际金价缘何大幅上涨

金融危机过后,在世界经济的复苏进程中,国际黄金价格出现大幅度上涨,其主要原因是美元贬值的压力、通货膨胀的威胁、复苏进程的不确定性、国际黄金市场供求关系的变化。黄金价格短期内上行趋势不会改变,但长期看不可持续。     

The international financial market and US interest rates

This paper examines the linkages between the Eurodollar and US domestic financial markets. It is shown that using weekly data allows the isolation of significant fluctuations being transmitted between markets in both directions. In particular, financial markets in the US are affected significantly by foreign events.It is impossible to reach precise conclusions about the causes of historical variation in the rates. However, this paper provides evidence that at most 40% of the variation in Eurodollar interest rates over the 1975–1978 period can be traced to domestic US sources and that between about one-fifth and two-thirds of the variation in domestic rates can be traced to foreign sources.     

OPEC in world financial markets: Oil prices and interest rates

This article examines the relationship between the real rate of interest in world financial markets and the price of oil. If OPEC cannot be viewed as a ‘small’ participant in world financial markets, and should its savings and portfolio behavior differ from that of the rest of the world, then wealth shifts to or from OPEC would affect world interest rates. Subsequently, this paper examines the magnitude of oil price changes required to elicit a significant interest rate change. Our empirical results shed light on OPEC's behavior, which at times may differ from a pure profit maximizing cartel. The short-run price elasticity of the world demand for oil is -0.04 and the long-run elasticity is -0.10. OPEC itself, as expected, faces higher elasticities of -0.08 and -0.36, respectively. The demand elasticity of oil with respect to ‘world’ GNP is 0.8. A major objective of this paper has been to determine the effect of changes in oil prices on world interest rates, and vice versa. Our results imply that only very large oil price increases will have a significant impact on world interest rates. However, oil prices show a non-negligible sensitivity to changes in world interest rates.     

What measure of inflation should a developing country central bank target?

In closed or open economy models with complete markets, targeting core inflation enables monetary policy to maximize welfare by replicating the flexible price equilibrium. We analyze this result in the context of developing economies, where a large proportion of households are credit constrained and the share of food expenditures in total consumption expenditures is high. We develop an open economy model with incomplete financial markets to show that headline inflation targeting improves welfare outcomes. We also compute the optimal price index, which includes a positive weight on food prices but, unlike headline inflation, assigns zero weight to import prices.     

Incomplete‐Market Equilibria Solved Recursively on an Event Tree

Because of non‐traded human capital, real‐world financial markets are massively incomplete, while the modeling of imperfect, dynamic financial markets remains a wide‐open and difficult field. Some 30 years after Cox, Ross, and Rubinstein (1979) taught us how to calculate the prices of derivative securities on an event tree by simple backward induction, we show how a similar formulation can be used in computing heterogeneous‐agents incomplete‐market equilibrium prices of primitive securities. Extant methods work forward and backward, requiring a guess of the way investors forecast the future. In our method, the future is part of the current solution of each backward time step.     

Inflation Triggers in Transition Economies: Their Evolution and Specific Features

Analysis of thirty inflation episodes in sixteen European transition economies, using the probit panel model with fixed effects, uncovers inflation triggers that overlap with those obtained in either developing or developed countries or both. However, we found some transition-specific features. Thus, the relative contribution of the triggers evolves as transition progresses, such that the early dominance of the output gap, the fiscal deficit, and elections are subsequently subdued by a rise in food and oil prices, the exchange rate regime, and the current account deficit. The last two triggers could be linked to deep financial integration in Europe and the consequent large flow of capital toward European transition economies in the 2000s, a phenomenon not observed in any other part of the world. In addition, the exchange rate regime as an inflation starter in transitional Europe may be due to its convergence with developed Europe and the resulting real appreciation of currency.     

Reinsurers' investment and underwriting portfolios and the exchange rates risk

Summary and concluding remarks The traditional analysis of the performance of large international reinsurers typically concentrates on the effect of exchange rates on profitability of the firm (NRG [9]). The multi-index model enables us to capture and analyze two additional effects: According to the Interest Rates Parity Theorem, the expected rates of return on foreign investments already reflect the expected change in the exchange rate. Therefore, a firm operating in a perfect market would be indifferent to the currency denomination of its financial assets. The firm should consider only the unexpected element in the exchange rate movements, i.e., the exchange risk. The uncertainty in the exchange rate contributes to the variability of the return on each investment and underwriting project. The firm must consider this new element of risk while constructing its investment and insurance portfolios. p ]The model can be used to examine and analyze alternative policies of the firm operating in international markets. For example, the model can be used to examine the “full hedge” policy, in which the insurer has a zero net position in any non-reference currency, or the policy of isolating national insurance markets.     

美联储政策变化、国际资本流动与宏观经济波动

本文构建包含国际投资者、外资企业和银行流动性冲击的DSGE模型来探究美联储货币政策变动和政策不确定性对我国宏观经济的影响和作用机制。研究发现:(1) 美联储加息会导致我国产出、投资和通货膨胀的下降、汇率贬值、国际资本外流和银行系统流动性紧张。随着金融摩擦程度的增加和银行杠杆率的上升,美联储加息对我国产出、投资和资产价格的负面影响会进一步增强。(2) 美联储货币政策不确定性的增加会直接导致外资企业的投资、劳动需求和产出的下降,并对我国总产出、总投资和资产价格产生明显的负向外溢效应,进一步加剧我国宏观经济的波动。(3)为应对美联储的利率变动,适当限制国际资本流动能有效稳定我国经济波动和改善社会福利,而实施固定汇率和央行盯住美国利率的政策会加大宏观经济的波动,并导致社会福利下降。