The Impact of 2007/08 Financial Crisis on the Stability and Enlargement of the EMU

Before 2007/08, the European Monetary Union (EMU) was expected to be enlarged on schedule, but the European sovereign debt problem, triggered by the exogenous US sub‐prime crisis, not only has revealed the EMU's fiscal coordination failure, but also has weakened regional financial integration. The stagnation of financial integration will therefore increase the cost of sustaining a monetary union, which in turn slows EMU enlargement and ruins the reputation of the euro. This paper aims to measure the damage to financial integration and to provide a more precise answer on real interest rate parity (RIP) convergence. Our estimation indicates that RIP between the EMU and some accession candidates is still valid after the interruptions of the financial crises. However, convergence of real interest rates cannot be achieved until 2030. This implies the EMU authority must strengthen regional financial integration to solidify the EMU and then be able to re‐start enlargement.     

Relative inflation dynamics in the new EU member countries of Central and Eastern Europe

Following their EU accession, the new member countries from Central and Eastern Europe (CEE) must achieve sustainable price stability as one of the pre-conditions for joining the Economic and Monetary Union (EMU) and adopting the euro. This article examines the distribution dynamics of inflation rates in ten new EU members from CEE relative to the EMU accession benchmark inflation over the period 1990–2009. In contrast to previous studies, we use nonparametric methods to test for convergence in inflation rates between CEE and the EMU benchmark as well as within the CEE sample. Over the entire sample period, we detect a general shift in the CEE inflation distribution toward the EMU benchmark along with intradistributional convergence. However, this process is not uniform. In the early years, it was equally likely for CEE inflation rates to move toward or away from the benchmark. The resulting multimodal distribution gave way to a unimodal distribution in the years leading up to the EU accession, accompanied by a marked shift toward the EMU benchmark. In more recent years, emergence of a bimodal distribution signaled the stratification of relative inflation in CEE into two convergence clubs, which has intensified since the start of the global economic crisis.     

Has the 2008 financial crisis and its aftermath changed the impact of inflation on inflation uncertainty in member states of the european monetary union?

We study to what extent the financial crisis of 2008 and its aftermath have changed the impact of inflation on inflation uncertainty in the 12 original member states of the European Monetary Union (EMU). We adopt a time‐varying coefficient regression model with stochastic volatility effects, and extract two measures of inflation uncertainty from our data, namely, (1) The conditional volatility of inflation, (2) The conditional volatility of steady‐state inflation. (1)–(2) represent short‐run and steady‐state inflation uncertainty, respectively. The time‐varying impact of inflation on inflation uncertainty is analyzed using Markov‐switching regressions, where switching between the low and high inflation uncertainty regime is determined via an unobserved Markov process. Results suggest that the 2008 financial crisis and its aftermath have changed the impact of inflation on (1) and (2) across the selected EMU member states. However, a uniform pattern cannot be detected. For some member states, we document a strong link, whereas for others, the impact of inflation on inflation uncertainty is relatively weaker.     

Europe's income convergence and the latest global financial crisis

This paper examines the effects of the 2008 financial crisis on economic growth and convergence across European countries from 1973 to 2012. Employing cross-sectional and dynamic panel data techniques, the results show that the global financial crisis has brought a greater absolute convergence rate rather than divergence, affected richer members more heavily and, presumably, allowed less developed members to recover more quickly. We find evidence that creating the European Union has contributed toward economic growth and convergence; meanwhile, no similar evidence is found concerning the European Monetary Union. Moreover, we present evidence that both the average output per capita and the rate of convergence during the financial crisis fell around 7%.     

Foreign Direct Investment and External Financing Conditions: Evidence from Normal and Crisis Times

In this paper, we investigate the effects that external financing conditions in source and destination countries have on foreign direct investment (FDI) in normal and crisis times, using a difference‐in‐differences approach. We find that the financial development of the source and destination countries has a strong positive impact on the relative volume of FDI in financially vulnerable sectors in normal times. However, during the 2008–2010 global financial crisis, the relative volume of FDI in financially vulnerable sectors fell relatively more in financially developed source and destination countries, most notably if these countries experienced a credit crisis.     

The effects of the subprime crisis on the Latin American financial markets: An empirical assessment

The aim of this article is to answer the following question: can the considerable rise in the volatility of the LAC stock markets in the aftermath of the 2007/2008 crisis be explained by the worsening financial environment in the US markets? To this end, we rely on a time-varying transition probability Markov-switching model, in which “crisis” and “non-crisis” periods are identified endogenously. Using daily data from January 2004 to April 2009, our findings do not validate the “financial decoupling” hypothesis since we show that the financial stress in the US markets is transmitted to the LAC's stock market volatility, especially in Mexico.     

The price of the euro: evidence from sovereign debt markets

The objective of this article is to ascertain how the Economic and Monetary Union (EMU) in Europe has affected its members’ long-term government bond yields. In order to estimate the effect, this article utilizes a synthetic control approach. The main finding is that the majority of the member countries did not receive economic gains from the EMU in sovereign debt markets. Synthetic counterfactual analysis finds strong evidence that Austria, Belgium, Finland, France and the Netherlands have paid a positive and substantial euro-premium in their 10-year government bonds since the adoption of the single currency. After the most recent financial crisis, government bond yields have been higher in all member countries compared to the situation that would have occurred without the monetary unification. This article concludes that from the viewpoint of sovereign borrowing, it would be beneficial for a country to maintain its own currency and monetary policy.     

BANK COMPETITION AND FINANCIAL STABILITY: LIQUIDITY RISK PERSPECTIVE

We study whether competition affects banks' liquidity risk‐taking, which was at the heart of the 2008 financial crisis. We find that banks with greater market power take more liquidity risk, implying that decreased competition leads to financial fragility. During a financial crisis, however, the effect of market power on liquidity risk varies across bank size. Small banks with greater market power reduce liquidity risk while large banks with greater market power do not change their liquidity risk‐taking behavior. This suggests that enhanced charter values due to reduced competition lowers small banks' risk‐shifting incentives when their default risk significantly increases during a crisis. (JEL G21, G28)     

Competition policy: ten lessons learnt from the financial crisis

The financial crisis brought great challenges also for competition policy. The aim of this paper is to summarize the most important insights for competition policy that could be derived from the turbulent period 2008–2010. The financial crisis is seen as project that demanded sound management from competition policy and enforcement. The insights will be presented in the instructive form of ‘lessons learnt’ which represents a common approved project management technique. We come to the result that the financial crisis is not the result of ‘too much competition’, but of regulatory failure and that the main answers to the financial crisis have to come from ‘smart regulation’. The relaxation of competition policy would be the wrong policy response in troubled times since competition policy can play an important role in bringing the crisis economy back on track. In contrast to banking we see no economic rationale for rescue packages for other economic sectors by referring to systemic risk. The renaissance of industrial policy is viewed with great skepticism since empirical evidence shows that the effort of picking ‘winners’ all too often results in saving ‘losers’.     

Evidence on the Convergence of Per Capita Income: A Comparison of Founder Members of the Association of South East Asian Nations and the South Asian Association of Regional Cooperation

This paper investigates the per capita income convergence patterns of a set of Association of South East Asian Nations (ASEAN) and South Asian Association of Regional Cooperation (SAARC) countries. We obtained a time‐series analysis for stochastic convergence by applying unit‐root tests in the presence of two endogenously‐determined structural breaks. We then supplemented the results by tests that produced evidence for β convergence. The evidence shows that the relative per capita income series of ASEAN‐5 countries were consistent with stochastic convergence and β convergence, but this was not found for SAARC‐5 countries. For the ASEAN‐5 countries, the structural breaks associated with the world oil crisis and the Asian crisis impacted heavily on the convergence/divergence process.     

Crisis and Recovery: What We Have Learned from the South Korean Experience?*

This paper analyzes the process of recovery from the 1997 financial crisis in South Korea, and draws some lessons from it. The fast restoration of financial stability due to early closure of non‐viable financial institutions and quick resolution of non‐performing loans was critical for the speedy recovery of the South Korean economy. The swift adjustment in fiscal and monetary policies in addition to the large depreciation of real exchange rates also supported the fast recovery. Corporate and government bond markets played an important role in the financial restructuring and macroeconomic adjustment process. Structural reforms helped to alleviate the weaknesses in the corporate sector, particularly in chaebol groups. However, the fast recovery also generated unwelcome side‐effects. Because of aggressive fiscal expansion through government‐guaranteed bonds and public credit guarantee programs, sovereign liabilities increased greatly and transparency of the official fiscal stance deteriorated. Thanks to structural reform, corporate and financial sectors began to recognize the importance of micro risk management, but increased risk aversion contributed to the slowdown of corporate investment and, therefore, reduced long‐run growth perspective in South Korea. How to revive long‐term growth rates remains an important question in South Korea despite fast recovery from the crisis.     

The time-varying characteristics of the Chinese financial cycle and impact from the United States

ABSTRACT

Although there have been many empirical studies about the financial cycle since the financial crisis of 2008, few have analysed the structural changes in the Chinese financial cycle over time. The Chinese financial development process is short, and it is difficult to obtain accurate results on the measurement of the financial cycle. Based on wavelet analysis, this paper analyzes the time-varying characteristics of the Chinese financial cycle and the relationship between the financial and business cycles. In addition, we measure the impact from the United States. This paper draws three conclusions. Firstly, in terms of the characteristics of cycles, the existence of Chinese business cycle and financial cycle is proved, while the credit cycle, leverage cycle, stock market cycle and property cycle are quite different. Specifically, China has a 5.8-year credit cycle, an 8-year stock market cycle, 3.4-year and 12-year business cycles and a 15-year leverage cycle. Secondly, the financial cycles can serve as leading indicators of the business cycle, though the relationships between them are change overtime. Finally, the United States has a significant impact on the Chinese financial cycle with a ‘decoupling-recoupling’ effect, which is mainly reflected in the leverage cycle and the stock market cycle.     

Equality of interest rates revisited: the multi‐country evidence

One influential aspect of international integration of financial markets is the possibility of reducing divergences between domestic interest rates and foreign interest rates or increasing the degree to which yields in different financial markets move together over time. In this study, we investigate the convergence of the real interest rates using the Kalman filter. Applying the modified Hall et al. () approach, we model the risk premium and convergence of real interest rates using the time‐varying parameter estimation techniques. We present evidence of risk premium and convergence for two blocks of countries—The Asian‐Pacific countries including the US, Japan, Taiwan and South Korea and the US‐European group including France, the UK, Germany and the US.     

国际金融危机下的中国企业营销研究

2007年由美国次贷危机引发的世界金融危机,2008年10月后已广泛影响到中国。如何应对国际金融危机对中国企业的影响,从营销角度进行研究的成果尚不多见。西方有学者认为,应对金融危机,要采取以下措施:精简产品组合;改进产品定价;加强信任。笔者通过案例研究发现中国市场营销方面采取的措施不完全等同于西方。中国企业采取的主要措施包括:调整产品结构,开拓市场;降本增效,调低价格;开拓融资,力保生存。其相应效果依次呈递减状态。在加强信任、增强信心方面,企业普遍重视不够,而政府层面较为重视。     

The negative side of inflation targeting: revisiting inflation uncertainty in the EMU

ABSTRACT

This article tests the Friedman–Ball hypothesis for the European Monetary Union (EMU) countries, using a GARCH methodology. The empirical results show a positive relationship between inflation and inflation uncertainty, largely supportive of the Friedman–Ball hypothesis. Furthermore, the ECB’s price stability mandate is found to have asymmetric, if not limited, effects on inflation uncertainty since 1999, with the findings different for the so-called peripheral countries when compared to the core. For the majority of the EMU countries, shifts away from the 2% target served to increase inflation uncertainty. The credibility of the ECB since the financial crisis, in attempting to meet its 2% inflation target has seen inflation uncertainty increase for some, likely driven by inflation failing to re-anchor. Furthermore, recent periods of deflation are found to generate inflation uncertainty, with short-term price variability increasing in line with observed negative price growth for the majority of the EMU countries. The results are supportive of a U-shaped relationship between inflation and inflation uncertainty. Using spline techniques, we formally provide support for such a U-shaped relation where inflation uncertainty broadly increases below a certain threshold for each country’s inflation rate. Asymmetric effects across countries are found in the level of this threshold.     

The Global Financial Crisis and Stochastic Convergence in the Euro Area

This paper analyzes the issue of convergence in the original Euro Area countries, and assesses the effect of the global financial crisis on the process of convergence. In particular, we consider whether the global financial crisis pulled the 12 economies of the Euro Area together or pushed them apart. We investigate the dynamics of stochastic convergence of the original Euro Area countries for inflation rates, nominal interest rates, and real interest rates. We test for convergence relative to Germany, taken as the benchmark for core EU standards, using monthly data over the period January 2001 to September 2010. We examine, in a time-series framework, three different profiles of the convergence process: linear convergence, nonlinear convergence, and linear segmented convergence. Our findings both contradict and support convergence. Stochastic convergence implies the rejection of a unit root in the inflation rate, nominal interest rate, and real interest rate differentials. We find that the differentials are consistent with a unit-root hypothesis when the alternative hypothesis is a stationary process with a linear trend. We frequently, but not always, reject the unit-root hypothesis when the alternative is a stationary process with a broken trend. We also note that the current financial crisis plays a significant role in dating the breaks.     

Does the Single Currency Affect Foreign Direct Investment?*

Does the creation of the euro partly explain the sharp increase in European investments? To address this question, we derive a simple gravity‐like model for bilateral foreign direct investment (FDI). Using this model, we find that the Economic and Monetary Union (EMU) has increased intra‐EMU FDI stocks on average by around 30 percent. This effect varies over time and across EMU members. It is found to be larger for the outward investments of the less‐developed EMU members. Moreover, contrary to early expectations of FDI diversion effects, EMU countries have invested more in non‐EMU countries since the launch of the euro.     

次贷危机后美国经济金融化趋势是否逆转?

20世纪70年代以来资本主义经济金融化趋势显著,以金融资本为主导的积累模式在一定时期内刺激了资本主义经济增长,但也为由美国次贷危机引发的2008年国际金融危机埋下了祸根.而今,距离危机的爆发已经十余年,危机后当代资本主义也经历了一系列调整.本文考察了危机后美国政府的系列"再工业化"政策、新自由主义持续强劲的势头、新形势...     

Asia's Decoupling: Fact,Fairytale or Forecast?

Standard measures of economic co‐movement between Asia‐Pacific economies and those elsewhere had been observed to follow a downward trend, leading some commentators to suggest that the region was decoupling. However, this process reversed in response to the 2008 international financial crisis, and co‐movement increased to historically high levels for some economies. We examine co‐movement patterns and show that these are very sensitive to changes in macroeconomic volatility over time. Controlling for this, however, co‐movement is closely linked to underlying trade and financial integration. If international links continue to strengthen in future, co‐movement will strengthen in tandem. Decoupling is more a fairytale than a fact or a forecast.     

Global Investment Environment of the Post‐Quantitative Easing World: The ‘new‐old’ and ‘new‐new’ Normal

Global markets since late 2007 are not ‘normal’, where normal means market conditions we would expect to observe going forward in the absence of any new economic shocks. Financial markets have been dominated by extraordinary central bank policies that were created to deal with challenging market conditions reflecting heightened risk aversion and illiquidity. Markets in the future will have some characteristics that look more like the market conditions observed in the pre‐crisis period, which I call the ‘new‐old normal’ and other conditions that differ from the past, which I call the ‘new‐new normal’. I first review what happened during the financial crisis in terms of developments in three asset classes, equities, fixed income and currencies, to place the forward‐looking view in proper context. Then the transition period from the quantitative easing (QE) era of exceptional monetary policy to post‐QE markets is discussed. Post‐transition, we will see some features of the post‐QE world that will resemble pre‐crisis market conditions, the ‘new‐old normal’ with higher policy interest rates, wider cross‐country interest differentials, lower cross‐asset return correlations and a resurgence of the importance of cross‐country differences in fundamentals in international investing. However, some features of the post‐QE investment environment will be unlike anything observed in the past: the ‘new‐new normal’ with reduced liquidity and more days of exceptionally large volatility and asset price moves due to regulatory effects resulting in a reduced ability of market‐makers to provide inventory buffers for counterparties and electronic trading venues that shut down trading in high volatility periods; low inflation; flatter yield curves; and emerging markets providing less opportunity for diversification gains as they converge to developed financial market characteristics.