Non linear and asymmetric linkages between real growth in the Euro area and global financial market conditions: New evidence

This paper deals with transition mechanisms through which financial market conditions affect real economic growth in the Euro area. The informational content of financial variables for predicting real economic growth is assessed, allowing for asymmetric responses to shocks. A nonlinear framework is developed based on a smooth transition model for which the effects of shocks can vary across business cycles when financial indicators modify both the endogenous and state variables. Global financial variables are shown to significantly affect real growth in the Euro area, particularly during periods of recession. Changes in stock market index and yield slope have asymmetric effects on real growth. In recessionary periods, the slope of the US yield curve does not have a significant impact on growth in the Euro area.     

CREDIT CRUNCH AND HOUSEHOLD WELFARE,THE CASE OF THE KOREAN FINANCIAL CRISIS*

We examine how the credit crunch in Korea in the late 1990s affected household behaviour and welfare. Using 1996–1998 household panel data, we estimate a consumption Euler equation, augmented by endogenous credit constraints. Korean households coped with the negative shocks of the 1997 credit crunch by reducing consumption of luxury items while maintaining food, education and health related expenditures. Our results show that, in 1997–1998, during the crisis, the probability of facing credit constraints and the resulting expected welfare loss from the binding constraints increased significantly, suggesting the gravity of the credit crunch at the household level.     

THE DECLINE OF JAPAN'S SAVING RATE AND DEMOGRAPHIC EFFECTS*

This paper investigates the phenomenon in which Japan's household saving rate showed a sharp decline even during the long stagnation period called “the lost decade.” Our empirical results show that the sharp decline in the saving rate in the 1990s can be explained by the significant impact of demographic factors. Furthermore, the estimated life cycle curve is hump shaped, meaning that the prediction of the life cycle model is confirmed with time series data on the Japanese saving rate.     

A MODEL OF SELF‐FULFILLING FINANCIAL CRISES*

This paper combines the structural weakness and the self‐fulfilling panic view to explain the cause of the East Asian crises. In this model economy, the diversification strategies induce conglomerate firms to overinvest. They accumulate losses due to their unprofitable sectors and then compensate by obtaining bank loans. Domestic banks, which borrow from foreign banks, lend money as long as the total amount of accumulated loans remains within the firms’ collateral value. The model shows that if the debt to collateral value ratio belongs to a certain range a self‐fulfilling crisis can occur due to the self‐fulfilling expectations of foreign investors.     

Macroeconomic Fluctuations and Bank Lending: Evidence for Germany and the Euro Area

Abstract. This paper analyzes the dynamic response of loans to the private sector and of economic activity to aggregate supply, demand and monetary policy shocks in Germany and the euro area based on a standard macroeconomic VAR using sign restrictions to identify the structural shocks. The main results of this analysis are that (i) with the exception of the response to the supply shock in Germany, the response of loans to the three macroeconomic shocks is rather weak and in most cases insignificant; (ii) the 2000–05 credit slowdown and weak economic performance in Germany were primarily driven by adverse supply shocks; and (iii) the marked slowdown in credit creation in Germany over this period actually represents a realignment of the outstanding stock of loans with its deterministic level. In order to assess the role of bank lending in the transmission of macroeconomic shocks, we further perform counterfactual simulations and analyze the dynamic responses of German loan subaggregates in order to test the distributional implications of potential credit market frictions. These exercises do not indicate that credit market frictions play an amplifying role in the transmission of macroeconomic fluctuations.     

The Interaction of Financial Fragility and the Business Cycle in Determining Banks’ Loan Losses: An Investigation of the Italian Case

The Basel II capital accord and the recent crises have fostered the debate over the financial stability of the aggregate banking sector. Because loan losses are an important factor for banking stability, this paper aims to gauge the impact of real and financial fragility on default losses of Italian banks. To this end the ratio of non‐performing loans to total loans is regressed on the business cycle and indebtedness. In addition, to capture the joint effect of real and financial fragility, the analysis considers an interaction term, which to our knowledge has never been applied before to Italian default data. Based on the interaction model, results show that the actual impact of financial fragility on default losses depends not only on the business cycle phase but also on the firm's size, whereby in adverse economic conditions, small firms are more significantly affected by financial fragility.     

ENDOGENOUS SELECTION OF PRODUCERS,ASSET PRICES,AND PRODUCTIVITY SLOWDOWN*

This paper presents a simple heterogeneous agent model to show that shocks that reduce aggregate borrowing capacity of producers under borrowing constraints cause endogenous productivity slowdowns through declines in asset prices and biased selections of producers. These dynamics of the model replicate the qualitative features of the Japanese economy during the 1990s, including a decline in the within effect in total factor productivity growth decomposition as well as default on mortgage loans. Policy experiments demonstrate that foreclosure restrictions already in place mitigate an exogenous productivity slowdown, but that a tightening of foreclosure restrictions causes an endogenous productivity slowdown.     

FINANCE,DISTRIBUTION AND THE ECONOMIC OBJECTIVE OF FINANCIAL COOPERATIVE INSTITUTIONS

This paper proposes a model where the structure rather than the size of the financial sector explains its influence on income distribution. Because of information asymmetries, a financial sector dominated solely by profit‐maximizing financial intermediaries will increase income and wealth inequality as it gives preferential access to credit for high‐income agents, whereas a diversified inclusive financial sector with alternative models of finance, like cooperatives, will reduce the inequality gap. No full convergence in income distribution can be realized through finance only and there is still a need for redistribution policies. Accordingly, an objective function for cooperative financial institutions should define a desired pricing behaviour that can increase the income of members at a rate higher than the average growth rate of the economy.     

Collateral constraints and the amplification mechanism

Kiyotaki and Moore (J. Polit. Economy 105 (1997) 211) have offered a theory for how common shocks to credit-constrained firms are amplified through changes in collateral values and transmitted as fluctuations in output. I clarify and extend their model by showing that their collateral amplification mechanism is not robust to the introduction of markets that allow these firms to hedge against common shocks. A theory of incomplete hedging is proposed in which the supply of hedging available in the economy is constrained by the aggregate value of collateral. I illustrate how the constraint reinstates amplification effects and discuss empirical implications of this new mechanism.     

THE ECONOMICS OF ILLUSION*

When individuals choose not only goods, but also how to process information, there is a bias: people tend to process information so that they feel good about themselves. This bias is particularly important in voting behavior, where agents have almost no individual effect on public choice outcomes, and therefore almost no incentive for unbiased use of information. Two examples are given. In one example, an adaptation of the classic overdepletion problem, the public chooses not to counteract externalities by appropriate tax policy. In the second example public policy follows the choices of experts, contrary to the interest of the public.     

Do Bank Capital and Liquidity Affect Real Economic Activity in the Long Run? A VECM Analysis for the US

This paper analyses the long‐term economic costs of the new regulatory standards (the so‐called Basel III reform) for the US. Using a Vector Error Correction Model that estimates long‐run relationships among a small set of macro‐variables over the period 1994–2008, it shows that tighter capital and liquidity requirements have negative (but rather limited) effects on the level of long‐run steady‐state output and more sizeable effects on banks’ return on equity. The economic costs are considerably below the estimated positive benefit that the reform should have by reducing the probability of banking crises and the associated banking losses ( BCBS, 2010b ).     

PRODUCTIVITY AND BUSINESS CYCLES IN JAPAN: EVIDENCE FROM JAPANESE INDUSTRY DATA*

Constructing a database of 37 industries, we examine whether the measured productivity in Japan is pro‐cyclical and investigate the sources of this pro‐cyclicality by using the production function approach employed by Hall (1990) and Basu and Fernald (1995). The aggregate Solow residual displays pro‐cyclicality. A large number of industries show constant returns to scale. No significant evidence for the presence of thick‐market externalities is found. Our results also hold when we consider labour hoarding, part‐time employment, and the adjustment cost of investment. The results indicate that policies to revitalize the Japanese economy should concentrate on promoting productivity growth.     

THE EFFECTIVENESS OF NON‐TRADITIONAL MONETARY POLICY MEASURES: THE CASE OF THE BANK OF JAPAN*

This paper summarizes non‐traditional monetary policy measures adopted by the Bank of Japan (BOJ) during the last 2 decades and by other G7 central banks since the start of the current global financial turmoil and analyses the effectiveness of such measures. The paper begins with a typology of policies usable near the zero lower bound on interest rates. They are: (i) forward guidance of future policy rates; (ii) targeted asset purchases; and (iii) quantitative easing. Using this typology, I review the measures adopted by the BOJ and other central banks. I then offer a news analysis of the effects of the measures adopted by the BOJ on asset prices, comparing them with those adopted by the Fed. Many of the measures, with the exception of strategy (iii), are shown to have moved asset prices in the expected directions. Another exception is that most of the monetary easing measures failed to weaken the yen. Despite some effects on asset prices, however, the measures have failed to stop the deflationary trend of the Japanese economy clearly. I discuss some possible reasons for this and more general implications for monetary policy.     

SOCIAL STATUS AND THE GROWTH EFFECT OF MONEY*

It has been shown that in a standard one‐sector AK model of endogenous growth with wealth induced preferences for social status, the economy's growth rates of real output and nominal money supply are positively related when the cash in advance constraint is applied solely to the household's consumption purchases. However, a positive output growth effect of money/inflation is not consistent with the existing empirical evidence. We show that when gross investment must be financed by real money balances as well, this result is overturned, i.e. higher inflation is detrimental to economic growth, because of a dominating portfolio substitution effect.     

SECTOR‐SPECIFIC EXTERNALITIES AND STATUS PREFERENCES IN THE UZAWA‐LUCAS MODEL*

This paper shows that introducing preferences for social status based on human capital holdings modifies the finding of Gómez (2004 ) that sector‐specific externalities associated with human capital in the goods sector do not violate the optimality of the competitive economy in the Uzawa–Lucas model. The effect of an increase in the degree of sector‐specific externalities is qualitatively the same as that of an increase in the strength of the desire for status. Hence, paradoxically, a greater degree of sector‐specific externalities makes human capital accumulation more excessive from the social point of view.     

Global imbalances,cross-market linkages,and the financial crisis: A multivariate Markov-switching analysis

Based on multivariate Markov-switching models, this paper presents new results on the interactions between global imbalances, credit spreads, housing markets, macroeconomic variables, commodities and equities during Q1-1987/Q1-2011. We show that rising global imbalances and the uncontrolled development of the US mortgage and housing markets have been deeply destabilizing the economy, with various shocks impacting subsequently equity markets and macroeconomic variables. But we also uncover, surprisingly, that the cross-market linkages with the commodity markets are strong. Finally, we identify that the US housing market lies at the epicenter of the crisis through its multiple and highly significant interactions with the other variables in the system (including the global imbalances). Sub-samples and alternative time series estimates are provided to check the statistical congruency of the various models.     

Financial liberalization,financial sector development and growth: Evidence from Malaysia

The objective of this paper is to examine whether financial development leads to economic growth or vice versa in the small open economy of Malaysia. Using time series data from 1960 to 2001, we conduct cointegration and causality tests to assess the finance-growth link by taking the real interest rate and financial repression into account. The empirical evidence suggests that financial liberalization, through removing the repressionist policies, has a favorable effect in stimulating financial sector development. Financial depth and economic development are positively related; but contrary to the conventional findings, our results support Robinson's view that output growth leads to higher financial depth in the long-run.     

Intangible Investment and Changing Sources of Growth in Korea

We examine how intangible investments change the sources of growth in the Korean economy. After constructing a novel industry‐level data set on intangibles, we estimate the contribution of intangible‐intensive industries and other industries to aggregate productivity growth in 1981–2008. The contribution of intangible‐intensive industries to aggregate labour productivity growth has significantly increased, whereas that of other industries has substantially decreased. The increased contribution of intangible‐intensive industries is mainly associated with total factor productivity growth rather than with input growth. This suggests that innovations related to intangible investments in these industries might become a new key source of productivity growth in Korea.