Additional evidence on monetary base and interest rate linkages in the EMS

Conclusion This note has examined interest rate and monetary base linkages within the EMS. Cointegration tests suggest the existence of a long-run equilibrium relationship between German and other EMS interest rates and German and other EMS country monetary bases in a number of cases. Bivariate VAR analysis suggested that Granger causality with respect to EMS interest rate linkages stemmed either from German to European markets or was bi-directional and that the monetary base linkages were overwhelmingly bi-directional. When allowance is made for the influence of US monetary policy developments, the pattern of Granger causality within the EMS is predominantly bi-directional. These findings may be attributable to integrated financial markets and the discipline of a formal exchange rate mechanism. Thus, our results fail to support the hypothesis that German monetary policy plays a dominant and independent role within the EMS. Rather, they suggest that monetary policies in the EMS mainly respond to each other and, to a very limited extent, to developments in US monetary policy.     

The domestic term structure and international interest rate linkages: A cointegration analysis

The Domestic Term Structure and International Interest Rate Linkages. A Cointegration Analysis. -This paper analyzes cointegration relations between domestic interest rates with different maturities and between the US and German interest rates of the same maturity by means of the Johansen procedure and single-equation error correction models. It analyzes also the implied common stochastic trends. The author concludes that in the long run, interest spreads within both countries strongly dominate and linkages between the interest rates of both countries are only important in the short run.     

German,US and Central and Eastern European Stock Market Integration

This paper examines the long-term linkages between seven Central and Eastern European (CEE) emerging stock markets and two developed stock markets, namely the German and the US markets. The stability of the long-run relationships is studied using recursive cointegration analysis. The results reveal that the financial linkages between the CEE markets and the world markets increased with the beginning of the EU accession process. Furthermore, the application of the Gonzalo and Granger (J Bus Econ Stat 13:27–35, 1995) methodology indicates that the examined stock markets are partially integrated, while there is also evidence that the emerging stock markets of Central and Eastern Europe except for Estonia together with the German and the US stock markets, have a significant common permanent component, which drives this system of stock exchanges in the long run. Finally, it is worthwhile to note that the global financial crisis of 2007–2009 caused a slowdown in the convergence process. In addition we find evidence that the Slovenian stock market exhibits a moderate increase in the transitory component and this may be attributed to the Slovenian full membership in the euro area.     

Costs and Benefits of Export-Oriented Foreign Investment: The Case of China

The costs and benefits of export-oriented FDI have been discussed by Helleiner (1973, 1998), Watanabe (1972), Sharpston (1975), and others. Processed exports generated from FDI have constituted over half of the exports of Singapore, Malaysia, Philippines, and China. Despite the importance of processed exports, empirical studies of their costs and benefits are difficult due to lack of data, especially on transfer earnings. Data on the division of benefits between the source and host countries are scarce and unreliable. This paper examines the costs and benefits of export-oriented foreign investment for China. China has been highly successful in exporting and in attracting FDI, especially export-oriented FDI from Hong Kong. Since 1993, China has become the second largest recipient of FDI in the world after the US, and Hong Kong has become the world's fourth largest source of FDI after the US, UK, and Germany. China's processed exports are largely re-exported via Hong Kong. As a result, good data on the total value-added of processed exports for Mainland China and for Hong Kong are available. It is found that the rate of value-added for Mainland China is relatively low compare with that for Hong Kong, indicating transfer pricing and absence of linkages in the mainland. This appears to be due to the rigidity of China's economic system which hampers backward and forward linkages. The mainland is thus dependent on Hong Kong for many services in the value-added chain. However, the rate of value-added for China has increased substantially since 1996, indicating an increase in both backward and forward linkages.     

Dynamic linkages of stock prices between the BRICs and the United States: Effects of the 2008–09 financial crisis

In this paper, we investigate the dynamic linkages between the BRIC countries (Brazil, Russia, India, and China) and the United States in the mean and variance of stock prices for the period August 2, 2004, to April 30, 2010. In particular, we focus on the impact of the US financial crisis in September 2008 on the dynamic linkages between these stock prices. The sample period is divided into pre- and post-crisis periods in order to study the causal relationships in the mean and variance. The empirical results indicate that the international transmission of stock prices between the BRICs and the United States weakened in both the mean and variance on account of the 2008–09 US financial crisis.     

Purchasing Power Parity Between the UK and Germany: The Euro Era

We use the Johansen cointegration approach to assess the empirical validity of the purchasing power parity (PPP) between the UK and Germany since the introduction of the euro. We conduct the empirical analysis in the context of the global financial crisis that began in 2007 and find that it directly affects the cointegration space. We fail to validate the Johansen and Juselius (1992) original hypothesis that nonstationarity of PPP associates with the nonstationarity of interest rate differentials to produce a stationary relation. On the other hand, we do not reject PPP. We find that PPP cointegrates with inflation differentials. We also find, contrary to conventional wisdom, that (i) equilibrium adjustment occurs between the German and UK inflation rates, while weak exogeneity exists for the German and UK interest rates and the PPP condition, and (ii) three common trends associated with the German interest rate the UK interest rate, and the PPP condition “push” the system with the German interest rate and the PPP condition playing dominant roles in affecting inflation in both Germany and the UK. These results cast serious doubt on the presumed independence of the UK monetary policy.     

Globalisation versus de-coupling: German emigration and the evolution of the Atlantic labour market 1870–1913

The decline of German emigration to the United States after 1895 was precipitate to a degree not matched by other “old immigration” sources. The paper considers possible reasons for this: the effect of land availability, relative growth rates of the US and German economies, and the impact of the so-called “new immigration” from southern and eastern Europe. It concludes that German immigration was unusually affected by competition from newer migrant sources, due to skill similarities and similar patterns of settlement. However, the more rapid growth of the German economy after 1895 and the movement of the land frontier into areas less suited to German agricultural skills also played a part. It shows that the skills possessed by migrants were an important factor in migrant earnings. The arrival in the US of large numbers of immigrants with similar skill endowments and lower reservation wages made emigration to the United States a less attractive option for potential German migrants after 1895.     

The stability of German export demand equations – have German exports suffered from the strength of the euro?

Since its introduction in 1999, the euro has shown pronounced swings against the US dollar and the British pound. In this study, we investigate whether this evolution has affected bilateral German exports to two of its major export destinations: the US and the UK. Applying the autoregressive distributed lags bounds testing approach, we find different elasticities of trade between the two export destinations. Our results show that the export demand equation for the US seems to be more stable than that for the UK. Furthermore, it seems that the short-run dynamics in particular have changed.     

How the German crisis of 1931 swept across Europe: a comparative view from Stockholm†

According to conventional wisdom, the fall of the Swedish currency in September 1931 was caused by the sterling crisis. This article shows that the road towards devaluation began earlier and that financial linkages with Germany proved to be more important than Sweden's economic and monetary relations with Great Britain. It all started in late 1929 when the Swedish financier Ivar Kreuger gave a loan to the German government in exchange for the match monopoly, thus tying his business ventures to Germany's solvency. In addition, a part of this loan was financed by large US dollar credits from the two largest Swedish banks that, in turn, accumulated a sizeable foreign short‐term deficit. When in June 1931 the German fiscal crisis began to escalate, international investors ceased to consider Sweden a safe haven because they knew about the linkages between the German government, Kreuger, and the Swedish banking system. This downgrading, in combination with the foreign short‐term deficit of the banking sector, proved lethal for the reserve position of the Swedish central bank, once the international liquidity crisis in mid‐July 1931 erupted. The sterling crisis only put the final nail in the coffin.     

The linkage of interest rates within the EMS

The Linkage of Interest Rates within the EMS. — The paper explores the linkage between interest rates in Germany and the United States with those on other currencies within the Exchange Rate Mechanism (ERM) of the European Monetary System. Monthly data on money market interest rates and rolling window cointegration techniques are used. The principal findings are that during the early part of the sample period (1979–1995), there is widespread cointegration between both US and German interest rates and those on other currencies in the ERM; but during the later part of the sample, this “worldwide” linkage disintegrates, cointegration between German and other ERM interest rates strengthening whilst that with the US disappears.     

International Convergence of Capital Market Interest Rates

This article investigates the extent of capital market interest rate convergence among six EU countries on the one hand, and a group of four countries with floating exchange rates - US, Germany, Japan, and Switzerland - on the other. We conclude that interest rate changes within the EU have been and still are converging gradually since 1980. Within the group of free-float currencies, the increase in convergence occurred abruptly around 1980, after which the extent of convergence remained roughly constant. Moreover, the presumed higher influence of US long-term interest rates on the level of German interest rates could not be detected.     

Depression dynamics: a new estimate of the Anglo‐American manufacturing productivity gap in the interwar period1

During the interwar period the manufacturing productivity gap between the US and the UK became much larger than existing estimates suggest. In this article a new comparison of US/UK productivity levels for 1935 is presented, utilizing a more rigorous methodology to revise the widely used, but methodologically outdated, benchmark comparison by Rostas that was published in 1948. Secondly, the comparison is extended to take account of variations in input prices, and it is shown that double deflation has a substantial effect on the new benchmark, particularly at the industry level. Thirdly, labour input is adjusted for actual hours worked. US manufacturing displayed a much higher level of comparative productivity for the key industries of the second industrial revolution, such as chemicals and engineering. These results support revisionist accounts of the depression's strengthening of US productivity leadership.     

动量策略与外汇市场效率研究

本文以澳大利亚、加拿大、法国、德国、日本、瑞士、英国和美国为例，考察了短期至中期采用股票市场常用的动量策略可否同样在外汇市场获利。结果表明，动量效应在各国表现出了高度的相似性：从第2周起开始显著，在4周达到峰值，从13周起逐渐减弱，直到26周，显著性突然下降甚至出现反转效应，52周时反转效应相对显著，少数持有期也开始出现动量效应。行为金融学的基本理论可以解释上述现象，显示了外汇市场效率的无效性。     

Some Unpleasant Consequences of EMU

The recent economic woes of some Eurozone countries have raised doubts about whether they can remain in the Eurozone. Prior to these problems emerging, the price levels in these countries rose faster than the average Eurozone price level and their rates of economic growth were higher. It is conjectured in this paper that the two sets of events are connected. Using a formal theory of inflation in the Eurozone based on a stylised version of the New Keynesian model, it is shown that, due to a “one-size-fits-all” monetary policy, inflation rates in individual Eurozone countries are unlikely to converge, and their price levels are likely to diverge, causing large differences in levels of competitiveness over time. The reason for this is different real effects in these economies such as productivity differences or different fiscal policies. In other words the Eurozone is not an optimal currency area. Despite the outstanding record of the ECB in achieving its inflation goals, it is powerless to affect the underlying problem.     

Tales from the Bretton Woods

An analogy has been made between the collapse of the Bretton Woods system in 1971 and the recent Eurozone crisis. The build up of TARGET balances in the Eurosystem of Central Banks after 2007 with the GIPS (deficit countries having large liabilities) and Germany (a surplus country) with large claims is seen as similar to the rising and persistent balance of payments deficits and declining gold reserves by the United States as center country of the BWS gold dollar standard in the 1960s. This paper argues that a better Bretton Woods analogy is between the UK which ran persistent balance of payments deficits reflecting low productivity growth and overly expansionary financial policies (an analogy to the GIPS) countries with West Germany which ran persistent balance of payments surpluses reflecting high productivity and conservative financial policies (analogous to Germany today). However Bretton Woods is very different from the Eurozone in many dimensions. An even better analogy than BWS is a comparison of the clearing mechanism in the U.S..--The Gold Settlement account—with the Target payments mechanism for the Eurozone. In the early 1930s massive gold flows from the interior, hard hit by banking panics, to New York City were similar to the payments imbalances within the Eurozone in the recent crisis. The Federal Reserve did little to accommodate the demands for liquidity leading to a collapse of the payments system in March 1933. By contrast the build up of TARGET reflected full accommodation of the liquidity demands of the member states. TARGET represented an institutional innovation that prevented a repeat of the 1930s payments crisis.     

Has there been any structural convergence in the transmission of European monetary policies?

This paper makes three contributions. First we present a technique by which the monetary transmission mechanism of Germany, France, the UK and the Eurozone can be decomposed into its component cycles, compared across economies and across time. As a result, we found that the individual data generating processes have varied over time. Second we show that Germany has now converged on the rest of Europe and not vice versa, although Germany had dominated monetary policy making in Europe for many years. Third, we show that the UK as an outsider has behaved like a peripheral EMU country, even when EMU was not in place. In other words, the transmission mechanisms of Germany and the UK were fundamentally different. Hence, when that German monetary policy dominated Europe in a way that was not in line with the rest of Europe, never mind the UK, it is no surprise that the UK eventually left the ERM (1992). The current financial crisis may enforce the trend of convergence of the transmission mechanism. But there have been signs of a divergence between core and periphery, to some extent involving the UK, so this general convergence, as opposed to tighter convergence in the core, may not last.

Unconventional Monetary Policy in the Euro Zone

The European Central Bank adopted a policy of quantitative easing early in 2015, long after the US and UK, and after implementing a succession of measures to increase liquidity in the Euro zone financial markets, none of which proved sufficient eventually. The paper draws out lessons for the Euro zone from US and UK experience. Numerous event studies have been undertaken to uncover the effects of QE on yields on and prices of financial assets. Estimated effects on long-term government bond yields are then converted into the size of the cut in the policy rate that would normally have been needed to produce them. From these implicit cuts in policy rates, estimates of the effect on GDP and inflation are generated. Euro zone QE appears to have had a much smaller effect on bond yields for the core members states than did QE in the US or UK. Therefore its effects on output and inflation are likely to be proportionately smaller. Its effects on long-term government bond yields in periphery members are greater. QE is compressing interest differential among Euro zone member states. The dangers of QE to which various commentators draw attention, that it creates a danger of inflation in the future, that it creates asset price bubbles, that it allows zombie firms and banks to survive, slowing down the process of adjustment, seem remote. Meanwhile it makes a useful contribution to cutting the costs of debt service and allowing member states more fiscal room for maneouvre.     

Interest rate causality and asymmetry in the EMS

This paper investigates the hypothesis of an asymmetric EMS under German leadership in the period from 1983 to 1991. The approach adopted was to undertake Granger-causality tests on daily observations of changes in interest rates. For the group of core countries we find that, in recent years, the EMS has operated asymmetrically. This asymmetry has developed over the years and was not evident prior to 1987.     

Fiscal Implications of the ECB’s Bond Buying Program

The perception that the government bond buying program (OMT) announced by the ECB may lead to future tax burdens on countries, in particular on Germany, is based on an erroneous application of solvency principles that apply to private agents, but not to central banks. We argue that the creditor nations’ taxpayers, in particular the German taxpayers, will receive tax revenue from the implementation of the OMT. We also measure the size of the bond-buying program that is compatible with price stability. It turns out that this estimate critically depends on whether the Eurozone stays in a liquidity trap situation or not. Today, as the Eurozone is still in a liquidity trap there is no limit to the amount of government bonds the ECB can buy without triggering inflation.