Housing, consumption and monetary policy: How different are the US and the euro area?

This paper provides a systematic empirical analysis of the role of the housing market in the macroeconomy in the US and the euro area. First, it establishes some stylised facts concerning key variables in the housing market on the two sides of the Atlantic, such as real house prices, residential investment and mortgage debt. It then presents evidence from Structural Vector Autoregressions (SVAR) by focusing on the effects of monetary policy, credit supply and housing demand shocks on the housing market and the broader economy. The analysis shows that similarities outweigh differences as far as the housing market is concerned. The empirical evidence suggests a stronger role for housing in the transmission of monetary policy shocks in the US. The evidence is less clear-cut for housing demand shocks. Finally, credit supply shocks seem to matter more in the euro area.     

Determinants of global spillovers from US monetary policy

This paper assesses the global spillovers from identified US monetary policy shocks in a global VAR model. US monetary policy generates sizable output spillovers to the rest of the world, which are larger than the domestic effects in the US for many economies. The magnitude of spillovers depends on the receiving country's trade and financial integration, de jure financial openness, exchange rate regime, financial market development, labour market rigidities, industry structure, and participation in global value chains. The role of these country characteristics for the spillovers often differs across advanced and non-advanced economies and also involves non-linearities. Furthermore, economies that experience larger spillovers from conventional US monetary policy also displayed larger downward revisions of their growth forecasts in spring 2013 when the Federal Reserve upset markets by discussing tapering off quantitative easing. The results of this paper suggest that policymakers could mitigate their economies' vulnerability to US monetary policy by fostering trade integration as well as domestic financial market development, increasing the flexibility of exchange rates, and reducing frictions in labour markets. Other policies – such as inhibiting financial integration, industrialisation and participation in global value chains – might mitigate spillovers from US monetary policy, but are likely to reduce long-run growth.     

International transmission and business-cycle effects of financial stress

We analyze the international transmission of financial stress and its effects on global economic activity. Our analysis is based on country-specific monthly financial stress indices (FSIs) over the sample period 1970–2012 for 20 major economies. First, we show that co-movement between the FSIs increases during major financial crises and towards the end of our sample period. Second, we show that the risk of large financial stress spillovers to an economy increases with its level of economic openness. Third, we show – using a global VAR (GVAR) model – that (i) a financial stress shock in the US quickly transmits internationally, (ii) financial stress shocks have lagged but persistent negative effects on economic activity, and (iii) that a negative US demand shock induces only limited financial stress on a global scale. Finally, we show that spillovers of financial stress run mainly from advanced to emerging economies and not in the opposite direction.     

Foreign exchange reserve diversification and the “exorbitant privilege”: Global macroeconomic effects

We assess the macroeconomic implications for the global economy of different strategies of official reserve management by developing a large scale new-Keynesian dynamic general equilibrium model, calibrated to the euro area, the United States, China and the rest of the world. An increase in the global demand for euros would boost euro area aggregate demand because of the reduction in euro area interest rates (the main benefit associated with the “privilege” of being a global currency). If the higher demand for euros is associated with lower demand for US dollars, then US aggregate demand falls because of higher interest rates, while the external balance improves; countries accumulating reserves continue to run a trade surplus, as exports to the euro area increase. We also compute welfare gains/costs for all economies.     

Does bank lending affect output? Evidence from the U.S. states

This paper uses a panel of state-level data to test whether changes in bank loan supply affect output. Since the U.S. states are small open economies with fixed exchange rates, state-specific shocks to money demand are automatically accommodated, leading to changes in lending if banks rely on deposits as a source of funding. Using these shocks as an instrumental variable, I find that shocks to money demand have large and statistically significant effects on the supply of bank loans, but loans have small, often negative and statistically insignificant effects on output.     

Changes in bank lending standards and the macroeconomy

Identifying macroeconomic effects of credit shocks is difficult because many of the same factors that influence the supply of loans also affect the demand for credit. Using bank-level responses to the Federal Reserve's Loan Officer Opinion Survey, we construct a new credit supply indicator: changes in lending standards, adjusted for the macroeconomic and bank-specific factors that also affect loan demand. Tightening shocks to this credit supply indicator lead to a substantial decline in output and the capacity of businesses and households to borrow from banks, as well as to a widening of credit spreads and an easing of monetary policy.     

Downside and upside risk spillovers between exchange rates and stock prices

We examined downside and upside risk spillovers from exchange rates to stock prices and vice versa for a set of emerging economies. We characterized the dependence structure between currency and stock returns using copulas and computed downside and upside value-at-risk and conditional value-at-risk. We documented a positive relationship between stock prices and currency values in emerging economies with respect to the US dollar and the euro, with downside and upside spillover risk effects transmitted both ways. Finally, we also documented asymmetries in upside and downside risk spillovers and asymmetric differences in the size of risk spillovers when the domestic currency values against the US dollar and the euro. Our results, consistent with flight-to-quality phenomena, have implications for downside and upside risk management of international investor portfolios in emerging markets.     

International monetary policy spillovers through the bank funding channel

In this paper, we examine the international transmission of monetary policies of major advanced economies (US, UK, euro area) through banks in Austria and Germany. In particular, we compare the role of banks’ funding structure, broken down by country of origin as well as by currency denomination, in the international transmission of monetary policy changes to bank lending. We find weak evidence for inward spillovers through a bank funding channel. The more a bank is funded in US dollars, the more its domestic real sector lending is affected by monetary policy changes in the US. This effect is more pronounced in Germany than in Austria. We do not find evidence for outward spillovers of euro area monetary policy.     

Economic policy uncertainty and credit growth: Evidence from a global sample

This study extends the research of Bordo, Duca, and Koch (2016) and Hu and Gong (2018) by examining the influences of economic policy uncertainty (EPU) at domestic and global levels on aggregate bank credit growth. The empirical analysis is conducted through both supply and demand side factors of bank credit growth in 22 economies over the period 2001–2015. This study employs different measures of EPU and applies panel-corrected standard errors (PCSE) and feasible generalized least squares (FGLS), which are suitable for unbalanced panel data models. Three principal findings are follows. First, higher level of EPU has negative impact on bank credit growth, which is significant for domestic EPU measures. Second, the positive change in EPU appears to have favorable effects on bank credit growth. The effects in both cases are different for the credit demand and supply sides. The findings suggest the need for appropriate measures to tackle bank credit risk-taking activities in uncertain conditions. Third, the impacts of EPU in emerging economies are negative and somewhat stronger than in advanced economies.     

New European Union members on their way to adopting the Euro: An analysis of macroeconomic disturbances

We identify aggregate demand and supply disturbances of several central and eastern European countries and compare them with the respective disturbances of France, Germany, and Italy which are the large economies of the euro zone. We also examine how output and prices of the various economies respond to these changes. We find that several central and eastern European countries (CEECs) still exhibit significant differences compared with the older member countries of the European Union (EU). However, some more advanced countries of the area already show remarkable similarities with the euro zone countries.     

New European Union members on their way to adopting the Euro: An analysis of macroeconomic disturbances

We identify aggregate demand and supply disturbances of several central and eastern European countries and compare them with the respective disturbances of France, Germany, and Italy which are the large economies of the euro zone. We also examine how output and prices of the various economies respond to these changes. We find that several central and eastern European countries (CEECs) still exhibit significant differences compared with the older member countries of the European Union (EU). However, some more advanced countries of the area already show remarkable similarities with the euro zone countries.     

The International Bank Lending Channel of Monetary Policy Rates and QE: Credit Supply,Reach‐for‐Yield,and Real Effects

We identify the international credit channel by exploiting Mexican supervisory data sets and foreign monetary policy shocks in a country with a large presence of European and U.S. banks. A softening of foreign monetary policy expands credit supply of foreign banks (e.g., U.K. policy affects credit supply in Mexico via U.K. banks), inducing strong firm‐level real effects. Results support an international risk‐taking channel and spillovers of core countries’ monetary policies to emerging markets, both in the foreign monetary softening part (with higher credit and liquidity risk‐taking by foreign banks) and in the tightening part (with negative local firm‐level real effects).     

Portfolio capital flows and the US dollar exchange rate: Viewed from the lens of time and frequency dynamics of connectedness

This study uses proprietary data on daily net non-resident portfolio flows to emerging markets to analyse the interconnectedness of non-resident debt and equity portfolio flows under different market conditions. We find that there is less interconnectedness during normal times but increased interconnectedness during periods of uncertainty and stress, suggesting an asymmetry in the spillovers of these portfolio flows. Importantly, we find that shocks in the broad EM US dollar exchange rate are a net transmitter of shocks to debt and equity portfolio flows of EM economies. Our analysis, based on the net directional spillover index, shows that this effect is most pronounced during the COVID-19 pandemic. Furthermore, using a frequency domain approach to connectedness, we find that the broad EM US dollar exchange rate is a net transmitter of shocks to the EM economies’ debt and equity flows, with the impact hitting portfolio capital flows within at least a week to 100 days. Our results suggest that pre-emptive macroprudential policy measures and better risk monitoring can improve the resilience of borrowers and investors in EM economies during times of global shocks, particularly during US dollar appreciations when portfolio flows tend to reverse.     

Assessing exchange rate dynamics of East Africa: fragmented or integrated?

This article investigates the dynamics of the currency markets of the East African Community, using forecast error variance decompositions from vector autoregressions. It shows that the exchange rates of Kenya, Tanzania and Uganda have been mainly driven by shocks to their own economies, while those of Burundi and Rwanda have been increasingly dictated by spillovers from the dollar and euro since the global financial crisis. Interactions within the region are limited, although there is some sign of elevation. This makes a clear contrast with European currency markets prior to the euro, where spillovers from the German mark dominated the markets.     

Fiscal Policy Shocks in the Euro Area and the US: An Empirical Assessment*

We analyse the impact of fiscal policy shocks in the euro area as a whole, using a newly‐available quarterly data set of fiscal variables for the period 1981–2007. To allow for comparability with previous results on euro‐area countries and the US, we use a standard structural vector autoregressive (VAR) framework, and study the impact of aggregated and disaggregated government spending and net‐tax shocks. In addition, to frame euro‐area results, we apply the same methodology for the same sample period to US data. We also explore the sensitivity of the results to the inclusion of variables aiming to control for underlying financial and fiscal conditions. The main new findings are that: expansionary fiscal shocks have a short‐term positive impact on GDP and private consumption, with government spending shocks entailing, in general, higher effects on economic activity than (net) tax reductions; output multipliers to government expenditure shocks are of similar size in the euro area and in the US; the persistence of a fiscal spending shock is higher in the US than in the euro area, which appears to be related to military spending in the US; and fiscal multipliers have increased over the recent past in both geographical areas.     

The effect of banking crisis on bank-dependent borrowers

We provide causal evidence that adverse capital shocks to banks affect their borrowers’ performance negatively. We use an exogenous shock to the U.S. banking system during the Russian crisis of Fall 1998 to separate the effect of borrowers’ demand of credit from the supply of credit by the banks. Firms that primarily relied on banks for capital suffered larger valuation losses during this period and subsequently experienced a higher decline in their capital expenditure and profitability as compared to firms that had access to the public-debt market. Consistent with an adverse shock to the supply of credit, crisis-affected banks decreased the quantity of their lending and increased loan interest rates in the post-crisis period significantly more than the unaffected banks. Our results suggest that the global integration of the financial sector can contribute to the propagation of financial shocks from one economy to another through the banking channel.     

Financial crisis,US unconventional monetary policy and international spillovers

We study the impact of US quantitative easing (QE) on both the emerging and advanced economies, estimating a global vector error-correction model (GVECM). We focus on the effects of reductions in the US term and corporate spreads. The estimated effects of QE are sizeable and vary across economies. First, we find the QE impact from reducing the US corporate spread to be more important than that from lowering the US term spread, consistent with Blinder's (2012) argument. Second, counterfactual exercises suggest that successive US QE measures might have prevented episodes of prolonged recession and deflation in the advanced economies. Third, the estimated effects on the emerging economies are diverse but generally larger than those found for the United States and other advanced economies. The estimates suggest that US monetary policy spillovers contributed to the overheating in Brazil, China and some other emerging economies in 2010 and 2011, but supported their respective recoveries in 2009 and 2012. These heterogeneous effects point to unevenly distributed benefits and costs of cross-border monetary policy spillovers.     

The Great Recession: US dynamics and spillovers to the world economy

This paper provides an empirical investigation of both the within-US and international channels of transmission of macroeconomic and financial shocks by means of a 50-country macroeconometric model (estimated over the 1980-2009 period), including measures of excess liquidity and financial fragility, specifically designed in order to evaluate the relevance of the boom-bust credit cycle view put forward as an interpretation of the recent “Great Recession” episode. We find that such a view is consistent with the empirical evidence. Moreover, concerning the real effects of financial shocks within the US, we detect stronger evidence of an asset prices channel, rather than a liquidity channel. Concerning the spillovers to the world economy, we find that while financial disturbances are transmitted to foreign countries through US house and stock price dynamics, as well as excess liquidity creation, the trade channel is the key trasmission mechanism of real shocks.     

Disaggregated oil shocks and stock-market tail risks: Evidence from a panel of 48 economics

We analyse the impact of oil supply, global economic activity, oil-specific consumption demand, and oil-inventory demand shocks on equity-market tail risks of a panel of 48 developed and emerging economies over the monthly period from 1975:01 to 2017:12. We find that, oil supply, global economic activity, and oil-inventory demand shocks reduce tail risks, but oil-specific consumption demand shock increases tail risks, with these effects stronger in oil-exporting economies. Our results have important implications for investors and policymakers.     

Asymmetric impacts of disaggregated oil price shocks on uncertainties and investor sentiment

This paper aims to examine short- and long-run asymmetries in the impacts of disaggregated oil price shocks on economic policy uncertainty, stock market uncertainty, treasury rates, and investor (bullish and bearish) sentiment in the US. To this end, we use a nonlinear auto-regressive distributed lag cointegration approach, which allows us to capture both positive and negative disaggregated oil shocks. We find that oil demand shocks are the main drivers of both measures of uncertainty, while oil supply shocks affect treasury rates. However, both oil demand shocks and oil supply shocks affect investor sentiment, with certain differences in the effects of positive and negative shocks. The overall effects of both oil demand and supply shocks—whether positive or negative—are stronger in the long-run than in the short-run. Additionally, we apply rolling causality and reveal evidence of a rather homogenous causal flow from disaggregated oil shocks to the variables studied, particularly around global stress periods. Our findings have implications for asset pricing and portfolio risk management and suggest policy formulations that differentiate between disaggregated positive and negative oil price shocks.