Determinants of Capital Structure: United Kingdom Versus Continental European Countries

In this paper, we analyze how country‐specific differences influence capital structure indirectly through firm‐specific variables. We apply a system Generalized Method of Moments technique to a panel data sample of companies from five countries (France, Germany, Italy, Spain and the United Kingdom) during the period 1998–2008. As the different financial systems of European economies (bank‐oriented or market‐oriented) may influence capital structure differently through firm‐specific variables, we first examine the determinants of capital structure for each country separately and we then analyze whether the observed differences between the United Kingdom and the continental European countries are relevant. The results show that there are substantial differences in the capital structure choices of firms across five major European countries. These differences are motivated by the type of financial systems of the countries (bank‐oriented and market‐oriented) and influence the capital structure indirectly through the firm‐specific variables. Overall, our results support the relevance of the differences in the capital structure choices of firms across five major European countries, and in particular, the singularity of the United Kingdom (a market‐oriented economy) as opposed to continental European countries (bank‐oriented economies).     

The international transmission channels of US supply and demand shocks: Evidence from a non-stationary dynamic factor model for the G7 countries

We employ a multi-country non-stationary dynamic factor model to assess spillover effects and transmission channels of US supply and demand shocks on a variety of macroeconomic variables in individual non-US G7 countries. We find that trade, financial and confidence channels all play a significant role in the international transmission of US shocks. However, the results point to substantial heterogeneities of shock transmission across the individual G7 economies. In particular, we find negative transmission effects for Italy and Japan as the only two G7 countries not well integrated into global value chains. Moreover, the exchange rate responses of Germany, France and Italy turn out to be far less pronounced in comparison to the other G7 economies which we relate to their membership of the euro area and their coordinated monetary policies prior to the establishment of the euro. Whereas we document a close comovement of stock market dynamics across the G7 countries, we find credit and real estate markets to be less synchronized. We do not find the effects and transmission channels to be fundamentally affected by the post-2008 economic environment.     

The Global Extent of the Great Moderation*

In 2008 the US financial crisis spilled over into a number of other economies causing declines in GDP across the world. Yet the decades preceding the current downturn had been a period of unprecedented stability for the US economy. This article examines annual data for 98 countries over the period 1961–2007 and finds that lower GDP growth volatility in the period preceding the current crisis was not confined to the US. It is detected in a number of developed and developing countries, suggesting that a reduction in volatility in this period was a more general phenomenon.     

欧洲主权债务危机的根源、影响及警示意义

自2009年以来,欧洲国家的主权债务问题一直被全球资本市场所关注,以PIIGS五国（希腊、西班牙、葡萄牙、爱尔兰、意大利）为代表的南欧多个国家的债务问题浮出水面,不仅引发了全球金融市场的剧烈波动,同时危及到整个欧元区乃至全球经济的稳定。本篇文章深入分析了欧洲主权债务危机的形成根源及影响,并揭示债务危机对各国的警示意义     

Economic policy uncertainty effects for forecasting future real economic activity

Recently introduced measures for economic policy uncertainty (EPU), included in the data from 1997 to 2016, have a role in forecasting out-of-sample values for future real economic activity for both the euro area and UK economies. The inclusion of EPU measures, either for the US, the UK or for overall European economies, improves the forecasting ability of models based on standard financial market information, especially for the period before the 2008 global crisis. However, during and after the crisis period, the slope of the yield curve and excess stock market returns improves the out-of-sample forecast performance the most compared to an AR-benchmark model. Hence, the EPU information is important in times of normal business cycles, but might contain similar information components to financial market return variables during turbulent crisis periods in the financial markets and in the real economy.     

WORLD OUTLOOK

The world recovery, now 18 months old, suffered two major setbacks in May: heightened political tension in the Middle East and a crisis in financial markets following a rise in US interest rates. On the assumption that oil supplies are not disrupted, we forecast that industrial production in the OECD area will rise by 7per cent in 1984 compared with 1983 and that total GNP will be 4 per cent higher. The Fed3 decision to tighten monetary policy, and run the risks of a US banking crisis, underline its determination to prevent the re-emergence of high inflation in the US. Higher interest rates are expected to produce a pause in the US recovery later this year, but, by reining back the economy and dampening down inflationary expectations, they should avert both a return to high inflation and the need for a more pronounced US recession at a later date. Compared with the January forecast, therefore, in which we assumed that, for political and debt-crisis reasons, the US authorities would avoid a rise in interest rates, the present forecast embodies higher interest rates and an earlier pause in the American recovery but, in the medium term, lower inflation and steadier growth of output. For the European and Japanese economies, where policy has remained more restrictive throughout, we have not changed our view that inflation will continue either to remain low (West Germany, Japan) or to moderate (France, Italy), thereby underpinning a sustainable medium-term recovery.     

The role of financial development on the underground economy in regards to Europe’s 2020 strategy

This paper attempts to investigate the relationships between development in the financial sector and the size of the underground economy in European Union countries. Our aim is to investigate the role of financial sector development when it comes to the size of the underground economy, as well as how financial development aids in meeting the growth objectives of the ‘Europe 2020 Strategy’. Panel data analysis will be conducted for the period 2004–2017 in order to examine the effects of financial sector development on the size of the underground economy. The main findings of this paper suggest that financial development has a significantly reducing effect on the size of the underground economy. In conclusion, development within the financial sector significantly lessens underground economic activity in the European Union. With further development of the financial sector, underground economies will not be an obstacle for the fulfilment of the cohesion and growth objectives of the Europe 2020 strategy.     

Long-run and short-run determinants of sovereign bond yields in advanced economies

We analyze determinants of sovereign bond yields in 22 advanced economies over the 1980–2010 period using panel cointegration techniques. The application of the cointegration methodology allows distinguishing between long-run (debt-to-GDP ratio, potential growth) and short-run (inflation, short-term interest rates, etc.) determinants of sovereign borrowing costs. We find that in the long run, government bond yields increase by about 2 basis points in response to a 1 percentage point increase in government debt-to-GDP ratio and by about 45 basis points in response to a 1 percentage point increase in the potential growth rate. In the short run, sovereign bond yields deviate from the level determined by the long-run fundamentals, but about half of the deviation adjusts in one year. When considering the impact of the global financial crisis on sovereign borrowing costs in euro area countries, the estimations suggest that spreads against Germany in some European periphery countries exceeded the level determined by fundamentals in the aftermath of the crisis, while some North European countries have benefited from “safe-haven” flows.     

The impact of EMU on bond yield convergence: Evidence from a time-varying dynamic factor model

This paper examines the dynamics of long term sovereign bond yields for 21 OECD countries. Following Del Negro and Otrok (2008), we estimate a dynamic factor model, with time varying parameters and stochastic volatility, that decomposes the observed variation in bond yields for each country into a common factor, a regional factor (EMU/non-EMU), and an idiosyncratic country specific factor. We find that prior to the financial crisis of 2008, the common factor played a dominant role for most countries in our sample. In the post financial crisis period there is substantial heterogeneity in the relative importance of the EMU and the idiosyncratic factors across different countries. For instance, our results suggest that there was a decoupling between the EMU and bond markets of the periphery economies of Greece, Ireland and Portugal in the post-2008 period. We find that after the onset of sovereign debt crises in these economies, the idiosyncratic factor assumed an important role in driving the bond yield variation. Thereafter, the EMU’s share in bond yield changes in Ireland and Portugal increased considerably since 2012, whereas for Greece the idiosyncratic factor continued to play a significant role in driving bond yields. In contrast, the EMU factor consistently played a dominant role in explaining bond yield changes in Italy and Spain, the other two economies that also experienced severe debt crisis during this period. We argue such differences in the importance of the EMU factor between core and periphery economies can be attributed to the systemic importance of core members for the EMU. This is indicated by our finding that bond yields and credit default swap (CDS) are less sensitive to changes in debt-GDP ratios in countries where the EMU factor played a larger role in the post-2008 period.     

International Leadership in Productivity at the Aggregate and Industry Level

Since many policies affect specific parts of economies differently, it is useful to decompose GDP per capita differences across countries into differences across smaller and smaller parts of economies. In this paper, we summarize recent contributions in this area and fit them together into a decomposition procedure for GDP per capita differences. The overall finding is that the U.S. is the productivity leader for the most of the economy. Moreover, international productivity differences at the aggregate level of the economies are in most cases translated into differences in the productivity of industries, at least compared to the productivity leader U.S. The variability of productivity differences at the industry level is, however, substantially higher than any differences at the aggregate or sector level. For the manufacturing sector alone the U.S. and Japan share the leadership on the industry level. In contrast, France, U.K., and Germany exhibit almost no leadership in productivity at the industry level. Hence, nation-specific factors appear to be dominant in the comparison of European countries with the U.S. Finally, mix differences do not play a very large role for big countries. For Germany, however, the mix effect can help to reconcile relative high productivity for the market economy and lower productivity at disaggregated levels.     

The macroeconomic impact of economic uncertainty and financial shocks under low and high financial stress

External financial frictions might increase the severity of economic uncertainty shocks. We analyze the impact of aggregate uncertainty and financial condition shocks using a threshold vector autoregressive (TVAR) model with stochastic volatility during distinct US financial stress regimes. We further examine the international spillover of the US financial shock. Our results show that the peak contraction in euro area industrial production due to uncertainty shocks during a financial crisis is nearly-four times larger than the peak contraction during normal times. The US financial shocks have an influential asymmetric spillover effect on the euro area. Furthermore, the estimates reveal that the European Central Bank (ECB) is more cautious in implementing a monetary policy against uncertainty shocks while adopting hawkish monetary policies against financial shocks. In contrast, the Fed adopts a more hawkish monetary policy during heightened uncertainty, whereas it acts more steadily when financial stress rises in the economy.     

To bail-out or to bail-in? Answers from an agent-based model

Since the beginning of the 2008 financial crisis almost half a trillion euros have been spent to financially assist EU member states in taxpayer-funded bail-outs. These crisis resolutions are often accompanied by austerity programs causing political and social friction on both domestic and international levels. The question of how to resolve failing financial institutions, and how this depends on economic preconditions, is therefore a pressing and controversial issue of vast political importance. In this work we employ an agent-based model to study the economic and financial ramifications of three highly relevant crisis resolution mechanisms. To establish the validity of the model we show that it reproduces a series of key stylized facts of the financial and real economy. The distressed institution can either be closed via a purchase & assumption transaction, it can be bailed-out using taxpayer money, or it may be bailed-in in a debt-to-equity conversion. We find that for an economy characterized by low unemployment and high productivity the optimal crisis resolution with respect to financial stability and economic productivity is to close the distressed institution. For economies in recession with high unemployment the bail-in tool provides the most efficient crisis resolution mechanism. Under no circumstances do taxpayer-funded bail-out schemes outperform bail-ins with private sector involvement.     

On the Real Effect of Financial Pressure: Evidence From Firm‐Level Employment During the Euro‐Area Crisis

Using a large panel of mainly unquoted euro‐area firms over the period 2003–2011, this paper examines the impact of financial pressure on firms’ employment. The analysis finds evidence that financial pressure negatively affects firms’ employment decisions. This effect is stronger during the euro area‐crisis (2010–2011), especially for firms in the periphery compared to their counterparts in non‐periphery European economies. When we introduce firm‐level heterogeneity, we show that financial pressure appears to be both statistically and quantitatively more important for bank‐dependent, small and privately held firms operating in periphery economies during the crisis.     

Does foreign aid procurement in resource-rich countries depend on these countries’ financial development and institutional quality? Evidence from PVECM and quantile-on-quantile regression

The underlying structure of the global economy has undergone major structural changes over the last two decades. These transformations have been powered by globalisation, technological development and multilateral trade agreements. The more open global economy has benefitted the global community, but many resource-rich developing countries are struggling to keep pace with more developed countries. As these resource-rich countries attempt to catch up with more developed economies, many rely on foreign aid to develop their institutions of governance and financial sector for a more knowledge-intensive economy. This study analyses the long- and short-run associations between foreign development aid procurement, financial development, and institutional quality in resource-rich countries from 2005 to 2020, employing the panel vector error-correction (PVECM) model and Quantile-on-Quantile Regression (QQR). Our analysis shows that, in the short run, there is a strong endogenous nexus between foreign aid procurement, quality of institutions and financial development. Furthermore, the results reveal that financial development and higher institutional development assist resource-rich countries in procuring foreign developmental aid in the long run. These findings suggest that a financial system which functions well, and favourable institutional governance are critical for these countries to secure foreign aid to put them on a path to sustainable development.     

Symposium: Youth labour market and the “Great Recession”

The financial crisis of 2007–2008, followed by the “Great Recession” and the additional sovereign debt crisis in some peripheral countries of the Eurozone, resulted in huge and persistent effects on European youth labour markets. Theoretical and empirical investigations on this topic are still scarce compared with the importance of the topic and the consequent economic, social and policy implications. This paper consists of a very short introduction to a symposium that contributes to filling that gap. A multifaceted picture emerges with major policy implications for the three levels of government (European, national and regional/local) in order to reduce youth unemployment and the NEET phenomenon.     

SURPLUSES AND DEFICITS

The US economy has twin deficits: internal (the budget deficit) and external (the current account). In sharp contrast, the UK combines a PSBR surplus with a rising current account deficit. Japan and West Germany both enjoy large current surpluses, though in Japan the public sector deficit is narrowing whereas in Germany it is rising. Remarkably, as Figure 1 shows, the present position on the public sector and overseas balances in each of the three major OECD economies and the UK is quite different. Japan is the mirror image of the US: the budget and overseas balances have been moving in the direction of surplus - private sector savings have been more stable. For the UK and West Germany (though again as images of one another) it is movements in private sector savings which have driven the current account. How has this come about?     

WORLD OUTLOOK

The strength of US domestic demand is exerting a very strong pull on the world economy. Japan in particular is benefiting from soaring export demand, but the effects on European exports have been offset by weak domestic demand and, in the case of West Germany and the UK, by damaging industrial disputes which have interrupted supply. Over the next 12 months we expect the US economy to slow down under the weight of the financial and external balance pressures, which two years of very rapid but unbalanced growth have built up. For the world economy, however, we expect the slowdown in the US to be counterbalanced by expanding domestic demand in Europe and Japan, especially if a lower dollar permits reductions in interest rates. We forecast world output growth of about 3 per cent next year, well below the near-5 per cent projected for 1984 - the cyclical peak. By the second half of 1985 the world recovery will be three years old and we expect a pause in the growth of output. Against a background of stable monetary growth we expect world inflation in the 5–6 per cent range over the medium term. This is consistent with some increase in US inflation, low and stable inflation in Japan and West Germany and further progress in reducing inflation in countries such as France and Italy. Our forecast is based on the assumption that the dollar falls next year. If it does not fail we believe there is a significant risk of slower growth.     

Wavelet coherence analysis of returns,volatility and interdependence of the US and the EU money markets: Pre & post crisis

This research analyse the US and the EU money markets interdependence from 2004 to 2018. The study explains to what extent the volatility of the chosen money markets instruments in two regions is inter-correlated before, during and after the financial crisis of 2008. We apply the econometric analysis and estimate time-series models of class GARCH to study the historical dynamics of interbank rates and bond returns. The study demonstrates that correlation between returns of analogous money market instruments in the EU and US is not stable over time. We find that correlation rises in periods when countries are exposed to the same external shocks as global financial crisis. Wavelet coherence analysis suggests that investors do not get any advantages of portfolio diversification investing only in US treasuries with different maturities for more than 256 days and do not get any advantages at all investing only in European bonds.     

Interest rate risk propagation: Evidence from the credit crunch

During the 2007–2009 financial crisis, US subprime mortgage risk exposures led to severe liquidity problems in several other foreign markets. Such risk contagion was caused by enormous changes in interest rates. Although risk contagion has been investigated by several literatures, the magnitude of propagated interest rate risk around global financial markets remains unexplored. Therefore, this study quantifies the degree to which the increased credit risk within the US financial system propagated to the European markets’ liquidity risks. Specifically, using a conditional value-at-risk (CoVaR) model, we quantitatively measure interest rate risk of a European country, by looking at the upside risk in distribution of changes in interest rate. And such propagation risk measure considers additional value-at-risk conditional on the interest rate movements in the US. The results show significantly positive differences between European country's value-at-risk conditional on the US financial markets being in a normal or distressed state. This propagating effect increased from 2007, and was particularly pronounced in the 2008–2009. In addition, the interest rate risk contagion is especially severe for some countries in the Euro regions with greater sovereign debt problems. Hence our result foretells the deterioration of the European sovereign debt crisis which started to unfold in 2010. Our work supplements the literature by successfully quantifying the magnitude of additional interest rate risk conditional on risk exposure from external sectors.     

EMPLOYMENT PROTECTION LEGISLATION AND THE GROWTH OF THE SERVICE SECTOR IN THE EUROPEAN UNION

In modern developed economies it is the service sector that generates jobs. In Anglo-Saxon economies, where employment protection legislation is low and unions comparatively weak, services account for three-quarters of income and four-fifths of jobs. Yet in France, Germany and Italy, where the reverse is true, the service sector accounts for much less of the economy in terms of income and jobs. This article shows that employment protection legislation – defended by trade unions still dominating manufacturing in continental Europe – results in higher unemployment rates and also negatively affects the growth of services.