Malmquist indices of productivity growth for Islamic and conventional banks in Malaysia

This paper studies the total factor productivity （TFP） of banks in Malaysia with the emphasis on comparing the relative productivities of Islamic and Conventional banks. The Malmquist index approach is used to decompose productivity growth into technical efficiency and technological change. The productivity growth is measured and decomposed into technical change and efficiency change. The efficiency change is further decomposed into pure efficiency change and scale efficiency. It is found that Islamic banks＇ productivity growth is limited by its lack of technological change compared to its conventional counterparts. Nonetheless, both types of banks are operating at the correct level in terms of scale or size.     

The financial content of inflation risks in the euro area

Recent studies have emphasized that survey-based inflation risk measures are informative about future inflation, and thus are useful for monetary authorities. However, these data are typically only available at a quarterly frequency, whereas monetary policy decisions require a more frequent monitoring of such risks. Using the ECB Survey of Professional Forecasters, we show that high-frequency financial market data have predictive power for the low-frequency survey-based inflation risk indicators observed at the end of a quarter. We rely on MIDAS regressions for handling the problem of mixing data with different frequencies that such an analysis implies. We also illustrate that upside and downside risks react differently to financial indicators.     

The effects of geographic expansion on the productivity of Spanish savings banks

This article analyzes the effects of geographic expansion on the productivity of Spanish savings banks. The study uses data from 1992 to 2004, the period when most savings banks expanded geographically. We consider an alternative approach to most multi-stage studies, which uses nonparametric methods both to measure productivity growth and to analyze its relationship with branch office expansion. Specifically, we use nonparametric regression techniques and their natural complement, conditional density estimation. Results indicate that savings banks that expand geographically outside their natural markets achieve greater productivity gains. However, there are some firms for which this result is more moderate. In contrast, lower increases in productivity are found in savings banks that expand on a nationwide basis, or that confine their territorial expansions to their traditional markets.     

Economic policies on Slovenia's road to the euro area

On 1 January 2007, Slovenia was the first new EU member state to enter the euro area. Since June 2004, the Slovenian tolar participated in the exchange rate mechanism ERM-II with a central parity of 239.64 against the euro. This parity was also the conversion rate upon euro area accession. Applying a macroeconometric model of Slovenia, this paper analyses the macroeconomic effects of different conversion rates. These simulations are compared to a scenario with flexible exchange rates. The best results are obtained with the actual conversion rate. In addition, it is shown that the labour market performance can be significantly improved by cutting non-wage labour costs.     

Fiscal policies and business cycles in an enlarged euro area

This paper compares the cyclical properties of fiscal policies across the 12 original eurozone countries and the future members from Central and Eastern Europe. For the sample period 1995–2005, the fiscal balance exhibits less inertia and is more counter-cyclical in Central and Eastern European countries than in members of the eurozone. The main differences arise from the revenue side. Differences in the formation of fiscal policy between current and future eurozone countries decrease over time. Both autonomous and counter-cyclical fiscal policies have little or no effect on cyclical variability in the eurozone countries, while such policies appear to be effective in Central and Eastern European countries.     

ALICE: Composite leading indicators for euro area inflation cycles

This paper develops Area-wide Leading Inflation CyclE (ALICE) indicators with the aim to provide early signals for turning points in the euro area headline and core inflation cycles. The headline (core) ALICE leads the reference cycle by three (four) months and the lead times extend to five (nine) months based on longer-leading series. Both ALICE indicators signalled turning points in the inflation cycles ex post and also performed well in a simulated real-time exercise. Moreover, in particular the headline ALICE also appeared to be useful for quantitative forecasting of the direction and level of inflation.     

Labor market institutions and inflation volatility in the euro area

Despite having had the same currency for many years, EMU countries still have quite different inflation dynamics. In this paper we explore one possible reason: country specific labor market institutions, giving rise to different inflation volatilities. When unemployment insurance schemes differ, as they do in EMU, reservation wages react differently in each country to area-wide shocks. This implies that real marginal costs and inflation also react differently. We report evidence for EMU countries supporting the existence of a cross-country link over the cycle between labor market structures on the one side and real wages and inflation on the other. We then build a DSGE model that replicates the data evidence. The inflation volatility differentials produced by asymmetric labor markets generate welfare losses at the currency area level of approximately 0.3% of steady state consumption.     

Predictive financial models of the euro area: A new evaluation test

This paper investigates the predictive ability of financial variables for euro area growth. Our forecasts are built from univariate autoregressive and single equation models. Euro area aggregate forecasts are constructed both by employing aggregate variables and by aggregating country-specific forecasts. The forecast evaluation is based on a recently developed test for equal predictive ability between nested models. Employing a monthly dataset from the period between January 1988 and May 2005 and setting the out-of-sample period to be from 2001 onwards, we find that the single most powerful predictor on a country basis is the stock market returns, followed by money supply growth. However, for the euro area aggregate, the set of most powerful predictors includes interest rate variables as well. The forecasts from pooling individual country models outperform those from the aggregate itself for short run forecasts, while for longer horizons this pattern is reversed. Additional benefits are obtained when combining information from a range of variables or combining model forecasts.     

Profit, productivity and distribution: Differences across organizational forms - The case of Spanish banks

We examine variations in financial and economic performance as a function of organizational form, and, over time. The forms we consider include Spanish commercial banks, savings banks, and financial cooperatives. We decompose multilateral variation in operating profit, our measure of financial performance, into price and quantity effects. We then decompose the latter into a margin effect and productivity change. Our measure of economic performance, productivity variation, is subsequently disaggregated into technical, cost efficiency, and scale. We find that deregulation and liberalization have acted to narrow performance gaps among organizational forms; this, despite less-than compelling evidence that increased competition has contributed to this convergence. For the Spanish banking system as a whole, the margin effect appears to deliver twice as much financial benefit as do improvements in productivity. Importantly, this finding does not vary across organizational form. Such regularity has an important implication: Incentives for growth are apparently provided by a positive margin rather than by the more elusive benefits of economies of scale and improved cost efficiency.     

Credit in the euro area: An empirical investigation using aggregate data

This paper uses multivariate cointegration techniques to estimate a model of aggregate bank lending in the euro area. The model provides a quantitative benchmark for assessing conjunctural developments in loans to the area-wide private sector. Large and protracted deviations of realised loans from the paths implied by the model may reveal information about the emergence of financial imbalances as well as about the state of the economy, particularly about the strength of inflationary pressures. A specific application of the model shows that its error-correction term contains information on future changes in inflation over forecast horizons of relevance for monetary policy.     

MIDAS vs. mixed-frequency VAR: Nowcasting GDP in the euro area

This paper compares the mixed-data sampling (MIDAS) and mixed-frequency VAR (MF-VAR) approaches to model specification in the presence of mixed-frequency data, e.g. monthly and quarterly series. MIDAS leads to parsimonious models which are based on exponential lag polynomials for the coefficients, whereas MF-VAR does not restrict the dynamics and can therefore suffer from the curse of dimensionality. However, if the restrictions imposed by MIDAS are too stringent, the MF-VAR can perform better. Hence, it is difficult to rank MIDAS and MF-VAR a priori, and their relative rankings are better evaluated empirically. In this paper, we compare their performances in a case which is relevant for policy making, namely nowcasting and forecasting quarterly GDP growth in the euro area on a monthly basis, using a set of about 20 monthly indicators. It turns out that the two approaches are more complements than substitutes, since MIDAS tends to perform better for horizons up to four to five months, whereas MF-VAR performs better for longer horizons, up to nine months.     

Currency movements within and outside a currency union: The case of Germany and the euro area

In this paper, we analyse the volume of euro banknotes issued by Germany within the euro area with several seasonal methods. We draw a distinction between movements within Germany, circulation outside Germany but within the euro area and demand from non-euro-area countries. Our approach suggests that only about 20% of euro notes issued by Germany are used for transactions in Germany. The rest is hoarded (10%), circulates in other euro area countries (25%) or is held outside the euro area (45%).     

P-star in times of crisis – Forecasting inflation for the euro area

In this paper we present three empirically testable versions of the common p-star model and evaluate their forecasting performance using conventional techniques. We try to answer the question if the p-star approach is preferable to achieve a reliable short-run inflation forecast and with regard to the latter we incur the need for a stable demand for money function. Our findings indicate the recurrence of the relevance of the monetary pillar of the ECB's two-pillar framework. In addition, we check for the effects of the current financial and economic crisis that started in 2007 on the forecasting performance, using two sub-sample periods, one excluding and one including the latter, and analyze the impact of the applied filter technique to compute the required equilibrium values.     

Modelling and forecasting government bond spreads in the euro area: A GVAR model

This paper proposes an extension to Global Vector Autoregressive (GVAR) models to capture time-varying interdependence among financial variables. Government bond spreads in the euro area feature a time-varying pattern of co-movement that poses a serious challenge for econometric modelling and forecasting. This pattern of the data is not captured by the standard specification that model spreads as persistent processes reverting to a time-varying mean determined by two factors: a local factor, driven by fiscal fundamentals and growth, and a global world factor, driven by the market’s appetite for risk. This paper argues that a third factor, expectations of exchange rate devaluation, gained traction during the crises. This factor is well captured via a GVAR that models the interdependence among spreads by making each country’s spread function of global European spreads. Global spreads capture the exposure of each country’s spread to other spreads in the euro area in terms of the time-varying ‘distance’ between their fiscal fundamentals. This new specification dominates the standard one in modelling the time-varying pattern of co-movements among spreads and the response of euro area spreads to the Greek debt crisis.     

Bayesian VAR forecasts,survey information,and structural change in the euro area

We incorporate external information extracted from the European Central Bank’s Survey of Professional Forecasters into the predictions of a Bayesian VAR using entropic tilting and soft conditioning. The resulting conditional forecasts significantly improve the plain BVAR point and density forecasts. Importantly, we do not restrict the forecasts at a specific quarterly horizon but their possible paths over several horizons jointly since the survey information comes in the form of one- and two-year-ahead expectations. As well as improving the accuracy of the variable that we target, the spillover effects on “other-than-targeted” variables are relevant in size and are statistically significant. We document that the baseline BVAR exhibits an upward bias for GDP growth after the financial crisis, and our results provide evidence that survey forecasts can help mitigate the effects of structural breaks on the forecasting performance of a popular macroeconometric model.     

Green shoots and double dips in the euro area: A real time measure

In order to perform real-time business cycle inferences and forecasts of GDP growth rates in the euro area, we use an extension of the Markov-switching dynamic factor models that accounts for the features of the day-to-day monitoring of economic developments, such as ragged edges, mixed frequencies and data revisions. We provide examples that show the nonlinear nature of the relationships between data revisions, point forecasts and forecast uncertainty. Based on our empirical results, we think that the real-time probabilities of recession inferred from the model are an appropriate statistic for capturing what the press call green shoots, and for monitoring double-dip recessions.     

The stationarity of British economic and productivity growth 1856–1913

Characterization of late nineteenth-century British economic performance rests heavily on identifying trends and turning points in GDP and productivity growth. Crafts, Leybourne and Mills (1989) provide the most sophisticated study in this genre, deploying a time-varying parameter model, to severely dent the notion of a climacteric. This paper argues the linear trend approach to assessing the climacteric may be otiose. Investigating the order of integration of the GDP series, and the cointegration of GDP and factor input growth, suggests both GDP and productivity growth tended to revert to a constant mean rate within the period 1856–1913, and undermines the notion of a climacteric.     

The euro and developing country finance: A survey

More than eight years after the introduction of the euro, impacts on developing countries have been relatively modest. Overall, the euro has become much more important in debt issuance than in official foreign exchange reserve holdings. The former has benefited from the creation of a large set of investors for which the euro is the home currency, while demand for euro reserves has been held back by the dominance of the dollar as a vehicle and intervention currency, and the greater liquidity of the market for US treasury securities. Fears of further dollar decline may fuel some shifts out of dollars into euros, however, with the potential for a period of financial instability.     

Returns to scale effect in labour productivity growth

Economists acknowledge that technical progress and growth in capital inputs increase labour productivity (LP). However, less focus is given to the realization that changes in labour input alone could also affect LP. Because this effect disappears when the short-run technology exhibits constant returns to scale, we call it the returns to scale effect. We decompose growth in LP into three contributing factors: (1) technical progress, (2) capital input growth and the (3) returns to scale effect. We propose theoretical measures for these three components and show that they coincide with the index number formulae consisting of prices and quantities of inputs and outputs. Subsequently, we apply the results of our decomposition to US industry data for 1987–2009. LP in the services sector is shown to grow much slower than that in the goods sector during the 1987–1995 productivity slowdown period. We conclude that the returns to scale effect can considerably explain the gap in LP growth between the two industry groups.