The real effect of financial crises in the European transition economies1

The aim of this work is to assess the impact of financial crises on output for 11 European transition economies (CEECs). The results suggest that financial crises have a significant and permanent effect, lowering long‐term output by about 12–17 percent. The effect is larger in smaller countries in which the banking sector presented more important financial disequilibria. We also found that fiscal policy has been the most efficient tool in dealing with the crises, whereas the effect of monetary policy has been rather modest. Flexible exchange rates are found to attenuate the impact of the crises in the short and medium term, but to amplify the effect in the long run. International Monetary Fund support is found to moderate the effect in the long run. Finally, the effect in the CEECs is considerably larger than in the EU advanced economies.     

Finance and unemployment: new panel evidence

The effect of credit market imperfections on unemployment is largely investigated in the context of financial crises. This paper shifts the focus toward financial development and structure in a panel of advanced and developing countries. Some important findings emerge. Unemployment increases with financial development and concentration in banking markets but decreases with market orientation, the effect is stronger in magnitudes for young workers than female ones. More rigid market regulation increases unemployment. These findings are particularly pronounced for countries with higher income, better developed financial sectors, lower income inequality, greater trade openness, higher democracy, and common-law systems.     

Sudden stops, banking crises and investment collapses in emerging markets

We evaluate whether financial openness leaves emerging market economies vulnerable to the adverse effects of capital reversals (“sudden stops”) on domestic investment. We investigate this claim in a broad sample of emerging markets during the period 1976–2002. If the banking sector does not experience a systemic crisis, sudden stop events fail to have a significant impact on investment. Bank crises, on the other hand, have a significant negative effect on investment even in the absence of a contemporaneous sudden stop crisis. We also find that openness to capital flows worsens the adverse impact of banking crises on investment. Our results provide statistical support for the policy view that a strong banking sector which can withstand the negative fallout of capital flight is essential for countries that open their economies to international financial flows.     

Tipping the (Im)balance: Capital inflows,financial market structure,and banking crises

An emerging consensus among scholars and policy‐makers identifies foreign capital inflows as one of the primary determinants of banking crises in developed countries. We challenge this view by arguing that external imbalances are destabilizing only when banks face substantial competition from securities markets in the process of financial intermediation. We assemble a dataset of banking crises covering the advanced industrialized countries from 1976 to 2011 and find evidence of a conditional relationship between capital inflows, a well‐developed securities market, and the incidence of banking crises. We further explore the impact of capital inflows on banks’ actual risk taking as indicated by their capital adequacy levels and measures of insolvency risk. Our results demonstrate that prudential capital cushions tend to decline with the combination of capital inflows and prominent securities markets. We highlight the political decisions—often made during the early days of a country's financial development—that determine the relative prominence of banks vs. non‐bank financial institutions and conclude with policy recommendations.     

Twin Crises in Emerging Markets: The Role of Liability Dollarization and Imperfect Competition in Banking

Currency crises in emerging markets have been accompanied by banking crises, with concentration in the market for bank credit increasing after large devaluations. This paper examines how the presence of imperfect competition and liability dollarization in banking shapes the real effects of the just mentioned twin crises. An important gap in the theoretical literature is filled, by being the first paper to provide a model of twin crises in the presence of imperfect competition in banking, and the changes in market structure that occur in the aftermath of crises. Doing so, the analysis is able to reveal that currency devaluations generate more severe twin crises in economies with less competitive banking sectors. This result is consistent with the empirical evidence on the concentration‐fragility view, and it unveils the importance of prudential regulation that focuses on the market structure in banking.     

Globalization and labor market outcomes: Wage bargaining, search frictions, and firm heterogeneity

We introduce search unemployment into Melitz's trade model. Firms' monopoly power on product markets leads to strategic wage bargaining. Solving for the symmetric equilibrium we show that the selection effect of trade influences labor market outcomes. Trade liberalization lowers unemployment and raises real wages as long as it improves average productivity. We show that this condition is likely to be met by a reduction in variable trade costs or by entry of new trading countries. Calibrating the model shows that the long-run impact of trade openness on the rate of unemployment is negative and quantitatively significant.     

The consequences of labor market flexibility: Panel evidence based on survey data

We introduce a new data set on hiring and firing restrictions for 21 OECD countries for the period 1984-1990. The data are based on surveys of business people in the countries covered, so the indices we use are subjective in nature. Controlling for country and time fixed effects, and using dynamic panel data techniques, we find evidence that increasing the flexibility of the labor market increases both the employment rate and the rate of participation in the labor force. A conservative estimate suggests that if France were to make its labor markets as flexible as those in the US, its employment rate would increase 1.6 percentage points, or 14% of the employment gap between the two countries. The estimated effects are larger in the female than in the male labor market, although both groups seem to have similar long-run coefficients. There is also some evidence that more flexibility leads to lower unemployment rates and to lower rates of long-term unemployment. We also find evidence consistent with the hypothesis that inflexible labor markets produce “jobless recoveries” and introduce more unemployment persistence.     

BANKING SYSTEM CONCENTRATION AND LABOR MARKET PERFORMANCE IN INDUSTRIAL COUNTRIES

Using data on 21 industrial countries from the period 1987 to 2009 and a large number of controls, this paper finds that a more concentrated banking sector is likely to raise the unemployment rate and reduce the employment rate. The magnitude of these effects appears to be moderate. The results are robust to potential endogeneity of the bank concentration variable as well as to numerous variations in specification. They are important because, as a consequence of the recent global financial crisis, many industrial countries have experienced both an increase in banking system concentration and a deterioration in labor market performance. (JEL E24, G21, J64, L16)     

Wages,selectivity, and vacancies: Evaluating the short-term and long-term impact of the minimum wage on unemployment

Using a circular matching model (Marimon R, Zilibotti F. Unemployment vs. mismatch of talents: Reconsidering unemployment benefits. Economic Journal 1999;109; 266–291), where the wage setting is similar to Weiss (Weiss A. Job queues and layoffs in labor markets with flexible wages. Journal of Political Economy 1980; 88; 526–538), we reexamine Card and Krueger's (Card, D., Krueger, A. Myth and Measurement, the New Economics of the Minimum Wage. Princeton University Press; 1995) intuition on the impact of the minimum wage on unemployment. In the short term, a rise in the minimum wage increases the employment level by making firms less selective. In the long term, numerical simulations show that, despite the reduction of job creation, introducing a minimum wage may lower unemployment as soon as workers and jobs are sufficiently differentiated. However, beyond some limit, the wage increase raises unemployment whatever the degree of differentiation is.     

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.     

Banking Structure,Marketization, and Small Business Development: Regional Evidence From China

This paper provides an empirical examination of the regional banking structures in China and their effects on entrepreneurial activity. Using a panel of 27 provinces and four directly controlled municipalities from 1997 through 2008, we find that the presence of large banking institutions negatively correlates with small business development in local markets and that this negative relation is driven mainly by participation of large banks in the short‐term loan market. Rural banking institutions, in contrast, are found to promote regional entrepreneurial activity. Moreover, large state banks facilitate small business development in concentrated markets. When we interact measures of banking financing by state banks and rural banking institutions with a set of provincial‐level marketization indexes, we find that extensive marketization, factor market development and sophistication of legal frameworks mitigate the negative effect of large state banks on small business development. In provinces with advanced market development, efficient factor markets and favourable institutional settings, the positive effect of rural banking institutions on small business growth is even stronger.     

Liberalization,Regulatory Delays and Vulnerability to Systemic Banking Crisis

This work aims at contributing to the improvement of the early warning systems of banking crises using a new approach accounting for model uncertainty. We show that a multinomial logit model based on Bayesian model averaging (BMA) is a good strategy to predict banking crisis. To do this, we argue that differences in vulnerability to banking crisis can be largely explained by an asymmetry between financial market evolution and regulation update on a sample of 49 developed and developing countries between 1980 and 2010. When markets are liberalized, competition pushes bankers to take more risks and take advantage of regulatory delays thus increasing crises probabilities. Our empirical evidence supports that crisis probability is higher in country liberalizing their banking system when regulation is not updated. We developed an early warning system for systemic banking crises based on the multinomial logit model. Its main difference to existing prediction models and its contribution to the literature is that it is intended to identify and resolve what is called by Bussiere and Fratzscher [(2006). Towards a new early warning system of financial crises. Journal of International Money and Finance, 25(6), 953–973] as post-crisis bias in binomial models and to develop a new methodology of leading indicators selection based on BMA. Overall, our model predicts all banking crises during our sample period.     

The welfare costs of union wage compression

This paper calculates the quantitative significance of the welfare costs of union wage compression. This is done in a dynamic general equilibrium model with overlapping generations where agents choose both schooling (human capital) and assets (physical capital). The labor market in this model is characterized as a right-to-manage contract, which allows unions to compress wage differentials between high- and low-skilled workers, by implementing a binding minimum wage. This paper shows that when labor markets are competitive even low levels of wage compression lead to large welfare losses, since wage compression creates costly unemployment among low-skilled workers. The effect of wage compression on the supply of skilled labor, however, is rather small, since the disincentive effect of a lower, high-skilled wage is, to a large extent, offset by a lower opportunity cost of schooling due to higher unemployment.     

Dancing Spreads: Market Assessment of Contagion from the Crisis in the Euro Periphery based on Distress Dependence Analysis

The crisis in the eurozone periphery has so far affected markets substantially more than the size of the countries in the region would suggest. Data on direct exposures and simple correlations also fail to explain the cross-border impact of the crisis. Following Segoviano (2006), this paper uses distress dependence analysis to measure market assessment of contagion risks from Greece and Ireland to the rest of Europe during the peaks of the crises in these countries. The results provide insights to possible contagion risks through cross-border negative feedback loops between sovereigns and banking sectors in Europe that help explain the severe impact of the crisis.     

Capital account openness and early warning system for banking crises in G20 countries

This paper develops an early warning system for banking crises in the G20 countries, with the inclusion of capital account openness indicators. Results suggest that the capital account openness demonstrates a significant predictive power on systemic banking crises, and the impact is related with the level of the economic development. For low-income countries, increased capital account openness has a significantly negative impact on the banking crises likelihoods, while for high-income countries it imposes a positive impact. For middle-income countries, however, the occurrence of banking crises is more indifferent to capital account liberalization.     

How Will EMU Affect Inflation and Unemployment in Europe?

This paper explores how European Monetary Union will change the wage setting behavior of national labor unions. We derive the impact of national inflation aversion and labor militancy on the performance of national labor markets under different monetary arrangements. A common central bank raises inflation and unemployment if it acts as conservatively as national central banks. However, unemployment falls in countries that previously tied their monetary policy to the Bundesbank. We also examine the composition of EMU and the influence of national labor market legislation.
JEL Classification : E 24; F 02; F 33     

Credit information sharing and banking crises: An empirical investigation

We study the effect of credit information sharing on the likelihood of banking crises using a comprehensive cross-country dataset for the period from 1975 to 2006. The empirical analysis shows that credit information sharing reduces the likelihood of banking crises and it does more so in low income countries. The effect is statistically and economically significant, and applies to both public registries and private bureaus. Furthermore, we show that credit information sharing reduces the impact of rapid credit growth on banking crises. Specifically, rapid credit growth is less likely to lead to a banking crisis in countries with credit information sharing.     

Interest Rate Defenses of Currency Pegs

ABSTRACT

Reducing rigidity in labor markets is key to lowering unemployment. Theoretical models suggest that the impact of such reforms depends on the country-specific regulatory framework. We test this hypothesis by estimating the impact of changes in six categories of regulation conditional on the country-specific regulatory environment for 26 OECD countries. We overcome problems of modeling a large set of institutional interdependencies by applying a machine learning type model selection approach. We provide evidence for the existence of higher-order institutional interdependencies. We further document that especially for changes in employment protection and the unemployment benefit system the impact on unemployment is mixed across countries.     

Globalization of labor markets and macroeconomic equilibrium

It is shown that under all-round ‘atomistic’ behavior, international mobility of labor has a beneficial effect on national employment levels but an adverse effect on consumer-price-indices (CPIs) inflation rates. Accordingly, whether or not policymakers in individual countries will be prepared to welcome on macroeconomic grounds the increasing globalization of the labor markets will depend on how they evaluate lower unemployment relative to lower CPI inflation. On the other hand, mobility of labor has an overall positive effect on the wage-setters' position, implying that, contrary to the findings of much of the international-trade literature, an increasing globalization of labor markets would be welcome by unions. It is also shown that with globalization both of the labor markets and of the wage-setting processes, atomistic behavior by monetary policymakers may well lead to both high unemployment and high inflation. Indeed, we find that in such a situation, the best option for monetary policymakers is also to cooperate. Given the recent tendency for a greater globalization of the labor markets in the OECD both in terms of labor mobility and in the sphere of wage setting, this result provides support for more monetary co-operation among the industrialized countries. Finally, with international mobility of labor, inter-union co-operation coupled with inter-government co-operation may prove to be preferable even relative to all-round nonco-operative play.     

Structural breaks in the lending interest rate pass-through and the euro

This paper investigates whether size and speed of the pass-through of market rates into short term business lending rates have increased in the wake of the introduction of the euro. Allowing for multiple unknown structural breaks we find two in four EMU countries, and in the UK as well, and a single one in five other countries. The pattern of dates fits national banking systems adjusting slowly to the new monetary regime and suggests caution in associating structural changes to the introduction of the euro. The estimated equilibrium pass-through in the last break-free period is on average more incomplete, hinting at a reduced effectiveness of the single monetary policy. These results run against the economic intuition that a reduced volatility in money market rates is bound to mitigate uncertainty and to ease therefore the transfer of policy rate changes to retail rates; the run-up to Basel 2 and a deterioration of competition in loan markets could be the motivations. Caution in extrapolating these findings to recent periods is suggested by the differences between the unharmonized and the new harmonized retail rates.