Global financial conditions,country spreads and macroeconomic fluctuations in emerging countries

This paper uses a panel structural vector autoregressive (VAR) model to investigate the extent to which global financial conditions, i.e., a global risk-free interest rate and global financial risk, and country spreads contribute to macroeconomic fluctuations in emerging countries. The main findings are: (1) global financial risk shocks explain about 20% of movements both in the country spread and in the aggregate activity in emerging economies. (2) The contribution of global risk-free interest rate shocks to macroeconomic fluctuations in emerging economies is negligible. Its role, which was emphasized in the literature, is taken up by global financial risk shocks. (3) Country spread shocks explain about 15 percent of the business cycles in emerging economies. (4) Interdependence between economic activity and the country spread is a key mechanism through which global financial shocks are transmitted to emerging economies.     

Macroeconomic fluctuations in the Eastern Caribbean: The role of climatic and external shocks

This article develops country-specific vector autoregressive (VAR) models with block exogeneity restrictions to analyze how exogenous factors affect business cycles in the Eastern Caribbean. It finds that external shocks play a key role, explaining more than half of macroeconomic fluctuations in the region. Domestic business cycles are especially vulnerable to changes in climatic conditions, with a natural disaster leading to an immediate and significant fall in output – but the effects do not appear to be persistent. Oil price and external demand shocks also contribute significantly to domestic macroeconomic fluctuations. An increase in oil prices (external demand) is contractionary (expansionary), and the effects dissipate up to three years after the shock.     

Preparations for the Euro by U.K. SMEs with Trading Links with the Euro Currency Area

This paper examines euro preparations by U.K. SMEs with trading links with the euro currency area. It suggests, notwithstanding the U.K.'s decision not to join the euro in the first wave, that SMEs with euro area trade links are particularly likely to have had to make some adjustments for the introduction of the euro. The paper assesses this level of preparation and seeks to understand if it is contingent upon the characteristics of the business, its geographic location, its business orientation and the type of trade link (e.g. importer/exporter). The paper finds, contrary to previous research, that business characteristics, geographic location and business orientation are, on the whole, of limited value in explaining euro preparation. What, instead, seems more significant is the type of link with the euro area: importers, exporters and those with subsidiary businesses in the euro area appear more likely to have made preparations for the euro than U.K. SMEs that are part of a euro supply-chain or are a subsidiary of a euro area business.     

国际贸易冲击与中国经济的周期波动

国际经济波动对我国经济周期的影响主要是通过国际贸易这个渠道实现的,本文在对我国对外贸易波动的特征及与经济周期相关性进行分析的基础之上,通过国际贸易乘数效应具体分析了国际贸易冲击对经济周期波动的影响,其结论表明国际贸易冲击对我国的经济周期波动产生了重要的作用和影响,出口每波动1%,会引发GDP波动0.25个百分点左右,随着我国对外贸易的快速增长,贸易波动对宏观经济的影响会进一步增加。     

The common sources of business cycles in Trans‐Pacific countries and the US? A comparison with NAFTA

This paper uses both a non‐structural and a structural approach to investigate the drivers of the business cycles in the US and 15 Trans‐Pacific (TP) countries. Our non‐structural analysis, based on a principal component methodology, reveals the shares of variation in macroeconomic variables that are due to factors common to both the US and the TP region, and factors that are region‐specific. We obtain similar measures by using a structural model (an estimated two‐country dynamic stochastic general equilibrium model) that allows for common and correlated shocks across the two regions. The clear and common finding from our analyses is that common shocks explain a substantial amount of macroeconomic variation. Comparison with the NAFTA region, along this dimension, reveals that the US economy is more similar to the TP region (a wider region that also includes Mexico and Canada) than its two neighbours.     

Business Cycle Desynchronisation: Amplitude and Beta vs. Co-movement

A high degree of correlation among the business cycles of individual countries is usually seen as a key criterion for an optimum currency area. However, the elasticity with which countries react to the common cycle is equally important. A country with a non-unitary growth elasticity relative to the common area will experience cyclical divergences at the peak and trough of the common cycle. Despite being characterised by highly correlated business cycles, the euro area suffers from widely differing amplitudes.     

Book reviews

This paper analyzes how fiscal policies and credit constraints can affect the impact of macroeconomic volatility on long-run growth. The model by Aghion et al. (2005) is extended by allowing for governmental fiscal policy over the business cycle. The analysis shows that in an economy facing credit constraints, an increase in volatility will result in lower mean growth, and all the more the less financially developed and the more procyclical the fiscal policy is. The main implication is that in countries with lower degrees of financial development, countercyclical fiscal policies are particularly important in reducing the negative consequences of adverse aggregate shocks on firms' long-run investments. An empirical analysis is finally conducted using different groups of countries that confirm the theoretical predictions.     

Sentiment-dependent impact of funding liquidity shocks on futures market liquidity

We examine the effect of funding liquidity changes on futures market liquidity, depending on economic sentiment. Futures market liquidity improves following negative funding liquidity shocks, and economic sentiment is an important determinant explaining this relationship. While individuals' trading is most significantly affected by sentiment, its response to funding liquidity shocks remains independent of sentiment effects. Domestic institutions' reactions depend on the sentiment regime; they trade futures contracts more actively as funding liquidity becomes more abundant (scarcer) when sentiment is more pessimistic (optimistic). Foreigners, following negative funding liquidity shocks, generally increase their futures trading, whereas their trading decreases under the extremely pessimistic sentiment. Domestic banks and pension funds provide liquidity to the futures market even when sentiment is pessimistic.     

Die Europäische Währungsunion: Viel reformiert,aber noch nicht am Ziel

Since the onset of the euro crisis, many aspects of the governance of the euro area have been reformed. Rules for budget control have been tightened, and oversight and resolution of banks has been centralised. Credit facilities have been created for member states who have trouble tapping financial markets. Moreover, the reform process is not over yet but can be expected to continue for another decade before details of a planned fiscal capacity will be implemented. Yet despite all these reforms, the euro area is still not crisis-proof. The permanent low rate of economic growth and the continuing lack of working macroeconomic coordination are particular reasons for concern.     

The macroeconomics outcome of oil shocks in the small Eurozone economies

In this work, we provide an analysis over the period 1999–2015 of the effects of oil shocks on prices and GDP in a group of small Euro-area economies. The group includes Austria, Belgium, Finland, Greece, Ireland, Italy, Netherlands, Portugal and Spain. In order to characterise the macroeconomic outcomes of movements in oil prices, we adopt the structural vector autoregression (VAR) methodology. We find that under the European Monetary Union (EMU), oil price shocks have been important drivers of business cycle fluctuations in almost all these countries. Moreover, an increase in oil prices produces significant recessionary effects in all the countries included in the investigation. Thus, although there are different sizes in the responses of output in the investigated countries, our main conclusion is that despite the structural changes experienced by the European economies in the last decades, oil prices still matter for these countries. In the light of these results, we also stress some important challenges for the conduct of monetary policy in the Euro area.     

Britain and EMU: Assessing the Costs in Macroeconomic Variability

Stochastic simulations are used on the Liverpool Model of the UK to assess the effect of UK euro entry on macroeconomic stability. Instability increases substantially, particularly for inflation and real interest rates. A key factor is the extent of the euro's instability against the dollar; by adopting a regional currency the UK imports this source of shocks, as well as losing its control of interest rates. The results are not highly sensitive to changes in assumptions about the degree of labour market flexibility, the use of fiscal policy, and increased convergence of monetary transmission.     

The impact of the euro crisis on Switzerland

The euro area crisis is the main external factor threatening the Swiss economy. In 2010 and 2011, the Swiss franc was rapidly appreciating against the euro, causing a drop in exports, losses for the tourism business and a rise in unemployment. This paper gives an overview of developments in the euro area and explains the reasons for the strength of the franc, the effects it had on the economy and the measures taken to curtail its appreciation.     

Heterogeneous effects of competitiveness shocks on macroeconomic performance across euro area countries

This paper considers how competitiveness impacts macroeconomic performance in 11 euro area countries. VAR models are estimated for the individual countries using quarterly data from 1995Q4 to 2013Q4. Besides unit labour costs as a competitiveness measure, the models include GDP, the current account balance and domestic credit. The empirical analyses show that changes in unit labour costs help explain GDP dynamics in the short and medium term in most countries, whereas they have little explanatory power for the current account balance or domestic credit for most countries. Overall, the effects of the unit labour costs vary substantially across the countries in the euro area. The heterogeneity suggests that policy measures aiming to improve economic growth, correct current account imbalances and ensure financial stability need to take country‐specific features into account.     

Endogenous OCA Analysis and the Early Euro Experience

Some have argued that the endogenous responses to the formation of a currency area are so strong that one need not worry about optimum currency area conditions ex ante. We argue that this is much too strong a conclusion. We draw on a number of recent studies to evaluate the endogeneity experiences of the eurozone in three major areas; trade flows, business cycle synchronisation and structural reforms to improve labour and product market flexibility. Simple before‐and‐after comparisons are insufficient for analysis of endogeneity. The experiences of non‐euro Western European economies suggest that broader trends also had considerable influence on trade and business cycle patterns. While trade rose substantially within the eurozone, it also rose with and among other European economies. We argue that political economy considerations tend to dampen the magnitude of endogeneity efforts on structural reforms and that meeting conditions for entry may be a more powerful mechanism in this than are subsequent endogenous responses. We also discuss a number of areas for further research.     

The Importance of Global Shocks for National Policymakers – Rising Challenges for Sustainable Monetary Policies

This paper analyses the importance of global shocks for the global economic developments and national policymakers from a novel perspective. On the one hand, we examine whether global factors convey additional information about monetary conditions not summarised by national aggregates. More specifically, we keep an eye on the question whether domestic monetary policies have become less effective in the wake of financial globalisation. We adopt a FAVAR framework to derive structural shocks on a worldwide level and their impact on other global and also national variables. We estimate our macromodel using quarterly data from Q1 1984 to Q4 2012 for the G7 countries plus the euro area. According to our results, global liquidity shocks significantly influence the global economy at the commodity price level. However, some other common shocks originating from house prices and GDP play a role at the global level as well.     

A Vicious Cycle of Manias,Crises and Asymmetric Policy Responses – An Overinvestment View

Over the past three decades, we find that asymmetric policy responses heavily contributed to manias and bursting bubbles that eventually trapped the major industrial economies into near zero short‐term interest rates with rapidly rising public indebtedness. The article uses the endogenous business cycle theories of Wicksell, Mises, Schumpeter, Hayek and Minsky to show how ostensible counter‐cyclical monetary policies are asymmetric, as central banks are less willing to raise interest rates in booms than cut them when bubbles collapse. After interest rates have fallen towards zero, fiscal policy is called on which sooner or later becomes bounded by extraordinary debt to GDP ratios. Central banks hesitate to raise interest rates even in the face of a partial economic recovery because the cost of public debt service would become prohibitive. The economies then languish at very low interest rates that encourage low productivity real investments and a continual threat of bubbles in asset and raw material markets. This makes them unable to deal with further macroeconomic shocks.     

Ten misconceptions about current account imbalances in the euro area

In the pre-crisis period, substantial current account imbalances built up in the euro area. Despite recent progress in economic rebalancing, especially in the countries mostly affected by the euro debt crisis, a controversial debate is still raging about past causes, current interpretations and future outlooks for the current account positions of euro area countries. This article examines ten common claims often heard in the public debate and critically discusses their economic foundation.     

Drug trafficking,money laundering and the business cycle: Does secular stagnation include crime?

The aim of the paper is to analyze theoretically and empirically the impact the macroeconomic cycle has on the accumulation of capital by organized crime, using estimates for the global drug market. So far, the economic literature has neglected the relationships existing between illegal markets, money laundering and the business cycle. We propose a dynamic model where the business cycle influences the criminal economy via two different channels. On the one side, illegal markets grow at variable rates, depending on the health of the legal economy. Second, a pass‐through effect can exist, since the business cycle affects the legal markets which criminal operators use to launder their revenues. Furthermore, we analyze the consequences of a ‘saturation effect’ limiting maximum accumulation of illegal capital. We find that overall illegal capital is affected by the business cycle through a capital multiplier; in addition to this, the dynamics of interest rates in financial markets can influence such multiplier.     

Aufschwung in Deutschland weiter kräftig — Anspannungen nehmen zu

The business cycle upswing in Germany has gained strength and breadth. In addition to private consumption, the expansion is now also supported by investment and foreign trade. The latter benefits from growing exports to the euro area, where the economy is gaining momentum. Since the euro area upswing rests on solid fundamentals, the ECB should be able to start tapering without putting the economy at risk.     

贸易条件、国际利率冲击与经济波动

开放经济条件下国际金融危机所带来的传染和溢出效应是当下国际宏观经济学的热点和核心问题,而随着中国经济改革开放正在向纵深发展,在危机传染机制下的中国经济正在经历各种外部条件的冲击。金融危机的传染机制对中国经济产生了显著的负面波及效应,文章基于开放经济的视角,构建了一个动态均衡模型并对中国经济波动特征进行了研究,模型引入了反映国际经济传导的两类关键冲击,即国际贸易条件冲击和国际融资利率冲击。参数校准后的数值模拟显示,开放经济模型能够较好的匹配我国实际经济的主要二阶距波动特征,进一步的波动性分解发现国际贸易条件冲击和国际融资利率冲击对中国经济波动有很强的解释力。政府在开放经济框架下应该加强对经常账户和国际资本流动的监管,使得中国经济在改革开放走向纵深的背景下稳定增长。