How do US credit supply shocks propagate internationally? A GVAR approach

We study how US credit supply shocks are transmitted to other economies. We use the recently developed GVAR approach to model financial variables jointly with macroeconomic variables in 33 countries for the period 1983–2009. We experiment with inter-country links based on bilateral trade, portfolio investment, foreign direct investment and banking exposures. Capturing both bilateral trade and financial exposures in a GVAR fits the data better than using trade weights only. We use sign restrictions on the short-run impulse responses in the US model to identify the credit supply shocks. We find that negative credit supply shocks have strong negative effects on US and foreign GDP. Credit and equity markets in several countries respond clearly to the shocks. Exchange rate responses are consistent with a “flight to quality” to the US dollar. The credit supply shocks explain about a fifth of one-year-ahead output forecast error variance in the US and about a tenth in the euro area and the UK, but considerably less elsewhere.     

Do news shocks increase capital utilization?

Using the workweek of capital as a measure of capital utilization, we empirically test whether news shocks actually increase capital utilization. To this end, by estimating a panel VAR on two-digit manufacturing data identifying news shocks as innovations to stock returns orthogonal to the variations in current-period TFP growth, we find the positive response of capital utilization to news shocks. Moreover, to explain the positive response of capital utilization to news shocks in terms of plant-level investment behavior, we propose a heterogeneous plant model that combines the fixed cost of capital adjustment and an endogenous capital utilization choice. With the presence of fixed costs, except for the plants that have recently adjusted capital stock, news shock shortens the effective time horizon of currently installed capital stock and increases capital utilization. When the model economy is calibrated to match the salient features of the plant-level investment rate distribution, the economy generates a news-driven positive response of capital utilization.     

Does income inequality really matter for credit booms?

This paper addresses the question whether income inequality is associated with credit booms, alongside other macroeconomic factors. We distinguish between the different types of credit booms—real estate credit booms, household credit booms, firm credit booms and credit booms that turn into crises. Furthermore, our analysis of a sample of 70 countries between 1990 and 2016 does not provide any evidence of credit booms driving income inequality. We observe that capital inflows increase the likelihood of credit boom occurrence, while countries experiencing high economic growth tend to have more credit booms. Finally, we note that credit booms are more frequent in countries with fixed exchange rate regimes.     

Does the banking sector structure matter for credit procyclicality?

The aim of this paper is to investigate whether the banking sector structure matters in explaining credit procyclicality for 17 OECD countries over the 1986–2010 period. To this end, we first provide a detailed classification of the banking system structure through the use of a hierarchical clustering methodology. Relying on the estimation of panel VAR models and accounting for potential heterogeneity between countries, we then propose a measure of credit procyclicality based on the impulse-response function of credit to a shock in GDP. Our findings show that while credit significantly responds to shocks in GDP, the structure of the banking sector is not a key factor in assessing the procyclicality of credit for OECD countries.     

Are valuation effects desirable from a global perspective?

Recent studies have emphasized the role of valuation effects due to exchange rate movements in easing the process of adjustment of the external balance of a country. This paper asks to what extent valuation effects are desirable from a global perspective as a mean to achieve an efficient allocation of resources. In a frictionless world, it is desirable to have large movements in prices and exchange rates. But once a small degree of price rigidity is introduced not only should prices be stabilized but also the response of the exchange rate should be muted. There is a minor role for valuation effects that depends both on the size and composition of assets and liabilities.     

Do environment regulations matter for EU-MENA trade?

This study examines the impact of environmental regulations stringency on agricultural trade between European Union (EU) and Middle East and North Africa (MENA countries). Using a gravity model and applying the zero-inflated Poisson (ZIP) model, we estimate the impact of environmental regulations stringency on bilateral agricultural exports between 28 EU and 20 MENA countries during the period 2001–2014. The results have showed that environmental regulations do matter for agricultural trade between both regions because in the presence of excessive zero trade observations, they act as significant fixed export costs that affect the probability of trade. More stringent environmental regulations stimulate innovative efforts in cost-saving green technologies, which increase productivity and positively affect agricultural exports. The results have favoured the revisionist Porter hypothesis (PH), according to which environmental regulations may stimulate innovative efforts, which mitigate the negative effects of higher fixed abatement costs and enhance trade competitiveness.     

Do search frictions matter for inflation dynamics?

We assess the empirical relevance for inflation dynamics of accounting for the presence of search frictions in the labor market. The new Keynesian Phillips curve explains inflation as being mainly driven by current and expected future marginal costs. Recent empirical research has emphasized different measures of real marginal costs to be consistent with observed inflation persistence. We argue that, allowing for search frictions in the labor market, real marginal cost should also incorporate the cost of generating and maintaining long-term employment relationships, along with conventional measures, such as real unit labor costs. In order to construct a synthetic measure of real marginal costs, we use newly available labor market data on worker finding and separation rates that reflect hiring and firing costs. We then estimate a new Keynesian Phillips curve by generalized method of moments (GMM) using the imputed marginal cost series as an observable and find that the contribution of labor market frictions in explaining inflation dynamics is small.     

Estimating the effects of monetary policy shocks: does lag structure matter?

This paper examines the implications of lag structure for estimating the effects of monetary policy shocks in a VAR. A symmetric lag structure in which all variables have the same lag length and an asymmetric lag structure in which the lag length differs across variables but is the same for a particular variable in each equation of the model are examined. This is important in light of the fact that the true lag structure is generally not known. Four commonly used identification schemes are employed to identify monetary policy shocks. Monte Carlo simulations strongly indicate that the lag structure of a VAR model does matter when assessing the quantitative effects of monetary policy shocks. Given the inherent uncertainty about the true lag structure in practice, it is thus important that one compare the impulse response functions from both symmetric lag and asymmetric lag VARs in assessing the effects of monetary policy shocks.     

Volunteering and life or financial shocks: does income and wealth matter?

Volunteering is a dominant social force that signals a healthy state. However, although the literature on volunteering is extensive, knowledge on how life’s discontinuities (life and financial shocks) affect volunteering is limited because most studies work with static (cross-sectional) data. To reduce this shortcoming, we use longitudinal data from Australia (HILDA) that track the same individuals over time to assess how individuals from different income and wealth groups respond to life and financial shocks with respect to volunteering. Although both income and wealth can act as buffers against life shocks by providing stability and reducing vulnerability – which decreases the need to actually change behaviour patterns – we observe more heterogeneity than expected and also stickiness at the lowest income levels. Response delays in post-shock volunteering also suggest that volunteering habits may be driven and influenced by strong commitment and motivation that are not shattered by life or financial shocks. In fact, the amount of time spent volunteering tends to increase after negative income shocks and decrease after positive income shocks.     

Testing theories of reciprocity: Do motivations matter?

One of the key issues for understanding reciprocity is how agents evaluate the kindness of an action. In this paper we investigate experimentally the hypothesis that the motivation driving an action is relevant for its perceived kindness and, as a consequence, for reciprocal behavior. In particular, we examine the hypothesis that, for a given distributional outcome, positive reciprocity is less strong in response to strategically motivated actions than to non-strategically motivated actions. Our results indicate that, both at the aggregate and the individual level, reciprocity is significantly stronger when strategic motivations can be ruled out. These findings suggest that intentions matter and, in particular, that models of intention-based reciprocity should take into account the nature of the motivations behind choices.     

Do credit unions have distinct objectives? Evidence from executive compensation structures

Credit unions compete directly with commercial banks in markets for consumer financial services yet receive an exemption from federal corporate income tax. Commercial banks claim that credit unions are no different than banks and that the credit union tax exemption represents an unfair competitive advantage. Credit unions counter that while they offer similar products and services, they differ from commercial banks in terms of structure and mission, given their not-for-profit, cooperative status. In this paper, we test for substantive differences in the objective functions of commercial banks and nonprofit credit unions by comparing CEO compensation structures. Drawing on the relevant principal–agent literature, we provide several arguments to support the hypotheses that credit union boards of directors establish lower-powered incentive contracts with their CEOs relative to similarly sized commercial banks, and offer lower total compensation. We find that credit union CEOs receive approximately 250% less performance-based compensation relative to CEOs of similarly sized community banks. Bank CEOs also earn approximately 15% to 20% more total compensation on average. The results are generally robust to controlling for CEO- and board-level characteristics, local economic conditions, and institution-level indicators of size, growth, complexity, liquidity and risk. The findings suggest important differences in incentive structures and objectives between banks and credit unions.     

Weakness of investment in Portugal: what role do credit supply and fiscal consolidation shocks play?

Portuguese Economic Journal - In order to illustrate how tightened financial conditions have hampered investment in Portugal, we estimate a Factor Augmented Vector AutoRegressive model (FAVAR) with...     

A bank lending channel or a credit supply shock?

Shifts in credit supply could have a bearing on house prices e.g. through financial innovations and changes in regulation independently of the existence of a bank lending channel of monetary policy. This paper assesses the responses of US house prices to an exogenous credit supply shock and compares them with the effects from variations in credit supply associated with a bank lending channel. The contribution of the study is twofold. First, innovations in credit supply are identified using a mortgage mix variable, thereby accounting for the market-based financial intermediaries. As a robustness check a survey variable of bank lending standards for mortgage loans is also used. Second, the policy-induced credit supply effect on house prices is disentangled and compared with the effect from an exogenous credit supply shock. It is shown that in the first 3 years credit supply shocks affect house prices exogenously rather than through the bank lending channel. Monetary policy has still a large impact on house prices, even when the bank lending channel is ‘turned off’.     

Do incentive systems spur work motivation of inventors in high tech firms? A group-based perspective

In this paper, we explore with a model the potential tensions between the incentive system of groups of inventors and knowledge diversity in a high tech firm. We show that, when all groups are rewarded and able to interact freely with their peers, extrinsic and intrinsic motives are mutually self-reinforcing, leading to crowding in effects. As a result, the level of created knowledge increases in each group, reinforcing the diversity of the firm’s knowledge base. By contrast, competitive rewards and constrained autonomy are likely to produce motivating effects in a small number of groups, limiting knowledge creation to the firm’s core competencies. In this case, the firm can suffer from crowding out effects by the other groups, leading eventually to the extinction of creation in their fields and reduced diversity in the long run. The results are illustrated with empirical findings from a case study of a French high tech firm.     

Idiosyncratic and international transmission of shocks in the G7: Does EMU matter?

This paper analyzes the transmission of shocks across the Group of Seven industrialized countries (G7) before and after the introduction of the euro. We estimate global vector autoregressive (VAR) models for different periods to investigate changes in the domestic and international adjustment of macroeconomic variables following supply, demand, and nominal shocks. The shocks are identified with robust sign restrictions, which we derive from a small open economy dynamic stochastic general equilibrium (DSGE) model. Specifically, we analyze the adjustment of output, inflation, and the real effective exchange rate following those shocks. Our results indicate that changes in the adjustment are due to global convergence rather than to regional‐specific convergence.     

Do dynamics and heterogeneity in panel data models matter?

This article investigates empirically the determinants of central banks’ reserve holdings for a large panel data set of developing and transition countries covering the period from 1975 to 2003. It estimates both a static and a dynamic relationship and applies estimators for homogeneous and heterogeneous panel data. Thereby, it examines the extent to which conclusions of panel data studies on the determinants of international reserve holdings are robust to the inclusion of dynamics as well as to the consideration of heterogeneity across countries. The results show that the neglect of dynamics and heterogeneity in country behaviour may lead to misleading inferences. Independently of the chosen estimation method, the findings suggest that trade openness and external debt are robust determinants of the level of reserves. Central banks take precautionary measures against the downside of the increasing international economic integration.     

Do national political parties matter? Evidence from Italian municipalities

Recently several countries have experienced a drop in popularity of national political parties, accompanied by the success of independent movements (e.g. “Civic Lists” in Italy). I exploit the success of “Civic Lists” in Italian municipalities and use them as a comparison group for party-affiliated politicians, to test whether national parties affect fiscal discipline. Using a Regression Discontinuity Design (RDD), I show that party-affiliated mayors are more fiscally responsible: they run lower deficits, accumulate less debt and reduce expenditures. The effect is significant only for municipalities not constrained by fiscal rules. This suggests that national parties act as a substitute for fiscal rules in constraining politicians. Besides, I provide evidence that the discipline of party-affiliated politicians is linked to better career prospects: party-affiliated mayors have a higher probability of being re-elected and better chances of being promoted to higher levels of government. Alternative stories find less support in the data.     

Do mispricing and financial constraints matter for investment decisions?

This study investigates how mispricing and financing constraints affect ?rms’ future capital investments. We find that when the financing constraints are high, overpriced (underpriced) firms invest more (less) subsequently under previous non-optimal investments. The overpriced (underpriced) firms with precautionary motives invest significantly less subsequently when they are financially constrained. The overall evidence suggests that share mispricing, financial constraints and precautionary motives play a critical role that enables investors to less effectively monitor managers’ real decisions, thus limiting firms’ capital investments.     

Do technology shocks lower hours worked? – Evidence from Japanese industry level data

We examine the response of productivity and hours worked to technology and nontechnology shocks using the Japan Industrial Productivity (JIP) Database. We find that, at the aggregate level, positive technology shocks increase hours worked both in the manufacturing and the nonmanufacturing sector, accounting for a large fraction in the variances of hours worked. At the two- and three-digit industry levels, in contrast, we find that the correlation between productivity and hours worked in response to sectoral technology shocks tends to be negative. Further, we find that neither aggregate nor sectoral technology shocks appear to be the dominant factor underlying fluctuations in hours worked at the disaggregate level. The productivity decline in response to nontechnology shocks is not related to a permanent change in the relative size of industries.     

Do capital flows drive credit growth and consumption in Central and Eastern Europe?

Domestic credit expansion in CEE economies, fuelled in part by foreign capital inflows, helped increase household welfare before the 2008 financial crisis caused a contraction across the region. How strong are the linkages between the current account, domestic credit and consumer spending? This study compiles a quarterly dataset of domestic credit as a share of GDP for 11 CEE European Union members and isolates structural breaks in the series’ growth rates that often align with the 2008 crisis. Vector autoregressive methods, particularly impulse response functions, show that increased current-account deficits lead to increased consumption in six of the 11 countries and increased credit growth in three, and that shocks to credit growth increase consumption in six countries. Capital inflows significantly increase consumption through domestic credit in Slovenia, while the Baltics show a large share of significant effects.