Credit derivatives and loan pricing

This paper examines the relation between the new markets for credit default swaps (CDS) and banks’ pricing of syndicated loans to US corporates. We find that changes in CDS spreads have a significantly positive coefficient and explain about 25% of subsequent monthly changes in aggregate loan spreads during 2000–2005. Moreover, when compared to traditional explanatory factors, they turn out to be the dominant determinant of loan spreads. In particular, they explain loan rates much better than same rated bonds. This suggests that CDS prices contain, beyond general credit risk, to a substantial extent information relevant for bank lending. We also find that, over time, new information from CDS markets is faster incorporated into loans, but information from other markets is not. Overall, our results indicate that the markets for CDS have gained an important role for banks.     

The Saving Collapse during the Transition in Eastern Europe

Almost all of the transition economies in Eastern Europe andthe former Soviet Union experienced a severe decline in theirnational saving rates. The saving collapse could be explainedby the elimination of involuntary saving, a feature of centralplanning, or by a change in equilibrium saving reflecting thenew economic-circumstances following the end of socialism. Thepredicted saving rates of market economies with the same fundamentalsas the transition economies before the transition are computedto test for the presence of involuntary saving. The resultsprovide some support for the hypothesis of consumption smoothing.Also considered is whether differences in the extent of liberalizationaffected saving rates in the cross section of transition economies.This is found to be the case: greater liberalization is associationwith lower saving with a one-year lag. To the extent that liberalizationis associated with future growth, this finding is consistentwith smoothing in the face of output evolving along J-curve.     

Joint Management of Wildlife and Livestock Disease

We analyze a bioeconomic model of a multiple-host disease problem involving wildlife and livestock. The social planner’s choices include targeted (i.e., infectious versus healthy) livestock harvests, non-targeted wildlife harvests, environmental habitat variables, and on-farm biosecurity to prevent cross-species contacts. The model is applied to bovine tuberculosis among Michigan white-tailed deer and cattle. We find optimal controls may target the livestock sector more stringently when the livestock sector exhibits low value relative to the wildlife sector. This is in contrast with the conventional wisdom on the issue that controls should primarily target wildlife species that serve as disease reservoirs.     

Perspektiven zur aktuellen Kapazitätsmarktdiskussion in Deutschland

Over the last years, proposals for the implementation of capacity mechanisms in Germany have been published. However, some basic questions have not been answered yet: regarding the need for capacities, the functioning of the energy-only-market and the objective and type of a possible capacity mechanism. The actual need for capacities is an important input factor for capacity mechanisms and crucial to determine whether these are required. Currently, uncertainties prevail due to differing assumptions regarding the capacity credits of renewables and other capacities. Existing studies show highly diverse estimates for capacity needs after 2020. It is also unclear whether the energy-only-market can provide sufficient investment incentives. The current low prices cannot be interpreted as a sign for market failure. They represent overcapacities due to European integration and increasing renewable shares. The mid-term effects of increasing renewable shares on electricity prices still need to be analyzed in detail. At last, the objective of a capacity mechanism is not clear in the German context. This makes the selection of an adequate capacity mechanism and an effective market design more complicated. Furthermore, effects on the energy market need to be considered. Parameterization errors can be expensive. Also, capacity mechanisms do not necessarily guarantee higher investment security. As a consequence, the authors advise against the prompt introduction of a capacity mechanism, especially as the new EnWG guarantees the operation of system-relevant power plants until 2017. Instead, an incremental improvement of the energy-only market and in-depth analysis of the described questions seam necessary.     

Sustainable Carbon Cycles: A Framework for the Ramp-up of Carbon Capture?

Intereconomics - With its communication “Sustainable Carbon Cycles”, the European Commission has opened a new chapter in European climate policy. For the first time, natural and...     

Bailouts and the modeling of bank distress

In this article, we develop a model for predicting distress events among large banks. We show that a bailout possibility induces different behaviors among small and large banks, and the proposed failure prediction model for large banks is thus considerably different from that for small banks. Major bank-level fundamentals show opposite conjecture directions for large versus small banks. The Tier 1 capital ratio, which is under the scrutiny of regulators and investors, has almost no distress prediction power among large banks. However, banks rescued by governments tend to maintain a lower Tier 1 ratio. The cost of funding in large banks is negatively correlated with the probability of failure, reflecting the fact that lenders internalize the too-big-to-fail (TBTF) policy and demand a lower interest rate from TBTF banks.     

Dispersion in Dispersion: Measuring Establishment-Level Differences in Productivity

We describe new experimental productivity dispersion statistics, Dispersion Statistics on Productivity (DiSP), jointly produced by the Bureau of Labor Statistics (BLS) and the Census Bureau, that complement the official BLS industry-level productivity statistics. The BLS has a long history of producing industry-level productivity statistics, which represent the average establishment-level productivity within industries when appropriately weighted. These statistics cannot, however, tell us about the variation in productivity levels across establishments within those industries. Dispersion in productivity across businesses can provide information about the nature of competition and frictions within sectors and the sources of rising wage inequality across businesses. DiSP data show enormous differences in productivity across establishments within industries in the manufacturing sector. We find substantial variation in dispersion across industries, increasing dispersion from 1997 to 2016, and countercyclical total factor productivity dispersion. We hope DiSP will enable further research into understanding productivity differences across industries and establishments and over time.     

Investment and employment from large-scale photovoltaics up to 2050

Investments in renewable energy were at US$211 billion in 2010 and developing economies overtook developed ones for the first time in terms of new financial investments in renewable energy. Photovoltaics for generation of electricity from sunlight has the highest growth rate among the competing forms of renewable energy and has now begun to achieve grid parity in some regions. If these trends of investments continue, solar energy will play a major economic role. We analyze these developments and assess the ensuing amounts of investment and employment for a range of sizes of the sector of solar energy. We find that by 2050 electricity from photovoltaics could cover up to 90% of total global energy demand, with a then global capital investment in our main scenario in photovoltaic manufacturing capacity at 500 billion US$211 billion in 2010 and developing economies overtook developed ones for the first time in terms of new financial investments in renewable energy. Photovoltaics for generation of electricity from sunlight has the highest growth rate among the competing forms of renewable energy and has now begun to achieve grid parity in some regions. If these trends of investments continue, solar energy will play a major economic role. We analyze these developments and assess the ensuing amounts of investment and employment for a range of sizes of the sector of solar energy. We find that by 2050 electricity from photovoltaics could cover up to 90% of total global energy demand, with a then global capital investment in our main scenario in photovoltaic manufacturing capacity at 500 billion US₂₀₁₀ by around 2030 and 1,500 billion by 2050. Employment in photovoltaic manufacturing is predicted to rise to 6 million by 2050. Sensitivity analysis with respect to the core parameters of assumptions is supplied.