Fire sales by euro area banks and funds: What is their asset price impact?

The assets under management of investment funds have soared in recent years, triggering a debate on their possible implications for financial stability. We contribute to this debate assessing the asset price impact of fire sales in a novel partial equilibrium model of euro area funds and banks calibrated over the period between 2008 and 2017. An initial shock to yields causes funds to sell assets to address investor redemptions, while both banks and funds sell assets to keep their leverage constant. These fire sales generate second-round price effects. We find that the potential losses due to the price impact of fire sales have decreased over time for the system. The contribution of funds to this impact is lower than that of banks. However, funds’ relative contribution has risen due to their increased assets under management and banks’ lower leverage and rebalancing towards loans. Should this trend continue, funds will become an increasingly important source of systemic risk.     

Overcapacities in banking: Measurement,trends and determinants

Global banks face profitability challenges since the global financial crisis. Besides cyclical factors, structural features such as overcapacities have been identified as root causes. While policymakers agree on the need for bank consolidation, there is less consensus on the definition and measurement of overcapacities in banking. This paper contributes by conceptualising and formalising the different dimensions of overcapacities in banking and by constructing a novel measure thereof. In addition, it empirically tests the main determinants of overcapacities in banking from 2006 to 2017 and assesses their relative importance. The results indicate that non-bank competition, the interest rate environment and bank business models are the most important driving factors of banking sector overcapacities. This is because shadow banks, benefitting from regulatory arbitrage, have altered banks’ capacity needs, low rates compressed margins and increased pressure to improve cost efficiencies, and retail-oriented business models have operated extensive branch networks entailing heavy fixed costs.     

Material Offshoring: Alternate Measures

Industry measures of offshoring of material inputs are often generated using the proportionality assumption applied to aggregate import data—that the import share of each commodity used in the production process for a particular industry is similar to the import share of a commodity for the total economy. This note compares estimates of offshoring for the Canadian manufacturing sector derived using this assumption to four alternatives: two measures that use direct measures of firm‐based imports, and two hybrid measures that use both input and import information. These indirect measures are compared to survey estimates that directly assess import intensity in the production process in an effort to evaluate which indirect method yields more reasonable offshoring measures.     

Product attributes and models of multiple discreteness

Demand for product characteristics is examined within the context of models that allow for both corner and interior solutions corresponding to zero and non-zero demand. Product attribute information is associated with marginal utility and curvature (satiation) parameters of various utility functions. Empirical applications demonstrate the need for incorporating characteristics in a fairly general way. We also compare our approach to an ideal point and pure Lancasterian versions of our nonlinear utility model. The data support our model over either the ideal point or Lancasterian variants.     

Tax competition and tax structure in open federal economies: Evidence from OECD countries with implications for the European Union

Tax competition arguments suggest that governments that operate in an open economy (such as local governments) should not and will not rely on non-benefit taxes, such as the income tax. Yet we observe reliance on income taxes by local governments in many countries, and such reliance changes over time. Evidence from a panel data set of 13 OECD countries over the period 1975-1984 suggests that competition between levels of government (resulting in a vertical fiscal externality) and between governments at the same level (resulting in a horizontal fiscal externality) provide some economic rationale for these changes. Moreover, the evidence indicates that the vertical and horizontal fiscal externalities interact. These results have some interesting implications for fiscal policy in the European Union, particularly as the EU continues to evolve. One implication for the EU is that enlargement that increases tax base disparities within the EU (and is not accompanied by an EU-level income tax) will tend to lower national income tax rates, although this must be qualified because it also depends on the mobility of the population. A second implication is that fiscal expansion of the EU to include an EU-level income tax may tend to lower the reliance of national governments on income taxes through the vertical externality, but may also tend to equalize tax bases across countries, and so increase reliance on national income taxes through the horizontal externality.     

Local elections and consumption insurance

During our sample period from 1987 to 2002, Chinese villages completed the transition from government‐appointed village leaders to elected ones. This article examines if and how much democratic elections of the village leaders affected consumption insurance by Chinese village residents. Exploring a panel dataset of 1,400 households from this period, we find that consumption insurance is around 20 percent more complete with elected village leaders. Furthermore, local elections improve consumption insurance only for the poor and middle‐income farmers, but not for the rich. The results are robust when we allow for pretrending, potential endogeneity of elections, and higher measurement errors for rich residents. We also find that the effects on consumption insurance are stronger when closer to the upcoming election year and when the village committees consist largely of non‐Communist Party members. These findings suggest that the election effects on consumption insurance partly come from increasing accountability to local constituents.     

The animal spirits hypothesis and the Benhabib–Farmer condition for indeterminacy

This paper provides a self-contained review of the introduction of the animal spirits hypothesis into the infinite horizon optimal‐growth model. The analysis begins with an economic discussion of Pontryagin's maximum principles. Thereafter, I develop a version of the increasing-returns Benhabib–Farmer model by showing the possible sub-optimality of the central planner solution and deriving the bifurcation condition for indeterminacy. Moreover, I give some insights on how to model intrinsic and extrinsic uncertainty. Finally, analyzing the equilibrium condition of the labor market, I provide an intuitive rationale for the mechanism that in this model might lead prophecies to be self-fulfilling.     

Social contracts,markets and efficiency: Groundwater irrigation in North India

This paper uses primary data to analyze the institutions and informal markets that govern groundwater allocation in a sugarcane-cultivating village in North India. We find that, in contrast to earlier literature, the observed water trades result in efficient water allocation across farms. We interpret this and other stylized facts in terms of a social contract using a simple bargaining model with limited inter-player transfers. Poor functioning of the power sector leads to reduced pumping and a water supply constraint. Simulations show that power supply reform can significantly increase farm yields, and be financed out of increased farm profits.     

Microfinance and gender empowerment

In this paper, we develop a theoretical model of household production, bargaining and credit to analyse how access to microcredit affects intra-household decision-making and welfare, and identify conditions under which female household members are most likely to benefit. We show that, consistent with ethnographic accounts of the impact of microcredit programmes on poor households, access to loans can lead to a variety of outcomes for intra-household decision-making and welfare depending on initial conditions and that, in some instances, women borrowers may experience a decline in welfare. We identify two instances in which a woman is most likely to benefit: when there is scope for investing the loan profitably in a joint activity, and when a large share of the household budget is devoted to household public goods.     

Chinese competition and product variety of Indian firms

Using detailed firm-product-year data across manufacturing industries in India, and exploiting the exogenous nature of China’s entry into the WTO in 2001, we investigate the link between the impact of import penetration from China on the product variety of Indian manufacturing firms. We find: (i) robust and significant effects of product drop, with the effect coming only from competitive pressure in the domestic market; (ii) robust evidence of product drop or ‘creative destruction’ only for firms belonging to the lower-half of the size distribution; (iii) firms drop their peripheral/marginal products and concentrate on the core ones; and (iv) the result is strongest for firms producing intermediate goods. For an average Indian manufacturing firm, a 10 percentage point increase in India’s Chinese share of imports in the domestic market reduces the product scope of firms by 1.7–4.4%. In contrast, we find positive effects on product scope when firms are importing intermediate goods. We also find evidence of significant productivity effects and within-firm factor reallocation. Our results are consistent to a battery of robustness checks and IV estimation.