European Central Bank

Displaying 1-40 of 265 results

  • White Papers // Jul 2011

    Capital Flows, Push Versus Pull Factors And The Global Financial Crisis

    The causes of the 2008 collapse and subsequent surge in global capital flows remain an open and highly controversial issue. Employing a factor model coupled with a dataset of high-frequency portfolio capital flows to 50 economies, the paper finds that common shocks - key crisis events as well as changes...

    Provided By European Central Bank

  • White Papers // Jul 2011

    Real-time Data And Fiscal Policy Analysis: A Survey Of The Literature

    This paper surveys the empirical research on fiscal policy analysis based on real-time data. This paper can be broadly divided in three groups that focus on: the statistical properties of revisions in fiscal data; the political and institutional determinants of fiscal data revisions and of one-year-ahead projection errors by governments...

    Provided By European Central Bank

  • White Papers // Jun 2011

    Theoretical Notes On Bubbles And The Current Crisis

    The authors explore a view of the crisis as a shock to investor sentiment that led to the collapse of a bubble or pyramid scheme in financial markets. They embed this view in a standard model of the financial accelerator and explore its empirical and policy implications. In particular, they...

    Provided By European Central Bank

  • White Papers // Jun 2011

    Sovereign Credit Ratings And Financial Markets Linkages: Application To European Data

    The authors use EU sovereign bond yield and CDS spreads daily data to carry out an event study analysis on the reaction of government yield spreads before and after announcements from rating agencies (Standard & Poor's, Moody's, Fitch). The results show: significant responses of government bond yield spreads to changes...

    Provided By European Central Bank

  • White Papers // Jun 2011

    Do Financial Investors Destabilize The Oil Price?

    In this paper, the authors assess whether and to what extent financial activity in the oil futures markets has contributed to destabilize oil prices in recent years. They define a destabilizing financial shock as a shift in oil prices that is not related to current and expected fundamentals, and thereby...

    Provided By European Central Bank

  • White Papers // Jun 2011

    Systemic Risk-Taking: Amplification Effects, Externalities, And Regulatory Responses

    This paper analyzes the efficiency of risk-taking decisions in an economy that is prone to systemic risk, captured by financial amplification effects that occur in response to strong adverse shocks. It shows that decentralized agents who have unconstrained access to a complete set of Arrow securities choose to expose themselves...

    Provided By European Central Bank

  • White Papers // Jun 2011

    The Basel III Framework For Liquidity Standards And Monetary Policy Implementation

    Basel III introduces for the first time an international framework for liquidity risk regulation, reflecting the experience of excessive liquidity risk taking of banks in the run up to the financial crisis that erupted in August 2007, and associated negative externalities. As central banks play a crucial role in the...

    Provided By European Central Bank

  • White Papers // Jun 2011

    Determinants Of Credit-Less Recoveries

    This paper aims to shed light on the characteristics and particularly the determinants of credit-less recoveries. After building a dataset and documenting some stylised facts of credit-less recoveries in emerging market economies, this paper uses panel probit models to analyze key determinants of credit-less recoveries. The authors' main findings are...

    Provided By European Central Bank

  • White Papers // Jun 2011

    Systemic Risk And Financial Development In A Monetary Model

    In a stochastic pure endowment economy with money but no financial markets, two types of agents trade one non-durable goods using two alternative types of cash constraints. Simulations of the corresponding variants are compared to Arrow-Debreu and Autarky equilibriums. First, this illustrates how financial innovation or financial regression, including systemic...

    Provided By European Central Bank

  • White Papers // May 2011

    Have Euro Area And EU Economic Governance Worked? Just The Facts

    The authors test whether two key elements of the EU and euro area economic governance framework, the Stability and Growth Pact and the Lisbon Strategy, have had any impact on macroeconomic outcomes. They test this proposition using a difference-in-difference approach on a panel of over 30 countries, some of which...

    Provided By European Central Bank

  • White Papers // May 2011

    The Predictive Content Of Sectoral Stock Prices: A US-Euro Area Comparison

    This paper examines the out-of-sample forecast performance of sectoral stock market indicators for real GDP, private consumption and investment growth up to 4 quarters ahead in the US and the euro area. The findings are that the predictive content of sectoral stock market indicators: is potentially strong, particularly for the...

    Provided By European Central Bank

  • White Papers // May 2011

    Fiscal Data Revisions In Europe

    Public deficit figures are subject to revisions, as most macroeconomic aggregates are. Nevertheless, in the case of Europe, the latter could be particularly worrisome given the role of fiscal data in the functioning of EU's multilateral surveillance rules. Adherence to such rules is judged upon initial releases of data, in...

    Provided By European Central Bank

  • White Papers // May 2011

    Exact Likelihood Computation For Nonlinear DSGE Models With Heteroskedastic Innovations

    Phenomena such as the Great Moderation have increased the attention of macro-economists towards models where shock processes are not (log-) normal. This paper studies a class of discrete-time rational expectations models where the variance of exogenous innovations is subject to stochastic regime shifts. The authors first show that, up to...

    Provided By European Central Bank

  • White Papers // May 2011

    How Wages Respond To Shocks: Asymmetry In The Speed Of Adjustment

    The time series of various economic variables often exhibit asymmetry: decreases in the values tend to be sharp and fast, whereas increases usually occur slowly and gradually. The authors detect signs of an analogous asymmetry in firms' wage setting behaviour on the basis of managerial surveys, with employers tending to...

    Provided By European Central Bank

  • White Papers // May 2011

    The Stock Market Reaction To The 2005 Non-Tradable Share Reform In China

    During 2005-2006, the Chinese government implemented a reform aimed at eliminating the so-called Non-Tradable Shares (NTS), shares typically held by the State or by politically connected institutional investors that were issued at the early stage of financial market development. The analysis, based on the time series of risk factors and...

    Provided By European Central Bank

  • White Papers // May 2011

    Financial Frictions And Optimal Monetary Policy In An Open Economy

    A growing number of papers have studied positive and normative implications of financial frictions in DSGE models. The authors contribute to this literature by studying the welfare-based monetary policy in a two-country model characterized by financial frictions, alongside a number of key features, like capital accumulation, non-traded goods and foreign-currency...

    Provided By European Central Bank

  • White Papers // May 2011

    Who Invests In Home Equity To Exempt Wealth From Bankruptcy?

    Homestead exemptions to personal bankruptcy allow households to retain their home equity up to a limit determined at the state level. Households that may experience bankruptcy thus have an incentive to bias their portfolios towards home equity. Using US household data from the Survey of Income and Program Participation for...

    Provided By European Central Bank

  • White Papers // May 2011

    A Monetary Policy Strategy In Good And Bad Times: Lessons From The Recent Past

    The authors evaluate the ECB's monetary policy strategy against the underlying economic structure of the euro area economy, in normal times and in times of severe financial dislocations. They show that in the years preceding the financial crisis that started in 2007 the strategy was successful at ensuring macroeconomic stability...

    Provided By European Central Bank

  • White Papers // May 2011

    The Bank Lending Channel: Lessons From The Crisis

    The 2007-2010 financial crises highlighted the central role of financial intermediaries' stability in buttressing a smooth transmission of credit to borrowers. While results from the years prior to the crisis often cast doubts on the strength of the bank lending channel, recent evidence shows that bank-specific characteristics can have a...

    Provided By European Central Bank

  • White Papers // May 2011

    On The Importance Of Sectoral And Regional Shocks For Price-Setting

    The authors use a novel disaggregate sectoral euro area data set with a regional breakdown to investigate price changes and suggest a new method to extract factors from over-lapping data blocks. This allows them to separately estimate aggregate, sectoral, country-specific and regional components of price changes. They thereby provide an...

    Provided By European Central Bank

  • White Papers // Apr 2011

    Business Cycle Dynamics Under Rational Inattention

    The authors develop a dynamic stochastic general equilibrium model with rational inattention by households and firms. Consumption responds slowly to interest rate changes because households decide to pay little attention to the real interest rate. Prices respond quickly to some shocks and slowly to other shocks. The mix of fast...

    Provided By European Central Bank

  • White Papers // Apr 2011

    Financial Remoteness And The Net External Position

    This paper shows that, controlling for standard determinants of net external positions; financially-remote countries exhibit more positive net external positions. This finding is found to be stronger for less advanced countries, hinting at external funding problems for more remote countries. Being located near financially very open countries, being in currency...

    Provided By European Central Bank

  • White Papers // Apr 2011

    Securitization, Bank Lending And Credit Quality: The Case Of Spain

    While the 2007-2010 financial crises have hit a variety of countries asymmetrically, the case of Spain is particularly illustrative: this country experienced a pronounced housing bubble partly funded via spectacular developments in its securitization markets leading to looser credit standards and subsequent financial stability problems. The authors analyze the sequential...

    Provided By European Central Bank

  • White Papers // Apr 2011

    The Effectiveness Of Monetary Policy In Steering Money Market Rates During The Recent Financial Crisis

    The recent financial crisis deeply affected the money market yield curve and thus, potentially, the proper functioning of the interest rate channel of monetary policy transmission. Therefore, the authors analyze the effectiveness of monetary policy in steering euro area money market rates using two measures: first, the predictability of money...

    Provided By European Central Bank

  • White Papers // Apr 2011

    Systemic Risk Diagnostics: Coincident Indicators And Early Warning Signals

    The authors propose a novel framework to assess financial system risk. Using a dynamic factor framework based on state-space methods, they construct coincident measures ('Thermometers') and a forward looking indicator for the likelihood of simultaneous failure of a large number of financial intermediaries. The indicators are based on latent macro-financial...

    Provided By European Central Bank

  • White Papers // Apr 2011

    Welfare Costs Of Inflation And The Circulation Of US Currency Abroad

    Empirical studies of the "Shoe-leather" costs of inflation are typically computed using M1 as a measure of money. Yet, official data on M1 includes all currency issued, regardless of the country of residence of the holder. Using monetary data adjusted for US dollars abroad, the authors show that the failure...

    Provided By European Central Bank

  • White Papers // Apr 2011

    The ECBs New Multi-country Model For The Euro Area: NMCM - With Boundedly Rational Learning Expectations

    Rational expectations has been the dominant way to model expectations, but the literature has quickly moved to a more realistic assumption of boundedly rational learning where agents are assumed to use only a limited set of information to form their expectations. A standard assumption is that agents form expectations by...

    Provided By European Central Bank

  • White Papers // Apr 2011

    The ECBs New Multi-country Model For The Euro Area: NMCM - Simulated With Rational Expectations

    The model presented here is a New estimated medium-scale Multi-Country Model (NMCM) which covers the five largest euro area countries and is used for forecasting and scenarios analysis at the European Central Bank. The model has a tight theoretical structure which allows for non-unitary elasticity of substitution, non-constant augmenting technical...

    Provided By European Central Bank

  • White Papers // Apr 2011

    Price And Wage Setting In Portugal: Learning By Asking

    This paper presents the main findings of a survey conducted on a sample of Portuguese firms. The main aim was to identify some relevant characteristics about the dynamics of prices and wages in Portugal. The most important conclusions are: changes to wages are more synchronized than changes to prices; most...

    Provided By European Central Bank

  • White Papers // Apr 2011

    Distributional Dynamics Under Smoothly State-Dependent Pricing

    Starting from the assumption that firms are more likely to adjust their prices when doing so is more valuable, this paper analyzes monetary policy shocks in a DSGE model with firm-level heterogeneity. The model is calibrated to retail price microdata, and inflation responses are decomposed into "Intensive", "Extensive", and "Selection"...

    Provided By European Central Bank

  • White Papers // Apr 2011

    Central Bank Communication On Financial Stability

    Central banks regularly communicate about financial stability issues, by publishing Financial Stability Reports (FSRs) and through speeches and interviews. The paper asks how such communications affect financial markets. Building a unique dataset, it provides an empirical assessment of the reactions of stock markets to more than 1000 releases of FSRs...

    Provided By European Central Bank

  • White Papers // Apr 2011

    Wage Structure Effects Of International Trade: Evidence From A Small Open Economy

    In the last decades, international trade has increased between industrialised countries and between high- and low-wage countries. This important change has raised questions on how international trade affects the labour market. In this spirit, this paper aims to investigate the impact of international trade on wage dispersion in a small...

    Provided By European Central Bank

  • White Papers // Apr 2011

    Nowcasting Inflation Using High Frequency Data

    This paper proposes a methodology to nowcast and forecast inflation using data with sampling frequency higher than monthly. The nowcasting literature has been focused on GDP, typically using monthly indicators in order to produce an accurate estimate for the current and next quarter. This paper exploits data with weekly and...

    Provided By European Central Bank

  • White Papers // Apr 2011

    Structural Reforms And Macroeconomic Performance In The Euro Area Countries: A Model-based Assessment

    The authors quantitatively assess the macroeconomic effects of country-specific supply-side reforms in the euro area by simulating EAGLE, a multi-country dynamic general equilibrium model. They consider reforms in the labor and services markets of Germany (or, alternatively, Portugal) and the rest of the euro area. Their main results are as...

    Provided By European Central Bank

  • White Papers // Apr 2011

    Business Cycle Synchronisation: Disentangling Trade And Financial Linkages

    Drawing on a large sample of countries, this paper explores whether closer economic ties between countries foster business cycle synchronisation and disentangles the role of the various channels, including trade and financial linkages as well as the similarity in sectoral specialisation. Overall, the results confirm that trade integration fosters business...

    Provided By European Central Bank

  • White Papers // Apr 2011

    Macroeconomic Implications Of Downward Wage Rigidities

    Growth of wages, unemployment, employment and vacancies exhibit strong asymmetries between expansionary and contractionary phases. In this paper the authors analyze to what degree downward wage rigidities in the bargaining process affect other variables of the economy. They introduce asymmetric wage adjustment costs in a New-Keynesian DSGE model with search...

    Provided By European Central Bank

  • White Papers // Apr 2011

    What Lies Beneath? A Time-varying Favar Model For The UK Transmission Mechanism

    This paper uses a time-varying Factor Augmented VAR to investigate the evolving transmission of monetary policy and demand shocks in the UK. Simultaneous estimation of time-varying impulse responses of a large set of macroeconomic variables and disaggregated prices suggest that the response of inflation, money supply and asset prices to...

    Provided By European Central Bank

  • White Papers // Apr 2011

    Fiscal Developments And Financial Stress: A Threshold VAR Analysis

    The authors use a threshold VAR analysis to study whether the effects of fiscal policy on economic activity differ depending on financial market conditions. In particular, they investigate the possibility of a non-linear propagation of fiscal developments according to different financial market stress regimes. More specifically they employ a quarterly...

    Provided By European Central Bank

  • White Papers // Apr 2011

    Using The Global Dimension To Identify Shocks With Sign Restrictions

    Identification of structural VARs using sign restrictions has become increasingly popular in the academic literature. This paper argues that identification of shocks can benefit from introducing a global dimension, and shows that summarising information by the median of the available impulse responses - as commonly done in the literature -...

    Provided By European Central Bank

  • White Papers // Apr 2011

    Financial Imbalances And Financial Fragility

    This paper develops a general equilibrium model to analyze the link between financial imbalances and financial crises. The model features an interbank market subject to frictions and where two equilibria may (co-)exist. The normal times equilibrium is characterized by a deep market with highly leveraged banks. The crisis time's equilibrium...

    Provided By European Central Bank

  • White Papers // Apr 2010

    Wage Setting And Wage Flexibility In Ireland - Results From A Firm-Level Survey

    This paper investigates the wage-setting behaviour of Irish firms. The authors place particular emphasis on the use of flexible pay components and examine how these allow firms to deal with shocks requiring a reduction in costs without having to cut base wages. The results presented in this paper are based...

    Provided By European Central Bank

  • White Papers // Apr 2010

    Nominal And Real Wage Rigidities. In Theory And In Europe

    In this paper the author studies the relation between Real Wage Rigidity (RWR) and nominal price and wage rigidity. The author shows that in a standard DSGE model RWR is mainly affected by the interaction of the two nominal rigidities and not by other structural parameters. The degree of RWR...

    Provided By European Central Bank

  • White Papers // Apr 2010

    Credit Supply - Identifying Balance-Sheet Channels With Loan Applications And Granted Loans

    To identify credit availability the authors analyze the extensive and intensive margins of lending with loan applications and all loans granted in Spain. They find that during the period analyzed both worse economic and tighter monetary conditions reduce loan granting, especially to firms or from banks with lower capital or...

    Provided By European Central Bank

  • White Papers // Apr 2010

    Price And Trading Response To Public Information

    In their seminal paper French and Roll (1986) postulate that public information affects prices before anyone can trade on it. In contrast, several models assuming heterogeneous investors show that public news releases are directly followed by high trading volume. Empirical evidence on this question is still mixed, primarily due to...

    Provided By European Central Bank

  • White Papers // Apr 2010

    Evolving Phillips Trade-Off

    The authors characterise the evolution of the U.S. unemployment-inflation trade-off since the late XIX century era via a Bayesian time-varying parameters structural VAR. The Great Inflation episode appears as historically unique along several dimensions. In particular, the shape of the 'Phillips loop' - which is defined in terms of the...

    Provided By European Central Bank

  • White Papers // Apr 2010

    In Dubio Pro CES - Supply Estimation With Mis-Specified Technical Change

    Capital-labor substitution and Total Factor Productivity (TFP) estimates are essential features of growth and income distribution models. In the context of a Monte Carlo exercise embodying balanced and near balanced growth, the authors demonstrate that the estimation of the substitution elasticity can be substantially biased if the form of technical...

    Provided By European Central Bank

  • White Papers // Apr 2010

    How Far Are We From The Slippery Slope? The Laffer Curve Revisited

    The authors characterize the Laffer curves for labor taxation and capital income taxation quantitatively for the US, the EU-14 and individual European countries by comparing the balanced growth paths of a neoclassical growth model featuring "Constant Frisch Elasticity" (CFE) preferences. They derive properties of CFE preferences. They provide new tax...

    Provided By European Central Bank

  • White Papers // Apr 2010

    Market Power And Fiscal Policy In OECD Countries

    The authors compute average mark-ups as a measure of market power throughout time and study their interaction with fiscal policy and macroeconomic variables in a VAR framework. From impulse-response functions the results, with annual data for a set of 14 OECD countries covering the period 1970-2007, show that the mark-up...

    Provided By European Central Bank

  • White Papers // Apr 2010

    The Impact Of Numerical Expenditure Rules On Budgetary Discipline Over The Cycle

    The authors study the impact of numerical expenditure rules on the propensity of governments to deviate from expenditure targets in response to surprises in cyclical conditions. Theoretical considerations suggest that due to political fragmentation in the budgetary process expenditure policy might be prone to a pro-cyclical bias. However, this tendency...

    Provided By European Central Bank

  • White Papers // Apr 2010

    Food Price Pass-through In The Euro Area The Role Of Asymmetries And Non-Linearities

    In this paper the authors analyse the pass-through of a commodity price shock along the food price chain in the euro area. Unlike the existing literature, which mainly focuses on food commodity prices quoted in international markets, they use a novel database that accounts for the role of the Common...

    Provided By European Central Bank

  • White Papers // Mar 2010

    The Term Structure Of Risk Premia: New Evidence From The Financial Crisis

    This paper calibrates the term structure of risk premia before and during the 2007/2008 financial crisis using a new calibration approach based on credit default swaps. The risk premium term structure was flat before the crisis and downward sloping during the crisis. The instantaneous risk premium increased significantly during the...

    Provided By European Central Bank

  • White Papers // Mar 2010

    Asset Pricing, Habit Memory, And The Labor Market

    This paper studies the asset pricing and the business cycle implications of habit formation in a production economy with capital adjustment costs and endogenous labor supply. A specification of internal habit in the mix of consumption and leisure which minimizes the wealth effect on labor supply is introduced into an...

    Provided By European Central Bank

  • White Papers // Mar 2010

    Inflation Risks And Inflation Risk Premia

    This paper investigates the link between the perceived inflation risks in macro-economic forecasts and the inflation risk premia embodied in financial instruments. The authors first provide some stylized facts about the term structure of inflation compensation, inflation expectations and inflation risk premia in the euro area bond market. Latent factor...

    Provided By European Central Bank

  • White Papers // Feb 2010

    Housing, Consumption And Monetary Policy: How Different Are The US And The Euro Area?

    The paper provides a systematic empirical analysis of the role of the housing market in the macroeconomy in the US and in the euro area. First, it establishes some stylised facts concerning key variables in the housing market, such as the real house price, residential investment and mortgage debt on...

    Provided By European Central Bank

  • White Papers // May 2010

    Forecasting With DSGE Models

    In this paper the authors review the methodology of forecasting with log-linearised DSGE models using Bayesian methods. They focus on the estimation of their predictive distributions, with special attention being paid to the mean and the covariance matrix of h-step ahead forecasts. In the empirical analysis, they examine the forecasting...

    Provided By European Central Bank

  • White Papers // Apr 2010

    Labor Market Institutions And The Business Cycle Unemployment Rigidities Vs. Real Wage Rigidities

    This paper investigates the importance of labor market institutions for inflation and unemployment dynamics. Using the New Keynesian framework the authors argue that labor market institutions should be divided into those institutions that cause Unemployment Rigidities (UR) and those that cause Real Wage Rigidities (RWR). The two types of institutions...

    Provided By European Central Bank

  • White Papers // Apr 2010

    Inter-Industry Wage Differentials In EU Countries: What Do Cross-Country Time Varying Data Add To The Picture?

    This paper documents the existence and main patterns of inter-industry wage differentials across a large number of industries for 8 EU countries (Belgium, Germany, Greece, Hungary, Ireland, Italy, Netherlands, and Spain) at two points in time (in general 1995 and 2002) and explores possible explanations for these patterns. The analysis...

    Provided By European Central Bank

  • White Papers // May 2010

    Substitution Between Domestic And Foreign Currency Loans In Central Europe. Do Central Banks Matter?

    In this paper the authors analyse the impact of monetary policy on total bank lending in the presence of a developed market for foreign currency denominated loans and potential substitutability between domestic and foreign currency loans. The results, based on a panel of four biggest Central European countries (the Czech...

    Provided By European Central Bank

  • White Papers // May 2010

    Modelling Anti-Inflationary Monetary Targeting: With An Application To Romania

    This paper attempts to characterise an anti-inflationary Monetary Targeting (MT) regime. In order to derive a formal representation of this regime, the authors formulate the central bank's optimisation problem under the assumption that it is possible for the monetary targeted variable to have an impact on inflation. They apply a...

    Provided By European Central Bank

  • White Papers // Apr 2010

    Global Commodity Cycles And Linkages A Favar Approach

    In this paper the authors examine linkages across non-energy commodity price developments by means of a Factor-Augmented VAR model (FAVAR). From a set of non-energy commodity price series, they extract two factors, which they identify as common trends in metals and a food prices. These factors are included in a...

    Provided By European Central Bank

  • White Papers // Apr 2010

    The External Finance Premium In The Euro Area A Useful Indicator For Monetary Policy?

    In this paper the author estimates a New Keynesian Dynamic Stochastic General Equilibrium model for the Euro Area, which closely follows the structure of the model developed by Smets and Wouters (2003, 2005, 2007), with the addition of the so-called financial accelerator mechanism developed in Bernanke, Gertler and Gilchrist (1999)....

    Provided By European Central Bank

  • White Papers // May 2007

    Econometric Analyses With Backdated Data: Unified Germany And The Euro Area

    In this paper the authors compare alternative approaches for the construction of time series of macroeconomic variables for Unified Germany prior to 1991, and then use them for the construction of corresponding time series for the euro area. The resulting series for Germany and the euro area are compared with...

    Provided By European Central Bank

  • White Papers // Jun 2011

    Theoretical Notes On Bubbles And The Current Crisis

    The authors explore a view of the crisis as a shock to investor sentiment that led to the collapse of a bubble or pyramid scheme in financial markets. They embed this view in a standard model of the financial accelerator and explore its empirical and policy implications. In particular, they...

    Provided By European Central Bank

  • White Papers // Jun 2011

    Sovereign Credit Ratings And Financial Markets Linkages: Application To European Data

    The authors use EU sovereign bond yield and CDS spreads daily data to carry out an event study analysis on the reaction of government yield spreads before and after announcements from rating agencies (Standard & Poor's, Moody's, Fitch). The results show: significant responses of government bond yield spreads to changes...

    Provided By European Central Bank

  • White Papers // Jun 2011

    Do Financial Investors Destabilize The Oil Price?

    In this paper, the authors assess whether and to what extent financial activity in the oil futures markets has contributed to destabilize oil prices in recent years. They define a destabilizing financial shock as a shift in oil prices that is not related to current and expected fundamentals, and thereby...

    Provided By European Central Bank

  • White Papers // Jun 2011

    Systemic Risk-Taking: Amplification Effects, Externalities, And Regulatory Responses

    This paper analyzes the efficiency of risk-taking decisions in an economy that is prone to systemic risk, captured by financial amplification effects that occur in response to strong adverse shocks. It shows that decentralized agents who have unconstrained access to a complete set of Arrow securities choose to expose themselves...

    Provided By European Central Bank

  • White Papers // May 2011

    Have Euro Area And EU Economic Governance Worked? Just The Facts

    The authors test whether two key elements of the EU and euro area economic governance framework, the Stability and Growth Pact and the Lisbon Strategy, have had any impact on macroeconomic outcomes. They test this proposition using a difference-in-difference approach on a panel of over 30 countries, some of which...

    Provided By European Central Bank

  • White Papers // Apr 2011

    Business Cycle Dynamics Under Rational Inattention

    The authors develop a dynamic stochastic general equilibrium model with rational inattention by households and firms. Consumption responds slowly to interest rate changes because households decide to pay little attention to the real interest rate. Prices respond quickly to some shocks and slowly to other shocks. The mix of fast...

    Provided By European Central Bank

  • White Papers // Apr 2011

    Financial Remoteness And The Net External Position

    This paper shows that, controlling for standard determinants of net external positions; financially-remote countries exhibit more positive net external positions. This finding is found to be stronger for less advanced countries, hinting at external funding problems for more remote countries. Being located near financially very open countries, being in currency...

    Provided By European Central Bank

  • White Papers // Apr 2011

    Securitization, Bank Lending And Credit Quality: The Case Of Spain

    While the 2007-2010 financial crises have hit a variety of countries asymmetrically, the case of Spain is particularly illustrative: this country experienced a pronounced housing bubble partly funded via spectacular developments in its securitization markets leading to looser credit standards and subsequent financial stability problems. The authors analyze the sequential...

    Provided By European Central Bank

  • White Papers // Apr 2011

    The Effectiveness Of Monetary Policy In Steering Money Market Rates During The Recent Financial Crisis

    The recent financial crisis deeply affected the money market yield curve and thus, potentially, the proper functioning of the interest rate channel of monetary policy transmission. Therefore, the authors analyze the effectiveness of monetary policy in steering euro area money market rates using two measures: first, the predictability of money...

    Provided By European Central Bank

  • White Papers // Apr 2011

    Systemic Risk Diagnostics: Coincident Indicators And Early Warning Signals

    The authors propose a novel framework to assess financial system risk. Using a dynamic factor framework based on state-space methods, they construct coincident measures ('Thermometers') and a forward looking indicator for the likelihood of simultaneous failure of a large number of financial intermediaries. The indicators are based on latent macro-financial...

    Provided By European Central Bank

  • White Papers // Apr 2011

    Welfare Costs Of Inflation And The Circulation Of US Currency Abroad

    Empirical studies of the "Shoe-leather" costs of inflation are typically computed using M1 as a measure of money. Yet, official data on M1 includes all currency issued, regardless of the country of residence of the holder. Using monetary data adjusted for US dollars abroad, the authors show that the failure...

    Provided By European Central Bank

  • White Papers // Apr 2011

    The ECBs New Multi-country Model For The Euro Area: NMCM - With Boundedly Rational Learning Expectations

    Rational expectations has been the dominant way to model expectations, but the literature has quickly moved to a more realistic assumption of boundedly rational learning where agents are assumed to use only a limited set of information to form their expectations. A standard assumption is that agents form expectations by...

    Provided By European Central Bank

  • White Papers // Apr 2011

    The ECBs New Multi-country Model For The Euro Area: NMCM - Simulated With Rational Expectations

    The model presented here is a New estimated medium-scale Multi-Country Model (NMCM) which covers the five largest euro area countries and is used for forecasting and scenarios analysis at the European Central Bank. The model has a tight theoretical structure which allows for non-unitary elasticity of substitution, non-constant augmenting technical...

    Provided By European Central Bank

  • White Papers // Apr 2011

    Price And Wage Setting In Portugal: Learning By Asking

    This paper presents the main findings of a survey conducted on a sample of Portuguese firms. The main aim was to identify some relevant characteristics about the dynamics of prices and wages in Portugal. The most important conclusions are: changes to wages are more synchronized than changes to prices; most...

    Provided By European Central Bank

  • White Papers // Mar 2011

    News And Policy Foresight In A Macro-finance Model Of The US

    The authors study the effects of information shocks on macroeconomic and term structure dynamics in an estimated medium-scale DSGE model for the US economy. They consider news about total factor productivity and investment-specific technology, as well as foresight about monetary policy. The empirical investigation confirms the findings of previous studies...

    Provided By European Central Bank

  • White Papers // Mar 2011

    A Structural Model Of Central Bank Operations And Bank Intermediation

    The banking system is modeled in a closed system of financial accounts, whereby the equilibrium volume of bank intermediation between households and corporates reflects structural parameters such as household preferences, comparative cost structures of heterogeneous banks, loan demand of corporates, and the difference between the borrowing rate and the deposit...

    Provided By European Central Bank

  • White Papers // Mar 2011

    Macro-Financial Vulnerabilities And Future Financial Stress: Assessing Systemic Risks And Predicting Systemic Events

    This paper develops a framework for assessing systemic risks and for predicting (out-of-sample) systemic events, i.e. periods of extreme financial instability with potential real costs. The authors test the ability of a wide range of "Stand alone" and composite indicators in predicting systemic events and evaluate them by taking into...

    Provided By European Central Bank

  • White Papers // Mar 2011

    Is China Climbing Up The Quality Ladder? Estimating Cross Country Differences In Product Quality Using Eurostats COMEXT Trade Database

    There is an ongoing debate in the literature about the quality content of Chinese exports and to what extent China imposes a threat to the market positions of advanced economies. While China's export structure is very similar to that of the advanced world, its export unit values are well below...

    Provided By European Central Bank