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Working Paper Series in Economics
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No. wp2017-9
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- Aurélien Leroy and Yannick Lucotte
- Competition and credit procyclicality in European banking
This paper empirically assesses the effects of competition in the financial sector
on credit procyclicality by estimating both an interacted panel VAR (IPVAR)
model using macroeconomic data and a single-equation model with bank-level European
banking data. The findings of these two empirical approaches highlight
that an exogenous deviation of actual GDP from potential GDP leads to greater
credit fluctuation in economies where both competition among banks and competition
from non-bank financial institutions or direct finance (proxied by the fi-
nancial structure) are weak. According to the financial accelerator theory, if lower
competition strengthens the cyclical behavior of financial intermediaries, it follows
that these "endogenous developments in credit markets work to amplify and
propagate shocks to the macroeconomy" (Bernanke et al., 1999). Furthermore,
since credit booms are closely associated with future financial crises (Laeven and
Valencia, 2012), our results can also be read as evidence that greater competition
in the financial sphere reduces financial instability, which is in line with the
competition-stability view denying the existence of a trade-off between competition
and stability
- JEL-Codes: E32, E51, G20, D40, C33
- Keywords: credit cycle, business cycle, bank competition, interacted panel VAR
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No. wp2017-8
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- Natalja Levenko, Kaspar Oja and Karsten Staehr
- Total factor productivity growth in Central and Eastern Europe before, during and after the Global Financial Crisis
This paper conducts growth accounting for 11 EU countries from Central and
Eastern Europe for the years 1996–2016. Its contributions include the estimation
of new capital stock series, adjustment for the utilisation of the capital stock and a
time-varying elasticity of output to capital. Before the crisis, growth in total factor
productivity (TFP) was the main contributor to output growth in Slovenia,
Hungary and Slovakia, while capital deepening was more important in the Czech
Republic, Croatia and Poland. During the global financial crisis the contributions
of TFP and capital growth differed markedly across the countries, reflecting the
very diverse dynamics of the crisis. After the crisis the contribution of TFP
growth has been negligible in all of the sample countries coinciding with generally
weak output growth. The results are generally robust to changes in estimation
methods and parametrisations, but some assumptions are critical for the results.
- JEL-Codes: F43, O47
- Keywords: growth accounting, capital stock, perpetual inventory method, total factor productivity, global financial crisis, Central and Eastern Europe
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No. wp2017-7
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- Cuestas, Juan Carlos, Lucotte, Yannick and Reigl, Nicolas
- Banking sector concentration, competition and financial stability: the case of the Baltic countries
This paper empirically assesses the potential nonlinear relationship between
competition and bank risk for a sample of commercial banks in the
Baltic countries over the period 2000–2014. Competition is measured by
two alternative indexes, the Lerner index and the market share, while we
consider the Z-score and loan loss reserves as proxies for bank risk. In line
with the theoretical predictions of Martinez-Miera and Repullo (2010), we
find an inverse U-shaped relationship between competition and financial
stability. This then means that above a certain threshold, the lack of
competition is likely to exacerbate the individual risk-taking behaviour of
banks, and could be detrimental to the stability of the banking sector in
the Baltic countries. The threshold is around 0.60 for the Lerner index,
and close to 50% for market share in terms of assets. The policy implications
are that the existence of such a threshold suggests that the future
evolution of the the structure of the banking industry in these countries is
of critical importance. Specifically, this implies that policy-makers should
place greater emphasis on mergers and acquisitions to avoid any significant
increase of banking sector concentration
- JEL-Codes: G21, G28, G32, L51
- Keywords: bank competition, banking sector concentration, market power, Lerner index, financial stability, bank-risk taking, Baltic countries
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No. wp2017-6
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- Guender, Alfred V.
- Credit prices vs. credit quantities as predictors of economic activity in Europe: which tell a better story?
This paper examines the role of credit providers in the EMU and assesses the
effects of credit spreads and credit quantities on economic activity. Movements in
credit spreads are far more successful than movements in the external finance mix
in predicting near-term changes in real economic activity in ten EMU countries.
However, the forecasting performance of the three credit spreads evaluated in this
paper is uneven. A risk premium extracted from individual corporate bond yields
predicts three measures of economic activity fairly well in Germany and Southern
Europe. Two other credit spreads, the ‘spread’ and the ‘ECB-spread’, have predictive
power for some measures of economic activity but they fail to predict
consistently across either a range of economic indicators or countries
- JEL-Codes: E3, E4, G1
- Keywords: credit spreads, finance mix, bank vs open market debt, economic activity, financial crises
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No. wp2017-5
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- Kholodilin, Konstantin A. and Netsunajev, Aleksei
- Crimea and punishment: the impact of sanctions on Russian and European economies
The conflict between Russia and Ukraine that started in March 2014 led to bilateral
economic sanctions being imposed on each other by Russia and Western countries, including
the members of the euro area. The paper investigates the impact of the sanctions on
the real side of the economies of Russia and the euro area. The effects of sanctions are
analysed with a structural vector autoregression. To pin down the effect we are interested
in, we include in the model an index that measures the intensity of the sanctions. The
sanction shock is identified and separated from the oil price shock by narrative sign restrictions.
We find a very high probability that Russian GDP declined as a result of the
sanctions. In contrast to that, the effects of the sanctions on the euro area are limited to
real effective exchange rate adjustments
- JEL-Codes: C32, F51
- Keywords: political conflict; sanctions; economic growth; Russia; euro area; structural vector autoregression
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No. wp2017-4
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- Tairi Room and Jaanika Merikull
- The financial fragility of Estonian households: Evidence from stress tests on the HFCS microdata
This paper analyses the financial fragility of the Estonian household sector using microdata from the Household Finance and Consumption Survey (HFCS). We use a stress-testing framework where the probability of default is evaluated on the basis of the financial margin (i.e. the ability to service debt from current income) and the availability of financial buffers. The HFCS data from household interviews are complemented with information from administrative registers. This lets us evaluate and compare measures of financial vulnerability that draw on data from different sources. We derive a set of indicators to identify households that are financially distressed and analyse the sensitivity of financial sector loan losses to adverse shocks. The stress-test elasticities are assessed separately for three standardised negative macroeconomic shocks: a rise in interest rates, an increase in the unemployment rate, and a fall in real estate prices. In addition, we evaluate the impact of a simultaneous shock mimicking the dynamics of these three variables during the Great Recession. It is found that: (1) despite there being a lot of households with financial difficulties, the risks for banks from the household sector are limited; (2) financial fragility is strongly negatively related to income; (3) the loan default rate of households is most sensitive to shocks to the unemployment rate and the interest rate, while the loan losses of banks are affected most by real estate price shocks; and (4) compared with the survey data, the information collected from administrative sources points to higher household default rates and larger bank losses.
- JEL-Codes: D14,E43
- Keywords: household financial fragility, stress-testing, household finance and consumption survey, Estonia, measurement error in household surveys
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No. wp2017-3
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- Gregory Levieuge, Yannick Lucotte and Florian Pradines-Jobet
- Central banks preferences and banking sector vulnerability
According to "Schwartz’s conventional wisdom" and what has been called "divine coincidence", price stability should imply macroeconomic and financial stability. However, in light of the recent financial crisis, with monetary policy focused on price stability, scholars have held that banking and financial risks were largely unaddressed. According to this alternative view, the belief in divine coincidence turns out to be benign neglect. The objective of this paper is to test Schwartz’s hypothesis against the benign neglect hypothesis. The priority assigned to the inflation goal is proxied by the central banks’ conservatism (CBC) index proposed by Levieuge and Lucotte (2014b), here extended to a large sample of 73 countries from 1980 to 2012. Banking sector vulnerability is measured by six alternative indicators that are frequently employed in the literature on early warning systems. Our results indicate that differences in monetary policy preferences robustly explain cross-country differences in banking vulnerability and validate the benign neglect hypothesis, in that a higher level of CBC implies a more vulnerable banking sector
- JEL-Codes: E3; E44; E52; E58
- Keywords: central banks preferences, inflation aversion, banking sector vulnerability, monetary policy
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No. wp2017-2
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- Juan Carlos Cuestas and Merike Kukk
- Asymmetries in the interaction between housing prices and housing credit in Estonia
This paper investigates the mutual dependence between housing prices and housing credit in Estonia, a country which experienced rapid debt accumulation during the 2000s and big swings in house prices during that period. We use Bayesian econometric methods on data spanning 2000–2015. The estimations show the interdependence between house prices and housing credit. More importantly, housing credit shocks had a stronger effect on house prices in the period of declining credit turnover. The asymmetry in the linkage between housing credit and house prices highlights important policy implications, in that if central banks increase capital buffers during good times, they can release credit conditions during hard times to alleviate the negative spillover into house prices and the real economy
- JEL-Codes: E32, E44, E51, G21, R21, R31
- Keywords: house prices, housing credit, credit cycle, asymmetries, Bayesian
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No. wp2017-11
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- Theologos Dergiades, Costas Milas and Theodore Panagiotidis
- An assessment of the inflation targeting experience
An effective inflation targeting (IT) regime assumes both a change in the stationarity
properties of inflation and a lower variability. Within a framework that does not make a
priori assumptions about the order of integration, we examine whether there is a change
in the inflation persistence in forty-five, developed and developing, countries and in
three groups of countries, the G7, the OECD, and OECD Europe. For the inflation
targeters, we find that the endogenously identified break dates are not consistent with
the formal adoption of the IT regime. We employ a test for the variability of inflation
that tracks how frequently inflation variability is in control. Logit analysis reveals that
inflation targeters do not experience a greater probability than non-inflation targeters of
inflation persistence changing, and they are not more in control of their inflation
variability. The quality of institutions emerges as being more significant for taming
inflation
- JEL-Codes: C12, E4, E5
- Keywords: structural change, persistence change, inflation targeting
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No. wp2017-10
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- Karsten Staehr and Lenno Uuskula
- Forecasting models for non-performing loans in the EU countries
This paper estimates panel data models that use macroeconomic and macrofinancial
variables to forecast the ratio of non-performing loans to total loans.
The panels consist of either all EU countries or various subgroups, and the
time sample is 1997Q4 to 2017Q1. The estimations show that macroeconomic
and macro-financial variables have important roles in forecasting nonperforming
loans. The ratio of non-performing loans exhibits substantial
persistence and higher GDP growth, lower inflation and lower debt are robust
leading indicators of the ratio of lower non-performing loans. The current
account balance and real house prices are important indicators for Western
Europe but are less important for Central and Eastern Europe
- JEL-Codes: E44, E47, G21
- Keywords: non-performing loans, forecasting, financial stability
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No. wp2017-1
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- Barry Eichergreen
- Ragnar Nurkse and the international financial architecture
World-renowned economist, Professor of Economics at the University of California, and the author of several books on international economy and the monetary system, Barry Eichengreen, gave the 2017 Ragnar Nurkse memorial lecture entitled Ragnar Nurkse and the International Financial Architecture. The lecture was held at Eesti Pank on January 12th 2017.
In his lecture, Professor Eichengreen gave an overview of Ragnar Nurkse’s book International Currency Experience: Lessons of the Inter-War Period that was published in 1944 and discussed whether the conclusions of the book still hold true today.
The 2017 Ragnar Nurkse memorial lecture was held in honour of the 110th birth anniversary of the Estonian economist who achieved global recognition in the 1940s and 1950s. His research on monetary policy issues, international trade, international policy coordination, and development economics has provided valuable information, lessons, and guidelines. Eesti Pank started the regular lecture series dedicated to Ragnar Nurkse in 2007
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No. wp2016-11
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- Georgios Bampinas and Theodore Panagiotidis
- Oil and stock markets before and after financial crises : a local Gaussian correlation approach
The effect of financial shocks on the cross-market linkages between oil prices, both spot and
future, and stock markets is examined for four crises: the Mexican crisis of 1994, the Asian
crisis of 1997, the dot.com bubble of 2000 and the global financial crisis of 2007–09. By
employing the local Gaussian correlation approach introduced in Tjøstheim and Hufthammer
(2013), which captures asymmetries and the intrinsic nonlinearity of the relationship,
we find that the two markets were regionalised for most of the 1990s and the early 2000s.
Flight from stocks to oil occur in all crisis episodes under extreme market conditions, except
the recent global financial crisis. During the latter, evidence of higher correlation
between the two markets throughout the spectrum emerges and this is more pronounced in
the state of financial distress (in the left tail). The view that stock and oil markets behave
like ’a market of one’ after the financialisation of commodities is further supported by the
presence of contagion between US stock markets and all the benchmark crude oil markets.
Finally, our empirical results provide evidence of nonlinear and asymmetric dependence
between oil and stock markets during all financial crisis periods
- JEL-Codes: G01, G10, F3
- Keywords: stocks, crude oil, nonlinear dependence, financial crisis, contagion, local Gaussian correlation
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No. wp2016-10
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- Karsten Staehr
- Capital flows and growth dynamics in Central and Eastern Europe
This paper assesses the importance of capital flows as measured by the current account balance for the growth dynamics of the EU countries from Central and Eastern Europe. Economic growth in these countries was on average relatively high before the global financial crisis but markedly lower after the crisis. Panel data econometrics using annual data for 1997–2015 points to the contemporaneous current account balance having a sizeable negative effect on annual GDP growth. Estimations using many control variables and instrumental variables suggest that the negative effect is mainly demand driven. Counterfactual simulations show that growth rates in all CEE countries would have been lower in the absence of capital flows, and this applies particularly to the countries with the most disadvantageous starting points
- JEL-Codes: P17, P21, P36
- Keywords: business cycles, output performance, capital flows, current account balance, transition economies
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No. wp2016-10
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- Karsten Staehr
- Capital flows and growth dynamics in Central and Eastern Europe
This paper assesses the importance of capital flows as measured
by the current account balance for the growth dynamics of
the EU countries from Central and Eastern Europe. Economic
growth in these countries was on average relatively high before
the global financial crisis but markedly lower after the crisis.
Panel data econometrics using annual data for 1997–2015 points
to the contemporaneous current account balance having a sizeable
negative effect on annual GDP growth. Estimations using many
control variables and instrumental variables suggest that the negative
effect is mainly demand driven. Counterfactual simulations
show that growth rates in all CEE countries would have been
lower in the absence of capital flows, and this applies particularly
to the countries with the most disadvantageous starting points.
- JEL-Codes: P17, P21, P36
- Keywords: business cycles, output performance, capital flows, current account balance, transition economies
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