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Costs of financial instability, household-sector balance sheets and consumption

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Abstract

Extant work on costs of financial instability focuses on fiscal costs and declines in aggregate GDP following banking crises. We estimate effects of banking and currency crises on consumption in 19 OECD countries, showing consumption plays an important role in the adjustment following a crisis, and effects are not captured solely by the impact of crises on standard consumption determinants, income and wealth. Additional effects, attributable to factors such as time-varying confidence, uncertainty and credit rationing, are aggravated by high and rising leverage, despite financial liberalisation easing liquidity constraints. High leverage implies that banking crises taking place now could have greater incidence than in the past.

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... However, most of empirical studies (De Bandt & Hartmann (2000), Reinhart & Rogoff (2008, 2009), De Bandt et al. (2009), Trichet (2009, Allen & Carletti (2009), ECB (2009), Serwa (2010), Bollard (2011), etc.) focus on the concept of systemic risk and the economic consequences of systemic banking crises. There is surprisingly little empirical literature (Ruhm (2000), Alderman et al. (2006), Friedman & Thomas (2007), Das et al. (2008), Ravallion (2008, Ferreira & Schady (2008), Laeven &Valencia (2010)) analyzing the other aspects of systemic risk management in the banking.Hutchison & Noy (2005), Barrell et al. (2006), Kunt et al. (2006), Davis (2007, Von Hagen & Ho (2007), Rancière et al. (2008), Reinhart & Rogoff (2008, 2009), Laeven & Valencia (2008), Allen & Carletti (2009), Serwa (2010), Bollard (2011)) highlight the economic arguments of systemic risk management in the banking, however, there are many other reasons for systemic risk management in the banking sector. The academic literature does not provide any comprehensive analysis on this issue for the present. ...
... 1975-1979 1980-1984 1985-1989 1990-1994 1995-1999 2000-2004 2005-2009 Time The economic consequences of banking crises. The economic consequences of banking crises have been analyzed in many empirical studies (Boyd et al. (2005), Hutchison & Noy (2005), Barrell et al. (2006), Kunt et al. (2006), Laeven & Valencia (2008), Serwa (2010), etc.). In most of empirical studies have been indicated very large estimates of output losses and fiscal costs of banking crises, however in some cases, according to International Monetary Fund (1998) study, no significant output losses were estimated (in approximately 20 percent of the banking crises episodes). ...
... The results show that the banking crisis could lead to the occurrence of debt crisis. The results of empirical studies (Boyd et al. (2005), Hutchison & Noy (2005), Barrell et al. (2006), Kunt et al. (2006), Davis (2007, Von Hagen & Ho (2007), Rancière et al. (2008), Reinhart & Rogoff (2008, 2009), Laeven & Valencia (2008), Allen & Carletti (2009), Serwa (2010), Bollard (2011)) suggest that economic arguments of systemic risk management in the banking are most important. ...
Article
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Billio et al. (2010) note that the financial crisis of 2007–2009 has created renewed interest in systemic risk. The objective of this paper is to argue the importance of systemic risk management in the banking sector and to analyze the arguments of systemic risk management in the banking. The research results of this study show that the main arguments of systemic risk management in the banking can be distinguished into four main groups. The most important economic arguments of systemic risk management in the banking are following: the major role of banks in the financial system and economy, the high frequency of banking crises and their economic consequences, and the occurrence of banking crisis increase the probability of other financial crises. The social arguments of systemic risk management in the banking are also important because banking crises can have long-term consequences for human development and long-term deleterious effects on the psychological wellbeing of population. The scientific and other important arguments of systemic risk management in the banking are also discussed in this article. DOI: http://dx.doi.org/10.5755/j01.em.17.3.2097
... Multiplier effects also mean that changes in consumer spending have implications for production and employment. Surveys by De Nardi et al. (2012), Barrell et al. (2006) and, more recently, Mian and Sufi (2014) all highlight the role of consumption in driving economic growth during recent decades. The purpose of this paper is to identify the structural factors which drive household consumption, paying particular attention to the role of the housing market. ...
... Consequently, mortgage interest rate spreads fell steadily from 2000 onwards reducing the cost of home-buying and driving demand ( Figure 3). 11 In a time series model, one difficulty is that credit conditions and income growth are highly correlated with other variables, in particular with house price growth. This makes it difficult to isolate their individual impact on aggregate consumption. ...
... These are not rare events, and often follow periods of financial liberalisation. Barrell, Davis and Pomerantz (2006) list the recent crises used in IMF and World Bank studies of their impacts. They record six major banking crises amongst the eighteen established European countries between 1980 and 1999. ...
... Financial assets also get destroyed in banking crises and wealth declines, and as a result consumption spending declines. Barrell, Davis and Pomerantz (2006) look at the additional impact of crises on consumer spending after taking account of both lower output and lower wealth, and they show that there is an additional and large effect from changes in the behaviour of lenders. Credit rationing increases in a crisis and this reduces consumption further. ...
Article
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Over the summer of 2007 problems began to emerge in financial markets as a result of debt defaults, particularly on US housing lending to individuals with low credit ratings. The globalisation of financial markets has meant that such risks are shared across banks throughout the world and a number of European banks suffered major losses as a result of purchasing high yield high risk bundles of these assets. In this note we discuss the possibility of a systemic banking crisis as a result of debt defaults, putting this risk and its impact on the economy into recent historical context. We also look at the vulnerability of the personal and business sectors to increases in borrowing rates, and at the evidence for a risk related rise in borrowing rates. We then use our model, NiGEM, to investigate the impacts of a significant rise in the spread between lending and borrowing rates for both producers and consumers. Such an increase in spreads might arise when banks wish to rebuild their capital after a crisis or reflect significant capital rationing. In either case they represent the immediate impacts of a crisis in the banking sector. The spread between borrowing and lending rates for producers reflects a risk premium in the business sector, and was used in the September EFN report to the European Commission, whilst the spread between consumer lending and borrowing rates is in use for the first time on the model. The debt-to-income ratio has been rising in the personal sector in a number of countries, and especially in the UK, Ireland and Spain, as we can see from figure 1, and this might indicate where problems could arise.
... These include estimates of real three month money market interest rates, consumer confidence indicators and fiscal balances. House price data is available from the BIS or ECB for all euro area countries, and it has been used in Barrell, Davis and Pomerantz (2004). Demographic data are drawn from the UN Demographic database (UN Population Division 2004). ...
... Analysts suggest that these have played a role in the evolution of consumption in many countries. Using GLS panel estimation for 19 countries, Barrell, Davis and Pomerantz (2004) found such a role for house prices in consumption, where the short run effect of a given rise in house prices on consumption far exceeded that of net financial wealth. Their estimates were used to analyse the effect of a banking or currency crisis on consumption, and the work showed that consumption plays an important role in the macroeconomic adjustment following a financial crisis. ...
Article
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Understanding the behaviour of private consumption is crucial for the assessment of the economic situation in the short and the medium term. As the largest expenditure component of GDP, household spending plays a central role in the cyclical fluctuations of activity around its long-term growth path. According to consumption theory, households endeavour to smooth their spending over the life-cycle, a behaviour which should contribute to dampen the strength of cyclical downswings. However, recent developments in private consumption in the euro area have been disappointing. Since 2001, growth in private consumption has been persistently sluggish and has been much weaker than in some other EU countries or in the USA. Furthermore, after years of a declining trend, households have responded to deteriorating growth conditions with a rise in their saving rate in 2001-02. Since then their saving rate has remained broadly constant.
... GDP growth were lost for each year of the banking crisis. In particular, they found that banking crises were very damaging, reducing output by about 8-10 percent over a 2-4 year period. The combined effect of the banking and currency crises occurring simultaneously was therefore about 13-18 percent of output.Barrell et al. et al. (2006) analyzed the effect of a banking crisis on consumption both in terms of its impact on real personal disposable income and net financial wealth.The results of study showed that consumption played a key role in the macroeconomic adjustment following a banking crisis. Furthermore, the effect of a banking crisis was aggravated by high and r ...
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There have been many banking crises around the world over the recent decades. Academics argue that economy can be affected by banking crises in different ways. The overall impact of a banking crisis on the economy depends mainly on banking crisis characteristics, economic conditions and the manner and speed of banking crisis resolution by the authorities. The objective of this paper is to review theoretical literature on measuring the cost of banking crises, to indicate trends of costs imposed by banking crises on the economy and to analyze the linkages between cost and features of banking crises. The results of this study confirm the positive relationship between the output losses and fiscal cost. The length of banking crisis and the currency crisis onset dummy have a positive impact on output losses. The results of this research suggest that statistically significant positive effect on fiscal costs have independent variables such as duration of banking crisis, currency crisis onset dummy etc.
... A more recent IMF study [3] estimates that the total cost of the 2007-2009 crises in thirteen countries resulted in an average of 24.5% output loss, a 23.9% increase in public debt as % of GDP and had a 4.9% of GDP direct fiscal cost. The economic cost of a bank crisis is not associated only with a decline in real output it also extends to household consumption as the latter plays an important role in the adjustment procedure after the crisis [4]. As Ackermann [5] points out these costs tend to be lower when the supervision of the banking system is close and effective. ...
... It is however difficult to explain house price developments in terms of just its user cost, as Barrell, Kirby and Riley (2004) suggest. 3 The evidence on the effects of house prices on consumption is discussed in Barrell and Davis (2007), and their work suggests that changes in house prices have more impact in the UK, the US and Spain than in France, Germany or Italy. 4 The user cost of capital on the model depends on the weighted average of equity finance and borrowing, and the weights depend on the importance of the equity market in the economy. ...
... Does the decline in growth come from the financial distress or from others shocks? Demirgüc-Kunt, Detragiache and Gupta (2000), Barrell, Davis and Pomerantz (2006) or Cerra and Saxena (2008) (2008) for a short descriptive intuition on the costs of the biggest financial distresses. 2 See the recent paper of Claessens, Kose and Terrones (2008). 3 See Loupias and alii (2003) or Chatelain and alii (2003) for the euro area. ...
Article
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The current financial crisis has now led to a fall in real output and the downturn is yet expected to last for some time. The aim of our paper is to analyse and quantify the impact financial crisis on the French and the United States economies. We first present the shocks characterising at best financial crisis and explain how they come through the real economy. The remaining of the contribution is devoted to the empirical work based on a VAR model. Structural shocks are identified using the generalised approach of Pesaran and Shin (1998) which does not require ad hoc assumptions on how shocks come through the system contemporaneously. Most of impulse responses to shocks are found theoretically consistent and statistically significant. Finally, the historical decompositions show that past and current financial shocks contribute significantly to the declines in the economic activity in France and in the United States.
... When the state of balance sheets is poor, even relatively small shocks can lead to vulnerabilities, with an adverse income shock squeezing the cash flow available for consumption or investment, while changes in liquidity constraints can amplify the effect of a shock that affects credit supply (Barrell et al., 2006). ...
Working Paper
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Debt levels have surged since the mid-1990s and have reached historic highs across the OECD. High debt levels can create vulnerabilities, which amplify and transmit macroeconomic and asset price shocks. Furthermore, high debt levels hinder the ability of households and enterprises to smooth consumption and investment and of governments to cushion adverse shocks. The empirical evidence suggests that when private sector debt levels, particularly for households, rise above trend the likelihood of recession increases. Measures of financial leverage give less warning and typically only deteriorate once the economy begins to slow and asset prices are falling. Government debt typically rises after the onset of a recession, suggesting that there is a migration of debt across balance sheets. Some policies, such as robust micro prudential regulation and frameworks to deal with debt overhangs and maintain public debt at prudent levels, can help economies withstand adverse shocks. Other policy options, such as addressing biases in tax codes that favour debt financing and targeted macro-prudential policies, will help bring down debt levels and address future run ups in debt.
... In this context, Ranciere et al. (2006) have shown that financial liberalisation can lead to a higher level of risk, increase the volatility of macroeconomic indicators and the probability of occurrence of banking crises. Other studies, in particular those conducted by Barrell et al. (2006) and Tornell et al. (2004) have validated this observation. Finally, Menkhoff and Suwanaporn (2007), and Currie (2006), show that financial liberalisation pursued in a slightly-developed institutional environment accentuates the proliferation of banking crises. ...
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To find a lesson to US and UE banking crises, this paper studies the factors associated with the emergence of banking crises during the process of financial liberalisation in a large sample of cross-countries in 1989-1997 using a spatial Durbin model in a panel data econometrics. The empirical results suggest that financial liberalisation has the tendency to stimulate the banking instability in emerging economies. Then we find evidence that the measures of bank regulation variables also contributed, either positively or negatively, towards the observed crisis outcomes, with poor institutional environment playing a particularly significant role. The inclusion of regional variables has a major effect on the estimations, even if most of the qualitative results are preserved. Indeed, some estimated coefficients become larger and more significant when the regional variables are included. And the great virtue of economic downturn is then to remind us that we can not sustainably invest resources in doubtful productivity sectors.
... As highlighted by several authors (Barrell et al. 2006), the influence of economic crises on consumption should not be disregarded, especially in the presence of an important leverage as bank loans accessed for paying debts as mortgages, rent, and utilities. ...
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The present research focuses on the influence of the well-being indicators, more specifically, the indicators reflecting the life quality on the banking systems evolution from the EU member states. The study offers a unique approach to comparing the two country groups: the eurozone countries and the EU noneuro countries during the 2008–2019 period. The model is estimated with the help of the OLS method by using panel data. The study aims to identify which life quality indicators significantly influence the EU member states’ banking systems evolution and develop models dividing the countries into two groups. Our conclusions show that, among all the determinant factors analysed in this study, household consumption and internet users strongly influence all EU countries’ banking systems.
... Barth, Caprio, and Levine (1999) affirm that countries with the most regulatory and restrictive systems are likely to eradicate banking crises. Ranciere, Tornell, and Westermann (2006), Barrell, Davis, and Pomerantz (2006), Gupta and Karapatakis (2008) show the process of financial liberalization may increase, at a high level of risk, the volatility of macroeconomic indicators and may raise the probability of starting banking crises. Kaminsky and Reinhart (1999) conducting a study of a panel of 20 countries in Latin America, Europe, and Asia over the period 1970-1995 conclude the number of banking crises strongly increased and policies of financial liberalization precede these crises. ...
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In this paper we analyze the impact of financial liberalization, reforms in the banking sector and the associated changes in the industry structure on the banking performance, measured in terms of cost efficiency and total productivity growth index in 17 countries from Central and Eastern Europe for 2004 – 2008 period. The period chosen is relevant in the context of the entrance of new ten EU members at the beginning of the year of 2004 and the beginning signs of the subprime crises in the Central and Eastern Europe in 2008. To examine the relationship between bank performance, financial liberalization and banking systems structure, we develop a two-stage empirical model that involves estimating bank performance in the first stage and assessing its determinants in the second. From our analyze result that the levels of the banking reform and interest rate liberalization indicator and financial openness index improve cost efficiency, suggesting that banks from Central and Eastern European countries with higher level of liberalization and openness are able to increase cost efficiency and finally to offer cheaper services to clients. Concerning the effect of financial reform on total productivity growth of banks from CEE countries, the results show that the level of banking reform and interest rate liberalization indicator and the score regarding soundness and safety of banks have a positive impact on total productivity growth.
... 17 As the leader of the AKP, Recep Tayyip Erdoğan was elected as President in 2014, and before his 7-year term expired, a constitutional referendum was held in 2017 to switch to a new presidential system and Erdoğan was re-elected in 2018. 18 For more detailed discussions, see Akyüz and Boratav (2003), Özatak and Sak (2003), Barrell et al. (2004), Claessens et al (2004), Hutchinson (2003), Herrala (1999), and Eken and Schadler (2012). ...
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After Atatürk's death (November 10, 1938), the Turkish military saw itself as the unquestioned sole guardian of Atatürk's principles-secularism and national unity. The Turkish military protected the country against authoritarian and anti-secular policies in the 1950s, extreme anarchy in the 1960s and 1970s, and rise of Islamist-based political parties with anti-secular ideologies in the 1990s. The Turkish Armed Forces (TSK) had gained certain prerogatives and privileges after each coup, but the 1982 Constitution drafted by the military ensuing the 1980 coup d'état created formal (institutional) and informal (non-institutional) mechanisms for the military to exert power in domestic, foreign, and defense policies. The developments in 2007 marked the starting point for a shift in balance of power in civil-military relations; in spite of the military's high alert on the AKP's anti-secular ways, the April 27 midnight e-memorandum (e-coup) failed to deter the AKP to select Foreign Minister Abdullah Gül as the ruling party's candidate for the presidency in 2007; but more importantly, the military failed to protect the country's laicistic-secularist order. Then Prime Minister Erdoğan waged a legal war against senior military officers including four-star generals for allegedly plotting a coup against the AKP government in 2003 and 2004. The military lost this battle too, through Ergenekon and Balyoz (Sledgehammer) investigations and related trials, many high-ranking military personnel had been accused, arrested, and prosecuted for plotting to overthrow the AKP government; and for the first time in Turkish history, and to everyone's disbelief, senior military officers were actually prosecuted in civilian courts by civilian prosecutors. According to President Erdoğan's new foreign and defense policies, today Turkey is not backing away showing its military muscle even this may mean irritating many of its neighbors and NATO allies. The AKP government under President Erdoğan's leadership has devoted itself through relentless efforts to reduce the TSK's political power; in the process, the Erdoğan administration has taken full advantage of the EU's Copenhagen Criteria (i.e. civilian control of the military is a condition for EU accession negotiations) to strip of the military's both formal and informal mechanisms. Today, the military is bent to President Erdoğan's will, who selects military personnel and gives orders to commanders of the armed forces; additionally, Erdoğan has made a number of structural changes to reshape the military as he has envisaged. As Turkey insists spending on military ($20.4 billion in 2019), a sustainable economic recovery remains a distant dream.
... One may argue that the central bank should react not only to developments that may cause a financial crisis, but also to developments that may strengthen and prolong financial crisis. Households' debt ratio is important for the severity of a financial crisis and therefore an important variable within our analysis, see Barrell et al. (2004). 2 These equations are presented in Jacobsen and Naug (2004, 2005) and Jacobsen and Kloster (2006). ...
Article
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We model an inflation-targeting central bank with a clear mandate to promote financial stability within the framework of a small open-economy model. The interest rate is the single policy instrument, and the central bank needs to balance its different objectives using this instrument. When financial stability is an explicit target, the central bank should choose a longer horizon than otherwise if the economy is hit by a house price shock, or more generally, a demand shock. The same is true in the case of a credit shock. The operational definition of financial stability is complex, which complicates monetary policy. The reaction function of the central bank is asymmetric and includes truncated variables, since, by nature, financial stability is threatened and calls for policy action when risks to financial stability are high, while no policy response is needed when risks are low.
... A comprehensive survey of the literature dealing with wealth and asset price effects on economic activity is provided by Altisimo et al. (2005). The impacts of banking and currency crises on consumption in 19 OECD countries are estimated by Barrel et al. (2006). It is shown by their results that consumption plays an important role in the adjustment following a crisis and that the effects are not fully captured by the impact of crises on the standard consumption determinants, i.e. income and wealth. ...
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In this paper, the impact of an economic downturn on the household sector is studied. Household budgets can be negatively affected by declines in nominal wages and increases in unemployment. This effect is tested for the small, open, emerging economy using the estimated macro model. As a result of a lack of individual data on household finances, micro data are simulated. It is clearly shown by the conducted analysis that there is a significant additional decline in consumption related to an increase in household default rates and unemployment. It is found that potential household insolvencies have important implications for the financial system as well as for the macroeconomy.
... This of course differs between countries, with financial wealth being more important in the US in the short term than in continental countries such as Germany and France. The background work on the relation between consumption and housing wealth is discussed in Barrell and Davis (2007) and the impacts of house prices and wealth on reactions of consumers to financial crises is evaluated by Barrell, Davis and Pomerantz (2006). Although the consumption equations were estimated on data, we can see current income as a proxy for expected income, and in policy analysis consumption on the model can be turned fully forward looking, affecting both fiscal multipliers and the possibility of events in the future affecting consumption now. ...
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The Institute is a world leader in macroeconomic modelling and forecasting. It has produced quarterly economic forecasts for around sixty years, supported by macroeconomic models. The aim of the original builders of macroeconomic models was to transform understanding of how economies worked and use that knowledge to improve economic policy. In the early years, when computers were rare, macroeconomic modelling was a new frontier and Institute economists were among the first to produce a working model of the UK economy. It is remarkable how quickly models were being used to produce forecasts, assess policy and influence the international macroeconomic research agenda. The models built at the Institute were mainstream in the sense that they followed the contents of standard macroeconomic textbooks, developed with the subject, and fitted the facts as they were known at the time. There were continual improvements in understanding as the subject developed in response to new ideas and developments in the global economy. This article celebrates the development of macroeconomic modelling at the Institute and the contribution it has made to public life.
... Housing and equity markets are severely hit; the decline is about 35% and 56%, respectively. For instance, Jordá et al. (2013) show that recessions following a banking-crisis are costlier than other recessions and Barrell et al. (2006) show that banking crises have a non-negligible effect on consumption, particularly in the presence of high leverage. ...
Article
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It is known that banking crises produce large economic costs. Yet might their consequences be even more far‐reaching? We investigate an issue as yet largely unexplored and provide some of the first evidence that banking crises also lead to major, widespread, and lasting psychological losses. We estimate the costs of banking crises with individual life satisfaction; we show that these extend beyond GDP declines and other macroeconomic and financial leakages. For the 2007‐8 financial crisis, we find some evidence that the losses are larger for those countries that had previously experienced a credit boom.
... In the literature, there are quite a few studies on financial instability on the basis of Minsky's hypothesis. In one of those studies, for instance, Barrell, Davis and Pomerantz (2006) examined the effects of banking and monetary crises on the consumption in the OECD Countries for the period of 1970-2002. In the study, the reaction of the consumption on financial instability was examined with the Panel Data Analysis. ...
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As in the financial crisis of 2008, overindebtedness of the economic units leads to an instability. In the Financial Instability Hypothesis, Hyman Minsky, who supports this opinion, points out that borrowing in capitalist systems causes instability. In this study, the validity of Minsky's hypothesis was examined in a micro-based way with reference to the relation between the profitability and borrowing rates of the firms. Therefore, it was aimed to research the relations between the debt structure and the profitability of the firms considering the sectors within the context of Istanbul Stock Exchange (BIST) Market manufacturing industry. In the study, the variables such as return on assets, return on equity, net profit margin, leverage ratio, short term debt ratio, current ratio, average collection period, inventory cycle time, economic instability and financial instability were examined. And also, the annual data over the period of 1994-2010 for the 15 firms which are in metal manufacturing industry in BIST were used. In the study, the relation between economic instability and financial instability was examined by the Westerlund cointegration test while the existence of causal relation was examined by the Holtz-Eakin Panel causality test. As a result, it was concluded that any long term relation and any relation of causality do not exist between the relevant variables.
... The recurrence of financial crises during the last two decades, such as the European Monetary System crisis , the Tequila crisis , the East Asian and Russian crises , the Turkish crisis (2001), the Subprime crisis and the Greek debt crisis (2011) have focused attention on the implication of crises on the rise of volatility in these countries (Giannetti 2007;Ranciere, Tornell and Westermann 2006;Daniel and Jones 2007;Cunado, Go´mez Biscarri and Pe´rez de Gracia 2006;Aka 2006;Barrell, Davis and Pomerantz 2006). An in-depth examination of previous empirical studies reveals an important methodological imperfection. ...
... Weak balance sheet can even prohibit from coping with minor economic fluctuations, which can considerably decreases cash flow towards consumption and investments. Moreover changes of liquidity constrains can increase negative impacts of disorder and influence supply of credit (Barrell et al., 2006). ...
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In this paper we report the results of a series of internal and external shocks on the Euro Area, using the National Institute's Global Econometric Model, NiGEM. The differences in impacts across countries are discussed, stressing the role of openness to the rest of the world, the nature of investment finance, the importance of wealth in different economies, and the impact of liquidity constrained consumers on the transmission mechanism. The link between financial market integration and channels of policy transmission is closely studied.
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This paper has two central aims. The first one is to deal empirically with the effects of financial crises on emerging stock markets volatility. The second objective consists in testing if the level of stock market development affects this relationship. For this purpose, we estimate a static panel data model for a sample of nine emerging economies from January 1990 to December 2006. We consider three types of financial crises, i.e. banking, currency and twin crises. Our empirical results suggest that the onset of financial crises strongly increased stock market volatility. In addition, we find that the biggest impact is exerted by twin crises. When dealing with the second objective, our results show that the market size and the liquidity level can attenuate the effects of banking and currency crises, but not the one associated to twin crises. Nevertheless, the degree of stock market integration seems to reduce the effects of banking, currency and twin crises on stock market volatility.
Chapter
The analysis of consumption plays an important role in both macroeconomic theory and empirical research. The matter of macroeconomic instability is one of the main points in modern macroeconomics. The tasks of the paper are: to reveal the essence of the population consumption as an economic category; to assess consumer attitudes in different countries, to determine the number of factors that affect the level of consumption and its structural elements under instability; and to construct the models of population consumption patterns. The analysis of the changes in consumer attitudes over the world during the period of instability was conducted. We observed the dynamics and structure of household consumption spending in the United States, Canada, Japan, the European Union, the Russian Federation and Ukraine. It has been resolved that over the past few years the global trend has improved, which is characterized by an increase in the consumer confidence index for most countries. We made a focus on the post-crisis period only for Ukraine, not considering the war period due to missed data. Nevertheless, we found out that the Consumer Confidence Index in Ukraine has dropped sharply over the past two years. Ukrainians still negatively assess the economic trend due to the difficult macroeconomic situation in the country. We built the models of the dependence of the consumption growth rate on the permanent and temporary incomes growth rate, the rate of inflation and the percentage deviation from the long-term equilibrium in the period of instability based on the samples for the United States, Canada, Japan, the Russian Federation and European countries.
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This paper studies the economic impact of the current global economic downturn on the household sector. Household budgets can be negatively affected by declines in nominal wages and increases in unemployment. We empirically test this effect for the Czech economy. As a result of the lack of micro data on the Czech household finances, micro data are simulated. Our analysis clearly points out that there is a significant additional decline in consumption related to an increase in household default rates. We find that potential household insolvencies have important implications for the financial system as well as for the aggregate economy.
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This paper analyzes whether there is a magnify effect of twin crises on output and the relationship between banking and currency crises. Using data from 12 emerging countries over the period 1980-2006 we found that the cost of twin crises is large but it does not magnify the effect as compare to the combine cost of banking and a currency crisis happens at different time. In fact, the cost of twin crises was smaller when compare to the two crises with a difference between 2 to 2.6 percent using different methodologies. This result was also similar even with the exclusion of countries involved in the Asian Financial crisis as there was no evidence of the magnify effect on twin crises on GDP growth.
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This note reviews recent Institute work on the factors that might affect the future evolution of consumption. Drawing on Barrell and Davis (2007), it discusses the evidence for the effects of housing wealth on consumption, and shows that there has been strong and well supported evidence for a link for some time. This evidence suggests that a fall in house prices will cause consumption growth to slow. The discussion also covers evidence from Barrell, Davis and Pomerantz (2006) on the effects of financial crises on consumption behaviour. They suggest that there are large and significant negative effects on consumption during banking crises that are over and above the effects on consumption of the crisis-induced changes in income and wealth. Much of this work is embedded in our structural model, NiGEM, and it is possible to estimate the effects of house price declines and financial crises on consumption and income using the model. The note also gives a set of ready reckoners for the impacts of house price declines on output and of a given associated fall in the level of housing wealth on the level of consumption.
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We investigate the effects of changes in taxes using the National Institute international macro model, NiGEM. A comparison on fiscal impulses worth 1 per cent of GDP for one year is made, with a comparison of a direct tax change, indirect tax change, and a lump sum payment. Multipliers are assessed one country at a time and when policy is coordinated to increase its impacts. We look at the importance of releasing borrowing constraints in a banking crisis. The analysis assumes financial and foreign exchange markets are forward looking.
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The Euro Area economy grew by 0.8 per cent in the first quarter of this year, and is proving more resilient than anticipated in our April forecast. We were then expecting a markedly less robust outturn of an increase of 0.4 per cent. However, despite this positive start, we still anticipate a downturn in the Euro Area's year-on-year economic growth. After peaking at 2.9 per cent in 2006, real GDP growth is projected to slow down to around 2 per cent over the forecast period. Sluggish domestic demand and diminishing contributions from net trade both contribute to this downturn. Household consumption is forecast to expand by 1 per cent in the short term, down from 1.6 per cent in 2007. Consumption growth is expected to be considerably weaker than in 2007 due to accelerating inflation and the slowdown in the growth of housing wealth, particularly in France, Ireland and Spain as well as elsewhere. Moreover, real disposable income growth is expected to slow down from 2 per cent in 2007 to about 1¼ per cent this year. Nominal wages are expected to rise by 3½ per cent on average this year, and HCP inflation is likely to pick up strongly to slightly more than 3¾ per cent per annum, 1½ percentage points above the level of last year.
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Crises have a common shape but not always common consequences, as Barrell and Davis (2005) discuss. Asset bubbles are associated with the run-up to most crises and regulators should respond, taking an asset bubble as a signal of a need for precautionary action. It is easy to say that fundamentals have changed an asset market, and hard to spot a bubble. It is also common to suggest that interest rate policy should be set to constrain bubbles such as those in housing markets in recent years. Not only is it difficult for the central bank to use interest rates to constrain a bubble, it is also inappropriate if inflation is under control. It is for the financial market regulator, which may or may not be in the central bank, to respond to the bubble and strengthen its precautionary measures designed to raise lending standards.
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Bibliogr. s. 222-233
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This paper proposes unit root tests for dynamic heterogeneous panels based on the mean of individual unit root statistics. In particular it proposes a standardized t-bar test statistic based on the (augmented) Dickey–Fuller statistics averaged across the groups. Under a general setting this statistic is shown to converge in probability to a standard normal variate sequentially with T (the time series dimension) →∞, followed by N (the cross sectional dimension) →∞. A diagonal convergence result with T and N→∞ while N/T→k,k being a finite non-negative constant, is also conjectured. In the special case where errors in individual Dickey–Fuller (DF) regressions are serially uncorrelated a modified version of the standardized t-bar statistic is shown to be distributed as standard normal as N→∞ for a fixed T, so long as T>5 in the case of DF regressions with intercepts and T>6 in the case of DF regressions with intercepts and linear time trends. An exact fixed N and T test is also developed using the simple average of the DF statistics. Monte Carlo results show that if a large enough lag order is selected for the underlying ADF regressions, then the small sample performances of the t-bar test is reasonably satisfactory and generally better than the test proposed by Levin and Lin (Unpublished manuscript, University of California, San Diego, 1993).
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Efficient estimators of cointegrating vectors are presented for systems involving deterministic components and variables of differing, higher orders of integration. The estimators are computed using GLS or OLS, and Wald statistics constructed from these estimators have asymptotic x [superscript] 2 distributions. These and previously proposed estimators of cointegrating vectors are used to study long-run U.S. money (M1) demand. M1 demand is found to be stable over 1900-1989; the 95 percent confidence intervals for the income elasticity and interest rate semielasticity are (0.88, 1.06) and (-0.13, -0.08), respectively. Estimates based on the postwar data alone, however, are unstable, with variances which indicate substantial sampling uncertainty. Copyright 1993 by The Econometric Society.
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We estimate the impact of financial liberalisation on consumption in seven major industrial countries, and find a marked shift in behaviour, notably a decline in short-run income elasticities and a rise in short-run wealth and interest rate elasticities. A corollary is that consumption equations estimated over both pre- and post-liberalisation regimes may be misleading, and either a form of testing as presented here or a shortening of the sample period may be appropriate for accurate forecasting and simulation.
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Monetary policies of the ECB and US Fed can be characterised by Taylor rules, that is both central banks seem to be setting rates by taking into account the output gap and inflation. We also set up and tested Taylor rules which incorporate money growth and the euro-dollar exchange rate, thereby improving the fit between actual and Taylor rule based rates. In general, Taylor rules appear to be a much better way of describing Fed policy than ECB policy. Simulations suggest that the ECB's short-term interest rates have been at a much lower level in the last two years compared with what a Taylor rule would suggest.
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The crisis problem is one of the dominant macroeconomic features of our age. Its prominence suggests questions like the following: Are crises growing more frequent? Are they becoming more disruptive? Are economies taking longer to recover? These are fundamentally historical questions, which can be answered only by comparing the present with the past. To this end, this paper develops and analyses a data base spanning 120 years of financial history. We find that crisis frequency since 1973 has been double that of the Bretton Woods and classical gold standard periods and is rivalled only by the crisis-ridden 1920s and 1930s. History thus confirms that there is something different and disturbing about our age. However, there is little evidence that crises have grown longer or output losses have become larger. Crises may have grown more frequent, in other words, but they have not obviously grown more severe. Our explanation for the growing frequency and chronic costs of crises focuses on the combination of capital mobility and the financial safety net, including the implicit insurance against exchange risk provided by an ex ante credible policy of pegging the exchange rate, which encourages banks and corporations to accumulate excessive foreign currency exposures. We also provide policy recommendations for restoring stability and growth. — Michael Bordo, Barry Eichengreen, Daniela Klingebiel and Maria Soledad Martinez-Peria
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relate only to the restructuring and recapitalization of the financial system. Moreover, we are not able to include the burden borne by depositors and borrowers in the form of wider interest rate spreads resulting from bad loans left on banks' balance sheets. Finally, most of the data on costs do not include costs resulting from indirect methods of bailing out banks. For example, a government may subsidize a borrower by granting it monopoly privilege or other means to improve profits and so repay loans. Algeria 1990--92 Share of nonperforming loans in the banking system reached 50 percent. Benin All three commercial banks collapsed; 80 percent of banks' loan portfolios were nonperforming. CFA 95 billion, equivalent to 17 percent of GDP. Burkina Faso 1988--94 Banking system nonperforming loans estimated at 34 percent. Burundi 1994--? Banking system nonperforming loans estimated at 25 percent in 1995; one bank was liquidated. Cameroon In 1989 banking system nonperforming loans
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