Frank Westermann’s research while affiliated with Osnabrück University and other places

The Optimal Currency Area (OCA) literature has been focusing on the co‐movement of business cycle shocks as a key policy criterion. We document in a simple Barro–Gordon framework that, in addition to a high correlation of shocks, a common persistence of shocks is a relevant OCA criterion. The model provides a conceptual underpinning for empirical studies that have used the Serial Correlation Common Features (SCCF) test to evaluate common currency areas. We apply the SCCF test to a set of countries that could potentially introduce the Euro and find for the period from 1999 (Q1) to 2019 (Q3) only little evidence that the acceding countries share a common cyclical response pattern with the European Monetary Union (EMU) aggregate.

The Euro and the RMB are both relatively new currencies traded on the global foreign exchange market. While the Euro was introduced in 2001, China started cross-border settlement in RMB in 2009. We analyse the evolution of Euro trading based on data from the BIS triennial survey and compare the patterns to the experience of RMB internationalization. We find that—similar to the RMB—Euro trading displayed some convergence to the geographical pattern of all currencies in the first years of its existence. Thereafter, the convergence process appears to have come to halt. We document that the determinants of Euro trading include links to offshore trading centres, economic and institutional characteristics, but these turn out to be rather unstable over time. The RMB, in comparison, displays a clear convergence pattern and is more strongly influenced by policies and recent trade disputes. Furthermore, we compare the geographical dispersion of Euro trading to the previous D-Mark period and to other commonly used international currencies. These results help to interpret the evidence on initial convergence as a rebound effect from a decline in the international use of the D-Mark during the 1990s.

While illicit capital flight is a major concern of policy makers in developing countries, there is only little research on the possible link between capital flight and development aid. In this paper, we address the issue for Nepal, a stereotypical financially‐closed developing economy that is highly dependent on resources from abroad. Distinguishing features of our approach are the use of a narrowly defined proxy of capital flight, based on trade‐cost adjusted mirror trade statistics, and the focus on the foreign‐exchange cash component of development aid. We document a robust partial correlation between aid and outward capital flight that is economically and statistically significant. Interestingly, this positive correlation is not observable for remittances, an alternative form of foreign‐exchange inflows where the capital flight motivation is absent. Furthermore, it is visible in the the FX‐cash component but not in broader aid definitions that include in‐kind transfers, or in multilateral and IMF loans. Finally, when comparing the subcomponents of export underinvoicing and import overinvoicing, only the latter is driving our results.

We study the evolution of offshore renminbi trading between 2016 and 2019. The geographical pattern of changes in offshore renminbi trading during this period is different from the one between 2013 and 2016. The pattern of changes in the 2016-2019 period, in addition to the previously reported convergence to the geographical trading pattern of all currencies, is affected by (geopolitical) disputes and trade intensity. Further, China-specific RQFII investment quota arrangements and offshore market’s equity market capitalization and level of financial development play a role in shaping the offshore RMB trading pattern.

Since the beginning of the financial crisis in 2007/2008, new lending in the euro area has slowed sharply and the old loans experienced ‘evergreening’, that is, bad loans have been rolled over rather than being liquidated. Even though ameliorating evergreening is key to promote lending for new investment projects and growth, no systematic evergreening measures exist. In this paper, we propose a new cross-country evergreening index and develop a public-choice model to explain why evergreening may reflect the incentives of regulators to forebear. Our evergreening index is based on a survey we designed and was administered by the ifo Institute to about 1000 experts in over 80 countries. We bring the model to the data using a heteroscedastic probit model and find that evergreening is higher in: (i) euro-area countries than in the rest of the world; (ii) in countries facing bank distress; and (iii) is highest in countries which experience banking distress and are members of the euro area. These results are consistent with our theoretical model. (JEL codes: F33, F55 and E58)

We analyze current account imbalances through the lens of the two largest surplus countries; China and Germany. We observe two striking patterns visible since the 2007/8 Global Financial Crisis. First, while China has been gradually reducing its current account surplus, Germany’s surplus has continued to increase throughout and after the crisis. Second, for these two countries, there is a remarkable reversal in the patterns of exchange rate misalignment: China’s currency has turned from being undervalued to overvalued, Germany’s currency has erased its level of overvaluation and become undervalued. Our empirical analyses show that the current account balances of these two countries are quite well explained by currency misalignment, common economic factors, and country-specific factors. Furthermore, we highlight the global financial crisis effects and, for Germany, the importance of differentiating balances against euro and non-euro countries.

We use two measures to study two capital flight channels for Germany. One measure is based on the concept of trade misinvoicing and one on net claims and liabilities in the Eurosystem of central banks. For both measures, we propose refinements to enhance the assessment of capital flight. We find that capital flight towards Germany via these two channels has been quite sizable in the recent decade and can tally to about 2% of GDP annually. Regarding their determinants, we show that the two capital flight measures are driven by both common and measure-specific factors. Traditional determinants such as covered interest differentials only play a limited role, while crisis-specific factors such as economic policy uncertainty, the ECB collateral policy, as well as currency misalignment are driving factors of the investors’ apparent flight-to-safety behavior.