May the Force Be with You: Exit Barriers, Governance Shocks, and Profitability Sclerosis in Banking
Michael Koetter, Carola Müller, Felix Noth, Benedikt Fritz
Deutsche Bundesbank Discussion Paper,
No. 49,
2018
Abstract
We test whether limited market discipline imposes exit barriers and poor profitability in banking. We exploit an exogenous shock to the governance of government-owned banks: the unification of counties. County mergers lead to enforced government-owned bank mergers. We compare forced to voluntary bank exits and show that the former cause better bank profitability and efficiency at the expense of riskier financial profiles. Regarding real effects, firms exposed to forced bank mergers borrow more at lower cost, increase investment, and exhibit higher employment. Thus, reduced exit frictions in banking seem to unleash the economic potential of both banks and firms.
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19.12.2018 • 23/2018
IWH Mid-term Projections: The German Economy and Public Finances 2018 to 2025
In 2018 the general government overall balance is likely to be in surplus by almost 60 billion euros. In the medium term, however, demographic conditions will deteriorate, as will public finances. The financial position of the German state will nevertheless remain stable until 2025, unless major negative shocks occur. “But even if interest rates rose significantly or foreign demand declined markedly, only moderate deficits would arise”, says Oliver Holtemöller, head of the Department of Macroeconomics and vice president at Halle Institute for Economic Research (IWH). However, given the expected reduction of the surplus under existing legislation, there is no room for further increases in spending.
Oliver Holtemöller
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On the Risk of a Sovereign Debt Crisis in Italy
Oliver Holtemöller, Tobias Knedlik, Axel Lindner
Intereconomics,
No. 6,
2018
Abstract
The intention for the Italian government to stimulate business activity via large increases in government spending is not in line with the stabilisation of the public debt ratio. Instead, if such policy were implemented, the risk of a sovereign debt crisis would be high. In this article, we analyse the capacity of the Italian economy to shoulder sovereign debt under different scenarios. We conclude that focusing on growth enhancing structural reforms, would allow for moderate increases in public expenditure.
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Should We Use Linearized Models To Calculate Fiscal Multipliers?
Jesper Lindé, Mathias Trabandt
Journal of Applied Econometrics,
No. 7,
2018
Abstract
We calculate the magnitude of the government consumption multiplier in linearized and nonlinear solutions of a New Keynesian model at the zero lower bound. Importantly, the model is amended with real rigidities to simultaneously account for the macroeconomic evidence of a low Phillips curve slope and the microeconomic evidence of frequent price changes. We show that the nonlinear solution is associated with a much smaller multiplier than the linearized solution in long‐lived liquidity traps, and pin down the key features in the model which account for the difference. Our results caution against the common practice of using linearized models to calculate fiscal multipliers in long‐lived liquidity traps.
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Zu den rentenpolitischen Plänen im Koalitionsvertrag 2018 von CDU, CSU und SPD: Konsequenzen, Finanzierungsoptionen und Reformbedarf
Oliver Holtemöller, Christoph Schult, Götz Zeddies
Zeitschrift für Wirtschaftspolitik,
No. 3,
2018
Abstract
In the coalition agreement from February 7, 2018, the new German federal government drafts its public pension policy, which has to be evaluated against the background of demographic dynamics in Germany. In this paper, the consequences of public pensions related policy measures for the German public pension insurance are illustrated using a simulation model. In the long run, the intended extensions of benefits would lead to an increase in the contribution rate to the German public pension insurance of about two and a half percentage points. Referring to pension systems of other countries, we discuss measures in order to limit this increase in the contribution rate.
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The Joint Dynamics of Sovereign Ratings and Government Bond Yields
Makram El-Shagi, Gregor von Schweinitz
Journal of Banking and Finance,
2018
Abstract
Can a negative shock to sovereign ratings invoke a vicious cycle of increasing government bond yields and further downgrades, ultimately pushing a country toward default? The narratives of public and political discussions, as well as of some widely cited papers, suggest this possibility. In this paper, we will investigate the possible existence of such a vicious cycle. We find no evidence of a bad long-run equilibrium and cannot confirm a feedback loop leading into default as a transitory state for all but the very worst ratings. We use a bivariate semiparametric dynamic panel model to reproduce the joint dynamics of sovereign ratings and government bond yields. The individual equations resemble Pesaran-type cointegration models, which allow for valid interference regardless of whether the employed variables display unit-root behavior. To incorporate most of the empirical features previously documented (separately) in the literature, we allow for different long-run relationships in both equations, nonlinearities in the level effects of ratings, and asymmetric effects in changes of ratings and yields. Our finding of a single good equilibrium implies the slow convergence of ratings and yields toward this equilibrium. However, the persistence of ratings is sufficiently high that a rating shock can have substantial costs if it occurs at a highly speculative rating or lower. Rating shocks that drive the rating below this threshold can increase the interest rate sharply, and for a long time. Yet, simulation studies based on our estimations show that it is highly improbable that rating agencies can be made responsible for the most dramatic spikes in interest rates.
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Lame-Duck CEOs
Marc Gabarro, Sebastian Gryglewicz, Shuo Xia
SSRN Working Papers,
2018
Abstract
We examine the relationship between protracted CEO successions and stock returns. In protracted successions, an incumbent CEO announces his or her resignation without a known successor, so the incumbent CEO becomes a “lame duck.” We find that 31% of CEO successions from 2005 to 2014 in the S&P 1500 are protracted, during which the incumbent CEO is a lame duck for an average period of about 6 months. During the reign of lame duck CEOs, firms generate an annual four-factor alpha of 11% and exhibit significant positive earnings surprises. Investors’ under-reaction to no news on new CEO information and underestimation of the positive effects of the tournament among the CEO candidates drive our results.
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Does it Payoff to Research Economics? A Tale of Citation, Knowledge and Economic Growth in Transition Countries
Dejan Kovač, Boris Podobnik, Nikol Scrbec
Physica A: Statistical Mechanics and its Applications,
September
2018
Abstract
There are many economic theories that promote human capital as a key driver of a country’s economic growth, but it is challenging to test this theory empirically on a country level and causally interpret the coefficients due to several identification problems. We tried to answer this particular question by using a quasi-natural experiment that happened quarter century ago – the fall of communist block in Eastern Europe. We use a shock to a particular scientific field – economics, to test whether the future investment into that particular field resulted in increased welfare and economic growth. The economics paradigm that was governing all of the communist block ceased to exist. Human capital depreciated over night and all communist countries had to transit from planned economy to a market economy. In the following years countries had to adapt to market economy through additional investment in human capital and research. We find that countries which lack both of the two fourth mentioned components had 25 years later a relatively lower economic growth and wealth. Unlike economics, other fields such as physics and medicine did not go through the same process so we use them as a placebo effect for our study. We find that the relative ratio of citations between economics and physics in post-communist countries is increasing only 15 years after the “paradigm” shock which gives a suggestive evidence that timing of investment into particular scientific field matters the most.
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