Modelling Country Default Risk as a Latent Variable: A Multiple Indicators Multiple Causes Approach
A. Bühn, Stefan Eichler, Dominik Maltritz
Applied Economics,
No. 36,
2012
Abstract
We study the determinants of country default risk by applying a Multiple Indicators Multiple Causes (MIMIC) model. This accounts for the fact that country default risk is an unobservable variable. Whereas existing (regression-based) approaches typically use only one of several possible country default risk indicators as the dependent variable, the MIMIC model enables us to consider several indicators at once. The simultaneous consideration of sovereign yield spreads and Standard and Poor (S&P) ratings may help to improve the identification of the latent country default risk. Our results confirm most of the literature's main findings regarding important determinants of country default risk, refute others and provide new evidence to controversial questions.
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Trade Misinvoicing: The Dark Side of World Trade
A. Buehn, Stefan Eichler
World Economy,
No. 8,
2011
Abstract
We analyse the determinants of trade misinvoicing using data on 86 countries from 1980 to 2005. In a simple microeconomic framework, we derive the determinants of four different types of trade misinvoicing taking into account that only the financial incentives determine whether and how much exports/imports to underinvoice or overinvoice, whereas the deterrents only affect the extent of misinvoicing. The hypothesised determinants are tested using data on discrepancies in bilateral trade with the United States. We find that the black market premia and tariffs motivate illegal trading activities. Higher financial penalties effectively act as a deterrent to this crime.
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Stock Market Firm-Level Information and Real Economic Activity
Filippo di Mauro, Fabio Fornari, Dario Mannucci
ECB Working Paper,
No. 1366,
2011
Abstract
We provide evidence that changes in the equity price and volatility of individual firms (measures that approximate the definition of 'granular shock' given in Gabaix, 2010) are key to improve the predictability of aggregate business cycle fluctuations in a number of countries. Specifically, adding the return and the volatility of firm-level equity prices to aggregate financial information leads to a significant improvement in forecasting business cycle developments in four economic areas, at various horizons. Importantly, not only domestic firms but also foreign firms improve business cycle predictability for a given economic area. This is not immediately visible when one takes an unconditional standpoint (i.e. an average across the sample). However, conditioning on the business cycle position of the domestic economy, the relative importance of the two sets of firms - foreign and domestic - exhibits noticeable swings across time. Analogously, the sectoral classification of the firms that in a given month retain the highest predictive power for future IP changes also varies significantly over time as a function of the business cycle position of the domestic economy. Limited to the United States, predictive ability is found to be related to selected balance sheet items, suggesting that structural features differentiate the firms that can anticipate aggregate fluctuations from those that do not help to this aim. Beyond the purely forecasting application, this finding may enhance our understanding of the underlying origins of aggregate fluctuations. We also propose to use the cross sectional stock market information to macro-prudential aims through an economic Value at Risk.
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Bank-specific Shocks and the Real Economy
Claudia M. Buch, Katja Neugebauer
Journal of Banking and Finance,
No. 8,
2011
Abstract
Governments often justify interventions into the financial system in the form of bail outs or liquidity assistance with the systemic importance of large banks for the real economy. In this paper, we analyze whether idiosyncratic shocks to loan growth at large banks have effects on real GDP growth. We employ a measure of idiosyncratic shocks which follows Gabaix (forthcoming). He shows that idiosyncratic shocks to large firms have an impact on US GDP growth. In an application to the banking sector, we find evidence that changes in lending by large banks have a significant short-run impact on GDP growth. Episodes of negative loan growth rates and the Eastern European countries in our sample drive these results.
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The Laffer curve revisited
Mathias Trabandt, Harald Uhlig
Journal of Monetary Economics,
No. 4,
2011
Abstract
Laffer curves for the US, the EU-14 and individual European countries are compared, using a neoclassical growth model featuring “constant Frisch elasticity” (CFE) preferences. New tax rate data is provided. The US can maximally increase tax revenues by 30% with labor taxes and 6% with capital taxes. We obtain 8% and 1% for the EU-14. There, 54% of a labor tax cut and 79% of a capital tax cut are self-financing. The consumption tax Laffer curve does not peak. Endogenous growth and human capital accumulation affect the results quantitatively. Household heterogeneity may not be important, while transition matters greatly.
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The Importance of Estimation Uncertainty in a Multi-Rating Class Loan Portfolio
Henry Dannenberg
IWH Discussion Papers,
No. 11,
2011
Abstract
This article seeks to make an assessment of estimation uncertainty in a multi-rating class loan portfolio. Relationships are established between estimation uncertainty and parameters such as probability of default, intra- and inter-rating class correlation, degree of inhomogeneity, number of rating classes used, number of debtors and number of historical periods used for parameter estimations. In addition, by using an exemplary portfolio based on Moody’s ratings, it becomes clear that estimation uncertainty does indeed have an effect on interest rates.
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MNE’s Regional Location Choice - A Comparative Perspective on East Germany, the Czech Republic and Poland
Andrea Gauselmann, Philipp Marek, J. P. Angenendt
IWH Discussion Papers,
No. 8,
2011
published in: Empirica
Abstract
The focus of this article is the empirical identification of factors influencing Foreign Direct Investment (FDI) in transition economies on a regional level (NUTS 2). The analysis is designed as benchmark between three neighboring post-communist regions, i.e. East Germany, the Czech Republic and Poland. Their different transition paths have not only resulted in economic differences. We can also observe today that the importance of pull factors for FDI varies significantly across the regions. This analysis shows that in comparison with Poland and the Czech Republic, East Germany’s major benefit is its purchasing power, its geographical proximity to West European markets, and its modern infrastructure. Furthermore, the analysis suggests that intra-industry linkages such as specialization and agglomeration economies are relevant factors for the location decision of foreign investors. This result can help to explain the regional divergence of FDI streams in transition economies.
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Competition, Risk-shifting, and Public Bail-out Policies
Reint E. Gropp, H. Hakenes, Isabel Schnabel
Review of Financial Studies,
No. 6,
2011
Abstract
This article empirically investigates the competitive effects of government bail-out policies. We construct a measure of bail-out perceptions by using rating information. From there, we construct the market shares of insured competitor banks for any given bank, and analyze the impact of this variable on banks' risk-taking behavior, using a large sample of banks from OECD countries. Our results suggest that government guarantees strongly increase the risk-taking of competitor banks. In contrast, there is no evidence that public guarantees increase the protected banks' risk-taking, except for banks that have outright public ownership. These results have important implications for the effects of the recent wave of bank bail-outs on banks' risk-taking behavior.
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Central and Eastern European Countries in the Global Financial Crisis: A Typical Twin Crisis?
Diemo Dietrich, Tobias Knedlik, Axel Lindner
Post-Communist Economies,
No. 4,
2011
Abstract
This paper shows that during the Great Recession, banking and currency crises occurred simultaneously in Central and Eastern Europe. Events, however, differed widely from what happened during the Asian crisis that usually serves as the model case for the concept of twin crises. We look at three elements that help explaining the nature of events in Central and Eastern Europe: the problem of currency mismatches, the relation between currency and banking crises, and the importance of multinational banks for financial stability. It is shown that theoretical considerations concerning internal capital markets of multinational banks help understand what happened on capital markets and in the financial sector of the region. We discuss opposing effects of multinational banking on financial stability and find that institutional differences are the key to understand differing effects of the global financial crisis. In particular, we argue that it matters if international activities are organized by subsidiaries or by cross-border financial services, how large the share of foreign currency-denominated credit is and whether the exchange rate is fixed or flexible. Based on these three criteria we give an explanation why the pattern of the crisis in the Baltic States differed markedly from that in Poland and the Czech Republic, the two largest countries of the region.
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What Drives FDI in Central-eastern Europe? Evidence from the IWH-FDI-Micro Database
Andrea Gauselmann, Mark Knell, Johannes Stephan
Post-Communist Economies,
No. 3,
2011
Abstract
The focus of this paper is on the match between strategic motives of foreign investments into Central-Eastern Europe and locational advantages offered by these countries. Our analysis makes use of the IWH-FDI-Micro Database, a unique dataset that contains information from 2009 about the determinants of locational factors, technological activity of the subsidiaries, and the potentials for knowledge spillovers in the Czech Republic, Hungary, Poland, Romania, and Slovakia. The analysis suggests that investors in these countries are mainly interested in low (unit) labour costs coupled with a well-trained and educated workforce and an expanding market with the high growth rates in the purchasing power of potential buyers. It also suggests that the financial crisis reduced the attractiveness of the region as a source for localised knowledge and technology. There appears to be a match between investors’ expectations and the quantitative supply of unqualified labour, not however for the supply of medium qualified workers. But the analysis suggests that it is not technology-seeking investments that are particularly content with the capabilities of their host economies in terms of technological cooperation. Finally, technological cooperation within the local host economy is assessed more favourably with domestic firms than with local scientific institutions – an important message for domestic economic policy.
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