The Impact of Banking and Sovereign Debt Crisis Risk in the Eurozone on the Euro/US Dollar Exchange Rate
Stefan Eichler
Applied Financial Economics,
No. 15,
2012
Abstract
I study the impact of financial crisis risk in the eurozone on the euro/US dollar exchange rate. Using daily data from 3 July 2006 to 30 September 2010, I find that the euro depreciates against the US dollar when banking or sovereign debt crisis risk increases in the eurozone. While the external value of the euro is more sensitive to changes in sovereign debt crisis risk in vulnerable member countries than in stable member countries, the impact of banking crisis risk is similar for both country blocs. Moreover, rising default risk of medium and large eurozone banks leads to a depreciation of the euro while small banks’ default risk has no significant impact, showing the relevance of systemically important banks with regards to the exchange rate.
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Fiscal Policy and the Great Recession in the Euro Area
Mathias Trabandt, Günter Coenen, Roland Straub
American Economic Review: Papers and Proceedings,
No. 3,
2012
Abstract
How much did fiscal policy contribute to euro area real GDP growth during the Great Recession? We estimate that discretionary fiscal measures have increased annualized quarterly real GDP growth during the crisis by up to 1.6 percentage points. We obtain our result by using an extended version of the European Central Bank's New Area-Wide Model with a rich specification of the fiscal sector. A detailed modeling of the fiscal sector and the incorporation of as many as eight fiscal time series appear pivotal for our result.
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Macroeconomic Adjustment: The Baltic States versus Euro Area Crisis Countries
Axel Lindner
Intereconomics,
No. 6,
2011
Abstract
Estonia, Latvia and Lithuania have succeeded in rapidly reducing their current account deficits despite fixed exchange rates. Which factors have played a major role in this? What similarities, and what differences, do the Baltic states show compared to Greece and Portugal? What insights can be gained for the political debate on the euro area debt crisis?
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Has the Euro Increased International Price Elasticities?
Oliver Holtemöller, Götz Zeddies
IWH Discussion Papers,
No. 18,
2010
published in: Empirica
Abstract
This paper analyzes the role of common data problems when identifying structural breaks in small samples. Most notably, we survey small sample properties of the most commonly applied endogenous break tests developed by Brown, Durbin, and Evans (1975) and Zeileis (2004), Nyblom (1989) and Hansen (1992), and Andrews, Lee, and Ploberger (1996). Power and size properties are derived using Monte Carlo simulations. Results emphasize that mostly the CUSUM type tests are affected by the presence of heteroscedasticity, whereas the individual parameter Nyblom test and AvgLM test are proved to be highly robust. However, each test is significantly affected by leptokurtosis. Contrarily to other tests, where skewness is far more problematic than kurtosis, it has no additional effect for any of the endogenous break tests we analyze. Concerning overall robustness the Nyblom test performs best, while being almost on par to more recently developed tests in terms of power.
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The ADR Shadow Exchange Rate as an Early Warning Indicator for Currency Crises
Stefan Eichler, Alexander Karmann, Dominik Maltritz
Journal of Banking and Finance,
No. 11,
2009
Abstract
We develop an indicator for currency crisis risk using price spreads between American Depositary Receipts (ADRs) and their underlyings. This risk measure represents the mean exchange rate ADR investors expect after a potential currency crisis or realignment. It makes crisis prediction possible on a daily basis as depreciation expectations are reflected in ADR market prices. Using daily data, we analyze the impact of several risk drivers related to standard currency crisis theories and find that ADR investors perceive higher currency crisis risk when export commodity prices fall, trading partners’ currencies depreciate, sovereign yield spreads increase, or interest rate spreads widen.
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Growth, Volatility, and Credit Market Imperfections: Evidence from German Firms
Claudia M. Buch, Jörg Döpke
Journal of Economic Studies,
2008
Abstract
Purpose – The purpose of this paper is two-fold. First, it studies whether output volatility and growth are linked at the firm-level, using data for German firms. Second, it explores whether the link between volatility and growth depends on the degree of credit market imperfections.
Design/methodology/approach – The authors use a novel firm-level dataset provided by the Deutsche Bundesbank, the so-called Financial Statements Data Pool. The dataset has time series observations for German firms for the period 1997-2004, and the authors use information on the debt-to-assets or leverage ratio of firms to proxy for credit-constraints at the firm-level. As additional proxies for the importance of credit market imperfections, we use information on the size and on the legal status of firms.
Findings – The authors find that higher volatility has a negative impact on growth for small and a positive impact for larger firms. Higher leverage is associated with higher growth. At the same time, there is heterogeneity in the determinants of growth across firms from different sectors and across firms with a different legal status.
Practical implications – While most traditional macroeconomic models assume that growth and volatility are uncorrelated, a number of microeconomic models suggest that the two may be linked. However, it is unclear whether the link is positive or negative. The paper presents additional evidence regarding this question. Moreover, understanding whether credit market conditions affect the link between volatility and growth is of importance for policy makers since it suggests a channel through which the credit market can have long-run welfare implications. The results stress the importance of firm-level heterogeneity for the effects and effectiveness of economic policy measures.
Originality/value – The paper has two main novel features. First, it uses a novel firm-level dataset to analyze the determinants of firm-level growth. Second, it analyzes the growth-volatility nexus using firm-level data. To the best of the authors' knowledge, this is the first paper, which addresses the link between volatility, growth, and credit market imperfections using firm-level data.
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Regional origins of employment volatility: evidence from German states
Claudia M. Buch
CES IFO Working Paper No. 2296,
2008
Abstract
Greater openness for trade can have positive welfare effects in terms of higher growth. But increased openness may also increase uncertainty through a higher volatility of employment. We use regional data from Germany to test whether openness for trade has an impact on volatility. We find a downward trend in the unconditional volatility of employment, paralleling patterns for output volatility. The conditional volatility of employment, measuring idiosyncratic developments across states, in contrast, has remained fairly unchanged. In contrast to evidence for the US, we do not find a significant link between employment volatility and trade openness.
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The Euro and Cross-Border Banking: Evidence from Bilateral Data
S. Blank, Claudia M. Buch
Comparative Economic Studies,
No. 3,
2007
Abstract
Has the introduction of the Euro fostered financial integration in Europe? We answer this question using a data set of banks’ bilateral foreign assets and liabilities provided by the Bank for International Settlements. The data cover the pre-Euro period (1995–1998) and the post-Euro period (1999–2005). We use information from 10 OECD reporting countries and all OECD recipient countries. Gravity regressions show a positive and significant impact of the Euro on bilateral financial linkages. This effect is stronger and more robust for banks’ foreign assets than for their foreign liabilities.
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The integration of imperfect financial markets: Implications for business cycle volatility
Claudia M. Buch, C. Pierdzioch
Journal of Policy Modeling,
No. 7,
2005
Abstract
During the last two decades, the degree of openness of national financial systems has increased substantially. At the same time, asymmetries in information and other financial market frictions have remained prevalent. We study the implications of the opening up of national financial systems in the presence of financial market frictions for business cycle volatility. In our empirical analysis, we show that countries with more developed financial systems have lower business cycle volatility. Financial openness has no strong impact on business cycle volatility, in contrast. In our theoretical analysis, we study the implications of the opening up of national financial markets and of financial market frictions for business cycle volatility using a dynamic macroeconomic model of an open economy. We find that the implications of opening up national financial markets for business cycle volatility are largely unaffected by the presence of financial market frictions.
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Financial Openness and Business Cycle Volatility
Claudia M. Buch, Jörg Döpke, C. Pierdzioch
Journal of International Money and Finance,
No. 5,
2005
Abstract
This paper discusses whether the integration of international financial markets affects business cycle volatility. In the framework of a new open economy macro-model, we show that the link between financial openness and business cycle volatility depends on the nature of the underlying shock. Empirical evidence supports this conclusion. Our results also show that the link between business cycle volatility and financial openness has not been stable over time.
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