Pricing-to-market with state-dependent pricing

This paper extracts information on inflation expectations, the real interest rate, and various risk premiums by exploring the underlying common factors among the actual inflation, University of Michigan consumer survey inflation forecast, yields on U.S. nominal Treasury bonds, and particularly, yields on Treasury Inflation Protected Securities (TIPS). Our findings suggest that a significant liquidity risk premium on TIPS exists, which leads to inflation expectations that are generally higher than the inflation compensation measure at the 10-year horizon. On the other hand, the estimated expected inflation is mostly lower than the consumer survey inflation forecast at the 12-month horizon. Survey participants slowly adjust their inflation forecasts in response to inflation changes. The nominal interest rate adjustment lags inflation movements, too. Our model also edges out a parsimonious seasonal AR(2) time series model in the one-step-ahead forecast of inflation.

Financial market integration under EMU

The single most important policy-induced innovation in the international financial system since the collapse of the Bretton-Woods regime is the institution of the European Monetary Union. This paper provides an account of how the process of financial integration has promoted financial development in the euro area. It starts by defining financial integration and how to measure it, analyzes the barriers that can prevent it and the effects of their removal on financial markets, and assesses whether the euro area has actually become more integrated. It then explores to which extent these changes in financial markets have influenced the performance of the euro-area economy, that is, its growth and investment, as well as its ability to adjust to shocks and to allow risk-sharing. The paper concludes analyzing further steps that are required to consolidate financial integration and enhance the future stability of financial markets

German economic performance: disentangling the role of supply-side reforms, macroeconomic policy and coordinated economy institutions

Since unification, the debate about Germany's poor economic performance has focused on supply-side weaknesses, and the associated reform agenda sought to make low-skill labour markets more flexible. We question this diagnosis using three lines of argument. First, effective restructuring of the supply side in the core advanced industries was carried out by the private sector using institutions of the coordinated economy, including unions, works councils and blockholder owners. Second, the implementation of orthodox labour market and welfare state reforms created a flexible labour market at the lower end. Third, low growth and high unemployment are largely accounted for by the persistent weakness of domestic aggregate demand, rather than by the failure to reform the supply side. Strong growth in recent years reflects the successful restructuring of the core economy. To explain these developments, we identify the external pressures on companies in the context of increased global competition, the continuing value of the institutions of the coordinated market economy to the private sector and the constraints imposed on the use of stabilizing macroeconomic policy by these institutions. We also suggest how changes in political coalitions allowed orthodox labour market reforms to be implemented in a consensus political system

Asset Price Bubbles, Price Stability, and Monetary Policy: Japan' s Experience

Japan's economy has experienced an extremely large swing against the backdrop of the emergence, expansion, and bursting of asset price bubbles. When examining the emergence and bursting of the bubble economy from the viewpoint of monetary policy management, should the Bank of Japan have given more consideration to asset price fluctuations in formulating its monetary policy? Or, should the Bank not have been perplexed with asset price fluctuations and conducted policies focusing only on the general price level such as inflation targeting? In answering these questions and deciding policy actions, to what extent should the Bank consider financial system problems? This paper aims at forming some tentative answers to these questions.

An Anatomy of the French Labour Market

[Excerpt] Over the last decades, many European countries have experienced high and persistent unemployment rates. The bulk of labour market research has tackled this issue by emphasizing the effect of employment protection legislation, hereafter EPL, on labour market performance. As a result, the importance of labour market flexibility has been widely acknowledged. This view can be summarized by the expressed desire of the E.U. council to give member States incentives to “review and, where appropriate, reform overly restrictive elements in employment legislation that affect labour market dynamics [...] and to undertake other appropriate measures to promote a better balance between work and private life and between flexibility and security”. It is however striking that most of the reforms undertaken have contrasted sharply with this latter recommendation by favouring reforms at the margin. Those reforms have fostered two-tier systems, as the increase in labour market flexibility has taken place mainly through a series of marginal reforms that liberalized the use of fixed-term and/or non-standard employment contracts. Two-tier systems have promoted the emergence of dual employment protection which can be broadly defined as the coexistence of both long-term contracts, which benefit from stringent protection, and short-term contracts with little or no protection. It is often argued that this combination creates labour market segmentation, traps workers in a recurring sequence of frequent unemployment spells, favours unequal repartition of risk between workers and enhances inequalities. In particular, two-tier systems create excess labour turnover as they increase the incentives to create temporary rather than permanent jobs, reduce job destruction for stable jobs, but increase churning for temporary jobs. For instance in countries with stringent legal constraints on the termination of permanent jobs, such as France or Spain, it turns out that about 70 per cent to 90 per cent of entries into employment are in temporary jobs with very short duration (on average less than one month and a half in France). If excess labour turnover and its consequences are a concern for the economy as a whole, the dramatic spread of temporary jobs is even more a concern for young/less experienced workers as they are more likely to be negatively affected by the adverse effects of dual employment protection. The French labour market is no exception and has faced similar trends during the 1990s. Given the pervasiveness of temporary jobs on the labour market and their consequences on the society and economic outcomes, it is urgent to understand how two-tier systems shape the functioning of the labour market. This is the very purpose of the present report. After having described in details the salient features of the French dual labour market and having discussed the legislation at the root of French dualism, we review the different mechanisms through which dualism affect labour markets: labour market dynamics, wage inequality, human capital accumulation, job satisfaction, social integration and health. We consider whenever possible both theoretical insights and empirical evaluations. We finally conclude this report by providing possible directions to reform the labour market

Financial Market Integration under EMU

The European Monetary Union (EMU) has been the single most important policy-induced innovation in the international financial system since the collapse of the Bretton-Woods system. By eliminating exchange rate risk, EMU has eliminated a key obstacle to financial integration. But while a single currency is a necessary condition for the emergence of pan-European capital markets, it is not a sufficient one. Other frictions may still stand in the way of full integration: persistent differences in regulations applying to financial intermediaries, tax treatment, standard contractual clauses and business conventions, issuance policy, security trading systems, settlement systems, availability of information, and judicial enforcement may still segment financial markets along national borders. In the process that preceded and accompanied the introduction of the euro, however, monetary unification triggered a sequence of policy actions and private sector responses that swept aside many other regulatory barriers to financial integration. To what extent has this process of regulatory reform led to actual financial integration? And if European financial markets have actually become more integrated, to what extent have these changes spurred growth and investment in Europe? Will financial integration affect also the ability of households to shoulder risks, or the ability of European economies to adjust to macroeconomic shocks? Which policy lessons can we draw for the future of European financial markets?978-92-79-08237-5, Jappelli, Pagano, euro area, financial markets, financial integration, EMU

Volatility and contagion in a financially integrated world : lessons from East Asia's recent experience

The buildup of vulnerabilities in East Asia is shown here to be mainly the result of weaknesses in financial intermediation, poor corporate governance, and deficient government policies, including pro-cyclical macroeconomic policy responses to large capital inflows. Weak due diligence by external creditors, fueled partly by ample global liquidity, also played a role but global factors were more important in triggering the crises than in causing them. The crisis occurred partly because the economies lacked the institutional and regulatory structure to cope with increasingly integrated capital markets. Trouble arose from private sector decisions (by both borrowers and lenders) but governments created incentives for risky behavior and exerted little regulatory authority. Governments failed to encourage the transparency needed for the market to recognize and correct such problems as unreported mutual guarantees, insider relations, and nondisclosure of banks'and companies'true net positions. Domestic weaknesses were aggravated by poorly disciplined foreign lending. The problem was not so much overall indebtedness as the composition of debt; a buildup of short-term unhedged debt left the economics vulnerable to a sudden loss of confidence. The same factors made the crisis's economic and social impact more severe than some anticipated. The loss of confidence directly affected by private demand - both investment and consumption - which could not be offset in the short run by net external demand. The effect on corporations and financial institutions has been severe because of the high degree of leveraging and the unhedged, short-term nature of foreign liabilities, which has led to a severe liquidity crunch. Domestic recession, financial and corporate distress, liquidity constraints, and political uncertainty were self-reinforcing, leading to a severe downturn.International Terrorism&Counterterrorism,Economic Theory&Research,Fiscal&Monetary Policy,Payment Systems&Infrastructure,Banks&Banking Reform,Macroeconomic Management,Banks&Banking Reform,Financial Crisis Management&Restructuring,Economic Theory&Research,Financial Intermediation

Global Crises and Equity Market Contagion

Using the 2007-09 financial crisis as a laboratory, we analyze the transmission of crises to country-industry equity portfolios in 55 countries. We use a factor model to predict crisis returns, defining unexplained increases in factor loadings and residual correlations as indicative of contagion. We find statistically significant evidence of contagion from US markets and from the global financial sector, but the effects are economically small. By contrast, there has been substantial contagion from domestic equity markets to individual domestic equity portfolios, with its severity inversely related to the quality of countries’ economic fundamentals and policies. This confirms the old “wake-up call” hypothesis, with markets and investors focusing substantially more on country-specific characteristics during the crisis.

The Empirical Relevance of a basic sticky-price intertemporal model

In this paper, we first outline the monetary version of the sticky price intertemporal model of Obstfeld and Rogoff (1995, 1996), in which monetary shocks unambiguously generate apermanent nominal exchange rate depreciation and a temporary current account surplus. Wethen empirically investigate these theoretical predictions in two structural VAR systems for15 OECD countries over the period 1979-1999, using the long-run restriction identificationscheme suggested by Clarida and Galì (1994). Our empirical findings support the mainpredictions of the basic model, as well as suggesting that monetary shocks play an importantrole in the current account fluctuations. Moreover, we find that more open economies showgreater sensitivity of the current account to monetary shocks.

Has emerging Asia decoupled? An analysis of production and trade linkages using the Asian international input-output table

Due to the emergence of global production networks, trade statistics have became less accurate in describing the dependence of emerging Asia on external demand. This paper analyses, using an update of the Asian International Input-Output (AIO) table, the interdependence of emerging Asian countries, the United States, the EU15, and Japan via trade and production linkages. According to the results, we do not find evidence of the decoupling of emerging Asia from the rest of the world. On the contrary, we find evidence on increasing trade integration, both globally and regionally. Nonetheless, our analysis indicates that emerging Asia’s dependence on exports is only about one-third of its GDP, i.e. well below the 50% exposure suggested by trade data. This finding can be explained by the high import content of exports in these economies, which is a result of the increasing segmentation of production across the region. JEL Classification: F14, C67, E23Asian International Input-Output table, decoupling, Emerging Asia, real linkages, resilience