"How Far Can U.S. Equity Prices Fall Under Asset and Debt Deflation"

Equity prices have been falling since March 2000. How far can they fall before they reach bottom? The current bear market differs from the mid-1970s plunge in equity prices in terms of the causes and, consequently, the factors that should be monitored to test its progress. In the 1970s, the bear market was caused by soaring inflation resulting from a surge in the price of oil. It eroded households' real disposable income and corporate profits. That was a supply-led business cycle. Now, the bear market is caused by asset and debt deflation triggered by the burst of the "new economy" bubble. This working paper argues that on current economic fundamentals, the Standard & Poor's (S&P) index is fairly valued at 871, but the fair value may fall if the economy has a double-dip recession that triggers a property market crash. We suggest that the U.S. economy is heading for such a recession, as the poor prospects of the corporate sector are affecting the real disposable income of the personal sector. The forces that drive the economy back to recession are related to imbalances in the corporate and personal sectors that have started infecting the balance sheet of the commercial banks. The final stage of the asset-and-debt-deflation process involves a spiral between banks and the nonbank private sector (personal and corporate). Banks cut lending to the nonbank private sector, creating a credit crunch that worsens the economic health of the latter, which is reflected subsequently as a further deterioration of banks' balance sheets.

Coordination of fiscal with monetary and financial stability policies can better cure unemployment

This paper examines recent theoretical and empirical developments on fiscal policy to conclude that it is an effective macroeconomic tool in terms of curing unemployment. It is further shown that financial stability, ignored prior to the ‘Great Recession’, is important in economic policy. Fiscal policy can contribute to curing unemployment, especially so when coordinated closely not only with monetary policy but also with financial stability policies. It is also suggested that such coordination should be geared towards reducing income inequality. It is then high time that economists and economic policy-makers turned their attention more closely and seriously to restoring faith in fiscal policy with its strong macroeconomic role as a means of curing unemployment. Fiscal policy, properly coordinated with monetary and financial stability policies, should thereby be restored to its proper upgraded role in terms of economic policy.This is the accepted manuscript. The final version is available at http://www.elgaronline.com/view/journals/roke/3-2/roke.2015.02.07.xm

Testing For Financial Contagion Between Developed And Emerging Markets During The 1997 East Asian Crisis

In this paper we examine whether during the 1997 East Asian crisis there was any contagion from the four largest economies in the region (Thailand, Indonesia, Korea and Malaysia) to a number of developed countries (Japan, UK, Germany and France). Following Forbes and Rigobon (2002), we test for contagion as a significant positive shift in the correlation between asset returns, taking into account heteroscedasticity and endogeneity bias. Furthermore, we improve on earlier empirical studies by carrying out a full sample test of the stability of the system that relies on more plausible (over)identifying restrictions. The estimation results provide some evidence of contagion, in particular from Japan (the major international lender in the region), which drastically cut its credit lines to the other Asian countries in 1997

Endogeneity Analysis of Output Synchronization in the Current and Prospective EMU

The sustainability of European economic and monetary union (EMU) remains an important issue in light of existing plans for enlargement. This paper conducts an endogeneity analysis of output synchronization, based on panel data estimation from 1994-2013, for different country-groups, including core, periphery, central and eastern European countries, northern European and the prospective candidate countries, which are expected to adopt the euro over the coming years. The quantification of trade-related and direct spillover channels associated with monetary integration provides insight into the relative importance of direct and indirect synchronization gains arising from EMU membership. The use of amplitude and concordance measures of synchronization and a range of estimators enhances robustness. There are important endogeneity implications which emerge from our analysis.This is the author accepted manuscript. The final version is available from Wiley via http://dx.doi.org/10.1111/jcms.1230

Modelling the housing market in OECD countries

Recent episodes of housing bubbles, which occurred in several economies after the burst of the United States housing market, suggest studying the evolution of housing prices from a global perspective. We utilise a theoretical model for the purposes of this contribution, which identifies the main drivers of housing price appreciation, as for example, income, residential investment, financial elements, fiscal policy and demographics. In a second stage of our analysis, we test our theoretical hypothesis by means of a sample of 18 OECD countries from 1970 to 2011. We employ the vector error correction econometric technique in terms of our empirical analysis, which permits us to model the long-run equilibrium relationship and the short-run dynamics, which also helps to account for endogeneity and reverse causality problems.This is the accepted manuscript. The final version is available from Taylor & Francis at http://www.tandfonline.com/doi/full/10.1080/02692171.2013.828683#.VFyu-oXziE

Credit Risk and Macroeconomic Stress Tests in China

This paper examines the vulnerability of commercial banks in China to the changes in macroeconomic conditions by employing a macroeconomic stress test. We particularly focus on how the changes in housing market related variables and the scale of shadow banking influence the credit risks of China’s entire banking system. Based on the result of a Vector Autoregression (VAR) model, we proceed with a five-scenario analysis. Our main finding is the ability of shadow banking to absorb the credit risks of commercial banks rather than there being a spill over effect, according to the data from Q1 2005 to Q2 2016.1 Moreover, the mortgage loan is risky to commercial banks during this period. In addition, our scenario analysis suggests that China’s banking system is relatively stable and that the Central Bank of China is capable of monitoring the credit risks of commercial banks using appropriate credit policies

A model of economic growth for an open emerging country: empirical evidence for Brazil

Brazil liberalised its trade and finance in the 1990s as a strategy for higher economic growth. However, the country’s GDP growth has been unstable and low compared to its own performance during the industrialization period. This paper builds a model of economic growth that accounts for the main components of effective demand as well as important specificities of emerging economies to explain the economic dynamics after the liberalising reforms. The model is estimated for the case of Brazil from 1990 to 2014 and the results suggest that this economy became highly dependent on the world economic growth and the evolution of the real exchange rate. The main finding is that Brazil experiences higher economic growth only in favourable world scenarios but the evolution of the real exchange rate in this scenario may stimulate investments that only reinforce the existing productive structure, affecting negatively the long-run economic growth.Carolina Troncoso Baltar is very grateful to “Coordenação de Aperfeiçoamento de Pessoal de Nível Superior” (CAPES) for financial support

‘BREXIT’: A POLITICAL ECONOMY APPROACH

To understand the future of the UK no matter the decision on Brexit, the authors argue it is imperative to understand what led to Brexit in the first place. Almost unmistakable, whatever the future of Brexit, the British economy is smaller because of the referendum to leave than it would have been otherwise

Brazilian Economic Performance Since The Emergence Of The Great Recession: The Effects Of Income Distribution On Consumption

Fundação de Amparo à Pesquisa do Estado de São Paulo (FAPESP)After a long period of unstable and low economic activity, Brazil achieved a relatively high economic growth with low inflation from 2004 to 2008, when the world scenario was favourable for the Brazilian trade balance. An incomes policy, focused on real increases in the minimum wage along with a credit boom, led to a decade of high consumption growth rates. High levels of consumption and exports, in turn, induced investment and stimulated manufacturing production, despite the real appreciation of the national currency. However, the Great Recession that emerged after the global financial crisis of 2007/2008 brought challenges to the Brazilian economic performance, with unpleasant consequences for the country's GDP growth. Consumption, investment and exports have decelerated, despite anti-cyclical macroeconomic policies. In this setting, manufacturing production stagnated and GDP growth slowed down substantially, while imports continued rising considerably. The aim of this paper is to provide an explanation to the slowdown of Brazilian growth rates after the Great Recession. The main hypothesis is that consumption was the main source of effective demand in the country since 2003. However, Brazil has not yet been able to sustain manufacturing and economic growth without a more active government policy to stimulate productive investment.63157174Sao Paulo Research Foudation (FAPESP)Fundação de Amparo à Pesquisa do Estado de São Paulo (FAPESP)12th International Conference on Developments in Economic Theory and PolicyJUN 25-26, 2015Bilbao, SPAI

Regional financialisation and financial systems convergence: Evidence from Italy

The term ‘financialisation’ has now entered the lexicon of academics and policy makers, though there is still no agreement on its meaning and significance. One of the earlier definitions was in relation to the growing weight of financial motives, financial actors and markets in the operation of modern economies, both at the national and international level, from the early 1980s until today. Building on this definition, this paper sheds further light on the implications of spatial financialisation, which has been associated with the over and under-extension of credit across and within countries and evolving financial instability. The paper’s primary contribution is to extend in a robust manner a powerful panel data convergence testing methodology to analyse the spatial scale and temporal evolution of Italian regional lending conditions. The paper concludes that financial divergence has broadly increased in Italian regions. Furthermore, we are able to link regional financialisation to the growing north–south divide in a significant and meaningful way. As a result, the ability of southern regions in Italy to absorb adverse macroeconomic and financial shocks has been weakened. Relevant regional financial policies have thereby become very important. This is the author accepted manuscript. The final version is available from SAGE Publications via https://doi.org/10.1177/0308518X1666419