Households' response to wealth changes; do gains or losses make a difference

We estimate the excess impact of financial asset capital losses relative to gains on household active savings and durable goods consumption in the Netherlands. The sample period covers both the stock-market boom during the 90's, and the bear period afterwards. The results suggest that households react more to capital losses than to capital gains. Failing to take into account this asymmetry may seriously bias the estimates of the marginal propensity to consume out of wealth.

The Forward Premium Puzzle only emerges gradually

The forward premium puzzle (FPP) is the negative correlation between the forward premium and the realized exchange rate return at maturities of a month and beyond. Some recent evidence shows that at maturities of multiple years and at the highest intra day frequency the correlation is positive and close to one. This paper contributes by using futures data instead of forwards to complete the maturity spectrum at the (multi-) day level. We find that the correlation only slowly turns negative as the number of days to maturity is increased to the monthly level. The typical shape of the premium correlation with regard to the forward maturity length appears to be V-shaped

Weathering the crisis and beyond: perspectives for the Euro area

The euro area is experiencing a severe and highly complex crisis. It comprises three problem areas, the difficulties of some highly indebted European sovereigns to ascertain funding at palatable cost, the disconcerting fragility of the European banking system and disappointing growth prospects in the euro area periphery. To make matters even worse, these problems have developed into a systemic crisis of the European Monetary Union (EMU), since observers have apparently developed fundamental doubts over its integrity. To overcome this systemic crisis, it would not be sufficient, if only the stronger euro area economies provided more solidarity, nor would it be sufficient, if only all of Europe adhered to ironclad budgetary discipline from now on. A European Redemption Pact could be a strong political commitment to the EMU and offer a bridge between the proponents of fiscal discipline and structural reform and those governments advocating for more support. This pact would entail two indispensable aspects, the codification of a credible and coherent reform path and a temporary and limited instrument for joint refinancing.Der Euro-Raum befindet sich inmitten einer schweren und höchst komplexen Krise, in der sich in einem Teufelskreis drei Teilkrisen gegenseitig verstärken: eine Staatsschuldenkrise, eine Bankenkrise und eine makroökonomische Krise. In ihrem Zusammenspiel haben diese zu einer systemischen Krise der Europäischen Währungsunion (EWU) geführt, denn mittlerweile haben außenstehende Beobachter ernsthafte Zweifel an ihrem Fortbestand. Um diese ernsthafte Lage zu überwinden, wäre es keineswegs ausreichend, wenn lediglich die stärkeren Mitgliedstaaten des Euro-Raums einseitig noch mehr Solidarität mit den schwächeren zeigten. Noch wäre es hinreichend, wenn sich alle Mitgliedsregierungen von nun an zu eisernen Budgetdisziplin verpflichteten. Vielmehr könnte ein Europäischer Schuldentilgungspakt eine Brücke von der Krise hin zu einer stabileren Lage bilden. Sein Abschluss könnte nicht nur den starken politischen Willen zu einer Fortsetzung des Integrationsprozesses in Europa dokumentieren, sondern diesen Prozess durch eine Balance zwischen den Forderungen nach Haushaltsdisziplin und Strukturreformen einerseits und nach solidarischer Unterstützung andererseits auch inhaltlich tragen. Das Konzept des Paktes ruht in seinen Grundfesten auf einer Verbindung von glaubwürdigen und umfassenden Reformvorhaben mit einer temporär und in der Größe begrenzt ausgestalteten gemeinsamen Haftung bei der Refinanzierung der Mitgliedstaaten

Current Account Imbalances in the Euro Area: Catching Up or Competitiveness?

In the debate on global imbalances, the euro area countries did not receive much attention so far. While the current account is on balance for the entire area, divergences between individual member states have increased since the introduction of the common currency. In this paper, the imbalances are traced back to catching up and competitiveness factors using paneleconometric techniques. In line with the intertemporal approach to the current account, low income countries tend to run deficits, while rich countries realize surpluses. However, the effect diminishes, if early years are dropped from the sample. The competitiveness channel is more robust and shows the expected sign, i.e. a real appreciation leads to external deficits. To restore competitiveness, a reduction of unit labour costs is on the agenda. Since a deterioration of competitiveness is not a feasible strategy for the surplus countries, an asymmetric response across countries is required in order to reduce the imbalances.In der Diskussion über globale Ungleichgewichte spielen die Länder der Eurozone bisher nicht die zentrale Rolle. Während die Leistungsbilanz für die gesamte Währungsunion ausgeglichen ist, sind die Ungleichgewichte zwischen den Mitgliedsländern erheblich und haben sich seit der Einführung der gemeinsamen Währung erhöht. In diesem Papier werden die Ungleichgewichte auf ökonomische Aufholprozesse und Wettbewerbsfähigkeit zurückgeführt. Dabei kommen panelökonometrische Methoden zum Einsatz. Bei Wohlfahrtunterschieden sollten Länder mit niedrigen Einkommen Defiziten, reichen Länder hingegen Überschüsse realisieren. Dieser Effekt nimmt jedoch im Zeitablauf ab. Eeine Erklärung über die Wettbewerbsfähigkeit ist robuster und zeigt die erwarteten VorZeichen, d.h. eine reale Aufwertung führt zu externen Defizite. Zur Wiederherstellung der Wettbewerbsfähigkeit steht eine Reduzierung der Lohnstückkosten steht auf der Tagesordnung. Da eine Verschlechterung der Wettbewerbsfähigkeit keine geeignete Strategie für die Überschussländer ist, scheint eine asymmetrische Reaktion in den einzelnen Ländern erforderlich zu sein, um die Ungleichgewichte in der Währungsunion zu verringern

The European Debt Crisis and Fiscal Reaction Functions in Europe 2000-2012

After the global financial crisis, some governments in the EU experienced serious debt financing problems, while others were less affected. This paper seeks to shed light on the divergent fiscal performance by assessing the fiscal conduct in the EU countries before and after the outbreak of the crisis. Fiscal reaction functions of the primary balance are estimated for different groups of EU countries using quarterly data for the pre-crisis period 2001-2008 and for the post-crisis period 2009-2012. The pre-crisis estimations reveal some differences in persistence and cyclical reaction between different groups of countries, but generally little feedback from the debt stock to the primary balance. The countries that eventually developed fiscal problems do not stand out. The post-crisis estimations show less counter-cyclicality and much more feedback from the debt stock, and these reactions are particularly pronounced for the countries with severe fiscal problems

The Impact of ECB Communication on Financial Market Expectations

This paper analyzes European financial markets' comprehension and interpretation of ECB communication signals. By applying a novel indicator developed by Berger et al. (2006), that quantifies the contents of the ECB's introductory statements, we find that communication affects the term structure of interest rates in the medium run over a horizon between five months to one year. Our results suggest that financial market agents expect the ECB to prepare them for a change in interest rates well in advance. However, judging upon the dynamics of the response, the exact timing of a decision is less foreseeable. Disentangling the effects of ECB statements on prices, the real and the monetary sector, we provide evidence that especially the ECB's interpretation and forecasts of price developments represent important news to financial market agents

The Euro as a Proxy for the Classical Gold Standard? Government Debt Financing and Political Commitment in Historical Perspective

[Introduction] In spite of the recent troubles in the euro area, Jesus Huerta de Soto (2012), a famous proponent of the gold standard, argues that the euro should be considered a 'second best to the gold standard' and is worth being preserved. From a classical liberal point of view, he sheds some light on the euro's similarities with the gold standard and on some important advantages of the currency union over its alternative, flexible exchange rates in Europe. According to Huerta de Soto (2012), the main advantage of the introduction of the common currency is that - like when 'going on gold' - European governments have given up monetary nationalism. Like the gold standard, the euro limits state power as it prevents national central banks from manipulating exchange rates and inflating away government debt. Currently, he argues, the common currency - like previously the gold standard - forces important reforms and/or spending cuts upon the countries of the euro area that face severe debt and structural problems. In this respect, the euro should be seen as 'a proxy for the gold standard'. In this policy paper, I attempt to address some similarities and differences in the institutional framework of the classical gold standard (1880 - 1912) and the European Monetary Union (EMU) (1999 - ) that affect government debt financing and the way in which countries react to crisis. I argue that - in line with Huerta de Soto (2012) - giving up monetary nationalism and committing to the rules of either the gold standard or EMU initially restricted the scope of state action. Therefore, the euro - like previously the gold standard - provided some (fiscal) policy credibility. Fiscal policy credibility was the main determinant of capital market integration and low government borrowing costs in Europe under both systems. But in contrast to Huerta de Soto (2012), I shall emphasize that neither the gold standard, nor the euro itself force reforms and spending cuts upon countries that face crisis and debt problems. The political commitment to the monetary systems determines the willingness to reform or cut spending and therewith fiscal policy credibility in crisis periods: (...