Dynamic Linkages Between Monetary Policy And The Stock Market

This paper examines the dynamic linkages between the federal funds rate and the S&P500 index for the 1970-2003 period, decade by decade, using cointegration and error-correction methodologies. The results indicate absence of cointegration during the 1970s and the 1980s but presence of a dynamic, short-run relationship between the two variables only in the 1970s. Specifically for the 1990s, there seems to have been a disconnection between actions taken by the Fed and responses by the stock market or vice versa. Overall, the results seem to suggest that there was no concrete and consistent dynamic relationship between monetary policy and the stock market and that the nature of such dynamics was different in each of the three decades, which coincided with three different Fed operating regimes

House price comovements in the Eurozone economies

The house price boom in major industrialized countries since the early 1990s has been unprecedented. Co-movement is a key feature of it and it has been attributed by scholars to synchronization of monetary policy, financial liberalization, integration of international financial markets, as well as global business cycle linkages. In this paper we focus on seven European countries, all members of the EMU, and ask the question if, the apparent co movement of the housing prices in the seven major euro zone economies implies convergence of their housing markets. Using monthly data from DSI Statistical Bases for 1990(1)-2009(4), we concentrate on the impact of the adoption of the common currency on real house prices movements. We conduct the analysis using country-specific macroeconomic variables and then extend it by adding foreign-specific macro variables to each country’s model. The empirical analysis includes cointegration analysis and VAR specifications. Our findings suggest that the movement of the housing prices of the euro zone countries apart from the well known fundamentals of GDP, interest rates and stock returns is also based on a number of idiosyncratic and structural factors like demographics, the tax system and government intervention which determine the duration and the strength of the housing cycles in each country. Furthermore, it seems that the degree of convergence underlying housing prices co movement is limited given the diversities in living standards, regulation of property markets, government intervention and attitudes to residential housing.peer-reviewe

Assessing the effectiveness of the emergency liquidity assistance tool in the euro area

quantitative study investigating the effect of ELA on sovereign debt and liquidit

Oil prices, tourism income and economic growth: A structural VAR approach for European Mediterranean countries

In this study, a Structural VAR model is employed to investigate the relationship among oil price shocks, tourism variables and economic indicators in four European Mediterranean countries. In contrast with the current tourism literature, we distinguish between three oil price shocks, namely, supply-side, aggregate demand and oil specific demand shocks. Overall, our results indicate that oil specific demand shocks contemporaneously affect inflation and the tourism sector equity index, whereas these shocks do not seem to have any lagged effects. By contrast, aggregate demand oil price shocks exercise a lagged effect, either directly or indirectly, to tourism generated income and economic growth. The paper does not provide any evidence that supply-side shocks trigger any responses from the remaining variables. Results are important for tourism agents and policy makers, should they need to create hedging strategies against future oil price movements or plan for economic policy developments

Dynamic Stability of Public Debt: Evidence from the Eurozone Countries

This paper investigates the dynamic stability of public debt and its solvency condition in the face of crisis periods (1980–2021) in a sample of 11 euro-area countries. The focus is on the feedback loop between the dynamic stability of public debt and interest rates, discounted by economic growth, in conjunction with budget deficits during tranquil and turbulent periods. Using the GMM panel dynamic model, the results show that dynamic stability was the case before the global financial crisis (GFC), while from GFC to the pandemic, dynamic instability prevailed and persisted in the evolution of public debt. Furthermore, panel threshold estimates show that dynamic instability of debt starts to violate the solvency condition when the borrowing cost is above 3.29%, becomes even stronger when it is above 4.39%, and exerts even more pressure when the level of debt is greater than 91%. However, the debt sustainability condition reverses course when economic growth is higher than 3.4%. The main policy implication drawn from the results is that low interest rates can create a self-reinforcing loop of high debt, which itself is a serious matter for public authorities when designing economic policies

Dynamic stability of public debt : evidence from the Eurozone countries

This paper investigates the dynamic stability of public debt and its solvency condition in the face of crisis periods (1980–2021) in a sample of 11 euro-area countries. The focus is on the feedback loop between the dynamic stability of public debt and interest rates, discounted by economic growth, in conjunction with budget deficits during tranquil and turbulent periods. Using the GMM panel dynamic model, the results show that dynamic stability was the case before the global financial crisis (GFC), while from GFC to the pandemic, dynamic instability prevailed and persisted in the evolution of public debt. Furthermore, panel threshold estimates show that dynamic instability of debt starts to violate the solvency condition when the borrowing cost is above 3.29%, becomes even stronger when it is above 4.39%, and exerts even more pressure when the level of debt is greater than 91%. However, the debt sustainability condition reverses course when economic growth is higher than 3.4%. The main policy implication drawn from the results is that low interest rates can create a self-reinforcing loop of high debt, which itself is a serious matter for public authorities when designing economic policies

How strong is the linkage between tourism and economic growth in Europe?

In this study, we examine the dynamic relationship between tourism growth and economic growth, using a newly introduced spillover index approach. Based on monthly data for 10 European countries over the period 1995{2012, our analysis reveals the following empirical regularities. First, the tourism-economic growth relationship is not stable over time in terms of both magnitude and direction, indicating that the tourism{led economic growth (TLEG) and the economic{driven tourism growth (EDTG) hypotheses are time{dependent. Second, the aforementioned relationship is also highly economic event{dependent, as it is influenced by the Great Recession of 2007 and the ongoing Eurozone debt crisis that began in 2010. Finally, the impact of these economic events is more pronounced in Cyprus,Greece, Portugal and Spain, which are the European countries that have witnessed the greatest economic downturn since 2009. Plausible explanations of these results are provided and policy implications are drawn

Stock market response to monetary and fiscal policy shocks: Multi-country evidence

A Structural VAR model is employed to investigate the effects of monetary and fiscal policy shocks on stock market performance in Germany, UK and the US. A significant number of past studies have concentrated their attention on the relationship between monetary policy and stock market performance, yet only few on the effects of fiscal policy on stock markets. Even more we know little, if any, on the effects of fiscal and monetary policies on stock market performance when the two policies interact. This study aims to fill this void. Our results show that both fiscal and monetary policies influence the stock market, via either direct or indirect channels. More importantly, we find evidence that the interaction between the two policies is very important in explaining stock market developments. Thus, investors and analysts in their effort to understand the relationship between macroeconomic policies and stock market performance should consider fiscal and monetary policies in tandem rather than in isolation

Does feedback trading drive returns of cross-listed shares?

This paper examines the role of cross-listing in stock return dynamics with particular reference to feedback trading based on a sample of five most frequently traded cross-listed shares. We find that a long-run equilibrium relationship among the cross-listed share prices exists, but find no evidence of long-run co-movements among different shares traded in the same exchange. Furthermore, the VAR Granger causality tests indicate bi-directional feedback relations among the returns of cross-listed shares, while there is no consistent causality among different stocks within the markets. We also find that the cross-listed shares demonstrate strong volatility spillovers, which is driven by the covariance structure that are formed by variance and correlation terms. In addition, we report liquidity spillover effects and spillovers running from liquidity to volatility for some firms but no evidence that spillover effects run from volatility to liquidity

Financial and monetary policy responses to oil price shocks: evidence from oil-importing and oil-exporting countries

In this study, we investigate the financial and monetary policy responses to oil price shocks using a Structural VAR framework. We distinguish between net oil-importing and net oil-exporting countries. Since the 80s, a significant number of empirical studies have been published investigating the effect of oil prices on macroeconomic and financial variables. Most of these studies though, do not make a distinction between oil-importing and oil-exporting economies. Overall, our results indicate that the level of inflation in both net oil-exporting and net oil-importing countries is significantly affected by oil price innovations. Furthermore, we find that the response of interest rates to an oil price shock depends heavily on the monetary policy regime of each country. Finally, stock markets operating in net oil-importing countries exhibit a negative response to increased oil prices. The reverse is true for the stock market of the net oil-exporting countries. We find evidence that the magnitude of stock market responses to oil price shocks is higher for the newly established and/or less liquid stock market