Is there Evidence of Shift-Contagion in International Housing Markets?

The paper attempts to provide, for housing markets, evidence of "shift-contagion" at the international level, i. e. regime shifts in the transmission of asset prices during crisis periods. The focus is in particular on UK and Spain. We use a Markov Switching FAVAR framework and regime-dependent impulse response functions. The `Crisis' regime which we identify endogenously is shown to also correspond to an exogenously determined index of frequency of financial crises in OECD countries, which peaked in the early 1990s and in the more recent Subprime crisis. Furthermore, we find that the response of domestic house price to a shock to a common (global) house price factor during a `Crisis' regime is relatively more amplified than in a `Normal' (more tranquil) regime. Less compelling evidence is found for France.contagion, housing market, regime shifts, FAVAR model

Assessment of “stress tests” conducted on the French banking system.

During the first quarter of 2004, the General Secretariat of the Commission bancaire (SGCB) and the Directorate General Economics and International Relations (DGEI) of the Banque de France conducted an assessment of the stability of the French banking system and its capacity to withstand a set of macroeconomic and financial shocks, as part of a broader evaluation of the French financial system carried out under the auspices of the IMF’s Financial Sector Assessment Program (FSAP). The assessment employed a macro-prudential approach which seeks to quantify the effects of shocks to the banking system using “stress tests”. The tests measured the impact of severe shocks, deemed plausible but infrequent: e.g., a recession, a large movement in interest rates, an oil price shock, a sharp drop in stock prices. This report discusses in detail the principal characteristics of the “stress tests” and the innovations introduced during the French FSAP, including in particular the design of coherent scenarios, which were developed using the DGEI’s macroeconomic model and the SGCB’s financial models for measuring risk. The results of the assessment indicate that, given the high average solvency ratio, the French banking system is currently in a position to withstand a major macroeconomic shock, such as a prolonged recession lasting two years. This type of shock would, however, erode the quality of bank assets and reduce bank profits by 38.5% in the second year, compared with the baseline, resulting in a decline in the international solvency ratio of one percentage point (using the Basel I methodology) or two percentage points (using the new methodology proposed in the Basel II Accord). Other scenarios, such as a 32% depreciation of the dollar against the euro for two years or an increase of nearly 50% in the price of oil also for two years, would have more limited effects on net income and solvency ratios.

Fiscal Policy in the Transition to Monetary Union: a Structural VAR Model

In order to assess the effect of fiscal rules in Stage Three of EMU for France and Germany, Bayoumi and Eichengreen's (1992) structural VAR analysis is extended by including the general government financial surplus and conditioning by external variables. This allows a distinction between fiscal and monetary shocks. During the period 1972.1-1995.4, monetary policy has a significant effect on prices in both countries. On the other hand, fiscal shocks, whose effect on the deficit provides a measure of the " structural deficit ", only contribute to a significant part of the dynamics of output in Germany. For that period, they appear to have little effect in France. In addition, fiscal shocks are uncorrelated between the two countries, although it is difficult to conclude that it reflects purely idiosyncratic shocks rather than a different policy-mix.Budget deficit ; Ricardian equivalence ; Structural VAR ; EMU

Competition among Financial Intermediaries and the Risk of Contagious Failures.

The paper presents a model where financial intermediaries invest in a safe and a risky, two-period asset -with aggregate and idiosyncratic shocks on tire risky asset. The realization of returns is privately observed by banks, which offer deposit contracts, with a promised return at t = 1, the level of which depends on the degree of competition in the banking industry. Banks are sensitive .to the propagation of other banks' failures: depositors try to infer the state of the economy.and revise their beliefs after observing too many failures, hence they may watt to rut even on relatively healthy banks.Term structure of interest rates ; Expectations hypothesis ; Error-correction model.

Measuring Long-Run Exchange Rate Pass-Through.

The paper discusses the issue of estimating short- and long-run exchange rate pass-through to import prices in euro area countries and reviews some problems with the measures recently proposed in the literature. Theoretical considerations suggest a long-run Engle and Granger cointegrating relationship (between import unit values, the exchange rate and foreign prices), which is typically ignored in existing empirical studies. We use time series and up-to-date panel data techniques to test for cointegration with the possibility of structural breaks and show how the long-run may be restored in the estimation. The main finding is that allowing for possible breaks around the formation of EMU and the appreciation of the euro starting in 2001 helps restore a long run cointegration relationship, where over the sample period the fixed component of the pass-through decreased while the variable component tended to increase.Exchange rates ; Pass-through ; Import prices ; Panel cointegration ; Structural break.

Stress Testing and Corporate Finance.

The article contributes to the literature on financial fragility, studying how macro-economic shocks affect supply and demand in the corporate debt market. We take into account the effect of the competitive environment, as well as the risk level, measured by companies' default rate. The model is estimated using data from the Harmonised BACH database of corporate accounts for large euro area countries on the 1993-2005 period, in order to carry out an illustrative stress testing exercise. We measure the impact of large macroeconomic shocks (a severe recession and a sharp increase in oil prices) on the equilibrium in the debt market.Corporate Finance ; Debt ; Financial Fragility ; Stress Tests ; Panel Data.

Convergence in Household Credit Demand Across Euro Area Countries: Evidence from Panel Data.

The paper contributes to the literature on the convergence of financial systems in the euro area by estimating household credit demand in individual countries. Using the ARDL framework advocated notably by Pesaran et al. (1999), the paper provides evidence on the convergence of long run credit demand determinants (interest rates, investment and house prices) among the largest euro area countries, while short run dynamics remain heterogenous across countries. The paper also demonstrates that the equation uncovers demand rather than supply behaviour.Credit demand ; Panel cointegration ; Households ; Bank profitability.

L’impact macroéconomique des réformes structurelles.

Outre leur crédibilité, la coordination et la hiérarchisation des réformes sont déterminantes pour réduire les coûts à court terme et tirer avantage des effets positifs à long terme.Réformes structurelles, marché des biens, marché du travail, croissance potentielle.

Forecasting Inflation using Economic Indicators: the Case of France

In order to provide short run forecasts of headline and core HICP inflation for France, we assess the forecasting performance of a large set of economic indicators, individually and jointly, as well as using dynamic factor models. We run out-of-sample forecasts implementing the Stock and Watson (1999) methodology. It turns out that, according to usual statistical criteria, the combination of several indicators -in particular those derived from surveys- provides better results than dynamic factor models, even after pre-selection of the variables included in the panel. However, factors included in VAR models exhibit more stable forecasting performance over time. Results for HICP excluding unprocessed food and energy are very encouraging. Moreover, we show that it is possible to use forecasts on this indicator to project overall inflation.Inflation ; Out-of-sample forecast ; Indicator models ; Dynamic factor models ; Phillips curve.

Les strategies de "Stop Loss" : Theorie et application au contrat notionnel du MATIF.

Pour expliquer l'existence de règles de «stop-loss» dans les institutions financières, nous développons un modèle principal-agent, où une firme d'investissement (le principal) doit faire appel à l'expertise d'un opérateur (l'agent) pour investir dans un actif risqué et sophistiqué (par exemple, un contrat à terme). Quand l'opérateur a une «responsabilité limitée», nous montrons que la firme d'investissement peut accroître ses gains en s'engageant à mettre en place des règles de «stop-loss», c'est-à-dire a liquider la position de l'opérateur quand ses résultats sont mauvais. En utilisant des données journalières sur les positions individuelles sur le Contrat Notionnel du Matif, nous trouvons certains éléments en faveur d'une des conclusions testables du modèle, à savoir que les positions sont plus souvent liquidées lorsque les pertes sont importantes. Il ressort de l'analyse empirique que plus de 20 % des comptes utilisent des stratégies de ce type.Information ; Institutions financières