Short-Term Determinants of the Idiosyncratic Sovereign Risk Premium:A Regime-Dependent Analysis for European Credit Default Swaps

This study investigates the dynamics of the sovereign CDS term premium, i.e. difference between 10Y and 5Y CDS spreads. It can be regarded a forward-looking measure of idiosyncratic sovereign default risk as perceived by financial markets. For some European countries this premium featured distinct nonstationary and heteroskedastic pattern during the last years. Using a Markov-switching unobserved component model, we decompose the daily CDS term premium of five European countries into two unobserved components of statistically different nature and link them in a vector autoregression to various daily observed financial market variables. We find that such decomposition is vital for understanding the short-term dynamics of this premium. The strongest impacts can be attributed to CDS market liquidity, local stock returns, and overall risk aversion. By contrast, the impact of shocks from the sovereign bond market is rather muted. Therefore, the CDS market microstructure effect and investor sentiment play the main roles in sovereign risk evaluation in real time. Moreover, we also find that the CDS term premium response to shocks is regime-dependent and can be ten times stronger during periods of high volatility

Is monetary policy in the new EU member states asymmetric?

This paper tests whether monetary policy can be described as asymmetric in three new European Union (EU) members (the Czech Republic, Hungary, and Poland), which apply an inflation targeting regime. Two different empirical frameworks are used: (i) Generalized Method of Moments (GMM) estimation of models that allow discrimination between sources of potential policy asymmetry but are conditioned by specific underlying relations, and (ii) a flexible framework of sample splitting where nonlinearity enters via a threshold variable and monetary policy is allowed to switch between regimes

Empirické eseje o pravidlech měnové politiky a inflaci

This dissertation is divided into four essays, each of them having its own structure and methodological framework. Although each of the essays making the chapters of the thesis is self-contained, their topics are very closely related. Consequently, the reader will be able to follow the thesis in its unity. Essay I is a selective survey of the extensive, mostly theoretic, literature dealing with monetary policy rules. We aim at contextualization of the monetary policy rules in the existing monetary economics literature. We explain the logic, the inspiration and the history of the rules for the monetary policy conduct. We distinguish between instrument rules and targeting rules as two basic categories. Finally, we resume specific issues related to policy rules for small open economies. Essay II studies the logic of short-term interest rate setting pursued by 15 EU countries before and after the launch of the EMU. We employ econometric estimation of the augmented Taylor rule (TR) for individual 15 EU countries and the Euro area. Although a vast empirical evidence is available for the major economies like the US, the UK or Germany, there is an important gap in our understanding of the factors behind the short-term interest rate dynamics in smaller economies. We find that in the period preceding the euro adoption, the TR is a poor representation of monetary policy setting in most EU countries and that many central banks considered decisions made by dominant economies rather than their domestic macroeconomic developments. The analysis of monetary policy rule of the ECB features additional problems related to the heterogeneity of the EMU. We argue that results based on Euro-area aggregated series, commonly presented in empirical studies, are subject to diverse econometric problems. We provide some evidence that the ECB is concerned also with national information and propose quasi-panel analysis as a viable framework. Essay III explores the relation between the existing monetary policy and domestic price stability in small open emerging economies, in particular the 12 EU new member states. This work has three principal objectives. First, it aims at revealing the logic of interest rate setting pursued by monetary authority of each country. The linear specification of the Taylor rule, applied already in the Essay II, is accompanied by an extensive analysis of nonlinearities in monetary policy rules and the inference on their possible sources. We find that the official monetary policy is sometimes inconsistent with the empirical evidence on the short term interest rate setting. The second objective consists in revealing the determinants of the inflation process. We have found that inflation rates are driven not only by backward persistency but also by the forward-looking component. Third, we employ analysis of the conditional inflation variance so as to give account on the viability of the existing monetary policy setting for price stability. We conclude that the policy of inflation targeting seems to be preferable to exchange rate peg because it allows decreasing not only inflation rate but also its conditional variance. Essay IV seeks to shed light on inflation dynamics of four CEEC (Czech Republic, Hungary, Poland and Slovakia) and test when the predominant model of inflation, the New Keynesian Philips Curve (NKPC), is consistent with the data of these countries. According to the microfounded NKPC, the current inflation is related to inflation expectations and the real marginal cost. The empirical validity of this model has recently become a subject of major controversy in the monetary economics. Although we find some favorable evidence for the NKPC, it seems to be too restrictive model for small open economies. In particular, the failure of the NKPC to explain the inflation dynamics of these countries may be related to the assumption that inflation is related to forward-looking price setting of domestic monopolist firms while our evidence suggests that prices in CEEC have an important backward-looking component and the inflation is significantly driven by external factors like the exchange rate and the foreign inflation rate

Empirické eseje o pravidlech měnové politiky a inflaci

Tato disertační práce se skládá ze čtyř esejů, zabývajících se pravidly měnové politiky a inflační dynamikou v zemích EU. Každý z esejů je samostatný, má svoji vlastní strukturu, metodiku i výsledky. Témata esejů i použitá metodologie spolu nicméně velmi úzce souvisejí. První esej má formu přehledového článku, zbývající tři jsou empirické. První esej (Monetary economics and monetary policy rules) usiluje o zmapování značně rozličných příspěvků monetární ekonomie, které se nějak dotýkají problematiky pravidel pro provádění měnové politiky. Příspěvek představuje logiku uplatňovaní pravidel v měnové politice, jejich teoretickou inspiraci i významná pravidla či návrhy pravidel v historii. Je zde rozlišováno mezi pravidly zaměřenými na nástroje měnové politiky (instruments) a pravidly platnými pro její cíle (targets). Závěrem jsou zdůrazněny specifické problémy aplikace pravidel pro měnovou politiku v malých otevřených ekonomik. Druhý esej (The monetary policy rules in EU-15: before and after the euro) studuje logiku rozhodování o krátkodobých úrokových sazbách 15 zemí EU před a po přijetí eura prostřednictvím ekonometrického odhadu rozšířeného Taylorova pravidla (TR). Výsledkem je zjištění, že TR, spočívající v reakci krátkodobých úrokových sazeb na pozorovanou (či očekávanou) míru inflace a fázi ekonomického cyklu (měřeného mezerou produkce), bylo uplatňováno pouze v několika velkých zemích. Naopak úrokové sazby zemí malých byly ovlivněny dodatečnými proměnnými jako jsou např. úrokové sazby v zahraničí. Při pokusu o identifikaci pravidla rozhodování Evropské centrální banky (ECB) docházíme k závěru, že použití agregovaných dat pro empirickou analýzu je problematické. Navíc zjišťujeme, že ECB při svém rozhodování bere v úvahu nejen společné trendy celé Eurozóny, ale i disperzi makroekonomických veličin napříč členskými zeměmi. Studie ukazuje, že panelová analýza je vhodnou alternativou regrese založené na agregovaných datach. Třetí esej (The monetary policy rules and the inflation process in open emerging economies: evidence for 12 new EU members) studuje vliv pravidel měnové politiky na cenovou stabilitu v malých otevřených ekonomikách, konkrétně v případech 12 nových členských zemí EU. Práce sleduje tři základní cíle. Prvním z nich je identifikovat logiku rozhodování o změně krátkodobých úrokových sazeb v těchto zemích. Zjišťujeme, že dynamika krátkodobých úrokových sazeb není vždy zcela v souladu s oficiálním měnovým režimem. Druhým cílem práce je základní identifikace inflačních procesů těchto zemí prostřednictvím odhadu verze Phillipsovy křivky (PC) přizpůsobené pro malé otevřené ekonomiky. Výsledkem je zjištění, že inflační dynamika 12 nových členských zemí EU má některé společné rysy, konkrétně např. že současná míra inflace závisí na inflačních očekáváních. Zatímco odhadnuté koeficienty PC nevykazují význačné rozdíly mezi zeměmi v závislosti na typu uplatňované měnové politiky, podmíněný rozdíl inflace má odlišné rysy. Konkrétně, dlouhodobý odhad podmíněného rozptylu, stejně jako jeho perzistence, je významně nižší u zemí s flexibilním kurzovým režimem. Našim závěrem proto je, že politika flexibilního kurzu a cílování inflace je (s ohledem na domácí cenovou stabilitu) lepší strategií než fixace směného kurzu. Čtvrtý esej (Inflation dynamics and the New Keynesian Phillips curve in CEEC) zkoumá, zda nejvýznamnější model inflační dynamiky současnosti, tzv. nová keynesovská Phillipsova křivka (NKPC) nachází podporu v datech čtyř středoevropských zemí. NKPC, která stojí na propracovaných mikroekonomických základech, předpokládá, že míra současné inflace závisí na očekávaném vývoji mezních nákladů ze strany firem. Výsledky naší analýzy jsou s ohledem na NKPC smíšené. Na jednu stranu je zřejmé, že inflačních očekávání mají vliv na současnou míru inflace, na druhou stranu mezní náklady nepůsobí na inflaci jako hlavní hybná proměnná. Naše analýza potvrzuje, že inflace středoevropských zemí vykazuje významný stupeň perzistence (zřejmě souvisejícím s cenových rozhodováním firem trpícím značnou závislostí na minulosti), stejně jako že její determinanty jsou externí povahy (směnný kurz, inflace v zahraničí).This dissertation is divided into four essays, each of them having its own structure and methodological framework. Although each of the essays making the chapters of the thesis is self-contained, their topics are very closely related. Consequently, the reader will be able to follow the thesis in its unity. Essay I is a selective survey of the extensive, mostly theoretic, literature dealing with monetary policy rules. We aim at contextualization of the monetary policy rules in the existing monetary economics literature. We explain the logic, the inspiration and the history of the rules for the monetary policy conduct. We distinguish between instrument rules and targeting rules as two basic categories. Finally, we resume specific issues related to policy rules for small open economies. Essay II studies the logic of short-term interest rate setting pursued by 15 EU countries before and after the launch of the EMU. We employ econometric estimation of the augmented Taylor rule (TR) for individual 15 EU countries and the Euro area. Although a vast empirical evidence is available for the major economies like the US, the UK or Germany, there is an important gap in our understanding of the factors behind the short-term interest rate dynamics in smaller economies. We find that in the period preceding the euro adoption, the TR is a poor representation of monetary policy setting in most EU countries and that many central banks considered decisions made by dominant economies rather than their domestic macroeconomic developments. The analysis of monetary policy rule of the ECB features additional problems related to the heterogeneity of the EMU. We argue that results based on Euro-area aggregated series, commonly presented in empirical studies, are subject to diverse econometric problems. We provide some evidence that the ECB is concerned also with national information and propose quasi-panel analysis as a viable framework. Essay III explores the relation between the existing monetary policy and domestic price stability in small open emerging economies, in particular the 12 EU new member states. This work has three principal objectives. First, it aims at revealing the logic of interest rate setting pursued by monetary authority of each country. The linear specification of the Taylor rule, applied already in the Essay II, is accompanied by an extensive analysis of nonlinearities in monetary policy rules and the inference on their possible sources. We find that the official monetary policy is sometimes inconsistent with the empirical evidence on the short term interest rate setting. The second objective consists in revealing the determinants of the inflation process. We have found that inflation rates are driven not only by backward persistency but also by the forward-looking component. Third, we employ analysis of the conditional inflation variance so as to give account on the viability of the existing monetary policy setting for price stability. We conclude that the policy of inflation targeting seems to be preferable to exchange rate peg because it allows decreasing not only inflation rate but also its conditional variance. Essay IV seeks to shed light on inflation dynamics of four CEEC (Czech Republic, Hungary, Poland and Slovakia) and test when the predominant model of inflation, the New Keynesian Philips Curve (NKPC), is consistent with the data of these countries. According to the microfounded NKPC, the current inflation is related to inflation expectations and the real marginal cost. The empirical validity of this model has recently become a subject of major controversy in the monetary economics. Although we find some favorable evidence for the NKPC, it seems to be too restrictive model for small open economies. In particular, the failure of the NKPC to explain the inflation dynamics of these countries may be related to the assumption that inflation is related to forward-looking price setting of domestic monopolist firms while our evidence suggests that prices in CEEC have an important backward-looking component and the inflation is significantly driven by external factors like the exchange rate and the foreign inflation rate

Spatial economics and spatial externalities: A survey of theory and emprics

The spatial and regional analysis has a long tradition but until very recently the mainstream economics has not given careful attention to space. This article surveys recent contributions on the spatial or regional economics, which often overlaps with urban economics. As this literature is very heterogeneous, we use the concept of spatial externalities as the common criterion for the basic classification of the studies. The pecuniary externalities, which are by-product of the market transactions, became the cornerstone of the New Economic Geography (NEG) introduced by Krugman. NEG is presently the dominant theory in the economics of space as it builds on robust microeconomic foundations. Yet its empirical verification is at the very beginning. On the contrary the technological externalities are believed to arise rather spontaneously because of the physical proximity rather then intentional economic transactions. The existing research on these externalities is predominately empiric. Meanwhile the human capital externalities are example of static technological externalities; the related externalities of labour pooling are of pecuniary nature. Finally, the knowledge externalities or spillovers are pure technological externalities. There are three main strands of literature that employ this concept: studies on local economic growth, empirical studies on the localized knowledge spillovers (part of it known as spatial econometrics) and Italian New Industrial Geography. Many of the studies give important insight on the formation of economic space but all lacks generality. For this reason it would be vital in the future to extent the studies that they could deal with different kinds of spatial externalities and directly compare their individual importance in territory.spatial externalities, external economies, spatial economics, economic geography, agglomeration

Measuring Sovereign Bond Spillover in Europe and the Impact of Rating News

Although there is by now strong evidence that sovereign risk premia are driven by a common factor, little is known about the detailed linkages between sovereign bond markets. We employ the VAR method by Diebold and Yilmaz (2009) to analyse the strength and direction of bilateral linkages between EU sovereign bond markets using daily data on sovereign bond yield spreads and a common factor. The forecast-error variance decomposition of this FAVAR indicates a lot of heterogeneity in the bilateral spillover sent and received between bond markets. Spillover is more important than domestic factors for all eurozone countries. The CE countries mostly affect each other. Only Denmark, Sweden and the UK are rather insulated from spillover. The spillover has increased substantially since 2007, despite starting from a high level. We use this framework to measure the impact of sovereign rating news and analyse the dynamic linkages between spreads and the ratings of the main credit rating agencies. We find a two-sided relation between rating news and sovereign risk premia. The spillover of rating news is very heterogeneous, and it is substantially stronger for downgrades at lower grades. The impact is often weaker domestically than on bond spreads of other sovereigns. JE

Transmission of uncertainty shocks:learning from heterogeneous responses on a panel of EU countries

Numerous recent studies, starting with Bloom (2009), highlight the impact of varying uncertainty levels on economic activity. These studies mostly focus on individual countries, and cross-country evidence is scarce. In this paper, we use a set of (panel) BVAR models to study the effect of uncertainty shocks on economic developments in EU Member States. We explicitly distinguish between domestic, common and global uncertainty shocks and employ new proxies of uncertainty. The domestic uncertainty indicators are derived from the Business and Consumer Surveys administered by the European Commission. The common EU-wide uncertainty is subsequently derived by means of a factor model. Finally, the global uncertainty indicator – inspired by Jurado et al. (2015) – is extracted as a common factor from a broad set of forecast indicators that are not driven by the business cycle. The results suggest that real output in EU countries drops after spikes in uncertainty, mainly as a result of lower investment. Unlike for the U.S., there is little evidence of activity overshooting following this initial fall. The responses to uncertainty shocks vary across Member States. These differences can be attributed not mainly to different shock sizes, but rather to cross-country structural characteristics. Member States with more flexible labour markets and product markets seem to weather uncertainty shocks better. Likewise, a higher manufacturing share and higher economic diversification help dampen the impact of uncertainty shocks. The role of economic openness is more ambiguous

Changes in inflation dynamics under inflation targeting? Evidence from Central European countries ☆

a b s t r a c t a r t i c l e i n f o Many countries have implemented inflation targeting in recent decades. At the same time, the international conditions have been favorable, so it is hard to assess to what extent the success in stabilizing inflation should be attributed to good luck and to what extent to the specific policy framework. In this paper, we provide a novel look at the dynamics of inflation under inflation targeting, focusing on three Central European (CE) countries that adopted the IT regime at similar times and in similar environments. We use the framework of the open economy New Keynesian Phillips curve (NKPC) with time-varying parameters and stochastic volatility to recover changes in price-setting and expectation formation behavior and volatility of shocks. We employ Bayesian model averaging to tackle the uncertainty in the selection of instrumental variables and to account for the possible country-specific nature of inflation dynamics. The results suggest that inflation targeting does not itself automatically trigger changes in the inflation process, and the way the framework is implemented might matter. In particular, we find rather heterogeneous evolution of intrinsic inflation persistence and volatility of inflation shocks across these countries despite the fact that all three formally introduced inflation targeting a decade ago