Business fixed investment and credit market frictions. A VECM approach for Hungary

The aim of this paper is to model the interaction between the loan market and real activity, while financial frictions are explicitly taken into account. The econometric methodology used is VECM. Johansen’s approach is employed to allow for multiple cointegration. Financial frictions are captured by including balance sheet indicators of firms and banks (cash flow and the VIX index) which move the loan supply curve. For the non-financial corporate sector 3 long-run equilibrium relationships were found, each corresponding to a reduced form investment, a loan demand and a loan supply equation, where loan supply is determined by the cost of borrowing, and the cash flow of firms or the VIX index. In contrast, for manufacturing no evidence was found concerning the significance of financial frictions. Impulse response analysis is used to calculate the real effects of a loan supply shock. Various tax measures and the introduction of inflation targeting were found to have significant impact on investment.aggregate investment, financial frictions, cointegration, error correction models

Structural breaks and financial risk management

There is ample empirical evidence on the presence of structural changes in financial time series. Structural breaks are also shown to contribute to the leptokurtosis of financial returns and explain at least partly the observed persistence of volatility processes. This paper explores whether detecting and taking into account structural breaks in the volatility model can improve upon our Value at Risk forecast. VAR is used by banks as a standard risk measure and is accepted by regulation in setting capital, which makes it an issue for the central bank guarding against systemic risk. This paper investigates daily BUX returns over the period 1995-2002. The Bai-Perron algorithm found several breaks in the mean and volatility of BUX return. The shift in the level of unconditional mean return around 1997-1998 is likely to be explained by the evolving efficiency of the market, but most of all by the halt of a strong upward trend in the preceding period. Volatility jumped to very high levels due to the Asian and Russian crisis. There were longer lasting shift too, most likely due to increasing trading volume. When in-sample forecasts are evaluated, models with SB dummies outperform the alternative methods. According to the rolling-window estimation and out-of-sample forecast the SB models seem to perform slightly better. However the results are sensitive to the evaluation criteria used, and the choice on the probability level.Structural Break tests, volatility forecasting, Value-at-Risk, backtest.

Business fixed investment and credit market frictions: A VECM approach for Hungary

The aim of this paper is to model the interaction between the loan market and real activity, while financial frictions are explicitly taken into account. The econometric methodology used is VECM. Johansen's approach is employed to allow for multiple cointegration. Financial frictions are captured by including balance sheet indicators of firms and banks (cash flow and the VIX index) which move the loan supply curve. For the non-financial corporate sector 3 long-run equilibrium relationships were found, each corresponding to a reduced form investment, a loan demand and a loan supply equation, where loan supply is determined by the cost of borrowing, and the cash flow of firms or the VIX index. In contrast, for manufacturing no evidence was found concerning the significance of financial frictions. Impulse response analysis is used to calculate the real effects of a loan supply shock. Various tax measures and the introduction of inflation targeting were found to have significant impact on investment

The role of foreign currency lending in the impact of the exchange rate on the real economy

The purpose of our article is to define how the FX debt of the private sector changes the impact of the exchange rate on the real economy: to identify the balance sheet channels through which depreciation of the exchange rate has a negative impact on GDP and the factors which determine whether the overall impact of depreciation will be contractionary or expansionary. In our analysis, we identified three balance sheet channels. Depreciation of the nominal exchange rate increases the debt burden of companies and households which are indebted in foreign currency and have no FX income, leading in turn to lower investments and consumption. Although the direct FX exposure of the banking sector is not significant, if banks face binding capital and/or liquidity constraints, changes in the exchange rate may have an indirect impact on the credit supply of banks through a number of channels. Looking at the impact of a weaker exchange rate on growth, our calculations show that the effect of depreciation on the lending ability of the banking system is of key importance. If we only take into account the impact of the exchange rate on the balance sheets of the households and corporate sector, the impact on competitiveness is presumably stronger, but the impact of depreciation on household income and the profitability of companies with FX debts and no natural hedge will use up approximately 50% of the expansionary effect of increased competitiveness. However, if there is also a strong balance sheet adjustment in the banking sector, the overall impact of depreciation may well be contractionary. The effect of the exchange rate on the banks’ credit supply should, at least in such a strong form, be considered as a temporary phenomenon associated with the crisis. In parallel with the consolidation of the global financial environment and further improvement in the capital position and profit prospects of the banking sector, the credit supply channel is also expected to attenuate.bank lending channel, balance sheet channel, depreciation

Crisis severity and the international trade network

In this paper we analyse the role of the international trade network for the strength of the global recession across countries. The novelty of our paper is the use of value-added trade data to capture the importance of trade network structure. We estimate with BMA techniques how far network indicators measuring interlinkages in terms of value added trade has explanatory power both for the length and the depth of the recent crisis once we control for pre-crisis macroeconomic fundamentals. Our main findings are that the macroeconomic control variables with the strongest explanatory power for the length and the depth of the crisis are the growth rates of credit and of the real effective exchange rate in the pre-crisis period and, though to a lesser extent, GDP and inflation growth over the same period and pre-crisis foreign exchange reserves. Government debt, the GVC participation index and net foreign assets have very little explanatory power in the BMA estimations. The models’ performance increases when we introduce interaction terms of credit growth with other vulnerability measures. The results demonstrate that the coincidence of vulnerabilities matters a lot. Credit growth deepens the crisis mainly if accompanied with pre-crisis GDP growth or low reserves, while the crisis tends to be longer if credit growth has led to large leverage or the accumulation of net foreign liabilities. Finally, we find evidence that value added trade linkages have an impact on the severity of the crisis. While the increasing connectivity or openness of the country makes the crisis longer, the same characteristics of the neighbours makes it also deeper. The tendency to interact with already connected countries lowers or increases the impact of the crisis depending on the position of the country. Altogether we have mixed results on the direct trade channel, but we demonstrate the importance of network structure beyond the countries’ own openness. In addition, we are also able to improve results by using gross value added instead of gross trade data

Vállalati dinamika és aggregált növekedés Magyarországon

A tanulmány a vállalati dinamika magyarországi stilizált tényeit mutatja be a 2001– 2015-ös időszak adatain. Azt találjuk, hogy a fiatal vállalatok többnyire kisméretűek. Gyorsan növekednek, ugyanakkor kockázatosak, magas közöttük a megszűnő vállalatok aránya és termelékenységük alacsonyabb, mint az idősebb vállalatoké. Bár a fiatal vállalatoknak alacsony a részesedése az aggregált kibocsátásból, az aggregált növekedéshez jelentős a hozzájárulásuk. Dinamizmusuk inkább fiatal korukból, mintsem kis méretükből származik. Az exportteljesítmény ettől némileg eltérő képet mutat, mivel az exportáló idősebb vállalatok aktívabbak maradnak, ezért érdemi a hozzájárulásuk az aggregált növekedéshez. A fiatal vállalatok hozzájárulása a növekedéshez a válság alatt is pozitív volt, de ekkor az aggregált képet az idősebb cégek romló teljesítménye dominálta, termelésből való nagy részesedésük miatt. Az egyes vállalati szegmensek viselkedése méret és kor szerint különbözött a válság, ill. a kilábalás alatt. Érdekes módon úgy tűnik, hogy a kilábalást a vállalati sokaság eloszlásának alsó széle dominálta: a rombolás enyhült, és kevesebb vállalat szűnt meg, de a bruttó teremtésben nem volt javulás. A vállalatalapítási kedv tovább csökkent még a kilábalás alatt is, ami hozzájárulhatott a lassú és gyenge kilábaláshoz

Firm Dynamics and Aggregate Growth: The Case of Hungary

This paper reports some stylised facts on firm dynamics in Hungary for the period 2001–2015. We find that young firms tend to be small. They grow fast, but at the same time they are risky, have a high exit rate and their productivity is lower than that of older firms. Despite their small share in aggregate output, their contribution to aggregate growth is significant. Their dynamism comes from their young age rather than from their small size. Export performance is somewhat different, as older firms remain more active and make a significant contribution to aggregate growth. During the crisis, young firms still made a positive contribution to growth, but the deteriorating performance of older firms dominated the aggregate picture, because of their large share in production. The behaviour of firm groups by size and age varied during the crisis and the recovery. Interestingly, the recovery seems to be dominated by the lower-end of the distribution of firm population; destruction eased and fewer firms exited, but there was no recovery in gross creation. Firm entry kept falling even during the recovery period, which must have contributed to the sluggish, weak recovery

„A hiány” visszhangja Keleten és Nyugaton. (A recenziók tükrében)

Ismertetésünkkel annak bemutatására vállalkozunk, hogy miként fogadta a külföldi szakmai közvélemény Kornai János „A hiány” című művét. Ezt azért tartjuk fontosnak, mert a könyvben kifejtett elmélet véleményünk szerint alapvető jelentő­ ségű a szocialista gazdaság működésének megértése szempontjából. Tanulságos lehet, hogy a különböző beállítottságú szerzők milyen kérdésekre helyezik a hangsúlyt, hol látják az elméleti konstrukció erősségét vagy gyenge pontjait, és miként illesztik be „A hiány”-t a közgazdasági gondolatok fejlődési vonalába

Financial shocks and the macroeconomy: heterogeneity and non-linearities

This paper analyses the transmission of financial shocks to the macroeconomy. The role of macro-financial linkages is investigated from an empirical perspective for the euro area as a whole, for individual euro area member countries and for other EU and OECD countries. The following key economic questions are addressed: 1) Which financial shocks have the largest impact on output over the full sample on average? 2) Are financial developments leading real activity? 3) Is there heterogeneity or a common pattern in macro-financial linkages across the euro area and do these linkages vary over time? 4) Do cross-country spillovers matter? 5) Is the transmission of financial shocks different during episodes of high stress than it is in normal times, i.e. is there evidence of non-linearities? In summary, it is found that real asset prices are significant leading indicators of real activity whereas the latter leads loan developments. Furthermore, evidence is presented that macro-financial linkages are heterogeneous across countries – despite persistent commonalities – and time-varying. Moreover, they differ between euro area and other countries. Results also indicate that cross-country spillovers matter. Finally, important non-linearities in the transmission of financial shocks are documented, as the evidence suggests that the transmission differs in episodes of high stress compared with normal times

The bank lending channel during financial turmoil

This paper uses a natural experiment to study the impact of a loan supply shock on a Hungarian matched bank-firm dataset. The event studied is a funding shock Hungarian banks faced following the collapse of the Lehman Brothers. Banks were affected via their external funding and positions on the swap market. The existence of firms with multiple bank links is utilized to separate demand and supply, and to find instruments to calculate the impact of the supply shock on lending and firms' real outcome. According to the results banks with large exposure on the swap market and with heavy reliance on foreign market funding cut their lending more, while foreign group funding provided a buffer. Firms were not able to fully offset the impact of the supply shock by shifting to less exposed banks, their overall lending fell too. The supply shock affected various groups of firms differently: banks reallocated lending towards larger firms. The squeeze on lending in turn had an impact on firms' real performance, by lowering their net investment. The real impact was more detrimental for small and risky firms