Volatility, Growth and Financial Crises

This research group analyses the build-up of financial vulnerabilities and real consequences of financial crises. Different policy shocks and the causal reaction of macroeconomic aggregates are identified. Early-warning models describe the cyclical nature of financial vulnerabilities.

IWH Data Project: Financial Stability Indicators in Europe

Research Cluster
Financial Resilience and Regulation

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Professor Dr Gregor von Schweinitz
Professor Dr Gregor von Schweinitz
- Department Macroeconomics
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EXTERNAL FUNDING

01.2022 ‐ 12.2023

Sovereign Risk Shocks

Professor Dr Gregor von Schweinitz

05.2017 ‐ 09.2019

Early Warning Models for Systemic Banking Crises: The Effect of Model and Estimation Uncertainty

Professor Dr Gregor von Schweinitz

01.2018 ‐ 12.2018

International Monetary Policy Transmission

Professor Dr Gregor von Schweinitz

Refereed Publications

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Working Papers

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The Appropriateness of the Macroeconomic Imbalance Procedure for Central and Eastern European Countries

Martina Kämpfe Tobias Knedlik

in: IWH Discussion Papers, No. 16, 2017

Abstract

The experience of Central and Eastern European countries (CEEC) during the global financial crisis and in the resulting European debt crises has been largely different from that of other European countries. This paper looks at the specifics of the CEEC in recent history and focuses in particular on the appropriateness of the Macroeconomic Imbalances Procedure for this group of countries. In doing so, the macroeconomic situation in the CEEC is highlighted and macroeconomic problems faced by these countries are extracted. The findings are compared to the results of the Macroeconomic Imbalances Procedure of the European Commission. It is shown that while the Macroeconomic Imbalances Procedure correctly identifies some of the problems, it understates or overstates other problems. This is due to the specific construction of the broadened surveillance procedure, which largely disregarded the specifics of catching-up economies.

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Inflation Dynamics During the Financial Crisis in Europe: Cross-sectional Identification of Long-run Inflation Expectations

Geraldine Dany-Knedlik Oliver Holtemöller

in: IWH Discussion Papers, No. 10, 2017

Abstract

We investigate drivers of Euro area inflation dynamics using a panel of regional Phillips curves and identify long-run inflation expectations by exploiting the crosssectional dimension of the data. Our approach simultaneously allows for the inclusion of country-specific inflation and unemployment-gaps, as well as time-varying parameters. Our preferred panel specification outperforms various aggregate, uni- and multivariate unobserved component models in terms of forecast accuracy. We find that declining long-run trend inflation expectations and rising inflation persistence indicate an altered risk of inflation expectations de-anchoring. Lower trend inflation, and persistently negative unemployment-gaps, a slightly increasing Phillips curve slope and the downward pressure of low oil prices mainly explain the low inflation rate during the recent years.

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Much Ado About Nothing: Sovereign Ratings and Government Bond Yields in the OECD

Makram El-Shagi

in: IWH Discussion Papers, No. 22, 2016

Abstract

In this paper, we propose a new method to assess the impact of sovereign ratings on sovereign bond yields. We estimate the impulse response of the interest rate, following a change in the rating. Since ratings are ordinal and moreover extremely persistent, it proves difficult to estimate those impulse response functions using a VAR modeling ratings, yields and other macroeconomic indicators. However, given the highly stochastic nature of the precise timing of ratings, we can treat most rating adjustments as shocks. We thus no longer rely on a VAR for shock identification, making the estimation of the corresponding IRFs well suited for so called local projections – that is estimating impulse response functions through a series of separate direct forecasts over different horizons. Yet, the rare occurrence of ratings makes impulse response functions estimated through that procedure highly sensitive to individual observations, resulting in implausibly volatile impulse responses. We propose an augmentation to restrict jointly estimated local projections in a way that produces economically plausible impulse response functions.

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Exit Expectations and Debt Crises in Currency Unions

Alexander Kriwoluzky G. J. Müller M. Wolf

in: IWH Discussion Papers, No. 18, 2015

Abstract

Membership in a currency union is not irreversible. Exit expectations may emerge during sovereign debt crises, because exit allows countries to reduce their liabilities through a currency redenomination. As market participants anticipate this possibility, sovereign debt crises intensify. We establish this formally within a small open economy model of changing policy regimes. The model permits explosive dynamics of debt and sovereign yields inside currency unions and allows us to distinguish between exit expectations and those of an outright default. By estimating the model on Greek data, we quantify the contribution of exit expectations to the crisis dynamics during 2009 to 2012.

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Flight Patterns and Yields of European Government Bonds

Gregor von Schweinitz

in: IWH Discussion Papers, No. 10, 2013

Abstract

The current European Debt Crisis has led to a reinforced effort to identify the sources of risk and their influence on yields of European Government Bonds. Until now, the potentially nonlinear influence and the theoretical need for interactions reflecting flight-to-quality and flight-to-liquidity has been widely disregarded. I estimate government bond yields of the Euro-12 countries without Luxembourg from May 2003 until December 2011. Using penalized spline regression, I find that the effect of most explanatory variables is highly nonlinear. These nonlinearities, together with flight patterns of flight-to-quality and flight-to-liquidity, can explain the co-movement of bond yields until September 2008 and the huge amount of differentiation during the financial and the European debt crisis without the unnecessary assumption of a structural break. The main effects are credit risk and flight-to-liquidity, while the evidence for the existence of flight-to-quality and liquidity risk (the latter measured by the bid-ask spread and total turnover of bonds) is comparably weak.

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