13.12.2018 • 21/2018
Economic activity in the world and in Germany is losing momentum
In the second half of 2018, the upturn of the German economy has stalled. Production of the automotive industry declined because of delays in switching production to WLTP compliant cars. Irrespectively of this, the German export business has been weakening since the beginning of the year, since the global economy, burdened by the political uncertainties surrounding trade conflicts, the impending Brexit and the conflict over the Italian budget, was unable to keep up with the high momentum of 2017. “It is to be expected that the less benign external environment will not only dampen exports, but will also impact on companies’ investment and hiring decisions”, says Oliver Holtemöller, head of the Department Macroeconomics and vice president at Halle Institute for Economic Research (IWH). Gross domestic product is expected to increase by 1.5% in 2018 and by 1.4% in 2019, which is roughly equal to the growth rate of economic capacity in Germany.
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The Joint Dynamics of Sovereign Ratings and Government Bond Yields
Journal of Banking & Finance,
Can a negative shock to sovereign ratings invoke a vicious cycle of increasing government bond yields and further downgrades, ultimately pushing a country toward default? The narratives of public and political discussions, as well as of some widely cited papers, suggest this possibility. In this paper, we will investigate the possible existence of such a vicious cycle. We find no evidence of a bad long-run equilibrium and cannot confirm a feedback loop leading into default as a transitory state for all but the very worst ratings. We use a bivariate semiparametric dynamic panel model to reproduce the joint dynamics of sovereign ratings and government bond yields. The individual equations resemble Pesaran-type cointegration models, which allow for valid interference regardless of whether the employed variables display unit-root behavior. To incorporate most of the empirical features previously documented (separately) in the literature, we allow for different long-run relationships in both equations, nonlinearities in the level effects of ratings, and asymmetric effects in changes of ratings and yields. Our finding of a single good equilibrium implies the slow convergence of ratings and yields toward this equilibrium. However, the persistence of ratings is sufficiently high that a rating shock can have substantial costs if it occurs at a highly speculative rating or lower. Rating shocks that drive the rating below this threshold can increase the interest rate sharply, and for a long time. Yet, simulation studies based on our estimations show that it is highly improbable that rating agencies can be made responsible for the most dramatic spikes in interest rates.
IWH at 2020 ASSA Annual Meeting in San Diego
IWH at 2020 ASSA Annual Meeting in San Diego Next year’s 2020 ASSA Annual Meeting...
Reports of the European Forecasting Network (EFN)
Reports of the European Forecasting Network (EFN) The European Forecasting...
Borrowers Under Water! Rare Disasters, Regional Banks, and Recovery Lending ...
21.03.2018 • 5/2018
What is holding back the banking union?
The European Commission wants to better regulate and monitor the European banking sector. In many EU Member States, however, the necessary directives are being implemented extremely slowly. Surprisingly, the reasons for this do not lie in politics and banking structures, but in the institutional framework conditions and existing regulations in the Member States, as argued by Michael Koetter, Thomas Krause and Lena Tonzer from the Halle Institute for Economic Research (IWH).
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How Do Political Factors Shape the Bank Risk-Sovereign Risk Nexus in Emerging Markets?
Review of Development Economics,
This paper studies the role of political factors for determining the impact of banking sector distress on sovereign bond yield spreads for a sample of 19 emerging market economies in the period 1994–2013. Using interaction models, I find that the adverse impact of banking sector distress on sovereign solvency is less pronounced for countries with a high degree of political stability, a high level of power sharing within the government coalition, a low level of political constraint within the political system, and for countries run by powerful and effective governments. The electoral cycle pronounces the bank risk–sovereign risk transfer.
06.07.2017 • 28/2017
Politicians share responsibility for the risk of their state defaulting
Investors assume higher risks of default when a country is politically unstable or governed by a party at the left or right end of the political spectrum. However, according to findings obtained by Stefan Eichler from the Halle Institute for Economic Research (IWH), the more democratic the country is and the more it is integrated into the global economy, the lower is the impact that such political factors have.
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Politische Determinanten staatlicher Ausfallrisiken
Wirtschaft im Wandel,
Staatliche Zahlungsausfälle haben nicht selten politische Ursachen. Während ökonomische Rahmenbedingungen wie etwa Wirtschaftswachstum, Finanzstabilität oder globale Investorenstimmungen die Zahlungsfähigkeit eines Staates beeinflussen, wird die tatsächliche Rückzahlung von Staatsschulden letztendlich von der einheimischen Regierung entschieden. Die Zahlungswilligkeit einer Regierung spielt daher eine entscheidende Rolle für das Risiko eines staatlichen Zahlungsausfalls. In diesem Artikel wird der Einfluss politischer Faktoren auf das staatliche Ausfallrisiko für 27 Schwellen- und Entwicklungsländer im Zeitraum von 1996 bis 2009 untersucht. Die Auswertung von Anleihedaten zeigt, dass Investoren ein höheres Ausfallrisiko fürchten, falls ein Land politisch instabil ist oder von einer Rechts- bzw. Linkspartei regiert wird. Der Einfluss politischer Faktoren auf das staatliche Ausfallrisiko eines Landes sinkt mit dessen Grad an Demokratie und Integration in die Weltwirtschaft.