14.09.2021 • 23/2021
Production bottlenecks delay recovery
The German recovery made good progress over the summer 2021. However, bottlenecks in sea transport and the production of intermediate goods are weighing on world trade. The rise in raw material prices has prompted inflation rates to spike, and an increase in new infections is clouding the outlook again. A weak final quarter is therefore to be expected. The Halle Institute for Economic Research (IWH) forecasts that German gross domestic product (GDP) will increase by 2.2% in 2021 and 3.6% in 2022 (East Germany: 1.8% and 2.8%).
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Covered Bonds and Bank Portfolio Rebalancing
Norges Bank Working Papers,
We use administrative and supervisory data at the bank and loan level to investigate the impact of the introduction of covered bonds on the composition of bank balance sheets and bank risk. Covered bonds, despite being collateralized by mortgages, lead to a shift in bank lending from mortgages to corporate loans. Young and low-rated firms in particular receive more credit, suggesting that overall credit risk increases. At the same time, we find that total balance sheet liquidity increases. We identify the channel in a theoretical model and provide empirical evidence: Banks with low initial liquidity and banks with sufficiently high risk-adjusted return on firm lending drive the results.
15.06.2021 • 16/2021
Increase in personal contacts spurs economic activity
This summer the economic outlook in Germany is bright. As the pandemic is in retreat, the restrictions that have hampered many service activities are likely to be gradually lifted, and a strong boost in private purchases can be expected. The Halle Institute for Economic Research (IWH) forecasts that gross domestic product will increase by 3.9% in 2021 and by 4.0% in 2022. Production in East Germany is expected to increase by 3% in both years, respectively.
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The Impact of Risk-based Capital Rules for International Lending on Income Inequality: Global Evidence
This paper investigates the impact of international bank flows from G10 lender countries on income inequality in 74 borrower countries over 1999–2013. Specifically, we examine the role of international bank flows contingent upon the Basel 2 capital regulation and the level of financial market development in the borrower countries. First, we find that improvements in the borrower country risk weights due to rating upgrades under the Basel 2 framework significantly increase bank flows, leading to improvements in income inequality. Second, we find that the level of financial market development is also important. We report that a well-functioning financial market helps the poor access credit and thereby reduces inequality. Moreover, we employ threshold estimations to identify the thresholds for each of the financial development measures that borrower countries need to reach before realizing the potential reductions in income inequality from international bank financing.
15.04.2021 • 11/2021
Pandemic delays upswing – Demography slows growth
In their spring report, the leading economic research institutes forecast an increase in gross domestic product of 3.7% in the current year and 3.9% in 2022. The renewed shutdown is delaying the economic recovery, but as soon as the risks of infection, particularly from vaccination, have been averted, a strong recovery will begin. The economy is likely to return to normal output levels around the start of the coming year.
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Financial Analysts' Career Concerns and the Cost of Private Debt
Journal of Corporate Finance,
Career-concerned analysts are averse to firm risk. Not only does higher firm risk require more effort to analyze the firm, thus constraining analysts' ability to earn more remuneration through covering more firms, but it also jeopardizes their research quality and career advancement. As such, career concerns incentivize analysts to pressure firms to undertake risk-management activities, thus leading to a lower cost of debt. Consistent with our hypothesis, we find a negative association between analyst career concerns and bank loan spreads. In addition, our mediation analysis suggests that this association is achieved through the channel of reducing firm risk. Additional tests suggest that the effect of analyst career concerns on loan spreads is more pronounced for firms with higher analyst coverage. Our study is the first to identify the demand for risk management as a key channel through which analysts help reduce the cost of debt.
18.03.2021 • 9/2021
Economic mobility likely to increase significantly after relaxation – but also number of COVID-19 cases
The relaxation of Corona containment measures from the beginning of March 2021 lead to a significant increase in economic mobility and thus also in personal contacts in Germany. Estimates suggest that the recent relaxations increase economic mobility by more than ten percentage points and the number of new infections and deaths in Germany by 25%. Because both continued lockdowns and relaxations carry significant negative consequences, it is even more important to enable further relaxations through better testing and quarantine strategies and by increasing the pace of vaccination without putting people's health at risk.
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Economic Mobility Likely to Increase Significantly after Relaxation – but also Number of COVID-19 Cases
IWH Policy Notes,
In Germany, measures to contain the coronavirus were relaxed in some areas at the beginning of March; in many places, for example, the restrictions on private and public gatherings were eased, and retail stores are increasingly able to receive customers again. The aim of these decisions is to allow for more economic mobility and personal contact between people. However, the frequency of contact is a major factor influencing the rate at which the coronavirus spreads, especially since the relaxations have so far not been accompanied by a systematic testing strategy; and vaccination progress has so far also fallen short of expectations. Estimates based on a model of the relationship between containment measures (Oxford COVID-19 Government Response Tracker, Stringency Index), economic mobility (Google Mobility Data), new corona infections, and deaths with data from 44 countries suggest that the recent relaxations increase economic mobility by ten percentage points and the number of new infections and deaths in Germany by 25%. Because both continued lockdown and relaxations have significant negative consequences, it is even more important to enable further relaxations through better testing and quarantine strategies and by increasing the pace of vaccination without putting people's health at risk.
What Drives the Commodity-Sovereign Risk Dependence in Emerging Market Economies?
Journal of International Money and Finance,
Using daily data for 34 emerging markets in the period 1994–2016, we find robust evidence that higher export commodity prices are associated with lower sovereign default risk, as measured by lower EMBI spreads. The economic effect is especially pronounced for heavy commodity exporters. Examining the drivers, we find that, first, commodity dependence is higher for countries that export large volumes of commodities, whereas other portfolio characteristics like volatility or concentration are less important. Second, commodity-sovereign risk dependence increases in times of recessions and expansionary U.S. monetary policy. Third, the importance of raw material prices for sovereign financing can likely be mitigated if a country improves institutions and tax systems, attracts FDI inflows, invests in manufacturing, machinery and infrastructure, builds up reserve assets and opens capital and trade accounts. Fourth, the country’s government indebtedness or amount of received development assistance appear to be only of secondary importance for commodity dependence.
11.03.2021 • 8/2021
New wave of infections suspends economic recovery
The lockdown is being eased only slightly in Germany in March 2021, and gross domestic product (GDP) declines significantly in the first quarter of 2021. As vaccination campaigns progress and restrictions are gradually eased, a normalisation of household consumption patterns will likely boost the economy later during the year. The Halle Institute for Economic Research (IWH) forecasts that GDP will increase by 3.7% in 2021, following a decline of 4.9% in 2020. In East Germany, both the contraction and the rebound are much less pronounced.
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