German Economy on the Brink of Recession
Wirtschaft im Wandel,
2. Sonderausgabe
2008
Abstract
In autumn 2008, the word economy is in a downswing, caused by the commodity and energy price hike of the first half of the year, housing crises in the US and some other important countries, and in particular by the financial crisis that has recently intensified. The downswing will continue this year and for some time during 2009, and will only come to an end later next year if governments and central banks succeed in stabilizing financial markets in the coming months. In this case, lower prices of commodities and still high growth dynamics in important emerging markets countries will lead to a tentative revival of the world economy.
The German economy is on the brink of a recession. It is particularly vulnerable to a global downswing because exports of investment goods are of upmost importance for the overall economy. Because the uncertainty about the worldwide effects of the financial crisis is very high, the forecast is split. A more probable scenario is based on the assumption of a stabilizing world economy. In this scenario, the growth rate of the German economy in 2009 is 0.2%. The second scenario is based on the assumption of a worldwide recession next year and forecasts that German GDP will shrink by 0.8% in 2009.
Concerning policy, the institutes recommend a strengthening of the capital base of banks via injection of government money. This should be done in a way that gives incentives to banks for attracting additional capital from private sources.
A special chapter of the report analyzes the nature and causes of the price hikes of energy and commodities in the first half of 2008.
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Monetary Policy and Financial (In)stability: An Integrated Micro–Macro Approach
Ferre De Graeve, Thomas Kick, Michael Koetter
Journal of Financial Stability,
No. 3,
2008
Abstract
Evidence on central banks’ twin objective, monetary and financial stability, is scarce. We suggest an integrated micro–macro approach with two core virtues. First, we measure financial stability directly at the bank level as the probability of distress. Second, we integrate a microeconomic hazard model for bank distress and a standard macroeconomic model. The advantage of this approach is to incorporate micro information, to allow for non-linearities and to permit general feedback effects between financial distress and the real economy. We base the analysis on German bank and macro data between 1995 and 2004. Our results confirm the existence of a trade-off between monetary and financial stability. An unexpected tightening of monetary policy increases the probability of distress. This effect disappears when neglecting microeffects and non-linearities, underlining their importance. Distress responses are largest for small cooperative banks, weak distress events, and at times when capitalization is low. An important policy implication is that the separation of financial supervision and monetary policy requires close collaboration among members in the European System of Central Banks and national bank supervisors.
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Business Cycle Forecast, Summer 2008: Price Hikes and Financial Crisis Cloud Growth Prospects
Wirtschaft im Wandel,
No. 7,
2008
Abstract
In the summer of 2008 the turmoil on financial markets and that on the markets for energy dim the prospects for the world economy. The acceleration of the oil price hike during the first half of the year has led to an increase in expected inflation and to higher interest rates on capital markets, while stock prices are going down. At the same time, the financial crisis is far from over, and banks in the US and in Western Europe continue in their efforts to consolidate their balance sheets. Thus, the expansion of credit supply will be scarcer in the next quarters. All this means that demand will slow in the developed economies during the next quarters. However, the massive fiscal stimulus will help the US economy to stabilize, and the world economy still benefits from the high growth dynamics in the emerging markets economies. All in all, the developed economies will not reach their potential growth rate before the second half of 2009. In Germany, the upswing comes to a temporary halt during summer of this year. Slowing foreign demand and the oil price hike induce firms to postpone investments, and private consumption, the soft spot of the upswing in Germany, is still sluggish due to high inflation rates that impair purchasing power. For the end of 2008, chances are good that growth in Germany accelerates again, because German exporters are still penetrating emerging markets as competitiveness does not diminish. All in all, the German economy will grow by 2.3% in 2008 (mainly due to the very high dynamics at the beginning of the year) and by 1.3% in 2009. A main risk of this forecast is that monetary policy fails in easing the high inflationary pressures. As to fiscal policy, efforts to reach sustainable public finances should not weaken.
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Foreign Subsidiaries in the East German Innovation System – Evidence from Manufacturing Industries
Jutta Günther, Björn Jindra, Johannes Stephan
IWH Discussion Papers,
No. 4,
2008
Abstract
This paper analyses the extent of technological capability of foreign subsidiaries located in East Germany, and looks at the determinants of foreign subsidiaries’ technological sourcing behaviour. The theory of international production underlines the importance of strategic and regional level variables. However, existing empirical approaches omit by and large regional level factors. We employ survey evidence from the “FDI micro data- base” of the IWH, that was only recently made available, to conduct our analyses. We find that foreign subsidiaries are above average technologically active in comparison to the whole East German manufacturing. This can be partially explained by the industrial structure of foreign direct investment. However, only a limited share of foreign subsidiaries with R&D and/or innovation activity source technological knowledge from the East German innovation system. If a subsidiary follows a competence augmenting strategy or does local trade, it is more likely to source technological knowledge locally. The endowment of a region with human capital and a scientific infrastructure has a positive effect too. The findings suggest that foreign subsidiaries in East Germany are only partially linked with the regional innovation system. Policy implications are discussed.
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Do Weak Supervisory Systems Encourage Bank Risk-taking?
Claudia M. Buch, G. DeLong
Journal of Financial Stability,
2008
Abstract
Weak bank supervision could give banks the ability to shift risk from themselves to supervisors. We use cross-border bank mergers as a natural experiment to test changes in risk and the impact of supervision. We examine cross-border bank mergers and find that the supervisory structures of the partners’ countries influence changes in post-merger total risk. An acquirer from a country with strong supervision lowers total risk after a cross-border merger. However, total risk increases when the target bank is located in a country with relatively strong supervision. This result is consistent with strong host regulators limiting the risky activities of their local banks. Foreign-owned competitors could then engage in the risky projects, especially if the foreign banks’ supervisors are not strong. An acquirer entering a country with strong supervision appears to shift risk back to its home country. The results suggest that bank supervisors can reduce total banking risk in their countries by being strong.
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The Stability of Bank Efficiency Rankings when Risk Preferences and Objectives are Different
Michael Koetter
European Journal of Finance,
No. 2,
2008
Abstract
We analyze the stability of efficiency rankings of German universal banks between 1993 and 2004. First, we estimate traditional efficiency scores with stochastic cost and alternative profit frontier analysis. Then, we explicitly allow for different risk preferences and measure efficiency with a structural model based on utility maximization. Using the almost ideal demand system, we estimate input- and profit-demand functions to obtain proxies for expected return and risk. Efficiency is then measured in this risk-return space. Mean risk-return efficiency is somewhat higher than cost and considerably higher than profit efficiency (PE). More importantly, rank–order correlation between these measures are low or even negative. This suggests that best-practice institutes should not be identified on the basis of traditional efficiency measures alone. Apparently, low cost and/or PE may merely result from alternative yet efficiently chosen risk-return trade-offs.
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FDI and Domestic Investment: An Industry-level View
Claudia M. Buch
CEPR. Discussion Paper No. 6464,
2007
Abstract
Previous empirical work on the link between domestic and foreign investment provides mixed results which partly depend on the level of aggregation of the data. We argue that the aggregated home country implications of foreign direct investment (FDI) cannot be gauged using firm-level data. Aggregated data, in turn, miss channels through which domestic and foreign activities interact. Instead, industry-level data provide useful information on the link between domestic and foreign investment. We theoretically show that the effects of FDI on the domestic capital stock depend on the structure of industries and the relative importance of domestic and multinational firms. Our model allows distinguishing intra-sector competition from inter-sector linkage effects. We test the model using data on German FDI. Using panel cointegration methods, we find evidence for a positive long-run impact of FDI on the domestic capital stock and on the stock of inward FDI. Effects of FDI on the domestic capital stock are driven mainly by intra-sector effects. For inward FDI, inter-sector linkages matter as well.
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Banking Regulation: Minimum Capital Requirements of Basel II Intensify Transmission from Currency Crises to Banking Crises
Tobias Knedlik, Johannes Ströbel
Wirtschaft im Wandel,
No. 8,
2007
Abstract
Emerging market currency crises are often followed by banking crises. One reason for the transmission is the increased value of foreign debt measured in local currency. Equity capital is often insufficient to ensure liquidity. This problem is addressed by Basel II, in particular by its minimum capital requirements. In difference to the current regulation (Basel I), Basel II employs a differentiated risk weighing on base of credit ratings. This contribution calculates the hypothetic effects of the new regulation on minimum capital requirements for the example of the South Korea currency and banking crises of 1997. The results are compared to current regulation. It can be shown that minimum capital requirements in the case of Basel II would have been lower than in the case of Basel I. Additionally, minimum capital requirements would have increased dramatically. The transmission from currency to banking crises would not have been prevented, but would have been accelerated. Thereby, minimum capital requirements under Basel I have been relatively low because of South Korea’s OECD membership. It can therefore be concluded that in other emerging market economies, which are not OECD members, the ratio of minimum capital requirements of Basel II to the minimum capital requirements of Basel I prior the crises would have been even lower. Therefore, the new instrument of banking regulation would have intensified the transmission from currency to banking crises.
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East German Economy: Demand Push Stronger than Structural Deficiencies
Wirtschaft im Wandel,
No. 7,
2007
Abstract
In 2006, growth of production was surprisingly strong in Eastern Germany. The structural deficiencies there would have suggested a slower pace. In particular, linkages with national and international business cycles have been underestimated. To a large part, the reason why output grew by 3 per cent did not come from Eastern Germany itself, but from the Old Länder and from abroad. In the New Länder, the strong upward swing in investment activity stimulated the economy. However, owing to a small increase in total income of private households, their purchasing power lagged behind.
The improved ability of East German firms to absorb cyclical impulses from exports and from Germany’s general investment activity proved to be a crucial factor. In particular, the endowment of workplaces with modern production facilities as well as the continued reduction in the disadvantages with respect to cost-competitiveness in the tradable goods sector were beneficial. The labour cost advantage compared to West German competitors increased further while the disadvantage compared to those from Central and Eastern Europe decreased.
Benefiting from these factors, economic activity in Eastern Germany will grow faster than in the Old Länder as long as the upswing in Germany and abroad remains strong. In 2007 and 2008, investments – especially in equipment – and exports will be the driving forces again. For exports, the strongly expanding markets in Central and Eastern Europe as well as in Russia will gain in importance. As income and employment prospects improve, private consumption will support the growth in production. Registered unemployment should decrease below the 1-million threshold.
Manufacturing will remain the primary force of the upswing; its advantages in production costs will not vanish as long as, even in presence of scarcity of skilled labour, salaries and wages do not increase more than in Western Germany. In the wake of robust economic growth, the New Länder will make further progress in catching up with respect to production and income.
Companies will regain support from the banking industry. Yet, investment capital still stems from public funding programmes to a non-negligible extent. In the medium run, access to credit will ease as a result of further improvements in the firms’ net worth position. However, dependency on internal funds remains high and exposes companies to comparatively strong cyclical risks. In an economic downturn, the structural deficiencies of the East German economy will impair economic expansion.
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asset price inflation
Tobias Knedlik, A. Knorr
Systeme monetärer Steuerung - Analyse und Vergleich geldpolitischer Strategien - Schriften zu Ordnungsfragen der Wirtschaft, Band 86,
No. 86,
2007
Abstract
Most of the influential central banks managed to bring inflation down to a sustainable path in the last two decades. However, during the same time asset prices increased significantly. From the perspective of economic policy, this development might constitute a problem in the case that price increases are not due to changes in fundamentals but are of a speculative nature. During the current past the number of asset price bubbles increased. The aim of this contribution is to analyze policy options with regard to asset price inflation. We identify the relevant markets, discuss their specific price mechanisms, discuss transmission mechanisms, and the usefulness of monetary policy and alternative instruments to deal with asset price inflation. We show that, once asset price inflation is present, monetary policy can do little to stop processes of speculative bubbles. It is the more important that that alternatives are considered. These include the analysis of monetary conditions, a straight forward communication, better regulation, and a strengthening of institutions that allow for diversifying risks to handle the necessary structural changes with lowest possible economic costs.
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