14.12.2021 • 29/2021
German economy not yet immune to COVID 19 ‒ outlook clouded again
The current pandemic wave and supply bottlenecks cause the German economy to stagnate in winter. When infection rates go down in spring, private consumption will increase significantly. In addition, supply restrictions will be gradually reduced. As a result, the economy will regain momentum. The Halle Institute for Economic Research (IWH) forecasts that German gross domestic product will increase by 3.5% (East Germany: 2.7%) in 2022, after 2.7% (East Germany: 2.1%) in the current year. Inflation is expected to decline only slowly.
Oliver Holtemöller
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Dilemma and Global Financial Cycle: Evidence from Capital Account Liberalisation Episodes
Xiang Li
IWH Discussion Papers,
No. 13,
2021
Abstract
By focusing on the episodes of substantial capital account liberalisation and adopting a new methodology, this paper provides new evidence on the dilemma and global financial cycle theory. I first identify the capital account liberalisation episodes for 95 countries from 1970 to 2016, and then employ an augmented inverse propensity score weighted (AIPW) estimator to calculate the average treatment effect (ATE) of opening capital account on the interest rate comovements with the core country. Results show that opening capital account causes a country to lose its monetary policy independence, and a floating exchange rate regime cannot shield this effect. Moreover, the impact is stronger when liberalising outward and banking flows.
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14.10.2021 • 26/2021
East German economy less affected by supply bottlenecks than German economy as a whole, but lower vaccination rates pose risks – Implications of the Joint Economic Forecast Autumn 2021 and of Länder data from recent publications of the Federal Statisti
Supply bottlenecks affect production in the manufacturing sector in East Germany somewhat less than in Germany as a whole. With 1.8%, the increase in Gross Domestic Product in eastern Germany in 2021 therefore is likely to be lower than in Germany as a whole (2.4%); this gap is likely to enlarge in 2022, when supply bottlenecks hamper less (East Germany: 3.6%, Germany 4.8%).
Oliver Holtemöller
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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%).
Oliver Holtemöller
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Covered Bonds and Bank Portfolio Rebalancing
Jin Cao, Ragnar E. Juelsrud, Talina Sondershaus
Norges Bank Working Papers,
No. 6,
2021
Abstract
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.
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29.07.2021 • 20/2021
Communication instead of conflict – why are female CEOs so interesting for hedge funds
The value of female-led firms is enhanced more by the intervention of activist investors than that of firms with male CEOs. This is the result of a recent paper by Iftekhar Hasan (Fordham University and IWH) and Qiang Wu (Rensselaer Polytechnic Institute, RPI) at the Halle Institute for Economic Research (IWH). "The results show that female CEOs particularly benefit from the intervention of hedge fund activists due to their strong communication and interpersonal skills," explains Iftekhar Hasan. This is because, on average, the intervention of an activist hedge fund increases the value of the firm ex post. To achieve this, activist hedge funds such as Carl Icahn, Trian Fundmanagement or Elliott prefer to rely on communication and cooperation with the management.
Reint E. Gropp
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Inequality in Life and Death
Martin S. Eichenbaum, Sergio Rebelo, Mathias Trabandt
Abstract
We argue that the Covid epidemic disproportionately affected the economic well-being and health of poor people. To disentangle the forces that generated this outcome, we construct a model that is consistent with the heterogeneous impact of the Covid recession on low- and high-income people. According to our model, two thirds of the inequality in Covid deaths reflect pre-existing inequality in comorbidity rates and access to quality health care. The remaining third, stems from the fact that low-income people work in occupations where the risk of infection is high. Our model also implies that the rise in income inequality generated by the Covid epidemic reflects the nature of the goods that low-income people produce. Finally, we assess the health-income trade-offs associated with fiscal transfers to the poor and mandatory containment policies.
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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.
Oliver Holtemöller
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Conditional Macroeconomic Forecasts: Disagreement, Revisions and Forecast Errors
Alexander Glas, Katja Heinisch
IWH Discussion Papers,
No. 7,
2021
Abstract
Using data from the European Central Bank‘s Survey of Professional Forecasters, we analyse the role of ex-ante conditioning variables for macroeconomic forecasts. In particular, we test to which extent the heterogeneity, updating and ex-post performance of predictions for inflation, real GDP growth and the unemployment rate are related to assumptions about future oil prices, exchange rates, interest rates and wage growth. Our findings indicate that inflation forecasts are closely associated with oil price expectations, whereas expected interest rates are used primarily to predict output growth and unemployment. Expectations about exchange rates and wage growth also matter for macroeconomic forecasts, albeit less so than oil prices and interest rates. We show that survey participants can considerably improve forecast accuracy for macroeconomic outcomes by reducing prediction errors for external conditions. Our results contribute to a better understanding of the expectation formation process of experts.
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The Impact of Risk-based Capital Rules for International Lending on Income Inequality: Global Evidence
Iftekhar Hasan, Gazi Hassan, Suk-Joong Kim, Eliza Wu
Economic Modelling,
May
2021
Abstract
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.
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