03.05.2016 • 20/2016
Are Lacking Structural Reforms in the Financial Sector the Underlying Reason for the German Criticism of the ECB?
The major reason for the intense criticism of the European Central Bank’s (ECB’s) low-interest-rate policy may be the lack of structural reforms in the German banking system. The resulting persistent fragmentation increases the banking sector’s vulnerability to the low-interest-rate environment. Hence, parts of the banking sector, due to their strong ties to politicians, appear to have successfully influenced public opinion against the ECB.
Reint E. Gropp
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Did TARP Distort Competition Among Sound Unsupported Banks?
Michael Koetter, Felix Noth
Economic Inquiry,
No. 2,
2016
Abstract
This study investigates if the Troubled Asset Relief Program (TARP) distorted price competition in U.S. banking. Political indicators reveal bailout expectations after 2009, manifested as beliefs about the predicted probability of receiving equity support relative to failing during the TARP disbursement period. In addition, the TARP affected the competitive conduct of unsupported banks after the program stopped in the fourth quarter of 2009. Loan rates were higher, and the risk premium required by depositors was lower for banks with higher bailout expectations. The interest margins of unsupported banks increased in the immediate aftermath of the TARP disbursement but not after 2010. No effects emerged for loan or deposit growth, which suggests that protected banks did not increase their market shares at the expense of less protected banks.
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A Market-based Indicator of Currency Risk: Evidence from American Depositary Receipts
Stefan Eichler, Ingmar Roevekamp
IWH Discussion Papers,
No. 4,
2016
Abstract
We introduce a novel currency risk measure based on American Depositary Receipts(ADRs). Using a multifactor pricing model, we exploit ADR investors’ exposure to potential devaluation losses to derive an indicator of currency risk. Using weekly data for a sample of 831 ADRs located in 23 emerging markets over the 1994-2014 period, we find that a deterioration in the fiscal and current account balance, as well as higher inflation, increases currency risk. Interaction models reveal that these macroeconomic fundamentals drive currency risk, particularly in countries with managed exchange rates, low levels of foreign exchange reserves and a poor sovereign credit rating.
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Determinants of the Size of the Sovereign Credit Default Swap Market
Tobias Berg, Daniel Streitz
Journal of Fixed Income,
No. 3,
2016
Abstract
We analyze the sovereign credit default swap (CDS) market for 57 countries, using a novel dataset comprising weekly positions and turnover data. We document that CDS markets—measured relative to a country’s debt—are larger for smaller countries, countries with a rating just above the investment-grade cutoff, and countries with weaker creditor rights. Analyzing changes in credit risk, we find that rating changes matter but only for negative rating events (downgrades and negative outlooks). In particular, weeks with downgrades and negative outlooks are associated with a significantly higher turnover in the sovereign CDS market, even after controlling for changes in sovereign CDS spreads. We conclude that agencies’ ratings are a major determinant of the size of the sovereign CDS market.
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Do Federal Reserve Bank Presidents’ Interest Rate Votes in the FOMC Follow an Electoral Cycle?
Stefan Eichler, Tom Lähner
Applied Economics Letters,
No. 9,
2016
Abstract
We find that Federal Reserve Bank presidents’ regional bias in their dissenting interest rate votes in the Federal Open Market Committee follows an electoral cycle. Presidents put more weight on their district’s economic environment during the year prior to their (re-)election relative to nonelection years.
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24.09.2015 • 38/2015
German Households Benefit from Low Interest Environment
Calculations of the Halle Institute for Economic Research (IWH) – Member of the Leibniz Association show that the average household in Germany has benefited from the low policy rate environment. The average return on their portfolio was higher than in the pre-crisis period while at the same time, they benefited from lower interest on new loans. Households in Germany had a total Euro benefit of more than 364 billion Euro over a five-year period relative to 2003 to 2007. Increases in stock prices and real estate prices over-compensate lower interest rates on savings accounts, despite their relatively low share in households’ portfolios. There are benefits across the income distribution. Households that do not own real estate lost though, but their losses are very small at on average about 100 Euro per year.
Reint E. Gropp
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“The German Saver” and the Low Policy Rate Environment
Reint E. Gropp, Vahid Saadi
IWH Online,
No. 9,
2015
Abstract
It is widely claimed that “the German saver” suffers (i.e. generates significantly lower returns on her savings) in the low interest environment that Germany currently experiences relative to a high interest rate environment. With “low interest rate environment”, the observers tend to mean “low policy rates”, i.e. the European Central Bank’s (ECB) main refinancing rate.
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Global Food Prices and Business Cycle Dynamics in an Emerging Market Economy
Oliver Holtemöller, Sushanta Mallick
Abstract
This paper investigates a perception in the political debates as to what extent poor countries are affected by price movements in the global commodity markets. To test this perception, we use the case of India to establish in a standard SVAR model that global food prices influence aggregate prices and food prices in India. To further analyze these empirical results, we specify a small open economy New-Keynesian model including oil and food prices and estimate it using observed data over the period from 1996Q2 to 2013Q2 by applying Bayesian estimation techniques. The results suggest that big part of the variation in inflation in India is due to cost-push shocks and, mainly during the years 2008 and 2010, also to global food price shocks, after having controlled for exogenous rainfall shocks. We conclude that the inflationary supply shocks (cost-push, oil price, domestic food price and global food price shocks) are important contributors to inflation in India. Since the monetary authority responds to these supply shocks with a higher interest rate which tends to slow growth, this raises concerns about how such output losses can be prevented by reducing exposure to commodity price shocks and thereby achieve higher growth.
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