In this paper, it is shown that, contrary to standard arguments, fiscal discipline is not substantially enhanced by a fixed exchange rate regime. This study is based on data from 116 countries collected from 1975 to 2004 and uses various estimation techniques for dynamic panel data, in particular a GMM estimation in the tradition Arellano and Bover (1995) and Blundell and Bond (1998). Contrary to previous papers on this topic, the present paper takes into account that the consequences of a new exchange rate regime do not necessarily fully manifest immediately.

Based on case studies from countries that have been hit hardest by the Asian financial crisis of 1997, the present paper shows that the accusation that sovereign ratings led to a severe acceleration of the crisis is unconvincing and that the empirical method often used to support accusations against rating agencies is inappropriate for the problem under analysis. Rather, it must be emphasised that ratings were downgraded in most countries very shortly before the end of the crisis. In some countries, the ratings were even further downgraded after the end of the crisis as countries started to recover. This is not in line with the thesis that the crisis was accelerated by rating agencies.

Since the Asian crises it is often taken as granted that capital markets have significant functional deficits. Often these deficits are believed to be so very strong that the ability of free capital markets to guarantee a more or less correct international allocation of capital is denied. It is argued that speculation dominates capital markets so much that capital allocation is purely random. This is one of the major arguments backing the present trend to re-establish capital controls, which emerged after the capital market distortions observed during the Asian flu. In the present article it is shown that capital markets, while certainly prone to many distortions, are well capable of roughly guiding capital to the proper place. Though allocation is not model-like perfect, this steals the thunder from the idea, that closed or government-guided capital markets were able to perform better.

<p>Our results reveal that higher lending spreads between foreign and home markets redirect real estate backed lending towards foreign markets offering a higher interest rate, which provides evidence for "search for yield" behavior. This re-allocation is found especially for banks with more expertise on the foreign market due to a higher local activity and holds for commercial and residential real estate backed loans. Furthermore, "search for yield" behavior and a resulting increase in foreign real estate backed lending is found when macroprudential regulation is missing or misaligned between a bank’s country of residence and the destination country. When turning to the question of whether the detected search for yield behavior results in more risk, we find that especially better capitalized banks report higher forbearance ratios as they might face less stigma effects compared to low capitalized banks.</p>

<p>We use project-level information for the largest regional economic development program in German history to study how government subsidies to firms affect credit markets. We identify credit market responses by considering both, bank lending and firm borrowing during 1998-2019. We find that subsidies lead to larger lending volumes without crowding out credit to non-subsidized firms. Banks that are more exposed to subsidized firms exhibit moderately higher credit risk though. Firm subsidies support lending especially when credit constraints are elevated during the years of the financial crisis.</p>

We identify the effect of climate change-related regulatory risks on credit real-location. Our evidence suggests that effects depend borrower's region. Following an increase in salience of regulatory risks, banks reallocate credit to US firms that could be negatively impacted by regulatory interventions. Conversely, in Europe, banks lend more to firms that could benefit from environmental regulation. The effect is moderated by banks' own loan portfolio composition. Banks with a portfolio tilted towards firms that could be negatively a affected by environmental policies increasingly support these firms. Overall, our results indicate that financial implications of regulation associated with climate change appear to be the main drivers of banks' behavior.

Over the last decade, German housing prices have increased unprecedentedly. Drawing on quality-adjusted housing price data at the district level, we document large and increasing regional disparities: Growth rates were higher in 1) the largest seven cities, 2) districts located in the south, and 3) districts with higher initial price levels. Indications of price bubbles are concentrated in the largest cities and in the purchasing market. Prices seem to be driven by the demand side: Increasing population density, higher shares of academically educated employees and increasing purchasing power explain our findings, while supply remained relatively constrained in the short term.

Does financial development shield countries from the pass-through of financial shocks to real outcomes? We evaluate this question by characterising the probability density of expected GDP growth conditional on financial stability indicators in a panel of 28 countries. Our robust results unveil a non-linear nexus between financial stability and expected GDP growth, depending on countries’ degree of financial development. While both domestic and global financial factors affect expected growth, the effect of global factors is moderated by financial development. This result highlights a previously unexplored channel trough which financial development can break the link between financial (in)stability and GDP growth.