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EFN Report Spring 2015: Economic Outlook for the Euro Area in 2015 and 2016

EFN Reports, Nr. 2, 2015
Abstract
Recent movements on world markets for commodities, currencies and capital stimulate the world economy, but they entail also considerable risks: income losses of energy exporting countries might trigger financial crises with worldwide repercussions; crises might also emerge from financial distress of emerging market debtors with liabilities denominated in US dollars. Extremely low interest rates might not only trigger stock and bond price booms, but also more volatility if investors become fearful of financial bubbles. Quite a few conditions are highly beneficial for a recovery of the euro area economy: governments and large corporations benefit from ultra-low bond yields, banks’ composite costs of debt financing have been converging during the past two years to very low levels, and borrowing costs for non-financial corporations have come down markedly. Prices for stocks, bonds and (on average) houses have gone up. Real disposable incomes of private households have risen due to oil prices. The real effective exchange rate is about 10% lower in March 2015 than it was a year ago, strengthening the price competitiveness of firms in the euro area. According to our forecasts, the euro area GDP will grow by 1.6% in 2015 and by 2.1% in 2016. Structural impediments, however, still limit the ability of the euro area economy to grow strongly: firms and, in particular, private households are only slowly reducing their heavy debt burdens, and confidence will not fully come back in France and Italy, as long as reform processes are inconclusive in both countries and as long as unemployment is not coming down markedly. Our inflation forecast for 2015 is 0.1%, with the possibility of a mild deflation not excluded. In 2016 inflation will increase up to 1.3%, still clearly below the 2% ECB’s target. This calls for continued monetary expansion, though its effects could be limited in the absence of a complementary fiscal stimulus, in particular in those countries where the implementation of structural reforms brings long term gains but short term losses.
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EFN Report Winter 2014/15: Economic Outlook for the Euro Area in 2015 and 2016

EFN Reports, Nr. 1, 2015
Abstract
At the beginning of the year 2015 crude oil is, with little more than 50 dollars per barrel (Brent), about 50% cheaper than in the summer 2014. The oil price hike is a stimulus for the whole world economy, even though the gains of energy users are matched by losses of the suppliers: oil producing countries frequently run high current account surpluses vis-à-vis the rest of the world. It is therefore plausible to assume that, reacting to the redistribution of incomes, the oil user countries will increase their spending by more than what will be lost in spending by producers. Investment activity in the euro area has recently been particularly weak. Remarkably, investment in Greece, Portugal, and Spain, i.e. in countries that had to accept international support during the euro crisis, has strengthened. The setback took place in the so-called core countries, including Germany. Consumption growth was also subdued. Lower oil prices, by increasing real incomes of consumers and lowering production costs for firms, should increase private consumption and, in particular, investment. Moreover, the depreciation of the euro will favour exports. Overall, according to our forecasts, the euro area GDP will grow by 1.3% in 2015 and by 1.6% in 2016. GDP growth is about 0.3 percentage points higher due to the impact of lower oil prices in 2015. However, these forecasts are subject to substantial uncertainty, and we do not see any significant reduction of the unemployment rate during the forecasting horizon. Our inflation forecast for 2015 is 0.3%, with the possibility of a mild deflation not excluded. In 2016 inflation will increase up to 1.1%, still clearly below the 2% ECB’s target. This calls for further monetary expansion, though its effects could be limited in the absence of a complementary fiscal stimulus. The expansionary cyclical policies should be combined with more structural reforms to enhance the competitiveness of the euro area and its growth potential, which in our forecasts remains quite limited. In fact, we expect potential output to grow by only 0.4% both in 2015 and 2016.
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EFN Report Autumn 2014: Economic Outlook for the Euro Area in 2014 and 2015

, 2014
Abstract
In autumn 2014, world production continues to be expanding at a moderate rate, a bit faster than at the beginning of the year. A strong upswing of the world economy is, however, not in sight: the US upswing continues but is not probable to gain more pace, and the Chinese economy has to cope with severe problems in the financial and the housing sector. Important conditions for a stronger recovery are in place: the fall in financing costs allows euro area governments to conduct fiscal policies that are, on average, clearly less restrictive than in the years before, and nonfinancial firms benefit from a shrinking burden of interest payments. Interest rates for bank credit in the southern economies are now slowly going down. However, the recovery will stay sluggish as long as firms and households lack confidence in the economic policy of important member states. In fact, economic confidence in the euro area declined somewhat during summer in part due to news on the conflict between Russia and the west, although only about 5% of all exports leaving the euro area go to Russia or Ukraine. Production growth in the euro area slowed down to stagnation in the second quarter, mainly due to a decline in Germany related to a weather effect. Demand in the rest of the euro area continued to slowly expand. In this context, we forecast that the euro area economy will expand by 1.3% in 2015, after 0.9% in 2014. For 2014 and 2015, we do not see any significant reduction of the unemployment rate, because employment dynamics will stay weak due to subdued growth and the still rising participation rate in the euro area. Our inflation forecast for 2014 is 0.5%. In 2015 inflation will also remain subdued, at about 1.1%.
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Forecast Dispersion, Dissenting Votes, and Monetary Policy Preferences of FOMC Members: The Role of Individual Career Characteristics and Political Aspects

Stefan Eichler, Tom Lähner
Public Choice, Nr. 3, 2014
Abstract
Using data from 1992 to 2001, we study the impact of members’ economic forecasts on the probability of casting dissenting votes in the Federal Open Market Committee (FOMC). Employing standard ordered probit techniques, we find that higher individual inflation and real GDP growth forecasts (relative to the committee’s median) significantly increase the probability of dissenting in favor of tighter monetary policy, whereas higher individual unemployment rate forecasts significantly decrease it. Using interaction models, we find that FOMC members with longer careers in government, industry, academia, non-governmental organizations (NGOs), or on the staff of the Board of Governors are more focused on output stabilization, while FOMC members with longer careers in the financial sector or on the staffs of regional Federal Reserve Banks are more focused on inflation stabilization. We also find evidence that politics matters, with Republican appointees being much more focused on inflation stabilization than Democratic appointees. Moreover, during the entire Clinton administration ‘natural’ monetary policy preferences of Bank presidents and Board members for inflation and output stabilization were more pronounced than under periods covering the administrations of both George H.W. Bush and George W. Bush, respectively.
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EFN Report Summer 2014: Economic Outlook for the Euro Area in 2014 and 2015

, 2014
Abstract
World growth disappointed at the beginning of the year, when in the US extremely cold weather caused production to contract, the recovery in the euro area stumbled and the slowdown of the Chinese economy continued. At present, however, confidence indicators and order books point to a moderate pickup of growth in most regions. Prices on markets for energy, real and financial assets have reacted little to recent bad news about rising geopolitical risks in the Middle East and Eastern Europe up to now. A sudden increase of risk aversion or a change of believes among investors could trigger a swift deterioration of financial conditions for the world economy. In the euro area, strong stimuli from abroad are not to be expected and private households continue to keep their real spending about constant. Investment has been expanding since summer 2013, but at a very moderate rate. In this context, our forecast for GDP growth is 1.1% in 2014 and 1.6% in 2015. For 2014 and 2015, we do not see any significant reduction of the unemployment rate, because employment dynamics will stay weak due to subdued growth and the still rising participation rate in the euro area. Our inflation forecast for 2014 is 0.6%. In 2015 inflation will also remain subdued, at about 1.0%. In this context of very low price dynamics, monetary policy keeps the recovery alive: official interest rates around zero and the search for yields on financial markets have depressed yields for government bonds; the fall in financing costs allows euro area governments to conduct fiscal policies that are much less restrictive than in the years before, with tax cuts in Italy, France, and Spain starting this year. Nonfinancial firms benefit from a shrinking burden of interest payments, and the availability of bank loans for small and medium enterprises has improved since 2012 in most countries.
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Outperforming IMF Forecasts by the Use of Leading Indicators

Katja Drechsel, Sebastian Giesen, Axel Lindner
IWH Discussion Papers, Nr. 4, 2014
Abstract
This study analyzes the performance of the IMF World Economic Outlook forecasts for world output and the aggregates of both the advanced economies and the emerging and developing economies. With a focus on the forecast for the current and the next year, we examine whether IMF forecasts can be improved by using leading indicators with monthly updates. Using a real-time dataset for GDP and for the indicators we find that some simple single-indicator forecasts on the basis of data that are available at higher frequency can significantly outperform the IMF forecasts if the publication of the Outlook is only a few months old.
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Leverage, Balance-Sheet Size and Wholesale Funding

H. Evren Damar, Césaire Meh, Yaz Terajima
Journal of Financial Intermediation, Nr. 4, 2013
Abstract
Positive co-movements in bank leverage and assets are associated with leverage procyclicality. As wholesale funding allows banks to quickly adjust leverage, banks with wholesale funding are expected to exhibit higher leverage procyclicality. Using Canadian data, we analyze (i) if leverage procyclicality exists and its dependence on wholesale funding, (ii) market factors associated with this procyclicality, and (iii) if banking-sector leverage procyclicality forecasts market volatility. The findings suggest that procyclicality exists and that its degree positively depends on use of wholesale funding. Furthermore, funding-market liquidity matters for this procyclicality. Finally, banking-sector leverage procyclicality can forecast volatility in the equity market.
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EFN Report Autumn 2013: Economic Outlook for the Euro Area in 2013 and 2014

, 2013
Abstract
In autumn 2013, the expansion of world output has slightly accelerated. The recovery in the euro area is partly a result of special effects such as a rebound of construction after a particularly cold winter. Other positive factors, however, are longer lasting. Above all, doubts about the future of the currency union have receded substantially. As a consequence, private households and firms are more prepared to take spending decisions. For these reasons, we have revised upward our GDP forecasts for 2013, to -0.3 per cent lower in 2013 than in 2012 (from -0.5 expected in the summer). For 2014, we expect a GDP growth of about 1.0% that will keep unemployment at similar levels to the ones observed in 2013 (12.3%). Our inflation expectations for 2013 have moderated to a y-o-y rate of 1.5%, and they remain subdued also in 2014, at about 1.4%.
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EFN Report Summer 2013: Economic Outlook for the Euro Area in 2013 and 2014

, 2013
Abstract
The structural problems in emerging economies, the still mild recovery in the USA and the on-going crisis in the euro area will probably keep world economic growth subdued at least for the rest of 2013. Current and expected future monetary policy in Japan and, in particular, in the USA have heightened volatility in global bond and stock markets, including those of the euro area, though much less than during the crisis episodes. The process of consolidation of public finance in many euro area countries has become slightly less ambitious but it will continue to weigh on the economy in 2013, though less than in 2012. For this reason and for the lower expected global growth, we have revised downward our GDP forecasts for 2013 from previous reports. Now, we expect GDP to be -0.5 per cent lower in 2013 than in 2012, with considerable risks of an even stronger contraction. In 2014, when fiscal policy might be close to neutral, and if reforms continue to be, by and large, successfully implemented, the euro area economy should start to close its wide output gap with an expected GDP growth of about 1.2%, again subject to downwards risks. Moreover, this will not be sufficient to lower the unemployment rate, which actually could further increase to about 12.5%. The interest rates cut in May 2013 shows the will of the ECB to keep monetary policy expansive, but credit conditions and lending rates remain quite heterogeneous across the member countries. Despite the interest rate cut, euro area inflation is still very likely to remain significantly below the ECB target throughout our forecasting period. Our inflation expectations for 2013 have moderated to a y-o-y rate of 1.5%, and they remain subdued also in 2014, at about 1.4%.
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An Options-based Approach to Forecast Competing Bids: Evidence for Canadian Takeover Battles

Stefan Eichler, Dominik Maltritz
Applied Economics, Nr. 34, 2013
Abstract
During takeover battles, a tender offer provides a call option right to the target’s shareholders: it guarantees the offered price but maintains the chance of a higher offer. We present an options-based approach to estimate the probability and expected value of higher competing takeover bids using target stock price data. Analysing Canadian takeover battles in the period 1997 to 2007 we find that during the 5 trading days prior to the occurrence of an increased takeover bid, the estimated probability of a higher bid exceeds 80% on average and the expected value of a potential competing bid almost matches the realized value.
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