Showing papers by "Marcel Fratzscher published in 2011"
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TL;DR: In this article, a factor model coupled with a dataset of high-frequency portfolio capital flows to 50 economies was employed to find that common shocks such as key crisis events as well as changes to global liquidity and risk have exerted a large effect on capital flows both in the crisis and in the recovery.
Abstract: The causes of the 2008 collapse and subsequent surge in global capital flows remain an open and highly controversial issue. Employing a factor model coupled with a dataset of high-frequency portfolio capital flows to 50 economies, the paper finds that common shocks – key crisis events as well as changes to global liquidity and risk – have exerted a large effect on capital flows both in the crisis and in the recovery. However, these effects have been highly heterogeneous across countries, with a large part of this heterogeneity being explained by differences in the quality of domestic institutions, country risk and the strength of domestic macroeconomic fundamentals. Comparing and quantifying these effects shows that common factors (“push” factors) were overall the main drivers of capital flows during the crisis, while country-specific determinants (“pull” factors) have been dominant in accounting for the dynamics of global capital flows in 2009 and 2010, in particular for emerging markets. JEL Classification: F3, F21, G11
631 citations
TL;DR: In this paper, the authors find that asset prices react strongest to other domestic asset price shocks, but that there are also substantial international spillovers, both within and across asset classes.
Abstract: Understanding the complexity of the financial transmission process across various assets—domestically as well as within and across asset classes—requires the simultaneous modeling of the various transmission channels in a single, comprehensive empirical framework. The paper estimates the financial transmission between money, bond and equity markets and exchange rates within and between the USA and the euro area. We find that asset prices react strongest to other domestic asset price shocks, but that there are also substantial international spillovers, both within and across asset classes. The results underline the dominance of US markets as the main driver of global financial markets: US financial markets explain, on average, around 30% of movements in euro area financial markets, whereas euro area markets account only for about 6% of US asset price changes. Moreover, the methodology allows us to identify indirect spillovers through other asset prices, which are found to increase substantially the international transmission of shocks within asset classes. Copyright © 2010 John Wiley & Sons, Ltd.
254 citations
TL;DR: In this paper, the role of the tightening in liquidity conditions and the collapse in risk appetite played in the global transmission of the financial crisis was analyzed and compared with a Global VAR approach, highlighting the diversity of the transmission process.
242 citations
TL;DR: The authors analyzed the transmission of crises to country-industry equity portfolios in 55 countries using a factor model to predict crisis returns, defining unexplained increases in factor loadings and residual correlations as indicative of contagion.
Abstract: Using the 2007-09 financial crisis as a laboratory, we analyze the transmission of crises to country-industry equity portfolios in 55 countries. We use a factor model to predict crisis returns, defining unexplained increases in factor loadings and residual correlations as indicative of contagion. We find statistically significant evidence of contagion from US markets and from the global financial sector, but the effects are economically small. By contrast, there has been substantial contagion from domestic equity markets to individual domestic equity portfolios, with its severity inversely related to the quality of countries’ economic fundamentals and policies. This confirms the old “wake-up call” hypothesis, with markets and investors focusing substantially more on country-specific characteristics during the crisis.
236 citations
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TL;DR: In this article, the authors analyze the transmission of crisis to country-industry equity portfolios in 55 countries using the 2007-2009 financial crisis as a laboratory, and find evidence of systematic contagion from US markets and from the global financial sector, but the effects are very small.
Abstract: Using the 2007-2009 financial crisis as a laboratory, we analyze the transmission of crises to country-industry equity portfolios in 55 countries. We use an asset pricing framework with global and local factors to predict crisis returns, defining unexplained increases in factor loadings as indicative of contagion. We find evidence of systematic contagion from US markets and from the global financial sector, but the effects are very small. By contrast, there has been systematic and substantial contagion from domestic equity markets to individual domestic equity portfolios, with its severity inversely related to the quality of countries’ economic fundamentals and policies. Consequently, we reject the globalization hypothesis that links the transmission of the crisis to the extent of global exposure. Instead, we confirm the old "wake-up call" hypothesis, with markets and investors focusing substantially more on idiosyncratic, country-specific characteristics during the crisis.
134 citations
TL;DR: In this article, an empirical assessment of the reactions of stock markets to more than 1000 releases of FSRs and speeches by 37 central banks over the past 14 years is presented.
Abstract: Central banks regularly communicate about financial stability issues, by publishing Financial Stability Reports (FSRs) and through speeches and interviews. The paper asks how such communications affect financial markets. Building a unique dataset, it provides an empirical assessment of the reactions of stock markets to more than 1000 releases of FSRs and speeches by 37 central banks over the past 14 years. The findings suggest that FSRs have a significant and potentially long-lasting effect on stock market returns, and also tend to reduce market volatility. Speeches and interviews, in contrast, have little effect on market returns and do not generate a volatility reduction during tranquil times, but have had a substantial effect during the 2007-10 financial crisis. The findings suggest that financial stability communication by central banks are perceived by markets to contain relevant information, and they underline the importance of differentiating between communication tools, their content and the environment in which they are employed.
118 citations
TL;DR: The authors studied the convergence of European bond markets and the anchoring of inflation expectations in the euro area using high-frequency bond yield data for France, Germany, Italy, and Spain as well as smaller euro area countries.
Abstract: We study the convergence of European bond markets and the anchoring of inflation expectations in the euro area using high-frequency bond yield data for France, Germany, Italy, and Spain as well as smaller euro area countries and a control group comprising the UK, Denmark, and Sweden. We find that Economic and Monetary Union (EMU) has led to substantial convergence in euro area sovereign bond markets in terms of interest rate levels, unconditional daily fluctuations, and conditional responses to major macroeconomic announcements. Our findings also suggest a substantial increase in the anchoring of long-term inflation expectations since EMU, particularly for Italy and Spain, which have seen their long-term interest rates become much lower, much less volatile, and much better anchored in response to news. Finally, we present evidence that the elimination of exchange rate risk and the adoption of a common monetary policy were the primary drivers of bond market convergence in the euro area, as opposed to fiscal policy restraint and the loose exchange rate peg of the 1990s. JEL no: E52, E58
90 citations
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TL;DR: In this article, a factor model coupled with a dataset of high-frequency portfolio capital flows to 50 economies was employed to find that common shocks -key crisis events as well as changes to global liquidity and risk - have exerted a large effect on capital flows both in the crisis and in the recovery.
Abstract: The causes of the 2008 collapse and subsequent surge in global capital flows remain an open and highly controversial issue. Employing a factor model coupled with a dataset of high-frequency portfolio capital flows to 50 economies, the paper finds that common shocks - key crisis events as well as changes to global liquidity and risk - have exerted a large effect on capital flows both in the crisis and in the recovery. However, these effects have been highly heterogeneous across countries, with a large part of this heterogeneity being explained by differences in the quality of domestic institutions, country risk and the strength of domestic macroeconomic fundamentals. Comparing and quantifying these effects shows that common factors ('push' factors) were overall the main drivers of capital flows during the crisis, while country-specific determinants ('pull' factors) have been dominant in accounting for the dynamics of global capital flows in 2009 and 2018 in particular for emerging markets.
60 citations
TL;DR: The authors analyzed how favorably the print media report about the European Central Bank's (ECB) monetary policy decisions and found that favorableness is, inter alia, influenced by the amount of information communicated by the ECB.
Abstract: Just like private companies depend crucially on their ability to reach customers, policymakers must communicate with private agents to be successful—and much of this communication is channeled through the media. This is especially true for central banks, which need to build credibility among the general public. This paper analyses how favorably the print media report about the European Central Bank's (ECB) monetary policy decisions. Favorableness is, inter alia, influenced by the amount of information communicated by the ECB. There are, however, also indications of a critical monitoring role of the media, which reports more negatively when inflation exceeds the inflation target.
55 citations
TL;DR: This paper showed that politicians, on average, favor significantly lower interest rates than independent central banks, and that their preferences are affected by political economy motives, as politicians primarily focus on national economic objectives rather than the euro area as a whole.
Abstract: How and why do politicians' preferences about monetary policy differ from the interest rates set by independent central banks? Looking at the European Central Bank (ECB), this paper shows that politicians, on average, favor significantly lower interest rates. Three factors explain the different preferences. First, politicians put relatively less weight on inflation (and more on output) in their preferred monetary policy reaction function. Second, their preferences are affected by political economy motives. Third, different preferences are also, and largely, due to different constituencies, as politicians primarily focus on national economic objectives rather than the euro area as a whole.
29 citations
TL;DR: This article investigated the empirical link between fiscal vulnerabilities and currency crashes in advanced economies over the last 130 years, building on a new data set of real effective exchange rates and fiscal balances for 21 countries since 1880, finding evidence that crashes depend more on prospective fiscal deficits than on actual ones, and more on the composition of public debt (that is, rollover/sudden stop risk) than on its level.
Abstract: This paper investigates the empirical link between fiscal vulnerabilities and currency crashes in advanced economies over the last 130 years, building on a new data set of real effective exchange rates and fiscal balances for 21 countries since 1880. The paper finds evidence that crashes depend more on prospective fiscal deficits than on actual ones, and more on the composition of public debt (that is, rollover/sudden stop risk) than on its level. The paper also uncovers significant nonlinear effects at high levels of public debt as well as significantly negative risk premiums for major reserve currencies, which enjoy a lower probability of currency crash than other currencies ceteris paribus. Yet, the estimates indicate that such premiums remain small in size relative to the conditional probability of a currency crash if prospective fiscal deficits or rollover/sudden stop risk are high.
TL;DR: The authors found that there is a substantial degree of heterogeneity in the ability of Fed watchers to forecast US monetary policy decisions and that this heterogeneity is related to both the skills of analysts and their geographic location.
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TL;DR: The authors analyzed the relationship between asset prices and current account positions estimating a Bayesian VAR for a broad set of 42 industrialized and emerging market countries and modeled asset price shocks as news shocks about future productivity in a two-country DSGE model.
Abstract: We analyze the relationship between asset prices and current account positions estimating a Bayesian VAR for a broad set of 42 industrialized and emerging market countries. To derive model-based identifying restrictions, we model asset price shocks as news shocks about future productivity in a two-country DSGE model. Such shocks are found
TL;DR: In this paper, the authors analyzed how IMF surveillance announcements may be influenced by political power that member countries exert at the IMF and used the financial market reaction to the released PINs as tools to identify the role of political economy factors for IMF surveillance.
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TL;DR: This paper analyzed the favorableness with which monetary policy decisions are reported upon in the print media and found that media coverage is, among other things, influenced by the amount of information communicated by the European Central Bank.
Abstract: Just like private companies depend crucially on their ability to reach customers, policymakers must communicate with private agents to be successful--and much of this communication is channeled through the media. This is especially true for central banks because the effectiveness of monetary policy depends to a large degree on their credibility among the general public. Using the case of the European Central Bank (ECB), the paper analyses the favorableness with which monetary policy decisions are reported upon in the print media. We find that media coverage is, among other things, influenced by the amount of information communicated by the ECB. There are, however, also indications of a critical monitoring role assumed by the media, which tends to report more negatively on ECB policy decisions when inflation exceeds the inflation target.
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TL;DR: The authors assesses whether the international monetary system is already tri-polar and centred around the US dollar, the euro and the Chinese renminbi (RMB) and find evidence that the RMB has become a key driver of currency movements in emerging Asia since the mid-2000s, and even more so since the global financial crisis.
Abstract: This paper assesses whether the international monetary system is already tri-polar and centred around the US dollar, the euro and the Chinese renminbi (RMB). It focuses on what we call China’s" dominance hypothesis", i.e. whether the renminbi is already the dominant currency in Asia, exerting a large influence on exchange rate and monetary policies in the region, a direct reference to the old "German dominance hypothesis" which ascribed to the German mark a dominant role in Europe in the 1980s-1990s. Using a global factor model of exchange rates and a complementary event study, we find evidence that the RMB has become a key driver of currency movements in emerging Asia since the mid-2000s, and even more so since the global financial crisis. These results are consistent with China’s dominance hypothesis and with the view that the international monetary system is already tri-polar. However, we also find that China’s currency movements are to some extent affected by those in the rest of Asia.
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01 Jan 2011TL;DR: In this article, the authors studied the impact of central bank communication on stock market returns and volatility in 36 countries over the past 14 years, and found that FSRs have a significant and potentially long-lasting effect on market returns, and also tend to reduce market volatility.
Abstract: In response to the financial crisis of 2007-2010, many central banks are getting involved in macroprudential supervision. Central bank communication will constitute a central policy tool for that purpose. The paper asks how such communication will affect financial markets, exploiting the fact that many central banks have had some financial stability role in the past, and have communicated extensively on this through the publication of Financial Stability Reports (FSRs) and financial stability-related statements. Building a unique dataset, it provides an empirical assessment of the financial market reactions to more than 1000 releases of FSRs and speeches in 36 countries over the past 14 years. The findings suggest that FSRs have a significant and potentially long-lasting effect on stock market returns, and also tend to reduce market volatility. Speeches and interviews, in contrast, have little effect on market returns and tend to increase volatility during tranquil times, but can have a substantially larger effect during periods of financial stress. Moreover, central bank communication can affect markets even when leaning against asset price booms. The findings underline the importance of differentiating between communication tools and content when designing a communication strategy on macroprudential issues.(This abstract was borrowed from another version of this item.)
Posted Content•
TL;DR: In this paper, an empirical assessment of the reactions of stock markets to more than 1000 releases of FSRs and speeches by 37 central banks over the past 14 years is presented.
Abstract: Central banks regularly communicate about financial stability issues, by publishing Financial Stability Reports (FSRs) and through speeches and interviews. The paper asks how such communications affect financial markets. Building a unique dataset, it provides an empirical assessment of the reactions of stock markets to more than 1000 releases of FSRs and speeches by 37 central banks over the past 14 years. The findings suggest that FSRs have a significant and potentially long-lasting effect on stock market returns, and also tend to reduce market volatility. Speeches and interviews, in contrast, have little effect on market returns and do not generate a volatility reduction during tranquil times, but have had a substantial effect during the 2007-10 financial crisis. The findings suggest that financial stability communication by central banks are perceived by markets to contain relevant information, and they underline the importance of differentiating between communication tools, their content and the environment in which they are employed. JEL Classification: E44, E58, G12