This article proposes a theoretical framework to investigate economic robustness to exogenous shocks such as natural disasters. It is based on a dynamic model that represents a regional economy as a network of production units through the disaggregation of sector-scale Input-Output tables. Results suggest that disaster-related output losses depend on direct losses heterogeneity and on the economic network structure. Two aggregate indexes, concentration and clustering, appear as important drivers of economic robustness, offering opportunities for robustness-enhancing strategies. Modern industrial organization seems to reduce short-term robustness in a trade-off against higher efficiency in normal times.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1971703_code1462840.pdf?abstractid=1971703&mirid=1&type=2

Firm-Network Characteristics and Economic Robustness to Natural Disasters

This paper develops an arbitrage-free affine term structure model of potentially defaultable sovereign bonds to model a cross-section of eight euro area government bond yield curves since January 1999 The existence of a common monetary policy under European Monetary Union determines the short end of the yield curves, whereas decentralized debt policies drive expected default probabilities and thereby spreads towards Germany, assumed to be free of default risk The pricing factors are three observable area-wide macroeconomic variables and measures of national fiscal sustainability, which we proxy by expected changes in debt/GDP ratios of the respective countries Our model explains spreads both before and during the crisis to an impressive extent The deterioration in public finances was the major driver of the widening in spreads since 2008 through both heightened compensations for default risk and increases in risk premia We also present perceived probabilities of sovereign default at any maturity and assess their elasticity to shifts in expected changes in debt/GDP ratios

Fiscal Sustainability, Default Risk and Euro Area Sovereign Bond Spreads

We explore the practical relevance from a supervisor's perspective of a popular market-based indicator of the exposure of a financial institution to systemic risk, the marginal expected shortfall (MES). The MES of an institution can be defined as its expected equity loss when the market itself is in its left tail. We estimate the dynamic MES recently proposed by Brownlees and Engle (2011) for a panel of 65 large US banks over the last decade and a half. Running panel regressions of the MES on bank characteristics, we first find that the MES can be roughly rationalized in terms of standard balance sheet indicators of bank financial soundness and systemic importance. We then ask whether the cross section of the MES can help to identify ex ante, i.e. before a crisis unfolds, which institutions are the more likely to suffer the most severe losses ex post, i.e. once it has unfolded. Unfortunately, using the recent crisis as a natural experiment, we find that standard balance-sheet metrics like the tier one solvency ratio are better able than the MES to predict equity losses conditionally to a true crisis. JEL Classification: C5, E44, G2

How useful is the Marginal Expected Shortfall for the measurement of systemic exposure? A practical assessment

We explore the practical relevance from a supervisor's viewpoint of a recent but already popular market-based indicator of the systemic importance of financial institutions, the marginal expected shortfall (MES). The MES of an institution can be defined as its expected equity loss when the market itself is in its left tail. We compute the dynamic MES developed by Brownlees and Engle (2010) for a panel of 65 large US banks over the last decade and a half. Running panel regressions of the MES on bank characteristics, we first find that the MES can be partly rationalized in terms of standard balance sheet indicators of bank health and systemic importance, but also that these relationships changed widely over time. We then ask whether the cross section of the MES can help to identify ex ante, i.e. before a crisis unfolds, which institutions are the more likely to suffer the most severe losses ex post, i.e. once it has unfolded. Unfortunately, using the recent crisis as a natural experiment, we find that standard balance-sheet metrics like the tier one solvency ratio are better able to predict equity losses conditional to a true crisis.

/pdf/how-useful-is-the-marginal-expected-shortfall-for-the-3oevqpxg5r.pdf

How Useful is the Marginal Expected Shortfall for the Measurement of Systemic Exposure? A Practical Assessment

In this paper, we assess the impact of fiscal policy discretion on economic activity in the short and medium-term. Using a panel of 132 countries from 1960 to 2008, we find that fiscal policy discretion provides a net stimulus to the economy in the short-run and crowding-in effects are amplified once crisis episodes are controlled for– in particular, banking crises - giving a great scope for fiscal policy stimulus packages. However, crowding-out effects take over in the long-run – especially, in the case of debt crises -, in line with the concerns about long-term debt sustainability.

/pdf/fiscal-policy-discretion-private-spending-and-crisis-2vji3n7w3h.pdf

Fiscal policy discretion, private spending, and crisis episodes?

espanolEste trabajo conjunto de Bundesbank, Banque de France y Banco de Espana analiza en detalle algunos de los numerosos canales a traves de los cuales el brexit afectara a la economia del Reino Unido y a la de sus socios comerciales. En particular, se centra en los canales comercial y migratorio, haciendo una evaluacion mas general de los costes de la salida de la UE utilizando un modelo de gravedad. El canal comercial por si solo puede reducir el PIB del Reino Unido un 2 % a medio plazo si el Reino Unido vuelve a las reglas de la OMC, mientras que un modelo de gravedad mas general apuntaria a que el PIB del Reino Unido se reduciria casi un 6 % en comparacion con el escenario de no salida. Por lo tanto, de acuerdo con nuestro analisis, el «coste de estar fuera de Europa» (como se establecio originalmente en el trabajo seminal de Cecchini en 1988) se encuentra entre el 2 % y el 6 % en terminos de perdidas del PIB real para el Reino Unido. Este impacto es en gran medida asimetrico, ya que el PIB de la zona del euro no se ve practicamente afectado por este evento, al situarse menos de un 1 % por debajo del escenario de no salida en 2023. El estudio tambien pone de manifiesto como los resultados son sensibles a la reaccion de las politicas economicas. En general, las politicas monetarias y fiscales pueden actuar para amortiguar el shock del brexit; sin embargo, su efectividad depende de la fuente subyacente de la perturbacion. EnglishThis joint work by the Bundesbank, the Banque de France and the Banco de Espana highlights some of the numerous channels through which Brexit will affect the UK economy and its economic partners. In particular, it focuses on trade and migration channels, adding a more general assessment of exiting the EU through the use of a gravity model. The trade channel alone may cut UK GDP by 2% over the medium term if the UK reverts to WTO rules, while a more general gravity model would point to UK GDP falling by almost 6% compared to baseline. According to our analysis, the ‘cost of non-Europe’ (such as originally stated by Cecchini’s seminal work in 1988) lies therefore between 2% and 6% in terms of real GDP losses for the UK. With the shock being largely asymmetric, the EA remains relatively unscathed by the UK’s exit, with GDP less than 1% lower than baseline by 2023. The study also shows that results are sensitive to the envisaged policy response. In general, monetary and fiscal policies may act to cushion a Brexit-related shock; however, the potency of the policy response depends on the underlying source of the shock.

/pdf/assessing-the-macroeconomic-impact-of-brexit-through-trade-155pbe7z5p.pdf

Assessing the macroeconomic impact of Brexit through trade and migration channels

Estimates of the Nairu generally suer from a large uncertainty, which can be reduced by adopting a bivariate framework and assuming that shifts of the Phillips curve share a common trend with the unemployment rate. We consider in this paper if this common trend assumption is empirically relevant or not for seven economies over the sample 1973-2010. First, it appears that the Nairu can substantially dier from the unemployment trend. Second, relaxing the common trend assumption improves the t of the ination equation. Third, this assumption is necessary for

/pdf/measuring-the-nairu-a-complementary-approach-52kyv57ech.pdf

Measuring the NAIRU: a complementary approach

Estimates of the Nairu generally suffer from a large uncertainty, which can be reduced by adopting a bivariate framework and assuming that shifts of the Phillips curve share a common trend with the unemployment rate. We consider in this paper if this common trend assumption is empirically relevant or not for seven economies over the sample 1973-2010. First, it appears that the Nairu can substantially differ from the unemployment trend. Second, relaxing the common trend assumption improves the fit of the inflation equation. Third, this assumption is necessary for getting an important reduction of uncertainty in a bivariate framework.

Cet article vise a evaluer la croissance potentielle en France, en Allemagne et en zone euro au cours de la periode posterieure a la crise de credit de 2007-2008 jusqu’a l’horizon de prevision 2012. Une telle evaluation joue en effet un role central dans celle du deficit structurel et donc dans la definition des plans de consolidation. Apres avoir presente les effets possibles recenses par la litterature de la crise sur la croissance potentielle, nous utilisons pour nos evaluations des modeles a composantes inobservables. Ceux-ci permettent de reconcilier les approches dites traditionnelles, fondees sur l’utilisation d’une fonction de production et les approches statistiques basees sur des methodes de filtrage. Nos evaluations montrent pour les differentes zones que la crise a eu un impact marque sur la croissance potentielle des 2009. En prevision, la croissance potentielle devrait rester atone a l’horizon 2012 pour la France et l’Allemagne, comme pour la zone euro agregee. La faiblesse de la croissance potentielle s’explique en partie par un net repli de la contribution du facteur travail, notamment en France et en zone euro. Ce repli provient lui-meme essentiellement de la montee du Nairu, excepte en Allemagne. L’Allemagne se distingue en effet du reste de la zone euro par une baisse continue du Nairu jusqu’a l’horizon 2012.

/pdf/impact-de-la-crise-sur-la-croissance-potentielle-une-mfn9or1zxm.pdf

Impact de la crise sur la croissance potentielle. Une approche par les modèles à composantes inobservables

This joint work by the Bundesbank, the Banque de France and the Banco de Espana highlights some of the numerous channels through which Brexit will affect the UK economy and its economic partners. In particular, it focuses on trade and migration channels, adding a more general assessment of exiting the EU through the use of a gravity model. The trade channel alone may cut UK GDP by 2% over the medium term if the UK reverts to WTO rules, while a more general gravity model would point to UK GDP falling by almost 6% compared to baseline. According to our analysis, the ‘cost of non-Europe’ (such as originally stated by Cecchini’s seminal work in 1988) lies therefore between 2% and 6% in terms of real GDP losses for the UK. With the shock being largely asymmetric, the EA remains relatively unscathed by the UK’s exit, with GDP less than 1% lower than baseline by 2023. The study also shows that results are sensitive to the envisaged policy response. In general, monetary and fiscal policies may act to cushion a Brexit-related shock; however, the potency of the policy response depends on the underlying source of the shock.

/pdf/assessing-the-macroeconomic-impact-of-brexit-through-trade-4pda00bwcg.pdf

Marie-Elisabeth de la Serve

Papers

Assessing the macroeconomic impact of Brexit through trade and migration channels

Measuring the NAIRU: a complementary approach

Measuring the NAIRU: a complementary approach

Impact de la crise sur la croissance potentielle. Une approche par les modèles à composantes inobservables

Assessing the Macroeconomic Impact of Brexit through Trade and Migration Channels