While there is considerable literature attempting to model current account, there are not many studies to forecast current account balance. This study gives a comprehensive way to model and predict current account deficit (CAD) by evaluating the forecasting performance of direct and indirect approach. At the disaggregated level, I use two variants to model current account components; in the first alternative I apply different ARIMA models with exogenous variables (ARIMA-X) to account for the pattern of the data and exogenous factors. In the second alternative, I integrate the cointegration relationship between exports and imports with ARIMA-X models. With respect to the direct approach, I use error correction model to allow for dynamics in current account. The data used spans from January 2000 to December 2014 and comes from the Central Bank of Tunisia, the Tunisian National Institute of Statistics, and the OECD database. I find that for one-step ahead forecast, both ARIMA-X and reduced form model produce accurate forecast. However, with respect to dynamic forecasts, direct method is more accurate when compared to ARIMA-X. When cointegrating relationship between exports and imports is combined with ARIMA-X models, the indirect approach outperforms the direct approach. I also show that, as volatility of underlying components increase disaggregate approach using time series models become less reliable. In addition, I found that current account is mainly affected by domestic GDP, trade openness, fiscal deficit, exchange rate, credit to the private sector and partner GDP. Estimation of ECM indicates that persistent effect is high and can take more than three quarters to die out. In addition I assess the performance of direct and indirect approach over time using naïve approach as benchmark. It appears that the MSE of naïve approach lies between direct and indirect approach in average up to horizon 12, but then worsen.
The paper investigates transmission of different foreign and domestic shocks to bank lending activity in Bosnia and Herzegovina through the bank lending channel. The bank lending channel is analyzed in a time series cross sectional data framework for the period 2006q1- 2014q1, investigating reactions of small vs. large banks to those shocks. First, the evidence has been found that both groups of banks decreased their lending activity in the aftermath of the crisis. There is some evidence that liquidity shock after the onset of the crisis is mainly transmitted through large banks that are affiliates of the large Western European banking groups. Second, strong evidence is found that loosening of domestic monetary conditions through required reserves rate change had a positive effect on lending supply, especially for small banks operating in the country.
This paper uses a two-step procedure to analyze the long-run dynamics between real house prices and their fundamentals in Lima, Peru. In this framework, first a hedonic price index is calculated, and then used for estimating a quarterly vector error correction model over the period 1998-2014. The price determinants considered in this application are: real mortgage interest rate, real gross domestic product, and trading volume. The reduced form of the model is employed for generating alternative price forecasts. In addition, a structural decomposition of the system allows us to identify and give an economic interpretation to the permanent and transitory shocks. Finally, this analysis is also applied to different tranches of the price distribution to assess if the interrelationships in the system vary across them. Results imply that income and trading volume shocks contribute the most at explaining the dynamics in prices. Also, under reasonable assumptions for the modeled fundamentals, predictions suggest that real house prices would undergo an important deceleration during the following years. Some signs of differenced behavior throughout the price distribution in the housing market cannot be ruled out in this analysis.
This paper evaluates the importance of building a composite metric of financial soundness for the private corporate sector in Colombia. Instead of relying on the individual and sometimes restrictive financial ratio analysis approach, the purpose of this document is to provide a single metric aimed at measuring the financial health of firms. Said metric, the financial soundness index, is derived by employing the cross-section approach of principal component analysis. For the time period of 2000-2013, the results allow to identify which industries have a weak, strong or similar balance sheet performance relative to that observed for the private corporate sector as a whole. Furthermore, validation tests on the index confirm the apparent relationship between accounting data of private firms that are debtors of the Colombian financial system and the credit risk perception of and materialization for financial intermediaries.
This paper examines the phenomenon of financial euroization in Albania, focusing on the liability side of the banking system. It explores some of the main theoretical and empirical determinants of deposit euroization in the context of the high euroization rates originating in the transition period of the early 1990s. Despite gradual improvements in the macroeconomic framework, euroization rates have continued to be persistent throughout, long after the reversal of the original triggers of such phenomenon. The high level of euroization entails policy relevant concerns for euroized economies, as it has been shown to have potential adverse effects on macroeconomic policies and financial stability, issues of vital importance for a central bank. Using a VAR framework to capture the simultaneous dynamic relationships between macroeconomic aggregates, this paper finds evidence that euroization rates are highly persistent in Albania, while being influenced by several factors such as interest rate differentials, exchange rates, and credit euroization.
This paper presents a DSGE model with banks that face moral hazard in management. Banks receive demand deposits and fund investment projects. Banks are subject to potential withdrawals by depositors which may force them into early liquidation of their investments. The likelihood of this happening depends on the bank management efforts to keep the bank financially sound and the degree of bank leverage. We study the properties of this model under different monetary and macro-prudential policy arrangements. Our model is able to replicate the pro-cyclicality of leverage, and provides insights on the interplay between bank leverage and bank management incentives as a result of monetary, productivity and financial shocks. We find that a combination of pro-cyclical capital requirements and a standard monetary policy are well suited to contain the effects on output and prices of a downturn, keeping the financial system in check. Yet, in an expansionary phase (i.e. a productivity shock) this policy combination may produce desirable results for some macro-variables but at the expense of a deterioration in other macro-financial indicators.
At the forefront of the economic consolidation of the euro area, banking integration came to a stall following the beginning of the 2008 crisis. Since then European banks started retrenching their asset holdings within national borders, effectively reducing the scale of their European operations. This paper explores the link between banking integration and fragmentation in the interest rate channel in the eurozone. Using a rolling VAR, I estimate the overtime evolution of the interest rate pass-through across European countries, and then I relate this evidence to banking integration dynamics. The results support the existence of a statistically significant and negative link between banking integration and cross-country differentials in the interest rate channel.
Global Value Chains (GVCs) have become a central topic in trade and development policy but little is known about their actual impact on economic performance because data availability has been limited. Using a new unique set of Inter-Country Input-Output tables with extensive country coverage, I look at the relationship between GVC participation and domestic value added at the industry-level to determine if and for whom GVCs are beneficial. I show that GVC participation is positively related to domestic value added along the value chain. However,this effect is only significant for middle- and high-income countries. Deriving novel source/destination country-specific indicators, I present evidence on theoretical transmission channels between GVCs and domestic value added that explain these results. More specifically, I find support for productivity enhancing effects through cost savings when richer countries source from low-wage countries. In contrast,low- and middle-income countries only benefit from technology upgrading and spillovers if they have sufficient levels of absorptive capacity.
This paper investigates the role of banks’ foreign asset holdings in transmitting credit risk internationally. Foreign exposure in risky assets might severely affect the solvability of credit institutions. Credit risk, in turn, transfers from banks to public accounts as a consequence of implicit or explicit bailout guarantees to distressed banking systems. This paper articulates this mechanism with a simple model where governments choose to fill banks' capital gaps to self-protect from the severe economic consequence of a banking sector default. Referring to the existing literature on the determinants of sovereign yield spreads in the second part of the paper, I present empirical evidence of the link between banks’ foreign claims and countries' credit risk. Results for the eurozone identify banks' foreign exposure as a major determinant of sovereign default probability. Also, governments' vulnerability to credit risk spill over decreases with banks' capitalisation and sovereigns' fiscal soundness.
The real unit labor cost is an important variable in today's debate over competitiveness and labor cost imbalances in the Eurozone. This paper documents the link existing between developments in the labor share and relative monetary policy stance across euro area members. First I present the theoretical foundations of such link using a standard New Keynesian framework, then I investigate empirically this relationship using a panel of countries from the Eurozone. I find evidence that real interest rates differentials are key determinants of the evolution of real unit labor costs across Europe. Policy implications are significant as in the Eurozone the problem of divergent labor cost competitiveness cannot be separated from the one of differentials in monetary policy stance. Within this logic the reduction of State cross-differences in product and market frictions (structural reforms) are necessary but not sufficient for the elimination of labor cost imbalances. Other persistent sources of inflation differentials should be addressed as, for example, fiscal stance.
