E44 - Financial Markets and the MacroeconomyReturn

This paper examines the relationship between financial stability and income inequality in 35 developing countries from 2004 to 2020 using system generalized method of mo- ments (GMM) estimation. Four dimensions of the financial sector, namely financial stability, depth, access and efficiency were included as regressors. The results for the relationship of each of the financial dimensions with income inequality are mixed. In this study, inequality increases with an increase in the stability of the financial sector; on the contrary, the depth of the financial sector reduces inequality. Furthermore, not only does the dimension of the financial sector matter in addressing income inequality issues, but the quality of institutions is important. It is important for policy makers to understand linkages between financial dimensions and inequality so as to come up with appropriate prudential regulatory mechanisms.

European emerging and transition economies are in immense need of investments and renewal of capital, yet they produce a considerable amount of unutilized resources. In particular, banks hold excess liquidity in the face of seemingly profitable lending opportunities. Is it a demand-side or supply-side problem or is this region entirely different and have we been working under the wrong paradigm? This study creates a new estimate of excess liquidity by taking into account banks' overall liquidity position. Breaking down precautionary from involuntary excess liquidity, a significant presence of the latter is evident. A part of the story deals with insensitivity of deposits to interest rates. Based on our standard understanding of how banks work, this is puzzling and this study creates a new way to look at this. Using new measures is the way to launch the investigation of causes and policy implications for involuntary excess liquidity.

This paper analyses the effects of the ECB Corporate Sector Purchase Programme (CSPP) on yields of corporate sector bonds and its impact on the corporate sector's debt markets. The CSPP started as a part of an existing asset purchase programme and significantly affected corporate bond markets. Any research undertaken in this area of the ECB's respective actions is fairly limited due to the restrained access to data and its OTC nature. This paper analyses CSPP effects by using two distinct methods - a detailed regression-controlled event study and an impulse-response analysis of constructed VAR models. This study addresses questions regarding time, size and place of effects caused by the CSPP on corporate bond markets and deals in detail with related issues and related economic theory backgrounds. A series of obtained sector, country and company-specific results gives us a picture of the non-negligible impact of the CSPP on purchased bonds and of the size and persistency of stock and flow effects of the ECB's actions.

Global economic policy uncertainty (GEPU) is one of important phenomena in the global economy; it can impact on the overall economic performance and stock market per-formance, regardless of the status of the world economy. Thus, this paper empirically investigates the impact of global economic policy uncertainty on the Malaysian stock market over the period from 10:2003 to 2017:03. Using the GARCH model, the study demonstrates that global policy uncertainty affects the Malaysian stock market negatively. Similarly, the SVAR model also shows results consistent with the GARCH estimation. Nevertheless, the Markov switching estimation uncovers that global policy uncertainty has negative impacts on stock market performance in both low and high volatile market states. The impact is, however, greater during the high volatile state. Hence, the relationship between global economic policy uncertainty and stock market returns tends to be asymmetric. The overall empirical results infer that global economic policy uncertainty has some implications for asset pricing.

The size of the shadow banking sector (SBS) has more than doubled in the Czech Republic over the last decade. This places a potential burden on policy makers. On the one hand, the SBS complements regular banking by expanding access to credit and investments, enabling better risk sharing and maturity transformation, and sup-porting market liquidity. On the other hand, SBS activities can put the stability of the financial system at risk and amplify its procyclicality by exacerbating the build-up of leverage and asset price bubbles. We implement a FAVAR model of the Czech economy to determine the impact of macroeconomic factors on the SBS. We find that the SBS: (i) is sensitive to changes in market interest rates and term spread; (ii) exhibits great procyclicality; (iii) can act as a complement to regular banking and satisfy some additional demand for credit. We also define some potential risks of continued growth of the SBS, linked to our empirical evidence.

In this survey article, we present a rich extent of literature on volatility and its propagation on financial markets via spillovers. We document how new approaches or improved existing methodologies lead to results that offer richer insights than those derived from standard econometric techniques. Moreover, the implications of the results can be related to a wide set of markets as the surveyed articles cover emerging and developed European markets as well as the United States.

Common exposure to macroeconomic risk factors across financial institutions is a source of a systemic risk that influences quality of banks´ loan portfolios. This paper focuses on the growing literature on credit risk determinants. The aim of the paper is to provide more general information on effects of macroeconomic drivers with the use of quantitative meta-analytic techniques. We consider five of the most common macroeconomic determinants of non-performing loans ratio. The meta-regression results suggest that there are some significant differences among studies, which could be identified. For instance, data specification, estimation method, number of countries and observations included in the model play a significant role. In some cases, e.g. inflation and exchange rate, the size of the effects presented in journals with impact factor are significantly different from other types of studies included in the analysis. The sub-sample analysis mostly confirms meta-regressions results.

This paper examines contagion in the foreign exchange markets of three Central European countries and the euro area. Contagion is viewed as the occurrence of extreme events taking place in different countries simultaneously and is assessed with a measure of asymptotic tail dependence among the studied distributions. Currency crisis contagion is one strand of this research. However, the main aim of the paper is to examine the potential of bubble contagion. To this end the representative exchange rates are linked to their fundamentals using a cointegration approach. Given the long-time range required by cointegration testing, the variables are first tested for unit roots with structural breaks, whose existence is supported by these tests. In the sequel, the extreme values of the differences between actual daily exchange rates and their monthly equilibrium values determine the episodes associated with large departures from equilibrium. Using tools from Extreme Value Theory, we analyse the transmission of both standard crisis and bubble formation events in the examined currency markets. The results reveal a significant potential for contagion in the currency markets of Central Europe.

The goal of the article is to verify the credibility of time contingent Forward Guidance (FG) as well as its possible time-inconsistency based on the rarely addressed example of the National Bank of Poland (NBP). The NBP's FG constitutes a unique case study as this measure in its 'Odyssean' form was not introduced to overcome the limits of further policy rates cuts. It allowed us to verify the FG's credibility and time-inconsistency by applying OLS and GMM estimated contemporaneous and forward looking Taylor type rules with interest smoothing. Our empirical evidence reveals that the annual period of FG in Poland was perceived as a credible promise by consumers. We found that time-consistency could have been an additional factor enhancing the considerable credibility of FG. The satisfying results of the NBP's FG appear to be especially interesting, in particular, when contrasted with the often unfavourable experience with time-contingent FG of prominent central banks. We suppose that to achieve this, the central bank should act with caution and the NBP indeed did so by specifying carefully the short horizon of the commitment to be able to abandon FG when the circumstances change. We also discuss FG by opposing its advantages and the drawbacks indicated in the subject literature.

We estimate a financial stress index for the Czech Republic and examine its development during the 2002-2014 period. We find a marked increase in financial stress at the beginning of the global financial crisis with a decrease to nearly pre-crisis levels by the end of our study period. Next, we estimate vector autoregression models of the Czech economy and find that financial stress has systematic effects on output, prices and interest rates, with the maximum response occurring approximately one and a half years after the shock. Specifically, an increase in financial stress is associated with higher unemployment, lower prices and lower interest rates, indicating its detrimental effects on the real economy.

This study analyses the Czech, Hungarian, and Polish currencies by examining the statistical characteristics of the Swiss franc as well as the ECB monetary policy in order to indicate shocks in these markets between 2002 and 2013. The abundance of monetary easing decisions can be used as a viable sign of market misbehaviour in addition to the low probability of extreme exchange rate fluctuations. Indeed, the temporal distribution of extreme currency fluctuations provides vital information about the nature of the recent crisis. Contagions can be defined as increased correlations during periods of crisis, while divergence means a significant decrease in this regard. Methodologically, common movements in this study were calculated by using DCC-GARCH modelling. The findings of this study underline the special features of the Swiss franc exchange rate, notably that its extreme fluctuations can be managed by using swap agreements and that it tended towards divergences during the crisis era. These results support the idea of avoiding lending in reserve currencies.

Recent financial crisis has brought to attention the issues of interactions between financial markets and real economy. This paper presents an analysis of the possible explicit effects of various measures of financial markets' risk on real economy based on impulse - response functions within structural vector autoregressive models. As discussed in the paper the riskiness of financial markets is closely related to the more traditional mechanisms based on financial accelerator approach, however, although the issue of financial risk is closely tied with the financial accelerator model, broader effects outside this model may be considered as well. The analysis is carried out for the Czech Republic. The estimates of the responses in the impulse-response analyses typically correspond with the hypothesized effects of the financial risk factors on the real variables; also the interrelations between some of the financial risk factors are obvious. We conclude that increased financial risk seems to be an amplifying element rather than the key driver in the interactions between financial and real economy.

The purpose of the paper is to analyse the current crisis of the eurozone. The irst part explains why the eurozone is not an optimum currency area. The second part points out that euro is an intensiier of the business cycle. The third part examines the Greek crisis. The fourth part explains the inner tensions in the eurozone. The ifth part asks whether euro is suitable for the countries of Central and East Europe. The sixth part examines the debt crisis within the eurozone.

We tested the hypothesis of procyclicality against the economic activity and stock exchange of Croatia - as a country preparing for EU accession - in order to investigate the spillover effect, i.e., the degree and pace of integration into larger financial markets such as the EU. The empirical findings obtained in application of OLS methodology for the 2000-2010 period provided evidence that EU accession is a trigger for a closer financial integration of a candidate country as Croatia; and a trigger for a rise in stock prices and economic revival, was reflected in by an increase in GDP and large FDI.

The paper presents both the theoretical account of the issue of foreign exchange risk premium and the actual estimates of the time-varying risk premium for the cases of the Czech koruna to euro and US dollar. The risk premium is modelled within a state space framework and estimated using the Kalman filtering procedure. Some financial market fundamentals are used to estimate the risk premium, and thus not only do the estimates give insight into the foreign exchange market behaviour but also into some linkages between the various segments of the financial market as a whole.

This paper examines the long-run relationship between oil prices and stock market prices of G7 countries by using Robinson (1994a) tests for fractional integration and cointegration instead of the classical approaches. Having found that the unit root null hypothesis cannot be rejected for any individual series, it is examined whether oil prices and stock market prices have a fractional cointegration relationship. Test results on the residuals from the cointegrating regressions indicate that there is evidence of fractional cointegration between oil prices and DAX 30, Dow Jones, FTSE 100 and SP-TSX indices while there is no evidence of fractional cointegration for others.

The article analyzes efficiency of the Czech treasury T-bill market and the interbank deposit market over period 1993 to 1999. An efficient market-expectation hypothesis and alternative preferred habitat hypothesis were selected to compare both the markets and to determine the extent to which they are affected by macroeconomic fundamentals. The results reveal that the treasury T-bill market is more effective compared to the interbank deposit market. This founding has strong implication in the sence that only the treasury market over the given period is appropriate to be empirically investigated.

This theoretical paper maps the transition experience of the financial sector using evidence from the Czech money market. Especially, the respect is paid to the structure of interest rates during the period from 1993 to 2001. The main components of the money market that mostly determine the term structure are the interbank deposit market and the market for short-term securities. The study abstains from interbank market survey and provides a detailed description of the default-free short-term securities market and its impact on past interest rate movements.

The paper studies the compliance of the CZK - EUR exchange rate with the uncovered parity of returns on assets denominated in the two named currencies. A comparison with the same property for the euro-dollar rate is made. An uncovered total return parity (UTRP) formula is derived from the equilibrium in a portfolio optimization model with liquidity constraints. It is shown that the uncovered parity of total returns, and not of short-term money market rates, is a natural outcome of stochastic equilibrium asset pricing models that generalize the International Consumption-based Capital Asset Pricing Model. Accordingly, the traditional uncovered interest rate parity should be replaced by UTRP in empirical analysis. UTRP tests for the CZK/EUR and the USD/EMU currency pairs are conducted using yields of long-term government bond yields. UTRP typically holds, although the time horizons and measures of exchange rate movements, for which it becomes visible, may vary.