- International Monetary Fund. European Dept.
- Published Date:
- September 2009
Abiad, Abdul, DanielLeigh, and AshokaMody, 2009,“Financial Integration, Capital Mobility, and Income Convergence,” Economic Policy, Vol. 24 (April), pp. 241–305.
Acemoglu, Daron,1995,“Public Policy in a Model of Long-Term Unemployment,” Economica, Vol. 62 (May), No. 246, pp. 161–78.
Ardagna, Silvia, FrancescoCaselli, and TimothyLane,2004,“Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries,” NBER Working Paper No. 10788 (Cambridge, Massachusetts: National Bureau of Economic Research).
Armas, Adrian, AlainIze, and EduardoLevy-Yeyati, eds., 2006, Financial Dollarization: The Policy Agenda (New York: Palgrave Macmillan).
Ayuso i Casals, Joaquim, 2004, “Fixed-Term Contracts in Spain: A Mixed Blessing?” ECFIN Country Focus, Vol. 1 (January), pp. 1–6.
Backé, Peter, and CezaryWójcik, 2008, “Credit Booms, Monetary Integration, and the New Neoclassical Synthesis,” Journal of Banking and Finance, Vol. 32 (March), pp. 458–70.
Bank of England, 2009, “Employment and Output in the Current Recession,” Inflation Report (August), p. 29 (box).
Basu, Susanto, and JohnG. Fernald, 2009, “What Do We Know and Not Know about Potential Output?” FRBSF Working Paper No. 2009-05 (San Francisco: Federal Reserve Bank of San Francisco).
Beck, Guenter, KirstinHubrich, and MassimilianoMarcellino, 2009, “Regional Inflation Dynamics within and across Euro Area Countries and a Comparison with the United States,” Economic Policy, Vol. 24 (January), pp. 141–84.
Berger, Helge, 1998, “Regulation in Germany: Some Stylized Facts about Its Time Path, Causes, and Consequences,” Zeitschrift für Wirtschafts-und Sozialwissenschaften, Vol. 118, No. 2, pp. 185–220.
Berger, Helge, and StephanDanninger, 2007, “The Employment Effects of Labor and Product Market Deregulation and Their Implications for Structural Reform,” IMF Staff Papers, Vol. 54, No. 3, pp. 591–619.
Berger, Helge, and StephanDanninger, MichaelEhrmann, and MarcelFratzscher, forthcoming, “Forecasting ECB Monetary Policy: Accuracy Is a Matter of Geography,” European Economic Review.
Bernanke, Ben, and MarkGertler, 1989, “Agency Costs, Net Worth, and Business Fluctuations,” American Economic Review, Vol. 79 (March), pp. 14–31.
Bernanke, Ben, and SimonGilchrist, 1999, “The Financial Accelerator in a Quantitative Business Cycle Framework,” in Handbook of Macroeconomics, Vol. 1C, ed. by John Taylor and Michael Woodford (Amsterdam: North-Holland), pp. 1341–93.
Blanchard, Olivier J., 1984, “Current and Anticipated Deficits, Interest Rates and Economic Activity,” NBER Working Paper 1265 (Cambridge, Massachusetts: National Bureau of Economic Research).
Blanchard, Olivier J., and Summers, Lawrence1986, “Hysteresis and the European Unemployment Problem,” NBER Macroeconomics Annual, Vol. 1, pp. 15–78.
Borio, Claudio, CraigFurfine, and PhilipLowe, 2001, “Procyclicality of the Financial System and Financial Stability: Issues and Policy Options,” in Marrying the Macro- and Micro-prudential Dimensions of Financial Stability, BIS Papers No. 1, pp. 1–57 (Basel: Bank for International Settlements).
Calza, Alessandro, TommasoMonacelli, and LivioStracca, 2007, “Mortgage Markets, Collateral Constraints, and Monetary Policy: Do Institutional Factors Matter?” CEPR Discussion Paper No. 6231 (London: Centre for Economic Policy Research).
Carabenciov, I., I.Ermolaev, C.Freedman, M.Juillard, O.Kamenik, D.Korshunov, D.Laxton, and J.Laxton, 2008, “A Small Multi-Country Global Projection Model,” IMF Working Paper 08/279 (Washington: International Monetary Fund).
Carabenciov, Ioan, RobertoGarcia-Saltos, DouglasLaxton, TroyMatheson, SrobonaMitra, SusannaMursula, and KadirTanyeri, forthcoming, “Policies under Heightened Risk in Emerging Economies: Applications Based on Estimates from a Global Projection Model of a Small Open Emerging Economy,” IMF Working Paper (Washington: International Monetary Fund).
Caruana, Jaime, and AdityaNarain, 2008, “Banking on More Capital,” Finance and Development, Vol. 45 (June), pp. 24–28.
Cerra, Valerie, and SwetaC. Saxena (2008), “Growth Dynamics: The Myth of Economic Recovery,” American Economic Review, Vol. 98, No. 1, pp. 439–57.
Cheasty, Adrienne, and UdaibirDas, 2009, “Transcript of a Conference Call on the Publication of the Paper Crisis-Related Measures in the Financial System and Sovereign Balance Sheet Risks.”Available via the Internet: http://www.imf.org/external/np/tr/2009/tr091509.htm.
Christiano, Lawrence, RobertoMotto, and MassimoRostagno, 2009, “Financial Factors in Economic Fluctuations” (unpublished).
Čihák, Martin, and WimFonteyne, 2009, “Five Years After: European Union Membership and Macro-Financial Stability in the New Member States,” IMF Working Paper 09/68 (Washington: International Monetary Fund).
Čihák, Martin, ThomasHarjes, and EmilStavrev, 2009, “Euro Area Monetary Policy in Uncharted Waters,” IMF Working Paper 09/185 (Washington: International Monetary Fund).
Čihák, Martin, and ErlandNier, 2009, “The Need for Special Resolution Regimes for Financial Institution—The Case of the European Union,” IMF Working Paper 09/200 (Washington: International Monetary Fund).
Claessens, Stijn, M. AyhanKose, and MarcoTerrones, 2008, “What Happens During Recessions, Crunches, and Busts?” IMF Working Paper 08/274 (Washington: International Monetary Fund).
Clarida, Richard, JordiGalí, and MarkGertler, 1999, “The Science of Monetary Policy: A New Keynesian Perspective,” Journal of Economic Literature, Vol. 37 (December), pp. 1661–707.
Coenen, Günter, FrankSmets, and IgorVetlov, 2009, “Estimation of the Euro Area Output Gap Using the NAWM,” Lietuvos Bankas Working Paper Series No. 5/2009 (Vilnius: Bank of Lithuania).
Cotis, Jean-Philippe, JørgenElmeskov, and AnnabelleMourougane, 2004, “Estimates of Potential Output: Benefits and Pitfalls from a Policy Perspective,” in The Euro Area Business Cycle, ed. by Lucrezia Reichlin (London: Center for Economic Policy Research).
Debrun, Xavier, and BikasJoshi, 2008, “Credibility Effects of Numerical Fiscal Rules: An Empirical Investigation,” in Hungary: Selected Issues, IMF Country Report No. 08/314 (Washington: International Monetary Fund).
Djankov, Simeon, 2008, “Bankruptcy Regimes During Financial Distress” (unpublished; Washington: World Bank).
Ehrmann, Michael, and FrankSmets, 2003, “Uncertain Potential Output: Implications for Monetary Policy,” Journal of Economic Dynamics and Control, Vol. 27 (July), pp. 1611–38.
Estevão, Marcello, 2005, “Product Market Regulation and the Benefits of Wage Moderation,” IMF Working Paper 05/191 (Washington: International Monetary Fund).
European Central Bank, 2004, The Monetary Policy of the ECB (Frankfurt: European Central Bank, 2nd ed.).
European Commission, 2005, “Working Together for Growth and Jobs: A New Start for the Lisbon Strategy,” Communication to the Spring European Council (Brussels,February).
European Commission, 2007, “Integrated Guidelines for Growth and Jobs 2008-2010,” Communication from the Commission to the Spring European Council (Brussels,December).
European Commission, 2009a, “Aging Report, Economic and Budgetary Projections for the EU-27 Member States (2008-2060),” (Brussels: EC Directorate General for Economic and Financial Affairs).
European Commission, 2009b, “The EU’s Response to Support the Real Economy during the Economic Crisis: An Overview of Member States’ Recovery Measures,” European Economy, Occasional Papers 51 (Brussels: European Commission).
European Commission, 2009c, Quarterly Report on the Euro Area, Vol. 8, No. 2.
Everaert, Greetje, ManalFouad, EdouardMartin, and RicardoVelloso, 2009, “Disclosing Fiscal Risks in the Post-Crisis World,” IMF Staff Position Note No. 09/18 (Washington: International Monetary Fund).
Felices, Guillermo, 2003, “Assessing the Extent of Labour Hoarding,” Bank of England Quarterly Bulletin, Vol. 43, No. 2, pp. 198–206.
Fernandez-Villaverde, Jesus, Pablo A.Guerron-Quintana, JuanRubio-Ramirez, and MartinUribe, 2009, “Risk Matters: The Real Effects of Volatility Shocks,” NBER Working Paper No. 14875, (Cambridge, Massachusetts: National Bureau of Economic Research).
Financial Crisis Advisory Group, 2009, Report of the Financial Crisis Advisory Group.Available via the Internet: http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB/Document_C/DocumentPage&cid=1176156365880.
Fischer, Björn, MicheleLenza, HuwPill, and LucreziaReichlin, 2008, “Money and Monetary Policy: The ECB Experience 1999–2006,” in The Role of Money—Money and Monetary Policy in the Twenty-First Century, ed. by Andreas Beyer and Lucrezia Reichlin (Frankfurt: European Central Bank).
Fonteyne, Wim, 2009, “A New EU Cross-Border Financial Stability Framework,” in Euro Area Policies: 2009Selected Issues Paper, IMF Country Report No. 09/224 (Washington: International Monetary Fund).
Furceri, Davide, and AnnabelleMourougane, 2009, “The Effect of Financial Crisis on Potential Output: New Empirical Evidence from OECD Countries,” OECD Economics Department Working Paper No. 699 (Paris: Organization for Economic Cooperation and Development).
Galí, Jordi, 2008, Monetary Policy, Inflation, and the Business Cycle (Princeton: Princeton University Press).
Ghosh, Atish, MarcosChamon, Christopher Crowe, Jun Kim, and JonathanOstry, 2009, “Coping with Crisis: Policy Options for Emerging Market Countries,” IMF Staff Position Note 09/08 (Washington: International Monetary Fund).
Girouard, Nathalie, and ChristopheAndré, 2005, “Measuring Cyclically-Adjusted Budget Balances for OECD Countries,” OECD Economics Department Working Paper No. 434 (Paris: Organization for Economic Cooperation and Development).
Goodhart, Charles, and AvinashPersaud, 2008, “How to Avoid the Next Crash,” Financial Times (London), January30.
Gorodnichenko, Yuriy, and MatthewD. Shapiro, 2007, “Monetary Policy When Potential Output Is Uncertain: Understanding the Growth Gamble of the 1990s,” Journal of Monetary Economics, Vol. 54 (May), pp. 1132–62.
Grund, C., 2006, “Severance Payments for Dismissed Employees in Germany,” European Journal of Law and Economics, Vol. 22, pp. 49–71.
Gruss, B., and S.Sgherri, 2009, “The Volatility Costs of Procyclical Lending Standards: An Assessment Using a DSGE Model,” IMF Working Paper 09/23 (Washington: International Monetary Fund).
Honjo, Keiko, and BenjaminHunt, 2006, “Stabilizing Inflation in Iceland,” IMF Working Paper 06/262 (Washington: International Monetary Fund).
Horton, Mark, ManmohanKumar, and PaoloMauro, 2009, “The State of Public Finances: A CrossCountry Fiscal Monitor,” IMF Staff Position Note 09/21 (Washington: International Monetary Fund).
Iacoviello, Matteo, and StefanoNeri, 2008, “Housing Market Spillovers: Evidence from an Estimated DSGE Model,” Boston College Working Papers in Economics No. 659 (Boston: Boston College).
International Monetary Fund, 2008, Regional Economic Outlook: Europe (Washington, October).
International Monetary Fund, 2009a, Euro Area Policies: 2009 Article IV Consultation, IMF Country Report No. 09/223 (Washington: International Monetary Fund).
International Monetary Fund, 2009b, Euro Area Policies: 2009 Selected Issues Paper, IMF Country Report No. 09/224 (Washington: International Monetary Fund).
International Monetary Fund, 2009c, Global Financial Stability Report (Washington, October).
International Monetary Fund, 2009d, Regional Economic Outlook: Europe (Washington, May).
International Monetary Fund, 2009e, World Economic Outlook (Washington, October).
Ize, Alain, and EduardoLevy-Yeyati, 2003, “Financial Dollarization,” Journal of International Economics, Vol. 59 (March), pp. 323–47.
Jokipii, Terhi, and AlistairMilne, 2006, “The Cyclical Behaviour of European Bank Capital Buffers,” Bank of Finland Discussion Paper No. 17/2006 (Helsinki: Bank of Finland).
Justiniano, Alejandro, and GiorgioE. Primiceri, 2008, “Potential and Natural Output” (unpublished).
Kindleberger, Charles, 1978, Manias, Panics, and Crashes: A History of Financial Crises (New York: Basic Books).
Kiyotaki, Nobuhiro, and JohnMoore, 1997, “Credit Cycles,” Journal of Political Economy, Vol. 105 (April), pp. 211–48.
Koopman, Gert Jan, and IstvànSzékely, 2009, “The Financial Crisis and Potential Growth: Policy Challenges for Europe,” ECFIN Economic BriefIssue 3 (Brussels: European Commission).
Kuttner, Kenneth N., 1994, “Estimating Potential Output as a Latent Variable,” Journal of Business and Economic Statistics, Vol. 12 (July), pp. 361–68.
Laubach, Thomas, and JohnC. Williams, 2003, “Measuring the Natural Rate of Interest,” Review of Economics and Statistics, Vol. 85 (November), pp. 1063–70.
Luengnaruemitchai, Pipat, and SusanSchadler, 2007, “Do Economists’ and Financial Markets’ Perspectives on the New Members of the EU Differ?” IMF Working Paper 07/65 (Washington: International Monetary Fund).
Meier, Andre, 2009, “Panacea, Curse, or Nonevent? Unconventional Monetary Policy in the United Kingdom,” IMF Working Paper 09/163 (Washington: International Monetary Fund).
Minsky, Hyman P., 1992, “The Financial Instability Hypothesis,” Jerome Levy Economics Institute Working Paper No. 74 (Annandale-on-Hudson: Bard College).
Mody, Ashoka, and SvenJari Stehn, 2009, “Germany’s New Fiscal Rule: A Responsible Approach to Fiscal Sustainability,” vox blog. Available via the Internet: http://www.voxeu.org/index.php?q=node/3861.
Musso, Alberto, and ThomasWestermann, 2005, “Assessing Potential Output Growth in the Euro Area: A Growth Accounting Perspective,” ECB Occasional Paper No. 22 (Frankfurt: European Central Bank).
Nickell, Stephen, LucaNunziata, and WolfgangOchel, 2005, “Unemployment in the OECD since the 1960s: What Do We Know?” The Economic Journal, Vol. 115, No. 500, pp. 1–27.
Organization for Economic Cooperation and Development, 2004, The OECD Jobs Study (Paris).
Organization for Economic Cooperation and Development, 2006, “Cyclically-Adjusted Budget Balances: A Methodological Note.” Available via the Internet: http://www.oecd.org/dataoecd/0/61/36336878.pdf.
Organization for Economic Cooperation and Development, 2008, Economic Outlook No. 83 (Paris, June).
Orphanides, Athanasios, 2001, “Monetary Policy Rules Based on Real-Time Data,” American Economic Review, Vol. 91 (September), pp. 964–85.
Orphanides, Athanasios, and Simonvan Norden, 2002, “The Unreliability of Output-Gap Estimates in Real Time,” Review of Economics and Statistics, Vol. 84 (November), pp. 569–83.
Orphanides, Athanasios, RichardD. Porter, David Reifschneider, Robert Tetlow, and FredericoFinan, 2000, “Errors in the Measurement of the Output Gap and the Design of Monetary Policy,” Journal of Economics and Business, Vol. 52 (January-April), pp. 117–41.
Orphanides, Athanasios, and JohnC. Williams, 2003, “Imperfect Knowledge, Inflation Expectations, and Monetary Policy,” NBER Working Paper No. 9884 (Cambridge, Massachusetts: National Bureau of Economic Research).
Proietti, Tommaso, AlbertoMusso, and ThomasWestermann, 2007, “Estimating Potential Output and the Output Gap for the Euro Area: A Model-Based Production Function Approach,” Empirical Economics, Vol. 33, No. 1, pp. 85–113.
Ramey, Garey, ValerieA. Ramey, 1995, “CrossCountry Evidence on the Link between Volatility and Growth,” American Economic Review, Vol. 85 (December), No. 5, pp. 1138–51.
Reinhart, Carmen M., KennethS. Rogoff, 2009, “The Aftermath of Financial Crises,” NBER Working Paper No. w14656 (Cambridge, Massachusetts: National Bureau of Economic Research).
Repullo, Rafael, and JavierSuarez, 2008, “The Procyclical Effects of Basel II,” CEPR Discussion Paper No. 6862 (London: Centre for Economic Policy Research).
Rosenberg, Christoph B., and MarcelTirpák, 2008, “Determinants of Foreign Currency Borrowing in the New Member States of the EU,” IMF Working Paper 08/173 (Washington: International Monetary Fund).
Saurina, Jesús, and CarlosTrucharte, 2007, “An Assessment of Basel II Procyclicality in Mortgage Portfolios,” Journal of Financial Services Research, Vol. 32 (October), pp. 81–101.
Schadler, Susan, AshokaMody, AbdulAbiad, and DanielLeigh, 2006, Growth in the Central and Eastern European Countries of the European Union, IMF Occasional Paper 252 (Washington: International Monetary Fund).
Scheiber, Thomas, and HelmutStix, 2008, “Euroization in Central, Eastern and Southeastern Europe—New Evidence on Its Extent and Its Causes” (unpublished; Vienna: Austrian National Bank).
Sgherri, Silvia, and EddaZoli, forthcoming, “Sovereign Risks in the Euro Area,” IMF Working Paper (Washington: International Monetary Fund).
Taylor, Ashley, and CharlesGoodhart, 2006, “Procyclicality and Volatility in the Financial System: The Implementation of Basel II and IAS 39,” in Procyclicality of Financial Systems in Asia, ed. by Stephan Gerlach and Paul Gruenwald (Basingstoke: Palgrave Macmillan).
Vamvakidis, Athanasios, 2008, “Convergence in Emerging Europe: Sustainability and Vulnerabilities,” IMF Working Paper 08/181 (Washington: International Monetary Fund).
Weidner, Justin, and JohnC. Williams, 2009, “How Big Is the Output Gap?” FRBSF Economic Letter No. 2009-19 (San Francisco: Federal Reserve Bank of San Francisco).
High spreads and high volatility in interest rates are often observed together (Fernandez-Villaverde and others, 2009). The association works through investors seeking higher expected returns in case of higher risk. In turbulent times, news also arrives fast and frequently, inducing high volumes of trade in foreign debt and raising volatility when spreads are also higher.
Blanchard (2009) warns that the “higher risk perception may well be an enduring legacy of the crisis,” citing evidence from the Great Depression that led to a lasting increase in the risk premium on stocks.
For links between fiscal policy, financial sector risks, and interest spreads, see, for instance, Blanchard (1984); IMF (2009d); Ardagna, Caselli, and Lane (2004); Debrun and Joshi (2008); and Horton, Kumar, and Mauro (2009).
The structural deficit for Hungary was considerably tightened in 2009Q2, which helped lower spreads.
This is further amplified by the contingent costs of government guarantees for the financial sector. See Horton, Kumar, and Mauro (2009) and Chapter 3 for a discussion of the impact of the crisis on fiscal sustainability.
Downward revisions in the fiscal balance for the year and time-varying volatility of the exchange rate are highly correlated for some countries. For the countries shown in Figure 23, especially since the fall of Lehman Brothers, the coefficient of correlation is on average about 0.4.
IMF programs in some countries have led to letters of commitment from parent banks to the country authorities, committing to stand by their subsidiaries. The letter for Hungary can be found at http://www.imf.org/external/np/cm/2009/052009.htm; for Romania, at http://www.imf.org/external/np/cm/2009/032609.htm; for Bosnia and Herzegovina, at http://www.imf.org/external/np/cm/2009/062209.htm; and for Serbia, at http://www.imf.org/external/np/cm/2009/032709.htm.
If firms have to commit to their technology in advance, then volatility can lead to lower mean output because firms find themselves producing at suboptimal levels ex post. If lower current output affects resource accumulation, then growth is adversely affected (Ramey and Ramey, 1995).
This section and the next are written by Ioan Carabenciov, Roberto Garcia-Saltos, Michel Juillard, Douglas Laxton, Troy Matheson, Srobona Mitra, Susanna Mursula, and Kadir Tanyeri.
The analytical details are elaborated in Carabenciov and others (forthcoming). The model is estimated with data from 2001:Q3 to 2009Q1, and the standard deviation of the residuals are computed for the precrisis (2001:Q3–2007:Q2) and the crisis (2007:Q3–2009:Q1) periods.
Monetary policy shocks also tended to be more volatile in EM precrisis (not shown). In the GPM, the exchange rate shock is the shock to the uncovered interest parity equation. The expected change in the real exchange rate one quarter ahead equals the real interest rate difference between EM and the United States minus the difference between the equilibrium real interest rates (or the equilibrium risk premium) adjusted for changes in the equilibrium real exchange rate plus the exchange rate shock.
Policymakers could be thought of as wanting to maximize society’s welfare by lowering variability in inflation and output changes, given existing trade-offs. Given their preference and shock volatilities, the lowest preferred combinations of output and inflation variability can be plotted in the “efficiency frontier.” The estimates from the GPM and the various shock variances are used to draw the frontier. To do so, a social loss function denoted by the weighted sum of variances of inflation, output gap, and changes in the real interest rate is minimized subject to the estimated equations and their shock variances. Because there can be infinite combinations of weights depending on social preferences, the weight on the output gap is varied, and the optimal interest rate rule is estimated for each weight. The standard deviation of inflation and the output gap resulting from applying the newly optimized rule is then computed, forming a point in the efficiency frontier for the EM. Other points are obtained by varying the degree of dislike for output variability compared to inflation variability and following the same procedure.
For instance, if policymakers in both countries paid twice as much attention to the smoothness of inflation compared to output (for example, if the weight on the variance of the output gap in the loss function was 0.5 and that of inflation 1), then the best preferred lowest standard deviation of output would be 0.79 for the euro area, whereas the EM’s best achievement would be 1.62.
By construction, the efficiency frontier assumes that the EM’s central bank’s policy rule is optimally adjusted to the more volatile environment.
See Clarida, Gali, and Gertler (1999), footnote 11, for an interpretation of the aggregate demand shock and its relation to government spending.
For instance, Honjo and Hunt (2006) show how fiscal policy rules designed to ensure a consistently countercyclical fiscal stance along with a public debt target can shift Iceland’s efficiency frontiers to the southwest.
Sizable improvements in primary balances will be required in several emerging economies to halt or reverse the increase in debt-to-GDP ratios through 2014 (Horton, Kumar, and Mauro, 2009). Anchoring expectations about the fiscal policy path could be done by setting medium-term fiscal targets that are credibly set and supported by appropriate institutional frameworks. An example is a medium-term expenditure framework that sets multiyear limits at the aggregate, ministerial, or program level, to translate overall objectives into budget decisions. Also, see Horton, Kumar, and Mauro (2009) for a table on strategies to ensure fiscal sustainability announced or discussed by G-20 country authorities.