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Pablo Anaya Longaric
- 20 November 2024
- FINANCIAL STABILITY REVIEW - BOXFinancial Stability Review Issue 2, 2024Details
- Abstract
- Recent episodes of widening sovereign bond spreads have led to renewed concerns about financial stability related to sovereign risk in the euro area. Against this backdrop, this box presents an empirical analysis of the shifts in financing conditions for both sovereigns and non-financial corporations, as well as changes in the sovereign bond holdings of domestic and foreign investors following a sovereign stress shock. The analysis finds that financing conditions for sovereigns and firms deteriorate after sovereign stress events, while financial and political uncertainty increase. When sovereign stress events occur, investment funds and global investors withdraw from euro sovereign debt markets, while domestic investors step in.
- JEL Code
- F34 : International Economics→International Finance→International Lending and Debt Problems
F45 : International Economics→Macroeconomic Aspects of International Trade and Finance
G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors
- 22 November 2023
- FINANCIAL STABILITY REVIEW - BOXFinancial Stability Review Issue 2, 2023Details
- Abstract
- The smooth absorption of sovereign debt issuance by the financial sector is essential for financial stability. Newly issued government debt has been absorbed smoothly so far in 2023, despite the absence of net central bank purchases. Sovereign debt absorption patterns have been in line with empirical evidence, which suggests that investors tend to increase their bond purchases when yields rise. Non-bank investors tend to absorb less issuance in times of elevated financial market uncertainty, while accounting and leverage requirements influence the absorption capacity of banks. Higher government funding needs, especially in an environment of high market volatility, can imply rising yield levels and spreads.
- JEL Code
- G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates
G15 : Financial Economics→General Financial Markets→International Financial Markets
H63 : Public Economics→National Budget, Deficit, and Debt→Debt, Debt Management, Sovereign Debt
- 31 May 2023
- FINANCIAL STABILITY REVIEW - BOXFinancial Stability Review Issue 1, 2023Details
- Abstract
- Foreign investors have a significant footprint in euro area government bond markets, but this has fallen since the Eurosystem launched its asset purchase programmes. Against this background, this box analyses the role and behaviour of global and domestic investment funds in euro area government bond markets. The results indicate that after global risk shocks, domestic investment funds tend to turn to euro area government bonds, while global funds cut back their exposures. Moreover, after events that lead to spreads widening among euro area government bond markets, global investment funds tend to play a stabilising role in euro area government bond markets since they typically increase their exposure to medium or lower-rated euro area government bonds.
- JEL Code
- E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
F30 : International Economics→International Finance→General
G11 : Financial Economics→General Financial Markets→Portfolio Choice, Investment Decisions
G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors
- 7 October 2022
- WORKING PAPER SERIES - No. 2739Details
- Abstract
- Exchange rate movements affect the economy through changes in net exports, i.e. the trade channel, and through valuation changes in assets and liabilities denominated in foreign currencies, i.e. the financial channel. In this paper, I investigate the macroeconomic and financial effects of U.S. dollar (USD) exchange rate fluctuations in small open economies. Specifically, I examine how the financial channel affects the overall impact of exchange rate fluctuations and assess to what extent foreign currency exposure determines the financial channel’s strength. My empirical analysis indicates that, if foreign currency exposure is high, an appreciation of the domestic currency against the USD is expansionary and loosens financial conditions, which is consistent with the financial channel of exchange rates. Moreover, I estimate a small open economy New Keynesian model, in which a fraction of the domestic banks’ liabilities is denominated in USD. In line with the empirical results, the model shows that an appreciation against the USD can be expansionary depending on the strength of the financial channel, which is linked to the level of foreign currency exposure. Finally, the model indicates that the financial channel amplifies the effects of foreign monetary policy shocks.
- JEL Code
- E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
F31 : International Economics→International Finance→Foreign Exchange
F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics
- 14 June 2022
- THE INTERNATIONAL ROLE OF THE EURO - BOXThe international role of the euro 2022
- 11 November 2021
- ECONOMIC BULLETIN - ARTICLEEconomic Bulletin Issue 7, 2021Details
- Abstract
- This article reviews three popular equilibrium exchange rate models, the purchasing power parity (PPP), behavioural equilibrium exchange rate (BEER) and macroeconomic balance (MB) models. The aim is to address two questions: whether such models help in forecasting real and nominal exchange rates and which macroeconomic fundamentals contain such predictive power. The evidence suggests that real exchange rates adjust over time to their estimated real exchange rate equilibria only in the cases of the PPP and BEER models. Exploring this empirical regularity, it is possible to draw three important lessons. The first is that such equilibrium adjustment helps to forecast real exchange rates. The second lesson is that this real equilibrium adjustment process helps in forecasting nominal exchange rates, as most of the adjustment toward equilibrium is achieved by currency movements and not by relative price changes. The third is that most of the forecasting power comes from the exploitation of the mean-reverting properties of real exchange rates rather than an understanding of the relationship between exchange rates and economic fundamentals.
- JEL Code
- C33 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Panel Data Models, Spatio-temporal Models
F31 : International Economics→International Finance→Foreign Exchange
F37 : International Economics→International Finance→International Finance Forecasting and Simulation: Models and Applications
F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics
- 2 June 2021
- THE INTERNATIONAL ROLE OF THE EURO - BOXThe international role of the euro 2021
- 2 June 2021
- THE INTERNATIONAL ROLE OF THE EURO - BOXThe international role of the euro 2021