E pluribus EMU? how will Europe cope with a single currency?
Linkages across sovereign debt markets
We develop a multicountry model in which default in one country triggers default in other countries. Countries are linked to one another by borrowing from and renegotiating with common lenders with concave payoffs. A foreign default increases incentives to default at home because it makes new borrowing more expensive and defaulting less costly. Foreign defaults tighten home bond prices because they lower lenders' payoffs. Foreign defaults make home default less costly by lowering future recoveries, because countries can extract more surplus if they renegotiate simultaneously. In our model, ...
Europe may provide lessons on preventing mortgage defaults
During the last global recession, house prices fell in some European countries almost as much as in some U.S. states. However, mortgage defaults occurred at a much lower rate in Europe. The authors say the difference might be explained by two regulations that apply in Europe but are used on a limited or much less restrictive basis in the U.S.
A look at credit default swaps and their impact on the European debt crisis
Did you know that buying a credit default swap can be like buying insurance on your neighbor?s car?and then getting paid when that neighbor has an accident? Learn the ABCs of CDS, and find out why they are so important to any discussion of the European debt crisis.
European integration and asymmetry in the EMS
The empirical literature offers conflicting views of German dominance in the European Monetary System. We examine the validity of the German dominance hypothesis (GDH) by analyzing the responses of the European central banks and the money markets to monetary innovations originating both in Europe (European asymmetry) and abroad (international asymmetry). Our results reconcile the conflicting views in the literature. The GDH is confirmed when the analysis is conducted with intervention rates before the German unification. Results support European asymmetry with short rates before 1990 but not ...
Debt and deficit ceilings, and sustainability of fiscal policies: an intertemporal analysis
In this paper, we examine the likely consequences for the sustainability of fiscal policy of pursuing goals that rely on restrictive ceilings on deficits and debt. We provide a formal theoretical framework for analyzing the sustainability of fiscal policy based on the government intertemporal budget constraint and derive conditions that determine whether a given fiscal stance is sustainable. This framework generalizes the existing literature in several important respects. We allow for time-varying interest rates, for the primary deficit to be endogenous, for a finite planning horizon suitable ...
Journey to work: European model combines education with vocation
Related links: https://www.richmondfed.org/-/media/richmondfedorg/publications/research/econ_focus/2012/q4/feature2_weblinks.cfm
Eurosystem monetary targeting: lessons from U.S. data.
Using a small empirical model of inflation, output, and money estimated on U.S. data, we compare the relative performance of monetary targeting and inflation targeting. The results show that monetary targeting would be quite inefficient, with both higher inflation and output variability. This is true even with a deterministic money demand formulation. In this framework, there is thus no support for the prominent role given to money growth in the Eurosystem's monetary policy strategy.
The GATT's contribution to economic recovery in post-war Western Europe
By freeing Europe's regional and international trade from tariffs and other trade barriers, the General Agreement on Tariffs and Trade (GATT) has often been hailed as a key factor in promoting the post-war economic recovery in Western Europe and in preventing a return to the disaster of the interwar period. This paper describes and assesses the contribution of the GATT in supporting economic recovery in Western Europe in the decade after 1947. The formation of the GATT by itself does not appear to have stimulated a particularly rapid liberalization of world trade during this period. It is ...
Strategic returns to international diversification: an application to the equity markets of Europe, Japan, and North America
We undertake a decomposition of the risk factor loadings of fifteen national stock market returns from 1972 to 1990, using a variant of the Campbell-Shiller (1988) linearization. We find considerable variation among countries in the relative importance of a cash flow component and a discount rate component in determining the beta with the world equity index return and with other risk factors. Also, the international heterogeneity we find in factor loadings suggests that a global portfolio allows substantial hedging opportunities, presumably deriving from differences in underlying economic ...