Financial integration or financial fragmentation? A euro area perspective

In this article we address the question of how strongly bank lending rates and credit volumes co-move across the euro area. Following the breakdown in the interest rate pass-through across the euro area, we aim to disentangle the relative importance of country-specific and common components in explaining the variance of the macro and financial variables by using a time-varying two-level dynamic factor model. Our results show that a high share is explained by the common component. However, we find a persistent decline in the importance of the common factor in the bank lending rates, indicating the presence of financial fragmentation. Furthermore, we find persistent heterogeneity across member states, specifically those hit hard by the sovereign-debt crisis.

Exchange rate uncertainty and import prices in the euro area

This paper analyses the effects of exchange rate uncertainty on the pricing behaviour of import firms in the euro area. Uncertainty is measured via the volatility of the structural shocks to the exchange rate in a non-linear VAR framework and is an important determinant of import prices. An increase in exchange rate uncertainty is associated with a fall in prices on average, which suggests that the exchange rate risk is borne by the importers. The analysis utilizes a dataset on industrial import prices, disaggregated by origin of imports. Controlling for intra- and extra-euro area trade is important.

The regime-dependent evolution of credibility: a fresh look at Hong Kong's linked exchange rate system

An estimated Markov-switching DSGE modeling framework that allows for parameter shifts across regimes is employed to test the hypothesis of regime-dependent credibility of Hong Kong’s linked exchange rate system. The baseline model distinguishes two regimes with respect to the time-series properties of the risk premium. Regime-dependent impulse responses to macroeconomic shocks reveal substantial differences in spreads. To test the sensitivity of the results, a number of robustness checks are performed. The findings contribute to efforts at modeling exchange rate regime credibility as a nonlinear process with two distinct regimes.

Financial crises and time-varying risk premia in a small open economy: a Markov-switching DSGE model for Estonia

Under a currency board, the central bank relinquishes control over its monetary policy and domestic interest rates converge towards the foreign rates. Nevertheless, a spread between both usually remains. This spread can be persistently positive due …

The credibility of Hong Kong's currency board system: looking through the prism of MS‐VAR models with time‐varying transition probabilities

This paper employs a Markov regime‐switching VAR model to describe and analyse the time‐varying credibility of Hong Kong's currency board system. The endogenously estimated discrete regime shifts are made dependent on macroeconomic fundamentals. This …

Modelling the time-variation in euro area lending spreads

Using a Markov-switching VAR with endogenous transition probabilities, we analyse what has triggered the interest rate pass-through impairment for Italy, Ireland, Spain and Portugal. We find that global risk factors have contributed …