Andrea Cipollini

Threshold Effects in the U.S. Budget Deficit

We contribute to the debate on whether the large U.S. federal budget deficits are sustainable in the long run. We model the U.S. government deficit per capita as a threshold autoregressive process. We find evidence that the U.S. budget deficit is sustainable in the long run and that economic policymakers will intervene to reduce per capita deficit only when it reaches a certain threshold.

Does Inflation Targeting Affect the Trade-Off between Output Gap and Inflation Variability?

We utilize a stochastic volatility model to analyse the possible effects of inflation targeting on the trade-off between output gap variability and inflation variability. We find that the adoption of inflation targets (in New Zealand, Australia, Canada, the UK, Sweden and Finland) might result in a more favourable monetary policy trade-off (except in Australia and Finland). This conclusion is reached by comparing, first, the economic performance of targeting countries in the 1980s and the 1990s; and second, the economic performance in the 1990s of targeting and non-targeting countries (the USA, Japan, Switzerland, Germany, France and the Netherlands). We focus on two possible explanations for the performance of the inflation-targeting regime: the relatively high degree of monetary policy transparency, and the presence of a flexible institutional framework. Copyright 2002 by Blackwell Publishers Ltd and The Victoria University of Manchester

Testing For Government Intertemporal Solvency: A Smooth Transition Error Correction Model Approach

Applied macroeconomists have tested for the government intertemporal solvency condition by either testing for linear stationarity in the total government deficit series or testing for linear cointegration between total government spending and total tax revenues. A number of authors have focused, in particular, on structural breaks in the government deficit process. In this paper, we use a smooth transition error correction model to test and estimate a shift in the adjustment toward a linear cointegration relationship between the government spending to output ratio and the total tax revenues to output ratio. Estimation results show that government authorities react only to large (in absolute value) changes in the government spending to output ratio. Residual diagnostic tests are provided and they show that the model is not misspecified.

Forecasting financial crises and contagion in Asia using dynamic factor analysis

In this paper we use principal components analysis to obtain vulnerability indicators able to predict financial turmoil. Probit modelling through principal components and also stochastic simulation of a Dynamic Factor model are used to produce the corresponding probability forecasts regarding the currency crisis events a®ecting a number of East Asian countries during the 1997-1998 period. The principal components model improves upon a number of competing models, in terms of out-of-sample forecasting performance.

Fiscal Readjustments in the United States: A Nonlinear Time-Series Analysis

We analyze the fiscal adjustment process in the United States using a multivariate threshold vector error regression model. The shift from single-equation to multivariate setting adds value both in terms of our economic understanding of the fiscal adjustment process and the forecasting performance of nonlinear models. We find evidence that fiscal authorities intervene to reduce real per capita deficit only when it reaches a certain threshold and that fiscal adjustment takes place primarily by cutting government expenditure. The results of out-of-sample density forecast and probability forecasts suggest that a shift from a univariate autoregressive model to a multivariate model improves forecast performance.

The European sovereign debt market: from integration to segmentation

This paper investigates the impact of European Monetary Union (EMU) and of the recent financial and fiscal crisis on the integration of the European sovereign debt market using annual data 1992–2010. The panel regression dependent variable is time-varying market linkages computed from daily realised correlations between sovereign bond returns for 13 European economies and Germany. The results indicate that the elimination of currency risk following the implementation of EMU led to a fundamental and significant one-off increase in integration. The net impact of fiscal fundamentals was negligible up until 2009 as the markets seemed to be pricing in a potential bailout for member states in crisis and not fully pricing default risk. However, by 2010 the parlous situation of the peripheral economies lead the markets to price default risk and heralded a return to segmentation. The related increase in peripheral economy sovereign spreads has exacerbated the problem of fiscal imbalances which pose a major challenge for policy-makers.

Stock Returns and Exchange Rate Volatility Spillovers in the MENA Region

In this article, we examine the presence of volatility spillovers between nominal exchange rates and stock returns in three MENA countries: Egypt, Morocco and Turkey. The multivariate GARCH model we use does not produce evidence of cross-market effects for the general stock indices returns. Nevertheless, bidirectional shock and volatility spillovers between exchange rates and stock returns exist at the industry sector level. These findings are more pronounced in Egypt and Turkey. The different results are due to the different exchange rate regimes/policies adopted by the three countries. While exchange rates in Egypt and Turkey were allowed to float, Morocco followed a more tightly managed exchange rate regime.

The Impact of Bank Concentration on Financial Distress: The Case of the European Banking System

This paper examines the impact of bank concentration on bank financial distress using a balanced panel of commercial banks belonging to EU 25 over the sample period running from 2003 to 2007. Financial distress is proxied by the observations falling below a given threshold of the empirical distribution of a risk adjusted indicator of bank performance: the Shareholder Value ratio. We employ a panel probit regression estimated by GMM in order to obtain consistent and efficient estimates following the suggestion of Bertschek and Lechner (1998). Our findings suggest, after controlling for a number of enviroment variables, a positive effect of bank concentration on financial distress.

Exchange Rates and Stock Prices in the MENA Countries: What Role for Oil?

This paper considers the linkage between stock prices and exchange rates in four MENA (Middle East and North Africa) emerging markets. In contrast to the existing evidence that uses a global market index to uncover such a relationship it is found that for the sample countries oil prices emerge as the dominant factor in the above relationship. The paper considers the presence of regime shifts and evidence is found of cointegration only for the period following the 1999 oil price shock. Readjustment towards equilibrium in each stock market occurs via oil price changes. Finally, a number of robustness checks are performed and persistence profiles produced.

Business Cycle Effects on Portfolio Credit Risk: Scenario Generation through Dynamic Factor Analysis

In this paper, we focus on measuring the risk associated to a bank loan portfolio. In particular, we depart from the standard one factor model representation of portfolio credit risk. In particular, we consider an hetrogeneous portfolio, and we account for stochastic dependent recoveries. We also examine the influence of either one systemic shock (interpreted as the state of the business cycle) or two systemic shocks (interpreted as demand and supply innovations) on portfolio credit risk. The identification and estimation of the common shocks is obtained by fitting a Dynamic Factor model to a large number of macro credit drivers. The scenarios are obtained by employing Montecarlo stochastic simulation.