Antonia López-Villavicencio

Has the CDS market influenced the borrowing cost of European countries during the sovereign crisis

This paper assesses the potential influence of the growing CDS market on the borrowing cost of sovereign states during the European sovereign crisis. We analyze the sovereign debt market to ascertain the pattern of information transmission between the CDS and corresponding bond markets. Our methodological innovation is the use of a non-linear specification rather than the linear VECM specification customarily employed. Using a panel smooth transition model during the 2008-2010 period, we find that: 1) linearity tests clearly reject the null hypothesis of a linear transmission mechanisms between the bond and the CDS markets; 2) market distress alters the mutual influence and 3) the higher the distress the more the CDS market dominates the information transmission between CDS and bond markets.

Asymmetric exchange rate pass-through: Evidence from major countries

The aim of this paper is to investigate the asymmetric effect of exchange rate variations on prices over the short- and long-run. To this end, we estimate a mark-up model for prices using a novel and simple asymmetric cointegrating model, with positive and negative partial sum decomposition of the nominal exchange rates. Our results show that prices react differently to appreciations and depreciations over the long-run, an effect that was previously ignored in the literature. In particular, we provide evidence that depreciations are passed through prices more than appreciations, a result that might suggest weak competition structures. This result has important implications for the proper conduct of monetary policy.

Employment Protection and the Non-Linear Relationship between the Wage-Productivity Gap and Unemployment

This paper studies the relationship between the wage-productivity gap and the unemployment rate in OECD countries between 1985 and 2007. In particular, we investigate whether differences in the employment protection across countries affect the link between these two variables. We show that the elasticity of unemployment with respect to the wage-productivity gap is non-linear and that it switches from a positive to a negative value with stricter employment legislation. From a theoretical point of view, we argue that this result is related to a set of labor market reforms introduced in many OECD countries, which affected the relative strictness of institutions.

Is Globalization Weakening the Inflation–Output Relationship?

This paper investigates whether trade and financial openness has weakened the inflation–output trade-off and caused a shift in the preferences of monetary authorities. Based on the backward-looking Phillips curve and a Taylor-type interest rate rule, our results for France, the UK and the USA for the 1970–2012 period do not provide support for the relevance of globalization in making inflation less responsive to output expansions. Moreover, the change of preferences of Central Banks towards growth-oriented objectives is neither due to higher trade nor to financial globalization.

Short-run dynamics in bank credit: Assessing nonlinearities in cyclicality

This paper explores whether the procyclicality of private credit changes during the business cycle. To this end, we rely on the estimation of smooth transition regression models for a sample of 17 OECD countries over the 1986–2010 period. Our findings show that credit procyclicality is nonlinear, depending on economic conditions. More specifically, credit is highly procyclical in extreme – booms and busts – regimes in Canada, the UK and the US, while procyclicality is less pronounced in one or both extreme regimes in Australia, Belgium, France, Finland, the Netherlands, Norway, and Spain. Our results also emphasize the importance of financial factors in explaining the short-run behavior of private credit.

Temporal Dimension and Equilibrium Exchange Rate

We analyze, in a unified theoretical framework, the two main models for equilibrium exchange rate, namely, the BEER and the FEER approaches. In order to understand the interactions between them, we study in detail the temporal links between these two measures. Our results show that, in average, the BEER and the FEER are closely related. Yet, important differences can be observed for some countries and/or some periods of time. Therefore, we analyze some of the factors that may explain this disconnection, identifying several aspects which are able to alter the relation between the current account and the real effective exchange rate, and so, between the FEER and the BEER. Our analysis puts forward the structural changes in matter of competitiveness, the dynamics of foreign asset positions and valuation effects as explanations for the divergence.

The wage inflation-unemployment curve at the macroeconomic level

Based on the reduced form New Keynesian Wage Phillips Curve, we estimate wage rigidity and indexation at the aggregate level in several advanced countries for the 1985–2014 period. We document that the wage setting process is heterogenous among our sample of countries: nominal wage rigidities are more important in the United States, while wage indexation is dominant in European Countries. We also present evidence that indexation to past inflation has decrease as inflation stabilizes at lower levels. In addition, our results suggest that wage rigidity is not linked to the institutional environment at the macroeconomic level. Finally, we show that there is significant time variation in the estimated coefficients on the implied equation that is usually not taken into account in the theoretical literature.

The Determinants of Pension Funds’ Allocation to Private Equity

This paper investigates the main determinants of pension funds investment in private equity funds, and particularly in venture capital and leverage buyouts in the US and Canada over the 1996-2011 period. Our results, based on a Tobit model, show some important differences between pension funds allocating to private equity and more traditional assets (i.e. equity). The first ones are bigger, mainly diversified private funds. They do not consider the age of their members when deciding this type of allocation and they present a higher discount rate. Furthermore, they specially take into account their private equity returns in comparison to management costs. We also show that pension funds investing in private equity do not distinguish between venture capital and leverage buyouts.

Modelling Downward and Upward Wage Flexibility at the Macroeconomic Level

In this paper, we analyze wage sensitivity to labour market disequilibrium at a macroeconomic level in several OECD countries. We estimate the Phillips curve and a wage equation with an error correction term a la Sargan with a novel asymmetric approach that allows us to distinguish between downward and upward flexibility. We present evidence that downward wage flexibility is more important than upward flexibility in all the countries. We also show that flexible labor market institutions do not lead to higher downward wage flexibility and lower unemployment. However, higher employment protection.

On the Link Between Credit Procyclicality and Bank Competition

This paper investigates the relationship between bank competition and credit procyclicality for 17 OECD countries on the 1986-2009 period. We account for heterogeneity among countries in terms of bank competition through the use of a hierarchical clustering methodology. We then estimate panel VAR models for the identified sub-groups of economies to investigate whether credit procyclicality is more important when the degree of bank competition is high. Our findings show that while credit significantly responds to shocks to GDP, the degree of bank competition is not essential in assessing the procyclicality of credit for OECD countries.