Gabe de Bondt

Interest Rate Pass-Through: Empirical Results for the Euro Area

Abstract This paper empirically examines the interest rate pass-through at the euro area level. The focus is on the pass-through of official interest rates, approximated by the overnight interest rate, to longer-term market interest rates, which, in turn, are a proxy for the marginal costs for banks to attract deposits or grant loans, and therefore passed through to retail bank interest rates. Empirical results, on the basis of a (vector) error-correction and vector autoregressive model, suggest that the pass-through of official interest to market interest rates is complete for money market interest rates up to three months, but not for market interest rates with longer maturities. Furthermore, the immediate pass-through of changes in market interest rates to bank deposit and lending rates is found to be at most 50%, whereas the final pass-through is typically found to be close to 100%, in particular for lending rates. Empirical results for a sub-sample starting in January 1999 show qualitatively similar findings and are supportive of a quicker interest rate pass-through since the introduction of the euro. It is shown that the difference between the adjustment speed of bank deposit and lending rates (typically around one versus three months since the common monetary policy) can to a large extent significantly be explained by credit risk considerations.

Credit Channels and Consumption in Europe: Empirical Evidence

This paper studies the macroeconomic relevance of credit channels of monetary policy by examining the impact of the external finance premium (EFP), that may vary over the business cycle, on private consumption in Europe. A consumption model incorporates credit channels by assuming that liquidity-constrained consumers not only use current income for financing their consumption, but also external finance, which availability depends on the EFP. The empirical analysis shows an accelerator effect of the EFP on consumption for Germany, Italy and the Netherlands. In contrast, for France, the United Kingdom and Belgium no evidence in favour of this financial propagation mechanism has been found.

Booms and Busts in China’s Stock Market: Estimates Based on Fundamentals

This article empirically models Chinas stock prices using conventional fundamentals: corporate earnings, risk-free interest rate and a proxy for equity risk premium. It uses the estimated long-run stock price misalignments to date booms and busts, and analyses equity market reforms and excess liquidity as potential drivers of these stock price misalignments. Results show that Chinas equity prices can be well modelled using fundamentals, but that various booms and busts can be identified. Policy actions, either taking the form of deposit rate changes, equity market reforms or excess liquidity, have significantly contributed to these misalignments.

Determinants of corporate debt securities in the Euro area

Abstract This study examines the macroeconomic determinants of corporate debt securities in the euro area. The financing costs, as approximated by the cost of debt securities vis-à-vis other sources of corporate finance, and financing needs, as captured by mergers and acquisitions and gross domestic product, are found to be significant determinants in the short and long run. The empirical results are also supportive of substitution between debt security and internal financing unrelated to cost of differentials in the short run and of differences in the determination of long- and short-term debt securities. These findings are robust across different samples and specifications.

Investment, financing constraints and profit expectations: new macro evidence

Regression results show that the external financing costs, the financing gap and profit expectations significantly matter for US and euro area aggregate (nonconstruction) investment. This finding supports the view that external and internal financing constraints hamper investment also at the macro level.

Predictive content of the stock market for output revisited

In-sample and out-of-sample evidence for major countries shows that stock price determinants (earnings, risk-free interest rate and equity risk premium) accurately predict real Gross Domestic Product beyond 1 year compared to the stock price index, dividend yield, price/earnings ratio and the Fed model.In-sample and out-of-sample evidence for major countries shows that stock price determinants (earnings, risk-free interest rate and equity risk premium) accurately predict real Gross Domestic Product beyond 1 year compared to the stock price index, dividend yield, price/earnings ratio and the Fed model.

The equity premium and inflation

This empirical study examines the relation between the equity premium – the difference between the expected stock and risk-free return – and inflation in the major economies in the post-Bretton Woods era. We estimate a country-average level of the equity premium between 0.8% and 2%, confirming a shrinking premium. Regressions and impulse responses show that the equity premium significantly positively adjusts to inflation. Inflation is thus essential in explaining the level of the equity premium and provides a partial resolution to the equity premium puzzle.

The Euro Area Corporate Bond Market: Where Do We Stand Since the Introduction of the Euro?

This article examines the euro area corporate bond market, in particular its development since the introduction of the euro. This market, that is to say, debt securities issued by non-financial corporations, non-monetary financial corporations and monetary financial institutions, is economically important, as it contributes to the allocation of funds to their most profitable uses. The euro area corporate bond market has grown rapidly since the introduction of the euro. Empirical analysis using regression techniques suggests that this growth can be explained by developments in economic activity, the costs of issuance and M&A-related activity. The latter reflects financing needs related to corporate restructuring, which in turn appears to be triggered partly by the introduction of the euro. The results also suggest that the introduction of the single currency had a direct and permanent effect on debt securities issued by non-monetary financial corporations. However, the use of corporate bonds at the euro area level is not uniform across countries. Country-specific factors continue to matter, despite the fact that financial markets are gradually becoming more integrated. To reap the full benefits of integration, public authorities and market practitioners are implementing a number of EU initiatives.

NEW EVIDENCE ON THE MOTIVES FOR HOLDING EURO AREA MONEY

This study focuses on the role of equity and labour markets for holding euro area money. Equity affects money demand positively through wealth effects (financial transaction motive) and negatively via substitution effects from the expected return on equity (speculative motive). A precautionary motive is captured by the annual change in the unemployment rate. The empirical results show that equity and labour markets do matter for euro area money demand since 1983. This finding is robust across different proxies for the augmented motives and a shorter sample starting in 1994.

Does the credit risk premium lead the stock market

Empirical results for the United States show that the credit risk premium leads the stock market by up to four weeks. They are robust across different stock market measures, empirical methods and sample periods. The finding of a flight to quality that first occurs in the corporate bond and subsequently in the stock market suggests a pecking order in risk premia. It implies that stock market investors may benefit from closely monitoring the corporate bond market.Empirical results for the United States show that the credit risk premium leads the stock market by up to four weeks. They are robust across different stock market measures, empirical methods and sample periods. The finding of a flight to quality that first occurs in the corporate bond and subsequently in the stock market suggests a pecking order in risk premia. It implies that stock market investors may benefit from closely monitoring the corporate bond market.