Olivier de Bandt

Competition, contestability and market structure in European banking sectors on the eve of EMU

In order to assess the eAect of EMU on market conditions for banks based in countries which adopt the Single Currency, we use the H indicator suggested by Panzar and Rosse (Panzar, J.C., Rosse, J.N., 1987. Journal of Industrial Economics 35, 443‐ 456). Our contribution is to assess results separately for large and small banks, and for interest income and total income as a dependent variable. From a panel of banks over the period 1992‐1996, we provide evidence that the behavior of large banks was not fully competitive as compared to the US. Regarding small banks, the level of compe

Forecasting inflation using economic indicators: the case of France

In order to provide short-run forecasts of headline and core HICP inflation for France, we assess the forecasting performance of a large set of economic indicators, individually and jointly, as well as using dynamic factor models. We run out-of-sample forecasts implementing the Stock and Watson (1999) methodology. We find that, according to usual statistical criteria, the combination of several indicators-in particular those derived from surveys-provides better results than factor models, even after pre-selection of the variables included in the panel. However, factors included in VAR models exhibit more stable forecasting performance over time. Results for the HICP excluding unprocessed food and energy are very encouraging. Moreover, we show that the aggregation of forecasts on subcomponents exhibits the best performance for projecting total inflation and that it is robust to data snooping. Copyright

Optimal capacity in the Banking Sector and Economic Growth

The paper investigates, from the welfare and growth point of view, the determination of the optimal capacity of the banking system. For that purpose, we consider an overlapping generation model with endogenous growth. There is horizontal differentiation and imperfect competition in the banking sector. Macroeconomic shocks affect the return on capital and, together with the expectations of depositors, condition the stability of the banking sector. We specify to what extent deposit insurance may reduce instability and increase the number of deposits, welfare and growth. We also characterize the conditions under which excess banking capacities may appear and how their reduction may improve welfare.

Inflation and the Markup in the Euro Area

The paper implements a consistent empirical strategy in order to investigate the behaviour of the markup over the cycle and its contribution to inflation movements. We model the price series as I(2) components and use polynomial cointegration in order to recover a long-run price schedule. We do not reject statistically the reduction of the I(2) framework to an I(1) model as from the mid 1980s. We observe that the markup in fairly counter-cyclical and has a permanent effect on inflation through an error-correcting mechanism. Structural and forecasting equations exhibiting good performance are therefore estimated.

Measuring Long-Run Exchange Rate Pass-Through

The paper discusses the issue of estimating short- and long-run exchange rate pass-through to import prices in euro area countries and reviews some problems with the measures recently proposed in the literature. Theoretical considerations suggest a long-run Engle and Granger cointegrating relationship (between import unit values, the exchange rate and foreign prices), which is typically ignored in existing empirical studies. We use time series and up-to-date panel data techniques to test for cointegration with the possibility of structural breaks and show how the long-run may be restored in the estimation. The main finding is that allowing for possible breaks around the formation of EMU and the appreciation of the euro starting in 2001 helps restore a long run cointegration relationship, where over the sample period the fixed component of the pass-through decreased while the variable component tended to increase.

Monetary and fiscal policy in the transition to EMU: what do SVAR models tell us?

Abstract On the basis of SVAR models of monetary and fiscal policy in France, Germany and the euro area for the period 1979:1–2000:2, it appears that, during these two decades, monetary shocks exhibit significant correlation while fiscal shocks—which are closely linked to standard measures of structural deficits—are uncorrelated between France and Germany. At the same time, euro area fiscal shocks, especially in the 1990s, are largely impulsed by Germany. It is difficult, however, to conclude that the latter shocks reflect purely idiosyncratic shocks, as they often reveal differences in the timing of fiscal adjustments. The macroeconomic effects of monetary and fiscal policy are shown to be consistent with the ISLM model, but, from a statistical point of view, they are usually more significant for monetary policy than for fiscal policy shocks.

Assessing Aggregate Comovements in France, Germany and Italy. Using a Non Stationary Factor Model of the Euro Area

The objective of the paper is to investigate to what extent business cycles co-move in Germany, France and Italy. We use a large-scale database of non-stationary series for the euro area in order to assess the effect of common versus idiosyncratic shocks, as well as transitory versus permanent shocks, across countries over the 1980:Q1 to 2003:Q4 period. We apply the method-ology proposed by Bai (2004) and Bai and Ng (2004) to construct a coincident indicator of the euro area business cycle to which national developments appear to be increasingly correlated at business cycle frequencies (8 to 32 quarters), while more significant differences appear at lower frequencies which measures potential growth. The indicator is also shown to be related to extra euro area economic developments.

Convergence in Household Credit Demand Across Euro Area Countries: Evidence from Panel Data

This article contributes to the literature on the convergence of financial systems in the euro area by estimating household credit demand in individual countries. Using the ARDL framework advocated notably by Pesaran et al. (1999), the article provides evidence on the convergence of long-run credit demand determinants (interest rates, investment and house prices) in the largest euro area countries, while short run-dynamics remain heterogenous across countries. The article also demonstrates that the equation uncovers demand rather than supply behaviour.

A DGSE Model to Assess the Post-Crisis Regulation of Universal Banks

The paper assesses the overall consistency and impact on both the financial sector and the real economy, of the numerous banking regulations that have been introduced in the aftermath of the Great Financial Crisis. For this purpose, we develop, within a multi-period asset framework, a large scale DSGE model with a real and a financial sector. Universal banks grant credit but invest also in corporate and sovereign bonds. Small companies are financed through bank loans only, while large corporate can also issue bonds. The main findings of the paper are that: (i) the implementation of liquidity regulation which affects private consumption dynamics has a less persistent effect than solvency regulation that affects loan distribution as well as investment; (ii) the model assesses to what extent the Liquidity Coverage Ratio may induce banks to substitute sovereign bonds to business loans; (iii) liquidity and solvency regulations appear to be complementary; (iv) while the implementation of the LCR has qualitatively similar results as the NSFR, even if, quantitatively, the latter has a more mMarrakech_14oderate effect.

Convergence and Divergence in External Trade

The evolution of external trade over the last few years has exhibited quite different patterns across Germany, France and Italy. From that point of view, it certainly constitutes one source of asymmetry between the three countries. Over the 2000-2005 period the average annual growth rate of exports of goods and services in value was 5.5 % in Germany, but only 3.0 % in Italy and 1.5 % in France. In real terms and over the same period, exports grew by 5.6 % annually in Germany, 1.5 % in France and remained constant in Italy. After German reunification and weak export performance in Germany in the early 1990s, the 2nd part of the 1990s witnessed a recovery of German trade performance, which accelerated at the beginning of the 2000s, a movement going beyond a simple catching-up process. Conversely, Italian trade performance, in strong progression in the first half of the 1990s, has eroded since the mid-1990s and stabilised only recently. The recent good external performance of Germany has been partly offset by weak domestic demand (see Part 4 on demand side), resulting in GDP growth below the other two countries.2 Nevertheless, it may have structural implications. The question is therefore whether Germany is returning to a development pattern which is mainly export-driven, as already observed in the 1980s, or whether we are observing a different international division of industrial activities among the three countries on top of changes in the distribution between the euro area and the rest of the world in terms of relocation of stages of production. Several explanations have been put forward to explain the most recent German performance and, in contrast, the mediocre external results experienced by France and Italy. A preliminary remark is, however, necessary: one