biblio

Cahiers d'études

La BCL publie régulièrement le fruit des recherches de ses économistes. Ces publications ne devraient pas être présentées comme représentant la position de la BCL ou de l'Eurosystème. Elles reflètent le point de vue personnel de leurs auteurs respectifs qui n'est pas nécessairement partagé par d'autres chercheurs ou responsables de la BCL ou de l'Eurosystème.

 

Liste des cahiers d'études

2017

108
Public debt, central bank and money: some clarifications
de
Paul MERCIER
May 2017
Abstract

The purchase of securities, and more specifically government bonds, belongs to the monetary policy implementation framework of many central banks, the Eurosystem being no exception for that matter.

However, as for the euro zone, that tool remained unused until 2010, while present in the Eurosystem’s toolkit since its creation. Its implementation in times of crisis raised many debates, comments and even resorts to courts of justice. One of the central issues relates to the monetary financing of the public sector which in turn questions the relations between public debt, central banks and money.

This paper does not aim at providing a definite answer to the many questions, or to offer an arbitrage between the different arguments and schools of thoughts. More simply, in view of the often confused state of discussions, it goes back to the basic concepts of money creation, more specifically to the one of money creation by central banks for the benefit of the public sector.

Through a series of “typical cases” of interactions between central banks, commercial banks, public sector and households, the paper favours a better understanding of the quite complex mechanic of money creation through the purchase of public bonds by central and commercial banks. It also addresses a connected topic, i.e. the article 123 of the treaty on the Functioning of the European Union that prohibits the direct purchase by central bank on the primary market of debt instruments issued by the public sector.

107
Firm Growth in Europe: an Overview based on the CompNet Labour Module
de
C. FERNANDEZ, R. GARCIA, P. LOPEZ-GARCIA, B. MARZINOTTO, R. SERAFINI, J. VANHALA and L. WINTR
May 2017
Abstract

This paper illustrates the main features of the Labour Module of the CompNet dataset which provides indicators of firm growth over the period 1995-2012 across 17 EU (13 euro area) countries and 9 macro-sectors. It also includes information on a large set of micro-aggregated characteristics of firms growing at different speed such as their financial position and labour and total factor productivity. The paper shows that during the Great Recession the share of shrinking firms sharply increased in countries under stress, while firm growth slowed down in non-stressed countries. In the former, the construction sector suffered the most, while in the latter manufacturing and services related to transportation and storage were mainly affected, possibly as a result of the trade collapse. While we find that, all else equal, more productive firms had a higher probability of growing, the process of productivity-enhancing reallocation was muted during the Great Recession.

106
The Luxembourg Household Finance Consumption Survey: Results from the 2nd wave
Anastasia GIRSHINA, Thomas Y. MATHÄ and Michael ZIEGELMEYER
May 2017
Abstract

This report presents the main results and the underlying methodology of the 2nd wave of the Luxembourg Household Finance and Consumption Survey (LU-HFCS) and compares them to those obtained in the 1st wave in 2010. This survey is conducted among private households resident in Luxembourg and is part of the Eurosystem Household Finance and Consumption Survey, which provides detailed individual and household data on assets, liabilities, income and consumption. This individual-level information on households provides a view on the distribution of assets and liabilities that complements the aggregate data on the household sector in the financial accounts.

105
Investment Price Rigidity and Business Cycles
Alban MOURA
March 2017
Abstract

This paper incorporates sticky investment prices in a two-sector monetary model of business cycles. Fit to quarterly U.S. time series, the model suggests that price rigidity in the investment sector is the single most empirically relevant friction to match the data. Sticky investment prices are also important to understand the dynamic effects of technology shocks and their pass-through to the relative price of investment goods.

2016

104
Employment, wages and prices: How did firms adjust during the economic and financial crisis? Evidence from a survey of Luxembourg firms
en
Thomas Y. MATHÄ, Cindy VEIGA and Ladislav WINTR
October 2016
Abstract

This report presents new insights on the nature, size and persistence of various shocks (demand, credit, costs etc.) experienced by Luxembourg firms during the initial years of the economic crisis in 2008-09 and subsequently in the period 2010-13, as well as on how firms adjusted to these shocks in terms of employment, wages and prices. It discusses the extent to which institutional changes in the Luxembourg labour market through various public support measures helped alleviate the effects of the economic crisis.

Keywords: Economic and financial crisis, reaction to shocks, wage and price rigidity,

firms, survey, WDN

JEL Codes: C25, D22

103
Characterising the financial cycle in Luxembourg
en
Gaston GIORDANA and Sabbah GUEDDOUDJ
October 2016
Abstract

This paper characterises the financial cycle in Luxembourg using both the growth and classical cycle definitions. We implement both a frequency-based approach –using band-pass filters– to measure the growth cycle and a turning-point approach to capture the classical cycle. The financial cycle is characterized using varibales related to domestic credit and asset prices. We identify the dates of peaks/troughs for growth and classical cycles, describe the characteristics
of cycle phases and analyze the synchronisation between cycles for each macro-financial variable considered and the real activity. Additionally, we evaluate the synchronisation of credit and house prices across the neighbouring countries, based on the medium-term classical cycle. Finally, we introduce two novel tools to monitor the evolution of the financial cycle which are intended to contribute to informing macroprudential policy. The first tool is an optimal decision rule in the form of two warning thresholds signalling growth cycle phases related to a possible classical turning-point. The second tool is a measure of the probability of a turning-point in the classical cycle in each quarter after a peak in the growth cycle. The tools are built on the lead/lag relationships between peaks and troughs of growth and classical cycles. A composite index of the growth cycle is proposed as well.
Keywords : financial cycles, turning-points,  synchronisation, band-pass filter, survival data, Area
Under the Receiver Operating Characteristic Curve, Luxembourg.
JEL classification : E32, G01, G18.

102
Tracking Changes in the Intensity of Financial Sector’s Systemic Risk
en
Xisong JIN and Francisco NADAL DE SIMONE
October 2016
Abstract

This study provides the first available estimates of systemic risk in the financial sector comprising the banking and investment fund industries during 2009Q4 -2015Q4.
Systemic risk is measured in three forms: as risk common to the financial sector; as contagion within the financial sector and; as the build-up of financial sector’s vulnerabilities over time, which may unravel in a disorderly manner. The methodology models the financial sector components’ default dependence statistically and captures the time-varying non-linearities and feedback effects typical of financial markets. In addition, the study estimates the common components of the financial sector’s default measures and by identifying the macro-financial variables most closely associated with them, it provides useful input into the formulation of macro-prudential policy. The main results suggest that: (1) interdependence in the financial sector decreased in the first three years of the sample, but rose again later coinciding with ECB’s references to increased search for yield in the financial sector. (2) Investment funds are a more important source of contagion to banks than the other way round, and this is more the case for European banking groups than for Luxembourg banks. (3) For tracking the growth of vulnerabilities over time, it is better to monitor the most vulnerable part of the financial sector because the common components of systemic risk measures tend to lead these measures.

JEL Classification: C1, E5, F3, G1

Keywords: financial stability; macro-prudential policy; banking sector; investment funds; default probability; non-linearities; generalized dynamic factor model; dynamic copulas.

101
La provision forfaitaire permet-elle de réduire la procyclicité de l’activité bancaire au Luxembourg?
fr
Gaston GIORDANA et Jean-Baptiste GOSSÉ
Octobre 2016
Abstract

Cette étude s’attache à évaluer dans quelle mesure la provision forfaitaire contribue à atténuer la procyclicité de la profitabilité bancaire et à déterminer l’impact de ce dispositif sur les recettes fiscales de l’Etat. Cette provision représente certes un manque à gagner en termes de recettes fiscales à court terme, mais celui-ci est provisoire étant donné qu’elle est incorporée au résultat de la banque et, in fine, taxée. Les résultats des estimations indiquent que la provision forfaitaire suit une évolution opposée aux cycles financier et réel lorsque ceux-ci sont approximés, respectivement, par les écarts à la tendance de long terme du prix de l’immobilier résidentiel et du PIB luxembourgeois. Elle contribue également à lisser le profit des banques et, par là même, elle lisse les recettes fiscales et contribue à la stabilisation du solde budgétaire à la suite d’un retournement du cycle. La provision forfaitaire permet donc de mieux couvrir les pertes attendues – insuffisamment couvertes par les provisions spécifiques seules – et limite l’absorption des fonds propres des banques lors des phases basses du cycle. En ce sens, elle peut s’avérer un complément au coussin de fonds propres contracyclique pour préserver la résilience du système bancaire.
Mots-clés : Provisions, Lissage du profit, Régulation bancaire.
Classification JEL : E32 ; G21 ; G28.

2015

100
LOLA 3.0: Luxembourg OverLapping generation model for policy Analysis Introduction of a financial sector in LOLA
en
Luca Marchiori and Olivier Pierrard
November 2015
Abstract

LOLA 2.0 is a dynamic general equilibrium model for the Luxembourg economy, which features overlapping generation dynamics, labormarket frictions à la Diamond-Mortensen- Pissarides and a New Open Economy Macroeconomics structure. This paper presents the model LOLA 3.0, which essentially integrates a financial sector to LOLA 2.0. In contrast to the existing dynamic stochastic general equilibrium (DSGE) literature, the financial sector does not intermediate between resident households and resident firms, but exports wealth management services. We calibrate the model to match the size of the financial sector in terms of employment, value added, net exports and taxes. The 2008 financial crisis has affected Luxembourg’s financial sector and slowed inflows of cross-border workers. Because there is a lot of uncertainty surrounding future growth of the Luxembourg financial sector and cross-border worker inflows, we use LOLA 3.0 to study the evolution of the Luxembourg economy between 2015 and 2060 under alternative scenarios (high – medium – low).


Keywords: Overlapping generations, Long-run projections, Financial sector, Luxembourg.


JEL-Code: D91, E24, E62, F41, J11.

99
Other Real Estate Property in Selected Euro Area Countries
en
Michael ZIEGELMEYER
August 2015
Abstract


After the household main residence (HMR), other real estate property (OREP) accounts for the second largest share of total household net wealth in the euro area. However, OREP remains mainly unstudied. Using Eurosystem HFCS data, I analyse OREP investment in Luxembourg, in selected euro area countries and in the euro area as a whole. For those households that own OREP, it represents an important share of gross wealth and generates non-negligible rental income. I identify several stylised facts of OREP characteristics with respect to their owners, type, use and location.

JEL Classification: D10, D14, D31

Keywords: household finance, individual portfolio choice, real assets

98
The interest rate sensitivity of Luxembourg bond funds: Results from a time-varying model
en
Raphaël JANSSEN and Romuald MORHS
July 2015
Abstract

The primary aim of this work is to study the sensitivity of Luxembourg bond funds to interest rate movements. For this purpose, the dataset compiled at the Banque centrale du
Luxembourg (BCL) since December 2008 is used to analyse the balance sheet composition of Luxembourg bond funds and to measure the interest rate exposure of their
bond portfolio. An econometric model with time-varying parameters is then estimated on monthly data over the sample 2008:1-2014:6 to analyse the evolution of the interest rate
sensitivity of the Net Asset Value (NAV) of Luxembourg bond funds. The main findings of the study are the following. At the end of the period under review, Luxembourg bond
funds have lengthened the residual maturity and the duration of their portfolio, which have returned to a similar level as the one observed in December 2008. This evolution,
which points toward a search-for-yield behaviour in a low interest rate environment, suggests that Luxembourg bond funds have recently become more sensitive to fixedincome
market developments. According to the level of the parameter estimate obtained with the Kalman filter at the end of the sample, a 100 basis points rise in long term
interest rates on the sovereign bond markets associated with an additional 100 basis points rise in the risk premium on the high-yield bond markets would materialise
approximately into a 10% decrease in the NAV of Luxembourg bond funds.
Keywords: Bond funds, risk analysis, security-by-security reporting, Kalman filter.
JEL classification: C32, C81, F30, G11, G23.

97
Is the financial sector Luxembourg’s engine of growth?
en
Paolo GUARDA and Abdelaziz ROUABAH
July 2015
Abstract

This paper measures the links between financial services and other production sectors in the Luxembourg economy. The focus is on propagation within the country, without considering growth abroad. Among the 29 sectors in the annual input-output tables, financial intermediation is one of only four “key sectors” that the Leontief inverse identifies as featuring above-average forward and backward linkages to other production sectors. The links from financial services to other sectors became even stronger from 1995 to 2009. At quarterly frequency, Granger causality tests find that no sector leads financial services, although they also fail to find evidence that financial services lead other sectors. Lack of evidence may be attributed to quarter-on-quarter growth rates deviating from the normal distribution, with “fat tails” possibly reflecting volatility clustering. We therefore estimate univariate ARIMAGARCH models to identify normally distributed innovations in each sector. Comparing these growth innovations at different leads or lags, Cheung-Ng tests find little evidence of crosssector causality-in-mean or causality-in-variance. This time, lack of evidence could reflect time variation in cross-sector correlations, which is confirmed by the Engle-Sheppard test.
Estimated dynamic conditional correlations vary significantly through time, with cross-sector correlations surging during the financial crisis. Dynamic correlations are used to decompose the overall volatility of Luxembourg’s macroeconomic “portfolio” of different production sectors, which responds mostly to changes in cross-sector correlations. In conclusion, the financial sector appears to be strongly linked with the rest of the economy, benefiting from growth in other sectors, which it amplifies and propagates to the whole economy.
JEL classifications: C22; C51; C52; E0
Keywords: Output growth, GARCH models, Dynamic conditional correlations

96
Immigration, occupational choice and public employment
en
Luca MARCHIORI, Patrice PIERETTI and Benteng ZOU
July 2015
Abstract

This paper investigates the theoretical effects of immigration in an occupational choice model with three sectors: a low-skilled, a high-skilled and a public sector. The originality of our approach is to consider (i) intersectoral mobility of labor and (ii) public employment. We highlight the fact that including a public sector is crucial, since omitting it implies that low-skilled immigration unambiguously reduces wages and welfare of all workers. However, when public employment is considered, we demonstrate that immigration increases wages in the high-skilled and the public sectors, provided that the immigrant workforce is not too large and the access to public jobs is not too easy. The average wage of natives may also increase accordingly. Moreover, immigration may improve workers' welfare in each sector. Finally, the mechanism underlying these results does not require complementarity between natives and immigrants.
Keywords: Immigration, occupational choice model, public employment
JEL Classification: J24, J61, J45, H44

95
Investment Funds’ Vulnerabilities: A Tail-risk Dynamic CIMDO Approach
en
Xisong JIN and Francisco NADAL DE SIMONE
Published as “A Framework for Tracking Changes in the Intensity of Investment Funds’ Systemic Risk”. Journal of Empirical Finance, 2015, 29: 343-368.
July 2015
Abstract

This study measures investment funds’ systemic credit risk in three forms: (1) credit risk common to all funds within each of the seven categories National Central Banks report
to the ECB; (2) credit risk in each category of investment fund conditional on distress on another category of investment fund and; (3) the build-up of investment funds’
vulnerabilities which may lead to a disorderly unraveling. The paper uses a novel framework which combines marginal probabilities of distress estimated from a structural
credit risk model with the consistent information multivariate density optimization (CIMDO) methodology and the generalized dynamic factor model (GDFM). The
framework models investment funds’ distress dependence explicitly and captures the time-varying non-linearities and feedback effects typical of financial markets. In addition,
the estimates of the common components of the investment funds’ distress measures may contain some early warning features, and identifying the macro and financial
variables most closely associated with them may serve to guide macro-prudential policy.
The relative importance of these variables differs from those associated with the common components of marginal measures of distress. Thus this framework can
contribute to the formulation of macro-prudential policy.

JEL Classification: C1, E5, F3, G1
Keywords: financial stability; investment funds; procyclicality, macro-prudential policy;
structural credit risk models; probability of distress; non-linearities; generalized dynamic
factor model; dynamic copulas.

2014

94
How do households allocate their assets? Stylised facts from the Eurosystem Household Finance and Consumption Survey
en
Luc ARRONDEL, Laura BARTILORO, Pirmin FESSLER, Peter LINDNER, Thomas Y. MATHÄ, Cristiana RAMPAZZI, Frederique SAVIGNAC, Tobias SCHMIDT, Martin SCHÜRZ and Philip VERMEULEN
Published in International Journal of Central Banking 12(2): 129-220.
December 2014
Abstract
Using the first wave of the Eurosystem Household Finance and Consumption Survey (HFCS), a large micro-level dataset on households’ balance sheets in 15 euro area countries, this paper explores how households allocate their assets. We derive stylised facts on asset participation as well as levels of asset holdings and investigate the systematic relationships between household characteristics and asset holding patterns. Real assets make up the bulk of total assets. Whereas ownership of the main residence varies strongly between countries, the value of the main residence tends to be the major asset for homeowners and represents a significant part of total assets in all countries. While almost all households hold safe financial assets, a low share of households holds risky assets. The ownership rates of all asset categories generally increase with wealth (and income). The significance of inheritances for home ownership and holding of other real estate is remarkable. We tentatively link differences in asset holding patterns across countries to differences in institutions, such as mortgage market institutions and house price-to-rent ratios.

Keywords: Household financial decisions, individual portfolio choice, real and financial assets, cross-country comparisons

JEL Classification: D1, D3

 

93
Household Saving Behaviour and Credit Constraints in the Euro Area
en
Julia LE BLANC, Alessandro PORPIGLIA, Federica TEPPA, Junyi ZHU and Michael ZIEGELMEYER
Published in International Journal of Central Banking 12(2): 15-69.
December 2014
Abstract
We study the role of household saving behaviour, of individual motives for saving and that of perceived credit constraints in 15 Euro Area countries.
The empirical analysis is based on the Household Finance and Consumption Survey, a new harmonized data set collecting detailed information on wealth holdings, consumption and income at the household level. Since the data is from 2008-2011, strong conclusions as regards the present are difficult to draw.
This is because the crisis may have affected the data, especially in countries that were severely hit. Nevertheless we find evidence of some degree of homogeneity across countries with respect to saving preferences and the relative importance of different motives for saving. In addition, credit constraints are more heterogeneous across geographic regions and perceived to be binding for specific groups of respondents. Households living in Mediterranean countries report to be more subject to binding credit constraints than households living in Non-Mediterranean countries. Household characteristics and institutional macroeconomic variables are significant and economically important determinants of household saving preferences and credit constraints.

 

Jel -Classification: C8; D12; D14; D91

Keywords: Household Finance and Consumption; Life Cycle Saving; Survey Data

 

92
The Eurosystem, the banking sector and the money market
en
Paul MERCIER
June 2014
Abstract

Since October 2008, the credit granted by the Eurosystem to the Euro zone banking sector increased in a substantial way, as a result of the implementation of nonconventional measures, in particular the fact that the Eurosystem left to the banks the faculty to determine themselves the quantity of credit that they wished to obtain.

This paper first recalls the foundations of the interbank money market and then analyses the evolution of the “net liquidity needs” of the banking sector. It provided a clarification of the relation between the Eurosystem, the euro zone banking sector and the money market. In particular, it develops arguments against the myth of “idle money parked with the Eurosystem”.

Keywords: monetary policy implementation, central bank, central bank’s balance sheet, money market, liquidity deficit, excess liquidity

91
Household wealth in the euro area: The importance of intergenerational transfers, homeownership and house price dynamics
en
Thomas Y. MATHÄ, Alessandro PORPIGLIA and Michael ZIEGELMEYER
June 2014
Abstract

Results from the Eurosystem Household Finance and Consumption Survey reveal substantial variation in household net wealth across euro area countries that await explanation. This paper focuses on three main factors for the wealth accumulation process, i) homeownership, ii) housing value appreciation and iii) intergenerational transfers. We show that these three factors, in addition to the common household and demographic factors, are relevant for the net wealth accumulation process in all euro area countries, and moreover that, using various decomposition techniques, differences therein, in particular in homeownership rates and house price dynamics, are important for explaining wealth differences across euro area countries.

Keywords: household wealth, homeownership, property prices, inheritance, euro area

JEL Codes: D31, E21, O52, C42

90
Wealth differences across borders and the effect of real estate price dynamics: Evidence from two household surveys
en
Thomas Y. MATHÄ, Alessandro PORPIGLIA and Michael ZIEGELMEYER
May 2014
Abstract

Crossing borders, be it international or regional, often go together with price, wage or indeed wealth discontinuities. This paper identifies substantial wealth differences between Luxembourg resident households and cross-border commuter households despite their similar incomes. The average (median) net wealth difference is estimated to be €367,000 (€129,000) and increases for higher percentiles. Using several different regression and decomposition techniques, spatial (regional) differences in real estate price developments, and thus differences in accumulated nominal capital gains are shown to be one main driving factor for these wealth differences. Other factors contributing to the observed wealth differences are differences in age, income, education and other household characteristics.

Keywords: household survey, wealth, real estate price dynamics, cross-border commuting

JEL Codes: D31, J61, F22, R23, R31

89
Cross-border commuting and consuming: An empirical investigation
en
Thomas Y. MATHÄ, Alessandro PORPIGLIA and Michael ZIEGELMEYER
March 2014
Abstract

This paper analyses empirically how cross-border consumption varies across product and services categories and across household characteristics. It focuses on the part of crossborder sales that arise due to work-related cross-border crossings; it analyses the crossborder consumption behaviour of cross-border commuter households residing in Belgium, France and Germany and working in Luxembourg. In total, it is estimated that these households spend €925 million per annum in Luxembourg, reflecting about 17% of their gross annual income from Luxembourg and contributing about 10% to total household final consumption expenditure in Luxembourg. Cross-border consumption expenditure is shown to depend on individual and household characteristics, such as total household income, the number of cross-border commuters in the household, distance between home and work, as well as price level (index) differences between Luxembourg and its neighbouring countries.Cross-border commuters take advantage of existing arbitrage opportunities.

Keywords: cross-border shopping, commuting, consumption, expenditure, households

JEL Codes: F15, R12, R23, J61

88
2007-2013: This is what the Indicator told us - Evaluating the Performance of Real-Time Nowcasts from a Dynamic Factor Model
en
Muriel NGUIFFO-BOYOM
March 2014
87
Déficit, Croissance et bien-être intergénérationnel: comment réformer les pensions au Luxembourg?
fr
Muriel BOUCHET, Luca MARCHIORI et Olivier PIERRARD
March 2014
Abstract

Outre au problème de vieillissement de la population, le Luxembourg devra faire face au départ à la retraite de larges contingents de travailleurs non-résidents ainsi qu’à l’essoufflement attendu de l’immigration et de l’arrivée de futurs frontaliers. Le financement des systèmes de pensions par répartition devrait s’avérer plus difficile que dans d’autres pays.

 Nos précédentes études, basées sur le modèle macroéconomique LOLA, montrent que les changements démographiques vont sérieusement hypothéquer la santé des finances publiques et que la récente réforme des pensions - même si elle va dans la bonne direction - n’est pas suffisante pour régler le problème des pensions et maintenir des finances publiques saines.

Dans cette étude, nous proposons et évaluons une réforme globale, appelée LOLA. Cinq conclusions majeures ressortent de notre analyse. Premièrement, la “réforme LOLA” permet de contenir le problème des finances publiques à moyen terme (jusqu’en 2060) en maintenant le déficit public hors soins de santé aux alentours de 3%du PIB. Deuxièmement, elle préserve la croissance économique et limite la perte de bien-être des générations actuelles. Troisièmement, elle assure une plus grande équité intergénérationnelle que la récente réforme des pensions. Quatrièmement, ces conclusions se vérifient pour différents cas de figure - optimistes et pessimistes - d’évolution de la démographie et du travail frontalier. Finalement, nous montrons comment mettre en oeuvre la “réforme LOLA” en pratique et de façon complémentaire à la récente réforme.

Mots-clés : Générations imbriquées, Projections de long-terme, Pensions, Luxembourg.

JEL-Code : D91, E24, E62, F41, J11.

86
The Impact of the Exchange Rate on Luxemburg Equity Funds
en
Mustafa KULTUR and Romuald MORHS
February 2014
Abstract

The aim of this work is to investigate the impact of the exchange rate on Luxembourg equity funds. For this purpose, the dataset compiled by the Banque centrale du Luxembourg is used to exploit the detailed information on the currency composition of assets and liabilities and to deliver a statistical decomposition of the exchange rate valuation effect on both sides of the balance sheet. In addition, an econometric analysis relying on the International Capital Asset Pricing Model (ICAPM) is carried out to estimate the sensitivity of the Net Asset Value (NAV) to exchange rate movements. The main findings of the study are the following. (i) Equity funds in Luxembourg are highly internationalized as for the currency composition of their balance sheet, with 54% of noneuro denominated shares on the liability side, and 81% of non-euro denominated securities on the asset side at the end of June 2013. (ii) The currency composition of Luxembourg equity funds has changed since the onset of the financial crisis, with relatively more USD-denominated shares on the liability side and relatively more emerging markets currency-denominated securities on the asset side. (iii) This structural change in the currency composition of Luxembourg equity funds delivered a higher sensitivity of the NAV to exchange rate movements, in particular with respect to the emerging markets currencies. (iv) Despite this increased sensitivity to the exchange rate, stock market developments remain the most important driver for the activity of Luxembourg equity funds in the medium run. From this point of view, the EUR/USD exchange rate provided a natural hedging against stock market fluctuations during the crisis period, thereby mitigating the aggregate evolution of the NAV expressed in euro.

Keywords: Equity funds, risk analysis, ICAPM, fixed-effects model.

JEL classification: F30, G11, G23.

85
Household Risk taking after the Financial Crisis
en
Sarah NECKER and Michael ZIEGELMEYER
Published in The Quarterly Review of Economics and Finance (2016), 59, 141-160
February 2014
Abstract

This study investigates whether and how the crisis in 2008/2009 affects households' risk attitudes, subjective risk and return expectations, and planned financial risk taking using the German SAVE study. Households' wealth change from end-2007 to end-2009 is not found to have an effect. However, households that attribute losses to the crisis decreased their risk tolerance and planned risk taking; the probability of expecting an increase in risks and returns is raised. According to economic theory, wealth changes attributed to a dramatic event should not have a different effect than other wealth changes. The results suggest an emotional reaction.

Keywords: Financial and economic crisis, risk preferences, stock market expectations, wealth uctuations, emotions

JEL-Codes: D81, D14, G11

 

84
Household Risk Management and Actual Mortgage Choice in the Euro Area
en
Michael EHRMANN and Michael ZIEGELMEYER
Forthcoming as Mortgage choice in the euro area - Macroeconomic determinants and the effect of monetary policy on debt, Journal of Money, Credit and Banking.
February 2014
Abstract

Mortgages constitute the largest part of household debt. An essential choice when taking out a mortgage is between fixed-interest-rate mortgages (FRMs) and adjustable-interest-rate mortgages (ARMs). However, so far, no comprehensive cross-country study has analyzed what determines household demand for mortgage types, a task that this paper takes up using new data for the euro area. Our results support the hypothesis of Campbell and Cocco (2003) that the decision is best described as one of household risk management: income volatility reduces the take-out of ARMs, while increasing duration and relative size of the mortgages increase it. Controlling for other supply factors through country fixed effects, loan pricing also matters, as expected, with ARMs becoming more attractive when yield spreads rise. The paper also conducts a simulation exercise to identify how the easing of monetary policy during the financial crisis affected mortgage holders. It shows that the resulting reduction in mortgage rates produced a substantial decline in debt burdens among mortgage-holding households, especially in countries where households have higher debt burdens and a larger share of ARMs, as well as for some disadvantaged groups of households, such as those with low income.

JEL-codes: D12, E43, E52, G21

Keywords: mortgage choice, fixed-rate mortgage, adjustable-rate mortgage, household finance, monetary policy.

 

2013

83
News Shocks, Real Exchange Rates and International Co-Movements
en
Kyriacos LAMBRIAS
July 2013
Abstract

We propose a fully flexible, complete-market model of the international business cycle that is consistent with two major empirical facts: positive cross-country co-movement of economic aggregates and a negative correlation between the real exchange rate and relative consumption (the Backus-Smith puzzle). The model features non-tradable goods, zero wealth effects on labour supply, imperfect substitutability of capital across sectors and variable capacity utilisation. The latter can generate strong Balassa-Samuelson effects that drive a low consumption-real exchange rate correlation. Cyclical movements across countries are also positively correlated. The novelty of our paper is to introduce changes in expectations (news-shocks) as an explanation to the Backus-Smith puzzle through the wealth effects of future changes in income, while being consistent with expectations-driven economic expansions.

Keywords: News-Driven Cycles, Backus-Smith Puzzle, Real-Exchange Rates

JEL Classiffication: F41, F44

82
Banking Systemic Vulnerabilities: A Tail-risk Dynamic CIMDO Approach
en
Xisong JIN and Francisco NADAL DE SIMONE
Published in Journal of Financial Stability, 2014, 14: 81-101.
January 2013
Abstract

This study proposes a novel framework which combines marginal probabilities of default estimated from a structural credit risk model with the consistent information multivariate density optimization (CIMDO) methodology of Segoviano, and the generalized dynamic factor model (GDFM) supplemented by a dynamic t-copula. The framework models banks’ default dependence explicitly and captures the time-varying non-linearities and feedback effects typical of financial markets. It measures banking systemic credit risk in three forms: (1) credit risk common to all banks; (2) credit risk in the banking system conditional on distress on a specific bank or combinations of banks and; (3) the buildup of banking system vulnerabilities over time which may unravel disorderly. In addition, the estimates of the common components of the banking sector short-term and conditional forward default measures contain early warning features, and the identification of their drivers is useful for macroprudential policy. Finally, the framework produces robust outof-sample forecasts of the banking systemic credit risk measures. This paper advances the agenda of making macroprudential policy operational.

JEL Classification: C30, E44, G1

Keywords: financial stability; procyclicality, macroprudential policy; credit risk; early warning indicators; default probability, non-linearities, generalized dynamic factor model; dynamic copulas; GARCH.

81
Fluctuations économiques et dynamique de la constitution de provisions pour créances douteuses des banques luxembourgeoises
fr
Sabbah GUEDDOUDJ
January 2013
Abstract

This work uses dynamic panel data methods to identify the determinants of the loan loss provisioning ratio in the Luxembourg banking sector from 1995 Q1 to 2011 Q4. The study is motivated by the theoretical framework assuming that both macroeconomic and microeconomic variables have a strong impact on the loans quality and quantity. The empirical results for Luxembourg confirm the findings of previous studies: both macroeconomic and bank-specific variables have a large impact on the development of the loan loss provisioning ratio. Indeed, the results show that GDP growth, house prices, ROA and the solvency ratio have a negative impact on the loan loss provisioning ratio, whereas the unemployment and interest rate increase the ratio.

JEL classification codes : G21, C23.

Keywords: loan loss provisioning ratio Luxembourg banking system, macroeconomic factors and specific banking factors, dynamic data panel methods.

2012

80
The Determinants of Short Term Funding in Luxembourgish Banks
en
Dirk MEVIS
October 2012
Abstract

This paper attempts to empirically identify the determinants of Luxembourgish banks’ reliance on short term funding. The emphasis lies on making the link to developments in the macroeconomic environment and the build up of systemic risk while institution-specific factors are being controlled for. The paper provides evidence for a close link between exuberant credit developments at the aggregate level and short term funding of banks. This finding supports the view that one possible channel for increasing vulnerabilities during a lending boom may run through increased reliance of banks on short term funding. When it comes to bank specific variables, bank size has an important effect on the tendency to contract short term funding. This result is in line with recent work on leverage procyclicality in the banking sector. The results also imply that currently discussed regulatory standards on the funding structure of banks could mitigate the build up of vulnerabilities.

79
An Empirical Study on the Impact of Basel III Standards on Banks' Default Risk: the Case of Luxembourg
en
Gaston GIORDANA and Ingmar SCHUMACHER
October 2012
Abstract

We study how the Basel III regulations, namely the Capital-to-assets ratio (CAR), the Net Stable Funding Ratio (NSFR) and the Liquidity Coverage Ratio (LCR), are likely to impact the banks’ profitabilities (i.e. ROA), capital levels and default. We estimate historical series of the new Basel III regulations for a panel of Luxembourgish banks for a period covering 2003q2 to 2011q3. We econometrically investigate whether historical LCR and NSFR components as well as CAR positions are able to explain the variation in a measure of a bank’s default risk (proxied by Z-Score), and how these effects make their way through banks’ ROA and CAR. We find that the liquidity regulations induce a decrease in average probabilities of default. Conversely, while we find that the LCR has an insignificant impact on banks’ profitability, those banks with higher NSFR (through lower required stable funding, the NSFR denominator) are found to be more profitable. Additionally, we use a model of bank behavior to simulate the banks’ optimal adjustments of their balance sheets as if they had had to adhere to the regulations starting in 2003q2. Then we predict, using our preferred econometric model and based on the simulated data, the banks’Z-Score and ROA. The simulation exercise suggests that basically all banks would have seen a decrease in their default risk if they had previously adhered to Basel III.

Keywords: Basel III, bank default, Z-Score, profitability, ROA, GMM estimator, simulation, Luxembourg.

JEL classification: G21, G28.

78
Income, wealth and consumption of cross-border commuters to Luxembourg
en
Thomas MATHÄ, Alessandro PORPIGLIA and Michael ZIEGELMEYER
October 2012
Abstract

Exceeding 40% of domestic employment cross-border commuters are extremely important to Luxembourg’s economy and labour market in general. This paper presents unique information on their income, wealth and consumption using representative survey data from cross-border commuter households to Luxembourg. The estimated average total net wealth of cross-border commuter households is about €240,000, which falls substantially short of comparable estimates for Luxembourg resident households exceeding €700,000. Cross-border commuters do not only receive money from but also leave money in Luxembourg. In terms of consumption expenditures, they spend on average more than €9,300 per year inside Luxembourg’s borders, representing about 15% of their total gross income and 17% of their gross income from Luxembourg.

Keywords: household, survey, wealth, income, consumption, cross-border, commuter

JEL Codes: D31, C81, C83, J61

77
Macroeconomic Conditions and Leverage in Monetary Financial Institutions: Comparing European countries and Luxembourg
en
Gaston GIORDANA and Ingmar SCHUMACHER
October 2012
Abstract

In this article we study the interaction between leading macroeconomic indicators (industrial production, stock prices, consumer sentiment and real interest rates) and financial sector leverage in major European countries. We base our analysis on monthly, country-aggregated panel VAR models for the pre-crisis period January 2003 to August 2008, and the crisis period September 2008 to June 2011. We find little evidence for a relationship between macroeconomic variables and leverage in the pre-crisis period, with only real interest rates having a negative short-term impact on leverage growth. We find positive feedback loops between sentiment and stock prices as well as MFI assets in the pre-crisis period, and a positive impact of real interest rate changes on equity and asset growth. Thus, balance sheet expansions were driven by sentiment and stock prices, while real interest changes allowed MFIs to profit from higher spreads. During the crisis period (starting in September 2008), we observe a countercyclical impact from leverage on sentiment and stock prices, while sentiment and stock prices bear a pro-cyclical impact on leverage. In contrast to this, MFI leverage in Luxembourg is negatively impacted by stock prices, suggesting significant impacts from marking-to-market.We conclude that leverage drives expectations of financial instability (via e.g. default expectations), while sentiment and stock prices drive financial institutions’ investment decisions (via e.g. collateral value effects).

Keywords: leverage; macroeconomic conditions; Panel VAR; GMM estimation.

JEL classification: G21; G32; E32.

76
LOLA 2.0: Luxembourg OverLapping generation model for policy Analysis
en
Luca MARCHIORI and Olivier PIERRARD
July 2012
Abstract

Beyond cyclical movements, it may be helpful to understand how structural forces or policies shape an economy in the longer term. With such remote horizons, it is crucial to base analysis on an appropriate tool. In this paper, we build an overlapping generation structure with New Open Economy Macroeconomics and labour market frictions à la Diamond-Mortensen-Pissarides. The main novelty over LOLA 1.0 is the integration of current account and exchange rate dynamics according to the New Open Economy Macroeconomics approach. We calibrate the model on Luxembourg data. By way of illustration, we study the interactions between expected demographic changes, labour market dynamics and public finance, and we look at the recently proposed policy responses.

Keywords: Overlapping generations, Long-run projections, Imbalances, Luxembourg.

JEL-Code: D91, E24, E62, F41, J11.

75
An Early-warning and Dynamic Forecasting Framework of Default Probabilities
en
Xisong JIN and Francisco NADAL DE SIMONE
June 2012
Abstract

The estimation of banks’ marginal probabilities of default using structural credit risk models can be enriched incorporating macro-financial variables readily available to economic agents. By combining Delianedis and Geske’s model with a Generalized Dynamic Factor Model into a dynamic t-copula as a mechanism for obtaining banks’ dependence, this paper develops a framework that generates an early warning indicator and robust out-of-sample forecasts of banks’ probabilities of default. The database comprises both a set of Luxembourg banks and the European banking groups to which they belong. The main results of this study are, first, that the common component of the forward probability of banks’ defaulting on their long-term debt, conditional on not defaulting on their short-term debt, contains a significant early warning feature of interest for an operational macroprudential framework driven by economic activity, credit and interbank activity. Second, incorporating the common and the idiosyncratic components of macro-financial variables improves the analytical features and the out-of-sample forecasting performance of the framework proposed.

JEL Classification: C30, E44, G1

Keywords: financial stability; macroprudential policy; credit risk; early warning indicators;default probability, Generalized Dynamic Factor Model; dynamic copulas; GARCH.

74
Backing out of private pension provision – Lessons from Germany
en
Michael ZIEGELMEYER and Julius NICK
Published in Empirica - Journal of European Economics, 2013, 40(3): 505-539.
July 2012
Abstract
Financing pensions in the EU is a challenge. Many EU countries introduced private pension schemes to compensate declining public pension levels due to reforms made necessary by demographic change. In 2001, Germany introduced the Riester pension. Ten years after introduction the prevalence rate of this voluntary private pension scheme approximates 37%. However, numerous criticisms raise doubts that the market for Riester products is transparent. Using the 2010 German SAVE survey, this paper investigates for the first time terminated and dormant Riester contracts on a household level. Respectively 14.5% and 12.5% of households who own or have owned a Riester contract terminated it or stopped paying contributions. We find that around 45% of terminated or dormant Riester contracts are caused at least partly by product-related reasons, which is significantly higher than for endowment life insurance contracts. Uptake of a new contract after a termination is more likely if termination is productrelated. Nevertheless, after a termination 73% of households do not sign a new contract, which can have serious long-term consequences for old-age income. Households with low income, low financial wealth or low pension literacy are more likely to have terminated or dormant contracts. Low income and low financial wealth households also have the lowest prevalence rate of Riester contracts and are at higher risk of old-age poverty.

JEL: D12, D91, D14, J26

Key words: private pension, Riester, termination, financial literacy, SAVE

73
The Luxembourg household finance and consumption survey (LU-HFCS): Introduction and results
en
Thomas Y. MATHÄ, Alessandro PORPIGLIA and Michael ZIEGELMEYER
May 2012
Abstract
This paper introduces the Luxembourg Household Finance and Consumption Survey (LUHFCS), presents its background and aim, the field phase, the data treatment, including editing, imputation, and anonymisation, and some basic descriptive findings. The estimated average (median) total net wealth of Luxembourg households is about €733,000 (€403,000) - an extremely high value by international standards, which is likely to be driven by high incomes and correspondingly high prices of real estate in Luxembourg. Average total gross income and total net wealth generally increase with household size, with age up to retirement age and with education. On average, total gross income of Luxembourg national and foreign households do not seem to differ significantly. This cannot be said for total net wealth and net real wealth, which, on average, is more than double as high for Luxembourg households than for foreign households.

Keywords: Household, survey, editing, multiple imputation, wealth, income

JEL Codes: D31, D14, C81, C83

72
A financial social accounting matrix (SAM) for Luxembourg
en
Amela HUBIC
Published in: Bulletin BCL 2013/2
June 2012
Abstract
A Social Accounting Matrix (SAM) is a comprehensive, economy-wide data framework of real accounts, typically representing the economy of a nation but also providing the link between the economy and the rest of the world in terms of trade flows. However, in order to have a complete picture of the transactions taking place in an economy, real accounts are not sufficient and need to be complemented with financial accounts. This paper describes the construction of the first financial SAM for Luxembourg for the year 2007 by integrating both financial institutions and financial instruments into the real SAM. This powerful tool has two principal objectives: first, to organize the information that would allow an analysis of the structure of the economy of Luxembourg and second, to provide the benchmark data set for the creation of a financial computable general equilibrium (CGE) model.

Keywords: financial social accounting matrix, computable general equilibrium models, financial accounts, portfolio choice, financial institutional sectors

JEL Classification: D30, C68, D57, G11, G20, D53

71
Macro-Financial Linkages: evidence from country-specific VARs
en
Paolo GUARDA and Philippe JEANFILS
March 2012
Abstract

This paper estimates the contribution of financial shocks to fluctuations in the real economy by augmenting the standard macroeconomic vector autoregression (VAR) with five financial variables (real stock prices, real house prices, term spread, loans-to-GDP ratio and loans-to-deposits ratio). This VAR is estimated separately for 19 industrialised countries over 1980Q1-2010Q4 using three alternative measures of economic activity: GDP, private consumption or total investment. Financial shocks are identified by imposing a recursive structure (Choleski decomposition). Several results stand out. First, the effect of financial shocks on the real economy is fairly heterogeneous across countries, confirming previous findings in the literature. Second, the five financial shocks provide a surprisingly large contribution to explaining real fluctuations (33% of GDP variance at the 3-year horizon on average across countries) exceeding the contribution from monetary policy shocks. Third, the most important source of real  fluctuations appears to be shocks to asset prices (real stock prices account for 12% of GDP variance and real house prices for 9%). Shocks to the term spread or to leverage (credit-to-GDP ratio or loans-to-deposits ratio) each contribute an additional 3-4% of GDP variance. Fourth, the combined contribution of the five financial shocks is usually higher for fluctuations in investment than in private consumption. Fifth, historical decompositions indicate that financial shocks provide much more important contributions to output fluctuations during episodes associated with financial imbalances (both booms and busts). This suggests possible time-variation or non-linearities in macrofinancial linkages that are left for future research.

2011

70
How do firms adjust in a crisis? Evidence from a survey among Luxembourg firms
en
Patrick LÜNNEMANN and Thomas Y. MATHÄ
December 2011
Abstract
This paper uses survey evidence to analyse the response of Luxembourg firms to the economic and financial crisis in 2008-2009. Approximately three out of four firms reported that they were negatively affected by the crisis, mostly due to a fall in demand, but also due to financing difficulties and difficulties being paid for their products and services. The measures to adjust vary with the type and the size of the shock experienced. Firms aim at cutting costs in the first place, predominantly via a reduction of non-labour cost, but also by cutting temporary staff, bonuses and overtime compensation. While base wage freezes became much more common during the recent crisis, cuts in base wages remained very rare and few firms only reduced permanent staff in an attempt to reduce costs. The most important reasons for not cutting base wages relate to labour market regulation / existing wage agreements and the concern of reducing staff morale and effort. Finally, our results suggest that the assessment of adjustment measures and obstacles to wage cuts may depend on the economic environment and the actual situation of the firm.

Keywords: Economic and financial crisis, reaction to shocks, wage rigidity

JEL Codes: C25, D22

69
Demography, capital flows and unemployment
en
Luca MARCHIORI, Olivier PIERRARD and Henri R. SNEESSENS
October 2011
Abstract
This paper contributes to the already vast literature on demography-induced international capital flows by examining the role of labor market imperfections and institutions. We setup a two-country overlapping generations model with search unemployment, which we calibrate on EU15 and US data. Labor market imperfections are found to significantly increase the volume of capital flows, because of stronger employment adjustments in comparison with a competitive economy. We next exploit themodel to investigate how demographic asymmetriesmay have contributed to unemployment and welfare changes in the recent past (1950-2010). We show that a policy reform in one country also has an impact on labor markets in other countries when capital is mobile.

Keywords: demographics; capital flows; overlapping generations; general equilibrium; unemployment

JEL Classification: J11; F21; D91; C68

68
Is foreign-bank efficiency in financial centers driven by home-country characteristics?
en
Claudia CURI, Paolo GUARDA, Ana LOZANO-VIVAS and Valentin ZELENYUK
Published as “Is foreign-bank efficiency in financial centers driven by home or host country characteristics?” Journal of Productivity Analysis, 2013, 40(3): 367-385.
October 2011
Abstract
This paper investigates the effects of home country banking regulations on the performance of foreign banks in Luxembourg’s financial center. We control for the main regulatory indicators, such as capital requirements, private monitoring, official disciplinary power and restrictions on bank activities, accounting for the regulatory regime applied to foreign banks. We also control for the level of GDP in the home country and its position in the business cycle. The two-stage bootstrap method proposed by Simar and Wilson (2007) is applied to bank panel data covering 1999-2009. The analysis carries policy implications for bank regulators in both home and host countries and provides insight into the choice between establishing a branch or a subsidiary, when developing cross-border activities through financial centers.

JEL classification: G15, G21; G28, C14

Keywords: Foreign bank efficiency, Home-host country characteristics, Bank regulation, Data Envelopment Analysis, Bootstrap.

67
Changes in Bank specialisation: comparing foreign subsidiaries and branches in Luxembourg
en
Claudia CURI, Paolo GUARDA and Valentin ZELENYUK
October 2011
Abstract
Presumably, foreign banks open subsidiaries and branches in Luxembourg to perform different tasks. This paper studies the balance sheet structure of banks in Luxembourg, testing for differences across groups and across periods. Non-parametric methods yield several findings. First, specialisation and heterogeneity vary across years as well as across different market segments. Second, comparing subsidiaries and branches, estimated distributions across banks have been relatively similar for Interbank Loans but have become rather different for Interbank Deposits. For Customer Loans and Customer Deposits, the differences across groups are generally greater, especially for Customer Deposits. Third, in 2009 the financial crisis generally sharpened the differences between subsidiaries and branches for all variables considered. Fourth, long-term changes between 1995 and 2007 appeared to be (temporarily?) reversed between 2007 and 2009 by the financial crisis.

JEL Classification: C14; G21, D30

Keywords: Luxembourg Banks; Banking activities; Convergence; Distribution Dynamics; Non-Parametric kernel

66
The leverage cycle in Luxembourg's banking sector
en
Gaston GIORDANA and Ingmar SCHUMACHER
Published as What are the bank-specific and macroeconomic drivers of banks’ leverage? Evidence from Luxembourg”, Empirical Economics, 2013, 45(2): 905-928.
October 2011
Abstract
In this article we investigate the leverage cycle in Luxembourg’s banking sector using individual bank-level data for the period 2003 Q1 to 2010 Q1. We discuss the mechanics behind the leverage cycle in Luxembourg’s banks and show that these banks predominantly adjust leverage by changing both loans and deposits. One of our findings is that Luxembourg’s banks have a procyclical leverage. This procyclicality is not due to marking-to-market but because Luxembourg’s banks are liquidity providers to the EU banking sector. This also explains the different evolution of leverage compared to the US commercial banks (Adrian and Shin [1]) that, even though their balance sheet structure is similar to that of the Luxembourgish banks, target a constant leverage. To further understand what drives leverage in Luxembourg’s banks we empirically investigate the role of bank characteristics as well as real, financial and expectation variables that proxy for macroeconomic conditions in the pre-crisis and crisis period. We find that off-balance sheet exposures have different effects in the pre-crisis and crisis period, and that the share of liquid assets in the portfolio only affects the amount of security holdings. In terms of macroeconomic variables, we find that the Euribor-OIS spread is a significant driver of the build-up in leverage in the pre-crisis period. The reason is that most banks in Luxembourg are either branches or subsidiaries. This, firstly, makes leverage a less relevant indicator of riskiness for investors. Secondly, it implies that in times of liquidity shortages, mother companies or groups demand further liquidity from their branch or subsidiary. The downturn in leverage during the crisis can be accredited to reductions in expectations, which we proxy by an economic sentiment indicator. It can also be explained by increasing bond prices which induce depositors to shift their funds from bank deposits into bonds. We find no important role for GDP growth.

JEL classification: E51, E52, E58, G21, G28.

Keywords: leverge dynamics, banking sector, GMM estimation, crisis effect.

65
Market and book based models of probability of default for developing macroprudential policy tools
en
Xisong JIN and Francisco NADAL DE SIMONE
October 2011
Abstract
The recent financial crisis raised awareness of the need for a framework for conducting macroprudential policy. Identifying as early as possible and addressing the buildup of endogenous imbalances, exogenous shocks, and contagion from financial markets, market infrastructures, and financial institutions are key elements of a sound macroprudential framework. This paper contributes to this literature by estimating several models of default probability, two of which relax two key assumptions of the Merton model: the assumption of constant asset volatility and the assumption of a single debt maturity. The study uses market and banks’ balance sheet data. It finds that systemic risk in Luxembourg banks, while mildly correlated with that of European banking groups, did not increase as dramatically as it did for the European banking groups during the heights of the financial crisis. In addition, it finds that systemic risk has declined during the second half of 2010, both for the banking groups as well as for the Luxembourg banks. Finally, this study illustrates how models of default probability can be used for event-study purposes, for simulation exercises, and for ranking default probabilities during a period of distress according to banks’ business lines. As such, this study is a stepping stone toward developing an operational framework to produce quantitative judgments on systemic risk and financial stability in Luxembourg.

JEL Classification: C30, E44, G1,

Keywords: financial stability; credit risk; structured products; default probability, GARCH.

64
On the job search and cyclical unemployment: crowding out vs. vacancy effets
en
Daniel MARTIN and Olivier PIERRARD
Published in Journal of Economic Dynamics and Control, 2014, 44(3): 235-250.
October 2011
Abstract
We incorporate on-the-job search (OTJS) into a real business cycle model in order to study whether OTJS increases the cyclical volatility of unemployment and vacancies. The increased search of employed workers during expansions has two effects on the unemployed: it induces firms to openmore vacancies, but employedworkers also crowd out unemployed workers in the job search. The overall effect of OTJS on unemployment volatility is thus ambiguous. We showanalytically and numerically that the difference between the (employer’s share of the) surplus ofmatchwith a previously employed versus a previously unemployed job seeker determines the degree to which OTJS increases unemployment volatility. We use this result to re-consider some related papers of OTJS and explain the amplification of volatility they obtain.

Keywords: on-the-job search, cyclical properties

JEL classification: E24, E32, J64

63
An MVAR Framework to Capture Extreme Events in Macro-Prudential Stress Tests
en
Paolo GUARDA, Abdelaziz ROUABAH and John THEAL
Published in Journal of Risk Model Validation 7(4).
October 2011
Abstract
The stress testing literature abounds with reduced-form macroeconomic models that are used to forecast the evolution of the macroeconomic environment in the context of a stress testing exercise. These models permit supervisors to estimate counterparty risk under both baseline and adverse scenarios. However, the large majority of these models are founded on the assumption of normality of the innovation series. While this assumption renders the model tractable, it fails to capture the observed frequency of distant tail events that represent the hallmark of systemic financial stress. Consequently, these kinds of macro models tend to underestimate the actual level of credit risk. This also leads to an inaccurate assessment of the degree of systemic risk inherent in the financial sector. Clearly this may have significant implications for macro-prudential policy makers. One possible way to overcome such a limitation is to introduce a mixture of distributions model in order to better capture the potential for extreme events. Based on the methodology developed by Fong, Li, Yau and Wong (2007), we have incorporated a macroeconomic model based on a mixture vector autoregression (MVAR) into the stress testing framework of Rouabah and Theal (2010) that is used at the Banque centrale du Luxembourg. This allows the counterparty credit risk model to better capture extreme tail events in comparison to models based on assuming normality of the distributions underlying the macro models. We believe this approach facilitates a more accurate assessment of credit risk.

JEL classification: C15, E44, G01, G21

Keywords: financial stability, stress testing, MVAR, mixture of normals, VAR, tier 1 capital ratio, counterparty risk, Luxembourg banking sector

62
Aging and Pensions in General Equilibrium: Labor Market Imperfections Matter
en
David de la CROIX, Olivier PIERRARD and Henri R. SNEESSENS
Published in Journal of Economic Dynamics and Control, 2013, 37(1): 104-124.
July 2011
Abstract
This paper re-examines the effects of population aging and pension reforms in an OLG model with labor market frictions. The most important feature brought about by labor market frictions is the connection between the interest rate and the unemployment rate. Exogenous shocks (such as aging) leading to lower interest rates also imply lower equilibrium unemployment rates, because lower capital costs stimulate labor demand and induce firms to advertize more vacancies. These effects may be reinforced by increases in the participation rate of older workers, induced by the higher wage rates and the larger probability of finding a job. These results imply that neglecting labor market frictions and employment rate changes may seriously bias the evaluation of pension reforms when they have an impact on the equilibrium interest rate.

 

Keywords: Overlapping Generations, Search Unemployment, Labor Force Participation, aging, Pensions, Labor Market

JEL-Code: E24, H55, J26, J64

61
The Impact of the Basel III Liquidity regulations on the Bank Lending Channel: a Luxembourg Case Study
en
Gaston GIORDANA and Ingmar SCHUMACHER
Published as “Bank liquidity risk and monetary policy. Empirical evidence on the impact of Basel III liquidity standards”, International Review of Applied Economics, 2013, 27(5): 633-655.
June 2011
Abstract

In this paper we study the impact of the Basel III liquidity regulations, namely the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR), on the bank lending channel in Luxembourg. For this aim we built, based on individual bank data, timeseries of the LCR and NSFR for a sample of banks covering between 82% and 100% of total assets of the banking sector. Additionally, we simulated the optimal balance sheet adjustments needed to adhere to the regulations. We extend the existing literature on the identification of the bank lending channel by adding as banks characteristics the estimated shortfalls in both the LCR and NSFR. We find a significant role for the bank lending channel in Luxembourg which mainly works through small banks with a large shortfall in the NSFR. We also show that big banks are able to increase their lending following a contractionary monetary policy shock, in line with the fact that big banks in Luxembourg are liquidity providers. Our extrapolation and simulation results   suggest that the bank lending channel will no longer be effective in Luxembourg once banks adhere to the Basel III liquidity regulations. We find that adhering to the NSFR may reduce the bank lending channel more strongly than complying with the LCR.

JEL classification: E51, E52, E58, G21, G28.

Keywords: bank, bank lending channel, monetary policy, Basel III, LCR, NSFR.

60
Subprime Consumer Credit Demand: Evidence from a Lender's Pricing Experiment
en
Sule ALAN, Ruxandra DUMITRESCU and Gyongyi LORANTH
February 2011
Abstract
We test the interest rate sensitivity of subprime credit card borrowers using a unique panel data set from a UK credit card company. What is novel about our contribution is that we were given details of a randomized interest rate experiment conducted by the lender between October 2006 and January 2007. We find that individuals who tend to utilize their credit limits fully do not reduce their demand for credit when subject to increases in interest rates as high as 3 percentage points. This finding is naturally interpreted as evidence of binding liquidity constraints. We also demonstrate the importance of truly exogenous variation in interest rates when estimating credit demand elasticities. We show that estimating a standard credit demand equation with nonexperimental variation leads to seriously biased estimates even when conditioning on a rich set of controls and individual fixed effects. In particular, this procedure results in a large and statistically significant 3-month elasticity of credit card debt with repect to interest rates even though the experimental estimate of the same elasticity is neither economically nor statistically di¤erent from zero.

Keywords: subprime credit; randomized trials; liquidity constraints.

JEL Classi…cation: D11, D12, D14

59
Behavioural Characteristics and Financial Distress
en
Yvonne McCARTHY
February 2011
Abstract
Using a new nationally representative survey of financial capability and experience in the UK and Ireland, I investigate the key factors that cause individuals to experience financial distress. In this context, a key area that I focus on is whether individuals’ behavioural traits, such as their capacities for self-control, planning, and patience, affect their ability to stay out of financial trouble. I find that the variables that proxy for these behavioural characteristics are both statistically significant and economically important for predicting both mild and extreme forms of financial distress, in a regression controlling for demographic and socio-economic factors. Furthermore, behavioural traits emerge as having a stronger impact on the incidence of financial distress than education or financial literacy. The results raise questions about whether policy can be oriented towards improving financial habits and mitigating the impact of behavioural characteristics on personal finances.

JEL classification: C5, D14.

Keywords: Personal Finance, Financial Strain, Debt, Behaviour, Financial Literacy.

58
Household Sector Borrowing in the Euro Area: A Micro Data Perspective
en
Ramón GÓMEZ-SALVADOR, Adriana LOJSCHOVA and Thomas WESTERMANN
February 2011
Abstract
This paper uses microdata from the EU-SILC (Statistics on Income and Living Conditions) to generate structural information for the euro area on the incidence of household indebtedness and of the burden to service debt. It distinguishes this incidence according to relevant characteristics such as income, age and employment status, all elements that can be cross-examined in the light of theories such as the life-cycle hypothesis. Overall, income appears as the dominant feature determining the debt status of a household. The paper also examines the evolution of indebtedness and debt service burdens over time and compares it with the US. In general, the results suggest that the macroeconomic implications of indebtedness for monetary transmission and financial stability are not associated with the mean but with the tails of the distribution.

Keywords: household indebtedness, financial vulnerability, micro survey data, monetary transmission.

JEL Classification: C42, D12, D14, G21

57
The Immigrant/Native Wealth Gap in Germany, Italy and Luxembourg
en
Thomas Y. MATHÄ, Alessandro PORPIGLIA and Eva SIERMINSKA
February 2011
Abstract
This paper analyses the existence of an immigrant/native wealth gap by using household survey data for Luxembourg, Germany and Italy. The results show that, in all three countries, a sizeable wealth gap exists between natives and immigrants. Towards the upper tail of the wealth distribution the gap narrows to a small extent. This gap persists even after controlling for demographic characteristics, country of origin, cohort and age at migration although cross-country differences exist in the immigration penalty.

Keywords: household, survey data, wealth gap, immigrants, distribution

JEL Codes: D31, F22

56
Wealth mobility and dynamics over entire individual working life cycles
en
Stefan HOCHGUERTEL and Henry OHLSSON
February 2011
Abstract
We study taxable wealth in unique Swedish administrative data, annually following a large sample of households over a period of almost 40 years. The main data limitation is non-observability of wealth for those below the tax exemption level. This implies that much of the focus of the paper is on the rich, since we are confined to those whose wealth becomes taxable over time. We exploit the long panel dimension by estimating dynamic ‘fixed effects’ models for limited dependent variables that allow for individual heterogeneity in both constants and autoregressive parameters, and control for heterogeneity through observables. We find substantial wealth mobility over the long timepans, partly accounted for by life-cycle behavior, while sufficiently capturing dynamics by an AR(1) process at the individual level.

Keywords: wealth mobility, wealth dynamics, life cycle, heterogeneity, panel data

EconLit subject descriptors: C230, D140, D310, D910, H240

55
Inheritances and the Distribution of Wealth or whatever happened to the Great Inheritance Boom?
en
Edward N. WOLFF and Maury GITTLEMAN
February 2011
Abstract
We found that on average over the period from 1989 to 2007, 21 percent of American households at a given point of time received a wealth transfer and these accounted for 23 percent of their net worth. Over the lifetime, about 30 percent of households could expect to receive a wealth transfer and these would account for close to 40 percent of their net worth near time of death. However, there is little evidence of an inheritance “boom.” In fact, from 1989 to 2007, the share of households reporting a wealth transfer fell by 2.5 percentage points. The average value of inheritances received among all households did increase but at a slow pace, by 10 percent, and wealth transfers as a proportion of current net worth fell sharply over this period from 29 to 19 percent or by 10 percentage points. We also found, somewhat surprisingly, that inheritances and other wealth transfers tend to be equalizing in terms of the distribution of household wealth. Indeed, the addition of wealth transfers to other sources of household wealth has had a sizeable effect on reducing the inequality of wealth.

JEL Codes: D31, J15

Keywords: Inheritance, household wealth, inequality

54
Who lost the most? Financial Literacy, Cognitive Abilities and the Financial Crisis
en
Tabea BUCHER-KOENEN and Michael ZIEGELMEYER
Published as “Once burned, twice shy? Financial literacy and wealth losses during the financial crisis”, Review of Finance, 18(6) : 2215-2246.
February 2011
Abstract
We study how and to what extent private households are affected by the recent financial crisis and how their financial decisions are in uenced by this shock. Our analysis reveals that individuals with low levels of financial literacy are less likely to have invested in the stock market and thus are less likely to report losses in wealth.

Yet, individuals with low financial literacy are more likely to sell their assets which lost in value (realize losses). This reaction to short-term losses has potential longterm consequences if individuals do not participate in markets' recovery and face lower returns in the long run.

Keywords: financial literacy, cognitive ability, financial crisis, life-cycle savings, saving behavior, portfolio choice

JEL Classification: D91, D14, G11

 

53
Check in the Mail or more in the Paycheck: does the Effectiveness of Fiscal Stimulus depend on how it is delivered?
en
Claudia SAHM, Metthew D. SHAPIRO and Joel SLEMROD
February 2011
Abstract
Recent fiscal policies have aimed to stimulate household spending. In 2008, most households received one-time economic stimulus payments. In 2009, most working households received the Making Work Pay tax credit in the form of reduced withholding; other households, mainly retirees, received one-time payments. This paper quantifies the spending response to these different policies and examines whether the spending response differed according to whether the stimulus was delivered as a one-time payment or as a flow of payments in the form of reduced withholding. Based on responses from a representative sample of households in the Thomson Reuters/University of Michigan Surveys of Consumers, the paper finds that the reduction in withholding led to a substantially lower rate of spending than the one-time payments. Specifically, 25 percent of households reported that the one-time economic stimulus payment in 2008 led them to mostly increase their spending while only 13 percent reported that the extra pay from the lower withholding in 2009 led them to mostly increase their spending. The paper uses several approaches to isolate the effect of the delivery mechanism from the changing aggregate and individual conditions. Responses to a hypothetical stimulus in 2009, examination of “free responses” concerning differing responses to the policies, and regression analysis controlling for individual economic conditions and demographics all support the primary importance of the income delivery mechanism in determining the spending response to the policies.

JEL Classification: H31, E62, C83

Keywords: Fiscal stimulus, tax rebates, marginal propensity to consume, survey responses

52
Consumption and Initial Mortgage Conditions: Evidence from Survey Data
en
Giacomo MASIER and Ernesto VILLANUEVA
February 2011
Abstract
Economic theory predicts that the consumption path of unconstrained homeowners responds to the interest rate, while the consumption path of credit constrained homeowners is determined by the size and timing of payments (mortgage maturity). We exploit the rapid expansion of mortgage markets during the last decade in Spain and a very detailed survey on household …nances to estimate group-speci…c consumption responses to changes in the credit conditions. Our estimates suggest that the consumption of households headed by an individual with high school responds more to mortgage maturity than to the interest rate spread. The consumption of the rest of indebted households is insensitive to loan maturity. Those results are con…rmed when we instrument loan maturity exploiting the fact that banks are reluctant to o¤er contracts with age at maturity above 65. An interpretation of those results is that households headed by middle education individuals, 8% of our sample, behave as credit constrained.

JEL Codes: D91, E91 

Keywords: Credit constraints, mortgages, household consumption.

51
Financial Advice and Stock Market Participation
en
Dimitris GEORGARAKOS and Roman INDERST
February 2011
Abstract
We introduce professional financial advice in households’ choice to hold risky financial assets. Consistent with the predictions from a formal model, we present evidence that households’ trust in financial advice only matters when their perceived own financial capability is low. Instead, for households with higher financial capability, only the perception of legal protection in financial markets matters for stock market participation. Our empirical analysis highlights economically significant differences in households’ perception of their rights as consumers of financial services, even when their objective circumstances should not be much different.

Keywords: Financial Advice, Trust, Consumer Protection, Household Finance

JEL codes: E1, G2, D8

50
Which Households use Banks? Evidence from the Transition Economies
en
Thorsten BECK and Martin BROWN
February 2011
Abstract
This paper uses survey data for 29,000 households from 29 transition economies to explore how the use of banking services is related to household characteristics, bank ownership structure and the development of the financial infrastructure. At the household level we find that the holding of a bank account or bank card increases with income, wealth and education in most countries and also find evidence for an urban-rural gap, as well as for a role of religion and social integration. Our results show that foreign bank ownership is associated with more bank accounts among high-wealth, high-income, and educated households. State ownership, on the other hand, does not induce financial inclusion of rural and poorer households. We find that higher deposit insurance coverage, better payment systems and creditor protection encourage the holding of bank accounts in particular by highincome and high-wealth households. All in all, our findings shed doubt on the ability of policy levers to broaden the financial system to disadvantaged groups.

Keywords: Access to finance, Bank-ownership, Deposit insurance, Payment system, Creditor protection.

JEL Codes: G2, G18, O16, P34

2010

49
Monetary policy transmission and macroeconomic dynamics in Luxembourg : results from a VAR analyses.
en
Romuald MOHRS
December 2010
Abstract
The aim of this work is to study the interactions between monetary policy, credit, house prices and the macroeconomy in Luxembourg using a VAR model with quarterly data in levels from 1986 to 2009. The results of the structural analysis provide valuable information concerning the monetary policy transmission mechanism, the interactions between credit and house prices, and the importance of foreign shocks for the behaviour of domestic variables. Some tentative explanations related to the particular economic and financial structures of the Luxembourg economy are moreover suggested to interprete this empirical evidence. More specifically, the structural analysis leads to the following conclusions: (1) In accordance with the existing VAR literature, a contractionary monetary policy shock leads to a temporary decrease in output and to a gradual decline in prices. (2) Monetary policy transmission to the real economy is relatively strong in Luxembourg, a result that could be associated with the variable interest rate structure of loans to the private sector, the high degree of openness and the preponderance of the financial services industry. (3) The response of credit and GDP following a residential property price shock provides some scope for the existence of a house price channel of monetary policy transmission in Luxembourg. (4) Finally, domestic variables respond strongly to foreign shocks, as evidenced by both the impulse response functions and the forecast error variance decomposition.

Keywords: Monetary policy, small open economy, VAR, macroeconomic shocks.

JEL classification: C32, E52, F41.

48
Downward wage rigidity and automatic wage indexation: Evidence from monthly micro wage data
en
Patrick LUNNEMANN and Ladislav WINTR
August 2010
Abstract
This paper assesses the degree of downward wage rigidity in Luxembourg using an administrative monthly data set on individual wages covering the entire economy over the period from January 2001 to January 2007. After limiting for measurement error, which would otherwise bias downwards the estimates of wage rigidity, we conclude that nearly all workers in Luxembourg are potentially subject to downward real wage rigidity. Our results are robust to different procedures to adjust for measurement error and methods for estimation of downward wage rigidity.

We report relatively small differences in the frequency of nominal wage cuts across occupational groups and sectors. In addition, the observed rigidity does not seem to be driven predominantly by the absence of negative shocks. We show that the downward real wage rigidity is related to automatic wage indexation, while additional factors might be necessary to explain the high degree of downward nominal wage rigidity.

JEL Code: J31.

Keywords: downward wage rigidity, wage indexation.

 

 

47
Stress Testing: The Impact of Shocks on the Capital Needs of the Luxembourg Banking Sector
en
Abdelaziz ROUABAH and John THEAL
23 August 2010
Abstract

We use data on loan loss provisions and total loans over the period spanning 1995 until 2009 to estimate a stress testing model for the Luxembourg banking sector. The sample encompasses the recent global crisis and covers a period in which the average probability of default of the Luxembourg banking sector’s counterparties is observed to increase significantly. A joint model, consisting of several macroeconomic variables and the logit-transformed probability of default, is specified and estimated via seemingly unrelated regression (SUR). The results suggest that counterparty default rates are significantly affected by the euro area real GDP growth rate, the real interest rate and a domestic property price index. Conversely, changes in the Luxembourg real GDP growth rate have a much smaller effect on counterparty risk. We attribute this to the large number of foreign subsidiaries operating within Luxembourg. The estimated model is then used to simulate values of the probability of default and the macroeconomic variables over a horizon of 10 quarters. This allows us to construct distributions for the probability of default under both baseline and adverse scenarios. From the results of these simulations stressed Basel II tier 1 capital ratios are calculated and compared to their associated unstressed capitalization levels. Our calculations suggest that, under all the given adverse macroeconomic scenarios, the aggregate Luxembourg financial sector remains above the 4% minimum Basel II tier 1 capital requirement. Repeating the exercise on a limited sample of 5 individual banks produces similar results.

JEL classification: C15, E44, G01, G21

Keywords: financial stability; stress testing; Luxembourg banking sector; tier 1 capital ratio; counterparty risk

46
The Misconception of the Option Value of Deposit Insurance and the Efficacy of Non-Risk-Based Capital Requirements in the Literature on Bank Capital Regulation
en
Paolo FEGATELLI
Published in Journal of Financial Stability, 6(2):79-84.
13 July 2010
Abstract
This study shows how the misconception of the option value of deposit insurance by Merton (1977) and its later misuse by Keeley and Furlong (1990), among others, have led some literature supporting the adoption of binding non-risk-based capital requirements to derive incorrect conclusions about their efficacy. This study further shows that what Merton defines as the option value of deposit insurance is actually a component of a bank’s limited liability option under a third-party deposit guarantee. As such, it is already included in the value ofthe bank’s equity capital, and the flawed definition makes the Keeley-Furlong model internally incoherent.

 

JEL Classification: G21, G28, G11

Keywords: Capital requirements, Credit risk, Deposit insurance, Prudential regulation, Portfolio approach. Published in the Journal of Financial Stability (Vol. 6, Issue 2, June 2010, pp. 79-84; doi:10.1016/j.jfs.2009.06.001)

45
Market and Funding Liquidity Stress Testing of the Luxembourg Banking Sector
en
Francisco NADAL DE SIMONE and Franco STRAGIOTTI
29 juin 2010
Abstract
This paper performs market and funding liquidity stress testing of the Luxembourg banking sector using stochastic haircuts and run-off rates. It takes into account not only the shocks to the banking sector and banks’ responses to them, but second-round effects due to the effects of banks’ reactions on asset prices and reputation.

In general, banks’ business lines and, therefore their buffers’ composition, determine the net effect of the shocks on banks’ stochastic liquidity buffers. So, results differ across banks. Second-round effects exemplify the relevance of contagion effects that reduce the systemic benefits of diversification. While systemic liquidity risk is low following a shock to the interbank market, for Luxembourg, with its high number of subsidiaries of large foreign financial institutions, the results indicate the importance of monitoring the liquidity of parent groups to which Luxembourg institutions belong. In particular, shocks to related-party deposits are important. Finally, the results, including those of a run-on-deposits shock, show the relevance of system-wide measures to minimize the systemic effects of liquidity crises.

JEL Classification Numbers: E5, C1, G2

Keywords: stress test, liquidity risk, banks, stochastic, contagion, macro-prudential

44
The Role of Collateral Requirements in the Crisis: One Tool for Two Objectives?
en
Paolo FEGATELLI
23 March 2010
Abstract

The implications of central bank collateral requirements for the monetary policy transmission mechanism and the working of the money market have often been neglected. Such implications, however, have clearly manifested during the course of the 2007-2009 crisis. As liquidity was vanishing in the interbank market, banks used (and abused of) central bank funding more intensively, in order to cover their financing needs. As a result, central bank collateral eligibility criteria have become even more critical than the policy rate as a factor of monetary policy transmission as well as a driver of liquidity in the interbank market. Thus, in the light of a retrospective analysis of some major events affecting monetary policy in the Euro area in the last two years, this study intends to properly reformulate the problem related to the choice of ‘optimal’ collateral requirements, by illustrating their interrelations with other central bank policy tools and targets. Ultimately, this approach allows us to derive a non-exhaustive set of recommendations for collateral and interest rate policies, as well as for central banks’ exit strategies from the current unconventional measures.

JEL Classification: E58, E51, E52

Keywords: Collateral, Monetary policy, Central bank, Interbank market, Financial stability

 

2009

43
Liquidity risk monitoring framework: A supervisory tool
en
Franco STRAGIOTTI and Štefan RYCHTÁRIK
December 2009
Abstract
Over the last 12 months, the supervision of liquidity has become one of the most discussed issues by the central banks and the financial market authorities. The objective of this paper is to describe the off-site liquidity monitoring framework recently implemented as one of the supervisory tools of the Banque centrale du Luxembourg. In our approach, the liquidity position of every bank is described by two different scores that take into account the bank’s liquidity position across “peer�? banks as well as over time. The framework has three major outputs. First of all, it helps supervisors to identify banks with weaker liquidity positions. Secondly, the scores can be decomposed among 21 risk factors. Finally, the framework creates a basis to draw conclusions about the general trends within the Luxembourg banking sector for the purpose of ensuring financial stability. Unlike common supervisory scoring systems generally based on banks’ balance sheet and profit and loss data, our framework integrates on- and off-balance sheet data and general and idiosyncratic market data as well as macroeconomic data.

Keywords: Liquidity risk, Stress-test, Banking sector, Prudential supervision, Scoring system, Off-site supervision

JEL classification: G01, G21

42
Stress testing and contingency funding plans: an analysis of current practices in the Luxembourg banking sector
en
Franco STRAGIOTTI
December 2009
Abstract
This paper analyzes the current practices adopted by a sample of Luxembourg banks on liquidity stress testing and contingency funding plans. The paper covers four main topics: liquidity stress testing coverage, scenario design, policy issues and contingency funding plans. We compare, when relevant, these results to a larger sample of EU peer banks. The results, collected through a questionnaire addressed to forty-seven banking groups, are analyzed by the means of the principal component technique. The paper also highlights the main features and shortcomings of local banks in this field.

Keywords: liquidity risk, liquidity stress testing, contingency funding plan, principal component analysis.

JEL Classification: G21

41
Liquidity scenario analysis in the Luxembourg banking sector
en
Štefan RYCHTÁRIK
Septembre 2009
Abstract
This paper aims to develop the basis for an approach to measure the liquidity risk sensitivity of banks in Luxembourg and to test it on real banking sector data. For this purpose we have developed four different scenarios: run on a bank, use of committed loans by counterparties, netting of the position with the parent financial group and changes in conditions of refinancing operations with the Eurosystem. The impact of all four simulations is measured by relative changes of liquidity ratios that have been introduced for this purpose. In a second step, this methodology is tested on a sample of 32 banks active in the Luxembourg banking sector aiming at identifying the most severe scenario or a combination of scenarios and the most vulnerable banks of the sample.

Keywords: Liquidity risk, Scenario analysis, Banking sector, Stress testing.

JEL classification: G21

40
Pros and Cons of various fiscal measures to stimulate the economy
en
Carine BOUTHEVILLAIN, John CARUANA, Cristina CHECHERITA, Jorge CUNHA, Esther GORDO, Stephan HAROUTUNIAN, Geert LANGENUS, Amela HUBIC, Bernhard MANZKE, Javier J. PÉREZ and Pietro TOMMASINO
September 2009
Abstract
We review the theoretical and empirical literature on the effects of discretionary fiscal policies,against the background of renewed fiscal policy activism. In this sense, we analyze the main pros and cons of various fiscal tools to stimulate the economy. We show that it is extremely difficult to elaborate an unambiguous catalogue of measures defining an “optimal" fiscal package. Among the requirements that fiscal measures should be “timely, targeted and temporary"  (TTT), the implementation of the first one – timeliness – is the least controversial criterion in the current situation. On the basis of the literature review, we provide some hints on the appropriate composition of a fiscal stimulus packages. The review of the pros and cons of short-term fiscal stimulus packages cannot be decoupled from the discussion of the “exit strategies", i.e. the means of financing fiscal expansions, and the intertemporal consistency of fiscal plans.

 

 

39
Wages are flexible, aren’t they? Evidence from monthly micro wage data
en
Patrick LUNNEMANN and Ladislav WINTR
June 2009
Abstract
This paper assesses the degree of wage flexibility in Luxembourg using an administrative data set on individual base wages covering the entire economy over the period 2001–2006 with monthly frequency. We find that the wage flexibility at the discretion of the firm is rather low once we limit measurement error and remove wage changes due to institutional factors (indexation, changes in statutory minimum wage, age and marital status). The so adjusted frequency of wage change lies between 5% and 7%. On average, wages change less often than consumer prices. In addition, less than one percent of (nominal) wages are cut both from month to month and from year to year. Given full automatic indexation of wages covering vast majority of employees in Luxembourg, wages appear to be subject to substantial downward real wage rigidity. Finally, wage changes tend to be highly synchronised as they are concentrated around the events of wage indexation and the month of January.

 

38
Inflation dynamics with labour market matching:assessing alternative specifications
en
Kai CHRISTOFFEL, James COSTAIN, Gregory de WALQUE, Keith KUESTER, Tobias LINZERT, Stephen MILLARD and Olivier PIERRARD
May 2009
Abstract
This paper reviews recent approaches to modeling the labour market and assesses their implications for inflation dynamics through both their effect on marginal cost and on price-setting behavior. In a search and matching environment, we consider the following modeling setups: right-to-manage bargaining vs. efficient bargaining, wage stickiness in new and existing matches, interactions at the firm level between price and wage-setting, alternative forms of hiring frictions, search on-the-job and endogenous job separation. We find that most specifications imply too little real rigidity and, so, too volatile inflation. Models with wage stickiness and right-to-manage bargaining or with firm-specific labour emerge as the most promising candidates.

JEL Classification System: E31,E32,E24,J64

Keywords: Inflation Dynamics, Labour Market, Business Cycle, Real Rigidities.

37
Regional wages and market potential in the enlarged EU: An empirical investigation
en
Thomas Y. MATHÄ and Allison SHWACHMAN
Forthcoming in Applied Economics.
April 2009
Abstract
This paper empirically analyses the link between market potential and regional wages in the enlarged EU. We extend previous studies of EU regions in several ways. 1) we analyze the link between market potential and wages for the EU27, 2)  correct for spatial autocorrelation present in the data, showing that by neglecting spatial autocorrelation the strength of the relationship between market potential and wages may be underestimated, 3) decompose total market potential into several geographical components and analyze their respective contributions to explaining the geographical wage structure, and 4) explore which regions have gained the most from European integration by calculating counterfactual market potential if they could only trade with other regions within the same country.

Keywords: Market potential, market access, regional wages, distance, European Union

JEL-Codes: F12, F15, R11, R12.

36
LOLA 1.0 : Luxembourg OverLapping generation model for policy Analysis
en
Olivier PIERRARD and Henri R. SNEESSENS
March 2009
Abstract
We build on the DSGE literature to propose an overlapping generation model for Luxembourg.By way of illustration, the model is then used to study the consequences of the ageing of the population and the potential effects of alternative macroeconomic policies.

Keywords: Overlapping Generations, Search Unemployment, Small open economy, Labor Force Participation, Ageing, Labor Market Policy and Institutions

JEL-Code: E24, H55, J26, J64

2008

35
Financial (in)stability, supervision and liquidity injections: a dynamic general equilibrium approach
en
Gregory de WALQUE, Olivier PIERRARD and Abdelaziz ROUABAH
Published in The Economic Journal, 2010, 120:1234-1261.
October 2008
Abstract
This paper develops a dynamic stochastic general equilibrium model with interactions between an heterogeneous banking sector and other private agents. We introduce endogenous default probabilities for both firms and banks, and allow for  bank regulation and liquidity injection into the interbankmarket. Our aimis to understand the importance of supervisory and monetary authorities to restore financial stability. The model is calibrated against real data and used for simulations. We show that liquidity injections reduce financial instability but have ambiguous effects on output fluctuations. The model also confirms the partial equilibrium literature results on the procyclicality of Basel II.

Keywords: DSGE, Banking sector, Default risk, Supervision, Money

JEL classification: E13, E20, G21, G28

34
Regional mc parity: do common pricing points reduce deviations from the law of one price?
en
Thomas Y. MATHÄ
Published in Review of World Economics / Weltwirtschaftliches Archiv, 2009, 145(1): 155-166
September 2008
Abstract
This paper analyses price differences of McDonald’s products in four different countries. I show that pricing at pricing points in different currencies may contribute to explaining deviations from the law of one price. Observing strictly equal prices is more probable if prices are at psychological and fractional pricing points in a common currency. The latter is also found to reduce the size of price deviations. Additionally, price differences increase as transaction costs increase. Based on this data set there is no evidence that the euro has reduced price deviations.
33
Sequential bargaining in a new-Keynesian model with frictional unemployment and staggered wage negotiation
en
Gregory de WALQUE, Olivier PIERRARD, Henri SNEESSENS and Raf WOUTERS
Published as “Sequential bargaining in a New Keynesian Model with frictional unemployment and wage-staggering”, Annals of Economics and Statistics, 2009, 96(2): 221-250.
July 2008
Abstract

We build a model with frictional unemployment and staggered wage bargaining and we assume that hours worked are negotiated every period. We analyze the role of workers’ bargaining power in the hours negotiation on unemployment volatility and inflation persistence. The closer to zero is this parameter, (i ) the more firms adjust on the intensive margin, reducing employment volatility, (ii ) the lower the effective workers’ bargaining power for wages and (iii ) the more important is the hourly wage in the marginal cost determination. Combining staggered wage bargaining with some degree of workers’ bargaining power in the hours negotiation, we produce realistic labor market statistics together with inflation persistence.

Keywords: DSGE, Search and Matching, Nominal Wage Rigidity, Monetary Policy.

JEL classification: E31, E32, E52, J64.

32
Search in the product market and the real business cycle
en
Thomas Y. MATHÄ and Olivier PIERRARD
Published in Journal of Economic Dynamics and Control, 2011, 35: 1172-1191.
July 2008
Abstract
This paper develops a search-matching model, where producers provide effort to find customers (e.g. in form of advertising and marketing expenditures). Firms form long-term contractual relationships and bargain over prices. The price bargain results inmark up pricing above marginal cost. The size of the mark up is procyclical and depends on the relative bargaining power of producers and customers. Introducing frictions in the product market decreases the steady state equilibrium, improves the cyclical properties of the model and provides a more realistic picture of firms’ business environment, which includes effort in form of advertising and price fluctuations. This suggests that product market frictions may well be crucial in explaining business cycle fluctuations. Finally, we also show that welfare costs of price rigidities are negligible relative to welfare costs of frictions.
31
A monthly indicator of economic activity for Luxembourg
en
Muriel NGUIFFO-BOYOM
March 2008
Abstract
This paper presents a new indicator of economic activity for Luxembourg, developed using a large database of 99 economic and financial time series. The methodology used corresponds to the generalised dynamic-factor models that has been introduced in the literature by Forni et alii (2005), and the model as been estimated over the period from June 1995 to June 2007. Several means have been used to evaluate its forecasting performances and results are satisfactory. They in particular give clear evidence that our indicator allows to obtain better forecasts of the GDP growth relative to a more classical approach that relies on GDP past values only. This indicator is calculated on an experimental basis and changes may be integrated.
30
Eurosystem communication and financial market expectations
en
Patrick LUNNEMANN and Dirk MEVIS
March 2008
Abstract
This paper studies the impact of Eurosystem Governing Council communication on financial markets’ interest rate expectations based on evidence from bond markets, futures markets and options markets. First,we find that the level, the dispersion and the asymmetry of interest rate expectations are affected on Council meeting days. However, such effects may be relatively short-lived. Moreover, we find that interest rate expectations tend to become less volatile during the black out period. Second, monetary policy meetings tend to affect interest rate expectations much more strongly than data releases. Third, whereas the impact of monetary policy decisions seems to be particularly concentrated and strong around horizons of 2 years, the effect of euro area data releases on rate expectations seem to unfold in a more evenly distributed manner at longer horizons as well. Fourth, keywords may foster the (very) short-run predictability of the Eurosystem monetary policy. However, keywords do not seem to have a systematic impact on interest rate expectations over longer horizons.
29
Les taux d’intérêt des banques luxembourgeoises : une étude sur bases agrégée et individuelle
fr
Yann WICKY
Février 2008
Abstract

La littérature économique récente a contribué à une meilleure connaissance des mécanismes de transmission de la politique monétaire aux taux des banques. Un certain nombre de ces études a permis de montrer que le niveau des taux d’intérêt, tout autant que le degré et la vitesse de transmission des conditions de financement, était très hétérogène au sein de la zone euro. Par conséquent, nous avons souhaité analyser ces éléments dans le cadre des banques luxembourgeoises, et, partant, nous prononcer sur une éventuelle spécificité des données luxembourgeoises par rapport à celles d’autres pays membres de la zone euro. Pour ce faire, nous avons conduit une analyse portant sur les crédits immobiliers, les crédits à la consommation et les dépôts tant au niveau agrégé qu’au niveau individuel. La période d’observation s’étend de 1993 à 2007 (données trimestrielles). Il est apparu que les résultats sont plutôt conformes aux attentes théoriques, en ce sens que la formation des taux débiteurs et créditeurs peut être expliquée par les conditions de financement. Par ailleurs, les degrés de transmission des taux de référence du marché aux différents taux de détail des banques luxembourgeoises se situent dans la médiane de la zone euro. De manière plus surprenante, nous savons que la spécialisation de la place dans les activités de banque privée joue un rôle dans l’hétérogénéité des données individuelles, mais ce point est difficile à mettre en lumière en terme statistique.

Keywords : Banks ; Depositary Institutions ; Micro Finance Institutions ; Morgages

JEL-Code : G21

2007

28
An analysis of regional commuting flows in the European Union
en
Jordan MARVAKOV and Thomas Y. MATHÄ
November 2007
Abstract

Trotz weiterführender ökonomischer und politischer Integration ist die Europäische Union immer noch durch sehr niedrige Personenmobilität gekennzeichnet. Die regionale Arbeitsmobilität in der Europäischen Union wird in der Tat zum Teil so niedrig betrachtet, als dass sie nicht als ökonomisch relevanter Anpassungsmechanismus für regionale Arbeitsmarktungleichgewichte angesehen wird − ein Sachverhalt der auch für das Eurosystem von ausgewiesener Bedeutung ist. Dabei ist es gerade dieser regionale Aspekt, der wichtig erscheint, denn die regionalen Arbeitsmärkte in der Europäischen Union zeichnen sich durch starke Nachbarschaftseffekte aus. Das heißt, die regionale Arbeitsmarktsituation ist sehr eng mit der jeweiligen Arbeitsmarktsituation der benachbarten Regionen verknüpft. Regionale Mobilität kann jedoch nicht nur durch regionale Migration erreicht werden, sondern auch durch regionale Pendlertätigkeit. Und es scheint in der Tat so zu sein, dass diese zweite Form der regionalen Mobilität auf dem Vormarsch in der Europäischen Union ist. Laut Europäischer Kommission pendeln jeden Tag im Durchschnitt ungefähr 8 Prozent der Erwerbstätigen zwischen verschiedenen Regionen.

Das Ziel der vorliegenden Studie ist es, neue empirische Erkenntnisse über regionale Pendlerströme und seine Determinanten zu gewinnen. Ein wichtiger Aspekt ist in diesem Zusammenhang, ob regionale Pendlerströme auf regionale Arbeitsmarktungleichgewichte in der zu erwartenden Weise reagieren. Agieren Pendlerströme als ausgleichende Kraft, indem sie den Arbeitskräfteüberschuß in wirtschaftlich schwächelnden Regionen und den Arbeitskräftemangel in wirtschaftlich florierenden Regionen reduzieren? Anders ausgedrückt, können regionale Pendlerströme als potentieller Anpassungsmechanismus für regionale Arbeitsmarktungleichgewichte gesehen werden?

Die Resultate zeigen, dass Pendlerströme mit den Größen der Herkunft– und Zielregionen zunehmen und mit ihrer Entfernung von einander abnimmt. Die empirischen Schätzergebnisse belegen weiterhin, dass die Pendlerströme in der Tat auf Arbeitsmarktungleichgewichte, wie Unterschiede in regionalen Durchschnittslöhnen und Arbeitslosigkeitsraten, in der zu erwartenden Weise reagieren. Des weiteren weisen die Resultate einen positiven Zusammenhang des durchschnittlichen Ausbildungsniveaus und der regionalen Arbeitsmobilität auf. Geographische Aspekte, die sich jedoch von Land zu Land unterscheiden können, spielen auch eine wichtige Rolle. Ein generell sehr robustes Ergebnis ist, dass Regionen mit einem sehr hohen Urbanisationsgrad Zentren für regionale Einpendler sind und dementsprechend weniger Auspendler als nicht-urbane Regionen haben. Auch erweisen sich Regionen mit einem hohen Spezialisierungsgrad im Dienstleistungsbereich als Regionen mit hohen Auspendlerströmen. Zudem gibt es Unterschiede zwischen landesinneren Regionen, Grenzregionen, Küstenregionen und Regionen, die an eine EU15 Außengrenze stoßen. Diese Ergebnisse sind weniger robust, insgesamt gesehen jedoch pendeln weniger Arbeitnehmer aus Küstenregionen in die Nachbarschaftsregionen als das der Fall ist für landesinnere Regionen.

Cahier d'études n° 28

27
Banking output & price indicators from quarterly reporting data
en
Abdelaziz ROUABAH and Paolo GUARDA
Published as Output indicators for the banking sector, in Balling, M., E. Gnan, F. Lierman and J.-P. Schoder (eds.): Productivity in the Financial Services Sector. SUERF Studies 2009/4.
June 2007
Abstract

The measurement of banking output (and therefore productivity) has long been controversial. This article applies the user cost approach in Fixler and Zieschang (1999) to quarterly reporting data from Luxembourg’s banking sector. This requires associating the flows in the profit-and-loss account to different assets and liabilities in the balance sheet. The user cost of each asset/liability is then calculated as the difference between the rate at which it generates revenues/costs and a “reference rate” representing the opportunity cost of funds. A negative user cost then identifies an asset or liability as an output and a positive user cost identifies it as an input in the production process. In theory, this datadriven approach is capable of combining elements of both the two traditional approaches to measuring banking output (the production and intermediation approaches) since these classify inputs and outputs on an a priori basis. In practice, our results suggest that neither of these conventional approaches is wholly consistent with the data for Luxembourg. We then use multilateral Törnqvist indices to aggregate outputs and inputs separately and show that the resulting series are robust to alternative measures of the reference rate. The difference between the output and input index provides a measure of Total Factor Productivity (TFP) and an implicit price index is also derived. Results suggest that productivity growth in Luxembourg’s banking sector has been high since the mid-1990s, displaying volatile but persistent dynamics and moving pro-cyclically. Productivity varies widely across banks but larger banks (in terms of total assets) tend to be more productive.

JEL classifications: G21, D24, C34

Keywords: banks, total factor productivity, Törnqvist index numbers

 

26
Commuters, residents and job competition in Luxembourg
en
Olivier PIERRARD
Published as Commuters, residents and job competition” Regional Science and Urban Economics 38(6): 565-577.
May 2007
Abstract

Despite strong employment growth, unemployment is rising in Luxembourg. Stronger job competition from non-residents could explain this ‘unemployment paradox’. We construct a small theoretical search unemployment model of the Luxembourg labor market, with job competition between residents and cross-border commuters. We show both analytically and numerically that job competition alone cannot explain the unemployment paradox and we stress the role of the labor market institutions.

Keywords: Job competition, Commuters, Unemployment

JEL classification: J61, J64, R23

25
Co-variation des taux de croissance sectoriels au luxembourg: l’apport des corrélations conditionnelles dynamiques
fr
Abdelaziz ROUABAH
Avril 2007
Abstract
Cette analyse emploie le modèle des corrélations conditionnelles dynamiques développées récemment par Engle (2002) pour déterminer le caractère synchrone ou asynchrone des mouvements des taux de croissance de la valeur ajoutée des différents secteurs économiques au Luxembourg. Le recours à cette méthodologie, initialement développée pour l’analyse des séries financières, s’explique principalement par la non-constance de la volatilité des séries trimestrielles des composantes du PIB luxembourgeois. Cette caractéristique de la volatilité demeure naturelle pour une petite économie très ouverte, sujette par ailleurs, à une multiplicité de chocs exogènes dont les effets se traduiraient par une plus grande volatilité des agrégats économiques. Nous adoptons, par ailleurs, le test de causalité des moyennes et des variances construit par Cheung et Ng (1996) pour confirmer ou infirmer le rôle attribué par certains au secteur financier en tant que locomotive de l’économie luxembourgeoise.

Classification du JEL: C32.

Mots clés: GARCH, Corrélations conditionnelles dynamiques.

24
Mesure de la vulnérabilité du secteur bancaire luxembourgeois
fr
Abdelaziz ROUABAH
Avril 2007
Abstract

Cet article a pour objectif d’élaborer, dans une première phase, un indice trimestriel de vulnérabilité financière du secteur bancaire luxembourgeois, permettant ainsi de compléter la batterie d’indicateurs mis en place au sein de la banque centrale pour appréhender la solidité de ce secteur. Dans une seconde étape, le lien entre l’indice construit et l’environnement macroéconomique est exploré à travers une spécification linéaire. Enfin, un modèle est adopté pour la prévision de l’évolution de cet indice. L’approche que nous adoptons pour la construction de cet indice s’inscrit fondamentalement dans la lignée des travaux de Hanschel et Monnin (2005) et Illing et Liu (2006). L’élaboration de cet indice est basée sur un large éventail de variables bilantaires et macrofinancières. Et plusieurs méthodes furent adoptées pour sa construction. Il s’agit de l’indice standard établi avec des pondérations à variance égale, de celui construit selon les percentilles de la fonction de distribution cumulative des variables initiales et enfin, de l’indice élaboré à partirde l’application de la méthode de la composante principale aux données de notre échantillon. Les résultats obtenus révèlent une nette progression de l’indice de vulnérabilité du secteur bancaire luxembourgeois durant la crise financière russe (1998) et au cours de la période 2001-2003. Cette dernière période est caractérisée à la fois par la chute des indices boursiers en 2001-2003 et par l’émergence de la crise financière en Turquie et en Argentine. Quant à la baisse très nette de cet indice durant la période 2003-2006, elle signifie que l’environnement et le comportement du secteur bancaire luxembourgeois en matière de risque furent propices à la stabilité financière. Les résultats prévisionnels obtenus selon notre modèle semblent être en faveur d’une évolution contenue de cet indice. En tenant compte de l’incertitude qui entoure la prévision, la frontière de l’intervalle de confiance reste inférieure aux niveaux historiques les plus élevés observés en 2002 et en 2003. Ceci revient à affirmer qu’en l’absence d’un choc conjoncturel exceptionnel ou d’événements sévères d’ordre systémique, la vulnérabilité du secteur bancaire luxembourgeois demeure faible.

Classification du JEL: G10; E5

Mots-clés: Crise financière; Vulnérabilité financière; Institutions financières; Marchés financiers.

2006

23
The transition from payg to funding: Application to the Luxembourg privat sector pension system
en
Muriel BOUCHET
Published in: Muralidhar, A. and S. Allegrezza (eds.): Reforming European Pension Systems, Dutch University Press, 2006, pp. 223-292.
July 2006
Abstract

The Luxembourg private sector pension system (“régime général de pension”) is at crossroads. On the one hand, the current budgetary situation of the system appears extremely favourable. On the other hand, projections based on reasonable assumptions suggest that the pension regime is not sustainable over a long-term horizon. Pension benefits are indeed bound to increase steeply when large contingents of crossborder and immigrant employees will retire.

The primary objective of the paper is to assess whether a solution proposed by Modigliani and Muralidhar, where pensioners are gradually transferred from pay-as-you-go (PAYG) to a public fund in accordance with the defined benefit principle, is suitable to the Luxembourg situation. A baseline funding scenario designed in a stepwise manner and under reasonable return assumptions illustrates how fruitful such a solution could be in Luxembourg, provided that a significant prefunding effort takes place at the beginning of the transition period. In the steady state, this scenario would lead to very comfortable reserves and budgetary surpluses with no additional cost in terms of long-term, equilibrium contribution rates. These very favourable results would be achieved in spite of a continuously increasing pension cost ratio induced by ageing and by the gradual retirement of large contingents of cross-border workers. Another particularly attractive feature of the baseline funding scenario presented in the paper – especially in the context of a small and very open economy – is that it would mitigate in an effective way the impact on the pension regime of adverse GDP growth developments. By contrast, PAYG does not provide a sound basis for a social security scheme as contributions are very sensitive to small changes in the key macroeconomic variables. Finally, the baseline funding scenario is reasonably resilient to alternative return or demographic assumptions. However, even the funding system would have to be monitored in a rigourous way. To sum up, the currently favourable situation of the private sector pension regime should be considered as a window of opportunity during which the pension system should set aside the large assets required in order to cover future pension liabilities. This would mark the onset of a virtuous circle, where increasing assets and the related property incomes would offset the rising cost of pension benefits and at the same time mitigate adverse macroeconomic developments.

Keywords: Pensions, funding, defined-benefits, sustainability.

JEL classification: E62, H55, J11.

 

22
Are Internet prices sticky ?
en
Patrick LUNNEMANN and Ladislav WINTR
Published as “Price Stickiness in the US and Europe revisited: Evidence from internet prices”. Oxford Bulletin of Economics and Statistics, 2011, 73(5):593-621.
June 2006
Abstract

This paper studies the behaviour of Internet prices. It compares price rigidities on the Internet and in traditional brick-and-mortar stores and provides a cross-country perspective. The data set covers a broad range of items typically sold over the Internet. It includes more than 5 million daily price quotes downloaded from price comparison web sites in France, Germany, Italy, the UK and the US. The following results emerge from our analysis. First, and contrary to the recent findings for common CPI data, Internet prices in the EU countries do not change less often than online prices in the US. Second, prices on the Internet are not necessarily more flexible than prices in traditional brick-and-mortar stores. Third, there is substantial heterogeneity in the frequency of price change across shop types and product categories. Fourth, the average price change on the Internet is relatively large, but smaller than the respective values reported for CPI data. Finally, panel logit estimates suggest that the likelihood of observing a price change is a function of both state- and time-dependent factors.

Keywords: Price stickiness, Internet, price setting behaviour.

JEL: E31, L11.

21
La sensibilité de l’activité bancaire aux chocs macroéconomiques : une analyse en panel sur des données de banques luxembourgeoises
fr
Abdelaziz ROUABAH
Mai 2006
Abstract

This paper investigates the issue of the sensitivity of intermediary balances of the profit and loss account of Luxembourg banks to monetary, financial and macro-economic shocks. The analysis is based on a nonbalanced panel with data at quarterly frequency covering the period from 1994 to 2005. The methodology applied is similar to the one of Lehmann and Manz (2005). The estimation results and the simulations seem to indicate that Luxembourg banks are much more sensitive to changes in euro area GDP and to shocks related to the European DJE Stoxx than to monetary shocks. The latter are approximated by a quarterly change of one hundred basis points of the three-month Euribor. The extent of this reactivity should not be overemphasized, as it is not a fundamentally destabilizing factor of the banking sector as a whole.

Keywords: Banks, macroeconomic shocks, Models with panel data

JEL Classification: G21, E32, C33

20
Peut-on parler de bulle sur le marché immobilier au Luxembourg ?
fr
Christophe BLOT
Mai 2006
Abstract

House prices have grown regularly in Luxembourg since the 1970’s. Since 1997, the average annual growth rate is close to 10%. Since then, concerns about the origin of these developments have repeatedly merged. The aim of this paper is to provide an assessment of the housing market in Luxembourg. More precisely, we wonder whether house price increases are driven by fundamentals or whether a speculative bubble characterizes this market. We resort to a coïntégration analysis where we disentangle residential, non-residential and building plot markets. It is shown that fundamentals seem to have played a role in the growth of house prices. Particularly, construction costs, economic and demographic growth, and monetary policy through interest rates and credits contribute to the developments of house prices. Nevertheless, we should remain cautious regarding our conclusions since the implemented tests are subject to inherent technical pitfalls.

Codes JEL : G12, G21, R21

19
New survey evidence on the pricing behavior of Luxembourg firms
en
Patrick LUNNEMANN and Thomas Y. MATHÄ
Published as “A Survey of Price Setting Practices of Luxembourg Firms”, in Fabiani, S., C. Loupias, F. Martins and R. Sabbatini (eds.): Pricing Decisions in the Euro Area: How Firms Set Prices and Why, Oxford Univ. Press, 2007, Chapter 8, pp. 124-139.
May 2006
Abstract

This paper analyses the pricing behaviour of Luxembourg firms based on survey evidence. Luxembourg firms typically have low market share, many competitors and longstanding customer relationships. Price discrimination is frequently applied. A majority of firms use price review rules that include elements of state dependency. The median firm reviews and changes prices twice a year. The results suggest an almost equal share of firms applying forward- looking, backward-looking and rules of thumb behaviour. The adjustment speed is faster when cost goes up and demand goes down than in the opposite cases. The most relevant theories explaining price rigidity are implicit contracts, cost-based pricing and explicit contracts. Increases in labour and other costs are the most important factors leading to price increases; for price reductions it is price reductions by competitors followed by declining labour costs.

Keywords: Survey data, price setting, price rigidity, adjustment speed JEL

Codes: C21, C22 , C14

18
L'identité de Fisher et l'interaction entre l'inflation et la rentabilité des actions: l'importance des régimes sous-jacents aux marchés boursiers
fr
Abdelaziz ROUABAH
Published as L'inflation et la rentabilité des actions: Une relation enigmatique et un casse-tête pour les banques centrales”. Economie et Prévision, 2007, 177: 19-34.
Janvier 2006
Abstract
This paper sheds a new light on the puzzling negative relationship between nominal stock returns and expected inflation. The assertion that stocks offer a hedge against inflation is theoretically founded on the Fisher identity. Contrary to this fundamental view, recent empirical tests reject both the Fisher hypothesis and the Fama proxy hypothesis even when accommodating expected economic growth in the estimates. This article proposes to consider different regimes underlying stock market returns in the analysis of the relationship between inflation expectations and nominal stock returns. Using monthly data for the euro area and for Luxembourg over the past two decades, our results show that the Fisher hypothesis cannot be rejected when stock market regimes are accommodated in the estimates of the Geske & Roll inverse causality relation. In this context, shares allow for hedging against inflation and their prices can be used by central banks as a leading indicator for inflation.

Keywords: Fisher hypothesis; Stock market; Markov Switching

JEL classification: G12; E44; E52

 

2005

17
Consumer price behaviour in Luxembourg: evidence from micro CPI data
en
Patrick LUNNEMANN and Thomas Y. MATHÄ
Published as “Consumer price behaviour in Luxembourg: evidence from micro CPI data” Managerial and Decision Economics, 2010, 31(2-3):177-192.
October 2005
Abstract

This paper uses micro-level price data and analyses the behaviour of consumer prices in Luxembourg. We find that the median duration of consumer prices is roughly 8 months. The median durations of energy and unprocessed food are about 1.5 and 5 months, while prices of services typically change fewer than once a year. For some product types, such as non-energy industrial goods and processed food, a relatively large share of the observed price changes is reverted afterwards. With the exception of services, individual prices do not show signs of downward rigidity. On average, price decreases are as large as price increases. Price changes are determined both by state- and time-dependent factors. Accumulated price and wage inflation, wage adjustment due to indexation, the cash changeover and a larger number of competitors increase the probability of a price change, while pricing at attractive pricing points and price regulation have the opposite effect.

Keywords: Price setting, consumer prices, rigidity, wage indexation, sales

JEL-Codes: E31, C23, C41

16
Cape Verde's exchange rate policy and its alternatives
en
Romain WEBER
October 2005
Abstract

This paper analyses Cape Verde's exchange rate policy and investigates whether viable alternatives exist. Cape Verde currently operates a fixed exchange rate regime which, since 1999, links the national currency to the euro. The fixed exchange rate has many benefits, but authorities have to leave interest rates high in order to attract foreign capital, which has inhibited private investment and economic growth; the appreciation of the euro in 2002 and 2003 put the fixed exchange rate under additional strain. This issue is addressed by contemplating whether interest rates can be reduced in the context of the current exchange rate regime, and what costs and benefits are associated with a regime change that enables a reduction in interest rates. The analysis strongly suggests that it is not so much the exchange rate regime that is to blame for high interest rates, but rather a structural problem in the banking sector. Consequently, the policy conclusion reached in this paper is that although changing the current exchange rate policy might reduce interest rates, structural reforms would be more appropriate to tackle the problem at hand.

Keywords: Cape Verde, exchange rates, interest rates, central banks and monetary policy, remittances, modern asset market model

JEL codes: O55, F31, E40, E58

15
Estimating the natural interest rate for the euro area and Luxembourg
en
Ladislav WINTR, Paolo GUARDA and Abdelaziz ROUABAH
June 2005
Abstract
Le taux d’intérêt naturel est le taux d’intérêt réel compatible à la fois avec l’absence d’écart de production (le PIB est à son niveau potentiel) et avec la stabilité des prix. Cette étude fournit des estimations du taux d’intérêt naturel pour la zone euro et pour le Luxembourg. Théoriquement, le taux d’intérêt naturel est susceptible de servir de référence pour la politique monétaire. Quand le taux d’intérêt réel est plus élevé que le taux d’intérêt naturel, la politique monétaire est restrictive. A l’opposé, la politique monétaire est expansive quand le taux d’intérêt réel est inférieur au taux d’intérêt naturel. Ainsi, la banque centrale pourrait fixer le taux d’intérêt nominal de manière à faire évoluer les taux d’intérêt réels à court terme vers un niveau inférieur ou supérieur au taux d’intérêt naturel selon la nature des chocs déstabilisateurs. En pratique, le taux d’intérêt naturel est estimé avec un degré d’incertitude important et il est sujet à de multiples révisions dues à la publication de nouvelles données. Ces limitations réduisent l’utilité du taux d’intérêt naturel dans la conduite de la politique monétaire. Cependant, le taux d’intérêt naturel peut fournir une indication sur l’orientation de la politique monétaire relative aux périodes antérieures. De plus, le taux d’intérêt naturel estimé pour un pays à l’intérieur de la zone euro peut fournir des renseignements sur l’impact de la politique monétaire commune sur l’économie nationale en question.

Dans notre contribution, l’estimation du niveau du taux d’intérêt naturel pour la zone euro et pour le Luxembourg est basée sur l’approche semi-structurelle proposée par Laubach et Williams (2003). Cette approche s’appuie sur un petit modèle macroéconomique combinant une équation d’offre agrégée (courbe de Phillips) et une équation de demande agrégée (courbe IS). Le filtre de Kalman sert à estimer les variables inobservables, tels que le taux d’intérêt naturel, l’écart de production, et la croissance potentielle, en tenant compte de l’évolution des variables observées, en l’occurrence la production, l’inflation, et le taux d’intérêt réel. Ainsi, le taux d’intérêt naturel et la croissance potentielle sont estimés de manière simultanée.

Pour la zone euro, les résultants suggèrent une certaine stabilité du taux d’intérêt naturel depuis 1970 et confirment qu’il a baissé au cours de la dernière décennie. Pour le Luxembourg, le taux d’intérêt naturel estimé est beaucoup plus élevé, signe d’une croissance potentielle plus importante. Les résultats laissent présager que la politique monétaire commune a eu un impact expansif sur les périodes récentes, particulièrement au Luxembourg.

14
Nominal rigidities and inflation persistence in Luxembourg: a comparison with EU 15 member countries with particular focus on services and regulated prices
en
Patrick LUNNEMANN and Thomas Y. MATHÄ
Published as “Rigidities and inflation persistence of services and regulated prices” Managerial and Decision Economics, 2010, 31(2-3):193-208.
April 2005
Abstract

This paper analyses the degree of price rigidity and of inflation persistence across different product categories with particular focus on regulated prices and services for the individual EU15 countries, as well as for the EU15 and the euro area aggregates. We show that services and those HICP sub-indices considered being subject to price regulation exhibit larger degrees of nominal price rigidities, with less frequent but larger price index changes as well as stronger asymmetries between price index increases and decreases. With regard to what extent services and regulated prices contribute to the degree of overall inflation persistence, we find that, for most of the EU15 countries as well as for the EU15 and the euro area aggregates, excluding services from the full HICP results in a reduction in the measured degree of inflation persistence; for regulated indices such an effect is also discernible, albeit to a lesser extent.

Keywords: Price rigidity, inflation persistence, regulated prices, services

JEL Codes: E31, C22, C23, C43

13
Les déterminants du solde de la balance des transactions courantes au Luxembourg
fr
Abdelaziz ROUABAH
Février 2005
Abstract
The components of the current account balance of the Luxembourg balance of payments have been subject to substantial changes: a persistent deficit of the balance of trade in goods, a deterioration of the factor income balance, a worrying evolution of current transfers,… But what are the underlying reasons? Are they of a structural or transitory nature? Are they linked to a loss of competitiveness or are they rather the consequence of sluggish economic growth, thereby exacerbating the current account disequilibrium? We shall endeavour to address these questions by adopting two distinct methodologies. The first one consists in using “Mundell-Fleming”-type models of the balance of trade (in goods and services) in order to estimate critical elasticities (the Marshall-Lerner condition) or to identify the existence of a J-curve. The second approach consists in using intertemporal models of the current account where economies exchange the same good (or two tradable goods: imports and exports) in order to test the intertemporal smoothing behaviour of consumption, savings and investment.

Mots clés: compte de transactions courantes, compétitivité-prix, modèle intertemporel de la balance des transactions courantes.

Classification du JEL: E 21, F32, F41, F47

2004

12
Inflation persistence in Luxembourg a comparison with EU15 countries at the disaggregate level
en
Patrick LUNNEMANN and Thomas Y. MATHÄ
Published in part as “Mean reversion and sales”. Applied Economics Letters, 2009, 16(12): 1271-1275.
November 2004
Abstract

The aim of this paper is to analyse the degree of inflation persistence in Luxembourg using disaggregate price index data from the Harmonised Index of Consumer Prices. The degree of inflation persistence is then compared to estimates for the EU15 and for the euro area as well as for the individual member countries according to a unified approach. In order to assess the robustness of our estimates both a parametric and a non-parametric measure of inflation persistence is used. Overall, our results suggest a relatively low degree of inflation persistence in Luxembourg. For a large number of sub-indices we are not only able to reject the unit root hypothesis, but also we find a low degree of inflation persistence relative to other EU15 countries and relative to the EU15 and euro area aggregates. For Luxembourg as well as the other EU15 countries, our results suggest substantial heterogeneity in the degree of inflation persistence across sub-indices. We find some support for the presence of aggregation effects,    both across indices and countries. Structural break tests for all EU15 countries suggest the presence of structural changes in the inflation process owing to the inception of the single monetary policy and/or to the modified treatment of sales.

Keywords: Inflation persistence, Mean reversion, Aggregation effect, Structural breaks

JEL Codes: E31, C21, C22, C14

11
The new keynesian Phillips curve: empirical results for Luxembourg
en
Ieva RUBENE Paolo Guarda
June 2004
Abstract
The New Keynesian Phillips curve (NPC) differs from the conventional expectations-augmented Phillips curve in that it is forward-looking and links inflation to a measure of marginal cost instead of unemployment or the output gap. More fundamentally, the NPC is derived from New Keynesian models that combine nominal rigidities with individual optimising behaviour and model-consistent (rational) expectations. Because the NPC is grounded in micro-theory (unlike the conventional expectations-augmented Phillips curve), it is robust to some forms of the Lucas critique and may serve to analyse the impact structural changes such as increased price flexibility may have on inflation. New Keynesian Phillips curve estimates for Luxembourg using the Galí and Gertler (1999) hybrid form suggest that firms change prices often but tend to use backward-looking rules-of-thumb instead of resetting prices optimally using forward-looking expectations. In terms of policy implications, although the results suggest prices in Luxemboug are relatively flexible, the prevalence of backward-looking price setting implies greater inflation persistence and a higher sacrifice ratio attached to disinflationary monetary policy. From the perspective of individual firms, backward-looking price setting may be a rational response in a very small open economy because of its vulnerability to external shocks. Small size and openness plausibly imply higher costs of collecting information and lower benefits from optimal price setting.

2003

10
Nouveaux instruments de paiement: une analyse du point de vue de la Banque centrale
fr
Li-Chun YUAN
Novembre 2003
Abstract

 

9
Règle de Taylor : estimation et interprétation pour la zone euro et pour le Luxembourg
fr
Patrick LUNNEMANN
Abdelaziz ROUABAH Abdelaziz Rouabah
Octobre 2003
Abstract

This paper explores the compatibility of Eurosystem monetary policy with Taylor-type rules. The Taylor rule aims at giving central bankers guidance in the setting of monetary policy against the background of macroeconomic instability. The initial specification of the Taylor rule determines a level of short-term interest rates considered compatible with the objective of price stability and the elimination of the output gap. The spread between the "Taylor rate" and observed interest rates is an indicator of the appropriateness of monetary policy with respect to macroeconomic fundamentals. The first part of the paper focuses on the advantages and disadvantages of the Taylor rule in its original form. Its application to monetary policy in the euro area since monetary union yields inconclusive results. Modifications to the weights and/or the inclusion of additional variables allow it to track observed interest rates more closely. The second part of the paper deals with differential effects of the single monetary policy. An application of selected Taylor-type rules for the euro area to Luxembourg tends to support the existence of differential effects.

Mots clés: Inflation, Les règles de politique monétaire, Ecart de production

Classification du JEL : E3, E52, E58

8
What to expect of the euro? Analysing price differences of individual products in Luxembourg and its surrounding regions
en
Thomas Y. MATHÄ
Published as “The Euro and price differences of individual products in an integrated cross-border area”. Journal of Common Market Studies, 2006, 44(3): 563-580.
April 2003
Abstract

This paper uses individual supermarket prices and analyses to what extent absolute deviations from the law of one price are attributable to transaction costs. The results indicate that absolute percentage price differences are increasing in distance, but at a decreasing rate. Similarly, crossing borders increases price deviations, while being inside the former Belgian-Luxembourg monetary association has the opposite effect. This result nurtures the hopes that the euro may be able to reduce regional and cross-border price differences in the long term. Furthermore, larger differences in packaging sizes result in larger price deviations, while the opposite is the case for prices observed within the same retail group.

Keywords: Euro, Price Dispersion, Price Convergence, Law of One Price

JEL Classification: E31, F36, R11

7
The analysis of risk and risk mitigation techniques in payment and securities settlement systems and the impact on central bank's oversight
en
Simona AMATI
February 2003
Abstract

This paper investigates the risks and risk mitigation techniques which are in use within the Luxembourg-based payment and securities settlement systems and evaluates what could be the impact of risk analysis on central bank oversight. It indicates how overseers can make use of different tools to assess the availability and appropriateness of risk mitigation techniques implemented by market practitioners and to further promptly react in case of contingency.

6
The sustainability of the private sector pension system from a long-term perspective: the case of Luxembourg
en
Muriel BOUCHET
January 2003
Abstract

Le Cahier d'études a pour objet de fournir une première évaluation de la situation budgétaire du régime général de pensions au Luxembourg. Une telle analyse est certes confrontée à de multiples difficultés, tant il est difficile de prévoir l'évolution des déterminants de l'équilibre financier du régime à plusieurs décennies de distance. Cependant, l'économie luxembourgeoise présente diverses caractéristiques, dont les effets se déploient sur un horizon de très long terme. Dans un tel contexte, il importe de développer des outils permettant de baliser les évolutions futures, à défaut de les prévoir. La BCL a élaboré un tel outil, dont l'articulation logique et les principaux enseignements sont brièvement décrits ci-dessous.

1.   La situation présente du système de pensions luxembourgeois

La situation budgétaire présente du système de pensions paraît excellente. Les recettes du système ont été systématiquement supérieures aux dépenses au cours de la période 1990-2001, à raison d'environ 2% du PIB. La sédimentation d'excédents sur une longue période a donné lieu à de confortables réserves, qui se sont élevées à 22% du PIB à la fin de l'année 2001.

2.   Diverses caractéristiques propres au Luxembourg

Diverses caractéristiques de l'économie luxembourgeoise sont à la base des excellents résultats budgétaires du régime général. Il s'agit de la forte proportion de travailleurs frontaliers, d'un solde migratoire très positif et enfin de l'importance du secteur financier.

La population des frontaliers est relativement jeune, de sorte qu'elle devrait continuer à alimenter une progression soutenue des cotisations au cours des prochaines années. Cette situation est cependant appelée à se modifier lorsque les importants effectifs de frontaliers parviendront à l'âge de la pension. La même situation prévaut, mutatis mutandis, pour les arrivées de travailleurs étrangers. Une troisième caractéristique du Luxembourg est sa potentielle vulnérabilité aux chocs macroéconomiques ou financiers. Ce facteur a opéré en faveur du régime de pensions au cours des années récentes, en particulier de 1996 à 2000. Une évolution en sens inverse pourrait cependant se manifester dans le futur.

3.   L'outil de projections développé par la BCL

Le simulateur élaboré à la BCL comprend un modèle démographique, qui permet d'inférer l'évolution de la population par sexes et classes d'âge sur la période 2001-2085. Sur la base de taux d'activité, la population active assurée au système de pensions privé, l'évolution de la masse salariale et enfin le montant des cotisations futures peuvent être dégagés. Les dépenses de pensions sont également estimées à partir de la population répartie par sexes et classes d'âge. Sur la base de matrices de statuts, le nombre de pensionnés futurs est inféré. Les dépenses de pensions totales sont obtenues après multiplication par des pensions moyennes représentatives. Le même schéma est appliqué aux travailleurs frontaliers.

4.   Les perspectives d'évolution à long terme du système privé de pensions

4.1.   La projection de référence

Les hypothèses qui président à la simulation de référence sont décrites en détail dans le Cahier d'études. Il est notamment supposé que les arrivées nettes de frontaliers et d'immigrants demeureraient à des niveaux relativement élevés, soit respectivement 7000 et 4000 personnes par an à partir de 2005. Par ailleurs, la projection de référence inclut les mesures adoptées dans la foulée du Rentendësch et suppose le maintien du taux de cotisation à 24% des revenus cotisables.

La soutenabilité à terme du système de pensions paraît précaire sous ces hypothèses. A partir de 2005, la reprise des entrées de frontaliers et l'immigration soutenue conforteraient certes la croissance économique, ce qui tendrait à réduire l'importance relative des dépenses tout en favorisant les recettes. Il en résulterait une augmentation des excédents et une hausse soutenue du niveau des réserves, qui culmineraient à près de 50% du PIB en 2028. Les excédents primaires commenceraient cependant à décliner dès 2015, tandis que la capacité de financement diminuerait à partir de 2021. Elle cèderait la place à un besoin de financement dès 2041, qui s'élèverait à quelque 8% du PIB à l'issue de la période de projection. Dans un tel contexte, un premier endettement ferait son apparition en 2055. Il atteindrait 60% du PIB vers 2070 et 109% en 2085.

4.2.   Première variante: plafonnement de la population à 700 000 habitants

La population obtenue dans le cadre de la projection de référence dépasserait le seuil des 700 000 habitants à partir de 2048. Une projection a été effectuée, qui consiste à plafonner la population à 700 000 habitants en annulant les soldes migratoires à partir de 2049. Un tel plafonnement pourrait par exemple résulter d'une saturation des infrastructures publiques, ou encore d'une capacité de logement ou de transport insuffisante. Ce plafonnement affecterait très négativement l'équilibre du système de pensions. La dette et le besoin de financement atteindraient en effet 170% et 13,5% du PIB, respectivement, en 2085.

4.3.   Deuxième variante : ralentissement des arrivées de frontaliers

Les résultats de la simulation de référence dépendent de façon cruciale de l'hypothèse d'un maintien à un niveau élevé des arrivées nettes de frontaliers. Un scénario alternatif consiste à abaisser ces arrivées nettes à 4000 individus par an à partir de 2005. Dans ce contexte, le premier endettement se manifesterait dès 2045 et la dette du régime privé de pensions se monterait à 132% du PIB en 2085. Cet impact négatif s'éroderait cependant fortement à partir de 2057 du fait de la diminution du nombre de frontaliers pensionnés.

4.4.   Evaluation du coût du Rentendësch

Le coût statique en année pleine des mesures de la loi du 28 juin 2002 peut être estimé à 0,6% du PIB. Cependant, une telle estimation statique ignore les interactions entre les nouvelles mesures et l'environnement macroéconomique et démographique, de même que leur impact sur les charges d'intérêt. Compte tenu de ces effets indirects, le coût des mesures atteindrait 1% du PIB dès 2022 et près de 3% en 2085, ce gonflement étant largement imputable aux charges d'intérêt additionnelles. En l'absence des nouvelles mesures, la dette projetée ne se serait établie qu'à 61% du PIB en 2085, au lieu de 109% dans la projection de référence.

4.5.   Analyses de sensibilité des résultats

Diverses projections alternatives permettent d'évaluer la stabilité des résultats et de mieux illustrer la façon dont opèrent divers déterminants de l'équilibre du système privé de pensions. Les résultats de ces projections, qui font l'objet de commentaires détaillés dans le Cahier d'études, mettent en évidence l'effet durable d'une accélération même temporaire d'une hausse des salaires, l'importance cruciale d'une amélioration du taux de rendement des réserves, la sensibilité de la situation budgétaire au taux de participation des femmes au marché du travail et, enfin, les retombées très favorable d'un accroissement du taux de fertilité.

Conclusion

Les résultats brièvement décrits ci-dessus soulignent l'importance d'une surveillance proactive de l'évolution de la situation budgétaire du système de pensions. Il serait hasardeux de n'adopter d'éventuelles mesures de correction que lorsque les réserves de pensions auront significativement décliné. Il serait alors trop tard pour contrer avec succès les facteurs de dérive des coûts, ce qui contraindrait les autorités à hausser significativement les cotisations sociales.

Ces résultats mettent également en évidence la nécessité d'une gestion rigoureuse du budget de l'Etat central. Les excédents de la sécurité sociale sont vraisemblablement appelés à s'étioler à moyen terme. Dans un tel contexte, un déficit structurel de l'Etat central contrarierait davantage qu'actuellement le respect des exigences européennes, qui se rapportent aux administrations publiques considérées dans leur globalité (Etat central, communes, sécurité sociale).

2002

5
Monetary transmission: empirical evidence from Luxembourg firm-level data
en
Patrick LUNNEMANN and Thomas Y. MATHÄ
Published in Angeloni, I., A. Kashyap and B. Mojon, (eds.): Monetary Policy Transmission in the Euro Area, Cambridge Univ. Press, 2003, Chapter 12, pp. 212-220.
October 2002
Abstract

This paper investigates the transmission of monetary policy in Luxembourg. It is the first empirical analysis conducted for Luxembourg firm-level data. The results indicate that the sales accelerator may be at work. A very robust result is the negative effect of the user cost of capital on firms' investment ratio. Changes in user cost are significantly affected by changes in the monetary policy indicator. In addition, firm specific balance sheet characteristics, such as the lagged cash stock to capital ratio influence the investment behaviour according to the broad credit channel theory. It is shown that young firms, in particular, are more sensitive to user cost changes, sales growth and the lagged cash to capital ratio.

JEL Codes: D21, D92, E22, E52

Keywords: Investment, User Cost of Capital, Credit Channel, Panel Data

 

4
Potential output and the output gap in Luxembourg: some alternative methods
en
Paolo GUARDA
June 2002
Abstract

The output gap is defined as the difference between the observed level of an economy’s output and its trend or potential level. In the short term, an economy can produce above its potential level (a positive output gap) through unusually high levels of labour force participation, capacity utilisation, or technical progress. However, a positive output gap tends to generate inflationary pressures on the markets for factors of production. Once inflation accelerates, output will have to fall below its potential level (a negative output gap) to increase available resources and reduce the pressure on prices. Therefore, measures of the output gap are often used in macroeconomic analysis to assess current and future levels of inflationary pressures in the economy. This study reviews several of the many alternative methods of estimating output gaps and applies six of these to annual data for Luxembourg. These different measures of the output gap are then compared and evaluated in terms of their contribution to inflaton forecasting. Methods based on unobserved components models tend to do better than simpler, better known methods (i.e. linear trends, the Hodrick-Prescott filter). Multivariate methods that consider the simultaneous evolution of several different economic variables tend to do better than univariate methods that limit themselves to the output series itself.

3
Economies d'échelle, économies de diversification et efficacité productive des banques luxembourgeoises
fr
Abdelaziz ROUABAH
Mars 2002
Abstract

This study analyses productive efficiency in banking and scale and scope economies using stochastic frontier analysis. The European banking sector underwent great changes during the period under study (1995-2000), featuring a marked increase in competition. Empirical results suggest that Luxembourg-based banks in our sample are relatively efficient and that their good performance can in part be explained by independent variables in the cost function and by technological progress. Estimated scale elasticities do not provide evidence in favour of economies of scale. However, test results generally cannot reject the existence of cost-complementarities across the following output pairs: deposits-loans, loans-securities, and deposits-securities.

Mots Clés: X-efficiency; Stochastic Cost frontier; Banking; Panel data.

Classification JEL: G21, D21, C23.

2001

2
Stock market valuation of old and new economy firms
en
Patrick LUNNEMANN
November 2001
Abstract

Though stock prices are commonly not considered an integral part of central banks’ monetary policy strategy, financial asset prices are highly relevant because they exert important impacts on inflation, on the real sphere of the economy, and on the financial system. This paper illustrates the evolution of selected primary and secondary equity markets and elaborates divergences and similarities between the pricing of old and new economy stocks. It is shown that the valuation of new economy stocks is subject to enhanced contingency. Prices of new economy stocks ceteris paribus react more sensitively to new information and modifications to external assumptions. From both a microeconomic as well as a macroeconomic point of view, the growth projections implicit in price earnings ratios observed in recent years seem unrealistic. Furthermore, from a utility maximising perspective, it seems unlikely that the observed shift in investment away from old economy stocks and into new economy stocks could have been achievable without a change in the aggregate risk preference. Panel regression analysis based on 219 EURO STOXX firms, though, confirms a significant impact of firm-specific and macroeconomic fundamentals on monthly returns for old economy companies as well as for telecommunication, media and technology (TMT) firms. The null-hypothesis of no statistically significant difference between TMT firms and non-TMT firms with respect to the role of firm-specific and macroeconomic fundamentals in explaining monthly stock returns is rejected. While theoretical considerations and empirical findings suggest that the monetary policy stance remains an important factor driving equity valuation, the growing passion for stocks and the more volatile pricing of new economy stocks bear important implications for central bank policy making.

1
An assessment of the national labour market on employment, unemployment and their link to the price level in Luxembourg
en
Erik WALCH
April 2001
Abstract
In the framework of its participation in the decision-making process of the single monetary policy, the BCL, among other things, needs to analyse the national economy. Different parts of this paper address different audiences: in order to expose to the general and non-expert public why central banks are interested in labour markets, the first section begins with the basic link between monetary policy and labour markets. The discussion reviews the arguments indicating that in the long run a loose attitude towards inflation does not lead to lower unemployment. In addition, the discussion sketches out to what extent the labour market provides useful information for the conduct of an appropriate monetary policy.
In the second part, the paper focuses on the particularities of the Luxembourg labour market and its impact on the price level. The standard Phillips curve relationship is altered by a number of circumstances: monetary policy is fixed for the euro area as a whole, while the evolution of the labour market is a concern for local policy makers. The very large share of non-residents in domestic employment is the central aspect of Luxembourg’s labour market. In addition, the smallness of the economy is associated with a very high degree of openness in terms of exports and imports. These characteristics affect the determination of equilibrium unemployment and the price level. Since residents’ low participation rates are often criticised, the size of the potential reserve this represents for the labour market is estimated. This potential reserve is very limited compared with the current speed of job creation, so it remains crucial for the national labour market to remain attractive to cross-border commuters and immigrants. The wage bargaining process and non-wage labour costs also play an important role in the national labour market performance. Finally, aspects of resident unemployment are discussed in the light of job search theory.
The views expressed are those of the author and do not necessarily correspond to those of the Banque centrale du Luxembourg.