An anatomy of credit booms and busts

What is the relation between credit booms and bust and other macroeconomic variables such as housing prices, investment, output or consumption? In a recent paper, Mendoza and Terrones document this relation for 61 emerging and industrial countries over the 1960-2010 period. The crucial part of the paper (which is essentially descriptive) is identifying these events. This requires three steps. First, find the appropriate variable that captures the credit boom and bust. Second, decompose this variable into a trend component and deviations from this trend. Third, define some threshold level. When the deviation from trend exceeds this threshold you‘ve found your credit boom. In this way, Mendoza and Terrones identify 70 credit booms: 35 in industrialized countries and 35 in emerging markets. The graph below shows how these booms and busts are clustered around historic events.

Next, they look at the behaviour of output, domestic demand, non-tradables, current account, capital inflow, inflation, and prices. These quantities turn out to behave according to intuition. In the boom phase they rise above trend, while they drop below trend during the bust.  The graph below shows the typical relation for current account and capital inflow.

From a eurocrisis perspective, two of the paper’s findings are relevant. First, credit booms and busts seem more common in countries with managed exchange rates compared to those with  a flexible exchange rate. This suggests that countries in a currency union are more susceptible to such crises. As a result, these countries will have to be especially vigilant when it comes to preventing credit booms.

Second, for advanced economies government spending stays relatively flat over the boom-bust cycle. This suggests that for advanced economies credit booms are mainly driven by private credit and not government spending. Of course, counter examples exist. But for Spain and Ireland, these observations ring true. Consequently, we should not expect that constraining government spending or sovereign debt will prevent future credit booms.

European banking – a tale of fragmentation, financial repression and deleveraging

There has been so much fuss about the IMF’s analysis of fiscal multipliers one would almost forget there is a chapter 2 as well which has some pretty interesting stuff on European banking. It discusses topics such as debt issuance, deposit flows, bank credit to the private sector, and paints a picture of a banking sector facing fragmentation, financial repression, and deleveraging.

Fragmentation is due to the fact that banks are both fleeing to safe havens and withdrawing to their home countries. As a result the interconnectedness between the banking sectors of different countries and especially between north and south is decreasing. The graph below, showing the deposit flows in selected countries illlustrates this

Financial repression arises if countries more or less force their bank to buy home country sovereign debt. This creates an environment of low interest rates that allows the government to reduce its debt burden more slowly than it would otherwise. The IMF illustrates how Spanish and Italian banks increased their holdings of home country sovereign debt.

Finally, deleveraging. If banks have to increase capital levels, they can do so by stopping dividend payments, issuing capital, or reducing the size of their balance sheet. In times of distress, banks will preferable shrink their balance sheets. Banks have shrunk their balance sheets by roughly 600 billion from the 3rd quarter of 2011 to the 4th quarter of 2013.  In the southern countries this has resulted in a reduction in credit to the private sector, as shown below.

Assorted Links

    • Kenichi Ueda and Beatrice Weder di Mauro on the implicit subsidies received by systemically important banks: ‘It was already sizable, 60 basis points, as of the end-2007, before the crisis. It increased to 80 basis points by the end-2009.’
    • Tobias Adrian and Adam Ashcraft on shadow banking regulation: ‘the motivation for shadow banking has likely become even stronger as the gap between capital and liquidity requirements on traditional institutions and non-regulated institutions has increased’
    • Armen Hovakimian, Edward Kane and Luc Laeven on variation in systemic risk at US banks: ‘bank size, leverage, and asset risk are key drivers of systemic risk’

Be careful – or the big bad market will hike your interest rates

When will the big bad market come: if a country implements too little austerity, or if economic growth falters? Soon after the fall of the Dutch government (because the freedom party withdrew support for the minority government), the Dutch Central Bank published on its website a short analysis of Dutch – German bond spreads. They argued that the spreads increased as a direct consequence of the fall of the government. The supposed conclusion: the government budget should be put into order as soon as possible. Here’s the Dutch-German bond spread since 1987. It looks pretty high.

But the claim raises two questions. First, did the spread between Dutch and german interest rates really react to the news or was the larger spread just coincidence? In reality, bond prices jitter around all the time. What are the chances that the movement after the fall of the Dutch government were due to accident? The graph below shows the change in the spread between the 10-year Dutch and German treasury bonds and probability distribution associated with those changes. If we look at changes outside a 99.5% confidence interval, the day the Dutch cabinet fell, the 23rd of april, with a jump in the spread of 0.155 classifies as a significant event. The very next day, by the way, prices dropped by 0.136 percent.

The second question is what did markets actually react to? Did they react to a potential worsening of government budget or to a potential deterioration of growth prospects? In her presentation for the IMF on lessons from the crisis for fiscal policy, Christina Romer provided an interesting analysis for Spain. She made an overview of the ten largest increases in Spanish interest rates and coupled them to the information arriving in the market that caused these interest rate hikes. She concludes that news on a lack of fiscal consolidation as well as news on deteriorating growth prospects were associated in roughly equal proportions with the movements in interest rates.

In the period after 1-1-1999 there were 20 days with upward or downward jumps in the interest rate that were equally significant. Here’s the list.

The conclusion seems to be that Dutch bond prices did indeed increase after the government fell. To attribute jumps in spreads to a lack of austerity measures, however,  is a bridge too far. Bonds spreads might just as well have reacted to a perceived drop the probability of reform measures being enacted. Or to a temporary increase in uncertainty. Who knows.

Onzekerheid als beleidsinstrument?

Onzekerheid als beleidsinstrument? Thijs Knaap schrijft er over op de blog van ESB, het economenblad van Nederland (waar je  nog steeds geen reacties kunt achterlaten …) en op, met de Nederlandse huizenmarkt als een niet heel handig gekozen voorbeeld. Daardoor is het stuk moeilijk serieus te nemen als een beschouwing van een interessant beleidsinstrument.

Onzekerheid kan namelijk inderdaad nuttig zijn, bijvoorbeeld als het gaat om handhaving. Denk aan snelheidscontrole. Als niemand weet waar en wanneer gecontroleerd wordt, kun je met een combinatie van hoge boetes en willekeurige controles snelheidsovertredingen voorkomen. Omdat consumenten niet van onzekerheid houden, kan de overheid door meer onzekerheid te creëren een groter effect bereiken met dezelfde handhavingskosten.

Maar stel een beleidsmaker moet kiezen tussen het met zekerheid verlagen van de hypotheekrenteaftrek of zich verbinden deze al dan niet af te schaffen met een bepaalde waarschijnlijkheid, wat zou dan beter zijn? Nog afgezien van de vraag of zo’n bindende afspraak met zichzelf eigenlijk wel geloofwaardig is, uiteraard. Wat zijn de voordelen van onzekerheid over de hypotheekrenteaftrek? Ik zie alleen maar nadelen. Consumenten houden niet van risico, dus die hebben liever een zekere lage aftrek dan een onzekere hoge. Daarbij zegt Thijs dat de overheid wel zo nu en dan woord bij daad moet voegen en de hypotheekrente flink moet inperken. Het gevolg: nadat de overheid dat gedaan heeft, zullen de huizenprijzen dalen. Te hoge huizenprijzen zijn vervelend, maar volatiele huizenprijzen ook zeker geen gewenste beleidsuitkomst.

Waarom zou onzekerheid dan wel nuttig kunnen zijn? De onzekerheid die nu heerst, verkleint de impact van een daadwerkelijke vermindering van de hypotheekrente aftrek. Consument sorteren immers al voor op wat ze verwachten. Dat maakt als het ware een geleidelijke overgang mogelijk.

Vier stellingen over Nederlandse economenblogs

Mijn succesvolste blog ooit was niet mijn post over de toegevoegde waarde van de Nederlandse financiële sector die meer dan 400 keer op een dag bekeken werd. Nee, het was Nederlandse economen kunnen niet bloggen. En waarom? Omdat maar liefst drie collegabloggers er op reageerden, van respectievelijk (Marco Haan en Thijs Knaap) en van economendagboek (Peter van Bergeijk). Interactie dus – en dat is waar het  om gaat.

Maar wat is de stand van zaken in de Nederlandse blogosphere? Hoeveel blogs zijn er eigenlijk? Waar schrijven ze over? En discussiëren ze  met elkaar? Ik heb vier stellingen:

  1. Er zijn weinig economen met een eigen blog in Nederland.
  2. De meeste economenblogs gaan niet over actuele economische vraagstukken (daar is niks mis mee trouwens).
  3. Economen comuniceren in Nederland nog steeds vooral via traditionele media.
  4. Er is in Nederland weinig zichtbaar debat tussen economen.

Nu nog ontdekken hoe dit komt.