Financial Conditions And Macroeconomic Performance

This collection of papers on financial instability and its impact on macroeconomic performance honours Hyman P. Minsky and his lifelong work. It is based on a conference at Washington University, St. Louis, in 1990 and includes among the authors Benjamin M. Friedman, Charles P. Kindleberger, Jan Kregel and Steven Fazzari. These papers consider Minsky's definitive analysis that yields such a clear and disturbing sequence of financial events: booms, government intervention to prevent debt contraction and new booms that cause a progressive buildup of new debt, eventually leaving the economy much more fragile financially.

The paper investigates the non-performing loans (NPLs) in Central, Eastern and South-Eastern Europe (CESEE) in the period of 1998–2011. The paper finds that the level of NPLs can be attributed to both macroeconomic conditions and banks’ specific factors, though the latter set of factors was found to have a relatively low explanatory power. The examination of the feedback effects broadly confirms the strong macro-financial linkages in the region. While NPLs were found to respond to macroeconomic conditions, such as GDP growth, unemployment, and inflation, the analysis also indicates that there are strong feedback effects from the banking system to the real economy, thus suggesting that the high NPLs that many CESEE countries currently face adversely affect the pace economic recovery.

How can information on financial conditions be used to better understand macroeconomic developments and improve macroeconomic projections? We investigate this question for France by constructing country-specific financial conditions indices (FCIs) that are tailored to movements in GDP, investment, private consumption and exports respectively. We rely on a VAR approach to estimate the weights of the financial components of each FCI, including equity market returns (which turn out having a relatively strong weight across all FCIs), private sector risk premiums, long-term interest rates, and banks’ credit standards. We find that the tailored FCIs are useful as leading indicators of GDP, investment, and exports, and as a contemporaneous indicator of private consumption. Credit volumes turn out to be lagging indicators of growth. The indices inform us on macro-financial linkages in France and are used to improve the accuracy of quarterly forecasting models and high-frequency “nowcast” models. We show that FCI-augmented models could have significantly improved forecasts during and after the global financial crisis.

This book collects selected articles addressing several currently debated issues in the field of international macroeconomics. They focus on the role of the central banks in the debate on how to come to terms with the long-term decline in productivity growth, insufficient aggregate demand, high economic uncertainty and growing inequalities following the global financial crisis. Central banks are of considerable importance in this debate since understanding the sluggishness of the recovery process as well as its implications for the natural interest rate are key to assessing output gaps and the monetary policy stance. The authors argue that a more dynamic domestic and external aggregate demand helps to raise the inflation rate, easing the constraint deriving from the zero lower bound and allowing monetary policy to depart from its current ultra-accommodative position. Beyond macroeconomic factors, the book also discusses a supportive financial environment as a precondition for the rebound of global economic activity, stressing that understanding capital flows is a prerequisite for economic-policy decisions.

This open text provides complete, concise coverage of introductory macroeconomic theory and policy. It examines the Canadian economy as an economic system, and embeds current Canadian institutions and approaches to monetary policy and fiscal policy within that system. Particular attention is given to the recent structure, performance, and evolution of the Canadian economy, and to the current targets and instruments of Canadian monetary and fiscal policy.These are exciting and challenging times in which to study macroeconomics. We focus on short-run macroeconomic performance, analysis, and policy motivated by the recessions of the early 1980s and 1990s, the financial crisis and recession of 2008-2009, and the prolonged recovery in most industrial countries. To that end, the text examines macroeconomic institutions, performance, and policies in ways that help students understand and evaluate critically the news media coverage and broader public discussion of:- Recessions and recoveries, unemployment, inflation, deflation and conditions in financial markets-topics of ongoing reporting, discussion, and debate.- Monetary and fiscal policy announcements and discussions focused on inflation targets, interest rate settings, budget balances, tax rates, expenditures, and public debt targets as these affect economic performance.- Exports, imports, international capital flows, foreign exchange rates, and the importance of the international sector of the Canadian economy.- Economic growth, productivity growth, and the importance of productivity growth for standards of living in Canada and other countries.A traditional Aggregate Demand and Supply model is introduced to provide a consistent analytical framework for development of sector topics that follow. The analysis builds on a study of short-run business cycle fluctuations in output and employment, under constant equilibrium price conditions. The balance of payments, exchange rate policy, and monetary and fiscal policy under different exchange rate systems complete the short-run open economy model.A basic modern Aggregate Demand and Supply model of output and the inflation rate is also developed based on:- Current Canadian monetary policy based on inflation targets, interest rate policy instruments, and current Bank of Canada operating techniques, including the potential for quantitative or credit easing.- Current Canadian fiscal policy based on deficit and debt control targets, the government's budget function, the temporary shift to fiscal stimulus in 2009 and the implications for budget balances and the public debt.Numerical examples, diagrams, and basic algebra are used in combination to illustrate and explain economic relationships. Students learn about the importance of trade flows, consumption; government budgets; money supply; financial asset prices, yields, and interest rates; employment and unemployment; and other key relationships in the economy. Canadian and selected international data are used to provide real world examples and comparisons.The text is supported by Lyryx Learning, offering editorial services to develop and adapt open content, formative online assessment, course supplements, and support to both the students and instructors.

Effective decision making requires understanding of the underlying principles of financial markets and economics. Intellectually, economics and financial markets are genetically intertwined although when it comes to popular commentary they are treated separately. In fact, academic economic thinking appears separate from financial market equity strategy in most financial market commentary. Historically, macroeconomics tended to assume away financial frictions and financial intermediation whereas financial economists did not necessarily consider the negative macroeconomic spill overs from financial market outcomes. In more recent years, the economic discipline has gone through a serious self-reflection after the global crisis. This book explores the interplay between financial markets and macroeconomic outcomes with a conceptual framework that combines the actions of investors and individuals. Of interest to graduate students and those professionals working in the financial markets, it provides insight into why market prices move and credit markets interact and what factors participants and policy makers can monitor to anticipate market change and future price paths. ​

The October 2019 Global Financial Stability Report (GFSR) identifies the current key vulnerabilities in the global financial system as the rise in corporate debt burdens, increasing holdings of riskier and more illiquid assets by institutional investors, and growing reliance on external borrowing by emerging and frontier market economies. The report proposes that policymakers mitigate these risks through stricter supervisory and macroprudential oversight of firms, strengthened oversight and disclosure for institutional investors, and the implementation of prudent sovereign debt management practices and frameworks for emerging and frontier market economies.

Extraordinary policy measures have eased financial conditions and supported the economy, helping to contain financial stability risks. Chapter 1 warns that there is a pressing need to act to avoid a legacy of vulnerabilities while avoiding a broad tightening of financial conditions. Actions taken during the pandemic may have unintended consequences such as stretched valuations and rising financial vulnerabilities. The recovery is also expected to be asynchronous and divergent between advanced and emerging market economies. Given large external financing needs, several emerging markets face challenges, especially if a persistent rise in US rates brings about a repricing of risk and tighter financial conditions. The corporate sector in many countries is emerging from the pandemic overindebted, with notable differences depending on firm size and sector. Concerns about the credit quality of hard-hit borrowers and profitability are likely to weigh on the risk appetite of banks. Chapter 2 studies leverage in the nonfinancial private sector before and during the COVID-19 crisis, pointing out that policymakers face a trade-off between boosting growth in the short term by facilitating an easing of financial conditions and containing future downside risks. This trade-off may be amplified by the existing high and rapidly building leverage, increasing downside risks to future growth. The appropriate timing for deployment of macroprudential tools should be country-specific, depending on the pace of recovery, vulnerabilities, and policy tools available. Chapter 3 turns to the impact of the COVID-19 crisis on the commercial real estate sector. While there is little evidence of large price misalignments at the onset of the pandemic, signs of overvaluation have now emerged in some economies. Misalignments in commercial real estate prices, especially if they interact with other vulnerabilities, increase downside risks to future growth due to the possibility of sharp price corrections.