The recent economic literature has made a frequent use of the concept of hysteresis, for instance... more The recent economic literature has made a frequent use of the concept of hysteresis, for instance in the fields of international trade and unemployment. Hysteresis has only been given vague definitions there, most of the time not equivalent to one another. These definitions refer to two relatively sketchy ideas: (i) the "dependance of the system on its past" ; (ii) the permanent effects of transitory actions". This paper stresses that beyond the different phenomenologies where hysteresis may be found, the concept refers to a set of typical formai properties, defined in terms of the response of a system to an external action. The mathematical models of hysteresis recently developed clearly enlight these properties. We propose to distinguish between a weak form of hysteresis and a strong form, according to two criteria: (i) the type of remanence the system exhibits; (ii) the type of memory the system possesses. The strong form of hysteresis involves a non-trivial transition from heterogeneous micro-elements to a macro-aggregate. On the other hand, it is shown that it is not correct to assimilate the properties of systems with zeroor unit-root dynamics to hysteresis, as it is often done in the field of unemployment theory. For an hysteretic system, two opposite shocks in a row would not take the sytem back to its initial position, contrary to what happens with zero or unit-root processes. The persistence properties of zero-root processes derive from a kind of degeneracy of the dynamics which support it.
On the basis of historical data aggregated over the period 1973 to 2000, we have experimented wit... more On the basis of historical data aggregated over the period 1973 to 2000, we have experimented with four different approaches to estimate the synthetic euro's equilibrium exchange rate. Using a number of competing models with the same data set, variable definitions and sample period offers the possibility to assess the uncertainty surrounding such equilibrium levels, both from an empirical (different estimates) and a theoretical viewpoint (different specifications). In this exercise, the 'Rest of the World' is proxied by the US, the UK, Japan and Switzerland, aggregated on the basis of trade weights. We employed reduced form co-integration models, a structural VAR, a NATREX model (estimated in structural form) and the ECB's small-sized euro area wide macro-econometric model. In this order the approaches feature an increasing degree of 'structure', in the sense of the constraints based on economic theory embedded in the econometric models that were estimated. The results confirm the high likelihood for the euro having been undervalued in Q4 2000, while stressing the significant empirical and theoretical uncertainty with respect to the equilibrium exchange rate level. * The opinions expressed in this paper do not necessarily reflect those of the European Central Bank. Comments from three referees and discussions with R. Mestre, G. Fagan and J. Stein are gratefully acknowledged. The paper benefited also from comments from participants in workshops at the Bundesbank, Bocconi University and the University of Antwerp, in particular from C. van Hooydonk. Econometrics routines employed for the cointegration analysis were developed jointly with E. Angelini and G. Camba-Mendez.
The euro area is a new economic entity, the properties of which are less well known than those of... more The euro area is a new economic entity, the properties of which are less well known than those of individual countries. Using a recently developed macroeconometric model (AWM), which treats the euro area as a single economy, we document its response to monetary, fiscal, productivity and long-run unemployment shocks. The properties of the estimated model are thereby summarised in terms of these responses. The simulation results and the resulting multipliers appear to be relatively insensitive to the specification of the postulated interest rate setting equation-within the class of functions considered, namely variations around a standard Taylor rule.
... According to Johansen's likelihood ratio tests, the US rate is weakly exogenous prio... more ... According to Johansen's likelihood ratio tests, the US rate is weakly exogenous prior to German unification, but the German rate becomes the sole weakly exogenous variable in the system thereafter (see Table 3 for the results of the weak exogeneity and neutrality tests). ...
The Working Paper Series seeks to disseminate original research in economics and finance. All pap... more The Working Paper Series seeks to disseminate original research in economics and finance. All papers have been anonymously refereed. By publishing these papers, the Banco de España aims to contribute to economic analysis and, in particular, to knowledge of the Spanish economy and its international environment. The opinions and analyses in the Working Paper Series are the responsibility of the authors and, therefore, do not necessarily coincide with those of the Banco de España or the Eurosystem. The Banco de España disseminates its main reports and most of its publications via the INTERNET at the following website: http://www.bde.es Reproduction for educational and non-commercial purposes is permitted provided that the source is acknowledged.
This paper reviews the existing empirical evidence on the short-term impact on prices of fiscal v... more This paper reviews the existing empirical evidence on the short-term impact on prices of fiscal variables and assesses it against new results from harmonised simulations, conducted with six well-established econometric models used by the ECB and five national central banks (NCBs) of the Eurosystem. The outcome is also compared with results from the European Commission and the OECD models. Overall, a broad consensus appears on the impact on prices of changes in individual government budget items in the euro area. In all cases, changes in government demand and in direct taxes paid by households have a limited impact on prices in the first year while, in contrast, changes in indirect taxes and employers' social security contributions have a relatively large impact. The second year results show that the effects on prices usually take some time to materialise fully; in particular, they often become large for the public consumption shock.
FSI Insights are written by members of the Financial Stability Institute (FSI) of the Bank for In... more FSI Insights are written by members of the Financial Stability Institute (FSI) of the Bank for International Settlements (BIS), often in collaboration with staff from supervisory agencies and central banks. The papers aim to contribute to international discussions on a range of contemporary regulatory and supervisory policy issues and implementation challenges faced by financial sector authorities. The views expressed in them are solely those of the authors and do not necessarily reflect those of the BIS or the Basel-based committees.
INtROdUCtION 1.1 Why conduct macro stress tests? 1.2 Who conducts macro stress tests? 1.3 The mai... more INtROdUCtION 1.1 Why conduct macro stress tests? 1.2 Who conducts macro stress tests? 1.3 The main objectives and challenges of macro stress tests 2 SOLvENCy ANALySIS fRAmEwORk-thE fOUR PILLARS 2.1 Macro-financial scenario design 2.2 Translation of scenarios via top-down satellite models Box 1 Top-down satellite model design-A Bayesian model approach with a stress-test perspective 2.3 Solvency calculations Box 2 Data required for conducting top-down solvency analysis 2.4 Reverse stress test 2.5 Contagion and feedback analysis Box 3 Literature on financial contagion Box 4 Insurance sector solvency analysis framework: a stocktaking of available tools 3 APPLyINg thE ANALytICAL fRAmEwORk fOR POLICy ANALySIS 5 3.1 Illustrations of uses in regular policy analysis Box 5 Assessment of macro-prudential policy tools using the stress testing framework 3.2 Using top-down stress tests to review bottom-up stress test results Box 6 Liquidity / funding risk assessment 4 CONCLUSION 5 REfERENCES
We investigate the consequences of overleveraging and the potential for destabilizing effects ari... more We investigate the consequences of overleveraging and the potential for destabilizing effects arising from financial- and real-sector interactions. In a theoretical framework, we model overleveraging and demonstrate how a highly leveraged banking system can lead to unstable dynamics and downward spirals. Inspired by models developed by Brunnermeier, Sannikov and Stein, we empirically measure the deviation-from-optimal-leverage for a sample of large EU banks. This measure of overleveraging is used to condition the joint dynamics of credit flows and macroeconomic activity in a large-scale regime change model: a Threshold Mixed-Cross-Section Global Vector Autoregressive (T-MCS-GVAR). The regime-switching component of the model is meant to make the relationship between credit and real activity dependent on the extent to which the banking system is overleveraged. We find significant nonlinearities as a function of overleverage. The farther the observed leverage in the banking system from...
The recent economic literature has made a frequent use of the concept of hysteresis, for instance... more The recent economic literature has made a frequent use of the concept of hysteresis, for instance in the fields of international trade and unemployment. Hysteresis has only been given vague definitions there, most of the time not equivalent to one another. These definitions refer to two relatively sketchy ideas: (i) the "dependance of the system on its past" ; (ii) the permanent effects of transitory actions". This paper stresses that beyond the different phenomenologies where hysteresis may be found, the concept refers to a set of typical formai properties, defined in terms of the response of a system to an external action. The mathematical models of hysteresis recently developed clearly enlight these properties. We propose to distinguish between a weak form of hysteresis and a strong form, according to two criteria: (i) the type of remanence the system exhibits; (ii) the type of memory the system possesses. The strong form of hysteresis involves a non-trivial transition from heterogeneous micro-elements to a macro-aggregate. On the other hand, it is shown that it is not correct to assimilate the properties of systems with zeroor unit-root dynamics to hysteresis, as it is often done in the field of unemployment theory. For an hysteretic system, two opposite shocks in a row would not take the sytem back to its initial position, contrary to what happens with zero or unit-root processes. The persistence properties of zero-root processes derive from a kind of degeneracy of the dynamics which support it.
On the basis of historical data aggregated over the period 1973 to 2000, we have experimented wit... more On the basis of historical data aggregated over the period 1973 to 2000, we have experimented with four different approaches to estimate the synthetic euro's equilibrium exchange rate. Using a number of competing models with the same data set, variable definitions and sample period offers the possibility to assess the uncertainty surrounding such equilibrium levels, both from an empirical (different estimates) and a theoretical viewpoint (different specifications). In this exercise, the 'Rest of the World' is proxied by the US, the UK, Japan and Switzerland, aggregated on the basis of trade weights. We employed reduced form co-integration models, a structural VAR, a NATREX model (estimated in structural form) and the ECB's small-sized euro area wide macro-econometric model. In this order the approaches feature an increasing degree of 'structure', in the sense of the constraints based on economic theory embedded in the econometric models that were estimated. The results confirm the high likelihood for the euro having been undervalued in Q4 2000, while stressing the significant empirical and theoretical uncertainty with respect to the equilibrium exchange rate level. * The opinions expressed in this paper do not necessarily reflect those of the European Central Bank. Comments from three referees and discussions with R. Mestre, G. Fagan and J. Stein are gratefully acknowledged. The paper benefited also from comments from participants in workshops at the Bundesbank, Bocconi University and the University of Antwerp, in particular from C. van Hooydonk. Econometrics routines employed for the cointegration analysis were developed jointly with E. Angelini and G. Camba-Mendez.
The euro area is a new economic entity, the properties of which are less well known than those of... more The euro area is a new economic entity, the properties of which are less well known than those of individual countries. Using a recently developed macroeconometric model (AWM), which treats the euro area as a single economy, we document its response to monetary, fiscal, productivity and long-run unemployment shocks. The properties of the estimated model are thereby summarised in terms of these responses. The simulation results and the resulting multipliers appear to be relatively insensitive to the specification of the postulated interest rate setting equation-within the class of functions considered, namely variations around a standard Taylor rule.
... According to Johansen's likelihood ratio tests, the US rate is weakly exogenous prio... more ... According to Johansen's likelihood ratio tests, the US rate is weakly exogenous prior to German unification, but the German rate becomes the sole weakly exogenous variable in the system thereafter (see Table 3 for the results of the weak exogeneity and neutrality tests). ...
The Working Paper Series seeks to disseminate original research in economics and finance. All pap... more The Working Paper Series seeks to disseminate original research in economics and finance. All papers have been anonymously refereed. By publishing these papers, the Banco de España aims to contribute to economic analysis and, in particular, to knowledge of the Spanish economy and its international environment. The opinions and analyses in the Working Paper Series are the responsibility of the authors and, therefore, do not necessarily coincide with those of the Banco de España or the Eurosystem. The Banco de España disseminates its main reports and most of its publications via the INTERNET at the following website: http://www.bde.es Reproduction for educational and non-commercial purposes is permitted provided that the source is acknowledged.
This paper reviews the existing empirical evidence on the short-term impact on prices of fiscal v... more This paper reviews the existing empirical evidence on the short-term impact on prices of fiscal variables and assesses it against new results from harmonised simulations, conducted with six well-established econometric models used by the ECB and five national central banks (NCBs) of the Eurosystem. The outcome is also compared with results from the European Commission and the OECD models. Overall, a broad consensus appears on the impact on prices of changes in individual government budget items in the euro area. In all cases, changes in government demand and in direct taxes paid by households have a limited impact on prices in the first year while, in contrast, changes in indirect taxes and employers' social security contributions have a relatively large impact. The second year results show that the effects on prices usually take some time to materialise fully; in particular, they often become large for the public consumption shock.
FSI Insights are written by members of the Financial Stability Institute (FSI) of the Bank for In... more FSI Insights are written by members of the Financial Stability Institute (FSI) of the Bank for International Settlements (BIS), often in collaboration with staff from supervisory agencies and central banks. The papers aim to contribute to international discussions on a range of contemporary regulatory and supervisory policy issues and implementation challenges faced by financial sector authorities. The views expressed in them are solely those of the authors and do not necessarily reflect those of the BIS or the Basel-based committees.
INtROdUCtION 1.1 Why conduct macro stress tests? 1.2 Who conducts macro stress tests? 1.3 The mai... more INtROdUCtION 1.1 Why conduct macro stress tests? 1.2 Who conducts macro stress tests? 1.3 The main objectives and challenges of macro stress tests 2 SOLvENCy ANALySIS fRAmEwORk-thE fOUR PILLARS 2.1 Macro-financial scenario design 2.2 Translation of scenarios via top-down satellite models Box 1 Top-down satellite model design-A Bayesian model approach with a stress-test perspective 2.3 Solvency calculations Box 2 Data required for conducting top-down solvency analysis 2.4 Reverse stress test 2.5 Contagion and feedback analysis Box 3 Literature on financial contagion Box 4 Insurance sector solvency analysis framework: a stocktaking of available tools 3 APPLyINg thE ANALytICAL fRAmEwORk fOR POLICy ANALySIS 5 3.1 Illustrations of uses in regular policy analysis Box 5 Assessment of macro-prudential policy tools using the stress testing framework 3.2 Using top-down stress tests to review bottom-up stress test results Box 6 Liquidity / funding risk assessment 4 CONCLUSION 5 REfERENCES
We investigate the consequences of overleveraging and the potential for destabilizing effects ari... more We investigate the consequences of overleveraging and the potential for destabilizing effects arising from financial- and real-sector interactions. In a theoretical framework, we model overleveraging and demonstrate how a highly leveraged banking system can lead to unstable dynamics and downward spirals. Inspired by models developed by Brunnermeier, Sannikov and Stein, we empirically measure the deviation-from-optimal-leverage for a sample of large EU banks. This measure of overleveraging is used to condition the joint dynamics of credit flows and macroeconomic activity in a large-scale regime change model: a Threshold Mixed-Cross-Section Global Vector Autoregressive (T-MCS-GVAR). The regime-switching component of the model is meant to make the relationship between credit and real activity dependent on the extent to which the banking system is overleveraged. We find significant nonlinearities as a function of overleverage. The farther the observed leverage in the banking system from...
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Papers by Jérôme Henry