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How Powell Protects Your Economy, According to the Bundesbank

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Global macroeconomic movements this year have been in large part due to the United States Federal Reserve, which is so obvious that this paragraph is pointless.

Where the Fed leads, other central banks are often forced to follow, at least in defense of their domestic earnings (the “reverse currency wars” that have become so prominent this year).

But the Bundesbank paper Posted on Monday It goes beyond major rate increases and concern about rates. The authors write (taking a breath) Johannes Beutel, Lorenz Emtter, Norbert Mitteo, Esteban Prieto, and Yves Schuller that the risks of financial distress are well thought out, but this:

. . . Questions about how unexpected changes in financial conditions and monetary policy in the United States affect macroeconomic risks in other countries, and what characteristics of countries increase vulnerability to such changes, have received little attention in the literature.

using automatic Bayesian quantitative vector regression (duh) on data from 44 countries, as well as examining the effects of GDP and excess bond premium (cousin boob risk premium related to corporate bond markets), they found:

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(1) “External tightening in US financial conditions increases macroeconomic risks at the international level.”
– (2) “An unexpected tightening in US monetary policy also has stronger effects on the lower tail of the conditional GDP growth distribution than on the median and upper tail.”
(3) “Specific country characteristics are of great importance for the international transmission of these shocks on the bottom of the conditional distribution of GDP growth.

TL; Dr dollar wrecking ball He is very real, and very wrecked.

This is all very well, but an interesting discovery is how these effects are distributed. The gang (our focus):

The effect of shock on the upper tail (90% quantitative) is positive and less pronounced than the effect on the median. By contrast, the effect on the lower tail (10% quantitative) is much stronger than the effect on the mean. after four quarters, The effect on the lower tail is about four times stronger than that on the average.

Here’s how that looks in the graph – basically, when you hit wrecking balls directly, they hit hard:

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Some properties seem to make a growth effect Many Worse for those hardest hit. Specifically, large amounts of debt denominated in foreign currencies, fixed exchange rates, and a large amount of domestic leverage (no surprises there).

It is the best shield against shattering Eat a solid meal before you go out Floating exchange rate, researchers believe:

. . . For the 10% conditional quantity of GDP growth (upper panel), we find that countries with a relatively more flexible exchange rate regime show a more moderate (i.e., less negative) response to GDP growth to a US fiscal shock. ..

From the perspective of our results, any potential stabilizing effects of a currency peg system that insulates the economy from large fluctuations in the exchange rate are dominated by this mechanism.

The interesting takeaway here seems to be that having these vulnerabilities is especially problematic for those who suffer the most. In terms of a layman’s analogy, we think this is something like:

Setting fire to the upper half of your house and destroying it is bad
Setting your whole house on fire, lighting your huge stockpile of fireworks in your basement, is much worse

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Or, as Beutel et. put it:

Our findings indicate that the strength of the GDP growth response varies systematically with specific country characteristics for the lower tail of the conditional GDP growth distribution but not for the mean. Therefore policymakers concerned with the possibility of significant negative output growth should pay particular attention to policy choices that expose their economies to high GDP risks arising from external shocks.

To these policy makers we say: Good luck!

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UK regulator to investigate rising mobile phone and broadband prices

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The UK’s telecoms regulator has launched an investigation into whether telecoms companies were upfront with customers about price increases in a contract after complaints of a lack of transparency.

Ofcom will study whether mobile and broadband service providers made customers who signed a deal with the company between March 2021 and June 2022 sufficiently aware of changes to their pricing terms.

As inflation soared as the cost-of-living crisis intensified, telecom groups collapsed audit From the regulator and politicians about whether they acted enough to support struggling families and broke the rules of transparency. UK inflation hit a 41-year high of 11.1 percent in October.

Most operators chose to significantly increase their prices above the rate of inflation earlier this year, which boosted core revenue. For example, BT, Vodafone and EE raised their prices in line with the CPI, plus 3.9 percent.

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Ofcom He said he was concerned that such intra-contract price differences were not “sufficiently prominent or transparent” at the point of sale, as required by the regulator’s rules. If cases of non-compliance are identified, Ofcom may initiate an investigation into said operators.

said Lindsey Fossell, group director of regulator networks and communications.

Ofcom’s latest affordability report, published on Thursday, found that 32 per cent of households had problems paying for phone, broadband, pay TV or broadcast bills – more than double the level of April 2021.

It also found that 17 percent of households are currently cutting back on other spending, such as food and clothing, to afford telecom services — up from 4 percent in June 2021.

Dana Toback, chief executive of Hyperoptic, a broadband provider that chose not to raise its prices above inflation rates this year, said Ofcom’s investigation was “a huge step forward in preventing the consumer from harm caused by higher mid-price contracts”.

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This year’s Hyperoptic survey found that 60 percent of people were unaware that the price of their broadband would increase mid-decade.

“We work hard to make sure that the annual price increase is clearly defined and discussed at each registration or renewal,” said BT, which also owns EE, adding that the company also showed customers how price changes worked in the contract.

“We follow industry best practices, and will participate fully in the Ofcom programme,” she said.

Vodafone did not immediately respond to a request for comment.

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Georgieva of the International Monetary Fund to discuss the economy and Covid with Chinese authorities via Reuters

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© Reuters. International Monetary Fund Managing Director Kristalina Georgieva attends a press conference following a meeting at the Federal Chancellery in Berlin, Germany on November 29, 2022. REUTERS/Michel Tantosi

NEW YORK (Reuters) – International Monetary Fund Managing Director Kristalina Georgieva said on Thursday that she will travel to Beijing next week with heads of other international institutions to discuss China’s economic outlook and COVID-19 policies with the country’s leadership.

“This is the first time, and we hope we can sit down together and discuss the very pressing issues facing China and the world,” Georgieva told the upcoming Reuters conference.

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Dutch minister defends trade relations with China

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A senior Dutch minister has defended the country’s deepening trade ties with China and vowed not to overreact on high-tech exports as the Biden administration pushes its European partners to harden their stance on Beijing.

The Netherlands remains “very positive” about its relationship with China, Micky Adriansens, the economy minister, said, saying Dutch companies operating there are providing a boost to innovation and trade.

As the United States presses its partners to tighten controls on exports of high-end semiconductor equipment to China, it has insisted that the Netherlands and Europe “must have their own strategy.”

“We have to think about this through – what are the risks of doing business with China in terms of certain products and value chains,” she told the Financial Times. “In general, we in the Netherlands are very positive and always have good relations with China. We do a lot of business with China. There are a lot of Dutch companies operating.”

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China accounts for 11 percent of Dutch imports, second only to Germany, and about 5 percent of exports.

The minister said that the relationship “gives a real boost to innovation and trade which is fundamental for Europe. We must cherish that as well.”

The remarks appear to contradict those of US Secretary of State Antony Blinken this week, who said he has seen “growing rapprochement” between the US and its allies on China. Blinken’s comments follow the US decision in October to impose strict export controls aimed at slowing China’s development capacity and preventing it from obtaining advanced semiconductors that could be used for military purposes.

The Netherlands is home to ASML and ASM International, two world-leading manufacturers of chip equipment.

The United States is now trying to persuade the Netherlands and Japan, another big player in the global chip industry, to strike a three-way deal that would further limit China’s access to chip-making tools.

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US sanctions, which prevent companies from sending many US-made products to China, have already hurt Dutch industry. ASMI He said This week they will affect about 40 percent of sales to China, which accounts for 16 percent of the group’s revenue.

Adriaansens declined to comment on the possible time frame in the semiconductor talks, saying it’s “not a simple yes or no,” but a matter of examining many aspects of a very complex production process. “You have to be very clear about which aspect of the production process is the most important issue for China,” she said.

“The Netherlands and Europe should have their own strategy,” she said, when asked about the US talks. At the same time, they needed to be aware of the risks associated with “specific technologies”. She added, “You don’t want to overdo it, but on the other hand, you don’t want to open your doors where safety is the number one issue — it’s a balancing thing.”

She also warned that it may not be possible to prevent China from acquiring advanced technology. “The development cycle is going very fast in China. We must not be naive.”

Adriaansens said the US’s separate actions to provide massive green technology subsidies to local businesses are troubling The Hague.

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The European Union said that a large part of the $369 billion in tax breaks and tax support in the United States Inflation Reduction Act discriminatory and violates global trade rules, and is in talks with Washington.

“The law to reduce inflation has an impact on industry and the economy in the Netherlands and the EU as a whole,” said Adriaansens. Combined with lower energy prices, it would deter investors and hurt European business competitiveness.

The minister added that the West should have a level playing field and “the same set of rules”. I compared it to the upcoming World Cup match with the United States. “We would like to have the same goal size and the same lines on the field in both halves.”

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