Macroeconomic imbalances, financial stress and fiscal vulnerability in the euro area before the debt crises: A market viewGilles Dufrénot, Karine Gente et Frédia Monsia, Journal of International Money and Finance, Volume 67, Issue C, pp. 123-146, 2016

This paper tries to identify the macro-financial imbalances that exposed the euro area countries to fiscal stress before the outbreak of the European debt crises. Contrary to conventional wisdom that interprets fiscal stress in terms of fiscal sustainability, we focus on short-term fiscal vulnerability as reflected by the conditions of debt refinancing in the sovereign bond markets. We find that market-based indicators capturing risk perceptions of sovereign debts have been influenced by the indicators defined in the European Macroeconomic Imbalance Procedure (MIP) and by variables of financial vulnerability. When pricing the risk of sovereign bonds, the holders of government debts take into account, not only the macroeconomic imbalances, but also factors such as banking distress, corporate bond risk, liquidity risks in the interbank market or the volatility of stock prices.

L'Amérique latine dans la globalisation financière : a-t-on appris des crises passées ?Gilles Dufrénot, Revue d'économie financière, Volume 124, Issue 4, pp. 61-77, 2016

This paper discusses the monetary and exchange policies followed by Latin American countries during the financial crises that have appeared each decade since the beginning of the 1980s. We examine the implications of a phenomenon defined by Reinhart as “this time is different”. In particular, we report errors in the diagnosis of the structural causes of past financial crises, and the damages caused by the choice of fixed exchange rates. The article also looks at the problems facing the countries today: the resource curse, the dilemma between currency appreciation and financial bubbles, inflation targeting policy. We suggest that governments have learned from past crises, by further anchoring their financial policies to the reality of their economies: the exchange rate regime is no longer the guiding element of inflation policy, loans in local currency have increased due to the rise in domestic bond markets, monetary policies have remained accommodative during the 2008 financial crisis, and central banks have used swap agreements to meet their needs of international currencies. Classification JEL: E52, F14, F31, F33, F42, O11, O54.

Regime-Dependent Fiscal Multipliers in the United StatesGilles Dufrénot, Aurélia Jambois, Laurine Jambois et Guillaume Khayat, Open Economies Review, Volume 27, Issue 5, pp. 923-944, 2016

This paper proposes a regime-dependent model to estimate fiscal multipliers in the US. Output, consumption and investment are assumed to respond to tax and spending changes in a nonlinear manner. Fiscal multipliers are time-varying because their size and sign depend upon the state of the economy (upturns and downturns). Keynesian effects appear essentially during downturns, while anti-Keynesian effects are observed during expansions. Transfer payments contributes to a higher private consumption when they are given to consumers in bad times. Reducing taxes boosts consumption in good times. Investment responds positively to lower taxes during downturns, but negatively in the upturn regime. Our results thus suggest that Keynesian effects have been associated to expansionary policies during recessions, while anti-Keynesian effects were observed during expansions illustrating situations of expansionary fiscal consolidation. The effectiveness of fiscal positive impulses increases in downturns relative to upturns. A corollary is therefore that austerity measures during recessions would have detrimental effects on the GDP and its components.

Nonlinear effects of asset prices on fiscal policy: Evidence from the UK, Italy and SpainLuca Agnello, Gilles Dufrénot et Ricardo M. Sousa, Economic Modelling, Volume 44, Issue C, pp. 358-362, 2015

We test for nonlinear effects of asset prices on the fiscal policy of three major European economies (the UK, Italy and Spain). We model primary government spending and government revenue as time-varying transition probability Markovian processes (TVPMS). We find that while in Italy fiscal policy is substantially neutral vis-à-vis asset price movements, fiscal authorities in the UK and Spain seem to track the dynamics of wealth. In particular, revenue-based fiscal policy interventions in the UK are particularly effective in counteracting shocks in the asset markets induced by sharp wealth fluctuations. Similarly, in Spain, the spending-side of the fiscal policy plays a dominant role in stabilizing stock and housing markets.

The ECOWAS countries’ growth rates: what makes them similar and what makes them different? A quantile regression analysisGilles Dufrénot et Hélène Ehrhart, Canadian Journal of Development Studies / Revue canadienne d'études du développement, Volume 36, Issue 3, pp. 345-365, 2015

This paper uses a quantile regression analysis to investigate differences across the ECOWAS countries of the engine of growth. Specifically, we want to see whether differences in the growth rates are related to domestic factors of economic growth (investment, human capital and financial intermediation), policy variables (inflation and government consumption) and institutional factors (degree of bureaucracy, accountability, corruption and property rights). Our empirical investigation provides evidence of heterogeneity in the determinants of economic growth depending upon the location of countries in the conditional distribution of per-capita GDP growth. We find that in the upper tails of the distribution, governance and institutional variables are more crucial in impacting growth than the standard determinants of growth in the neoclassical growth models. Conversely, for the lower tails of growth distribution, the economic growth seems to depend more heavily on the accumulation of physical capital and on education.

A Comparison of the Fed’s and ECB’s Strategies during the Subprime CrisisMarcel Aloy et Gilles Dufrénot, W. A. Barnett et F. Jawadi (Eds.), 2015-07, Volume 24, pp. 419-449,Chapitre12, Emerald Group Publishing Limited, 2015

Abstract This chapter proposes a comparative analysis of the monetary policies undertaken by the Federal Reserve Board and the European Central Bank after the 2008 subprime crisis. We point out the twin nature of the financial crises in Europe in comparison with the US crises: in addition to the role of bank funding, the euro area countries have also experienced a structural problem of balance of payment disequilibria. This explains why in the early stages of the subprime crisis, the Fed has succeeded in tackling the illiquidity problems facing the banking sector, while the ECB did not. The Fed could then focus on tackling the recession in the real sector by adopting quantitative easing policies to exert downward pressure on the long-term interest-rate. In the euro area quantitative easing policies came later, in 2013. Even the forward guidance policies have been different between the two central banks. Unlike the ECB, the Fed has gone through diverse forward guidance policies: qualitative, calendar-based, and state-contingent. The chapter proposes a new survey of the monetary policies after the subprime crisis by comparing two strategies in different contexts: the United States and the euro area.

Reactions to Shocks and Monetary Policy Regimes: Inflation Targeting Versus Flexible Currency Board in Sub-Saharan AfricaFadia Al Hajj, Gilles Dufrénot, Kimiko Sugimoto et Romain Wolf, The Developing Economies, Volume 53, Issue 4, pp. 237-271, 2015

The paper examines the monetary policy actions through which central banks in sub-Saharan Africa have tried to eliminate the negative impacts of the shocks facing their economies. We compare two different monetary policy regimes: a currency board regime (in the CFA zone) and an inflation targeting policy regime (Ghana and South Africa) when central banks respond to demand, supply, and fiscal shocks. We extend the usual forecasting and policy analysis system models to replicate the economic features of these economies during the period 2002–12 and to evaluate the impact of several policies in response to these shocks. We find that both policies are inappropriate in helping the economies escape from the effects of negative demand shocks, both are essential when negative shocks to primary balance occur, while inflation targeting dominates the currency board regime as a strategy to cope with positive shocks to inflation.

Is financial repression a solution to reduce fiscal vulnerability? The example of France since the end of World War IIMarcel Aloy, Gilles Dufrénot et Anne Péguin-Feissolle, Applied Economics, Volume 46, Issue 6, pp. 629-637, 2014

This article contributes to the recent empirical literature on financial repression and focuses on the French case since the end of World War II. We find that the fiscal adjustment needed to lower the debt ratio has been smaller during the years of financial repression in comparison with those of liberalized financial markets. This was possible because the real interest rates were low. We conduct a counterfactual analysis to see whether the vulnerability of public finances would have been different, if, since the late 1980s, the governments had continued carrying out the same financial repression policies. We answer affirmatively showing that the cost of debt service would have been reduced.

Spillover effects of the 2008 global financial crisis on the volatility of the Indian equity markets: Coupling or uncoupling? A study on sector-based dataGilles Dufrénot et Benjamin Keddad, International Review of Financial Analysis, Volume 33, Issue C, pp. 17-32, 2014

This paper focuses on the following question: has the global financial stress in the US markets during the subprime crisis induced a persistent volatility of Indian equity stocks? We answer this question using sector-based data and we propose a simple stochastic volatility model augmented with exogenous inputs (financial stress indicators in the US market). We derive analytically the autocorrelation of the squared returns using cross-moments and estimate the impact of several variables such as the CDS spreads, the ABCP spreads, market liquidity, the volatility of the S&P 500 using a Kalman filter approach with the impact captured through Almon polynomials. We find a strong evidence of persistent volatility irrespective of the sector and interpret this finding as the result of two factors: the lower liquidity of the Indian equity markets during the subprime crisis and a wake-up call effect.

Global Imbalances And Financial Sector Instabilities: IntroductionVladimir Borgy, Carine Bouthevillain et Gilles Dufrénot, International Journal of Finance & Economics, Volume 19, Issue 1, pp. 1-2, 2014

This special issue provides several views about the sources of the current crisis and policy solutions to cope with it. It brings together papers from academic institutions, international organizations and central banks. The first three papers argue that the crisis was triggered by the lack of confidence of the investors in the markets. This was reflected, for instance, in the pricing of the public debt (with an increase in the sovereign debt spreads) and in the reduced syndicated lending in wholesale lending markets. The other three papers focus on policy aspects by analyzing indicators that could serve as early warning signals of increasing stress and vulnerability. The authors propose three set of indicators: policy‐based indicators, some variables used in the macro‐prudential literature and financial indexes. The papers are a selection of papers presented at a Conference on Macroeconomic and financial vulnerability indicators in advanced economies co‐organizes by the Banque de France and the University of Strasbourg on 13–14 September 2013. Copyright © 2013 John Wiley & Sons, Ltd.