"How Far Can U.S. Equity Prices Fall Under Asset and Debt Deflation"

Equity prices have been falling since March 2000. How far can they fall before they reach bottom? The current bear market differs from the mid-1970s plunge in equity prices in terms of the causes and, consequently, the factors that should be monitored to test its progress. In the 1970s, the bear market was caused by soaring inflation resulting from a surge in the price of oil. It eroded households' real disposable income and corporate profits. That was a supply-led business cycle. Now, the bear market is caused by asset and debt deflation triggered by the burst of the "new economy" bubble. This working paper argues that on current economic fundamentals, the Standard & Poor's (S&P) index is fairly valued at 871, but the fair value may fall if the economy has a double-dip recession that triggers a property market crash. We suggest that the U.S. economy is heading for such a recession, as the poor prospects of the corporate sector are affecting the real disposable income of the personal sector. The forces that drive the economy back to recession are related to imbalances in the corporate and personal sectors that have started infecting the balance sheet of the commercial banks. The final stage of the asset-and-debt-deflation process involves a spiral between banks and the nonbank private sector (personal and corporate). Banks cut lending to the nonbank private sector, creating a credit crunch that worsens the economic health of the latter, which is reflected subsequently as a further deterioration of banks' balance sheets.

Coordination of fiscal with monetary and financial stability policies can better cure unemployment

This paper examines recent theoretical and empirical developments on fiscal policy to conclude that it is an effective macroeconomic tool in terms of curing unemployment. It is further shown that financial stability, ignored prior to the ‘Great Recession’, is important in economic policy. Fiscal policy can contribute to curing unemployment, especially so when coordinated closely not only with monetary policy but also with financial stability policies. It is also suggested that such coordination should be geared towards reducing income inequality. It is then high time that economists and economic policy-makers turned their attention more closely and seriously to restoring faith in fiscal policy with its strong macroeconomic role as a means of curing unemployment. Fiscal policy, properly coordinated with monetary and financial stability policies, should thereby be restored to its proper upgraded role in terms of economic policy.This is the accepted manuscript. The final version is available at http://www.elgaronline.com/view/journals/roke/3-2/roke.2015.02.07.xm

Income inequality: Implications and relevant economic policies

The aim of this contribution is to discuss closely the implications of income inequality and the economic policies to tackle it, especially so in view of inequality being one of the main causes of the 2007/2008 international financial crisis and the ?great recession? that subsequently emerged. Wealth inequality is also important in this respect, but the focus is on income inequality. Ever since the financial crisis and the subsequent ?great recession?, inequality of income, and wealth, has increased and the demand for economic policy initiatives to produce a more equal distribution of income and wealth has become more urgent. Such reduction would help to increase the level of economic activity as has been demonstrated again more recently. A number of economic policy initiatives for this purpose will be the focus of this contribution.This is the final version of the article. It first appeared from the Association of Economists of Vojvodina via http://dx.doi.org/10.2298/PAN1601001

Testing For Financial Contagion Between Developed And Emerging Markets During The 1997 East Asian Crisis

In this paper we examine whether during the 1997 East Asian crisis there was any contagion from the four largest economies in the region (Thailand, Indonesia, Korea and Malaysia) to a number of developed countries (Japan, UK, Germany and France). Following Forbes and Rigobon (2002), we test for contagion as a significant positive shift in the correlation between asset returns, taking into account heteroscedasticity and endogeneity bias. Furthermore, we improve on earlier empirical studies by carrying out a full sample test of the stability of the system that relies on more plausible (over)identifying restrictions. The estimation results provide some evidence of contagion, in particular from Japan (the major international lender in the region), which drastically cut its credit lines to the other Asian countries in 1997

Regional financialisation and financial systems convergence: Evidence from Italy

The term ‘financialisation’ has now entered the lexicon of academics and policy makers, though there is still no agreement on its meaning and significance. One of the earlier definitions was in relation to the growing weight of financial motives, financial actors and markets in the operation of modern economies, both at the national and international level, from the early 1980s until today. Building on this definition, this paper sheds further light on the implications of spatial financialisation, which has been associated with the over and under-extension of credit across and within countries and evolving financial instability. The paper’s primary contribution is to extend in a robust manner a powerful panel data convergence testing methodology to analyse the spatial scale and temporal evolution of Italian regional lending conditions. The paper concludes that financial divergence has broadly increased in Italian regions. Furthermore, we are able to link regional financialisation to the growing north–south divide in a significant and meaningful way. As a result, the ability of southern regions in Italy to absorb adverse macroeconomic and financial shocks has been weakened. Relevant regional financial policies have thereby become very important. This is the author accepted manuscript. The final version is available from SAGE Publications via https://doi.org/10.1177/0308518X1666419

Residential Construction Activity in OECD Economies

Four years after the burst of the housing bubble in some of the main world economies, the recovery does not follow a homogeneous pattern among them. For instance, some economies, like the US, have experienced a weak recovery, while the situation in other countries, like Spain, it is still far from even such. In this context, it is necessary to pay attention to the evolution of residential investment, which traditionally has played an important role in the revival of the economy after previous episodes of bubbles in the housing market. We propose a theoretical explanation of the determinants of real residential investment in order to identify those channels which can be used by policy makers to soften the evolution of cycles in this particular market. In the second stage of our study, we estimate our theoretical framework utilising a sample of 18 OECD countries for the period 1970 to 2011. We utilise a specific linear function for each economy, which we estimate by applying the standard cointegration technique that permits us to obtain a long-run equilibrium relationship and analyse the dynamics in terms of a short-run relationship along with an error-correction term.This is the accepted manuscript. The final version's available from Wiley at http://dx.doi.org/10.1111/manc.1207

Modelling the housing market in OECD countries

Recent episodes of housing bubbles, which occurred in several economies after the burst of the United States housing market, suggest studying the evolution of housing prices from a global perspective. We utilise a theoretical model for the purposes of this contribution, which identifies the main drivers of housing price appreciation, as for example, income, residential investment, financial elements, fiscal policy and demographics. In a second stage of our analysis, we test our theoretical hypothesis by means of a sample of 18 OECD countries from 1970 to 2011. We employ the vector error correction econometric technique in terms of our empirical analysis, which permits us to model the long-run equilibrium relationship and the short-run dynamics, which also helps to account for endogeneity and reverse causality problems.This is the accepted manuscript. The final version is available from Taylor & Francis at http://www.tandfonline.com/doi/full/10.1080/02692171.2013.828683#.VFyu-oXziE

Is job insecurity a driver of the housing cycle? Some evidence in the spanish case

The aim of this paper is to study a possible connection between the characteristics of the labour market, namely, employment protection and flexibility, and the dynamics of the housing market. More specifically, this contribution analyses whether the poor quality of employment in a given economy could cause the collapse of the housing market and impairs its recovery. In the second stage of our analysis, we provide estimates for Spain over the period 1984-2014. In doing so, the autoregressive distributed lag (ARDL) bounds test for cointegration is employed.This is the author accepted manuscript. The final version is available from The Association of Economists of Vojvodina via http://dx.doi.org/10.2298/PAN1501001

Brazilian economic performance since the emergence of the great recession: The effects of income distribution on consumption

After a long period of unstable and low economic activity, Brazil achieved a relatively high economic growth with low inflation from 2004 to 2008, when the world scenario was favourable for the Brazilian trade balance. An incomes policy, focused on real increases in the minimum wage along with a credit boom, led to a decade of high consumption growth rates. High levels of consumption and exports, in turn, induced investment and stimulated manufacturing production, despite the real appreciation of the national currency. However, the Great Recession that emerged after the global financial crisis of 2007/2008 brought challenges to the Brazilian economic performance, with unpleasant consequences for the country?s GDP growth. Consumption, investment and exports have decelerated, despite anti-cyclical macroeconomic policies. In this setting, manufacturing production stagnated and GDP growth slowed down substantially, while imports continued rising considerably. The aim of this paper is to provide an explanation to the slowdown of Brazilian growth rates after the Great Recession. The main hypothesis is that consumption was the main source of effective demand in the country since 2003. However, Brazil has not yet been able to sustain manufacturing and economic growth without a more active government policy to stimulate productive investment.This is the final version of the article. It first appeared from The Association of Economists of Vojvodina via https://doi.org/10.2298/PAN1602157

The effects of financialisation and financial development on investment: Evidence from firm-level data in Europe

In this paper we estimate the effects of financialization on physical investment in selected western European countries using panel data based on the balance-sheets of publicly listed non-financial companies (NFCs) supplied by Worldscope for the period 1995-2015. We find robust evidence of an adverse effect of both financial payments (interests and dividends) and financial incomes on investment in fixed assets by the NFCs. This finding is robust for both the pool of all Western European firms and single country estimations. The negative impacts of financial incomes are non-linear with respect to the companies’ size: financial incomes crowd-out investment in large companies, and have a positive effect on the investment of only small, relatively more credit-constrained companies. Moreover, we find that a higher degree of financial development is associated with a stronger negative effect of financial incomes on companies’ investment. This finding challenges the common wisdom on ‘finance-growth nexus’. Our findings support the ‘financialization thesis’ that the increasing orientation of the non-financial sector towards financial activities is ultimately leading to lower physical investment, hence to stagnant or fragile growth, as well as long term stagnation in productivity