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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may Peter ClaeysUniversitat de Barcelona; e-mail: peter.claeys@eui.eu Bořek VašíčekCzech National Bank; e-mail: borek.vasicek@cnb.cz AbstractThe global financial crisis rapidly spread across borders and financial markets, and also distressed EU bond markets. The crisis did not hit all markets in the same way. We measure the strength and direction of linkages between 16 EU sovereign bond markets using a factor-augmented version of the VAR model in Diebold and Yilmaz (2009). We then provide a novel test for contagion by applying the multivariate structural break test of Qu and Perron (2007) on this FAVAR detecting significant sudden changes in shock transmission. Results indicate substantial spillover, especially between EMU countries. Differences in bilateral linkages are due to a combination of fiscal trouble and a large banking sector, as Belgium, Italy and Spain are central to shock transmission during the financial crisis. Contagion has been a rather rare phenomenon limited to a few well defined moments of uncertainty on financial assistance packages for Greece, Ireland and Portugal. Most of the frequent surges in market co-movement are driven by larger shocks rather than by contagion.Keywords: spillover, contagion, fiscal policy, eurozone, financial crisis, FAVAR JEL Codes: G12, C14, E43, E62, G12, H62, H63. 1 Nontechnical SummaryFinancial integration has increased the interdependence between asset markets. The European debt crisis shows that fiscal trouble can transmit in unexpectedly fast ways even between sovereign bond markets. Empirical studies typically confirm the rising importance of external factors in determining the evolution of yields on domestic bond markets. However, most studies aim at the common factors without detail look at bilateral linkages between bond markets (their strength, direction and time-variation).In this paper we analyse the bilateral linkages between EU sovereign bond markets over time using factor-augmented version of the VAR model in Diebold and Yilmaz (2009) Our results indicate the presence of significant spillover between the sovereign bond markets of EU countries. This should not come as a surprise given continued financial and economic integration. Spillover is also important for countries outside the eurozone but considerably less so:Central European countries (Czech Republic, Hungary and Poland) seem to affect one another, Denmark, Sweden and the UK are rather insulated fro...

MaRs is to develop core conceptual frameworks, models and/or tools supporting macro-prudential supervision in the EU. The research is carried out in three work streams: 1) Macro-financial models linking financial stability and the performance of the economy; 2) Early warning systems and systemic risk indicators; 3) Assessing contagion risks. MaRs is chaired by Philipp Hartmann (ECB). Paolo Angelini (Banca d'Italia), Laurent Clerc (Banque de France), Carsten Detken (ECB), Cornelia Holthausen (ECB) and Katerina Šmídková (Czech National Bank) are workstream coordinators. Xavier Freixas (Universitat Pompeu Fabra) and Hans Degryse (Katholieke Universiteit Leuven and Tilburg University) act as external consultant. Angela Maddaloni (ECB) and Kalin Nikolov (ECB) share responsibility for the MaRs Secretariat. The refereeing process of this paper has been coordinated by a team composed of Cornelia Holthausen, Kalin Nikolov and Bernd Schwaab (all ECB). The paper is released in order to make the research of MaRs generally available, in preliminary form, to encourage comments and suggestions prior to final publication. The views expressed in the paper are the ones of the author(s) and do not necessarily reflect those of the ECB or of the ESCB. Acknowledgements 1 AbstractWe search for early warning indicators that could indicate important risks in developed economies. We therefore examine which indicators are most useful in explaining costly macroeconomic developments following the occurrence of economic crises in EU and OECD countries between 1970 and 2010. To define our dependent variable, we bring together a (continuous) measure of crisis incidence, which combines the output and employment loss and the fiscal deficit into an index of real costs, with a (discrete) database of crisis occurrence. In contrast to recent studies, we explicitly take into account model uncertainty in two steps. First, for each potential leading indicator, we select the relevant prediction horizon by using panel vector autoregression. Second, we identify the most useful leading indicators with Bayesian model averaging. Our results suggest that domestic housing prices, share prices, and credit growth, and some global variables, such as private credit, are risk factors worth monitoring in developed economies. When the global turmoil demonstrated that developed economies can be also among those hit significantly by a crisis, it was not obvious whether the previously identified early warning indicators should be employed again. We try to take up this challenge and contribute to the early warning literature by focusing solely on developed economies and by offering several methodological improvements for explaining crisis incidence.In the first step, we refine the measure of the real costs of crises to the economy by combining a continuous index of real costs with a binary index of crisis occurrence. The continuous index reflects the output and employment loss along with the fiscal deficit, while the binary index captures the occurrence of various (bank...

We examine whether and how selected central banks responded to episodes of financial stress over the last three decades. We employ a new monetary-policy rule estimation methodology which allows for time-varying response coefficients and corrects for endogeneity. This flexible framework applied to the USA, the UK, Australia, Canada, and Sweden, together with a new financial stress dataset developed by the International Monetary Fund, not only allows testing of whether central banks responded to financial stress, but also detects the periods and types of stress that were the most worrying for monetary authorities and quantifies the intensity of the policy response. Our findings suggest that central banks often change policy rates, mainly decreasing them in the face of high financial stress. However, the size of the policy response varies substantially over time as well as across countries, with the 2008-2009 financial crisis being the period of the most severe and generalized response. With regard to the specific components of financial stress, most central banks seemed to respond to stock-market stress and bank stress, while exchange-rate stress is found to drive the reaction of central banks only in more open economies. JEL Codes:E43, E52, E58. Nontechnical SummaryThe recent financial crisis has intensified the interest in exploring in greater detail the nexus between monetary policy and financial stability. Although keeping the financial system stable is a major task, often delegated to central banks, how to consider financial stability concerns for monetary policy decision-making remains a puzzling question. Monetary policy is likely to react to financial instability in a non-linear way. When a financial system is stable, the interest-ratesetting process largely reflects macroeconomic conditions, and financial stability considerations enter monetary policy discussions only to a limited degree. On the other hand, central banks may alter their monetary policies to reduce financial imbalances if these become severe.This paper examines the reactions of the main central banks (the US Fed, the Bank of England, the Reserve Bank of Australia, the Bank of Canada, and Sveriges Riksbank) during periods of financial stress over the last three decades. In particular, we estimate the time-varying policy rule of each bank to assess whether and how its policy rate was adjusted in the face of financial instability. We track financial stress by means of a continuous financial stress indicator developed recently by the International Monetary Fund as well as its main subcomponents (banking stress, stock-market stress, and exchange-rate stress). Therefore, our empirical framework is suitable for detecting the periods and types of stress that were perceived as the most worrying and for quantifying the intensity of the policy response.Although theoretical studies disagree about the viability of considering financial instability for interest-rate setting, our empirical results suggest that central banks often alter the course of monet...

The Working Paper Series of the Czech National Bank (CNB) is intended to disseminate the results of the CNB's research projects as well as the other research activities of both the staff of the CNB and collaborating outside contributors, including invited speakers. The Series aims to present original research contributions relevant to central banks. It is refereed internationally. The referee process is managed by the CNB Research Department. The working papers are circulated to stimulate discussion. The views expressed are those of the authors and do not necessarily reflect the official views of the CNB.

The Working Paper Series of the Czech National Bank (CNB) is intended to disseminate the results of the CNB's research projects as well as the other research activities of both the staff of the CNB and collaborating outside contributors, including invited speakers. The Series aims to present original research contributions relevant to central banks. It is refereed internationally. The referee process is managed by the CNB Research Department. The working papers are circulated to stimulate discussion. The views expressed are those of the authors and do not necessarily reflect the official views of the CNB.

This paper develops a Financial Stress Index (FSI) for 28 OECD countries and examines its relationship to crises using a novel database for financial crises. A stress index measures the current state of stress in the financial system and summarizes it in a single statistic. Our results suggest that even though our FSI is clearly related to the occurrence of crises, there is only a weak relationship between the FSI and the onset of a crisis, notably the onset of a banking crisis. Policymakers should therefore be aware of the limited usefulness of FSIs as an early warning indicator.

Over the recent decades researchers in academia and central banks have developed early warning systems (EWS) designed to warn policy makers of potential future economic and financial crises. These EWS are based on diverse approaches and empirical models. In this paper we compare the performance of nine distinct models for predicting banking crises resulting from the work of the Macroprudential Research Network (MaRs) initiated by the European System of Central Banks. In order to ensure comparability, all models use the same database of crises created by MaRs and comparable sets of potential early warning indicators. We evaluate the models' relative usefulness by comparing the ratios of false alarms and missed crises and discuss implications for pratical use and future research. We find that multivariate models, in their many appearances, have great potential added value over simple signalling models. One of the main policy recommendations coming from this exercise is that policy makers can benefit from taking a broad methodological approach when they develop models to set macro-prudential instruments.The obligatory copyright note: We certify that we have the right to deposit the contribution with MPRA.