An empirical assessment of recent challenges in today's financial markets

Abstract

The broad range of methods and topics covered in these papers reflects the aim of the workshop and the annual conference to bring together young econometricians and economists. Essentially, all papers deal with important aspects of today's financial markets and relate them to issues faced by policymakers.The lead article contributed by Thornton (2019) deals with two of the most important puzzles in international finance relating to exchange rates: the unbiasedness puzzle -the finding of a marked difference in the conclusion about the forward rate unbiasedness hypothesis depending on whether the hypothesis is tested using the forward rate equation or forward premium equationand the forward premium puzzle-the fact that more often than not the forward premium incorrectly predicts the direction of the subsequent change in the spot rate. Thornton (2019) proposes a solution to both puzzles by highlighting the important of persistence in spot exchange rates and a potential small sample bias for the obtained test results.Most papers in this special issue are devoted to the analysis of up-to-date policy issues. While Thornton (2019) contributes to the debate on the wellestablished link between interest rate and exchange rates, Gehringer and Mayer (2019) investigate the factors determining long-term interest rates using cointegration techniques. They find that central banks have actually had a key influence on the level of long-term interest rates. Gehringer and Mayer (2019) argue that the Austrian school of economics explanation in the model of Wicksell-Mises-Hayek of the credit and business cycle adequately describes recent developments. They also point to a misalignment of market rates due to a lack of necessary knowledge and foresight to set market rates to levels consistent with economic fundamentals.Belke and Osowski (2019) deal with an important policy issue in the context of fiscal policy. They identify and measure fiscal spillovers in EU countries empirically using a global vector autoregression (GVAR) model. To account for effects on financial markets, the set of variables also includes 10year interest yields and exchange rates. Their empirical setting contains