Macroeconomic Conditions and Leverage in Monetary Financial Institutions: Comparing European countries and Luxembourg
In this article we study the interaction between leading macroeconomic indicators (industrial production, stock prices, consumer sentiment and real interest rates) and financial sector leverage in major European countries. We base our analysis on monthly, country-aggregated panel VAR models for the pre-crisis period January 2003 to August 2008, and the crisis period September 2008 to June 2011. We find little evidence for a relationship between macroeconomic variables and leverage in the pre-crisis period, with only real interest rates having a negative short-term impact on leverage growth. We find positive feedback loops between sentiment and stock prices as well as MFI assets in the pre-crisis period, and a positive impact of real interest rate changes on equity and asset growth. Thus, balance sheet expansions were driven by sentiment and stock prices, while real interest changes allowed MFIs to profit from higher spreads. During the crisis period (starting in September 2008), we observe a countercyclical impact from leverage on sentiment and stock prices, while sentiment and stock prices bear a pro-cyclical impact on leverage. In contrast to this, MFI leverage in Luxembourg is negatively impacted by stock prices, suggesting significant impacts from marking-to-market. We conclude that leverage drives expectations of financial instability (via e.g. default expectations), while sentiment and stock prices drive financial institutions? investment decisions (via e.g. collateral value effects).
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Karl Taylor & Robert McNabb, 2007.
"Business Cycles and the Role of Confidence: Evidence for Europe,"
Oxford Bulletin of Economics and Statistics,
Department of Economics, University of Oxford, vol. 69(2), pages 185-208, 04.
- Bob McNabb & Karl Taylor, 2002. "Business Cycles and the Role of Confidence: Evidence from Europe," Discussion Papers in Economics 02/3, Department of Economics, University of Leicester.
- Jason Bram & Sydney Ludvigson, 1997.
"Does consumer confidence forecast household expenditure?: A sentiment index horse race,"
9708, Federal Reserve Bank of New York.
- Jason Bram & Sydney Ludvigson, 1998. "Does consumer confidence forecast household expenditure? a sentiment index horse race," Economic Policy Review, Federal Reserve Bank of New York, issue Jun, pages 59-78.
- John Geanakoplos & Ana Fostel, 2008. "Leverage Cycles and the Anxious Economy," American Economic Review, American Economic Association, vol. 98(4), pages 1211-44, September.
- Stefano Schiavo & Andrea Vaona, 2006.
"Poolability and the finance-growth nexus: a cautionary note,"
Sciences Po publications
1299, Sciences Po.
- Schiavo, Stefano & Vaona, Andrea, 2008. "Poolability and the finance-growth nexus: A cautionary note," Economics Letters, Elsevier, vol. 98(2), pages 144-147, February.
- Stefano Schiavo & Andrea Vaona, 2006. "Poolability and the finance-growth nexus: a cautionary note," Kiel Working Papers 1299, Kiel Institute for the World Economy.
- Niek J. Nahuis & W. Jos Jansen, 2003.
"Which Survey Indicators Are Useful for Monitoring Consumption? Evidence fron European Countries,"
- W. Jos Jansen & Niek J. Nahuis, 2004. "Which survey indicators are useful for monitoring consumption? Evidence from European countries," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 23(2), pages 89-98.
- Michael C. Lovell, 1963. "Seasonal Adjustment of Economic Time Series and Multiple Regression," Cowles Foundation Discussion Papers 151, Cowles Foundation for Research in Economics, Yale University.
- Damiaan Persyn & Joakim Westerlund, 2008. "Error-correction–based cointegration tests for panel data," Stata Journal, StataCorp LP, vol. 8(2), pages 232-241, June.
- Love, Inessa & Zicchino, Lea, 2006. "Financial development and dynamic investment behavior: Evidence from panel VAR," The Quarterly Review of Economics and Finance, Elsevier, vol. 46(2), pages 190-210, May.
- Jokipii, Terhi & Milne, Alistair, 2007.
"The Cyclical Behaviour of European Bank Capital Buffers,"
SIFR Research Report Series
56, Institute for Financial Research.
- Jokipii, Terhi & Milne, Alistair, 2008. "The cyclical behaviour of European bank capital buffers," Journal of Banking & Finance, Elsevier, vol. 32(8), pages 1440-1451, August.
- Jokipii, Terhi & Milne , Alistair, 2006. "The cyclical behaviour of European bank capital buffers," Research Discussion Papers 17/2006, Bank of Finland.
- Jansen, W. Jos & Nahuis, Niek J., 2003.
"The stock market and consumer confidence: European evidence,"
Elsevier, vol. 79(1), pages 89-98, April.
- W. Jos Jansen & Niek J. Nahuis, 2002. "The Stock Market and Consumer Confidence: European Evidence," MEB Series (discontinued) 2002-11, Netherlands Central Bank, Monetary and Economic Policy Department.
- Baltagi, Badi H., 1981. "Pooling : An experimental study of alternative testing and estimation procedures in a two-way error component model," Journal of Econometrics, Elsevier, vol. 17(1), pages 21-49, September.
- Richard A. Ashley & Randal J. Verbrugge, 2009. "To difference or not to difference: a Monte Carlo investigation of inference in vector autoregression models," International Journal of Data Analysis Techniques and Strategies, Inderscience Enterprises Ltd, vol. 1(3), pages 242-274.
- Doroth�e Rivaud-Danset & Emmanuelle Dubocage & Robert Salais, 2001. "Comparison between the financial structure of SMES and that of large enterprises (LES) using the BACH database," European Economy - Economic Papers 155, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
When requesting a correction, please mention this item's handle: RePEc:bcl:bclwop:bclwp077. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.