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Abstract:In the aftermath of the European sovereign debt crisis (2009)(2010)(2011)(2012)(2013)(2014), the management of expectations has risen in importance. However, policy responses have emphasized the management of fiscal spending without examining the impact changes in the business confidence have on the economy. This paper uses a Factor-Augmented Vector Autoregressive specification, which allows for a larger information set covering both domestic and international developments, to measure the responses of five Euro Area economies to a one percent shock in government consumption and business confidence. The evidence suggests that even though the response to a government consumption shock is strong, a shock in expectations has an even greater effect. This points out to the fact that perceptions about the future and trust in the policymaker are much more important than previously considered. Thus, especially in (but not limited to) times of turbulence, or during efforts of stabilization and/or structural reforms, more emphasis should be placed on the overall credibility of the decisions, which could help to mitigate any potential adverse effects from the policies.

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This study examines for the existence of a nonlinear relationship between changes in anthropogenic concentrations of greenhouse gases (forcings) and changes in global temperature, using a smooth transition conditional correlation model. The findings suggest that the correlation between the two is practically zero before a threshold value of anthropogenic concentrations is reached, but rises significantly after this threshold is exceeded. The threshold can be traced back in the mid-1960s, during the years of economic growth in industrialized nations. Thus, the results provide an explanation as to the reason why previous studies had, at times, failed to find a significant relationship.

This paper tests the conjecture that easy money policies of central banks, that is setting low rates for long, are responsible for the excess risk-taking behavior that led to the global financial crisis. If the conjecture holds then policy rate shocks should have persistent effects on bank behavior either through the bank lending or the risk-taking channel. Using data for the period prior to the global financial crisis, and a shock persistence methodology, we find that the policy rate has only limited idiosyncratic effects on bank lending growth and no effect on credit risk.