NEW Financial and Fiscal Interaction in the Euro Area Crisis: This Time was Different (with Lucrezia Reichlin and Giovanni Ricco), European Economic Review, Volume 119, Pages 333-355, October 2019 (Download paper or the working paper version here).
This paper highlights the anomalous characteristics of the Euro Area `twin crises' by contrasting the aggregate macroeconomic dynamics in the period 2009-2013 with the business cycle fluctuations of the previous decades. We report three stylised facts. First, the contraction in
output was marked by an anomalous downfall in investment, while consumption, savings and unemployment followed their historical relation with GDP. Second, households' and financial corporations' debts, and house prices deviated from their pre-crisis trends. Third, the jump in the public deficit-GDP ratio in 2008-2009 was unprecedented and so was the fiscal consolidation that followed. Our analysis points to the financial nature of the crisis as a likely explanation for these facts. Importantly, the `anomaly' in public deficit is in large part explained by extraordinary measures in support of the financial sector, which show up in the stock-flow adjustments and reveal a key interaction between the fiscal and the financial sectors.
Macroeconomic News and Market Reaction: Surprise Indexes meet Nowcasting, International Journal of Forecasting, Volume 35, Issue 4, October–December 2019, Pages 1725-1734. Download paper or the Working Paper version here and here.
Market operators monitor a massive flow of macroeconomic news every day and react to the unexpected component of each release. Can we replicate the market’s pricing of macroeconomic news automatically? This paper shows that a “Nowcasting Surprise Index”, constructed by aggregating forecast errors from a nowcasting model using model-based weights, resembles the surprise indexes proposed in the recent literature or constructed by practitioners, which cumulate survey-based forecast errors weighted by using the average effect of news on asset prices. This suggests that market operators and a nowcasting model filter the macroeconomic data flow similarly and confirms the link between news about macroeconomic indicators and asset prices. Moreover, the paper shows that recent cumulated news in macroeconomic data, which carry information about the underlying state of the economy, accounts for a non-negligible part of asset price behaviour.
I propose an econometric model to interpret the flow of macroeconomic data releases that are useful to assess the state of the Mexican economy. I estimate the relevance of both Mexican and US indicators for predicting Mexican GDP, using a nowcasting model that can be continuously updated as new data are released. The model produces forecasts that have better accuracy than Surveys of Professional Forecasters, and shows the high relevance of US data in the real-time process of forecast updating. These results encourage a more frequent use of external indicators in short-term GDP forecasting in small open economies.
We analyse the predictive ability of real-time macroeconomic information for the yield curve of interest rates. We specify a mixed-frequency macro-yields model in real-time that incorporates interest rate surveys and that treats macroeconomic factors as unobservable components. Results indicate that real-time macroeconomic information is helpful to predict interest rates, and that data revisions drive a superior predictive ability of revised macro data over real-time macro data. Moreover, we find that incorporating interest rate surveys in the model can significantly improve its predictive ability.
The Impact of Macroeconomic News on the Euro-Dollar Exchange Rate, Working Papers ECARES, Universite Libre de Bruxelles, September 2016. Download paper
This paper studies the effect of macroeconomic "news" (market now-cast errors related to the flow of data releases on macroeconomic fundamentals) on the daily USD/EUR exchange rate. I consider a large number of real-time macroeconomic announcements from both the US and the euro-zone, and the related market expectations as reported by Bloomberg. For the euro-zone I also study country level announcements for the four biggest economies (Germany, France, Italy, Spain). The results for the whole sample (1999-2012) show that both the "news" associated with euro-zone releases and those associated with US ones have a significant impact on the USD/EUR exchange rate. However, the effect of the euro-zone "news" has become larger since the 2008 crisis and it is now more sizeable than that of the US "news".
The Legacy Debt and the Joint Path of Public Deficit and Debt in the Euro Area (with Lucrezia Reichlin and Giovanni Ricco), European Commission ECFIN Fellowship Initiative 2014-2015, September 2015. Download paper
This paper studies the joint dynamics of public debt and public deficit in the euro area for the period 1981-2013 and computes projections up to 2020. We show that, since 2009, public debt and public deficit have been negatively related. On the basis of a counter-factual simulation that conditions on past correlations with a large number of macroeconomic indicators and the observed GDP path since 2008 we find that the negative relation is anomalous with respect to previous historical experience. In contrast, private savings and private debt since 2008 have behaved in line with past experience. We define and estimate the “legacy debt” of the 2008 crisis and show that, if GDP and inflation will behave according to the International Monetary Fund (IMF) projection, by 2020 it will still account for 15% of total public debt.