Search Results

You are looking at 1 - 4 of 4 items for :

  • "risk premium surge" x
Clear All
Mr. Bas B. Bakker, Marta Korczak, and Mr. Krzysztof Krogulski
In the last decade, over half of the EU countries in the euro area or with currencies pegged to the euro were hit by large risk premium shocks. Previous papers have focused on the impact of these shocks on demand. This paper, by contrast, focuses on the impact on supply. We show that risk premium shocks reduce the output level that maximizes profit. They also lead to unemployment surges, as firms are forced to cut costs when financing becomes expensive or is no longer available. As a result, all countries with risk premium shocks saw unemployment surge, even as euro area core countries managed to contain unemployment as firms hoarded labor during the downturn. Most striking, wage bills in euro area crisis countries and the Baltics declined even faster than GDP, whereas in core euro area countries wage shares actually increased.
International Monetary Fund
Reserves remain a critical liquidity buffer for most countries. They are generally associated with lower crisis risks (crisis prevention) as well as space for authorities to respond to shocks (crisis mitigation). While other instruments, such as official credit lines and bilateral swap lines, are also external buffers, for most countries they principally act as a complement to their official reserves. For countries with sound fundamentals and a good policy framework, reserves provide policy makers with considerable space to respond to transitory shocks. However, this space diminishes as fundamentals deteriorate and the existence of adequate reserves does not, by itself, eliminate the risk of market pressures.
Mr. Bas B. Bakker, Marta Korczak, and Mr. Krzysztof Krogulski

German long-term government bond yields. 2/ Difference between post-2008 peak and 2008; percentage points. For DNK, LUX, ITA, EST, CYP, IRL, LVA and GRC – 2007 is the benchmark year (same for GDP decline). 3/ Difference between post-2008 trough and 2008; in percent. 4/ Risk premium peaks at less than 350 basis points. 5/ Risk premium peaks at more than 350 basis points. This was so for two reasons. One reason was that risk premium surges were associated with deep recessions ( Figure 3.1 ). Indeed, the larger the risk premium shock, the

International Monetary Fund

to record high levels in a wide range of advanced economies and the spread against U.S. dollar Libor, which in normal times fluctuates around near zero, widened sharply to record highs as market transactions de facto froze ( Box 2 ). Countries with financial institutions that rely heavily on dollar funding markets, such as Sweden and Australia, were affected, and the spread against US dollar Libor (risk premium) surged ( Figure 6 ). 11 In most cases, market dysfunction measured in this way lasted for two to three weeks ( Figure 7 ). While this event indicates that