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Pavol Jurca, Ján Klacso, Eugen Tereanu, Marco Forletta, and Mr. Marco Gross
We develop a semi-structural quantitative framework that combines micro and macroeconomic data to assess the effectiveness of combinations of borrower-based macroprudential measures in Slovakia. We expand on the integrated dynamic household balance sheet model of Gross and Población (2017) by introducing an endogenous loan granting feature, in turn to quantify the potential (ex-ante) impact of macroprudential measures on resilience parameters, compared with a counterfactual no-policy scenario, under adverse macroeconomic conditions. We conclude that (1) borrower-based measures can noticeably improve household and bank resilience to macroeconomic downturns, in particular when multiple measures are applied; (2) those measures tend to complement each other, as the impact of individual instruments is transmitted via different channels; and (3) the resilience benefits are more sizeable if the measures effectively limit the accumulation of risks before an economic downturn occurs, suggesting that an early, preemptive implementation of borrower-based measures is indeed warranted.
International Monetary Fund. Monetary and Capital Markets Department
This technical note assesses strengths and weaknesses of the macroprudential policy framework in Austria and provides policy recommendations. Financial sector resilience in Austria has improved significantly since the global financial crisis, and the macroprudential policy framework has been formalized. The institutional framework is appropriate for conducting macroprudential policy effectively, but it could be strengthened in some areas. However, some structural vulnerabilities to financial stability remain and cyclical risks are on the rise. Banks’ low efficiency and the resulting low profitability of domestic operations continues to be a key concern, especially given the fact that the Central Europe and South Eastern Europe region accounts for over 40 percent of Austrian banks' consolidated profits. The framework contains a clear mandate, well-defined objectives, and provides enough powers to the Financial Market Stability Board. Broad-based vulnerabilities remain contained but build-up of risks in the real estate sector warrants further action. The framework for addressing structural vulnerabilities is sophisticated, however, further improvements could be considered.
Michal Andrle and Miroslav Plašil
In this paper we provide tools for assessing the house prices and housing valuation. We develop two approaches: (i) borrowing capacity approach, and (ii) intrinsic value approach. The borrowing capacity of households, together with their down payment, implies how much housing they can attain. In the intrinsic value approach, property value is viewed as a discounted present value of adjusted net rental income. Our approach does not involve a complex econometric model and only widely available data are used. The proposed indicators can guide households, financial markets and macroprudential authorities in their understanding of house prices development. To illustrate the concepts, we analyze the housing prices in the Czech Republic and assess the degree of market over-and undervaluation.
International Monetary Fund. European Dept.
This Selected Issues paper assesses Slovakia’s household and private sector indebtedness against macroeconomic fundamentals, identifies key vulnerabilities from rapid household credit growth, assesses policy responses to date, and presents further policy options. Strong private sector credit growth has persisted for over a decade and resulted in household debt that is high relative to peers. Credit is now growing in riskier segments. Housing prices have also started to reflect pressures from strong credit growth. The paper describes assessments of household and private sector debt levels relative to fundamentals. It also describes the policy response to date and assesses its effectiveness. Econometric analysis suggests that household indebtedness is growing at a faster pace than implied by economic fundamentals. The credit cycle seems to have reached its post-crisis high. The credit cyclogram, compiled by the National Bank of Slovakia, is an aggregation of a set of core and supplementary variables evaluated against distributions of their own historical values to disentangle factors cyclical credit growth.
Mr. Francis Vitek
This paper documents the theoretical structure and empirical properties of the latest version of the Global Macrofinancial Model (GFM). This dynamic stochastic general equilibrium model of the world economy, disaggregated into forty national economies, was developed to support multilaterally consistent macrofinancial policy, risk and spillover analysis. It features a range of nominal and real rigidities, extensive macrofinancial linkages, and diverse spillover transmission channels. These macrofinancial linkages encompass bank and capital market based financial intermediation, with financial accelerator mechanisms linked to the values of the housing and physical capital stocks. A variety of monetary policy analysis, fiscal policy analysis, macroprudential policy analysis, spillover analysis, and forecasting applications of the GFM are demonstrated. These include quantifying the monetary, fiscal and macroprudential policy transmission mechanisms, accounting for business cycle fluctuations, and generating relatively accurate forecasts of inflation and output growth.
Maria Arakelyan
We use bank-level data on 16 CESEE economies over 2005-2014 to assess the role of foreign banks in the region’s credit dynamics. We confirm that macroeconomic fundamentals of both host and home countries matter, as do the bank and parent bank characteristics. Moreover, we take a new approach by studying the drivers of differential credit growth between parent banks and their foreign subsidiaries. Host country macroeconomic fundamentals cease to play a significant role, while bank-level characteristics and in particular parent bank-level characteristics remain important. From policymakers’ perspective, the paper provides further empirical evidence on the importance of monitoring the health of foreign parent banks as well as the potential regulatory changes in their home jurisdictions.
International Monetary Fund. European Dept.
This paper mainly examines fiscal decentralization, credit-loss recovery, and unemployment in Croatia. The degree of expenditure and revenue decentralization in Croatia appears limited relative to its peers. At about 16 percent of general government spending, subnational government spending in Croatia is modest compared to other southeastern European countries and to the EU-28 average, and particularly low compared to the most decentralized countries in the EU. Croatia’s recovery since late 2014 has been moderate. Croatia’s recession lasted six years and was thus the longest among the new EU member states. Croatia’s structural and cyclical unemployment rates are very high, at about 11.5 percent and 5 percent respectively in 2015.
International Monetary Fund. European Dept.
This 2015 Article IV Consultation highlights that Slovakia remains among Europe’s stronger economies, with growth continuing to pick up in 2015, driven by strong domestic demand. A push to spend expiring European Union funds has underpinned rising investment while job creation and real wage growth have supported private consumption. Unemployment has fallen significantly since 2013, but is still about 11 percent overall, and is much higher for the long-term unemployed, youth, and women. The outlook is favorable with growth of 3–3.5 percent expected through the medium-term, reflecting sustained domestic demand as well as further contributions from the important export sector as substantial additional foreign auto sector investment is planned.