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Money, credit, monetary policy and the business cycle in the euro area: what has changed since the crisis?
Reichlin, L., Giannone, D., Lenza, M.
Date Published: 18/06/14

Abstract:
This paper provides VAR based evidence of the response of a large set of euro area macroeconomic and financial variables to cyclical and monetary policy shocks. It then uses the model to analyze the stability of financial intermediation after the 2008 crisis. Our key finding is that the cyclical dynamics of short-term interest rates, deposits and loans is not significantly different from that identified in the pre-crisis sample while long-term interest rates have been exceptionally high and long-term loans and deposits exceptionally low.




The ECB and the Interbank Market
Reichlin, L., Giannone, D., Lenza, M., Pill, H.
Date Published: 01/11/2012

Abstract:
This paper analyses the impact on the macroeconomy of the ECB’s non-standard monetary policy implemented in the aftermath of the collapse of Lehman Brothers in the Fall of 2008. We study in particular the effect of the expansion of the intermediation of transactions across central bank balance sheets as dysfunctional financial markets seize up, which we regard as a key channel of transmission for non-standard monetary policy measures. Our approach is similar to Lenza et al. 2009 but we introduce the important innovation of distinguishing between private intermediation of interbank transactions in the money market and central bank intermediation of bank-to-bank transactions across the Eurosystem balance sheet. We do this by exploiting data drawn from the aggregate Monetary and Financial Institutions (MFI) balance sheet which allows us to construct a new measure of the ‘policy shock’ represented by the ECB’s increasing role as a financial intermediary. We find that bank loans to households and, in particular, to non-financial corporations are higher than would have been the case without the ECB’s intervention. In turn, the ECB’s support has a significant impact on economic activity: two and a half years after the failure of Lehman Brothers, the level of industrial production is estimated to be 2% higher, and the unemployment rate 0.6 percentage points lower, than would have been the case in the absence of the ECB’s non-standard monetary policy measures.


A Quasi Maximum Likelihood Approach for Large Approximate Dynamic Factor Models
Reichlin, L., Giannone, D., Doz, C.
Date Published: 2012

Abstract:
This paper considers quasi-maximum likelihood estimations of a dynamic approximate factor model when the panel of time series is large. Maximum likelihood is analyzed under different sources of misspecification: omitted serial correlation of the observations and cross-sectional correlation of the idiosyncratic components. It is shown that the effects of misspecification on the estimation of the common factors is negligible for large sample size (T) and the cross sectional dimension (n). The estimator is feasible when n is large and easily implementable using the Kalman smoother and the EM algorithm as in traditional factor analysis. Simulation results illustrate what are the empirical conditions in which we can expect improvement with respect to simple principle components considered by Bai (2003), Bai and Ng (2002), Forni, Hallin, Lippi, and Reichlin (2000, 2005b), Stock and Watson (2002a,b). JEL Classification: C51, C32, C33


Market Freedom and the Global Recession
Reichlin, L., Giannone, D., Lenza, M.
Date Published: 01/04/2011

Abstract:
This study finds that the set of policies that favor liberalization in credit markets (regulatory quality) are negatively correlated with countries’ resilience to the recent recession as measured by output growth in 2008 and 2009. The Global nature of the recession and the cross-country heterogeneity of its depth provide a unique opportunity to examine the link between the structural characteristics of economic and social systems before and after the crisis.




Short-term Forecasts of Euro Area GDP Growth
Reichlin, L., Giannone, D., Angelini, E., Camba-Mendez, G., Ruensler, G.
Date Published: 01/02/2011

Abstract:
Global financial integration unlocks a huge potential for international risk sharing. We examine the degree to which international equity holdings act as a risk sharing device in industrial and emerging economies. We split equity returns into investment income (dividend distribution) and capital gains to investigate which of the two channels delivers the largest potential for risk sharing. Our evidence suggests that net capital gains are a more potent channel of risk sharing. They behave in a countercyclical way, that is they tend to be positive (negative) when the domestic economy is growing more slowly (rapidly) than the rest of the world. Countries with more countercyclical net capital gains experience improved consumption risk sharing. The empirical analysis furthermore suggests that these risk sharing properties of net capital gains have increased through time, in particular in the 1990s and early-2000s, on the back of a declining equity home bias and financial market deepening. JEL Classification: E52, C33, C53





(This abstract was borrowed from another version of this item.)


A Two-step Estimator for Large Approximate Dynamic Factor Models Based on Kalman Filtering
Reichlin, L., Giannone, D., Doz, C.
Date Published: 2011

Abstract:
This paper shows consistency of a two-step estimation of the factors in a dynamic approximate factor model when the panel of time series is large (n large). In the first step, the parameters of the model are estimated from an OLS on principal components. In the second step, the factors are estimated via the Kalman smoother. The analysis develops the theory for the estimator considered in Giannone et al. (2004) and Giannone et al. (2008) and for the many empirical papers using this framework for nowcasting.


Non-standard Monetary Policy Measures and Monetary Developments
Reichlin, L., Giannone, D., Lenza, M., Pill, H.
Date Published: 2011


Monetary Policy in Exceptional Times
Reichlin, L., Lenza, M., Pill, H.
Date Published: 2010


Large Bayesian VARs
Reichlin, L., Giannone, D., Banbura, M.
Date Published: 2010

Abstract:
This paper shows that vector auto regression (VAR) with Bayesian shrinkage is an appropriate tool for large dynamic models. We build on the results of De Mol and co-workers (2008) and show that, when the degree of shrinkage is set in relation to the cross-sectional dimension, the forecasting performance of small monetary VARs can be improved by adding additional macroeconomic variables and sectoral information. In addition, we show that large VARs with shrinkage produce credible impulse responses and are suitable for structural analysis. Copyright © 2009 John Wiley & Sons, Ltd.


Monetary Analysis and Monetary Policy in the Euro Area 1999–2006
Reichlin, L., Fischer, B., Lenza, M., Pill, H.
Date Published: 01/11/2009

Abstract:
This paper assesses the practical experience of monetary analysis at the ECB from the introduction of the euro in 1999 through 2006. The paper exploits a unique and rich real-time data set, containing both the vintages of data and the economic models that have been employed in the ECB's monetary analysis during the first eight years of Monetary Union. It embodies both a description of how monetary analysis was conducted over this period and a quantitative evaluation of the indicators of risks to price stability that derived from this analysis. A close investigation of this material is used to evaluate the role monetary analysis has played in the evolution of monetary policy in the euro area


Nowcasting Euro Area Economic Activity in Real Time: The Role of Confidence Indicators
Reichlin, L., Giannone, D., Simonelli, S.
Date Published: 01/10/2009

Abstract:
This paper assesses the role of qualitative surveys for the early estimation of GDP in the Euro Area in a model-based automated procedure which exploits the timeliness of their release. The analysis is conducted using both an historical evaluation and a real-time case study on the current conjuncture.




Opening the Black Box: The Econometrics of Structural Factor Models
Reichlin, L., Giannone, D., Forni, M., Lippi, M.
Date Published: 2009

Abstract:
This paper shows how large-dimensional dynamic factor models are suitable for structural analysis. We argue that all identification schemes employed in structural vector Autoregression (SVAR) analysis can be easily adapted in dynamic factor models. Moreover, the “problem of fundamentalness,” which is intractable in SVARs, can be solved, provided that the impulse-response functions are sufficiently heterogeneous.We provide consistent estimators for the impulse-response functions and for (n,T ) rates of convergence. An exercise with U.S. macroeconomic data shows that our solution of the fundamentalness problem may have important empirical consequences.




Nowcasting: The Real Time Informational Content of Macroeconomic Data Releases
Reichlin, L., Giannone, D., Small, D.
Date Published: 01/05/2008

Abstract:
A formal method is developed for evaluating the marginal impact that intra-monthly data releases have on current-quarter forecasts (nowcasts) of real gross domestic product (GDP) growth. The method can track the real-time flow of the type of information monitored by central banks because it can handle large data sets with staggered data-release dates. Each time new data are released, the nowcasts are updated on the basis of progressively larger data sets that, reflecting the unsynchronized data-release dates, have a "jagged edge" across the most recent months.


Forecasting Using a Large Number of Predictors: Is Bayesian Shrinkage a Valid Alternative to Principal Components?”
Reichlin, L., Giannone, D., De Mol, C.
Date Published: 2008

Abstract:
This paper considers Bayesian regression with normal and double-exponential priors as forecasting methods based on large panels of time series. We show that, empirically, these forecasts are highly correlated with principal component forecasts and that they perform equally well for a wide range of prior choices. Moreover, we study conditions for consistency of the forecast based on Bayesian regression as the cross-section and the sample size become large. This analysis serves as a guide to establish a criterion for setting the amount of shrinkage in a large cross-section.


Explaining the Great Moderation: It Is Not The Shocks
Reichlin, L., Giannone, D., Lenza, M.
Date Published: 2008




VARs, Factor Models and the Empirical Validation of Equilibrium Business Cycle Models
Reichlin, L., Giannone, D., Sala, L.
Date Published: 01/05/2006

Abstract:
Equilibrium business cycle models have typically less shocks than variables. As pointed out by Altug, 1989 and Sargent, 1989, if variables are measured with error, this characteristic implies that the model solution for measured variables has a factor structure. This paper compares estimation performance for the impulse response coefficients based on a VAR approximation to this class of models and an estimation method that explicitly takes into account the restrictions implied by the factor structure. Bias and mean squared error for both factor based and VAR based estimates of impulse response functions are quanti?ed using, as data generating process, a calibrated standard equilibrium business cycle model. We show that, at short horizons, VAR estimates of impulse response functions are less accurate than factor estimates while the two methods perform similarly at medium and long run horizons.

(This abstract was borrowed from another version of this item.)


Does Information Help Recovering Structural Shocks From Past Observations?
Reichlin, L., Giannone, D.
Date Published: 01/04/2006

Abstract:
This paper asks two questions. First, can we detect empirically whether the shocks recovered from the estimates of a structural vector autoregression are truly structural? Second, can the problem of non-fundamentalness be solved by considering additional information? The answer to the first question is "yes" and that to the second is "under some conditions." (JEL: C32, C33, E00, E32, O3) (c) 2006 by the European Economic Association.




The Generalised Dynamic Factor Model: One Sided Estimation and Forecasting
Reichlin, L., Forni, M., Hallin, M., Lippi, M.
Date Published: 01/09/2005

Abstract:
This paper proposes a new forecasting method which makes use of information from a large panel of time series. As in Forni, Hallin, Lippi and Reichlin (2000), and in Stock and Watson (2002a,b), the method is based on a dynamic factor model. We argue that our method improves upon a standard principal component predictor in that, first, it fully exploits all the dynamic covariance structure of the panel and, second, it weights the variables according to their estimated signal-to-noise ratio. We provide asymptotic results for our optimal forecast estimator and show that in finite samples our forecast outperforms the standard principal components predictor.


A Core Inflation Indicator for the Euro Area
Reichlin, L., Cristadoro, R., Forni, M., Veronese, G.
Date Published: 01/06/2005


The Generalised Dynamic Factor Model Consistency and Rates
Reichlin, L., Forni, M., Hallin, M., Lippi, M.
Date Published: 01/04/2004


Monetary Policy in Real Time
Reichlin, L., Giannone, D., Sala, L.
Date Published: 2004

Abstract:
We analyse the panel of the Greenbook forecasts (sample 1970-96) and a large panel of monthly variables for the US (sample 1970-2003) and show that the bulk of dynamics of both the variables and their forecasts is explained by two shocks. Moreover, a two factor model which exploits, in real time, information on many time series to extract a two dimensional signal, produces a degree of forecasting accuracy of the federal funds rate similar to that of the markets, and, for output and inflation, similar to that of the Greenbook forecasts. This leads us to conclude that the stochastic dimension of the US economy is two. We also show that dimension two is generated by a real and nominal shock, with output mainly driven by the real shock and inflation by the nominal shock. The implication is that, by tracking any forecastable measure of real activity and price dynamics, the Central Bank can track all fundamental dynamics in the economy.
This abstract was borrowed from another version of this item.)


Do Financial Variables Help Forecasting Inflation and Real Activity in the Euro Area?
Reichlin, L., Forni, M., Hallin, M., Lippi, M.
Date Published: 01/09/2003

Abstract:
This paper uses a large data set, consisting of 447 monthly macroeconomic time series concerning the main countries of the Euro area to simulate out-of-sample predictions of the Euro-area industrial production and the harmonized inflation index and to evaluate the role of financial variables in forecasting. We considered two models which allow forecasting based on large panels of time series: Forni et al. (Rev. Econom. Statist. 82 (2000) 540; Mimeo (2001b)) and Stock and Watson (Mimeo (1999)). Performance of both models were compared to that of a simple univariate AR model. Results show that multivariate methods outperform univariate methods for forecasting inflation at one, three, six, and twelve months and industrial production at one and three months. We find that financial variables do help forecasting inflation, but do not help forecasting industrial production.


The Generalised Dynamic Factor Model: Identification and Estimation
Reichlin, L., Forni, M., Hallin, M., Lippi, M.
Date Published: 01/11/2001

Abstract:
This paper proposes a factor model with infinite dynamics and non-orthogonal idiosyncratic components. The model, which we call the generalized dynamic factor model, is novel to the literature, and generalizes the static approximate factor model of Chamberlain and Rothschild (1983), as well as the exact factor model `a la Sargent and Sims (1977). We provide identification conditions, propose an estimator of the common components, prove convergence as both time and cross-sectional size go to infinity at appropriate rates and present simulation results. We use our model to construct a coincident index for the European Union. Such index is defined as the common component of real GDP within a model including several macroeconomic variables for each European country.


A Measure of Co-Movement for Economic Variables, Theory and Empirics
Reichlin, L., Croux, C., Forni, M.
Date Published: 01/05/2001


Coincident and Leading Indicators for the EURO Area
Reichlin, L., Forni, M., Hallin, M., Lippi, M.
Date Published: 01/05/2001

Abstract:
This paper proposes a new way to compute a coincident and a leading indicator of economic activity. Our methodology, based on Forni, Hallin, Lippi and Reichlin (2000), reconciles dynamic principal components analysis with dynamic factor analysis. It allows us to extract indicators from a large panel of economic variables (many variables for many countries). The procedure is used to estimate coincident and leading indicators for the EURO area. Unlike other methods used in the literature, the procedure takes into consideration the cross-country as well as the within-country correlation structure and exploit all information on dynamic cross-correlation.


Federal Policies and Local Economies: Europe and the U.S.
Reichlin, L., Forni, M.
Date Published: 01/01/2001

Abstract:
This paper establishes stylized facts on regional output fluctuations in Europe and the US. Moreover, it proposes a measure of the potential output target of the future European central bank, estimates the potential variance stabilization of a fiscal federation and constructs a regional map of the potential beneficiaries of monetary and fiscal federal policies. The econometric model is an extention of the dynamic factor model à la Sargent and Sims (1977. In: Sims, C.A. (Ed.), New Methods in Business Research. Federal Reserve Bank of Minneapolis) where we introduce an intermediate-level shock, which is common to all regions (counties) in each country (state), but it is not common to Europe (US) as a whole. We build on Forni and Reichlin 1996. Empirical Economics, Long-Run Economic Growth (special issue) 21 (1996) 27–42. Review of Economic Studies 65 (1998) 453–473 to propose an estimation method which exploits the large cross-sectional dimension of our data set. Our analysis shows that (i) Europe has a level of integration similar to that of the US and that national shocks are not a sizeable source of fluctuations: around 75% of output variance is explained by global and purely local dynamics; (ii) Europe, unlike the US, has no traditional business cycle; (iii) the core of the most integrated regions in Europe does not have national boundaries; (iv) the future European Central Bank has a potential stabilization target of about 18% of total output fluctuations; (v) a fiscal federation, if implemented, could have a smoothing effect on output in addition to what done by national fiscal policy, which accounts also for about 18% of total output fluctuations.


Risk and Potential Insurance in Europe
Reichlin, L., Forni, M.
Date Published: 01/06/1999

Abstract:
This paper argues that risk is related to long-run volatility of income and therefore stabilization policies should target permanent fluctuations. We show that such fluctuations can, in principle, be insured away by a multinational fiscal federation which smooths income cross-sectionally and has no ex ante permanent redistribution effects. We propose a measure of risk and a measure of potential insurable risk. We estimate these measures for the European countries and compare results with the US. Results show that potential insurable income risk in Europe is about 45%. Most countries will benefit from an average income tax of 10%, but gains differ widely across countries.


Let’s Get Real: A Factor Analytical Approach to Disaggregated Business Cycle Dynamics
Reichlin, L., Forni, M.
Date Published: 01/07/1998

Abstract:
This paper develops a method for analysing the dynamics of large cross-sections based on a factor analytic model. We use “law of large numbers” arguments to show that the number of common factors can be determined by a principal components method, the economy-wide shocks can be identified by means of simple structural VAR techniques and that the parameters of the unobserved factor model can be estimated consistently by applying OLS equation by equation. We distinguish between a technological and a non-technological shock. Identification is obtained by minimizing the negative realizations of the technology shock. Empirical results on 4-digit industrial output and productivity for the U.S. economy from 1958 to 1986 show that: (1) at least two economy-wide shocks, both having a long-run effect on sectoral output, are needed to explain the common dynamics; (2) although the technological shock accounts for at least 50% of the aggregate dynamics of output, it cannot by itself explain dynamics at business cycle frequencies; (3) sector-specific shocks explain the main bulk of total variance but generate mainly high frequency dynamics; (4) both the technological and the non-technological component of output show a peak for positive sectoral comovements of output at business cycle frequencies; (5) technological shocks are strongly correlated with the growth rates of the investment in machinery and equipment sectors and their inputs.


VAR Analysis, Non-Fundamental Representations, Blashke Matrices
Reichlin, L., Lippi, M.
Date Published: 01/07/1994


Common and Uncommon Trends and Cycles
Reichlin, L., Lippi, M.
Date Published: 01/04/1994

Abstract:
The paper discusses the concepts of co-movements of macro variables in the short run and the long run when different trend-cycle decompositions are considered. Moreover, it specifies a model for the trend where identification is achieved by imposing restrictions on the shape of the impulse response function to the permanent shock. This is a multivariate generalization of Lippi and Reichlin (1994) where the trend and the cyclical components are easily derived from the estimation of a VAR model. An empirical section illustrates differences in implications between our suggested decomposition and other decompositions widely used in the literature for a bivariate case of cointegrated variables


Information, Forecasts and the Measurement of the Business Cycle
Reichlin, L., Evans, G.
Date Published: 01/04/1994


Diffusion of Technical Change and the Decomposition of Output Into Trend and Cycle
Reichlin, L., Lippi, M.
Date Published: 01/01/1994

Abstract:
In this paper we argue that modelling the trend component in real GNP as a random walk is inconsistent with its interpretation as productivity growth. As an alternative, we specify the trend as an ARIMA whose impulse response function follows an S-shaped pattern reflecting the process of diffusion of technical change. Such an ARIMA is employed to build and estimate an UCARIMA using USA postwar quarterly data. We find that our model, although more parsimonious, fits the data equally well than the standard random walk plus AR(2) cycle. Moreover, our model has a very low cycle/trend variance ratio.


The Dynamic Effects of Aggregate Demand and Supply Disturbances: Comment
Reichlin, L., Lippi, M.
Date Published: 01/06/1993


On Persistence of Shocks to Economic Variables: A Common Misconception
Reichlin, L., Lippi, M.
Date Published: 01/02/1992

Abstract:
Empirical results on U.S. GNP have provided estimates of the Beveridge and Nelson's persistence measure (almost) always greater than unity when using ARIMA models and always smaller than unity when using UCARIMA models. This paper shows that a measure of persistence less than unity is a mathematical consequence of the definition of UCARIMA models and not an independent estimation result. Therefore, ARIMA and UCARIMA estimates of persistence cannot be compared on the same ground.




Structural Change and Unit roots Econometrics
Reichlin, L.
Date Published: 01/12/1989


Testing for Structural Change: Discussion
Reichlin, L.
Date Published: 1989


Segmented Trends and Non-Stationary Time Series
Reichlin, L., Rappoport, P.
Date Published: 1989


 
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