This paper proposes a new solution to the purchasing power parity (PPP) puzzles, arguing that investors' higher-order risk attitudes, combined with higher-order uncertainty about nominal exchange rates, as reflected by skewness and kurtosis, drive a risk premium that leads to deviations from PPP. Analysing US dollar exchange rates against the currencies of three major net exporting countries to the US - Canada, Japan, and the European Union - we find that the skewness of the expected nominal exchange rate is the most significant and statistically robust moment-based factor influencing these deviations. Our estimates further suggest that only low to moderate exchange rate risks generate risk premia that contribute to these PPP deviations.

We use a panel of ten euro area member states to examine the link between macro/fiscal risk and private bank deposits relative to Germany. Our main findings are summarised as follows: First, the relationship between relative deposits and macro/fiscal risk factors is not stable over time. Second, the significant time variation characterizing this relationship is driven by aggregate EMU-wide macro/fiscal risk conditions. Third, relative deposits in periphery EMU countries are generally more responsive to macro/fiscal risk. Fourth, the ECB's unconventional monetary policy moderated the effect of the global financial and European debt crises on the relationship between relative deposits and macro/fiscal risk. Our empirical findings can inform the ongoing policy debate regarding the completion of the European Banking Union.

Firstly, we show that domestic prices of net importer countries incorporate a risk premium, driven by higher moments of future nominal exchange rate returns and secondly, using US dollar exchange rates against three currencies of major net exporting countries to the US such as Canada, Japan and the European Union, we find that the skewness of the future nominal exchange rate is the major and statistically robust moment-based factor of the deviations from purchasing power parity (PPP). Our estimates further suggest that only low and moderate exchange rate risks induce risk premia that drive deviations from PPP.

We examine the relationship between private bank deposits and macro/fiscal risk in the euro area. We test three hypotheses: First, private bank deposits relative to Germany are determined by macro/fiscal risk factors. Second, this relationship is time-varying. Third, time-variation is driven by the level of macro/fiscal risk. Our findings validate all three tested hypotheses. They also reveal persistent fragmentation between EMU core and periphery banking systems caused by a deficit of trust in periphery banking systems, unmitigated by the introduction of OMT and European Banking Union. Our findings have implications for the introduction of the European Deposits Insurance Scheme (EDIS), for which they offer tentative support.

Events in recent years have put the European economic integration project and the euro under pressure. The main cause of the euro crisis is loss of competitiveness, particularly on the periphery of the Economic and Monetary Union. To reverse this, Union members must promote structural reforms that increase long-term employment, productivity and external competitiveness. The successful implementation of reforms, however, requires sufficient public support, which in turn presupposes measures that support demand during the implementation of reforms. To that end, important steps include taking an expenditure-based approach to fiscal adjustment and the introduction of the European Deposit Insurance Scheme. And for Greece in particular, the set of necessary steps includes taking ownership of reforms, the downward revision of fiscal targets, and medium- and long-term measures of debt relief conditional upon meeting fiscal/reform targets. Finally, the stability of the euro hinges on the moderation of all fiscal and external imbalances across all member states, regardless of whether these imbalances are apparent or not.

This paper investigates the role of unconventional monetary policy as a source of time-variation in the relationship between sovereign bond yield spreads and their fundamental determinants. Our results provide evidence of a new bond-pricing regime following the announcement of the Outright Monetary Transactions (OMT) programme in August 2012. This regime is characterised by a weakened link between spreads and fundamentals, but with higher spreads relative to the pre-crisis period and residual redenomination risk. We also find that unconventional monetary policy measures affect the pricing of sovereign risk not only directly, but also indirectly through changes in banking risk.

Previous literature has documented but not yet explained asymmetric exchange rate responses to unanticipated inflation announcements under a credible inflation-targeting regime. We present a theoretical model explaining the reported asymmetries in exchange-rate responses based on asymmetries in monetary policy preferences. (C) 2015 Elsevier B.V. All rights reserved.

The global financial crisis of 2007–2009 and the subsequent, still ongoing, European sovereign debt crisis revealed serious flaws in the institutional design of the Economic and Monetary Union (EMU). The events of the last seven years have clearly shown that the pre-crisis euro-governance framework lacked the crisis-prevention capacities necessary for the euro's long-term sustainability, as well as the capacity required for effective management of crises.KeywordsEuro AreaEuropean Central BankSovereign BondEuropean Stability MechanismPeriphery CountryThese keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

We analyse the background of the Greek debt crisis and evaluate the three Greek financial assistance programme. The crisis and the first programme’s (2010-11) failure were mainly the result of misguided internal policies. The second programme (2012-14) achieved progress towards recovery but this was fragile and was cancelled out by Greece’s stand-off with her lenders in the first half of 2015. The stand-off was one that predictably Greece could not win, due to the lack of a credible growth plan; and the adoption of a transparently non-credible ultimatum-game strategy. These explain the signing of the third programme in August 2015.

We use a panel of ten euro area countries to assess the determinants of long-term sovereign bond yield spreads over the period 1999.01-2010.11. We find that government bond yield spreads are well-explained by fiscal fundamentals over the crisis period. We also find that the menu of risk factors priced by markets has been significantly enriched since March 2009, including international risk, liquidity risk and the risk of the crisis’ transmission among EMU member states. Finally, we find that transmission risk has increased considerably since spring 2009 due to rapidly increasing risk of investing in periphery bonds relative to core ones. JEL: C23, E62, H50.

The paper introduces a new concept in ship registration, the net flag-out ratio (in contrast to the standard flag-out ratio) and examines the potential contribution of metrics of corruption and institutional measures as decisive factors in explaining flag choice. Context-related factors are also controlled and included in the study. The study uses a cross-sectional, multiple regression econometric approach. Focusing on a sample of the 33 largest ship owning countries, we find that institutional factors do not explain the traditional flag-out measure but determine the net flag-out ratio. Our findings indicate a potential effect of institutional performance/environment on ship registration. (C) 2015 Elsevier Ltd. All rights reserved.

ABSTRACTWe use a panel of 10 euro area countries to assess the determinants of long‐term sovereign bond yield spreads over the period 1999.01–2010.11. We find that government bond yield spreads are well explained by fiscal fundamentals over the crisis period. We also find that the menu of risk factors priced by markets has been significantly enriched since March 2009, including international risk, liquidity risk and the risk of the crisis' transmission among European Monetary Union member states. Finally, we find that transmission risk has increased considerably since spring 2009 because of rapidly increasing risk of investing in periphery bonds relative to core ones. Copyright © 2013 John Wiley & Sons, Ltd.

We use a macro-theory framework of analysis to assess Greek macro-policy with emphasis on the period of the Greek debt crisis. The latter is mainly the result of misguided past internal policies deviating from the policy lessons of modern macroeconomics. The current policy, however, provides a credible platform for sustainable growth. Greece has entered the process of economic recovery but this is fragile and exposed to risks. We conclude that although a country’s currency is not per-se determining growth, supply-side reforms and institutional performance are; and for Greece both are better served within the EMU rather than outside.

We test for fiscal policy sustainability in the UK over the period 1955–2006. We find evidence of sustainability with three structural breaks, respectively occurring in the early 1970s, early 1980s and late 1990s. UK fiscal policy was not sustainable between 1973 and 1981. Within the fiscal regimes correction of fiscal disequilibrium occurs through adjustments in public revenue. Changes in fiscal regimes, however, occur through shifts in public expenditure. UK authorities do not react to relatively small deficits but correct exceedingly large deficits relatively fast. Finally, the recent financial crisis may have caused a substantial deterioration of UK fiscal dynamics.

We use a dynamic multipath general-to-specific algorithm to capture structural instability in the link between euro area sovereign bond yield spreads against Germany and their underlying determinants over the period January 1999–August 2011. We offer new evidence suggesting a significant heterogeneity across countries, both in terms of the risk factors determining spreads over time as well as in terms of the magnitude of their impact on spreads. Our findings suggest that the relationship between euro area sovereign risk and the underlying fundamentals is strongly time-varying, turning from inactive to active since the onset of the global financial crisis and further intensifying during the sovereign debt crisis. As a general rule, the set of financial and macro spreads' determinants in the euro area is rather unstable but generally becomes richer and stronger in significance as the crisis evolves.

We offer a detailed empirical investigation of the EMU sovereign-debt crisis. We find a marked shift in market pricing behaviour from a 'convergence-trade' model before August 2007 to one driven by macro-fundamentals and international risk thereafter. We find evidence of contagion effects, particularly among EMU periphery countries. The EMU debt crisis is divided into an early and current crisis period. Unlike the former where contagion was mainly originating from Greece, the latter involves multiple sources of contagion. Finally, the escalation of the Greek debt crisis since November 2009 is due to an unfavourable shift in country-specific market expectations. (C) 2012 Elsevier B.V. All rights reserved.