Journal of Banking and Financial Economics

JBFE No 1/2015

Wage-setting Behavior in France: Additional Evidence from an Ad-hoc Survey
Jérémi Montornès, Jacques-Bernard Sauner-Leroy




We investigate the wage-setting behavior of French companies using an ad-hoc survey specifically conducted for this study. Our main results are the following. i) Wages are changed infrequently. 75% of firms change their wages once a year. Wage changes occur at regular intervals during the year and are concentrated in January and July. ii) We find a lower degree of downward real wage rigidity and nominal wage rigidity in France compared to the European average. iii) About one third of companies have an internal policy to grant wage increases according to inflation. iv) When companies are faced with adverse shocks, the latter are partially transmitted into prices. Companies also adopt cost-cutting strategies. The wage of newly hired employees plays an important role in this adjustment.


JEL classification: E24, J3
Keywords: wage rigidity, wage-setting behavior, survey data.

DOI: 10.7172/2353-6845.jbfe.2015.1.1

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The validity and time-horizon of the Fed model for equity valuation: a co-integration approach.
Fabien Mercier


Investors do arbitrage between bonds and stocks. The so-called “Fed model” asserts that comparing the level of the earnings yields of stocks to the nominal government bond yields is relevant when assessing the relative values of the two asset classes, and their prospective returns. A conceptual problem with this model is that it compares a real quantity, the earning yield, to a nominal one, the government bond yield, thus implying that economic agents suffer from money-illusion. The merits of the Fed model as an indicator of stock returns is still very controversial. In this article we try to quantify the scope of the Fed model by employing appropriate techniques of co-integration to validate, or invalidate, the Fed model. More precisely, we study the validity of the model geographically and using different frequencies in order to determine its potential time horizon. We obtain the following results. First, the Fed model is very limited in scope and in time: of the 21 pairs of countries and stock exchange indices tested, only three are potential candidates for the Fed model: the US, Italy and Mexico; in the US, the Standard and Poor’s 500 confirms the model, but only from 1980 to 2000. Second, for the Standard and Poor’s 500 from 1980 to 2000 the validity of the Fed model is confirmed, for a time horizon of one week or more for predicting the earning yield on stocks and a time horizon of one month or more for the nominal yield on bonds. Third, from 2000 onwards the long-term relationship between earning yields and nominal bond yields becomes inverted, and the Fed long-term relationship does not help predict any of the two variables compared to a simple vector autoregressive model (VAR). Overall, the evidence for the relevance of a linear long-term relationship between nominal US bonds yields level and the earnings ratio of broad stock indexes appears very weak, even when this relationship is allowed to vary over time, with a structural break somewhere in 2000 with an inversion of the relationship. In most cases, assuming and estimating a possible long-term relationship between earning yields and nominal bond yields does not improve the forecasts as short-term dynamics dominate. 


JEL classification: G1 ; C1 ; G02; G14
Keywords: arbitrage; stock; earning yields; Fed model

DOI: 10.7172/2353-6845.jbfe.2015.1.2

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A global perspective on inflation and propagation channels
Luca Gattini, Huw Pill, Ludger Schuknecht 



This paper revisits the evidence on monetary policy transmission. It extends the existing literature in three dimensions. First, we attempt to internalise potential international channels of transmission by taking a global perspective. More specifically, we explore global aggregates covering a broader set of countries (ca. 70% per cent of the world economy) and a longer time span (from 1960 to 2013) than previous studies. Second, we broaden the set of transmission channels considered, notably by exploring interactions among monetary variables, inflation and asset prices (including residential property prices). Third, we look at the potential role of public debt in driving price developments, on the grounds underpinned by fiscal theories of the price level. On the basis of a VAR analysis, we find that: (1) global money demand shocks affect global inflation and global commodity prices (which, in turn, impact on inflation); (2) global asset price dynamics respond to financing cost shocks and (very modestly) to shocks to global money demand; and (3) positive house price shocks exert a significant influence on inflation. From a global perspective, the study suggests that an understanding of inflation requires recognition of the externalities that global commodity and asset price developments exert over domestic inflation. 


JEL classification: E31, E51, E62, C32, F42

Keywords: VAR, global inflation, global house prices, global money

DOI: 10.7172/2353-6845.jbfe.2015.1.3

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The Role of Foreign Firm Characteristics,
Absorptive Capacity and the Institutional Framework
for FDI Spillovers

Thomas Farole, Deborah Winkler




A vast set of empirical evidence has been amassed over the past decade on the existence and
direction of foreign direct investment (FDI)-generated horizontal and vertical spillovers. Overall,
the results are mixed, and suggest that the theoretical postulated spillover effects often do not
automatically materialize just because a country is able to attract FDI in the first place. As a result,
more and more research has been devoted to understanding the various conditions that may
explain these mixed results. Using a cross-section of more than 25,000 domestic manufacturing
firms in 78 low-and middle-income countries from the World Bank’s Enterprise Surveys Indicator
Database we assess how mediating factors influence productivity spillovers to domestic firms
from FDI. We differentiate between three types of mediating factors: (i) a foreign investor’s
spillover potential, (ii) a domestic firm’s absorptive capacity, and (iii) a country’s institutional
framework. We find that all three affect the extent and direction of FDI spillovers on domestic
firm productivity. Moreover, we find that the impact of mediating factors depends on domestic
firms’ productivity and the structure of foreign ownership.


JEL classification: F1, F2, O1

Keywords: foreign direct investment, spillovers, productivity, firm characteristics, absorptive
capacity, institutions

DOI: 10.7172/2353-6845.jbfe.2015.1.4

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Risk, capital buffers and bank lending:
The adjustment of euro area banks

Laurent Maurin, Mervi Toivanen




This paper estimates euro area banks’ internal target capital ratios and investigates whether banks’

adjustment to the targets affects their credit supply and securities holdings during the financial
crisis in 2005–2011. Based on data on listed banks and country-specific macro-variables, a partial
adjustment model is estimated in a panel context. The results indicate, first, that an increase in
the riskiness of banks’ balance sheets positively influences banks’ target capital ratios. On the
euro area level, we find banks’ undercapitalisation in terms of Tier 1 capital ratio to be close to
2 percentage points in the middle of 2008. While median capital gaps diminish towards the end
of 2011, the heterogeneity across individual banks increases. Second, the adjustment towards
higher equilibrium capital ratios has a significant impact on banks’ assets. The impact is more
sizeable on security holdings than on loans, thereby suggesting a pecking order of bank assets for


JEL classification: G01; G21

Keywords: banks, euro area, capital ratios, credit supply, partial adjustment model
DOI: 10.7172/2353-6845.jbfe.2015.1.5

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Financial Deepening, Property Rights, and Poverty: Evidence from Sub-Saharan Africa

Raju Jan Singh, Yifei Huang




Recent studies on the relationship between financial development and poverty have been
inconclusive. Some claim that, by allowing more entrepreneurs to obtain financing, financial
development improves the allocation of capital, which has a particularly large impact on the poor.
Others argue that it is primarily the rich and politically connected who benefit from improvements
in the financial system. This paper looks at a sample of 37 countries in sub-Saharan Africa from
1992 through 2006. Its results suggest that financial deepening could widen income inequality
and increase poverty, if not accompanied by stronger property rights. Similarly, interest rate and
lending liberalization alone could be detrimental to the poor without institutional reforms, in
particular stronger property rights and wider access to credit information.


JEL classification: O11, O16, G00

Keywords: financial development, poverty alleviation, income distribution, Africa
DOI: 10.7172/2353-6845.jbfe.2015.1.6

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Global Liquidity Determinants Across Emerging and Advanced Countries

Renata Karkowska




The paper explores the concept of global liquidity and its determinants, focusing on the banking
system in advanced and emerging markets. We explore the implications of the interaction between
liquidity and its local, global and financial markets determinants. We also analyze the global
liquidity channels, i.e. whether foreign banks play a significant role in the country’s financial
system. The study focuses on the investigation of banks’ liquidity determinants in 42 countries
(advanced and emerging/developing countries) over the 2000–2011 period. The results show the
significance of the differences in global liquidity depending on the country’s level of development.
We find support to the conjecture that globalization and global banks’ leverage may convey some
useful information on global liquidity. We also present an important observation that banks’
lending in advanced countries is shielded from the monetary policy because of their ability to
freely access alternative sources of funds.


JEL classification: E5, E44, G20, F3

Keywords: global liquidity, emerging countries, credit supply, financial instability
DOI: 10.7172/2353-6845.jbfe.2015.1.7

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