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The euro crisis shed lights on the nature of alternative adjustment mechanisms in a monetary union characterized by a large heterogeneity. Exchange rate adjustments being impossible, it remains very few efficient alternative mechanisms. At the level of the whole eurozone the euro is close to its equilibrium parity. But the euro is strongly overvalued for Southern European countries, France included, and largely undervalued for Northern European countries, especially Germany. This paper gives a new evaluation of these exchange rate misalignments inside the eurozone, using a FEER approach, and examines the evolution of competitiveness. In a second step, we use a two-country SFC model of a monetary union with endogenous interest rates and Eurobonds issuance. Three main results are found. Firstly, facing a competitiveness loss in southern countries due to exchange rates misalignments, increasing intra-European financing by banks of northern countries or other institutions could contribute to reduce the debt burden and induce a partial recovery but public debt would increase. Secondly, the implementation of Eurobonds as a tool to partially mutualize European sovereign debt would have a rather similar positive impact, but with a public debt limited to 70 percent of GDP. Finally, Eurobonds could also be used to finance large European projects which could impulse a stronger recovery in the entire zone with stabilized current account imbalances. However, the creation of a European institution in charge of the issuance of the Eurobonds would face strong political obstacles.

International audience; I build an exchange rate strategy that trades currencies conditional on changes in the global prices of commodity indices; hence, termed “commodity strategy”. First, I document that commodity prices have signicant out-of-sample forecasting ability for the future exchange rates of several commodity exporters and importers at the daily frequency. However, I report that the reverse forecasting relationship does not survive out-of-sample testing. Second, I find a signicant cross-sectional spread, in both spot and excess returns, of 6% p.a. between the currencies that are predicted to appreciate and those that are predicted to depreciate. The returns appear to be uncorrelated to those of popular exchange rate strategies such as the carry trade and currency momentum. Furthermore, the spread in returns is not explained by traditional risk factors; however, it is partly accounted for by the strategy’s high transaction costs. Net probability can be restored by either implementing a simple market timing rule or by investing in developed markets with low costs and high liquidity.

Traditionally, financial crisis Early Warning Systems (EWSs) have relied on macroeconomic leading indicators when forecasting the occurrence of such events. This paper extends such discrete-choice EWSs by taking the persistence of the crisis phenomenon into account. The dynamic logit EWS is estimated using an exact maximum likelihood estimation method in both a country-by-country and a panel framework. The forecasting abilities of this model are then scrutinized using an evaluation methodology which was designed recently, specifically for EWSs. When used for predicting currency crises for 16 countries, this new EWS turns out to exhibit significantly better predictive abilities than the existing static one, both in- and out-of-sample, thus supporting the use of dynamic specifications for EWSs for financial crises.

The euro zone crisis illustrates the insufficiency of adjustment mechanisms in a monetary union characterized by a large heterogeneity. Firstly, the paper gives an evaluation of exchange rate misalignments inside the euro zone, using a FEER approach (Jeong, Mazier and Saadaoui, 2010). Using panel econometric techniques over the period 1994-2010, we confirm that the exchange rate misalignments in the euro zone have diverged, reflecting unsustainable evolutions. Secondly, we use a "stock-flow consistent" model of a monetary union with two countries along the lines of Godley and Lavoie (2007) and Duwicquet and Mazier (2010). A federal budget is introduced with federal expenditures and social transfers financed by federal taxes and euro-bonds issuing. The stabilizing role of such a federal budget is confirmed facing asymmetric shock or the negative impact of exchange rate misalignments inside the monetary union. Similarly, the stabilizing role of euro-bonds used to finance European investment projects is illustrated., La crise de la zone euro illustre les carences des mécanismes d'ajustement dans une union monétaire caractérisée par une forte hétérogénéité. Cette situation reflète un diagnostic simple. Au niveau de l'ensemble de la zone, l'euro est proche de son taux d'équilibre. Mais l'euro est fortement surévalué pour les pays d'Europe du Sud, y compris la France, et largement sous-évalué pour les pays d'Europe du Nord, en particulier l'Allemagne (Jeong, Mazier et Saadaoui, 2010). Dans un premier temps, cet article donne une évaluation de ces désajustements de change au sein de la zone euro, en utilisant une approche FEER. De plus, en utilisant des données de panel sur la période 1994-2010, nous confirmons que les désajustements de taux de change ont divergé, reflétant des évolutions insoutenables. Enfin, nous estimons les transferts équivalents en % du PIB induits par ces désajustements pour les différents pays européens. Dans un second temps, nous utilisons une modélisation " stock-flux cohérente " à deux pays d'une union monétaire dans la lignée de Godley et Lavoie (2007) et de Duwicquet et Mazier (2010). Un budget fédéral est introduit avec des dépenses fédérales et des transferts sociaux financés par des impôts fédéraux et par l'émission d'euro-obligations. Le rôle stabilisateur d'un tel budget fédéral est confirmé face à des chocs asymétriques au sein de l'union. Parallèlement, le rôle stabilisateur d'euro-obligations destinées à des projets d'investissement est illustré.

The euro zone crisis illustrates the insufficiency of adjustment mechanisms in a monetary union characterized by a large heterogeneity. Exchange rate adjustments being impossible, they are very few alternative mechanisms. This situation reflects a simple diagnosis. At the level of the whole euro zone, the euro is close to its equilibrium parity. But the euro is strongly overvalued for Southern European countries, France included, and largely undervalued for Northern European countries, especially Germany. In a first step, the paper gives an evaluation of these exchange rate misalignments inside the euro zone, using a FEER approach. Using panel econometric techniques over the period 1994-2011, we confirm that the exchange rate misalignments in the euro zone have diverged, reflecting unsustainable evolutions. Last, we give an estimation of the equivalent transfers in % of GDP implied by these misalignments in the different European countries. In a second step, we use a 'stock-flow consistent' model of a monetary union with two countries along the lines of Godley and Lavoie (2007) and Duwicquet and Mazier (2010). A federal budget is introduced with federal expenditures and social transfers financed by federal taxes and euro-bonds issuing. Three results are obtained. The stabilizing role of such a federal budget is confirmed facing asymmetric shock or the negative impact of exchange rate misalignments inside the monetary union. Without such a federal mechanism the overvaluation of the Southern currency (Greek or Spanish euro), facing the undervaluation of the Northern currency (German euro), induces a strong slowdown in the South and a cumulative imbalances within the monetary union. Similarly, the stabilizing role of euro-bonds used to finance European investment projects is illustrated. Their role in the pooling of national debts would be the last point to examine.

This paper provides evidence of spillover effects from the Indian to the US financial markets. We use VAR and Kalman filter analysis to assess the influence of financial stress indicators like the LIBOR-OIS, CDS, the S&P 500 volatility and the exchange rate of the rupee against the Dollar on two indicators of financial stress in India, namely the illiquidity of stock indices and their volatility. We conduct an analysis bases on both daily and monthly frequency and use a database that consists of both aggregate and disaggregated indexes. Our results points to a signification contagion effect after the period following the Lehman Brothers collapse.

We analyze the time-variations of conditional correlations between selected Latin American emerging markets and between them and the World stock market to further shed light on the issues of capital market integration and portfolio diversification. The cross-market correlations are empirically estimated from the Engle (2002)'s DCC-GARCH model. Bai and Perron (2003)'s structural break analysis technique is also employed to test for possibly changing nature of stock market comovements. Main findings of the paper are as follows. First, the degree of cross-market comovements changed over time and has significantly increased since 1994 and onwards, which is to the large extent informative of increasing market integration. Despite the significant interdependencies among the studied markets, room for international portfolio diversification nevertheless seems largely possible. Second, it is demonstrated that the cross-market comovements are subjected to various regime shifts due essentially to major stock market events. Finally, the purpose that stock markets move much more together in times of crisis than in normal times can not be rejected according to our empirical evidence.