Ifo Institute Research Articles

From ‘I don’t like Mondays’ to ‘Friday I’m in love’ – day-of-the-week effects in business surveys

ABSTRACT This study identifies day-of-the-week effects in business surveys using monthly data from the ifo Institute in Germany. Companies are more likely to exhibit pessimistic business expectations for the upcoming months on Mondays and optimistic expectations towards the end of the week. This pattern also applies to the assessment of the current business situation. Moreover, firms exhibit greater uncertainty regarding their upcoming business development on Mondays, with this uncertainty decreasing by Saturday. These effects are primarily observed in firms from the service sector and companies with fewer than 50 employees. Although the effects are statistically significant, they are, from an economic standpoint, rather minor.

Can Standard Setters Improve Cash Flow Reporting of Capital Expenditures?

SYNOPSIS We evaluate whether current capital expenditures (capex) reporting in the cash flows statement can be improved via disaggregation and/or reclassification of some capex as operating activities. FASB Concept Statement No. 5 suggests recurrence and risk as useful characteristics for determining disaggregation and classification in financial statements. Using a novel German dataset that provides disaggregated capex information, we examine whether these characteristics differ across capex components and provide evidence of up to five economically distinct components. These results support disaggregating capex into maintenance, expansion, rationalization, restructuring, and environmental components. Our findings, however, do not support reclassifying any capex component as operating activities, although evidence suggests capex and capex components are misclassified as investing activities. As a first step toward improving capex reporting guidance, our evidence suggests standard setters consider disaggregating and presenting capex components as supplemental information in the cash flow statement, the footnotes, or MD&A. Data Availability: FactSet data are publicly available. The disaggregated capital expenditures data are available from the ifo Institute. JEL Classifications: G31; M41; M48.

FamData: Database for Family Business Companies in Germany Covering Company Key Figures and Survey Data

Abstract FamData is a database covering family businesses and non-family businesses across various size classes and branches containing structural and financial information. The ifo institute assembled a business panel with executives from almost 4000 companies. In addition to the “hard” business data like turnover and number of employees, the database also includes “soft” survey data. The latter one covers information from regular – at least yearly – surveys treating topics like investment behavior, skilled labor shortage or reaction of firms during the Corona pandemic situation and the rise in energy prices observed in 2022.

The Forecasting Power of the ifo Business Survey

The ifo Institute is Germany’s largest business survey provider, with the ifo Business Climate Germany as one of the most important leading indicators for gross domestic product. However, the ifo Business Survey is not solely limited to the Business Climate and also delivers a multitude of further indicators to forecast several important economic variables. This paper gives a literature overview over existing studies that deal with the forecasting power of various ifo indicators both for gross domestic product and further economic variables such as exports. Overall, the various indicators from the ifo Business Survey can be seen as leading indicators for a multitude of variables representing the German economy, making them a powerful tool both for an in-depth business cycle diagnosis and for applied forecasting work.

Business surveys as a mirror of the economy: Germany and Russia

Subject. The article addresses the business surveys conducted by the departments of the leading research institutes of Germany and Russia. Objectives. The aim is to investigate the specifics of survey statistics of the German IFO Institute for Economic Research and the Russian Economic Barometer, based on the analysis of relationship between surveys and forecasting, database parameters and main survey indicators. Methods. The study employs the methods of logical and statistical analysis. Results. We consider the main characteristics of respondent databases, the issues of using survey indicators to compile market forecasts, the dimension of databases (topics and levels of aggregation that determine the number of generated time series), analytical tools for market research, information and analytical publications, main indicators of survey statistics and the peculiarities of limitations to production. Conclusions. The paper reveals the main differences between the business surveys of the Russian Economic Barometer and the surveys of the IFO Institute. The most important achievement of the IFO Institute is the development of the main indicator, which became the basis for reliable market forecasting in Germany – the Business Climate Index, calculated on the basis of the Present Situation Index and the index of business expectations for six months in advance. For successful development of entrepreneurial surveys in Russia, it is necessary to take into account the German experience, which has received wide international recognition.

Evergreening in the Euro Area: Evidence from Survey Data and a Conceptual Framework

Abstract Since the beginning of the financial crisis in 2007/2008, new lending in the euro area has slowed sharply and the old loans experienced ‘evergreening’, that is, bad loans have been rolled over rather than being liquidated. Even though ameliorating evergreening is key to promote lending for new investment projects and growth, no systematic evergreening measures exist. In this paper, we propose a new cross-country evergreening index and develop a public-choice model to explain why evergreening may reflect the incentives of regulators to forebear. Our evergreening index is based on a survey we designed and was administered by the ifo Institute to about 1000 experts in over 80 countries. We bring the model to the data using a heteroscedastic probit model and find that evergreening is higher in: (i) euro-area countries than in the rest of the world; (ii) in countries facing bank distress; and (iii) is highest in countries which experience banking distress and are members of the euro area. These results are consistent with our theoretical model. (JEL codes: F33, F55 and E58)

The effect of dispatch methods on a recruiting campaign for a business survey: evidence from Germany

ABSTRACT The ifo Institute for Economic Research has been conducting the ifo business survey since its foundation in 1949. To ensure stability of participation rates, regular sample recruitment is indispensable. Does the dispatch method matter for response rates of a recruiting campaign? To answer this question, we conducted a controlled experiment involving invitation letters sent out to over 8,000 German industrial firms in May 2019. Our results show that standard mailing significantly increases the response rate compared to ‘Dialogpost’ (bulk mail). From a cost perspective, costs for standard mailing outweigh this effect.

Tracking and Predicting the German Economy: Ifo vs. Pmi

This analysis investigates the predictive power of the most important leading indicators for the German economy, which are provided by the ifo Institute and IHS Markit. We conduct an out-of-sample, real-time forecast experiment for growth of gross domestic product and growth of gross value added in both the manufacturing and the service sector. We find that both survey providers produce valuable leading indicators to predict the current quarter of German GDP growth. Regarding forecasts for the next quarter, the ifo indicators are slightly better than the IHS Markit headline index. For the manufacturing sector, series provided by ifo are clearly superior to those of IHS Markit. For the service sector, the ifo indicators produce better nowcasts, whereas the indicators by IHS are more valuable for one-quarter-ahead predictions.

The Forecasting Power of the Ifo Business Survey

The ifo Institute is Germany's largest business survey provider, with the ifo Business Climate Germany as one of the most important leading indicators for gross domestic product. However, the ifo Business Survey is not solely limited to the Business Climate and also delivers a multitude of further indicators to forecast several important economic variables. This paper gives a literature overview over existing studies that deal with the forecasting power of various ifo indicators both for gross domestic product and further economic variables such as exports. Overall, the various indicators from the ifo Business Survey can be seen as leading indicators for a multitude of variables representing the German economy, making them a powerful tool both for an in-depth business cycle diagnosis and for applied forecasting work.

The Effect of Dispatch Methods on a Recruiting Campaign for a Business Survey: Evidence from Germany

The ifo Institute for Economic Research has been conducting the ifo business survey since its foundation in 1949. To ensure stability of participation rates, regular sample recruitment is indispensable. Does the dispatch method matter for response rates of a recruiting campaign? To answer this question, we conducted a controlled experiment involving invitation letters sent out to over 8,000 German industrial firms in May 2019. Our results show that standard mailing significantly increases the response rate compared to “Dialogpost” (bulk mail). From a cost perspective, costs for standard mailing outweigh this effect.

The Euro Area's Common Pool Problem Revisited: Has the Single Supervisory Mechanism Ameliorated Forbearance and Evergreening?

The Single Supervisory Mechanism was introduced to eliminate the common-pool problem and limit uncontrolled lending by national central banks (NCBs). We analyze its effectiveness. Second, we model how, by forbearing and providing refinancing credit, NCBs avoid domestic resolution costs and, instead, share potential losses within the Euro Area. This results in “evergreening” of bad loans. Third, we construct a new evergreening index based on a large worldwide survey administered by the ifo institute. Regressions show evergreening is significantly greater in the Euro Area and where banks are in distress. Finally, greater evergreening accompanies higher growth of NCB-credit and Target2-liabilities.

A Forecast of Industrial and Commercial Drinking Water Consumption in Hamburg

This paper reports about a forecast of drinking water consumption in Hamburg up to the year 2045 which was done in cooperation of the Institute for Social-Ecological Research with the Ifo Institute. While the Institute for Social-Ecological Research was responsible for the drinking water demand of private households, the Ifo Institute undertook a long-term forecast of the industrial and commercial drinking water consumption. Comparable water demand forecasts for other cities or regions treat the industrial water consumption compared to domestic consumption rather rudimentary. The innovation of this forecast versus previous, conventional approaches is the choice of the workforce instead of the population as a reference point for the water requirements of enterprises. It is described in this paper how the problems of predicting industrial and commercial water consumption based on limited information were solved. Forecasts of sectoral employment were completed by determining the specific water needs for each sector and by assumptions about efficiency improvements in drinking water consumption. Those assumptions were secured through written and oral inquiries of major customers of the Hamburg Waterworks and experts from the water sector.

A Data-Driven Approach to Construct Survey-Based Indicators by Means of Evolutionary Algorithms

In this paper we propose a data-driven approach for the construction of survey-based indicators using large data sets. We make use of agents’ expectations about a wide range of economic variables contained in the World Economic Survey, which is a tendency survey conducted by the Ifo Institute for Economic Research. By means of genetic programming we estimate a symbolic regression that links survey-based expectations to a quantitative variable used as a yardstick, deriving mathematical functional forms that approximate the target variable. We use the evolution of GDP as a target. This set of empirically-generated indicators of economic growth, are used as building blocks to construct an economic indicator. We compare the proposed indicator to the Economic Climate Index, and we evaluate its predictive performance to track the evolution of the GDP in ten European economies. We find that in most countries the proposed indicator outperforms forecasts generated by a benchmark model.

Determinants of Business Fixed Investment: Evidence from German Firm-Level Data

Abstract This paper employs a novel firm-level dataset that combines financial accounts of German firms with data from a business survey to shed new light on the demand for capital. The empirical analysis employs firm-specific indicators in order to explore the effects of sales, the cost of capital and indicators of the business climate, which are used by the ifo Institute to provide a leading indicator for the German economy. The empirical results support a robust significant effect of a firm’s cost of capital on the stock of capital with an elasticity not significantly different from –1. Controlling for sales, a good rather than normal business situation is found to be associated with about 8 % higher investment.

PROTOCOL: Reducing Unemployment Benefit Duration to Increase Job Finding Rates: Protocol for a Systematic Review

PROTOCOL: Reducing Unemployment Benefit Duration to Increase Job Finding Rates: Protocol for a Systematic Review

Forecasting Business Surveys Indicators: Neural Networks vs. Time Series Models

The objective of this paper is to compare different forecasting methods for the short run forecasting of Business Survey Indicators. We compare the forecasting accuracy of Artificial Neural Networks (ANN) vs. three different time series models: autoregressions (AR), autoregressive integrated moving average (ARIMA) and self-exciting threshold autoregressions (SETAR). We consider all the indicators of the question related to a country’s general situation regarding overall economy, capital expenditures and private consumption (present judgement, compared to same time last year, expected situation by the end of the next six months) of the World Economic Survey (WES) carried out by the Ifo Institute for Economic Research in co-operation with the International Chamber of Commerce. The forecast competition is undertaken for fourteen countries of the European Union. The main results of the forecast competition are offered for raw data for the period ranging from 1989 to 2008, using the last eight quarters for comparing the forecasting accuracy of the different techniques. ANN and ARIMA models outperform SETAR and AR models. Enlarging the observed time series of Business Survey Indicators is of utmost importance in order of assessing the implications of the current situation and its use as input in quantitative forecast models.

Measuring Institutional Competitiveness in Europe

While there are many methods to measure the competitiveness of an economy, most of these concepts ignore the fact that competitiveness can change not only because of market processes such as wage negotiation but also because of political decision making. Governments that compete with others for factors of production face the incentive to adjust key policy variables such as tax rates to improve their competitive position. Disentangling market-induced and politics-induced changes in competitiveness are not easy, but strongly warranted given current discussions that some Economic and Monetary Union (EMU) Member States should improve their competitive position within the euro area by adjusting policy variables. Increasing country competitiveness is one of the key objectives currently discussed by policy makers in the context of creating an economic union in the euro area, to complement monetary union. We propose a new competitiveness index that captures the dimensions in which politics can influence competitiveness beyond factor price adjustments. Our index shows that the individual components of institutional competitiveness have developed heterogeneously among EMU Member States. To explain these divergent developments, the uneven integration within the European Union Single Market may play a role. (JEL codes: E02, E44, F15, H11, N44) Copyright The Author 2013. Published by Oxford University Press on behalf of Ifo Institute for Economic Research, Munich. All rights reserved. For permissions, please email: journals.permissions@oup.com, Oxford University Press.

Learning Capitalism the Hard Way --- Evidence from Germany's Reunification

How do firms learn to forecast future business conditions after major structural changes to the economy? How long does it take? We exploit German Reunification as a natural experiment, where firms in the East are treated with ignorance about the distribution of market states, to test a Bayesian learning framework. As predicted, we find that Eastern firms initially forecast future business conditions worse than Western ones, but this gap gradually closes over the three quarters of a decade following Reunification. The slow convergence stems from differences in forward expectations rather than realized market conditions. These results warn of costly and drawn out firm-level adjustments to contemporary regime changes, such as the US-China Trade War, COVID19 and Brexit.

Theory and Evidence on New Venture Founding and Strategy

This symposium presents four papers that investigate important stages in the early stages of an organization’s life cycle, developing new theory and empirically testing theory with rigorous analyses. The four studies investigate initial founding strategies and the subsequent evolution of new organizations, focusing on key phenomena like founding, joining, naming, and staffing new organizations. Founder or Joiner? The Role of Preferences and Context in Shaping Entrepreneurial Orientations. Presenter: Michael Roach; Duke U. Presenter: Henry Sauermann; Georgia Institute of Technology Eponymous Entrepreneurs. Presenter: Sharon Belenzon; Duke U. Presenter: Aaron Chatterji; Duke U. Organizational founding conditions and the subsequent evolution of employee demography. Presenter: Jing Chen; Copenhagen Business School Presenter: Christopher I. Rider; Emory U. Do Undervalued Employees Make Entrepreneurs? New Theory and Evidence. Presenter: Deepak Hegde; New York U. Presenter: Justin Tumlinson; Ifo Institute at the U. of Munich

Unemployment and Identity

This article employs social identity and self-categorization theories as a useful heuristic framework through which to learn more about the nature of the misery experienced by the unemployed; in economic terms, the individual cost of unemployment. Utilizing this framework, the article provides different empirical identification strategies in order to disentangle the various means through which unemployment alters both the well-being and utility of an individual and shows, by reviewing some of the recent research in which I have participated, that unemployment primarily threatens an individual's identity rather than reducing the instantaneous utility derived from day-to-day experiences. Copyright The Author 2012. Published by Oxford University Press on behalf of Ifo Institute, Munich. All rights reserved. For permissions, please email: journals.permissions@oup.com, Oxford University Press.