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on European Economics |
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Issue of 2010‒02‒20
seventeen papers chosen by Giuseppe Marotta University of Modena and Reggio Emilia |
| By: | Adam Posen; Nicolas Véron |
| Abstract: | Nicolas Véron and Adam Posen believe Europe should build new long term European joint-action to face the likely high rising number of insolvent banks on the continent. The authors propose on the one hand, a centralised triage and restructuring process of bad European banks lead by a new temporary European Institution, a European Bank Support Authority (EBSA), and on the other hand, long-term EU Institutions dedicated to the completion of an integrated market. |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:bre:polbrf:325&r=eec |
| By: | Lorenzo Cappiello (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Arjan Kadareja (Bank of Albania, Sheshi “Skënderbej”, No.1 Tirana, Albania.); Christoffer Kok Sørensen (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Marco Protopapa (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | Applying the identification strategy employed by Driscoll (2004) for the United States, this paper provides empirical evidence for the existence of a bank lending channel of monetary policy transmission in the euro area. In addition, and in contrast to recent findings for the US, we find that in the euro area changes in the supply of credit, both in terms of volumes and in terms of credit standards applied on loans to enterprises, have significant effects on real economic activity. This highlights the importance of the monitoring of credit developments in the toolkit of monetary policy and underpins the reasoning behind giving monetary and credit analysis a prominent role in the monetary policy strategy of the ECB. It also points to the potential negative repercussions on real economic growth of bank balance sheet impairments arising in the context of the financial crisis erupting in mid-2007 which led to the need for banks to delever their balance sheets and possibly to reduce their loan supply. JEL Classification: C23, E51, E52, G21. |
| Keywords: | bank credit, bank lending channel, euro area, panel data. |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101150&r=eec |
| By: | Jean Pisani-Ferry; André Sapir |
| Abstract: | Director Jean Pisani-Ferry and Senior Fellow André Sapir provide an in-depth examination of the the banking crisis in the European Union, starting with a discussion of the pre-crisis banking landscape and including an assessment of the management of the crisis and the lessons learned going forward. The authors argue that the EU was institutionally ill-prepared to manage the crisis, with the response characterised by ad hoc actions and a lack of transparency. They say, however, that coordination has remarkably not been impeded by a divide within the euro area and policy performance has been better than expected given the sub-optimal nature of EU financial institutional arrangements. |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:bre:wpaper:375&r=eec |
| By: | Pacheco, Luis (Universidade Portucalense) |
| Abstract: | Forecasts are an inherent part of economic science and the quest for perfect foresight occupies economists and researchers in multiple fields. The release of economic forecasts (and its revisions) is a popular and often publicized event, with a multitude of institutions and think-tanks devoted almost exclusively to that task. The European Central Bank (ECB) also publishes its forecasts for the euro area, however ECB’s forecast accuracy is not a deeply researched theme. The ECB forecasts’ accuracy is the main point developed in this paper, which tries to contribute to understand the nature of the errors committed by the ECB forecasts and its main differences compared to other projections. What we try to infer is whether the ECB is accurate in its projections, making less errors than the others, maybe due to some informational advantage. We conclude that the ECB seems to consistently underestimate the HICP inflation rate and overestimate GDP growth. Comparing it with the others, the ECB shows a superior performance, committing almost always fewer errors. So, this signals a possible informational advantage from the ECB. Since the forecasting errors could jeopardize ECB’s credibility public criticism could be avoided if the ECB simply let forecasts for the others. Naturally, this change should be weighted against the benefits of publishing forecasts. |
| Keywords: | European Central Bank; Staff projections; Monetary Policy; Forecasting; Central Bank Communication |
| JEL: | E52 E58 |
| Date: | 2010–02–08 |
| URL: | http://d.repec.org/n?u=RePEc:ris:cigewp:2010_011&r=eec |
| By: | Andrea Gerali (Bank of Italy); Stefano Neri (Bank of Italy); Luca Sessa (Bank of Italy); Federico M. Signoretti (Bank of Italy) |
| Abstract: | This paper studies the role of credit-supply factors in business cycle fluctuations. For this purpose, we introduce an imperfectly competitive banking sector into a DSGE model with financial frictions. Banks issue collateralized loans to both households and firms, obtain funding via deposits and accumulate capital from retained earnings. Margins charged on loans depend on bank capital-to-assets ratios and on the degree of interest rate stickiness. Bank balance-sheet constraints establish a link between the business cycle, which affects bank profits and thus capital, and the supply and cost of loans. The model is estimated with Bayesian techniques using data for the euro area. The analysis delivers the following results. First, the existence of a banking sector partially attenuates the effects of demand shocks, while it helps propagate supply shocks. Second, shocks originating in the banking sector explain the largest share of the fall of output in 2008 in the euro area, while macroeconomic shocks played a limited role. Third, an unexpected destruction of bank capital has a substantial impact on the real economy and particularly on investment. |
| Keywords: | collateral constraints, banks, banking capital, sticky interest rates |
| JEL: | E30 E32 E43 E51 E52 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_740_10&r=eec |
| By: | Jean Pisani-Ferry; André Sapir |
| Abstract: | Jean Pisani-Ferry and André Sapir believe that the euro has proved attractive as a fair-weather currency for countries and investors well beyond its borders. But it still remains to be seen if its governance is strong enough for it to succeed as a stormy-weather currency. The authors already detect, howevever, that the crisis shows the euro-area governance system lacks some crucial properties: speed of reaction, policy discretion and centralised decision-making. |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:bre:polcon:286&r=eec |
| By: | Zagaglia, Paolo |
| Abstract: | I address the role of information heterogeneity in the Euro interbank market for unsecured term lending. I use high-frequency quotes of bid and ask prices to estimate probabilities of informed trading for contract maturities from one month to one year. The dataset spans from November 2000 to March 2008, and includes the relevant events that characterize the developments of the Euro area money market. I obtain four main results. First, I show that the loose supply of liquidity of the ECB has not dampened the distortions arising from asymmetric information in the unsecured money market. I also find that the probability of trading with a better informed bank is higher on days when open market operations take place, and at the end of the maintenance period. This effect has strengthened during the turmoil. The results indicate that information is segmented, in the sense that heterogenous knowledge among banks is maturity-specific. Finally, the paper presents some evidence suggesting that the risk of trading with a counterparty that enjoys an enhanced information set is priced. |
| Keywords: | Market microstructure; PIN model; money markets; term structure |
| JEL: | G14 E52 |
| Date: | 2010–02–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:20415&r=eec |
| By: | Jürgen von Hagen; Jean Pisani-Ferry; Jakob von Weizsäcker |
| Abstract: | This Policy Brief was adapted from a paper written by the three authors and presented by Bruegel Director Jean Pisani-Ferry at the informal ECOFIN Council meetings in Gothenburg, Sweden, on 1 Oct. In the brief, the authors argue that bank recapitalisation and restructuring should be a matter of urgency for EU member states and that governments should not undertake the necessary fiscal and monetary policy exit until problems within the financial sector are addressed. The authors also recommend that European states set debt targets to be reached by the end of 2014 and explain that proper incentives are necessary to ensure that an exit strategy, once implemented, is done so in coordination between various institutional actors. Such a policy framework should be in place by summer 2010, the authors say, in order to avoid a buildup of financial instability during the process. |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:bre:polbrf:344&r=eec |
| By: | Garry Schinasi |
| Abstract: | Visiting Scholar Garry Schinasi examines the European proposals for the creation of both a European Systemic Risk Board (ESRB) to oversee macroprudential regulation and a European System of Financial Supervision (ESFS) to strengthen microprudential supervision. He argues that structural vulnerabilities of this regulatory framework need to be addressed to ensure that the early-warning systems will be adequate to avoid future crises. Specifically, Schinasi points to the fact that the ESRB lacks binding powers to enforce regulation as well as the lack of a legislative framework to resolve the insolvency of systemically important financial institutions (SIFIs). |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:bre:polbrf:357&r=eec |
| By: | Jean Pisani-Ferry; Jakob von Weizsäcker |
| Abstract: | Through Bruegel's role on the Monetary Experts Panel for the European Parliament's Committee on Economic and Monetary Affairs, Bruegel scholars contributed to the Committee's Monetary Dialogue with the European Central Bank meeting on 28 September. In this briefing paper for the Panel, Director Jean-Pisani Ferry and Resident Fellow Jakob von Weizsacker point out that, in the wake of the financial crisis, the ECB will take on much more responsibility for macro-prudential supervision of the financial system. With this added responsibility, however, comes serious questions about the mechanisms in place to ensure the ECB's accountability. Previously focused almost solely on price stability, the ECB will now likely be asked to increase its discretionary decision-making, especially in dealing with financial regulation. The accompanying accountability questions, the authors say, need to be addressed proactively. |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:bre:polcon:342&r=eec |
| By: | Alessandro Missale (University of Milan); emanuele bacchiocchi (University of Milan); elisa borghi |
| Abstract: | EU New Member States must comply with the Stability and Growth Pact (SGP) and the investment requirements implied by the Lisbon Agenda. However, the SGP rules may result in underinvestment or distortions in the allocation of public expenditure. This paper provides new evidence on the effects of debt sustainability and SGP fiscal constraints on government expenditure in fixed capital, education and health in OECD countries by estimating government expenditure reaction functions to public debt and cyclical conditions. We find that, at high levels of debt, government capital expenditure and education expenditure are significantly reduced as the debt ratio increases in all OECD countries independently of EMU (or EU) membership. By contrast neither capital expenditure nor education expenditure is affected by the debt ratio in low debt countries. These findings are robust to the inclusion of the government deficit in the estimated reaction functions. Hence, it appears that EU countries have been constrained in their investment decisions more by the need to ensure debt sustainability than by the rules of the SGP. In low debt NMS countries public investment even increases with the debt ratio, a finding that is reassuring for their growth prospects. However, a less optimistic picture emerges when we focus on expenditures in public health and education, as it appears that NMS governments cut such expenditures --even at low levels of debt-- as the deficit increases. Problems in controlling total expenditure together with the preventive arm of the SGP may have penalized investment in human capital in NMSs while leaving fixed capital investment unaffected. |
| Keywords: | government capital expenditure, government education expenditure, public investment, debt sustainability, EU New Member States, Stability and Growth Pact, |
| Date: | 2009–11–04 |
| URL: | http://d.repec.org/n?u=RePEc:bep:unimip:1093&r=eec |
| By: | Arne Melchior |
| Abstract: | Implementation of the European internal market and East-West integration has been accompanied by dramatic change in the spatial distribution of economic activity, with higher growth west and east of a longitude degree through Germany and Italy. In the east, income growth has been accompanied by increasing regional disparities within countries. We examine theoretically and empirically whether European integration as such can explain these developments. Using a numerical simulation model with 9 countries and 90 regions, theoretical predictions are derived about how various patterns of integration may affect the income distribution. Comparing with reality, we find that a reduction in distance-related trade costs combined with east-west integration is best able to explain the actual changes in Europe's economic geography. This suggests that the implementation of the European internal market or the Euro has "made Europe smaller". In Central Europe, capital regions grow faster and there are few east-west growth differences inside countries. There is no convincing support for the hypothesis that European integration had adverse effects on non-members. |
| Keywords: | Income distribution, regional inequality, economic growth and convergence, European integration. |
| JEL: | F12 F15 R12 O18 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:sec:cnstan:0379&r=eec |
| By: | Robert W. Fogel |
| Abstract: | This paper addresses three issues related to the relative rates of growth in the United States, the European Union, and China during the four decades between 2000 and 2040. The first concerns the source of the factors which make it likely that China will continue to grow at a high rate for another generation. The paper argues that this growth will be the result of both favorable economic and political conditions. The second concerns the source of declining GDP growth in the original fifteen nations of the European Union. For these countries, the underlying cause is due in large measure to low fertility rates and an increase in the dependency ratio. The third issue is the projection of long-term U.S. growth in GDP at a rate of 3.7 percent per annum. |
| JEL: | F47 O53 |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15721&r=eec |
| By: | Zsolt Darvas |
| Abstract: | Resident Fellow Zsolt Darvas takes a look at the issue of the Baltic states - Estonia, Latvia and Lithuania - and the challenges facing those three countries in the aftermath of the financial crisis. He argues that because it is in the broader European interest to prevent a collapse in the Baltics, the best option is immediate euro entry at a suitable exchange rate supported by appropriate resolution in order to manage the resulting debt overhang. However, there seems to be no legal basis for this under the current euro accession criteria. Furthermore, the economic foundations of the criteria are fundamentally flawed, as euro-area members continue to violate the criteria while the EU's expansion to 27 members has made the criteria tougher for new member states to meet themselves. Ultimately, the European Council has the ability to reform the criteria without a formal treaty change. The Council should do so, the author argues, and allow for more meaningful benchmarks for all future euro-area applicants. |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:bre:polcon:373&r=eec |
| By: | Fredrik Wilhelmsson |
| Abstract: | This paper analyses the effect of the EU enlargement process on income convergence among regions in the EU and in the Eastern neighbourhood of the EU. The data used is NUTS II regions in the EU and Oblasts' of Russia over the period 1996-2004. The estimation techniques used take into account both regional and spatial heterogeneity. The main findings are that the regional income differences are reduced within EU15. The income convergence within the EU is mainly driven by reductions in the differences across countries rather than by a reduction in regional differences within countries. When differences in initial conditions in the regions are controlled for by fixed regional effects there are strong evidences of convergence among regions in all studied country groups. |
| Keywords: | Income convergence, European integration, Border effects |
| JEL: | R11 O18 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:sec:cnstan:0383&r=eec |
| By: | Pirovano M.; Vanneste J.; Van Poeck A. |
| Abstract: | In this paper we estimate a dynamic panel model (Arellano-Bond GMM) explaining the volume of portfolio and short-term capital inflows (predominantly bank loans) in the new and potential EU member States as a function of a set of variables representing macroeconomic fundamentals (both domestic and foreign), macroeconomic policies and development of the financial sector. We find that while inflows of short-term bank loans are significantly explained by macroeconomic factors, exchange rate regime and liquidity of the banking sector, portfolio inflows seem to be meaningfully influenced only by the level of foreign GDP. We suggest two explanations for the latter result. First, the inability of aggregate data to capture the risk and expected profitability dimensions that typically underlie portfolio decisions. Second, portfolio capital in the form of bonds might react to interest rates other than the domestic and the European ones. During the last decade, the volume of short-term capital in the form of bank loans to the New and potential member States increased (with some heterogeneity across countries). In light of the econometric results, their vulnerability to reversals could be mitigated by adequate macroeconomic policies and further improvement of their financial sector. |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:ant:wpaper:2009018&r=eec |
| By: | Stanova N. |
| Abstract: | It is a generally documented fact that political cycles are a phenomenon of new democracies. In this paper we deepen the evidence for the new EU member countries that are a prominent example of recently established democratic systems. We show that, in line with the opportunistic theory, primary balances tended to deteriorate in the years of elections, if taking NMS ’en bloc’. This was mainly driven by the cycle in government expenditures. However, careful cross-country and cross-time analysis challenges the general view. It turns out that the political cycle cannot be attributed to all new European democracies, in particular, not to those that made long-run attempts to integrate into EMU. Moreover, we document that with the time passing, opportunism has evaporated from the overall sample of the NMS. This comes from the fact that the political cycle has diminished in countries that were prone to opportunistic manipulation in the initial period. |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:ant:wpaper:2009013&r=eec |