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on European Economics |
| By: | Alessandro Fontana (Ca’ Foscari University of Venice, Department of Economics, Fondamenta San Giobbe - Cannaregio 873, 30121 Venezia, Italy.); Martin Scheicher (European Central Bank, Financial Research Division, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper studies the relative pricing of euro area sovereign CDS and the underlying government bonds. Our sample comprises weekly CDS and bond spreads of ten euro area countries for the period from January 2006 to June 2010. We first compare the determinants of CDS spreads and bond spreads and test how the crisis has affected market pricing. Then we analyse the ‘basis’ between CDS spreads and bond spreads and which factors drive pricing differences between the two markets. Our first main finding is that the recent repricing of sovereign credit risk in the CDS market seems mostly due to common factors. Second, since September 2008, CDS spreads have on average exceeded bond spreads, which may have been due to ‘flight to liquidity’ effects and limits to arbitrage. Third, since September 2008, market integration for bonds and CDS varies across countries: In half of the sample countries, price discovery takes place in the CDS market and in the other half, price discovery is observed in the bond market. JEL Classification: G00, G01. |
| Keywords: | Credit Spread, CDS, government bond, financial crisis, limits to arbitrage. |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101271&r=eec |
| By: | Geert Bekaert; Campbell R. Harvey; Christian T. Lundblad; Stephan Siegel |
| Abstract: | At a time of historic challenges to the viability of the Eurozone, we assess the contribution of the EU and the Euro to equity market integration in Europe. We use a simple and essentially model free measure of bilateral market segmentation: two countries are segmented if there is a wide divergence in the valuations of their industries. We first establish that segmentation is significantly lower for EU versus non- EU members. Bilateral valuation differentials remain lower for EU members even after we control for several possible channels of integration, such as bilateral trade, direct investment positions, financial regulation, and interest rate differences. Importantly, we find that EU membership reduces equity market segmentation between member countries whether or not members have also adopted the Euro. The Euro adoption as well as the anticipation of the Euro adoption has minimal effects on market integration. |
| JEL: | F30 F31 F33 G15 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16583&r=eec |
| By: | Peter Hördahl (Bank for International Settlements, Centralbahnplatz 2, CH-4002, Basel, Switzerland.); Oreste Tristani (European Central Bank, DG Research, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | We use a joint model of macroeconomic and term structure dynamics to estimate inflation risk premia in the United States and the euro area. To sharpen our estimation, we include in the information set macro data and survey data on inflation and interest rate expectations at various future horizons, as well as term structure data from both nominal and index-linked bonds. Our results show that, in both currency areas, inflation risk premia are relatively small, positive, and increasing in maturity. The cyclical dynamics of long-term inflation risk premia are mostly associated with changes in output gaps, while their high-frequency fluctuations seem to be aligned with variations in inflation. However, the cyclicality of inflation premia differs between the US and the euro area. Long term inflation premia are countercyclical in the euro area, while they are procyclical in the US. JEL Classification: E43, E44. |
| Keywords: | Term structure of interest rates, inflation risk premia, central bank credibility. |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101270&r=eec |
| By: | Arghyrou, Michael G (Cardiff Business School); Tsoukalas, John D. |
| Abstract: | This article, originally published at www.roubini.com on 7 February 2010, spells out our two-currency EMU proposal as a plan of last resort for resolving the present EMU sovereign-debt crisis. The key ingredients of our proposal involve a temporary split of the euro into two currencies, both run by the European Central Bank. The hard euro will be maintained by the core-EMU members whereas periphery EMU countries will adopt for a suitable period of time the weak euro. All existing debts will continue to be denominated in strong-euro terms. The plan involves a one-off devaluation of the weak euro versus the strong one, simultaneously with the introduction of far-reaching reforms and rapid fiscal consolidation in the periphery EMU countries. We argue that due to enhanced market credibility, our two-tier euro plan has a realistic chance of success in resolving the EMU crisis, if all other approaches fail. |
| Keywords: | euro; two-currency EMU |
| JEL: | E44 F30 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2010/14&r=eec |
| By: | Ansgar Belke |
| Abstract: | The recent extensive package introduced by the Commission is the "most comprehensive reinforcement of economic governance in the EU and the euro area since the launch of the Economic and Monetary Union. Broader and enhanced surveillance of fiscal policies, but also macroeconomic policies and structural reforms are sought in the light of the shortcomings of the existing legislation. New enforcement mechanisms are foreseen for non-compliant Member States. In this very crucial and important package of 6 legislative dossiers this paper paper tries to identify critical missing or redundant and/or unworkable elements within the Commission package. Moreover it checks what (if anything) is missing outside and beyond the proposals in order to make the whole package of governance reform complete and workable as, for instance, crisis resolution mechanisms and debt restructuring, EMF, project bonds and Eurobonds. |
| Keywords: | EU governance, European Council, European Financial Stability Facility, European Monetary Fund, policy coordination, scoreboard, Stability and Growth Pact |
| JEL: | E61 E62 P48 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1082&r=eec |
| By: | Vahagn Galstyan (Institute for International Integration Studies, Trinity College Dublin); Philip Lane (Institute for International Integration Studies, Trinity College Dublin) |
| Abstract: | In this paper we examine shifts in the bilateral patterns in international portfolio holdings in emerging Europe during the 2001-2008 period. In relation to the 2001-2007 pre-crisis period, we find some evidence that shifts in the geographical composition of portfolio debt liabilities reflect shifts in bilateral trade patterns. In addition, we find that the new member states disproportionately attracted portfolio equity investment from other members of the European Union after 2004. During the crisis period, we find that the bilateral composition of the shift in portfolio positions is affected by the scale of pre-crisis holdings and the geographical proximity of creditors. We also find that countries in the euro area are more likely to maintain portfolio positions in emerging Europe than were investors from other regions. |
| Keywords: | Portfolio holdings, crises, emerging Europe |
| JEL: | F30 F32 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:iis:dispap:iiisdp346&r=eec |
| By: | European Commission |
| Abstract: | The European Commission services published a staff working document assessing the Financial Transactions Tax (FTT) and the Financial Activities Tax (FAT). |
| Keywords: | European Union; taxation; financial transaction tax; financial activities tax; financial institutions |
| JEL: | G20 H21 H22 H23 H25 H27 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:tax:taxpap:0025&r=eec |
| By: | Cândida Ferreira |
| Abstract: | This paper provides empirical evidence of the financial integration of some developed countries, mostly in the European Union, covering the period between 1961 and 2008. The main contributions are to be found first, in the application of panel estimates and test statistics. particularly of some recently developed tests like the Westerlund (2007) bootstrap cointegration tests and the Pesaran (2004) test of cross-sectional independence, using the available AMECO series of nominal and real long-term and short-term interest rates as well as the yield curve; secondly, in the comparison of the approximations between the countries’ series of rates and those of two chosen benchmarks: the German and US rates, for six panels of EU and some non-EU countries during three specific time intervals. The obtained results allow us to draw conclusions not only on the quite high degree of approximation towards the benchmark rates, particularly those of Germany, but also on the differences in the patterns of this approximation before and after the implementation of the Single Market Program and of the EMU. Furthermore, we draw conclusions on some specific characteristics of the considered series of rates and, in particular, of the yield curves. |
| Keywords: | Financial integration; European integration; panel estimates; cointegration tests. |
| JEL: | C33 E43 E44 F36 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:ise:isegwp:wp212010&r=eec |
| By: | Bentolila, Samuel (CEMFI, Madrid); Cahuc, Pierre (Ecole Polytechnique, Paris); Dolado, Juan José (Universidad Carlos III de Madrid); Le Barbanchon, Thomas (Ecole Polytechnique, Paris) |
| Abstract: | This paper analyzes the strikingly different response of unemployment to the Great Recession in France and Spain. Their labor market institutions are similar and their unemployment rates just before the crisis were both around 8%. Yet, in France, unemployment rate has increased by 2 percentage points, whereas in Spain it has shot up to 19% by the end of 2009. We assess what part of this differential is due to the larger gap between the dismissal costs of permanent and temporary contracts and the less restrictive rules regarding the use of the latter contracts in Spain. Using a calibrated search and matching model, we estimate that about 45% of the surge in Spanish unemployment could have been avoided had Spain adopted French employment protection legislation before the crisis started. |
| Keywords: | temporary contracts, unemployment, Great Recession |
| JEL: | H29 J23 J38 J41 J64 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp5340&r=eec |
| By: | Peter Claeys (Universitat de Barcelona,); Alessandro Maravalle (University of the Basque Country,) |
| Abstract: | The Financial Crisis has hit particularly hard countries like Ireland or Spain. Procyclical fiscal policy has contributed to a boom-bust cycle that undermined fiscal positions and deepened current account deficits during the boom. We set up an RBC model of a small open economy, following Mendoza (1991), and introduce the effect of fiscal policy decisions that change over the cycle. We calibrate the model on data for Ireland, and simulate the effect of different spending policies in response to supply shocks. Procyclical fiscal policy distorts intertemporal allocation decisions. Temporary spending boosts in booms spur investment, and hence the need for external finance, and so generates very volatile cycles in investment and the current account. This economic instability is also harmful for the steady state level of output. Our model is able to replicate the relation between the degree of cyclicality of fiscal policy, and the volatility of consumption, investment and the current account observed in OECD countries. |
| Keywords: | RBC, current account, small open economy, fiscal rule, spending |
| JEL: | E32 E62 F41 H62 |
| Date: | 2010–12–02 |
| URL: | http://d.repec.org/n?u=RePEc:ehu:dfaeii:201011&r=eec |
| By: | Reint Gropp (EBS Business School, Department of Finance, Accounting, and Real Estate, Gustav-Stresemann-Ring 3, 65189 Wiesbaden, Germany.); Christian Gruendl (EBS Business School, Department of Finance, Accounting, and Real Estate.); Andre Guettler (EBS Business School, Department of Finance, Accounting, and Real Estate,.) |
| Abstract: | In 2001, government guarantees for savings banks in Germany were removed following a law suit. We use this natural experiment to examine the effect of government guarantees on bank risk taking, using a large data set of matched bank/borrower information. The results suggest that banks whose government guarantee was removed reduced credit risk by cutting off the riskiest borrowers from credit. At the same time, the banks also increased interest rates on their remaining borrowers. The effects are economically large: the Z-Score of average borrowers increased by 7.5% and the average loan size declined by 17.2%. Remaining borrowers paid 46 basis points higher interest rates, despitetheir higher quality. Using a difference-in-differences approach we show that the effect is larger for banks that ex ante benefited more from the guarantee and that none of these effects are present in a control group of German banks to whom the guarantee was not applicable. Furthermore, savings banks adjusted their liabilities away from risk-sensitive debt instruments after the removal of the guarantee, while we do not observe this for the control group. We also document in an event study that yield spreads of savings banks’ bonds increased significantly right after the announcement of the decision to remove guarantees, while the yield spread of a sample of bonds issued by the control group remained unchanged. The results suggest that public guarantees may be associated with substantial moral hazard effects. JEL Classification: G21, G28, G32. |
| Keywords: | banking, public guarantees, credit risk, moral hazard, market discipline. |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101272&r=eec |
| By: | David E. Bloom (Harvard School of Public Health); Alfonso Sousa-Poza (University of Hohenheim) |
| Abstract: | This special issue of the European Journal of Population focuses on possible economic consequences of low fertility in Europe. This introduction reviews the history of falling fertility in Europe and the literature that explores its causes, its potential implications, and possible policy responses. It also summarizes the evolution of thinking about the relationship between population growth and economic development, with attention to recent work on the mechanisms through which fertility decline can spur economic growth if the necessary supporting conditions are met. The introduction also identifies some of the challenges of population aging that are associated with low fertility and suggests that there may be less reason for alarm than has been suggested by some observers. The papers that appear in this special issue are also summarized. |
| Keywords: | Economic consequences, low fertility, Europe |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:gdm:wpaper:5410&r=eec |