nep-eec New Economics Papers
on European Economics
Issue of 2011‒09‒05
nine papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Substitution between net and gross settlement systems: A concern for financial stability? By Craig, Ben; Fecht, Falko
  2. Combination Schemes for Turning Point Predictions By Monica Billio; Roberto Casarin; Francesco Ravazzolo; Herman K. van Dijk
  3. Under the influence of traumatic events, new ideas, economic experts and the ICT revolution - the economic policy and macroeconomic performance of Sweden in the 1990s and 2000s By Erixon, Lennart Erixon
  4. The 2007 subprime market crisis through the lens of European Central Bank auctions for short-term funds By Nuno Cassola; Ali Hortacsu; Jakub Kastl
  5. Sovereign and Bank Credit Risk during the Global Financial Crisis By Irina Stanga
  6. Economic Vulnerability and Severity of Debt Problems: An Analysis of the Irish EU-SILC 2008 By Russell, Helen; Maître, Bertrand; Whelan, Christopher T.
  7. The importance of real and nominal shocks on the UK housing market By Paresh Kumar Narayan; Seema Narayan
  8. Income volatility and insecurity in the U.S., Germany and Britain By Nicholas Rohde; Kam Ki Tang; Prasada Rao
  9. Foreign Ownership and Firm Performance in German Services: First Evidence based on Official Statistics By John P. Weche Geluebcke

  1. By: Craig, Ben; Fecht, Falko
    Abstract: While net settlement systems make more efficient use of liquidity than gross settlement systems, they are known to generate systemic risk. What does that tendency imply for the stability of the payments [or financial] system when the two settlement systems coexist? Do liquidity shortages induce banks to settle more transactions in net settlement system, thereby increasing systemic risk? Or do banks require their counterparties to send payments through gross settlement system when default risks are high, increasing the need for liquidity and the money market rate but reducing overall systemic risk? This paper studies the factors that drive the relative importance of net and gross settlement systems over the short run, using daily data on transaction volumes from the large-volume payment systems of all euro area countries that have had both a net and a gross settlement system at the same time. Applying a large portfolio of different econometric techniques, we find that it is actually the transactions volumes in gross settlement systems that affect the daily price of liquidity and the credit risk spread in money markets. --
    Keywords: Payment System,financial stability,interbank market,financial contagion
    JEL: E44 G21
    Date: 2011
  2. By: Monica Billio (University of Venice, Gretta Assoc. and School for Advanced Studies In Venice); Roberto Casarin (University of Venice, Gretta Assoc. and School for Advanced Studies In Venice); Francesco Ravazzolo (Norges Bank); Herman K. van Dijk (Erasmus University Rotterdam, VU University Amsterdam)
    Abstract: We propose new forecast combination schemes for predicting turning points of business cycles. The combination schemes deal with the forecasting performance of a given set of models and possibly providing better turning point predictions. We consider turning point predictions generated by autoregressive (AR) and Markov-Switching AR models, which are commonly used for business cycle analysis. In order to account for parameter uncertainty we consider a Bayesian approach to both estimation and prediction and compare, in terms of statistical accuracy, the individual models and the combined turning point predictions for the United States and Euro area business cycles.
    Keywords: Turning Points; Markov-switching; Forecast Combination; Bayesian Model Averaging
    JEL: C11 C15 C53 E37
    Date: 2011–08–22
  3. By: Erixon, Lennart Erixon (Dept. of Economics, Stockholm University)
    Abstract: The new economic-policy regime in Sweden in the 1990s included deregulation, central-bank independence, inflation targets and fiscal rules but also active labour market policy and voluntary incomes policy. This article describes the content, determinants and performance of the new economic policy in Sweden in a comparative, mainly Nordic, perspective. The new economicpolicy regime is explained by the deep recession and budget crisis in the early 1990s, new economic ideas, EU integration and the power of economic experts. In the 1998-2007 period, Sweden displayed relatively low inflation and high productivity growth, but unemployment was high, especially by national standards. The restrictive monetary policy was responsible for the low inflation and the dynamic ICT sector was decisive for the productivity miracle. Furthermore, productivity increases in the ICT sector largely explains why the Central Bank undershot its inflation target in the late 1990s and early 2000s. The new economic-policy regime in Sweden performed well during the global financial crisis. However, as in other OECD countries the moderate increase in unemployment was largely attributed to labour hoarding. And the rapid recovery of the Baltic countries made it possible for Sweden to avoid a bank crisis.
    Keywords: Swedish model; Swedish economic policy; Swedish Central Bank; economic experts; Sweden’s macroeconomic performance; financial crisis; new economic-policy regime
    JEL: D78 E24 E31 E58 E62 E63 E64 J51 N14 O47 O50
    Date: 2011–08–30
  4. By: Nuno Cassola (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Ali Hortacsu (The University of Chicago, Department of Economics, 1126 E. 59th Street, Chicago, IL 60637, USA.); Jakub Kastl (Stanford University, Department of Economics, Landau Economics Building, 579 Serra Mall, USA.)
    Abstract: We study European banks’ demand for short-term funds (liquidity) during the summer 2007 subprime market crisis. We use bidding data from the European Central Bank’s auctions for one-week loans, their main channel of monetary policy implementation. Our analysis provides a high-frequency, disaggregated perspective on the 2007 crisis, which was previously studied through comparisons of collateralized and uncollateralized interbank money market rates which do not capture the heterogeneous impact of the crisis on individual banks. Through a model of bidding, we show that banks’ bids reflect their cost of obtaining short-term funds elsewhere (e.g., in the interbank market) as well as a strategic response to other bidders. The strategic response is empirically important: while a naïve interpretation of the raw bidding data may suggest that virtually all banks suffered an increase in the cost of short-term funding, we find that for about one third of the banks, the change in bidding behavior was simply a strategic response. We also find considerable heterogeneity in the short-term funding costs among banks: for over one third of the bidders, funding costs increased by more than 20 basis points, and funding costs vary widely with respect to the country-of-origin. Estimated funding costs of banks are also predictive of market- and accounting-based measures of bank performance, suggesting the external validity of our findings. JEL Classification: D44, E58, G01.
    Keywords: Multiunit auctions, primary market, structural estimation, subprime market, liquidity crisis.
    Date: 2011–08
  5. By: Irina Stanga
    Abstract: This paper investigates the interaction of market views on the sustainability of sovereign debt and the perceived credit risk of banks. This interaction came into spotlight during the recent financial crisis, as government interventions in support of the financial sector were associated with increases in fiscal burden. I analyze and quantify the effect of government interventions in the domestic financial system on the default risks of the banking sector and sovereign borrowers. The paper focuses on the cases of Ireland and Spain, which experienced large public interventions in the domestic banking system and at a later stage highly volatile bond markets. For each country, I estimate a Vector Autoregression model to trace the interaction among sovereign CDS spreads, bank CDS spreads, and a measure of the business cycle over the sample period 2007-2011. I identify shocks by imposing sign restrictions on the impulse response functions. The results point towards a risk transfer from the financial to the sovereign sector, which generates an increase in the credit risk of the latter but only a temporary drop in that of banks.
    Keywords: Financial Crises; Sovereign Debt; VAR; Sign Restrictions
    JEL: C32 E44 H63
    Date: 2011–08
  6. By: Russell, Helen; Maître, Bertrand; Whelan, Christopher T.
    Abstract: In this paper, using Ireland, where debt issues are of particular salience as a test case, we seek to understand the extent to which the measures currently employed as national indicators of poverty and social exclusion succeed in capturing over-indebtedness and, more broadly, severity of debt problems. Our analysis reveals a clear gradient with predictive ability increasing sharply as one moves from 'at risk of poverty' to consistent poverty and finally economic vulnerability indicators. In relation to debt problems, the key distinction is between the just under one in five households defined as economically vulnerable and all others. Financial exclusion, relating to access to a bank account and a credit card, was found to increase debt levels. However, such effects were modest. The impact of economic vulnerability seems to be largely a consequence of its relationship to a wide range of socio-economic attributes and circumstances. The manner in which a potential debt crisis unfolds will be shaped by the broader socio-economic structuring of life-chances. Any attempt to respond to such problems by concentrating on household behaviour or, indeed, triggering factors without taking the wider social structuring of economic vulnerability is likely to be both seriously misguided and largely ineffective.
    Keywords: EU-SILC/Financial Exclusion/Ireland/Over-indebtedness/poverty/risk/social exclusion
    Date: 2011–08
  7. By: Paresh Kumar Narayan; Seema Narayan
    Abstract: The goal of this paper is to examine the responsiveness of the UK housing market to real and nominal shocks. To achieve this goal, we use a structural VAR model, based on quarterly data for the period 1957:1-2009:4. We find that in response to an interest rate shock, house prices (aggregate house price and modern house price) fall sharply over the first 4 years and do not recover to their pre-shock level. In response to a real GDP shock, both house prices react in a positive inverted U-shaped manner. Finally, we find that an inflation shock has a U-shaped negative impact on aggregate and modern house prices in the UK.
    Keywords: real shock, nominal shock, UK housing market, VAR model
    Date: 2011–08–29
  8. By: Nicholas Rohde (Griffith University); Kam Ki Tang (School of Economics, The University of Queensland); Prasada Rao (School of Economics, The University of Queensland)
    Abstract: Income volatility is studied as a component of economic insecurity using recent data from the Cross National Equivalence File (CNEF). Techniques from the inequality literature are applied to longitudinal household incomes and we refer to the results as measurements of income insecurity. Using this method we examine (i) cross national differences in average insecurity levels, (ii) the effects of taxes and transfers on the insecurity of different income groups and (iii) the relationships between income insecurity and long-run household income. We find that for pre-government incomes Britain exhibits the highest levels of income insecurity, with the U.S. the lowest. However estimates of insecurity in post-government incomes are highest in the U.S. It is shown that insecurity in market incomes is primarily concentrated around low income families and that this pattern is strongest in Germany and weakest in the U.S. Insecurity in post-government incomes is for the most part found to be unrelated to household income.
    Date: 2011
  9. By: John P. Weche Geluebcke (Institute of Economics, Leuphana University Lueneburg, Germany)
    Abstract: This study provides first comprehensive analyses of foreign-controlled enterprises in the German service sector based on new micro data from official statistics. Various performance measures were examined by comparing unconditional and conditional means and quantile regression techniques were applied. Results reveal persistently superior performance for foreign-controlled affiliates when compared to German-owned affiliates. In contrast, the relationship for profitability is exactly the opposite. Labor productivity becomes insignificant when the comparison group consists of domestically-owned affiliates with a high degree of internationalization. A breakdown by country of origin shows that European affiliates pay lower wages and export less compared to other foreign affiliates and that there is no productivity advantage in favor of US firms like in manufacturing.
    Keywords: foreign ownership, firm performance, inward FDI, service sector, multinational enterprise
    JEL: F15 F21 F23
    Date: 2011–08

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