nep-eec New Economics Papers
on European Economics
Issue of 2012‒02‒27
fourteen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. The Failed Political Economy of the Euro Crisis By Anders Aslund
  2. Overcrowding Versus Liquidity in the Euro Sovereign Bond Markets By Andrea Coppola; Alessandro Girardi; Gustavo Piga
  3. Financial market frictions in a model of the euro area By Giovanni Lombardo; Peter McAdam
  4. "Fiddling in Euroland as the Global Meltdown Nears" By Dimitri B. Papadimitriou; L. Randall Wray
  5. ECB Policy Response to the Euro/US Dollar Exchange Rate By Demir, Ishak
  6. The Quiet Run of 2011: Money Market Funds and the European Debt Crisis By Chernenko, Sergey; Sunderam, Adi
  7. Trichet Bonds to Resolve the European Sovereign Debt Problem By Nicholas Economides; Roy C. Smith
  8. Are bank loans still “special” (especially during a crisis)? Empirical evidence from a European country By Christophe Godlewski
  9. Calibrating a cross-European poverty line By Berthoud, Richard
  10. Labour Migration in the Enlarged EU: A New Economic Geography Approach By d'Artis Kancs
  11. A Systemic Industrial Policy to Pave a New Growth Path for Europe By Karl Aiginger
  12. Did the Fed and ECB react asymmetrically with respect to asset market developments? By Hoffmann, Andreas
  13. Who Contributes? A Strategic Approach to a European Immigration Policy By Giuseppe Russo; Luigi Senatore
  14. The Political Economy of European Monetary Union By A. R. Nobay

  1. By: Anders Aslund
    Abstract: The euro crisis has been extensively discussed in terms of economics, finance, political intrigues, and European institutions, but a key aspect—the political economy of the crisis—has received little attention. Politicians and social scientists from emerging economies, especially Eastern Europe, look with amazement at this oversight.
    Keywords: Euro crisis, economy, political economy
    Date: 2011–10
  2. By: Andrea Coppola (The World Bank); Alessandro Girardi (Italian National Institute of Statistics - ISTAT); Gustavo Piga (Faculty of Economics, University of Rome "Tor Vergata")
    Abstract: With the adoption of a common currency the degree of substitution between financial instruments supplied by EMU Member States to finance their national debts has risen. Providing the market for euro-denominated government securities with a large volume of similar financial instruments is likely to increase liquidity and lower yields. By contrast, providing an excessive volume of the same instrument might increase the return demanded by investors. This paper aims at empirically assessing the balance between liquidity and overcrowding effects by EMU countries’ issuance plans. Our results document a significant relationship between bunching in issues and bond yields.
    Keywords: EMU, government bond yields, liquidity, issuance calendars
    JEL: H63 H69
    Date: 2012–02–20
  3. By: Giovanni Lombardo (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Peter McAdam (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: We build a model of the euro area incorporating financial market frictions at the level of firms and households. Entrepreneurs borrow from financial intermediaries in order to purchase business capital, in the spirit of the "financial accelerator" literature. We also introduce two types of households that differ in their degree of time preference. All households have preferences for housing services. The impatient households are faced with a collateral constraint that is a function of the value of their housing stock. Our aim is to provide a unified framework for policy analysis that emphasizes financial market frictions alongside the more traditional model channels. The model is estimated by Bayesian methods using euro area aggregate data and model properties are illustrated with simulation and conditional variance and historical shock decomposition. JEL Classification: C11, C32, E32, E37.
    Keywords: Financial Frictions, euro area, DSGE modeling, Bayesian estimation, simulation, decompositions.
    Date: 2012–02
  4. By: Dimitri B. Papadimitriou; L. Randall Wray
    Abstract: President Dimitri B. Papadimitriou and Senior Scholar L. Randall Wray argue that the common diagnosis of a "sovereign debt crisis" ignores the crucial role of rising private debt loads and the significance of current account imbalances within the eurozone. Profligate spending in the periphery is not at the root of the problem. Moreover, pushing austerity in the periphery while ignoring the imbalances within the eurozone is a recipe for deflationary disaster. The various rescue packages on offer for Greece will not ultimately solve the problem, say the authors, and a default is a very real possibility. If a new approach is not embraced, we are likely seeing the end of the European Monetary Union (EMU) as it currently stands. The consequences of a breakup would ripple throughout the EMU as well as the shaky US financial system, and could ultimately trigger the next global financial crisis.
    Date: 2012–02
  5. By: Demir, Ishak
    Abstract: The exchange rate is an important part of transmission mechanism in the determination of monetary policy because movements in the exchange rate have significant effect on the macroeconomy. Measuring the reaction of monetary policy to the movements in exchange rate has some difficulties due to the simultaneous response of monetary policy on the exchange rate and the possibility that both variables respond several other variables. This study will use an identification method based on the heteroscedasticity in the high-frequency data. In particular, shifts in the importance of exchange rate relative to monetary policy shocks, and the estimated changes in the covariance between the shocks that result, allow us to measure the reaction of interest rates to changes in exchange rates. This study comes up with unbiased estimates with heteroscedasticity based identification approach and results of this paper suggest that ECB systematically respond to the exchange rate movements but that quantitative effects are small. The empirical results indicate that a 1 point rise (fall) in the exchange rate tends to decrease (increase) the three-month interest rate by around 20 basis points. Small and negative reaction coefficient implies that ECB may respond to the movements in exchange rate only to the extent warranted by their impact on the macroeconomy, since it affects the expected inflation and future output path.
    Keywords: Monetary Policy; Exchange Rates; Identi…cation through Heteroscedasticity; European Central Bank; Monetary Policy Reaction
    JEL: G12 E58 E5 E52 E44 E40
    Date: 2012–02–17
  6. By: Chernenko, Sergey (OH State University); Sunderam, Adi (Harvard University)
    Abstract: We show that money market funds transmitted distress across firm during the European sovereign debt crisis. Using a novel data set of US money market fund holdings, we show that funds with large exposures to Eurozone banks suffered significant outflows between June and August 2011. These outflows have significant short-run spillover effects on other firms: non-Eurobank issuers that typically rely on these funds raise less financing in this period. The results are not driven by issuer riskiness or direct exposure to Europe: for the same issuer, money market funds with greater exposure to Eurozone banks decrease their holdings more than other funds. Our results illustrate that instabilities associated with money market funds persist despite recent changes to the regulations governing them.
    JEL: G01 G18 G21 G28 G32
    Date: 2012–01
  7. By: Nicholas Economides; Roy C. Smith
    Date: 2011
  8. By: Christophe Godlewski (LaRGE Research Center, Université de Strasbourg)
    Abstract: We investigate bank loans’ specialness with a particular focus on the recent boom and bust cycle. We perform an empirical analysis using event study methodology on a sample of 253 large loan announcements for French borrowers between January 2000 and December 2009. We find a significant and negative reaction to bank loan announcements which is mostly driven by loan provided during the crisis period. We also document significant changes in bank behavior over the boom and bust cycle, with important contractual and organizational modifications reflecting a potential “wake-up call” of banks during the crisis.
    Keywords: Bank loans, boom and bust, crisis, event study, Europe.
    JEL: G14 G20
    Date: 2012
  9. By: Berthoud, Richard
    Abstract: How should relative poverty be defined and measured in a European Union where there are substantial variations in income between countries, as well as within countries? This paper uses objective and subjective deprivation indicators to assess the appropriate balance between national and Europe-wide relativities in explaining social exclusion. The analysis suggests that Europe-wide comparisons are more important to the perception of poverty than the convention of national relative poverty lines would have led us to expect. Even relative poverty is more prevalent in the new low-income (eastern) countries than in the old high-income (western) countries. But this is as much a political as an empirical issue.
    Date: 2012–01–31
  10. By: d'Artis Kancs
    Abstract: The paper studies the impact of migration policy liberalisation on international labour migration in the enlarged EU in a structural NEG approach. The liberalisation of migration policy would induce additional 1.80 - 2.98 percent of the total EU workforce to change their country of location, with most of migrant workers relocating from the East to the West. The average net migration rate is decreasing in the level of integration, suggesting that from the economic point of view no regulatory policy responses are necessary to labour migration in the enlarged EU.
    Keywords: Labour Migration, Economic Integration, Economic Geography, Market Access.
    JEL: F12 F14 F16 J21 J61 L11
    Date: 2011–12–12
  11. By: Karl Aiginger (WIFO)
    Abstract: The European Union is a successful integration experiment, with an increasing number of member countries and an unexpected depth of integration. According to many indicators, it is the largest economic region in the world, leading in many "beyond GDP" indicators representing well being including non material goals. The EU has, however, lost economic dynamic in the last decades and has failed to catch up with the USA in technology and per-capita GDP. Europe has internal disequilibria, its population is ageing and it did not follow its own innovation strategy. Three questions arise in this context: 1. whether Europe should try to go back to the core (deepening integration for a smaller homogenous group), 2. whether it should go for a low road strategy of competitiveness (lowering wages and taxes, forfeiting high quality specialisation and sophisticated standards), and 3. whether it should actively try to develop its own "European Model" and offer this model to its neighbors. A European research project was tendered by the European Commission in order to analyse options for Europe in the globalised world. This 7th Framework Programme project, with the acronym "WWWforEurope", will provide evidence-based research in support of the Europe 2020 Strategy in its four-year in-depth research to be carried out by WIFO and 32 international partners. One important aspect of this strategy is a new "Systemic Industrial and Innovation Policy" (SIIP) which is pulled by the vision of a new growth path of social development and higher emphasis on sustainability. SIIP is further pushed by internal and external competition, openness as well as new technologies and capabilities. This working paper provides some first tentative answers to the three raised questions above. It furthermore sketches the broader research question, challenges and research areas to be answered in the WWWforEurope programme.
    Keywords: European socioeconomic model, EU 2020 Strategy, industrial policy, innovation strategy
    Date: 2012–02–22
  12. By: Hoffmann, Andreas
    Abstract: This paper studies the monetary policy of the Federal Reserve (Fed) and the Bundesbank / European Central Bank (ECB) with respect to stock or/and foreign exchange markets from 1979 to 2009. I find that Fed policy changed over time, dependent on the chairman of the Fed. During the Greenspan era stock markets mattered for the Fed. In this period, the Fed lowered interest rates when stock prices fell, but did not raise interest rates in the boom. This asymmetry potentially put a downward pressure on interest rates. For the ECB, the exchange rate to the dollar played a role in monetary policy decisions until 2006. While I do not find evidence of asymmetric monetary policy with respect to the stock market, the ECB may be argued to indirectly have followed asymmetric US monetary policy via the exchange rate channel. --
    Keywords: monetary policy,Taylor rule,asset prices
    JEL: E52 E61
    Date: 2012
  13. By: Giuseppe Russo (University of Salerno and CSEF); Luigi Senatore (University of Salerno and University of Leicester)
    Abstract: According to the Lisbon Treaty the increasing cost of enforcing the European border against immigration shall be shared among the EU members. Nonetheless, the Treaty is rather vague with respect to the "appropriate measures" to adopt in order to distribute the financial burden. Members who do not share their borders with source countries have an incentive to free ride on the other countries. We study a contribution game where a border country and a central country minimize a loss function with respect to their national immigration target. We consider both sequential and simultaneous decisions and we show that joint contribution occurs only if the immigration targets are not too different. Total contribution is higher when decisions are simultaneous, but the sequential framework achieves joint contribution under a wider difference in the national targets.
    Keywords: Policy making, Government expenditures, Local government expenditures, Federalism.
    JEL: D78 H72 H77
    Date: 2012–02–08
  14. By: A. R. Nobay
    Abstract: Issues of European monetary union and international commercial policy share the centre stage of very current deliberations. This paper addresses the broader political economy perspective of monetary union rather than the specifics of this or that proposal, so as to abstract from the somewhat fluid nature of the discussions. I consider in turn, the background to the quest for monetary union, the conventional economic wisdom of such issues and finally, and more speculatively, the political economy aspects of European monetary arrangements in the world economy.
    Date: 2011–12

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