nep-eec New Economics Papers
on European Economics
Issue of 2012‒03‒21
eleven papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. EMU: the (post-)crisis perspective. Literature survey and implications for the euro-candidates By Andrzej Torój; Katarzyna Waćko; Dariusz Witkowski; Elżbieta Bednarek; Joanna Bęza-Bojanowska; Joanna Osińska
  2. Money, Credit, Monetary Policy and the Business Cycle in the Euro Area By Domenico Giannone; Michèle Lenza; Lucrezia Reichlin
  3. EMU sovereign spreads and macroeconomic news By Arru, Daniela; Iacovoni, Davide; Monteforte, Libero; Pericoli, Filippo Maria
  4. Modelling loans to non-financial corporations in the euro area By Christoffer Kok Sørensen; David Marqués Ibáñez; Carlotta Rossi
  5. Should Europe Become a Fiscal Union? By Keuschnigg, Christian
  6. Foreign Banks and the Vienna Initiative: Turning Sinners into Saints? By Ralph De Haas; Yevgeniya Korniyenko; Elena Loukoianova; Alexander Pivovarsky
  7. Do House Prices Impact Consumption and Interest Rate?: Evidence from OECD Countries Using an Agnostic Identification Procedure By Christophe André; Rangan Gupta; Patrick T. Kanda
  8. Optimal Price Setting During a Currency Changeover: Theory and Evidence from French Restaurants By Berardi, N.; Eife, T. A.; Gautier, E.
  9. Exit from a Monetary Union through Euroization: Discipline without Chaos By Russell Cooper
  10. The Effectiveness of Unconventional Monetary Policy at the Zero Lower Bound: A Cross-Country Analysis By L. GAMBACORTA; B. HOFMANN; G. PEERSMAN
  11. Trade openness and international fragmentation of production in the European Union: the new divide? By Paolo Guerrieri; Filippo Vergara Caffarelli

  1. By: Andrzej Torój (Ministry of Finance, Poland); Katarzyna Waćko (Ministry of Finance, Poland); Dariusz Witkowski; Elżbieta Bednarek; Joanna Bęza-Bojanowska (Ministry); Joanna Osińska (Ministry of Finance in Poland)
    Abstract: This paper provides an extensive survey of literature on the euro area crisis from the perspective of a candidate country. A mix of country-specific and systemic factors emerge from our analysis, suggesting that a stable participation in the monetary union requires that both country-level and union-wide policies be applied. We demonstrate how the crisis developed since the inception of the EMU as a result of misspecified institutions, unhandled macroeconomic imbalances, neglected structural reforms, financial shocks and fiscal profligacy. We document the available empirical material and recent (or ongoing) institutional changes in order to better define the future euro area framework that new countries (with so-called derogation) shall enter at some point. Whatever final design emerges from this process, it has already become clear that they will adopt the euro in a package with entering some sort of fiscal union. The crisis has illustrated that deeper fiscal integration was a necessary condition for long-run stability, but -- at the same time -- the euro adoption will be associated with giving up more sovereignty than it has previously been expected. The new situation implies some serious shifts in relative importance of euro-costs and euro-benefits for the EA-newcomers, both on the upside and on the downside. It remains an issue for quantitative research to weight their relative impact against each other, but it seems that their conditionality on country-level macroeconomic policy largely exceeds the previous assessments.
    Keywords: EMU, euro area crisis, euro adoption, Maastricht criteria
    JEL: D61 E42 F33
    Date: 2012–03–06
  2. By: Domenico Giannone; Michèle Lenza; Lucrezia Reichlin
    Abstract: This paper uses a data-set including time series data on macroeconomic variables, loans, deposits and interest rates for the euro area in order to study the features of financial intermediation over the business cycle. We find that stylized facts for aggregate monetary and real variables are re- markably similar to what has been found for the US by many studies while we uncover new facts on disaggregated loans and deposits. During the crisis the cyclical behavior of short term interest rates, loans and deposits remain stable but we identify unusual dynamics of longer term loans, deposits and longer term interest rates.
    Keywords: Money; Loans; Non-financial corporations; Monetary policy; euro area
    JEL: E32 E51 E52 C32 C51
    Date: 2012–03
  3. By: Arru, Daniela; Iacovoni, Davide; Monteforte, Libero; Pericoli, Filippo Maria
    Abstract: We investigate the relationship between macroeconomic news and sovereign spreads in the euro area at weekly frequency. Our focus lies in the role played by macroeconomic announcements. To this aim we augment a standard GARCH model with a synthetic measure for macroeconomic surprises obtained by aggregating deviations between data releases and market expectations on a set of indicators chosen for being closely watched by economic analysts and financial operators. We find that the dissemination of macroeconomic data on the US economy affects the level of sovereign spreads, i.e. the better the news the lower the spreads. Moreover, the dissemination of bad news on the euro area economy affects negatively the volatility, i.e. the worse the news the higher the volatility.
    Keywords: sovereign bond spreads; economic news
    JEL: G12 G15 G10
    Date: 2012–03–08
  4. By: Christoffer Kok Sørensen (European Central Bank); David Marqués Ibáñez (European Central Bank); Carlotta Rossi (Bank of Italy)
    Abstract: We model the determinants of loans to non-financial corporations in the euro area. Using the Johansen (1992) methodology, we identify three cointegrating relationships. These relationships are interpreted as the long-run loan demand, investment and loan supply equations. The short-run dynamics of loan demand for the euro area are subsequently modelled using a Vector Error Correction Model (VECM). We perform a number of specification tests, which suggest that developments in loans to non-financial corporations in the euro area can be reasonably explained by the model. We then use the estimated model to analyse the impact of permanent and temporary shocks to the policy rate on bank lending to non-financial corporations.
    Keywords: loans to non-financial corporations, credit.
    JEL: C32 C51
    Date: 2012–02
  5. By: Keuschnigg, Christian
    Abstract: Moving towards a fiscal union does not address the problems of divergence in Europe. Given cultural heterogeneity and diverse preferences, fiscal policy should remain under national sovereignty while important regulatory power is assigned to the Union. The paper argues that more credible fiscal rules combined with tighter surveillance reduce negative policy spillovers. A better capitalized banking sector imposes more market discipline with sovereign risk-premia. Institutional lending by the ESM (European Stabilization Mechanism) to distressed countries is subject to strict conditionality and will impose structural adjustment that was neglected ex ante. Further reform seems necessary to strengthen the financial capacity and institutional independence of the ESM and to impose tighter regulation and more ambitious recapitalization of European banks to contain cross-country contagion on financial markets. Such reform should prevent or at least much reduce the negative consequences of national decision making on other member countries and would in turn support the political goals of establishing peace and harmony in Europe.
    Keywords: Fiscal crisis, fiscal rules, common currency area
    JEL: E62 F15 H63 H77
    Date: 2012–03
  6. By: Ralph De Haas (European Bank for Reconstruction and Development (EBRD)); Yevgeniya Korniyenko (Bank of England); Elena Loukoianova (International Monetary Fund (IMF)); Alexander Pivovarsky (European Bank for Reconstruction and Development (EBRD))
    Abstract: We use data on 1,294 banks in Emerging Europe to analyze how bank ownership and the so-called Vienna Initiative impacted credit growth during the 2008-09 crisis. As part of the Vienna Initiative western European banks signed country-specific commitment letters in which they pledged to maintain exposures and to support their subsidiaries in Emerging Europe. We show that in general both domestic and foreign banks sharply curtailed credit during the crisis, but that foreign banks that participated in the Vienna Initiative were relatively stable lenders. We find no evidence of negative spillovers from countries where banks signed commitment letters to countries where they did not.
    Keywords: Foreign banks, Vienna Initiative, financial crisis, state support
    JEL: C23 F36 G21 P34
    Date: 2012–03
  7. By: Christophe André; Rangan Gupta; Patrick T. Kanda
    Abstract: This paper investigates the existence of significant spillovers from the housing sector onto the wider economy for the seven major OECD countries using Uhlig's (2005) agnostic identification procedure. This method allows a housing demand shock to be identified in a six-variable VAR model by imposing sign restrictions on the impulse responses of consumer prices, residential investment, real house prices and mortgage loans, while private consumption and nominal interest rate responses are left unrestricted. The results suggest that consumption responds positively and significantly to a house price shock in Canada, France, Japan and the UK. A significant positive delayed response of nominal interest rates follows a house price shock in Germany, Japan, the UK and the US, suggesting that while central banks do not seem to respond instantly and systematically to a housing demand shock, their repercussions on the economy tend to translate into higher policy rates after a few quarters.<P>Les prix des logements affectent-ils la consommation et le taux d'intérêt ? : Une étude empirique sur des pays de l'OCDE utilisant une procédure d'identification agnostique<BR>Cet article étudie l'existence d’une inflence significative du secteur du logement sur l'économie dans son ensemble pour les sept grands pays de l’OCDE, en utilisant la procédure d'identification agnostique d’Uhlig (2005). Cette méthode permet l'identification d'un choc de demande de logement dans un modèle VAR à six variables en imposant des restrictions sur les signes des fonctions de réaction aux innovations des prix à la consommation, de l'investissement résidentiel, des prix réels des logements et des prêts hypothécaires, tandis que les réponses de la consommation privée et des taux d'intérêt nominaux sont laissées libres. Les résultats suggèrent que la consommation réagit positivement et significativement à un choc de prix des logements au Canada, en France, au Japon et au Royaume-Uni. D'autre part, une réponse positive, significative et retardée des taux d'intérêt nominaux suit un choc de prix des logements en Allemagne, au Japon, au Royaume-Uni et aux Etats-Unis, suggérant que si les banques centrales ne semblent pas réagir instantanément et systématiquement à un choc de demande de logement, les répercussions de ce dernier sur l'économie ont tendance à se traduire par des taux directeurs plus élevés après quelques trimestres.
    Keywords: consumption, house prices, monetary policy, agnostic identification, consommation, prix des logements, politique monétaire, identification agnostique
    JEL: C32 E31 E32 E44 E52
    Date: 2012–03–09
  8. By: Berardi, N.; Eife, T. A.; Gautier, E.
    Abstract: This paper studies firms' price-setting decision during a currency changeover. Buyers' difficulties with the new nominal price level create incentives to raise prices temporarily but doing so comes at the risk of damaging a seller's reputation in the long run. We model firms' trade-off and study under which conditions increasing or decreasing prices is optimal. A key variable in the decision is buyers' information about a firm's conversion, which in turn is affected by (i) a firm's size, (ii) the proportion of regular buyers, and (iii) the visibility of a good's price. Difference-in-differences analyses based on micro-data of French restaurants strongly support the model's predictions empirically. Indeed, prices around the 2002 changeover in the European Monetary Union are less likely to rise in larger and non-tourist restaurants, especially when prices are advertised.
    Keywords: Price setting, changeover, euro, inflation.
    JEL: E31 F33 M39
    Date: 2012
  9. By: Russell Cooper
    Abstract: This paper studies the role of exit from a monetary union during a debt crisis. A monetary union, such as the European Monetary Union, needs to establish a procedure for exit as a tool to cope with debt default. The paper studies various forms of exit and argues that “Euroization” is both a credible and effective means of punishment for countries in default.
    JEL: E02 E58 E61 E63 F33 F34 F36
    Date: 2012–03
    Abstract: This paper assesses the macroeconomic effects of unconventional monetary policy by estimating a panel VAR with monthly data from eight advanced economies over a sample spanning the period since the onset of the global …nancial crisis. The results suggest that an exogenous increase in central bank balance sheets at the zero lower bound leads to a temporary rise in economic activity and consumer prices. The re- sponse pattern of output is thus very similar to that usually found for interest rate shocks, while the reaction of the price level is less persistent. Looking at individual country results reveals that the e¤ects of balance sheet shocks are very similar across countries.
    Keywords: unconventional monetary policy, zero lower bound, panel VARs
    JEL: C32 E30 E44 E51 E52
    Date: 2011–12
  11. By: Paolo Guerrieri (Sapienza, University of Rome); Filippo Vergara Caffarelli (Bank of Italy)
    Abstract: This paper analyses the relationship between international fragmentation of production, trade openness and global export performance in the European Union from 2000 to 2009. As most trade models featuring international production sharing show, the higher the level of fragmentation and related international openness the better the export performance of a country. Our econometric analysis confirms this hypothesis. We estimate an error correction model based on panel data on the EU Member States and find that inter-European fragmentation and openness significantly improve their long-run export performance. Policy implications could be that restrictive policies preventing firms from internationalizing production would weaken a country&#x2019;s position in global production networks, with long-term negative effects on domestic jobs and growth.
    Keywords: international fragmentation of production, trade openness, export performance, European Union
    JEL: F14 L23
    Date: 2012–02

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