nep-eec New Economics Papers
on European Economics
Issue of 2012‒03‒28
fifteen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Fear of a two-speed monetary union: what does a basic correlation scatter plot tell us? By Jean-Sébastien Pentecôte
  2. Identification of Animal Spirits in a Bounded Rationality Model: An Application to the Euro Area By Jang, Tae-Seok; Sacht, Stephen
  3. Green Shoots and Double Dips in the Euro Area. A Real Time Measure By Camacho, Maximo; Pérez-Quirós, Gabriel; Poncela, Pilar
  4. New Divide(s) in Europe? By Vasily Astrov; Vladimir Gligorov; Doris Hanzl-Weiss; Peter Havlik; Mario Holzner; Gabor Hunya; Sebastian Leitner; Zdenek Lukas; Anton Mihailov; Olga Pindyuk; Leon Podkaminer; Josef Pöschl; Sandor Richter; Hermine Vidovic
  5. The Role of Central Banks in Financial Stability: How has it changed? By Buiter, Willem H.
  6. Short-run forecasting of the euro-dollar exchange rate with economic fundamentals By Marcos dal Bianco; Maximo Camacho; Gabriel Perez-Quiros
  7. The ECB and the Interbank Market By Giannone, Domenico; Lenza, Michele; Pill, Huw; Reichlin, Lucrezia
  8. Do fiscal rules matter for growth? By António Afonso; João Tovar Jalles
  9. On detection of volatility spillovers in simultaneously open stock markets By Kohonen, Anssi
  10. Dynamic linkages and interdependence between Mediterranean region EMU markets during 2007 financial crisis By Dimitriou, Dimitrios; Mpitsios, Petros; Simos, Theodore
  11. Monetary Union effects on European stock market integration: An international CAPM approach with currency risk By Dimitriou, Dimitrios; Simos, Theodore
  12. Macro-Financial Linkages: evidence from country-specific VARs By Guarda, Paolo; Jeanfils, Philippe
  13. Vulnerable Banks By Greenwood, Robin; Landier, Augustin; Thesmar, David
  14. Infrastructure and regional growth in the European Union By Crescenzi, Riccardo; Rodríguez-Pose, Andrés
  15. The Dynamics of Homeownership Among the 50+ in Europe By Angelini, Viola; Brugiavini, Agar; Weber, Guglielmo

  1. By: Jean-Sébastien Pentecôte (University of Rennes 1 - CREM, (UMR 6211 CNRS))
    Abstract: I extend the Bayoumi-Eichengreen (1993) approach by extracting new information from a scatter plot of correlation coefficients between shocks in order to better visualize how far a given country is from a monetary union. Indexes of distance and relative strength can be derived from either a nonlinear or a linear combination of correlations in connexion with distinct welfare loss functions. Using quarterly data on ten countries over 1979:I-2011:IV, shocks have become more symmetric within, but also outside, the euro area. Despite less asymmetry in shock asymmetry since 1999, new statistical tests support the idea of a two-speed EMU.
    Keywords: monetary union, euro, shock asymmetry, distance, VAR identification
    JEL: F33 F36 D6 E2
    Date: 2012–03
  2. By: Jang, Tae-Seok; Sacht, Stephen
    Abstract: In this paper, we empirically examine a heterogenous bounded rationality version of a hybrid New-Keynesian model. The model is estimated via the simulated method of moments using Euro Area data from 1975Q1 to 2009Q4. It is generally assumed that agents' beliefs display waves of optimism and pessimism - so called animal spirits - on future movements in the output and inflation gap. Our main empirical findings show that a bounded rationality model with cognitive limitation provides fits for auto- and cross-covariances of the data which are slightly better than or equal to a model where rational expectations are assumed. This implies that the bounded rationality model provides some structural insights on the expectation formation process at the macro-level for the Euro Area. First, over the whole time interval the agents had expected moderate deviations of the future output gap from its steady state value with low uncertainty. Second, we find strong evidence for an autoregressive expectation formation process regarding the inflation gap. Both observations explain a high degree of persistence in the output gap and the inflation gap.
    Keywords: Animal Spirits; Bounded Rationality; Euro Area; New-Keynesian Model; Simulated Method of Moments
    JEL: E12 C53 E32 D83
    Date: 2012–03–16
  3. By: Camacho, Maximo; Pérez-Quirós, Gabriel; Poncela, Pilar
    Abstract: To perform real-time business cycle inferences and forecasts of GDP growth rates in the Euro area, we use an extension of the Markov-switching dynamic factor models that accounts for the specificities of the day to day monitoring of economic developments such as ragged edges, mixed frequencies and data revisions. We provide examples that show the nonlinear nature of the relations between data revisions, point forecasts and forecast uncertainty. According to our empirical results, we think that the real-time probabilities of recession inferred from the model are an appropriate statistic to capture what the press call green shoots or to monitor the double-dip recession
    Keywords: Business Cycles; Time Series; Turning Points
    JEL: C22 E27 E32
    Date: 2012–03
  4. By: Vasily Astrov (The Vienna Institute for International Economic Studies, wiiw); Vladimir Gligorov (The Vienna Institute for International Economic Studies, wiiw); Doris Hanzl-Weiss (The Vienna Institute for International Economic Studies, wiiw); Peter Havlik (The Vienna Institute for International Economic Studies, wiiw); Mario Holzner (The Vienna Institute for International Economic Studies, wiiw); Gabor Hunya (The Vienna Institute for International Economic Studies, wiiw); Sebastian Leitner (The Vienna Institute for International Economic Studies, wiiw); Zdenek Lukas (The Vienna Institute for International Economic Studies, wiiw); Anton Mihailov; Olga Pindyuk (The Vienna Institute for International Economic Studies, wiiw); Leon Podkaminer (The Vienna Institute for International Economic Studies, wiiw); Josef Pöschl (The Vienna Institute for International Economic Studies, wiiw); Sandor Richter (The Vienna Institute for International Economic Studies, wiiw); Hermine Vidovic (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: The present economic crisis bears all the familiar hallmarks of the financial, debt-related and structural aspects of current account crises. All these aspects have lasting level effects and recovery can be very protracted. Export-led growth was an important feature of the recovery period 2010-2011, yet significant inter-country differences persisted. A few countries with severe pre-crisis imbalances (Romania, Bulgaria and the Baltic states) enjoyed reasonable export growth over that period, while other structurally weak economies on the European periphery (Western Balkan countries and the Southern EU) fared badly in that respect. The latter group of countries will continue to lag behind also in the forecast period 2012-2014, while some of the Central European economies (Czech Republic, Poland and Slovakia) will manage to stay out of the vicious circle of low growth, high interest rates and unsustainable debt. These three countries, as well as the Baltic states, are expected to grow by about 3% in the years to come (still significantly below the trend growth rates before the crisis). The remaining EU new member states as well as the Western Balkan countries will achieve only about half of this growth. Turkey, Russia, Ukraine and Kazakhstan will grow by rates of up to 5%.
    Keywords: Central and East European new EU member states, Southeast Europe, GIIPS, financial crisis, future EU member states, Balkans, former Soviet Union, Turkey, economic forecasts, employment, foreign trade, competitiveness, debt, deleveraging, exchange rates, flow of funds, inflation, monetary policy
    JEL: C33 C50 E20 E29 F34 G01 G18 O52 O57 P24 P27 P33 P52
    Date: 2012–03
  5. By: Buiter, Willem H.
    Abstract: The roles of central banks in the advanced economies have expanded and multiplied since the beginning of the crisis. The conventional monetary policy roles - setting interest rates in the pursuit of macroeconomic stability and acting as lender of last resort and market maker of last resort to provide funding liquidity and market liquidity to illiquid but insolvent counterparties - have both been transformed. With official policy rates near or at the effective lower bound, the size of the central bank's balance sheet and the composition of its assets and liabilities have become the new, 'poor man's', monetary policy instruments. The LLR and MMLR roles have expanded to include solvency support for SIFIs and, in the euro area, the provision of liquidity support and solvency support for sovereigns also. Concentrating too many financial stability responsibilities, including macro-prudential and micro-prudential regulation, in the central bank risks undermining the independence of the central bank where it is likely to be useful -- the conventional monetary policy roles. The non-inflationary loss-absorption capacity (NILAC) of the leading central banks is vast. For the ECB/Eurosystem we estimate it at no less than EUR3.2 trillion, for the Fed at over $7 trillion. This is tax payers' money that is not under the effective control of the fiscal authorities. The central banks have used their balance sheets and their NILACs to engage in quasi-fiscal actions that have been essential to prevent even greater financial turmoil and possible disaster, but that also have important distributional impacts between sectors, financial institutions, individuals and nations. The ECB was forced into this illegitimate role by the fiscal vacuum at the heart of the euro area; the Fed by the fiscal paralysis of the US Federal government institutions.
    Keywords: Accountability; Central banks; Financial stability; Non-inflationary loss absorption capacity
    JEL: E41 E52 E58 E63 G01 H63
    Date: 2012–01
  6. By: Marcos dal Bianco (BBVA Research); Maximo Camacho (Universidad de Murcia); Gabriel Perez-Quiros (Banco de España)
    Abstract: We propose a fundamentals-based econometric model for the weekly changes in the euro-dollar rate with the distinctive feature of mixing economic variables quoted at different frequencies. The model obtains good in-sample fi t and, more importantly, encouraging outof-sample forecasting results at horizons ranging from one week to one month. Specifi cally, we obtain statistically signifi cant improvements upon the hard-to-beat random walk model using traditional statistical measures of forecasting error at all horizons. Moreover, our model improves greatly when we use the direction-of-change metric, which has more economic relevance than other loss measures. With this measure, our model performs much better at all forecasting horizons than a naive model that predicts the exchange rate has an equal chance to go up or down, with statistically signifi cant improvements.
    Keywords: euro-dollar rate, exchange rate forecasting, State-space model, mixed frequencies
    JEL: F31 F37 C01 C22
    Date: 2012–02
  7. By: Giannone, Domenico; Lenza, Michele; Pill, Huw; Reichlin, Lucrezia
    Abstract: This paper analyses the impact on the macroeconomy of the ECB’s non-standard monetary policy implemented in the aftermath of the collapse of Lehman Brothers in the Fall of 2008. We study in particular the effect of the expansion of the intermediation of transactions across central bank balance sheets as dysfunctional financial markets seize up, which we regard as a key channel of transmission for non-standard monetary policy measures. Our approach is similar to Lenza et al., 2009 but we introduce the important innovation of distinguishing between private intermediation of interbank transactions in the money market and central bank intermediation of bank-to-bank transactions across the Eurosystem balance sheet. We do this by exploiting data drawn from the aggregate Monetary and Financial Institutions (MFI) balance sheet which allows us to construct a new measure of the ‘policy shock’ represented by the ECB’s increasing role as a financial intermediary. We find that bank loans to households and, in particular, to non-financial corporations are higher than would have been the case without the ECB’s intervention. In turn, the ECB’s support has a significant impact on economic activity: two and a half years after the failure of Lehman Brothers, the level of industrial production is estimated to be 2% higher, and the unemployment rate 0.6 percentage points lower, than would have been the case in the absence of the ECB’s non-standard monetary policy measures.
    Keywords: interbank market; Non-standard monetary policy measures
    JEL: E5 E58
    Date: 2012–02
  8. By: António Afonso; João Tovar Jalles
    Abstract: We study the relevance of fiscal rules for growth in an EU panel. Our results show that they foster growth, while stricter fiscal rules mitigate the adverse impact on growth from big governments. Moreover, more recent EU member states have gained from the implementation of fiscal rules.
    Keywords: fiscal rules, growth, government size, panel analysis
    JEL: C23 E62 H60
    Date: 2012–01
  9. By: Kohonen, Anssi
    Abstract: Empirical research confirms the existence of volatility spillovers across national stock markets. However, the models in use are mostly statistical ones. Much less is known about the actual transmission mechanisms; theoretical literature is scarce, and so is empirical work trying to estimate specific theoretical models. Some economic theory founded tests for such spillovers have been developed for non-overlapping markets; this institutional set up provides a way around the problems of estimating a system of simultaneous equations. However, volatility spillovers across overlapping markets might be as important a phenomenon as across non-overlapping markets. Building on recent advances in econometrics of identifying structural vector autoregressive models, this paper proposes a way to estimate an existing signal-extraction model that explains volatility spillovers across simultaneously open stock markets. Furthermore, a new empirical test for detection of such spillovers is derived. As an empirical application, the theoretical model is fitted to daily data of eurozone stock markets in years 2010--2011. Evidence of volatility spillovers across the countries is found.
    Keywords: Volatility transmission; financial contagion; SVAR identification; hypothesis testing; stock markets; euro debt crisis
    JEL: G14 C12 G15 C30 D82
    Date: 2012–03–08
  10. By: Dimitriou, Dimitrios; Mpitsios, Petros; Simos, Theodore
    Abstract: This paper examines the volatility spillover effects among Mediterranean equity markets and investigates the effects of the 2007 financial crisis. German, Greek, Spanish, Italian and Portuguese markets are investigated. German market is used as a benchmark market. We employ a multivariate generalised autoregressive conditional heteroskedasticity (MGARCH) model to identify the direction and magnitude of volatility spillovers. By using a sample of daily data from 1994 to 2009, we find evidence that before the global crisis begins, the largest impact in Mediterranean markets had the Germany market. In post-crisis period, Spain had the higher spillover effects between the other markets, followed by Germany, Italy, Portugal and Greece. Our results have implications for investors, policy makers, entrepreneurs and academicians.
    Keywords: Spillover effects; Mediterranean markets; MGARCH; BEKK model
    JEL: G11 F21 F36
    Date: 2011–08
  11. By: Dimitriou, Dimitrios; Simos, Theodore
    Abstract: This paper explores the evolution of European stock markets integration with the US stock market, after the formation of European Monetary Union (EMU). To this end, we employ a dynamic version of international CAPM in the absence of purchasing power parity. The conditional covariance matrix of asset returns is estimated employing a parsimonious diagonal BEKK multivariate GARCH-in-mean model. The data sample is daily extending from June 1994 to June 2009. The introduction of world-wide information variables into the system reveals that the formation of monetary union has not exerted positive influence on EMU markets integration with US stock market. Moreover at the same time rolling estimates show that member states domestic or idiosyncratic risks have exhibited a lower volatility level.
    Keywords: Market integration; EMU; MGARCH-M specification
    JEL: G11 F30 G15
    Date: 2011–11
  12. By: Guarda, Paolo; Jeanfils, Philippe
    Abstract: This paper estimates the contribution of financial shocks to fluctuations in the real economy by augmenting the standard macroeconomic vector autoregression (VAR) with five financial variables (real stock prices, real house prices, term spread, loans-to-GDP ratio and loans-to-deposits ratio). This VAR is estimated separately for 19 industrialised countries over 1980Q1-2010Q4 using three alternative measures of economic activity: GDP, private consumption or total investment. Financial shocks are identified by imposing a recursive structure (Choleski decomposition). Several results stand out. First, the effect of financial shocks on the real economy is fairly heterogeneous across countries, confirming previous findings in the literature. Second, the five financial shocks provide a surprisingly large contribution to explaining real fluctuations (33% of GDP variance at the 3-year horizon on average across countries) exceeding the contribution from monetary policy shocks. Third, the most important source of real fluctuations appears to be shocks to asset prices (real stock prices account for 12% of GDP variance and real house prices for 9%). Shocks to the term spread or to leverage (credit-to-GDP ratio or loans-to-deposits ratio) each contribute an additional 3-4% of GDP variance. Fourth, the combined contribution of the five financial shocks is usually higher for fluctuations in investment than in private consumption. Fifth, historical decompositions indicate that financial shocks provide much more important contributions to output fluctuations during episodes associated with financial imbalances (both booms and busts). This suggests possible time-variation or non-linearities in macrofinancial linkages that are left for future research.
    Keywords: asset prices; autoregression; business cycle; credit; financial shock
    JEL: C32 E32 E44 E51
    Date: 2012–03
  13. By: Greenwood, Robin; Landier, Augustin; Thesmar, David
    Abstract: When a bank experiences an adverse shock to its equity capital, one way to return to target leverage is to sell assets. The price impact of the fire sale may impact other institutions with common exposures, resulting in contagion. We propose a simple framework that accounts for this effect. This framework explains how the distribution of leverage and risk exposures across banks contributes to systemic risk. We use it to compute a bank's exposure to sector-wide deleveraging, as well as the spillover of a bank's deleveraging onto other banks. We explain how the model can be used to evaluate a variety of policy proposals, such as caps on size or leverage, mergers of good and bad banks, and equity injections. We then apply the framework to measure (a) the vulnerability of European banks to sovereign risk in 2010 and 2011, and (b) the vulnerability of US financial institutions between 2001 and 2010. In our model, \microprudential" interventions, which target the solvency of individual banks are always less effective than \macroprudential", policies which aim to minimize spillovers across firms.
    Date: 2011–11
  14. By: Crescenzi, Riccardo; Rodríguez-Pose, Andrés
    Abstract: Transport infrastructure has represented one of the cornerstones of development and cohesion strategies in the European Union (EU) and elsewhere in the world. However, despite the considerable funds devoted to it, its impact remains controversial. This paper revisits the question of to what extent transport infrastructure endowment -- proxied by regional motorways -- has contributed to regional growth in the EU between 1990 and 2004. It analyses infrastructure in relationship to other factors which may condition economic growth, such as innovation, migration, and the local ‘social filter’, taking also into account the geographical component of intervention in transport infrastructure and innovation. The results of the two-way fixed-effect (static) and GMM-diff (dynamic) panel data regressions indicate that infrastructure endowment is a relatively poor predictor of economic growth and that regional growth in the EU results from a combination of an adequate ‘social filter’, good innovation capacity, both in the region and in neighbouring areas, and a region's capacity to attract migrants. The meagre returns of infrastructure endowment on economic growth raises interesting questions about the opportunity costs of further infrastructure investments across most of Western Europe.
    Keywords: Economic growth; European Union; Infrastructure; Innovation; Regions; Spillovers
    JEL: R11 R12 R42 R58
    Date: 2012–03
  15. By: Angelini, Viola; Brugiavini, Agar; Weber, Guglielmo
    Abstract: We use life history data covering households in thirteen European countries to analyse residential moves past age 50. We observe four types of moves: renting to owning, owning to renting, trading up or trading down for home-owners. We find that in the younger group (aged 50-64) trading up and purchase decisions prevail; in the older group (65+), trading down and selling are more common. Overall, moves are rare, particularly in Southern European countries. Most moves are driven by changes in household composition (divorce, widowhood, nest-leaving by children), but economic factors play a role: low income households who are house-rich and cash-poor are more likely to sell their home late in life.
    Keywords: housing; life-cycle
    JEL: D19 E21
    Date: 2012–03

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