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on European Economics |
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Issue of 2012‒07‒08
seventeen papers chosen by Giuseppe Marotta University of Modena and Reggio Emilia |
| By: | Dimitris A. Georgoutsos (Athens University of Economics & Business); Petros Migiakis (Bank of Greece) |
| Abstract: | In this paper we assess the movements of euro area sovereign bond yield spreads vis-à-vis the German Bund as processes specified across different levels of volatility and subject to movements in asset prices and economic conditions. The determinants we use are grouped into domestic and euro-area aggregates, thus allowing us to derive results on their relative explanatory power for movements in spreads and compare them across time and the spectrum of countries. We find that volatility influences the deterministic processes of the euro area sovereign spreads and that identical determinants have effects on spreads that vary considerably across countries. Furthermore, we find that economic sentiment indices are the most important determinants and their significance remains, to a large extent, even when controlling for the debt-to-GDP ratio. |
| Keywords: | bond spreads; euro area; investment confidence; financial stability. |
| JEL: | F21 F36 G12 G15 G32 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:143&r=eec |
| By: | Roberto A. De Santis (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany and CEPR.) |
| Abstract: | Since the intensification of the crisis in September 2008, all euro area long-term government bond yields relative to the German Bund have been characterised by highly persistent processes with upward trends for countries with weaker fiscal fundamentals. Looking at the daily period 1 September 2008 - 4 August 2011, we find that three factors can explain the recorded developments in sovereign spreads: (i) an aggregate regional risk factor, (ii) the country-specific credit risk and (iii) the spillover effect from Greece. Specifically, higher risk aversion has increased the demand for the Bund and this is behind the pricing of all euro area spreads, including those for Austria, Finland and the Netherlands. Country-specific credit ratings have played a key role in the developments of the spreads for Greece, Ireland, Portugal and Spain. Finally, the rating downgrade in Greece has contributed to developments in spreads of countries with weaker fiscal fundamentals: Ireland, Portugal, Italy, Spain, Belgium and France. JEL Classification: G15, F36. |
| Keywords: | Sovereign spreads, credit ratings, spillovers. |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121419&r=eec |
| By: | Jenny E. Ligthart (CentER and Department of Economics, Tilburg University, P.O. Box 90153, 5000 LE Tilburg, The Netherlands.); Sebastian E. V. Werner (Tilburg University, Warandelaan 2, 5037 AB Tilburg, The Netherlands.) |
| Abstract: | We present a new approach to study empirically the effect of the introduction of the euro on the pattern of currency invoicing. Our approach uses a compositional multinomial logit model, in which currency choice is explained by both currency-specific and country-specific determinants. We use unique quarterly panel data on the invoicing of Norwegian imports from OECD countries for the 1996-2006 period. We find that eurozone countries have substantially increased their share of home currency invoicing after the introduction of the euro, whereas the home currency share of non-eurozone countries fell slightly. In addition, the euro as a vehicle currency has overtaken the role of the US dollar in Norwegian imports. The substantial rise in producer currency invoicing by eurozone countries is primarily caused by a drop in inflation volatility and can only to a small extent be explained by an unobserved euro effect. JEL Classification: F33, F41, F42, E31, C25. |
| Keywords: | Euro, invoicing currency, exchange rate risk, inflation volatility, vehicle currencies, compositional multinomial logit. |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121414&r=eec |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121423&r=eec |
| By: | Roberto A. De Santis (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | We challenge the view that the relationship between money and prices is too loose in countries with low ination rates and argue that cross-border portfolio shifts are the root cause of the volatility in real money balances. The novelty of this paper is that we model jointly in the euro area and the United States (i) the equilibrium in the money market that takes into account the cross-border portfolio shifts, and (ii) the equilibrium in the domestic asset markets, by nding a no-arbitrage relation between domestic long-horizon expected stock and bond returns. We estimate a stable money demand in the long-run and nd that the short-run correlation between annual ination and model-based excess money growth is not statistically di¤erent from unity in both the euro area and the United States. We also nd that the resulting long-run equity risk premium comoves counter-cyclically with quarterly real GDP growth in both economies. JEL Classification: E31, E41, E51, E52, G58, F40. |
| Keywords: | Money demand, asset prices. |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121435&r=eec |
| By: | C. Fred Bergsten (Peterson Institute for International Economics); Jacob Funk Kirkegaard (Peterson Institute for International Economics) |
| Abstract: | The euro crisis is fundamentally a political crisis. At its core the crisis is about national sovereignty and the process in which European governments can agree to transfer it to new, required euro area institutions governing banking sectors and fiscal policies. This transfer of national control over domestic banking sectors and fiscal policy, say Bergsten and Kirkegaard, will happen only during an extraordinary crisis. An imminent economic catastrophe is almost certainly needed to overcome daunting political obstacles, which during normal political times is nearly impossible to accomplish. For this reason, the euro area policy response can only be reactive. Proactive decisions to resolve the crisis in one fell swoop are politically impossible and unrealistic. The authors put forward the "on the brink" theory to characterize the current process of European economic integration. Ultimately, the threat of imminent collapse of the European financial system and indeed the common currency itself would prompt euro area policymakers to take every feasible step to avoid it, including transferring sovereignty to new institutions. The threat, while it exists, is not as imminent as most mainstream commentary makes it out to be. Europe is more solid and has more time to fix its problems than financial markets and analysts think. But leaders urgently need to take a number of very far-reaching political decisions, in particular on banking and fiscal union, during 2012. Every gradual step, however small, that policymakers take on the brink is a step toward completing the decades-long political project and should not be underestimated. |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:iie:pbrief:pb12-18&r=eec |
| By: | David Sondermann (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | Sizable prevailing real economic disparities among countries in a currency union potentially involve costs for those countries for which the aggregate policy stance is not appropriate. This paper contributes to the literature by testing for productivity convergence among euro area countries. While no convergence can be found on the aggregate level, selected service sectors and manufacturing sub-industries indicate evidence of convergence. In a search for factors in uencing productivity, investments in research and development as well as a high skill level of employees are shown to be benecial whereas regulations constitute a burden. Consequently, euro area countries should engage in structural reforms where necessary to provide a more competitive environment, eventually facilitating economic convergence. JEL Classification: C33, O47, J24, L60, L80. |
| Keywords: | Productivity, Convergence, Panel Unit Root Test, Manufacturing and Service Sector |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121431&r=eec |
| By: | Nuno Cassola (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Claudio Morana (Università di Milano-Bicocca, Dipartimento di Economia Politica, Piazza dell’Ateneo Nuovo, 1 - 20126, Milano, Italy; at International Centre for Economic Research (ICER), Torino, Italy; Centre for Research on Pensions and Welfare Policies (CeRP), Moncalieri, Italy and Fondazione ENI Enrico Mattei (FEEM), Milano, Italy;) |
| Abstract: | In the paper we investigate the empirical features of euro area money market turbulence during the recent nancial crisis. By means of a novel Fractionally Integrated Heteroskedastic Factor Vector Au- toregressive model, we nd evidence of a deterministic level factor in the EURIBOR-OIS (OIS) spreads term structure, associated with the two waves of stress in the interbank market, following the BNP Paribas (9 August 2007) and the Lehman Brothers (16 September 2008) shocks, and two additional factors, of the long memory type, bearing the interpretation of curvature and slope factors. The unfold- ing of the crisis yielded a signi cant increase in the persistence and volatility of OIS spreads. We also nd evidence of a declining trend in the level and volatility of OIS spreads since December 2008, associated with ECB interest rate cuts and full allotment policy. JEL Classification: C32, E43, E58, G15. |
| Keywords: | money market interest rates, credit/liquidity risk, frac- tionally integrated heteroskedastic factor vector autoregressive model. |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121437&r=eec |
| By: | Jacob Ejsing (Danmarks Nationalbank, Government Debt Management, Havnegade 5, DK-1093 Copenhagen, Denmark.); Magdalena Grothe (European Central Bank, Directorate General Economics, Capital Markets and Financial Structure Division, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Oliver Grothe (University of Cologne, Department of Economic and Social Statistics, Albertus-Magnus-Platz, D-50923 Cologne, Germany.) |
| Abstract: | This paper quantifies liquidity and credit premia in German and French government bond yields. For this purpose, we estimate term structures of governmentguaranteed agency bonds and exploit the fact that any difference in their yields vis-`a-vis government bonds can be attributed to differences in liquidity premia. Adding the information on risk-free rates, we obtain model-free and model-based gauges of sovereign credit premia, which are an important alternative to the information based on CDS markets. The results allow us to quantify the price impact of so-called “safe haven flows”, which strongly affected bond markets in late 2008/early 2009 and again during some phases of the sovereign debt crisis. Thus, we show to what extent these effects disguised the increase of sovereign credit premia in the government yields of core euro area countries. JEL Classification: E44; G12; G01. |
| Keywords: | liquidity premium; sovereign credit risk; yield curve modeling; bond markets; state space models. |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121440&r=eec |
| By: | Philip Vermeulen (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany and CEPR.) |
| Abstract: | The survey based monthly US ISM production index and Eurozone manufacturing PMI output index provide early information on industrial output growth before the release of the official industrial production index. I use the Carlson and Parkin probability method to construct monthly growth estimates from the qualitative responses of the US ISM production index and the Eurozone manufacturing PMI output index. I apply the method under different assumptions on the cross-sectional distribution of output growth using the uniform, logistic and Laplace distribution. I show that alternative distribution assumptions lead to very similar estimates. I also test the performance of the different growth estimates in an out of sample forecasting exercise of actual industrial production growth. All growth estimates beat a simple autoregressive model of output growth. Distribution assumptions again matter little most of the time except during the financial crisis when the estimates constructed using the Laplace distributional assumption perform the best. My findings are consistent with recent findings of Bottazzi and Sechi (2006) that the distribution of firm growth rates has a Laplace distribution. JEL Classification: C18, E27. |
| Keywords: | Diffusion index, forecasting, purchasing managers’ surveys, ISM, PMI, qualitative response data, Carlson-Parkin method |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121417&r=eec |
| By: | Kohler, Wilhelm |
| Abstract: | This paper first describes the ingredients the present crisis in the euro zone and then evaluates the key options that policy makers face in resolving the crisis and avoiding similar crises in the future. I argue that the crisis should not be seen as caused by government profligacy alone. In many troubled countries, an unsustainable build-up of private sector debt was involved as well. I argue that a more fundamental problem is that the euro zone lacks an adjustment mechanism for balance of payments crises that may arise in its member countries, with or without excessive government deficits. The metaphor of taps to be opened or closed by policy is used to discuss the core trade offs that policy makers face. I discuss monetary taps, bailout taps, austerity taps and devaluation taps. I propose a simple model of government bond markets with sovereign insolvency to be used in order to evaluate EU-type bailouts. I discuss the pros and cons of austerity as a precondition for such bailouts, and I criticize the use of Target2 as a mechanism to absorb balance of national payments crises. -- |
| Keywords: | Euro,Sovereign risk,Sovereign default,Government solvency,Lender of last resort,External balance,Balance of payments |
| JEL: | F33 F36 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:tuewef:39&r=eec |
| By: | Jean Pisani-Ferry; André Sapir; Nicolas Véron; Guntram B. Wolff |
| Abstract: | This paper discusses the creation of a European Banking Union. First, we discuss questions of design. We highlight seven fundamental choices that decision makers will need to make: Which EU countries should participate in the banking union? To which categories of banks should it apply? Which institution should be tasked with supervision? Which one should deal with resolution? How centralised should the deposit insurance system be? What kind of fiscal backing would be required? What governance framework and political institutions would be needed? In terms of geographical scope, we see the coverage of the banking union of the euro area as necessary and of additional countries as desirable, even though this would entail important additional economic difficulties. The system should ideally cover all banks within the countries included, in order to prevent major competitive and distributional distortions. Supervisory authority should be granted either to both the ECB and a new agency, or to a new agency alone. National supervisors, acting under the authority of the European supervisor, would be tasked with the supervision of smaller banks in accordance with the subsidiarity principle. A European resolution authority should be established, with the possibility of drawing on ESM resources. A fully centralized deposit insurance system would eventually be desirable, but a system of partial reinsurance may also be envisaged at least in a first phase. A banking union would require at least implicit European fiscal backing, with significant political authority and legitimacy. Thus, banking union cannot be considered entirely separately from fiscal union and political union. The most difficult challenge of creating a European banking union lies with the short-term steps towards its eventual implementation. Many banks in the euro area, and especially in the crisis countries, are currently under stress and the move towards banking union almost certainly has significant distributional implications. Yet it is precisely because banks are under such stress that early and concrete action is needed. An overarching principle for such action is to minimize the cost to the tax payers. The first step should be to create a European supervisor that will anchor the development of the future banking union. In parallel, a capability to quickly assess the true capital position of the systemâ??s most important banks should be created, for which we suggest establishing a temporary European Banking Sector Task Force working together with the European supervisor and other authorities. Ideally, problems identified by this process should be resolved by national authorities; in case fiscal capacities would prove insufficient, the European level would take over in the country concerned with some national financial participation, or in an even less likely adverse scenario, in all participating countries at once. This approach would require the passing of emergency legislation in the concerned countries that would give the Task Force the required access to information and, if necessary, further intervention rights. Thus, the principle of fiscal responsibility of respective member states for legacy costs would be preserved to the maximum extent possible, and at the same time, market participants and the public would be reassured that adequate tools are in place to address any eventuality. |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:bre:polcon:731&r=eec |
| By: | Dániel Holló (Magyar Nemzeti Bank, 1054 Szabadság tér 8/9, 1850 Budapest, Hungary.); Manfred Kremer (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Marco Lo Duca (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper introduces a new indicator of contemporaneous stress in the financial system named Composite Indicator of Systemic Stress (CISS). Its specific statistical design is shaped according to standard definitions of systemic risk. The main methodological innovation of the CISS is the application of basic portfolio theory to the aggregation of five market-specific subindices created from a total of 15 individual financial stress measures. The aggregation accordingly takes into account the time-varying cross-correlations between the subindices. As a result, the CISS puts relatively more weight on situations in which stress prevails in several market segments at the same time, capturing the idea that financial stress is more systemic and thus more dangerous for the economy as a whole if financial instability spreads more widely across the whole financial system. Applied to euro area data, we determine within a threshold VAR model a systemic crisis-level of the CISS at which financial stress tends to depress real economic activity. JEL Classification: G01, G10, G20, E44. |
| Keywords: | Financial system, financial stability, systemic risk, financial stress index, macro-financial linkages. |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121426&r=eec |
| By: | Yener Altunbas (Centre for Banking and Financial Studies, University of Wales, Bangor, Gwynedd, LL57 2DG, United Kingdom.); Leonardo Gambacorta (Bank for International Settlements, Monetary and Economics Department, Centralbahnplatz 2, CH-4002 Basel, Switzerland.); David Marques-Ibanez (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | We analyze whether the impact of monetary policy on bank risk depends upon bank characteristics. We relate the materialization of bank risk during the financial crisis to differences in the monetary policy stance and bank characteristics in the pre-crisis period for a large sample of listed banks operating in the European Union and the United States. We find that the insulation effect produced by capital and liquidity buffers on bank risk was lower for banks operating in countries that, prior to the crisis, experienced a particularly prolonged period of low interest rates. JEL Classification: E44, E52, G21. |
| Keywords: | Risk-taking channel, monetary policy, credit crisis, bank characteristics. |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121427&r=eec |
| By: | Alexander Pivovarsky; Elena Loukoianova; Ralph De Haas; Yevgeniya Korniyenko |
| Abstract: | We use data on 1,294 banks in Central and Eastern Europe to analyze how bank ownership and creditor coordination in the form of the Vienna Initiative affected 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 Central and Eastern Europe. We show that 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: | Bank supervision , Banks , Credit expansion , Eastern Europe , Global Financial Crisis 2008-2009 , |
| Date: | 2012–05–09 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/117&r=eec |
| By: | Eric Dor (IESEG School of Management (LEM-CNRS)) |
| Abstract: | To explain the surge of the TARGET2-related claims of the Bundesbank on the Eurosystem, the usual narrative tells that there are huge deposit flights out of the euro zone’s distressed countries’ banks, and that the withdrew funds are being reinvested on deposit accounts in German banks. However, the data of the German balance of payments show that there has not been any significant increase of foreign deposits in German banks since 2008, apart from a slight inflow in 2012. It is however posible to track the evolution of the main driving factors of the surge of The TARGET2-related claims of the Bundesbank on the rest of the Eurosystem |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:ies:wpaper:e201212&r=eec |
| By: | Carla Sateriale; Brian Olden; Sami Yläoutinen; Duncan Last |
| Abstract: | This paper assesses the relative strengths and weaknesses of fiscal institutions in ten Southeastern European countries, using recent benchmarking methodologies developed by FAD. The assessment evaluates each country’s understanding of the scale of the fiscal adjustment challenge, its ability to develop a credible consolidation strategy, and its capacity to implement the strategy. Key institutional arrangements, are generally in place, including top-down budgeting and medium-term budget frameworks. Other institutional arrangements require further attention, including macro-fiscal forecasting, fiscal risk analysis, setting fiscal objectives, presence and role of independent fiscal agencies, and top-down parliamentary approval. |
| Keywords: | Budgeting , Budgets , Cross country analysis , Eastern Europe , Fiscal consolidation , Fiscal policy , Fiscal risk , Risk management , |
| Date: | 2012–05–07 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/113&r=eec |