nep-eec New Economics Papers
on European Economics
Issue of 2012‒09‒16
eleven papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. The fiscal multiplier in a time of massive public Debt : the euro area Case By Vranceanu, Radu; Besancenot, Damien
  2. Debt and growth: new evidence for the Euro area By Anja Baum; Cristina Checherita-Westphal; Philipp Rother
  3. Automatic Fiscal Stabilisers: What they are and what they do. By Jan in't Veld; Martin Larch; Marieke Vandeweyer
  4. Government bond market dynamics and sovereign risk: systemic or idiosyncratic? By Bicu Andreea; Candelon Bertrand
  5. Restoring Stability to Europe By Robert Shelburne
  6. House price responsiveness of housing investments across major European economies By Luca Gattini; Ioannis Ganoulis
  7. Age Effects in the Okun's Law within the Eurozone By Oliver Hutengs; Georg Stadtmann
  8. Does monetary policy affect bank risk? By Yener Altunbas; Leonardo Gambacorta; David Marques-Ibanez
  9. Financial structures and the real effects of credit-supply shocks in Denmark 1922-2011 By Kim Abildgren
  10. Revisiting fiscal sustainability: panel cointegration and structural breaks in OECD countries By António Afonso; João Tovar Jalles
  11. On the importance of indirect banking vulnerabilities in the Eurozone By Bicu Andreea; Candelon Bertrand

  1. By: Vranceanu, Radu (ESSEC Business School); Besancenot, Damien (University of Paris 13 and CEPN)
    Abstract: This paper argues that in Euro-area economies, where the ECB cannot bail-out financially distressed governments, the fiscal multiplier is adversely affected by the amount of public debt. A regression model on a panel of 26 EU countries over the last 16 years shows that a 10 percentage point increase in the debt-to-GDP ratio is connected to a slowdown in annual growth rates of 0.28 percentage point. Furthermore, the effectiveness of fiscal spending is adversely affected by the amount of public debt.
    Keywords: Fiscal multiplier; Euro-area; Public debt; Illiquidity; the Great Recession
    JEL: C23 E62 G01
    Date: 2012–09–05
  2. By: Anja Baum (University of Cambridge, Faculty of Economics, Austin Robinson Building, Sidgwick Avenue Cambridge, CB3 9DD, UK); Cristina Checherita-Westphal (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt, Germany); Philipp Rother (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt, Germany)
    Abstract: Against the background of the euro area sovereign debt crisis, our paper investigates the relationship between public debt and economic growth and adds to the existing literature in the following ways. First, we extend the threshold panel methodology by Hansen (1999) to a dynamic setting in order to analyse the nonlinear impact of public debt on GDP growth. Second, we focus on 12 euro area countries for the period 1990-2010, therefore adding to the current discussion on debt sustainability in the euro area. Our empirical results suggest that the shortrun impact of debt on GDP growth is positive and highly statistically significant, but decreases to around zero and loses significance beyond public debt-to-GDP ratios of around 67%. This result is robust throughout most of our specifications, in the dynamic and non-dynamic threshold models alike. For high debt-to-GDP ratios (above 95%), additional debt has a negative impact on economic activity. Furthermore, we can show that the long-term interest rate is subject to increased pressure when the public debt-to-GDP ratio is above 70%, broadly supporting the above findings. JEL Classification: H63, O40, E62, C20
    Keywords: Public debt, economic growth, scal policy, threshold analysis
    Date: 2012–07
  3. By: Jan in't Veld; Martin Larch; Marieke Vandeweyer
    Abstract: The global financial and economic crisis has revived the debate in the academic literature and in policy circles about the size and effectiveness of automatic fiscal stabilisers. Especially in the euro area where monetary policy is centralised and discretionary fiscal policy making is constrained by the EU fiscal rules, knowing the size and the effectiveness of automatic stabilisers is crucial. While automatic stabilisers are a fairly established concept in the fiscal policy literature, there is still no consensus about their actual nature and their effectiveness. This paper shows that differences in opinion mirror a deeper disagreement over how the budget would look like without automatic stabilisers. This issue is addressed by defining two types of counterfactual budgets giving rise to two different interpretations about the nature of automatic stabilisation. Simulations with a structural model confirm that the degree of smoothing is conditional on how the counterfactual budget, i.e. the budget without automatic stabilisers, is defined.
    Date: 2012
  4. By: Bicu Andreea; Candelon Bertrand (METEOR)
    Abstract: This paper investigates the comovement of long-term government bond yields in the Eurozone. Themethods used for identifying common trends and common cycles are cointegration and SCCF (serialcorrelation common feature). These low and high frequency comovement analyses based on asymptoticcritical values fail to identify the almost perfect convergence of 10 year sovereign bond yields.After adjusting for heteroscedasticity we find strong evidence for similar cyclical movements anda reduced number of "common cycles" for two separate groups (core and periphery). This confirmsthe hypothesis that in the European EMU (Economic and Monetary Union) the perceived risk of memberstates has converged. Based on the explanatory power of common and idiosyncratic components, weobserve that sovereign yields are mainly driven by common risk factors and to a reduced degree bycountry specific characteristics. We investigate wether our results are affected by the recentsovereign debt crisis. With some notable exceptions, we find only small declines in theexplanatory power of the common component. In line with recent literature on increased generalrisk aversion during times of stress, some policy implications for the common currency area areformulated.
    Keywords: Economics ;
    Date: 2012
  5. By: Robert Shelburne (United Nations Economic Commission for Europe)
    Abstract: The eurozone is in political and economic crisis. This is due to the inadequate design of the institutional structure of the eurozone and to the current poor implementation of macroeconomic policy. In designing the eurozone, well established principles of economics were ignored and major decisions were based primarily upon political considerations. Thus it was only a matter of time before these defects would become apparent. In addressing the current crisis that has developed policy makers have misdiagnosed the causes of the crisis and implemented solutions that are largely counterproductive to solving it. This paper describes the underlying factors that led to the inadequate design and improper macroeconomic response and explains what will be necessary in order to create an institutional structure and macroeconomic policy framework that can restore economic stability and growth to the region.
    Keywords: eurozone crisis, financial stability, European macroeconomics, fiscal policy, European monetary system
    JEL: E60 E61 E62 E63 E65 E66 E58 F55 H60 H87 N14 N94 O52
    Date: 2012–07
  6. By: Luca Gattini (European Investment Bank, 98-100, Boulevard Konrad Adenauer, Luxembourg L-2950); Ioannis Ganoulis (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany and CEPR)
    Abstract: In comparison with the large literature on house prices, housing investments have been studied far less. This paper investigates the behaviour of private residential investments for the six largest European economies, namely: Germany, France, Italy, Spain, the Netherlands and the United Kingdom. It employs a common modelling structure based on an error correction approach and country specific models. First, co-integration among the parsimoniously specified set of fundamental variables is detected in all countries. Second, cross-country differences are found in the responsiveness of private residential investments to real prices and to other relevant factors. Germany has the strongest response of private residential investments to house price changes whereas Italy shows the lowest responses. In Spain investments seem to be primarily related to their lagged component and short-term changes in house prices, and show a poor relationship with deviations from long-term fundamentals. In some countries, the lagged component of residential investments seems to point to a high persistency effect. JEL Classification: C2, R30, E22
    Keywords: Housing investments, elasticity, co-integration, error-correction mechanism
    Date: 2012–08
  7. By: Oliver Hutengs; Georg Stadtmann
    Abstract: We estimate Okun coefficients for five different age cohorts for several Eurozone countries. We find a stable pattern for all countries: The relationship between business-cycle fluctuations and the unemployment rate is the strongest for the youngest cohort and gets smaller for the elderly cohorts.
    Keywords: Okun's law, labor market, youth unemployment
    JEL: E24 F50 C23
    Date: 2012
  8. By: Yener Altunbas (Bangor Business School); Leonardo Gambacorta (Bank for International Settlements); David Marques-Ibanez (European Central Bank)
    Abstract: We investigate the effect of relatively loose monetary policy on bank risk through a large panel including quarterly information from listed banks operating in the European Union and the United States. We find evidence that relatively low levels of interest rates over an extended period of time contributed to an increase in bank risk. This result holds for a wide range of measures of risk, as well as macroeconomic and institutional controls including the intensity of supervision, securitization activity and bank competition. The results also hold when changes in realized bank risk due to the crisis are accounted for. The results suggest that monetary policy is not neutral from a financial stability perspective.
    Keywords: bank risk, monetary policy, credit crisis.
    JEL: E44 E52 G21
    Date: 2012–01
  9. By: Kim Abildgren (Danmarks Nationalbank, Havnegade 5, DK-1093 Copenhagen K, Denmark)
    Abstract: We examine the real effects of credit-supply shocks using a series of structural vector autoregressive models estimated on the basis on a new quarterly data set for Denmark spanning the past 90 years or so. We find no effects on the unemployment level from supplyshocks to credit from commercial/savings banks in the periods 1922-1949 and 1981-2011 even though these periods contained several cases of severe banking and financial crises. Furthermore, credit-supply shocks do not seem to explain any significant share of the volatility in the unemployment rate during these periods. We attribute these findings to the large market for mortgage-credit loans in Denmark raised through bond-financed mortgage banks combined with comprehensive government interventions to safeguard financial stability during times of crises. There might, however, be indications of real effects from credit-supply shocks in the period 1950-1980 where credit rationing and exchange controls served as important economic-policy instruments. Overall these results indicate that both the financialsystem structure as well as the extent of government intervention during banking crises play a key role to the significance of real effects of credit-supply shocks. These findings must be kept in mind when modelling the role of financial intermediaries in macroeconomic models. JEL Classification:
    Keywords: Credit-supply shocks, banking and financial crises, vector autoregressions, Danish economic history
    Date: 2012–08
  10. By: António Afonso (European Central Bank, Directorate General Economics, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany, ISEG/UTL - Technical University of Lisbon, Department of Economics and UECE – Research Unit on Complexity and Economics); João Tovar Jalles (European Central Bank, Directorate General Economics, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany and University of Aberdeen)
    Abstract: We assess the sustainability of public finances in OECD countries, over the period 1970-2010, using unit root and cointegration analysis, both country and panel based, controlling for endogenous breaks. Results notably show: lack of cointegration – absence of sustainability – between government revenues and expenditures for most countries (except for Austria, Canada, France, Germany, Japan, Netherlands, Sweden, and UK); improvements of the primary balance after past worsening in debt ratios for Australia, Belgium, Germany, Ireland, Netherlands and the UK; Granger causality from government debt to the primary balance for 12 countries (suggesting the existence of Ricardian regimes). Overall, fiscal policy has been less sustainable for several countries, and panel data results corroborate the time-series findings. JEL Classification: C32, E62, H62, H63
    Keywords: Debt, primary balance, fiscal regimes, stationarity, breaks, causality, panel cointegration, FMOLS
    Date: 2012–08
  11. By: Bicu Andreea; Candelon Bertrand (METEOR)
    Abstract: This paper investigates banking and sovereign distress in the Eurozone and the importance ofdirect and indirect financial exposures. We use BIS cross-border direct banking flows to linkmember states in a GVAR framework and jointly model sectoral CDS premia. Based on balance sheetpositions of an intermediate debtor country, we calculate indirect exposures and asses how thelevel of interconnectedness is impacted when indirect links are accounted for. We notice a generalslowdown in financial integration and a reduction in cross-border assets in the hope of limitinginternational contagion. By differentiating between direct and indirect links, we show that theimpact of reduced weights on core member states is insignificant and that deleveraging strategiesare not able to successfully reduce risk.
    Keywords: international economics and trade ;
    Date: 2012

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