nep-eec New Economics Papers
on European Economics
Issue of 2012‒10‒06
twelve papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Real Convergence in Europe: A Cluster Analysis By Juan Carlos Cuestas; Mercedes Monfort; Javier Ordóñez
  2. Stock Market Comovements in Central Europe: Evidence from Asymmetric DCC Model By Dritan Gjika; Roman Horváth
  3. Fiscal Consolidation - Does it deliver? By Weymes, Laura
  4. Specialization, gravity, and European trade in final goods By Richard Frensch; Jan Hanousek; Evžen Kočenda
  5. The Cross-Section of Interbank Rates: A Nonparametric Empirical Investigation By Iori, G.; Kapar, B.; Olmo, J.
  6. The European debt crisis: Defaults and market equilibrium By Marco Lagi; Yaneer Bar-Yam
  7. Political Risk, Institutions and Foreign Direct Investment: How Do They Relate in Various European Countries? By Vladimír Benácek; Helena Lenihan; Bernadette Andreosso-O’Callaghan; Eva Michalíková; Denis Kan
  8. Dirty floating and monetary independence in Central and Eastern Europe - The role of structural breaks By Thomas Windberger; Jesus Crespo Cuaresma; Janette Walde
  9. Too-connected versus too-big-to-fail: banks’ network centrality and overnight interest rates. By Gabrieli, S.
  10. Fiscal Compact - Implications for Ireland By Weymes, Laura; Bermingham, Colin
  11. The division of parental transfers in Europe By Javier Olivera Angulo
  12. The impact of the sovereign debt crisis on the activity of Italian banks By Ugo Albertazzi; Tiziano Ropele; Gabriele Sene; Federico M. Signoretti

  1. By: Juan Carlos Cuestas (Department of Economics, The University of Sheffield); Mercedes Monfort (Jaume I University, Spain); Javier Ordóñez (University of Bath)
    Abstract: In this paper we analyse real convergence in GDP per worker in the EU member states. The aim is to test whether there is evidence of club convergence in the EU, i.e. divergence in GDP per worker. Evidence in favour of cluster or club convergence may be an indication of significant productivity divergences between countries, which may also explain the current turmoil in the euro zone. The results show evidence of different economic growth rates within Europe, which also converge to different steady states, implying divergence in the EU-14. Within the EU-14 member states we observe two convergence clubs, which are not related to the fact that some countries belong to the euro area. Furthermore, Eastern European countries are also divided in two clubs, with a more direct effect of belonging to the euro zone in the composition of the clubs.
    Keywords: cluster; real convergence; economic integration; euro
    JEL: C32 C33 O47
    Date: 2012
  2. By: Dritan Gjika (Institute of Economic Studies, Charles University, Prague); Roman Horváth
    Abstract: We examine time-varying stock market comovements in Central Europe employing the asymmetric dynamic conditional correlation multivariate GARCH model. Using daily data from 2001 to 2011, we find that the correlations among stock markets in Central Europe and between Central Europe vis–à–vis the euro area are strong. They increased over time, especially after the EU entry and remained largely at these levels during financial crisis. The stock markets exhibit asymmetry in the conditional variances and in the conditional correlations, to a certain extent, too, pointing to an importance of applying sufficiently flexible econometric framework. The conditional variances and correlations are positively related suggesting that the diversification benefits decrease disproportionally during volatile periods.
    Date: 2012–09
  3. By: Weymes, Laura (Central Bank of Ireland)
    Abstract: This note examines recent experiences of fiscal consolidation in a selection of euro area countries. It illustrates the pace and composition of consolidation, together with expected budgetary impacts over 2008 to 2015. The effectiveness of consolidation measures is assessed through the lens of change in the structural budget balance and headline debt ratios. The assessment takes into account efforts undertaken to date (2008-2011), together with consolidation plans over 2012 to 2014 announced as of end April 2012. Country-specific examples focus on EU-IMF Programme countries; Greece (GR), Ireland (IE), Portugal (PT), together with Spain (ES) and Cyprus (CY).
    Date: 2012–08
  4. By: Richard Frensch (IOS-Regensburg); Jan Hanousek; Evžen Kočenda
    Abstract: We suggest that bilateral gravity equations augmented by ad hoc measures of absolute supply-side country differences are misspecified. Building on Haveman and Hummels (2004), we develop and test an alternative specification rooted in incomplete specialization that views bilateral gravity equations as statistical relationships constrained on countries’ multilateral specialization patterns. According to our results, specialization incentives seem not to play much of a role in the average European bilateral final goods trade relationship. However, this aggregate view conceals that trade in final goods between Western and Eastern Europe is driven by countries’ multilateral specialization incentives, as expressed by supply-side country differences relative to the rest of the world, fully compatible with incomplete specialization models. This indicates that many of the final goods traded between Western and Eastern Europe are still different, rather than differentiated, products.
    Keywords: international trade, gravity models, panel data, European Union
    JEL: F14 F16 L24
    Date: 2012–09
  5. By: Iori, G.; Kapar, B.; Olmo, J.
    Abstract: This paper analyzes the distribution of lending and borrowing credit spreads in the European interbank market conditional on main features of banks such as their size, operating currency and nationality. This is done by means of nonparametric kernel estimation methods for the cross-sectional density of interbank funding rates over a large sample of European banks trading in the e-MID market. The analysis is repeated over consecutive non-overlapping periods in order to assess and compare the effect of the factors during crisis and non-crisis periods. We find evidence of important differences between the borrowing and lending segment of the interbank market that are augmented during crises periods. Our results strongly support the existence of a size effect in the borrowing market. Largest banks enjoy the highest lending rates and the lowest borrowing rates. The collapse of Lehman Brothers accentuates the differences in funding conditions. In both borrowing and lending segments, crises are corresponded by high volatilities in daily funding costs. Banks using the Euro currency and in countries not affected by sovereign debt crises are benefited by lower funding costs. Our nonparametric analysis of densities conditional on banks' nationality suggests that distress in the interbank market can serve as an early warning indicator of sovereign risk.
    Keywords: e-MID Interbank Market; Financial Crisis; Nonparametric kernel estimation; Sovereign risk; Systemic Risk
    Date: 2012
  6. By: Marco Lagi; Yaneer Bar-Yam
    Abstract: During the last two years, Europe has been facing a debt crisis, and Greece has been at its center. In response to the crisis, drastic actions have been taken, including the halving of Greek debt. Policy makers acted because interest rates for sovereign debt increased dramatically. High interest rates imply that default is likely due to economic conditions. High interest rates also increase the cost of borrowing and thus cause default to be likely. If there is a departure from equilibrium, increasing interest rates may contribute to---rather than be caused by---default risk. Here we build a quantitative equilibrium model of sovereign default risk that, for the first time, is able to determine if markets are consistently set by economic conditions. We show that over the period 2001-2012, the annually-averaged long-term interest rates of Greek debt are quantitatively related to the ratio of debt to GDP. The relationship shows that the market consistently expects default to occur if the Greek debt reaches twice the GDP. Our analysis does not preclude non-equilibrium increases in interest rates over shorter timeframes. We find evidence of such non-equilibrium fluctuations in a separate analysis. According to the equilibrium model, the date by which a half-default must occur is March 2013, almost one year after the actual debt write-down. Any acceleration of default by non-equilibrium fluctuations is significant for national and international interventions. The need for austerity or bailout costs would be reduced if market regulations were implemented to increase market stability to prevent short term interest rate increases. We similarly evaluate the timing of projected defaults without interventions for Portugal, Ireland, Spain and Italy to be March 2013, April 2014, May 2014, and July 2016, respectively. All defaults are mitigated by planned interventions.
    Date: 2012–09
  7. By: Vladimír Benácek (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Helena Lenihan (University of Limerick); Bernadette Andreosso-O’Callaghan (University of Limerick); Eva Michalíková (Brno University of Technology); Denis Kan (University of Limerick)
    Abstract: This paper examines theoretically and empirically the extent to which the decision by foreign firms to invest in a group of countries is influenced by economic factors, as opposed to political risk and institutional performance. We consider the importance of these factors as drivers of foreign direct investment (FDI) for 32 European countries (subsequently divided into three pooled clusters) by means of panel regression techniques in two specifications over the 1995-2008 period. Our results suggest that risk and institutional factors considered in both static and dynamic perspectives significantly influence the behaviour of investors. Policies and institutions that vary widely between countries modify their decision-making, so that the purely economic factors have different statistical significance and impacts on the intensity of FDI, as was revealed by clustering countries into three groups according to levels of economic maturity. Additionally, not all factors of risk have an identical impact on FDI decisions in particular groups of countries. However, we find that as measures of political risk, monetary discipline, low regulation, effective government and good education prove to be highly significant for most country groupings. All of these measures reduce political risk and positively affect the level of FDI.
    Keywords: FDI; Political risk; Economic institutions; Panel regression; European Union
    JEL: F2 D81 C23
    Date: 2012–07
  8. By: Thomas Windberger; Jesus Crespo Cuaresma; Janette Walde
    Abstract: Obtaining reliable estimates of the volatility of interest rates and exchange rates is a necessary condition to evaluate issues related to monetary independence and fear of floating. In this paper we use methods which explicitly account for structural breaks in the volatility dynamics in order to assess monetary independence in the Czech Republic, Hungary and Poland. Our results indicate that the explicit modelling of structural breaks in volatility estimates can lead to striking differences concerning the evidence of monetary independence in Central and Eastern Europe. The results based on volatility estimates which account for regime change tend to indicate that the Czech Republic, Hungary and Poland have had a significant degree of monetary independence in the last decade.
    Keywords: Fear of floating, monetary independence, structural break, change-point model
    JEL: F31 C22 C11
    Date: 2012–09
  9. By: Gabrieli, S.
    Abstract: What influences banks’ borrowing costs in the unsecured money market? The objective of this paper is to test whether measures of centrality, quantifying network effects due to interactions among banks in the market, can help explain heterogeneous patterns in the interest rates paid to borrow unsecured funds once bank size and other bank and market factors that affect the overnight segment are controlled for. Preliminary evidence shows that large banks borrow on average at better rates compared to smaller institutions, both before and after the start of the financial crisis. Nonetheless, controlling for size, centrality measures can capture part of the cross-sectional variation in overnight rates. More specifically: (1) Before the start of the crisis all the banks, independently of their size, profit from different forms of interconnectedness, but the economic size of the effect is small. Bank reputation and perceived credit riskiness are the most relevant factors to reduce average daily interest rates. Foreign banks borrow at a discount over Italian ones. (2) After August 2007 the impact of banks’ interconnectedness becomes larger but changes sign: the “reward” stemming from a higher centrality becomes a “punishment”, which possibly reflects market discipline. Bank reputation becomes even more important. (3) After Lehman’s bankruptcy the effect of centrality on the spread maintains the same sign as after August 2007, but the magnitude increases remarkably. Foreign banks borrow at a relevant premium over Italian ones; reputation becomes outstandingly more important than in normal times.
    Keywords: Network centrality; Interbank market; Financial crisis; Money market integration; Macro-prudential analysis.
    JEL: C23 D85 G01 G21 G28
    Date: 2012
  10. By: Weymes, Laura (Central Bank of Ireland); Bermingham, Colin (Central Bank of Ireland)
    Abstract: This note examines the longer term implications for Ireland of changes to EU budgetary rules embodied in the Fiscal Compact. On the basis of fiscal projections to 2015, it presents illustrative scenarios showing the on-going correction in the budgetary position post-2015 needed to support compliance with these new rules. Using a newly developed fanchart modelling approach, it examines the near-term uncertainty around future fiscal outturns, demonstrating the budgetary implications which could arise were growth to diverge from its currently projected path. The fanchart methodology demonstrates graphically the degree to which fiscal outcomes depend jointly on exogenous shocks and policy decisions.
    Date: 2012–09
  11. By: Javier Olivera Angulo (University College Dublin)
    Abstract: In this paper we explore the patterns of the division of inter-vivos financial transfers from parents to adult children in a sample of 12 European countries. We exploit two waves of the Survey of Health, Aging, and Retirement in Europe (SHARE) for 50+. Contrary to previous studies, we find a higher frequency of parents dividing equally their transfers. We argue that altruistic parents are also concerned with norms of equal division, and hence don’t fully offset child income differences. The parents start to give larger transfers to poorer children if the child income inequality becomes unbearable from the parent’s view. We find econometric evidence suggesting this behaviour under different specifications and strategies. Furthermore, contextual variables like the gini coefficient and pension expenditures help to explain country differences with respect to the division of inter-vivos transfers. The lower frequency of equal division found in studies with American data may respond to the higher inequality and relatively lower pension expenditures in US.
    Keywords: inter-vivos transfers, altruism, equal division, Europe
    JEL: D19 D64 J18
    Date: 2012–09–25
  12. By: Ugo Albertazzi (Banca d'Italia); Tiziano Ropele (Banca d'Italia); Gabriele Sene (Banca d'Italia); Federico M. Signoretti (Banca d'Italia)
    Abstract: We assess the effects of the sovereign debt crisis on Italian banksÂ’ activity using aggregate data on funding and loan rates, lending quantities and income statements for the period 1991-2011. We augment standard reduced-form equations for the variables of interest with the spread on 10-year sovereign bonds as an additional explanatory variable. We find that, even when controlling for the standard economic variables that influence bank activity, a rise in the spread is followed by an increase in the cost of wholesale and of certain forms of retail funding for banks and in the cost of credit to firms and households; the impact tends to be larger during periods of financial turmoil. An increase in the spread also has a direct negative effect on lending growth, beyond that implied by the rise in lending rates. Finally, we document a negative impact of the spread on banksÂ’ profitability, stronger for larger intermediaries.
    Keywords: sovereign spread, bank loan rates, bank lending
    JEL: E44 E51 G21
    Date: 2012–09

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