nep-eec New Economics Papers
on European Economics
Issue of 2012‒11‒11
fifteen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Gauging the effects of fiscal stimulus packages in the euro area By Günter Coenen; Roland Straub; Mathias Trabandt
  2. Failing Institutions Are at the Core of the Euro Crisis By Yochanan Shachmurove; Alojzy Z. Nowak
  3. Estimating Phillips Curves in turbulent times using the ECB's survey of professional forecasters By Gary Koop; Luca Onorante
  4. Central bank communication on fiscal policy By Julien Allard; Marco Catenaro; Jean-Pierre Vidal; Guido Wolswijk
  5. Dual liquidity crises under alternative monetary frameworks: a financial accounts perspective By Ulrich Bindseil; Adalbert Winkler
  6. Interdependence and contagion in global asset markets By John Beirne; Jana Gieck
  7. Bank ratings: what determines their quality? By Harald Hau; Sam Langfield; David Marqués-Ibáñez
  8. Market opinions, fundamentals and the euro-sovereign debt crisis By Roberto Tamborini
  9. Identification of animal spirits in a bounded rationality model: An application to the euro area By Jang, Tae-Seok; Sacht, Stephen
  10. Structural and Cyclical Forces in the Labor Market During the Great Recession: Cross-Country Evidence By Sala, Luca; Söderström, Ulf; Trigari, Antonella
  11. Who needs credit and who gets credit in Eastern Europe? By Martin Brown; Steven Ongena; Alexander Popov; Pinar Yesin
  12. Fiscal Consolidation in Reformed and Unreformed Labour Markets: A Look at EU Countries By Turrini, Alessandro
  13. European Export Performance By Angela Cheptea; Lionel Fontagné; Soledad Zignago
  14. Financial market heterogeneity: Implications for the EMU By Gareis, Johannes; Mayer, Eric
  15. Households Debt Restructuring: Evidence from the French. By Fraisse, H.; Frouté, P.

  1. By: Günter Coenen (European Central Bank); Roland Straub (European Central Bank); Mathias Trabandt (Board of Governors of the Federal Reserve System)
    Abstract: We seek to quantify the impact on euro area GDP of the European Economic Recovery Plan (EERP) enacted in response to the financial crisis of 2008-09. To do so, we estimate an extended version of the ECB’s New Area-Wide Model with a richly specified fiscal sector. The estimation results point to the existence of important complementarities between private and government consumption and, to a lesser extent, between private and public capital. We first examine the implied present-value multipliers for seven distinct fiscal instruments and show that the estimated complementarities result in fiscal multipliers larger than one for government consumption and investment. We highlight the importance of monetary accommodation for these findings. We then show that the EERP, if implemented as initially enacted, had a sizeable, although short-lived impact on euro area GDP. Since the EERP comprised both revenue and expenditurebased fiscal stimulus measures, the total multiplier is below unity. JEL Classification: C11, E32, E62
    Keywords: Fiscal policy, fiscal multiplier, European Economic Recovery Plan, DSGE modelling, Bayesian inference, euro area
    Date: 2012–10
  2. By: Yochanan Shachmurove (Department of Economics and Business, The City College of The City University of New York,and Department of Economics, The University of Pennsylvania); Alojzy Z. Nowak (University of Warsaw, Poland)
    Abstract: The European Union was created to promote economic, cultural, and regional prosperity. However, the Global Financial Crisis demonstrates that its economic institutions are flawed. While each sovereign state in the Eurozone forfeits the control of its money supply, the lack of a common fiscal institution allows individual countries to pursue their own political and financial agendas. The on-going economic hardship emphasizes the critical role of economic and political institution ions. This paper analyzes both beneficial and perverse incentives of joining the European Union, discusses the consequences of deficient economic institutions and provides potential solutions towards the alleviation of the crisis.
    Keywords: European Union; Eurozone; Harmonized Index of Consumer Prices; Portugal, Ireland, Greece and Spain (PIGS); Fiscal Union; Financial Crises; Maastricht Criteria; Maastricht Treaty; Exchange Rate; Euro
    JEL: B52 F00 F01 F33 K0
    Date: 2012–10–18
  3. By: Gary Koop (University of Strathclyde); Luca Onorante (European Central Bank)
    Abstract: This paper uses forecasts from the European Central Bank’s Survey of Professional Forecasters to investigate the relationship between inflation and inflation expectations in the euro area. We use theoretical structures based on the New Keynesian and Neoclassical Phillips curves to inform our empirical work and dynamic model averaging in order to ensure an econometric specification capturing potential changes. We use both regression-based and VAR-based methods. The paper confirms that there have been shifts in the Phillips curve and identifies three sub-periods in the EMU: an initial period of price stability, a few years where inflation was driven mainly by external shocks, and the financial crisis, where the New Keynesian Phillips curve outperforms alternative formulations. This finding underlines the importance of introducing informed judgment in forecasting models and is also important for the conduct of monetary policy, as the crisis entails changes in the effect of expectations on inflation and a resurgence of the “sacrifice ratio”. JEL Classification: E31, C53, C11.
    Keywords: Inflation expectations, survey of professional forecasters, Phillips curve, Bayesian, financial crisis.
    Date: 2012–02
  4. By: Julien Allard; Marco Catenaro (European Central Bank); Jean-Pierre Vidal (European Central Bank); Guido Wolswijk (European Central Bank)
    Abstract: While the established literature on central bank communication has traditionally dealt with communication of monetary policy messages to financial markets and the wider public, central bank communication on fiscal policy has so far received little attention. This paper empirically reviews the intensity of central banks’ fiscal communication by five central banks (the US Federal Reserve, the ECB, the Bank of Japan, the Bank of England and the Swedish Riksbank) over the period 1999-2011. To that end, it develops a fiscal indicator measuring the fiscal-related communication in minutes or introductory statements. Our findings indicate that the ECB communicates intensively on fiscal policies in both positive as well as normative terms. Other central banks more typically refer to fiscal policy when describing foreign developments relevant to domestic macroeconomic developments, when using fiscal policy as input to forecasts, or when referring to the use of government debt instruments in monetary policy operations. The empirical analysis also indicates that the financial crisis has overall increased the intensity of central bank communication on fiscal policy. It identifies the evolution of the government deficit ratio as a driver of the intensity of fiscal communication by central banks in the euro area, the US and Japan, and for Sweden since the start of the crisis. In England the fiscal share in central bank communication is related to developments in government debt as of the start of the crisis. JEL Classification: E58, E61, E63
    Keywords: Central bank communication, fiscal policy, quantification of verbal information
    Date: 2012–09
  5. By: Ulrich Bindseil (European Central Bank); Adalbert Winkler (Frankfurt School of Finance & Management)
    Abstract: This paper contributes to the literature on liquidity crises and central banks acting as lenders of last resort by capturing the mechanics of dual liquidity crises, i.e. funding crises which encompass both the private and the public sector, within a closed system of financial accounts. We analyze how the elasticity of liquidity provision by a central bank depends on the international monetary regime in which the relevant country operates and on specific central bank policies like collateral policies, monetary financing prohibitions and quantitative borrowing limits imposed on banks. Thus, it provides a firm basis for a comparative analysis of the ability of central banks to absorb shocks. Our main results are as follows: (1) A central bank that operates under a paper standard with a flexible exchange rate and without a monetary financing prohibition and other limits of borrowings placed on the banking sector is most flexible in containing a dual liquidity crisis. (2) Within any international monetary system characterized by some sort of a fixed exchange rate, including the gold standard, the availability of inter-central bank credit determines the elasticity of a crisis country’s central bank in providing liquidity to banks and financial markets. (3) A central bank of a euro area type monetary union has a similar capacity in managing dual liquidity crises as a country central bank operating under a paper standard with a flexible exchange rate as long as the integrity of the monetary union is beyond any doubt. JEL Classification: E50, E58
    Keywords: Liquidity crisis, bank run, sovereign debt crisis, central bank co-operation, gold standard
    Date: 2012–10
  6. By: John Beirne (European Central Bank); Jana Gieck (International Monetary Fund)
    Abstract: This paper provides an empirical assessment of interdependence and contagion across three asset classes (bonds, stocks, and currencies) for over 60 economies over the period 1998 to 2011. Using a global VAR, we test for changes in the transmission mechanism – both within and cross-market changes - during periods of turbulence in financial markets. Our results suggest that within-market effects over the sample period for each asset market are highly significant for advanced economies. For emerging economies, these within-market effects mostly apply to the equity market. Contagion effects within-market are most notable in Latin America and Emerging Asia for equities. Cross-market contagion is identified from global bonds to local stocks in Central and Eastern Europe, but from global stocks to domestic bonds in the case of advanced economies. Impulse responses indicate that in crisis times, the origin of the shock plays an important role on the nature of the global transmission. The evidence suggests that in times of financial crisis, shocks that emanate in the US, particularly equity shocks, lead to risk aversion by investors in equities and currencies globally and in some emerging market bonds. Euro area shocks tend to have the most significant effect within the bond market. Our results have implications for policymakers in terms of understanding financial exposures and vulnerabilities and for investors in relation to portfolio rebalancing and the construction of portfolio diversification strategies across asset classes in crisis and non-crisis times. JEL Classification: F30, G15
    Keywords: Asset markets, contagion, global VAR
    Date: 2012–10
  7. By: Harald Hau (University of Geneva); Sam Langfield (European Systemic Risk Board Secretariat; UK Financial Services Authority); David Marqués-Ibáñez (European Central Bank)
    Abstract: This paper examines the quality of credit ratings assigned to banks in Europe and the United States by the three largest rating agencies over the past two decades. We interpret credit ratings as relative assessments of creditworthiness, and define a new ordinal metric of rating error based on banks’ expected default frequencies. Our results suggest that rating agencies assign more positive ratings to large banks and to those institutions more likely to provide the rating agency with additional securities rating business (as indicated by private structured credit origination activity). These competitive distortions are economically significant and contribute to perpetuate the existence of ‘too-big-to-fail’ banks. We also show that, overall, differential risk weights recommended by the Basel accords for investment grade banks bear no significant relationship to empirical default probabilities. JEL Classification: G21, G23, G28
    Keywords: Rating agencies, credit ratings, conflicts of interest, prudential regulation
    Date: 2012–10
  8. By: Roberto Tamborini
    Abstract: The unprecedented sovereign debt crisis across the European Monetary Union has prompted a new generation of models with "self-fulfilling" attacks to public debt. The key idea is that governments may be forced to default even though initial fundamental fiscal variables are sound. The model presented in this paper has two main features: (i) the government's default decision arises out of a cost-benefit analysis that sets the sustainable limit of the solvency primary balance; (ii) investors have no direct information about this variable, and are charaterized by a frequency distribution of "educated opinions". As a consequence, a "good" and "bad" state of the debt market are possibile; the latter is unstable and the model identifies an attraction domain of default within which the government is bound to default although initial solvency conditions are sustainable. A novel feature of the models is that the extent of this domain may be larger or smaller depending on the interplay between fiscal fundamentals and the distribution of investors' opinions. I then discuss several issues concerning the role of initial conditions, fiscal shocks, and the policy options to escape from the default domain. Under this new light, the institutional design of the European Monetary Union now appears seriously deficient and largely co-responsible for the gravity of the crisis
    Keywords: Models of public debt, speculative attacks, euro-soverign debt crisis
    Date: 2012
  9. By: Jang, Tae-Seok; Sacht, Stephen
    Abstract: In this paper we empirically examine a heterogeneous 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 of the output and inflation gap. Our main empirical findings show that a bounded rationality model with cognitive limitation provides a reasonable fit to auto- and cross-covariances of the data. This result is mainly driven by a high degree of intrinsic persistence in the output and inflation gap due to the impact of animal spirits on economic dynamics. Further, over the whole time interval the agents had expected moderate deviations of the future output gap from its steady state value with low uncertainty. Finally, we find strong evidence for an autoregressive expectation formation process regarding the inflation gap. --
    Keywords: Animal Spirits,Bounded Rationality,Discrete Choice Theory,Euro Area,New-Keynesian Model,Simulated Method of Moments
    JEL: C53 D83 E12 E32
    Date: 2012
  10. By: Sala, Luca (Department of Economics and IGIER); Söderström, Ulf (Monetary Policy Department, Central Bank of Sweden); Trigari, Antonella (Department of Economics and IGIER)
    Abstract: We use an estimated monetary business cycle model with search and matching frictions in the labor market and nominal price and wage rigidities to study four countries (the U.S., the U.K., Sweden, and Germany) during the financial crisis and the Great Recession. We estimate the model over the period prior to the financial crisis and use the model to interpret movements in GDP, unemployment, vacancies, and wages in the period from 2007 until 2011. We show that contractionary financial factors and reduced efficiency in labor market matching were largely responsible for the experience in the U.S. Financial factors were also important in the U.K., but less so in Sweden and Germany. Reduced matching efficiency was considerably less important in the U.K. and Sweden than in the U.S., but matching efficiency improved in Germany, helping to keep unemployment low. A counterfactual experiment suggests that unemployment in Germany would have been substantially higher if the German labor market had been more similar to that in the U.S.
    Keywords: Business cycles; financial crisis; labor market matching; Beveridge curve
    JEL: E24 E32
    Date: 2012–10–01
  11. By: Martin Brown (Swiss National Bank; Tilburg University); Steven Ongena (Tilburg University; CEPR - Centre for Economic Policy Research); Alexander Popov (European Central Bank); Pinar Yesin (Swiss National Bank)
    Abstract: Based on survey data covering 8,387 firms in 20 countries we compare credit demand and credit supply for firms in Eastern Europe to those for firms in selected Western European countries. We find that firms in Eastern Europe have a higher need for credit than firms in Western Europe, and that a higher share of firms is discouraged from applying for a loan. The higher rate of discouraged firms in Eastern Europe is driven more by the presence of foreign banks than by the macroeconomic environment or the lack of creditor protection. We find no evidence that foreign bank presence leads to stricter loan approval decisions. Finally, credit constraints do have a real cost in that firms which are denied credit or discouraged from applying are less likely to invest in R&D and introduce new products. JEL Classification: G21, G30, F34.
    Keywords: Credit constraints, banking sector, transition economies.
    Date: 2012–02
  12. By: Turrini, Alessandro (European Commission)
    Abstract: This paper estimates the impact of fiscal consolidation on unemployment and job market flows across EU countries using a recent database of consolidation episodes built on the basis of a “narrative” approach (Devries et al., 2011). Results show that the impact of fiscal consolidation on cyclical unemployment is temporary and significant mostly for expenditure measures. As expected, the impact of fiscal policy shocks on job separation rates is much stronger in low-EPL countries, while high-EPL countries suffer from a stronger reduction in the rate at which new jobs are created. Since a reduced job-finding rate corresponds to a longer average duration of unemployment spells, fiscal policy shocks also tend to have a stronger impact on long-term unemployment if EPL is stricter. Results are broadly confirmed when using "top-down" fiscal consolidation measures based on adjusting budgetary data for the cycle.
    Keywords: fiscal consolidation, unemployment, job market flows, employment protection legislation, labour market reforms
    JEL: E62 J63 J65
    Date: 2012–10
  13. By: Angela Cheptea; Lionel Fontagné; Soledad Zignago
    Abstract: Competitiveness has come to the forefront of the policy debate within the European Union, focusing on price competitiveness and intra-EU imbalances. But how to measure competitiveness properly, beyond price or cost competitiveness, remains an open methodological issue; and how can we explain the resilience of producers located in the EU to the competition of emerging economies? We analyze the redistribution of world market shares at the level of the product variety, as countries no longer specialize in sectors or even products, but in varieties of the same product, sold at dierent prices. We decompose changes in market shares into structural eects (geographical and sectoral) and a pure performance eect. Our method is based on an econometric shift-share decomposition and we regard the EU-27 as an integrated economy, excluding intra-EU trade. Revisiting the competitiveness issue in such a perspective sheds new light on the ongoing debate. From 1995 to 2009 the EU-27 withstood the competition from emerging countries better than the US and Japan. The EU market shares in the upper price range of the market proved quite resilient, by combining good performance and favorable structure eects, unlike the US and Japan. Finally, while most developed countries lose market shares in high-technology products to developing countries, the EU is slightly gaining, beneting of a favorable structure eect.
    Keywords: International Trade, Export Performance, Competitiveness, Market Shares, Shift-Share, European Union
    JEL: F12 F15
    Date: 2012–10
  14. By: Gareis, Johannes; Mayer, Eric
    Abstract: This paper evaluates business cycle and welfare effects of cross-country mortgage market heterogeneity for a monetary union. By employing a calibrated two-country New Keynesian DSGE model with collateral constraints tied to housing values, we show that a change in cross-country institutional characteristics of mortgage markets, such as the LTV ratio, is likely to be an important driver of an asymmetric development in housing markets and real economic activity of member states. Our welfare analysis suggests that the welfare of the home country where the reform is implemented increases substantially. In contrast, the rest of the EMU's welfare falls due to spillover effects with magnitude depending on the size of the home country. --
    Keywords: housing,LTV ratio,monetary union,cross-country heterogeneity
    JEL: E32 E44 F41
    Date: 2012
  15. By: Fraisse, H.; Frouté, P.
    Abstract: France has a long and unique experience of public intervention in household debt restructuring. When facing financial distress, households can file a case to a “households’ over-indebtedness commission” (HOC). These HOCs either grant a delay of payment or impose a partial reimbursement of the secured or unsecured debt. This paper evaluates the ex post impact of this decision on the creditors’ recovery rate, the household’s re-default rate and the net benefit of the treatment, defined as the amount recovered by the creditors minus the public cost of treatment of the file. The random allocation of the households over file managers with different pro-household friendlinesses is used to correct for endogeneity. Sixty percent of households are ordered to repay part of their debt. Over a two-year horizon, the possibility to grant a delay of payment decreases the average redefault rate and the average repayment rate respectively from 13 to 7 percentage points and from 14 to 12 percentage points. The net benefit over a small fraction of low distressed households offsets the loss observed over a large fraction of more distressed households. Our results highlight a substantial impact of the severity of the case manager.
    Keywords: Bankruptcy, Household Finance, Default, Debt Restructuring, Loan modification.
    JEL: D1 G2 K35
    Date: 2012

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