nep-eec New Economics Papers
on European Economics
Issue of 2013‒05‒19
eight papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Structural Budget Balance By Virkola, Tuomo
  2. Efficiency Gains of a European Banking Union By Dirk Schoenmaker; Arjen Siegmann
  3. On the Size of the Government Spending Multiplier in the Euro Area By Fève, Patrick; Sahuc, Jean-Guillaume
  4. Lessons from the European Spaghetti Bowl By Richard Baldwin
  5. The “Greatest” Carry Trade Ever? Understanding Eurozone Bank Risks By Viral V. Acharya; Sascha Steffen
  6. Measuring Credit Risk in a Large Banking System: Econometric Modeling and Empirics By Andre Lucas; Bernd Schwaab; Xin Zhang
  7. Would a euro's depreciation improve the French economy? By Riccardo Magnani; Luca Piccoli; Martine Carré; Amedeo Spadaro

  1. By: Virkola, Tuomo
    Abstract: Euro Area member states have agreed to introduce a structural budget balance target to their national legislation (Treaty on Stability, Coordination and Governance). However, there exists no commonly agreed methodology to calculate this macroeconomic indicator. This report presents the conceptual framework underlying the calculation of structural fiscal balances as suggested by different international organizations such as the European Commission and the IMF. We emphasize that the methodology indeed affects both the quantitative estimates and the interpretation of the indicator for policy analysis. In addition we discuss some of the possible limitations of the indicator within real-time macroeconomic surveillance.
    Keywords: cyclically-adjusted budget balance, structural balance, fiscal policy, macroeconomic surveillance
    JEL: H60 E62 E32
    Date: 2013–05–14
  2. By: Dirk Schoenmaker (Duisenberg School of Finance); Arjen Siegmann (VU University Amsterdam)
    Abstract: An anticipated benefit of the prospective European Banking Union is stronger supervision of European banks. Another benefit would be enhanced resolution of banks in distress. While national governments confine themselves to the domestic effects of a banking failure, a European Resolution Authority would follow a supranational approach, under which domestic and cross-border effects within Europe are incorporated. Using a model of recapitalising banks, this paper develops indicators to measure the efficiency improvement of resolution. Next, these efficiency indicators are applied to the hypothetical resolution of the top 25 European banks, which count for the vast majority of cross-border banking in Europe. Our cost-benefit analysis indicates that the UK, Spain, Sweden, and the Netherlands are the main beneficiaries and thus have the largest economic incentives to join Europe’s Banking Union.
    Keywords: Financial Stability, Financial Crises, Public Good, International Banking
    JEL: F33 G01 G28 H41
    Date: 2013–02–11
  3. By: Fève, Patrick; Sahuc, Jean-Guillaume
    Abstract: This article addresses the existence of a wide range of estimated government spending multipliers in a dynamic stochastic general equilibrium model of the euro area. Our estimation results and counterfactual exercises provide evidence that omitting the interactions of key ingredients at the estimation stage (such as Edgeworth complementarity between private consumption and government expenditures, endogenous government spending policy and general time nonseparable preferences) paves the way for potentially large biases. We argue that uncertainty on the quantitative assessments of fiscal programmes could partly originate from these biases.
    Keywords: Government spending multiplier, DSGE models, Estimation bias, Euro area.
    JEL: C32 E32 E62
    Date: 2013–04
  4. By: Richard Baldwin (Asian Development Bank Institute (ADBI))
    Abstract: European economic integration fascinates and inspires for the way it brought peace to a continent torn by violent and long-standing rivalries. The lessons from Europe, however, cannot be applied directly as the degree of the European Union’s supranationality is unthinkable elsewhere. This paper discusses how Europe overcame the specific problem of overlapping free trade agreements (FTAs) with the Pan-European Cumulation System which instituted common rules of origin, regional cumulation of value, and completed the full matrix of bilateral FTAs. After this, Europe had what can be thought of as a “customs union†for rules of origin.
    Keywords: Spaghetti Bowl, European Union, EU, overlapping free trade agreements (FTAs), customs union
    JEL: F15 F2
    Date: 2013–04
  5. By: Viral V. Acharya; Sascha Steffen
    Abstract: We show that Eurozone bank risks during 2007-2012 can be understood as a “carry trade” behavior. Bank equity returns load positively on peripheral (Greece, Ireland, Portugal, Spain and Italy, or GIPSI) bond returns and negatively on German government bond returns, a position that generated “carry” until the deteriorating GIPSI bond returns inflicted losses on banks. The positive GIPSI loadings correlate with banks’ holdings of GIPSI bonds; and, the negative German loading with banks’ short-term debt exposures. Consistent with moral hazard in the form of risk-taking by large, under-capitalized banks to exploit government guarantees, arbitrage regulatory risk weights, and access central-bank funding, we find that this carry-trade behavior is stronger for large banks, and banks with low Tier 1 ratios and high risk-weighted assets, in both GIPSI and non-GIPSI countries’ banks, but not so for similar banks in other Western economies or for non-bank firms.
    JEL: F3 G01 G14 G15 G21 G28
    Date: 2013–05
  6. By: Andre Lucas (VU University Amsterdam); Bernd Schwaab (European Central Bank, Financial Markets Research); Xin Zhang (VU University Amsterdam, and Sveriges Riksbank, Research Division)
    Abstract: Two new measures for financial systemic risk are computed based on the time-varying conditional and unconditional probability of simultaneous failures of several financial institutions. These risk measures are derived from a multivariate model that allows for skewed and heavy-tailed changes in the market value of financial firms’ equity. Our model can be interpreted as a Merton model with correlated Levy drivers. This model incorporates dynamic volatilities and dependence measures and uses the overall information on the shape of the multivariate distribution. Our correlation estimates are robust against possible outliers and influential observations. For very large cross-sectional dimensions, we propose an approximation based on a conditional Law of Large Numbers to compute extreme joint default probabilities. We apply the model to assess the risk of joint financial firm failure in the European Union during the financial crisis. By augmenting the dynamic parameter model with Euribor-EONIA rate and other variables that capture situations of systemic stress, we find that including extra economic variables helps to explain systemic correlation dynamics.
    Keywords: systemic risk; dynamic equicorrelation model; generalized hyperbolic distribution; Law of Large Numbers
    JEL: G21 C32
    Date: 2013–05–13
  7. By: Riccardo Magnani (CEPN - Université Paris XIII and CEPII); Luca Piccoli (Universitat de les Illes Balears); Martine Carré (LEDa - Université Paris-Dauphine); Amedeo Spadaro (Universitat de les Illes Balears)
    Abstract: In this paper, we use a Micro-Macro model to evaluate the effects of a euro's depreciation on the French economy, both at the macro and micro level. Our Micro-Macro model consists of a Microsimulation model that includes an arithmetical model for the French fiscal system and two behavioral models used to simulate the effects on consumption behavior and labor supply, and a multisectoral CGE model which simulates the macroeconomic effects of a reform or a shock. The integration of the two models is made using an iterative (or sequential) approach. We find that a 10% euro's depreciation stimulates the aggregate demand by increasing exports and reducing imports which increases production and reduces the unemployment rate in the economy. At the individual level, we find that the macroeconomic shock reduces poverty and, to a lesser extent, income inequality. In particular, the decrease in the equilibrium wage, determined in the macro model, slightly reduces the available income for people who have already a job, while the reduction in the level of unemployment permits to some individuals to find a job, substantially increasing their income and, in many cases, bringing them out of poverty.
    Keywords: Exchange rates; Microsimulation; CGE models
    JEL: F40 C63 C68
    Date: 2013
  8. By: Lidia Mannarino; Marianna Succurro (Dipartimento di Scienze Economiche, Statistiche e Finanziarie, Università della Calabria)
    Abstract: The aim of the paper is to investigate the impact of financial structure on firms’ performance in Western Europe convergence regions. While large amount of evidence exists on the relation between financial development, firms’ survival and growth both cross-country and cross-industry, much less is known at the microeconomic level of the firm. In this context, the contribution of our research - which relies on accounting data collected from the Bureau van Dijk’s Amadeus database - is twofold. First, we make a microeconomic comparison across Western Europe convergence regions, where the percentage of small and medium enterprises is relatively higher than in more developed regions. Second, following the most recent literature in this field, our research takes into account several financial ratios instead of a commonly used one-dimensional definition of financial status. The empirical evidence shows that the financial strength is a key factor explaining firm survival in Western Europe convergence regions. Some differences arise from a deeper analysis of the financial ratios. While both the debt and the cash flow ratios, as well as profitability, are strongly significant in explaining firms’ survival in Western Europe convergence regions, structure and operational ratios are not important factors explaining firms’ survival. Additional differences arise when we consider the countries separately: while debt and cash flow ratios are significant for bank based economies, they are not significant for United Kingdom, which is characterized by a more developed financial market. This analysis would have interesting applications, given the potential impact of financial constraints on market selection mechanisms and, therefore, on market structure.
    Keywords: Financial Structure, Firm Survival
    JEL: D92 E22 G33 L1
    Date: 2013–04

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