nep-eec New Economics Papers
on European Economics
Issue of 2013‒05‒22
eleven papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Inflation Persistence in Central and Eastern European Countries By Zsolt Darvas; Balázs Varga
  2. Linkages between the Eurozone and the South-Eastern European Countries: A VECMX* Analysis By Minoas Koukouritakis; Athanasios Papadopoulos; Andreas Yannopoulos
  3. Exchange Rate Uncertainty and International Portfolio Flows By Guglielmo Maria Caporale; Faek Menla Ali; Nicola Spagnolo
  4. How have inflation dynamics changed over time? Evidence from the euro area and USA By Oinonen, Sami; Paloviita, Maritta; Vilmi , Lauri
  5. Business Cycle Synchronization in the European Union: The Effect of the Common Currency By Periklis Gogas
  6. Liquidity in European Equity ETFs: What Really Matters? By Anna Calamia; Laurent Deville; Fabrice Riva
  7. Repo funding and internal capital markets in the financial crisis By Düwel, Cornelia
  8. The output effect of fiscal consolidations By Alberto Alesina; Carlo Favero; Francesco Giavazzi
  9. Pension Wealth and Household Savings in Europe: Evidence from SHARELIFE By Alessie, Rob; Angelini, Viola; van Santen, Peter
  10. Unemployment in the Great Recession By Christopher A. Pissarides
  11. The influence of regulatory and institutional framework and shareholder structure upon risk of financial institutions in Central Europe By Dorota Skała

  1. By: Zsolt Darvas; Balázs Varga (OTP Fund Management and Corvinus University of Budapest)
    Abstract: This paper studies inflation persistence with time-varying-coefficient autoregressions for twelve Central-European countries, in comparison with the US and the euro-area. Inflation persistence tends to be higher in times of high inflation. Since the oil price shocks, inflation persistence declined both in the US and euro-area. In most central and eastern European countries, for which our time period covers 1993-2012, inflation persistence has also declined, with the main exceptions of the Czech Republic, Slovakia and Slovenia, where persistence seems to be rather stable. We also concluded that the OLS estimate of an autoregression is likely upward biased when the parameters change.
    Keywords: inflation persistence, flexible least squares, Kalman-filter, time-varying coefficient models
    JEL: C22 E31
    Date: 2013–02
  2. By: Minoas Koukouritakis (Department of Economics, University of Crete, Greece); Athanasios Papadopoulos (Department of Economics, University of Crete, Greece); Andreas Yannopoulos (Department of Economics, University of Crete)
    Abstract: In the present paper we assess the impact of the Eurozone�s economic policies on specific South-Eastern European countries, namely Bulgaria, Croatia, Cyprus, Greece, Romania, Slovenia and Turkey. Since these countries are connected to the EU or the Eurozone and the economic interdependence among them is evolving, we carried out our analysis using the VECMX* framework. Our results indicate that the transition economies in our sample react in a similar manner to changes in international macroeconomic policies. Cyprus and Greece react also in a similar way, but these responses are very small in magnitude. Finally, Turkey behaves in a different way, probably due to the inflationary pressures in its economy. In general, there is evidence of linkages and interdependence among the EU or Eurozone members of the region.
    Keywords: South-Eastern Europe, Monetary Transmission, VECMX* Model, Generalised Impulse Responses.
    JEL: E43 F15 F42
    Date: 2013–02–15
  3. By: Guglielmo Maria Caporale; Faek Menla Ali; Nicola Spagnolo
    Abstract: This paper examines the impact of exchange rate uncertainty on different components of portfolio flows, namely equity and bond flows, as well as the dynamic linkages between exchange rate volatility and the variability of these two types of flows. Specifically, a bivariate GARCH-BEKK-in-mean model is estimated using bilateral data for the US vis-à-vis Australia, the UK, Japan, Canada, the euro area, and Sweden over the period 1988:01- 2011:12. The results indicate that the effect of exchange rate uncertainty on equity flows is negative in the euro area, the UK and Sweden, and positive in Australia, whilst it is negative in all countries except Canada (where it is positive) in the case of bond flows. Under the assumption of risk aversion, this suggests that exchange rate uncertainty induces a home bias and causes investors to reduce their financing activities to maximise returns and minimise exposure to uncertainty. Furthermore, since exchange rate volatility and the variability of flows are interlinked, exchange rate or credit controls on these flows can be used to pursue economic and financial stability.
    Keywords: Exchange rate uncertainty, Equity flows, Bond flows, Causality-in-variance
    JEL: F31 F32 G15
    Date: 2013
  4. By: Oinonen, Sami (Bank of Finland Research); Paloviita, Maritta (Bank of Finland Research); Vilmi , Lauri (Bank of Finland Research)
    Abstract: This paper analyzes euro area and U.S. inflation dynamics since the beginning of the 1990s by estimating New Keynesian hybrid Phillips curves with time-varying parameters. We measure inflation expectations by subjective forecasts from Consensus Economics survey and so do not assume rational expectations. Both rolling regressions and state-space models are employed. The results indicate that in both economic areas the inflation dynamics have steadily become more forward-looking over time. We also provide evidence that the impact of the output gap on inflation has increased in recent years. Overall, diminished inflation persistence emphasizes the role of credible monetary policy in inflation dynamics.
    Keywords: inflation; Phillips curve; time-varying parameters; survey expectations
    JEL: C22 C51 E31
    Date: 2013–05–06
  5. By: Periklis Gogas (Department of Economics, Democritus University of Thrace, Greece; The Rimini Center for Economic Analysis, Italy)
    Abstract: In this paper, I analyse the synchronization of business cycles within the E.U., as this is an important ingredient for the implementation of a successful monetary policy. The business cycles of twelve E.U. countries and two sub-groups of countries are extracted for the period 1989Q1-2010Q2. The cycle of G3, the group of the three largest European economies (Germany, France and Italy) is then used as a benchmark series for the comparisons. The sensitivity of the data to alternative cycle extraction methodologies is explored employing the Hodrick-Prescott and Baxter-King filters using alternative parameter specifications and leads/lags. The strength of cycle synchronization is measured using linear regressions, cross-correlation coefficients and the Cycle Synchronization Index (CSI). To assess whether synchronization is stronger after the introduction of the common currency, we also test two sub-samples pre- and post-EMU (1999Q1). The empirical results provide evidence that cycle synchronization within the Eurozone has become stronger in the common currency period.
    Keywords: Business Cycle, Synchronization, Eurozone
    Date: 2013–04
  6. By: Anna Calamia; Laurent Deville; Fabrice Riva
    Abstract: Despite the importance ETFs have recently gained, little is known about their liquidity. The conventional view on ETF liquidity is that what really matters is not the size of the ETF or its trading volume but the liquidity of its benchmark index. We argue that while creation/redemption effectively creates a tight link between the ETF and the index liquidity, other factors are likely to affect the former. The aim of our paper is to provide empirical evidence of the determinants of the spreads in the European equity ETF markets from their inception in 2000 to the end of 2011. We find that, while the liquidity of ETFs effectively depends on the liquidity of their benchmark index, size also matters: larger and more heavily traded ETFs display tighter spreads. We also find that synthetic ETFs exhibit lower spreads than physical ETFs but that this effect becomes insignificant when competition is accounted for. Finally, market fragmentation also affects spreads but does so differently in physical and synthetic ETFs, which may be explained by the degree of fragmentation these ETFs really face.
    Keywords: ETFs, liquidity, bid-ask spread, competition, fragmentation, synthetic replication, physical replication
    JEL: G10
    Date: 2013–04
  7. By: Düwel, Cornelia
    Abstract: This paper examines how the exposure of German parent banks to the disruptions on sale and repurchase markets (repo markets) during the financial crisis has affected their provision of funds to their foreign branches and subsidiaries via bank-internal capital markets. The collapse of the subprime market, the rescue of Bear Stearns and the bankruptcy of Lehman Brothers are analyzed with regard to their role as amplifiers of uncertainty about the value of collateral used in repo transactions and mistrust among market participants. The results show that parent banks which were more exposed to these disruptions were more likely to withdraw bank-internal funds from their branches and subsidiaries located abroad. Among the three events, the rescue of Bear Stearns triggered the largest contraction on internal capital markets from the part of the parent bank, possibly because this event demonstrated for the first time the fragility of even very large financial institutions. After the subprime market collapse, branches were briefly more protected as core investment locations, while subsidiaries were used as core funding locations up to the Lehman Brothers bankruptcy. All in all, funding via repo markets is found to be one channel that transmitted shocks primarily related to the US financial system abroad. --
    Keywords: repo,funding structure,multinational banks,internal capital market,intra-bank lending,financial crisis
    JEL: G21 G15 F34 E44
    Date: 2013
  8. By: Alberto Alesina; Carlo Favero; Francesco Giavazzi
    Abstract: Fiscal consolidations achieved by means of spending cuts are much less costly in terms of output losses than tax-based ones. The difference cannot be explained by accompanying policies, including monetary policy, and it is mainly due to the different response of business confidence and private investment. We obtain these results by studying the effects of the adoption of fiscal consolidation plans (rather than isolated shocks), that is combinations of tax increases and spending cuts, some unanticipated, other anticipated, in a sample of 16 OECD economies..Keywords: fiscal adjustment, output, confidence, investment JEL Classification: H60, E62
    Date: 2013
  9. By: Alessie, Rob (University of Groningen and Netspar); Angelini, Viola (University of Groningen and Netspar); van Santen, Peter (Research Department, Central Bank of Sweden)
    Abstract: We use recently collected retrospective survey data to estimate the displacement effect of pension wealth on household savings. The third wave of the Survey of Health, Ageing and Retirement in Europe, SHARELIFE, collects information on the entire job history of the respondent, a feature missing in most previous studies. We show that addressing measurement error problems is crucial to estimate the displacement effect when using survey data. We find that each euro of pension wealth is associated with a 47 (61) cent decline in non–pension wealth using robust (median) regression. In the presence of biases from measurement errors and omitted (unobserved) variables, we estimate a lower bound to the true offset between 17% and 30%, significantly different from zero. Instrumental variables regression estimates, although less precise, suggest full displacement.
    Keywords: Displacement effect; Lifetime income; Retrospective survey; Measurement error
    JEL: D31 D91 H55
    Date: 2013–04–01
  10. By: Christopher A. Pissarides
    Abstract: This paper studies the responses of unemployment in Germany, the United States and Britain to the Great Recession of 2008-09 by making use of Beveridge curve analysis, and in the entire OECD with other techniques. It is shown that Britain suffered from recession but no structural problems; the United States suffered from structural unemployment during the recovery; Germany exhibited a much better performance both during and after the recession. The rise in OECD unemployment is broken down into parts due to aggregate activity, the construction sector and a residual attributed to policies and institutions, which is used to reach conclusions about policy.
    Keywords: Unemployment, Great Recession, vacancies, Beveridge curve, construction sector, policies and institutions
    JEL: E24 J6
    Date: 2013–05
  11. By: Dorota Skała (Department of Finance, WNEiZ, University of Szczecin.)
    Abstract: We study the effects of broadening the safety net on bank risk taking in Central Europe, using individual bank data and time-varying regulatory data. Further, we analyse the shareholder structure and its links with risk, as well as possible modifications it may introduce to the moral hazard incentives produced by the financial safety net. We find that more extensive deposit insurance schemes and state aid granted to the financial sector induce higher levels of risk in individual banks. The shareholder structure does not significantly influence the risk levels, although some evidence for higher risk of government-owned institutions is identified. Majority ownership in the form of other financial institutions not only does not alleviate the moral hazard, but makes it more acute, at least in some risk specifications.
    Keywords: Bank risk taking, moral hazard, transition economies
    JEL: G21 G28 G32
    Date: 2013

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