nep-eec New Economics Papers
on European Economics
Issue of 2013‒08‒31
ten papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Europe’s Quest for Fiscal Discipline By Charles Wyplosz
  2. Announcements of ECB Unconventional Programs: Implications for the Sovereign Risk of Italy By Matteo Falagiarda; Stefan Reitz
  3. Market discipline during crisis: Evidence from bank depositors in transition countries By Hasan, Iftekhar; Jackowicz, Krzysztof; Kowalewski , Oskar; Kozlowski , Lukasz
  4. ECB monetary policy surprises: identification through cojumps in interest rates By Lars winkelmann; Markus Bibinger; Tobias Linzert;
  5. Interactions between eurozone and US booms and busts: A Bayesian panel Markov-switching VAR model By Monica Billio; Roberto Casarin; Francesco Ravazzolo; Herman K. van Dijk
  6. Non-uniform wage-staggering: European evidence and monetary policy implications By Juillard, Michel; Le Bihan, Herve; Millard, Stephen
  7. The Great Recession and the Two Dimensions of European Central Bank Credibility By Timo Henckel; Gordon Menzies; Daniel J. Zizzo
  8. Welfare Effects of the Euro Cash Changeover: Do Assumptions Really Matter? By Sara Bleninger
  9. The extreme dangers of a deposit tax By John H. Makin
  10. Macroecnomic Impacts of FDI in Transition Economies: A Meta-Study By Iwasaki, Ichiro; Tokunaga, Masahiro

  1. By: Charles Wyplosz
    Abstract: This paper argues that the sovereign debt crisis is the result of a lack of fiscal discipline broadly defined to include adequate banking supervision. The paper argues that Europe has inadvertently adopted the wrong model of collective discipline, because it is centralized while a decentralized model not only better fits the Euro Area makeup but also has a superior track record. It also notes the need for the ECB to accept its role of lender of last resort, which in turn requires the adoption of a full-blown banking union.
    JEL: E58 E61 G28 H53
    Date: 2013–04
  2. By: Matteo Falagiarda; Stefan Reitz
    Abstract: This paper studies the effects of ECB communications about unconventional monetary policy operations on the perceived sovereign risk of Italy over the last five years. More than fifty events concerning non-standard operations are identified and classified with respect to the specific ECB program. The empirical results are derived from both an event-study analysis and a GARCH framework, which uses Italian long-term bond futures to disentangle expected from unexpected policy actions. We find that the ECB announcements about unconventional monetary policies substantially reduced Italian long-term government bond yield spread relative to German counterparts. Particularly, among the different types of measures, news about the Securities Markets Programme and the Outright Monetary Transactions are found to be effective in affecting the perceived sovereign risk of Italy
    Keywords: central bank communications, unconventional monetary policy, European sovereign debt crisis, event-study, GARCH models
    JEL: E43 E52 E58 G01 G12
    Date: 2013–08
  3. By: Hasan, Iftekhar (BOFIT); Jackowicz, Krzysztof (BOFIT); Kowalewski , Oskar (BOFIT); Kozlowski , Lukasz (BOFIT)
    Abstract: The Central European banking industry is dominated by foreign-owned banks. During the recent crisis, for the first time since the transition, foreign parent companies were frequently in a worse financial condition than their subsidiaries. This situation created a unique opportunity to study new aspects of market discipline exercised by non-financial depositors. Using a comprehensive data set, we find that the recent crisis did not change the sensitivity of deposit growth rates to accounting risk measures. We establish that depositors’ actions were more strongly influenced by negative press rumors concerning parent companies than by fundamentals. The impact of rumors was especially perceptible when rumors turned out ex post to be founded. Additionally, we document that public aid announcements were primarily interpreted by depositors as confirmation of a parent company’s financial distress. Our results, indicating that depositors react rationally to sources of information other than financial statements, have policy implications, as depositor disci-pline is usually the only viable and universal source of market discipline for banks in emerging economies.
    Keywords: depositor behavior; market discipline; crisis; emerging markets; market rumors
    JEL: G21 G28
    Date: 2013–08–12
  4. By: Lars winkelmann; Markus Bibinger; Tobias Linzert;
    Abstract: This paper proposes a new econometric approach to disentangle two distinct response patterns of the yield curve to monetary policy announcements. Based on cojumps in intraday tick-data of a short and long term interest rate, we develop a day-wise test that detects the occurrence of a significant policy surprise and identifies the market perceived source of the surprise. The new test is applied to 133 policy announcements of the European Central Bank (ECB) in the period from 2001-2012. Our main findings indicate a good predictability of ECB policy decisions and remarkably stable perceptions about the ECB’s policy preferences.
    Keywords: Central bank communication; yield curve; spectral cojump estimator; high frequency tick-data
    JEL: E58 C14 C58
    Date: 2013–08
  5. By: Monica Billio (University of Venice, GRETA Association and School for Advanced Studies in Venice); Roberto Casarin (University of Venice, GRETA Association and School for Advanced Studies in Venice); Francesco Ravazzolo (Norges Bank (Central Bank of Norway) and BI Norwegian Business School); Herman K. van Dijk (Econometric Institute, Erasmus University Rotterdam, Econometrics Department VU University Amsterdam)
    Abstract: Interactions between the eurozone and US booms and busts and among major eurozone economies are analyzed by introducing a panel Markov-switching VAR model well suitable for a multi-country cyclical analysis. The model accommodates changes in low and high data frequencies and endogenous time-varying transition matrices of the country-specific Markov chains. The transition matrix of each Markov chain depends on its own past history and on the history of the other chains, thus allowing for modelling of the interactions between cycles. An endogenous common eurozone cycle is derived by aggregating country-specific cycles. The model is estimated using a simulation based Bayesian approach in which an efficient multi-move strategy algorithm is defined to draw common time-varying Markov-switching chains. Our results show that the US and eurozone cycles are not fully synchronized over the 1991-2013 sample period, with evidence of more recessions in the eurozone, in particular during the 90's when the monetary union was planned. Larger synchronization occurs at beginning of the Great Financial Crisis. Shocks affect the US 1-quarter in advance of the eurozone, but these spread very rapidly among economies. There exist reinforcement effects in the recession probabilities and in the probabilities of exiting recessions for both eurozone and US cycles, and substantial differences in the phase transitions within the eurozone. An increase in the number of eurozone countries in recession increases the probability of the US to stay within recession, while the US recession indicator has a negative impact on the probability to stay in recession for eurozone countries. Moreover, turning point analysis shows that the cycles of Germany, France and Italy are closer to the US cycle than other countries. Belgium, Spain, and Germany, provide more timely information on the aggregate recession than Netherlands and France.
    Keywords: Bayesian model, Panel VAR, Markov-switching, International business cycles, Interaction mechanisms
    Date: 2013–08–22
  6. By: Juillard, Michel (Banque de France); Le Bihan, Herve (Banque de France); Millard, Stephen (Bank of England)
    Abstract: In many countries, wage changes tend to be clustered in the beginning of the year, with wages being set for fixed durations of typically one year. This has been, in particular, documented in recent years for European countries using microeconomic data. Motivated by this evidence we build a model of uneven wage staggering, embedded in a standard DSGE model of the euro area, and investigate the monetary policy consequences of non-synchronised wage-setting. The model has the potential to generate responses to monetary policy shocks that differ according to the timing of the shock. Using a realistic calibration of the seasonality in wage-setting, based on a wide survey of European firms, the quantitative difference across quarters turns out however to be moderate. Relatedly, we obtain that the optimal monetary policy rule does not vary much across quarters.
    Keywords: Wage-setting; wage-staggering; wage synchronisation; monetary policy shocks; optimal simple monetary policy rules
    JEL: E27 E52
    Date: 2013–08–16
  7. By: Timo Henckel (Centre for Applied Macroeconomic Analysis, Australian National University); Gordon Menzies (Economics Discipline Group, University of Technology, Sydney); Daniel J. Zizzo (School of Economics and CBESS, University of East Anglia)
    Abstract: A puzzle from the Great Recession is an apparent mismatch between a fall in the persistence of European inflation rates, and the increased variability of expert forecasts of inflation. We explain this puzzle and show how country specific beliefs about inflation are still quite close to the European Central Bank target of 2% (what we call official target credibility) but the degree of anchoring to this target has gone down, implying an erosion of what we call anchoring credibility. A decline in anchoring credibility can explain increased forecast variance independently of any changes in inflation persistence, contrary to standard time series models.
    Keywords: Central bank credibility; excess volatility; euro; inferential expectations; inflation
    JEL: C51 D84 E31 E52
    Date: 2013–08–01
  8. By: Sara Bleninger
    Abstract: Manski’s partial identification allows less restrictive, therefore, more credible assumptions than the assumption of random treatment assignment to solve the evaluation problem. In this article the theory of partial identification is applied to the welfare effect of the euro cash changeover. When evaluating the impact of the euro cash changeover on individual welfare, Wunder et al. (2008) face the evaluation problem. Instead of arguing for a comparability of both treatment groups used (i.e. the British and the German Population), partial identification as a more robust technique is used for evaluating the effect of the euro cash changeover. Imposing less restrictive assumptions leaves out an answer about the direction of the welfare effect.
    Date: 2013
  9. By: John H. Makin (American Enterprise Institute)
    Abstract: Cyprus and other economically beleaguered nations should avoid deposit taxes and instead attempt to reassure their citizens of the security of their bank deposits if they hope to rebuild their economies.
    Keywords: Cyprus,banking,Economic outlook,Eurozone crisis
    JEL: A F
    Date: 2013–03
  10. By: Iwasaki, Ichiro; Tokunaga, Masahiro
    Abstract: In this paper, we conduct a meta-analysis of the literature that empirically examines the impact of foreign direct investment (FDI) on economic growth in Central and Eastern Europe and the former Soviet Union. We found that existing studies indicate a growth-enhancing effect of FDI in the region as a whole. The results of our meta-regression analysis suggest that the effect size and statistical significance of the reported estimates strongly depend on study conditions. In particular, the estimation period, data type, estimator, and type of FDI variable are important factors that explain the heterogeneity in the empirical results. The degree of freedom and the research quality greatly affect estimates of the FDI variable as well. We also found that the relevant studies fail to present genuine evidence of a non-zero FDI effect due to the presence of publication selection bias and insufficient numbers of empirical evidence. More research is necessary to identify the true effect.
    Keywords: economic transition, macroeconomic impacts of FDI, meta-analysis, publication selection bias, Central and Eastern Europe, former Soviet Union
    JEL: F21 F23 F43 P33
    Date: 2013–08

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