nep-eec New Economics Papers
on European Economics
Issue of 2013‒11‒16
nineteen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Conditional Eurobonds and the Eurozone Sovereign Debt Crisis By John Muellbauer
  2. Systemic Risk, Sovereign Yields and Bank Exposures in the Euro Crisis By Niccolò Battistini; Marco Pagano; Saverio Simonelli
  3. News Flow, Web Attention and Extreme Returns in the European Financial Crisis By Chouliaras, Andreas; Grammatikos, Theoharry
  4. The links between some European financial factors and the BRICS credit default swap spreads By Avouyi-Dovi, Sanvi; Ano Sujithan, Kuhanathan
  5. Bank-Lending Standards, Loan Growth and the Business Cycle in the Euro Area By Sylvia Kaufmann; Johann Scharler
  6. Central bank refinancing, interbank markets and the hypothesis of liquidity hoarding: evidence from a euro-area banking system By Affinito, Massimiliano
  7. Fiscal policy and external imbalances in a debt crisis: the Spanish case By Pablo Hernández de Cos; Juan F. Jimeno
  8. Exports and Capacity Constraints – A Smooth Transition Regression Model for Six Euro Area Countries By Ansgar Belke; Anne Oeking; Ralph Setzer
  9. Towards Deeper Financial Integration in Europe: What the Banking Union Can Contribute By Claudia M. Buch; T. Körner; B. Weigert
  10. Price effects of sovereign debt auctions in the Euro-zone: the role of the crisis By Beetsma, Roel; Giuliodori, Massimo; de Jong, Frank; Widijanto, Daniel
  11. Macroprudential policy instruments and economic imbalances in the euro area By Brzoza-Brzezina, Michał; Kolasa, Marcin; Makarski, Krzysztof
  12. Links between the trust in the ECB and its interest rate policy By Maciej Albinowski; Piotr Ciżkowicz; Andrzej Rzońca
  13. The Impact of Sovereign Credit Signals on Bank Share Prices during the European Sovereign Debt Crisis By Gwion Williams; Rasha Alsakka; Owain ap Gwilym
  14. Determinants of Spain’s decision to leave the European Monetary Union By Antonio Estella
  15. Risk-Return Trade-Off for European Stock Markets By Nektarios Aslanidis; Charlotte Christiansen; Christos S. Savva
  16. Predicting distress in European banks By Betz, Frank; Oprica, Silviu; Peltonen, Tuomas A.; Sarlin, Peter
  17. How to Measure Financial (In)Stability in Emerging Europe? By Petr Jakubik; Tomas Slacik
  18. The German Public and its Trust in the ECB: The Role of Knowledge and Information Search By Bernd Hayo; Edith Neuenkirch
  19. Structural change, aggregate demand and employment dynamics in the OECD, 1970-2010 By Jochen Hartwig

  1. By: John Muellbauer
    Abstract: This paper proposes that all new euro area sovereign borrowing be in the form of jointly guaranteed Eurobonds.� To avoid classic moral hazard problems and to insure the guarantors against default, each country would pay a risk premium conditional on economic fundamentals to a joint debt management agency.� This suggests that these bonds be called 'Euro-insurance-bonds'.� While the sovereign debt markets have taken increasing account of the economic fundamentals, the signal to noise ratio has been weakened by huge market volatility, so undercutting incentives for appropriate reforms and obscuring economic realities for voters.� This paper uses an econometric model to show that competitiveness, public and private debt to GDP, and the fall-out from housing market crises are the most relevant economic fundamentals.� Formula-based risk spreads based on these fundamentals would provide clear incentives for governments to be more oriented towards economic reforms to promote long-run growth than mere fiscal contraction.� Putting more weight on incentives that come from risk spreads, than on fiscal centralisation and the associated heavy bureaucratic procedures, would promote the principle of subsidiarity to which member states subscribe.� The paper compares Euro-insurance-bonds incorporating these risk spreads with other policy proprosals.
    Keywords: Sovereign spreads, eurobonds, eurozone sovereign debt crisis, subsidiarity
    JEL: E43 E44 G01 G10 G12
    Date: 2013–10–29
  2. By: Niccolò Battistini (Rutgers University); Marco Pagano (Università di Napoli Federico II, CSEF, EIEF and CEPR.); Saverio Simonelli (Università di Napoli "Federico II" and CSEF)
    Abstract: Since 2008, euro-area sovereign yields have diverged sharply, and so have the corresponding CDS premia. At the same time, banks’ sovereign debt portfolios featured an increasing home bias. We investigate the relationship between these two facts, and its rationale. First, we inquire to what extent the dynamics of sovereign yield differentials relative to the swap rate and CDS premia reflect changes in perceived sovereign solvency risk or rather different responses to systemic risk due to the possible collapse of the euro. We do so by decomposing yield differentials and CDS spreads in a country-specific and a common risk component via a dynamic factor model. We then investigate how the home bias of banks’ sovereign portfolios responds to yield differentials and to their two components, by estimating a vector error-correction model on 2008-12 monthly data. We find that in most countries of the euro area, and especially in its periphery, banks’ sovereign exposures respond positively to increases in yields. When bank exposures are related to the country-risk and common-risk components of yields, it turns out that (i) in the periphery, banks increase their domestic exposure in response to increases in country risk, while in core countries they do not; (ii) in most euro area banks respond to an increase in the common risk factor by raising their domestic exposures. Finding (i) hints at distorted incentives in periphery banks’ response to changes in their own sovereign’s risk. Finding (ii) indicates that, when systemic risk increases, all banks tend to increase the home bias of their portfolios, making the euro-area sovereign market more segmented.
    Keywords: sovereign yield differentials, dynamic latent factor model, home bias, vector error-correction model
    JEL: C32 C51 C58 G11 G15
    Date: 2013–10–28
  3. By: Chouliaras, Andreas; Grammatikos, Theoharry
    Abstract: We examine the existence of stock market contagion effects among three groups of countries: the Euro-periphery countries (Portugal, Ireland, Italy, Greece, Spain), the Euro-core countries (Germany, France, the Netherlands, Finland, Belgium), and the major European Union - but not euro-countries (Sweden, UK, Poland, Czech Republic, Denmark). Using daily stock market data from January 2004 till March 2013, contagion effects for the tails of the marginal distributions are present for the Pre-crisis and the Euro-crisis periods within the Euro-periphery countries and from the Euro-periphery group to the Non-Euro and the Euro-core groups. We do not find a significant change in the contagion transmission mechanism when comparing the two periods, but for the Euro-crisis periods the extreme returns have a higher magnitude. Finally, we propose a connection between extreme stock market returns, the Web Attention index and two News Flow factors. The Euro-periphery Web Attention and News Flow variables significantly affect the probabilities of extreme bottom returns for the Euro-periphery, the Non-euro and the Euro-core groups. The effect is asymmetric in most of the cases since the Euro-periphery Web Attention and News Flow factors do not affect the probabilities of extreme top returns, with a few exceptions. More Web Attention and more bad news for the Euro-periphery in times of crisis are associated with higher probabilities of extreme bottom returns within and across groups. Granger-causality tests show that the News Pessimism and the News Relevance factors exhibit a two-way causality with the stock market movements while the Web Search Volume Index (SVI) one-way Granger-causes stock markets and extreme bottom returns in the three country groups.
    Keywords: Financial Crisis, Contagion, Web Attention, News Flow.
    JEL: D83 G0 G01 G14 G15
    Date: 2013–10–31
  4. By: Avouyi-Dovi, Sanvi; Ano Sujithan, Kuhanathan
    Abstract: Emerging economies and especially the BRICS countries have strong economic ties with the euro area. In addition, the financial crisis in the euro area may have effects on other markets or areas, especially those of the main emerging markets. Credit default swap (CDS) spreads are relevant indicators of credit risks. After identifying a set of fundamental determinants for sovereign CDS spreads, including euro area financial factors and computing Markov switching unit root test, we estimate Markov switching models over the period from January 2002 to August 2012, in order to examine the behaviour of sovereign CDS spreads in the BRICS countries. , i) We detect two different regimes for the BRICS, that finding is backed by conventional robustness checks and economic events; ii) most of the explanatory variables are involved in the determining theses regimes. Thus both financial and real factors have an impact on the relations defining each regime, except for Russia which is only impacted by financial ones. Especially, euro area financial indicators are largely involved in the BRICS sovereign CDS spreads’ dynamics. Besides, the robustness check supports the use of euro area variables as determinants of BRICS sovereign CDS spreads.
    Keywords: Credit default swap; BRICS; emerging markets; euro area financial markets indicators; Markov switching;
    JEL: C13 G12 G15
    Date: 2013–06
  5. By: Sylvia Kaufmann; Johann Scharler
    Abstract: We study the relationship between bank lending standards, loan growth and the business cycle in the euro area and the US within a vector error correciton model using Bayesian estimation methods. To deal with the short data series available for the euro area, we exploit information from the estimated US system to improve the estimation of the euro area system. We find that tighter bank lending standards are associated with lower loan growth as well as lower output growth in both areas. Differences in reactions appear in the strength and the persistence of responses.
    Keywords: Bank Lending Standards, Bayesian Cointegration Analysis
    JEL: E40 E50
    Date: 2013–10
  6. By: Affinito, Massimiliano
    Abstract: This paper tests the hypothesis of liquidity hoarding in the Italian banking system during the 2007-2011 global financial crisis. According to this hypothesis, in periods of crisis, interbank markets stop working and central banks’ interventions are ineffective because banks hoard the liquidity injected rather than channelling it on to other banks and the real economy. The test uses monthly data at banking-group level for all intermediaries operating in Italy between January 1999 and August 2011. This is the first paper to use micro data to analyse the relationship between single banks’ positions vis-à-vis the central bank and the interbank market. The results show that the Italian interbank market functioned well even during the crisis, and, contrary to widespread conjecture, the liquidity injected by the Eurosystem was intermediated among banks and towards the real economy. This finding is robust to the use of several estimation methods and data on the different segments of the money market. JEL Classification: G21, E52, C30
    Keywords: central bank refinancing, financial crisis, Interbank Market, liquidity
    Date: 2013–11
  7. By: Pablo Hernández de Cos (Banco de España); Juan F. Jimeno (Banco de España)
    Abstract: In this paper we reflect on the role that fiscal policy could play in the resolution of the crisis in Eurozone countries crippled by both public and private debt, and beset by growth and competitiveness problems. As an illustration, we revisit the Spanish case, a paradigmatic example of the economic difficulties created by high debt and internal and external imbalances. After describing the build-up of fiscal and macroeconomic imbalances in Spain during the period 1995-2007, we first discuss how the correction of macroeconomic imbalances conditions progress on the fiscal consolidation front and, secondly, how fiscal consolidation affects the correction of imbalances. We conclude that the role that national fiscal policies can play in these countries to expand demand and reduce the costs of solving external and internal imbalances seems limited. Also, overall, the best contribution that fiscal policy can achieve under these constraints is through a better targeting of government expenditures and tax reforms, aimed at introducing permanent measures to stabilise debt ratios. These could then be combined with productivity-enhancing structural reforms and with improvements in product market regulation to increase competition, so that the short-term costs of the internal devaluation required are reduced
    Keywords: macro imbalances, fiscal policy, euro crisis
    JEL: E62 H30 J11
    Date: 2013–11
  8. By: Ansgar Belke; Anne Oeking; Ralph Setzer
    Abstract: Traditional specifications of export equations incorporate foreign demand as a demand pull factor and the real exchange rate as a relative price variable. However, such standard export equations have failed to explain the export performance of euro area countries during the crisis period. In particular, the significant gains in export market shares in a number of vulnerable euro area crisis countries did not coincide with an appropriate improvement in price competitiveness. This paper argues that, under certain conditions, firms consider export activity as a substitute of serving domestic demand. The strength of the link between domestic demand and exports is dependent on capacity constraints. Our econometric model for six euro area countries suggests domestic demand pressure and capacity constraint restrictions as additional variables of a properly specified export equation. As an innovation to the literature, we assess the empirical significance through the logistic and the exponential variant of the non-linear smooth transition regression model. In the first case, we differentiate between positive and negative changes in capacity utilization and in the second case between small and large changes of the same transition variable. We find that domestic demand developments are relevant for the short-run dynamics of exports when capacity utilization is low. For some countries, we also find evidence that the substitution effect of domestic demand on exports turns out to be stronger the larger is the deviation of capacity utilization from its average value over the cycle.
    Keywords: Domestic demand pressure; error correction models; asymmetry; play-hysteresis; modeling techniques; switching/spline regression; smooth transition models; exports; sunk costs
    JEL: F14 C22 C50 C51
    Date: 2013–10
  9. By: Claudia M. Buch; T. Körner; B. Weigert
    Abstract: The agreement to establish a Single Supervisory Mechanism in Europe is a major step towards a Banking Union, consisting of centralized powers for the supervision of banks, the restructuring and resolution of distressed banks, and a common deposit insurance system. In this paper, we argue that the Banking Union is a necessary complement to the common currency and the Internal Market for capital. However, due care needs to be taken that steps towards a Banking Union are taken in the right sequence and that liability and control remain at the same level throughout. The following elements are important. First, establishing a Single Supervisory Mechanism under the roof of the ECB and within the framework of the current EU treaties does not ensure a sufficient degree of independence of supervision and monetary policy. Second, a European institution for the restructuring and resolution of banks should be established and equipped with sufficient powers. Third, a fiscal backstop for bank restructuring is needed. The ESM can play a role but additional fiscal burden sharing agreements are needed. Direct recapitalization of banks through the ESM should not be possible until legacy assets on banks’ balance sheets have been cleaned up. Fourth, introducing European-wide deposit insurance in the current situation would entail the mutualisation of legacy assets, thus contributing to moral hazard.
    Keywords: banking union, Europe, single supervisory mechanism, risk sharing
    JEL: E02 E42 G18
    Date: 2013–10
  10. By: Beetsma, Roel; Giuliodori, Massimo; de Jong, Frank; Widijanto, Daniel
    Abstract: Exploring the period since the inception of the euro, we show that secondary-market yields on Italian public debt increase in anticipation of auctions of new issues and decrease after the auction, while no or a smaller such effect is present for German public debt. However, these yield movements on the Italian debt are largely confined to the period of the crisis since mid-2007. We also find that there is some tendency of the yield movements to be larger when the demand for the new issue is smaller relative to its supply. Our results are consistent with a framework in which a small group of primary dealers require compensation for inventory risk and this compensation needs to be higher when market uncertainty is larger. We also find that the secondary-market behaviour of series with a maturity close to the auctioned series, but for which there is no auction, is very similar to the secondary-market behaviour of the auctioned series. These findings support an explanation of yield movements based on the behaviour of primary dealers with limited risk-bearing capacity. JEL Classification: G12, G18
    Keywords: Auctions, bid-to-cover ratio, crisis, euro-zone, event, Germany, Italy, primary dealers, public debt, study, yield movements
    Date: 2013–09
  11. By: Brzoza-Brzezina, Michał; Kolasa, Marcin; Makarski, Krzysztof
    Abstract: Since its creation the euro area suffered from imbalances between its core and peripheral members. This paper checks whether macroprudential policy tools - applied in a countercyclical fashion as known from the DSGE literature to the peripheral countries - could contribute to providing more macroeconomic stability in this region. To this end we build a two-economy macrofinancial DSGE model and simulate the effects of macroprudential tools under the assumption of asymmetric shocks hitting the core and the periphery. We find that a countercyclical application of macroprudential tools is able to partly make up for the loss of independent monetary policy in the periphery. Moreover, LTV policy seems more efficient than regulating capital adequacy ratios. However, for the policies to be effective, they must be set individually for each region. Area-wide policy is almost ineffective in this respect. JEL Classification: E32, E44, E58
    Keywords: DSGE with banking sector, euro-area imbalances, Macroprudential policy
    Date: 2013–09
  12. By: Maciej Albinowski (Warsaw School of Economics); Piotr Ciżkowicz (Warsaw School of Economics); Andrzej Rzońca (Warsaw School of Economics and Monetary Policy Council in Narodowy)
    Abstract: We contribute to the new, albeit fast-growing empirical literature on the determinants of trust in central banks. Like in most other studies we use panel data models based on the Eurobarometer survey on trust in the European Central Bank. Firstly, we confirm the main conclusion from previous studies that the trust in the ECB has suffered from the crisis’ outburst. Moreover, households perceive the ECB’s responsibility for the occurrence of the crisis to go beyond the responsibility of other institutions. This finding casts some doubt on the central bank’s ability to manage expectations in a country having been hit by a severe negative demand shock, while this ability is precondition of the central banks’ power to boost aggregate demand when its interest rates are at the zero lower bound. Secondly (and most importantly), in addition to previous studies, we examine the links between the trust in the ECB and its policy. Our main result is that when households have pessimistic expectations, aggressive cuts in interest rates have an adverse effect on their trust in central bank. This result is in accordance with the ‘lack-of-confidence shock’ hypothesis developed by Schmitt-Grohé and Uribe (2012) and go against the ‘fundamental shock’ hypothesis which would imply positive effects of aggressive cuts for trust in the ECB. These findings are robust to changes in the estimation method, the definition of the lack of confidence shock, control variables and countries under consideration. We also show that it cannot be easily rejected as spurious.
    Keywords: trust in central banks, zero lower bound, lack-of-confidence shock, Eurobarometer, panel data
    JEL: C23 E58 H12
    Date: 2013
  13. By: Gwion Williams (Bangor University); Rasha Alsakka (Bangor Business School); Owain ap Gwilym (Bangor Business School)
    Abstract: The ongoing financial crisis has drawn attention to the role of credit rating agencies (CRAs). We investigate the relative impacts of sovereign actions by different CRAs on the share prices of major European banks during the financial crisis. We examine how bank abnormal returns are affected by sovereign rating changes, watch and outlook announcements, to capture how the crisis spills over across countries and from the sovereign to the financial sector. We find that CRAs’ signals affect share prices, although there is no evidence that CRA actions are the dominant force leading to falling share prices during the crisis.
    Keywords: European sovereign debt crisis; Credit signals; Spillover effect; Credit outlook/watch; Bank shares
    JEL: G15 G21 G24
    Date: 2013–10
  14. By: Antonio Estella
    Abstract: Spain is the Member State of the European Union whose public opinion is most in favour to exit the Eurozone. In this context, there is a growing social and political debate on this issue in this Member State. This paper analyses at a theoretical level the main economic and socio political determinants that Spain would face if it were considering to take a decision to leave the EMU.
    Keywords: Spain
    Date: 2013–07–09
  15. By: Nektarios Aslanidis (Department of Economics, FCEE, University Rovira Virgili); Charlotte Christiansen (Cyprus University of Technology); Christos S. Savva (Aarhus University and CREATES)
    Abstract: This paper adopts dynamic factor models with macro-fi?nance predictors to revisit the intertemporal risk-return relation in ?five large European stock markets. We identify country specifi?c, Euro area, and global factors to determine the conditional moments of returns considering the role of higher-order moments as additional measures of risk. The preferred combination of factors varies across countries. In the linear model, there is a strong but negative relation between conditional returns and conditional volatility. A Markov switching model describes the risk-return trade-off well. A number of variables have explanatory power for the states of the European stock markets.
    Keywords: Risk-return trade-off, Dynamic factor model, Markov switching, Macro-?nance predictors, Higher order moments
    JEL: C22 G11 G12 G17
    Date: 2013–07–29
  16. By: Betz, Frank; Oprica, Silviu; Peltonen, Tuomas A.; Sarlin, Peter
    Abstract: The paper develops an early-warning model for predicting vulnerabilities leading to distress in European banks using both bank and country-level data. As outright bank failures have been rare in Europe, the paper introduces a novel dataset that complements bankruptcies and defaults with state interventions and mergers in distress. The signals of the early warning model are calibrated not only according to the policy-maker’s preferences between type I and II errors, but also to take into account the potential systemic relevance of each individual financial institution. The key findings of the paper are that complementing bank specific vulnerabilities with indicators for macro-financial imbalances and banking sector vulnerabilities improves model performance and yields useful out-of-sample predictions of bank distress during the current financial crisis. JEL Classification: E44, E58, F01, F37, G01
    Keywords: bank distress, early-warning model, prudential policy, signal evaluation
    Date: 2013–10
  17. By: Petr Jakubik (European Insurance and Occupational Pensions Authority (EIOPA), Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Tomas Slacik (Oesterreichische Nationalbank, Foreign Research Division)
    Abstract: The importance of assessing financial stability in emerging Europe has increased rapidly since the recent financial crisis. Against this background, in the present paper we contribute to the existing literature in a twofold way: First, by using a broad range of indicators from money, bond, equity and foreign exchange markets, we develop a comprehensive financial instability index (FII) that gauges the level of financial market stress in some key Central, Eastern and Southeastern European (CESEE) countries. In a second step, we perform a panel estimation to investigate which macroprudential indicators that cover both internal and external imbalances explain the evolution of our FII over the past more than 15 years. Our analysis suggests that both the levels and changes of some indicators (such as credit growth and the level of private sector indebtedness) play an important role for financial stability. Moreover, we find that the impact of some key indicators on financial (in)stability is nonlinear and varies over time depending on market sentiment.
    Keywords: Financial stability, crisis, macroprudential framework, emerging Europe, external and internal imbalances
    JEL: G28 G32 G33 G38
    Date: 2013–09
  18. By: Bernd Hayo (University of Marburg); Edith Neuenkirch (University of Marburg)
    Abstract: In this paper, we analyse the effects of objective and subjective knowledge about mone-tary policy, as well as the information search patterns, of German citizens on trust in the ECB. We rely on a unique representative public opinion survey of German households conducted in 2011. We find that subjective and factual knowledge, as well as the desire to be informed, about the ECB foster citizens’ trust. Specific knowledge about the ECB is more influential than general monetary policy knowledge. Objective knowledge is more important than subjective knowledge. However, an increasing intensity of media usage, especially newspaper reading, has a significantly negative influence on trust. We con-clude that the only viable way for the ECB to generate more trust in itself is to spread monetary policy knowledge.
    Keywords: ECB, Economic knowledge, German public attitudes, Institutional trust
    JEL: D83 E52 E58
    Date: 2013
  19. By: Jochen Hartwig (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: The paper combines Baumol’s model of structural change with a model of aggregate demand growth in the Keynesian-Kaleckian tradition to predict the dynamics of aggregate employment. The model for the demand regime is estimated with – and Baumol’s model for the productivity regime is calibrated on – OECD data. The trajectory for employment predicted by the combination of the two models tracks the actual employment dynamics in the OECD over the period 1970-2010 remarkably well.
    Keywords: Structural change, demand growth, productivity growth, employment dynamics, OECD panel data
    JEL: C23 E12 E13 E20 O41
    Date: 2013–10

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