nep-eec New Economics Papers
on European Economics
Issue of 2014‒01‒10
nine papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Inflation targeting, flexible exchange rates, and macroeconomic performance since the Great Revolution By Andersen, Thomas Barnebeck; Malchow-Møller, Nikolaj; Nordvig, Jens
  2. How much random does European Union walk? A time-varying long memory analysis By A. Sensoy; Benjamin Miranda Tabak
  3. The International Finance Multiplier in Business Cycle Fluctuations By Naohisa Hirakata; Takushi Kurozumi
  4. Growth and competitiveness as factors of Eurozone external imbalances : evidence and policy implications By Sanchez , Jose Luis Diaz; Varoudakis, Aristomene
  5. Some Thoughts On The Spanish Economy After Five Years Of Crisis By Eloísa Ortega; Juan Peñalosa
  6. Asset Allocation and Monetary Policy: Evidence from the Eurozone By Harald Hau; Sandy Lai
  7. The Impacts of Financial Crisis on Sovereign Credit Risk Analysis in Asia and Europe By Min Zhang; Adam W. Kolkiewicz; Tony S. Wirjanto; Xindan Li
  8. Inside PESSOA - A Detailed Description of the Model By Vanda Almeida; Gabriela Lopes de Castro; Ricardo Mourinho Félix; Paulo Júlio; José R. Maria
  9. Supervisory transparency in the European banking union By Christopher Gandrud; Mark Hallerberg

  1. By: Andersen, Thomas Barnebeck (Department of Business and Economics); Malchow-Møller, Nikolaj (Department of Business and Economics); Nordvig, Jens (Nomura Securities)
    Abstract: Has inflation targeting (IT) conferred benefits in terms of economic growth on countries that followed this particular monetary policy strategy during the crisis period 2007-12? Analyzing the sample of all OECD countries, we answer this question in the affirmative: Countries with an IT monetary regime with flexible exchange rates weathered the crisis much better than countries with other regimes. This includes in particular countries with fixed exchange rate regimes, but also countries with flexible exchange rates without IT. The result holds in the full sample; it holds when we exclude the so-called peripheral Eurozone countries (Greece, Italy, Ireland, Portugal, and Spain); and it holds when we exclude all Eurozone countries. It is, in other words, a robust empirical finding. We demonstrate that part of the explanation for this difference in growth performance is found in differences in export performance during the initial years of the crisis, which in turn is explained by real exchange rate depreciations. However, this cannot explain the entire difference in performance between countries with flexible and fixed exchange rates in the aftermath of the Great Recession. IT seems also to confer other benefits on the countries above and beyond the effect from currency depreciation.
    Keywords: Inflation targeting; flexible exchange rates; economic growth; OEDC; Great Recession
    JEL: E42 E58 O43
    Date: 2013–12–21
  2. By: A. Sensoy; Benjamin Miranda Tabak
    Abstract: This paper proposes a new efficiency index to model time-varying inefficiency in stock markets. We focus on European stock markets and show that they have different degrees of time-varying efficiency. We observe that the 2008 global financial crisis has had an adverse effect on almost all EU stock markets. However, the Eurozone sovereign debt crisis has had a significant adverse effect only on the markets in France, Spain and Greece. For the late members, joining EU does not have a uniform effect on stock market efficiency. Our results have important implications for policy makers, investors, risk managers and academics
    Date: 2013–12
  3. By: Naohisa Hirakata (Director and Senior Economist, Institute for Monetary and Economic Studies (currently, Financial System and Bank Examination Department), Bank of Japan (E-mail:; Takushi Kurozumi (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: In the wake of the gGreat Recessionh of 2007-09, recent studies have emphasized the importance of the ginternational finance multiplier (IFM)h mechanism for inter- national business cycles, using calibrated two-country models. This paper develops and estimates a two- country model with the IFM mechanism using 21 time series from the Euro Area (EA) and the US. The estimation results show that during the past quarter-century, EA shocks to the external finance premium and net worth not only had a considerable effect on the EA economy together with an EA neutral technology shock, but also were transmitted to the US through the IFM mechanism and had a great impact on the US economy together with a US marginal efficiency of investment (MEI) shock. The rate of EA neutral technological change and the US MEI shock then have strong correlations with lending attitudes of banks in the EA and the US, and thus the EA neutral technology shock and the US MEI shock are likely to represent disturbances to the banking sectors in the EA and the US. These findings therefore demonstrate that financial factors are important sources of EA and US business cycle fluctuations over the past quarter-century.
    Keywords: Business cycle fluctuations, International finance multiplier mechanism, Financial accelerator mechanism
    JEL: F3 F4
    Date: 2013–12
  4. By: Sanchez , Jose Luis Diaz; Varoudakis, Aristomene
    Abstract: The paper assesses the contribution of key factors associated with external imbalances in the Eurozone through the estimation of a panel-data vector autoregressive model over 1975-2011. Growth fluctuations, initially associated with demand booms triggered by unusually low interest rates and later with demand contractions resulting from the crisis and policy adjustments, have been key drivers of current account fluctuations. Changes in competitiveness, measured by real exchange rates or unit labor costs, have played a less important role. Demand shocks have contributed more to current account balance dynamics in the Eurozone periphery than in the core, whereas competitiveness has been a less prominent factor in the periphery but relatively more important in the core. Changes in competitiveness are positively associated with changes in growth. Preventing imbalances from building up in a context of growing financial integration and easy finance warrants enhanced mutual surveillance of fiscal imbalances, but also better regulation of credit markets to prevent excess leverage and concentration of lending in investments prone to speculative bubbles. Coordination of fiscal policy across the Eurozone would facilitate the management of external imbalances without placing an often unwarranted burden on fiscal tightening in countries with sound fiscal positions affected by credit booms. The policies of internal devaluation implemented in the periphery, aimed at promoting external competitiveness, may have had only limited effectiveness in restoring the external balance to equilibrium.
    Keywords: Currencies and Exchange Rates,Economic Theory&Research,Debt Markets,Emerging Markets,Macroeconomic Management
    Date: 2013–12–01
  5. By: Eloísa Ortega (Banco de España); Juan Peñalosa (Banco de España)
    Abstract: This paper briefl y describes some features of the situation of the Spanish economy after five years of crisis, a task which is easier now that this period can be analysed from a certain perspective. The crisis prompted a substantial readjustment of the main Spanish macroeconomic aggregates, affecting the level and composition of GDP, employment and the balance sheet position of the institutional sectors. During this period some of the imbalances that built up during the upturn have been corrected and several key variables are currently at around the average European levels. All told, the legacy of the crisis, in terms of the magnitude of unemployment and of the still high levels of indebtedness, makes for a complex outlook and suggests that the recovery will be gradual and not free of uncertainty. This uncertainty mainly affects the functioning of the economy’s adjustment mechanisms, particularly those working through the channels of competitiveness and of private sector balance sheets. Despite the depth of the crisis in Spain, the progress made in the reforms on various fronts is, on balance, signifi cant. From the perspective provided by the analysis of the crisis in this paper, supply-side policies will have to play a major role in the current phase of the cycle to enable the recovery to proceed fi rmly.
    Keywords: Spanish economy, economic crisis, adjustment, rebalancing, internal devaluation,competitiveness, balance sheet position, indebtedness, reforms
    JEL: E60 E65 F32 G01 H12
    Date: 2013–12
  6. By: Harald Hau (University of Geneva and Swiss Finance Institute and Hong Kong Institute for Monetary Research); Sandy Lai (The University of Hong Kong)
    Abstract: The eurozone has a single short-term nominal interest rate, but monetary policy conditions measured by either real short-term interest rates or Taylor rule residuals varied substantially across countries in the period between 2003-2010. We use this cross-country variation in the (local) tightness of monetary policy conditions to examine its influence on equity and money market flows. In line with a powerful risk-shifting channel, we find that fund investors in countries with lower real interest rates shift their portfolio investment out of the money market and into the riskier equity market. This produces the strongest equity price increase in countries where domestic institutional investors hold a large share of the countries' stock market capitalization.
    Keywords: Monetary Policy, Asset Price Inflation, Risk Seeking, Taylor Rule Residuals
    JEL: G11 G14 G23
    Date: 2013–11
  7. By: Min Zhang (School of Management and Engineering, Nanjing University, China); Adam W. Kolkiewicz (Department of Statistics & Actuarial Science, University of Waterloo, Canada); Tony S. Wirjanto (Department of Statistics & Actuarial Science, School of Accounting & Finance, University of Waterloo, Canada); Xindan Li (School of Management and Engineering, Nanjing University, China)
    Abstract: We investigate the nature of sovereign credit risk for selected Asian and European countries based on a set of sovereign CDS data over an eight-year period that includes the episode of the 2008-2009 global financial crisis. The principal component analysis results indicate that there exists strong commonality in sovereign credit risk among the countries studied in this paper following the crisis. In addition, the regression results show that commonality is importantly associated with both local and global financial and economic variables. There are also important differences in the sovereign of credit risk behavior between Asian and European countries. Specifically, we find that foreign reserve, global stock market, and volatility risk premium, affect Asian and European sovereign credit risks in the opposite direction. Lastly, we model the arrival rates of credit events as a square-root diffusion process from which a pricing model is constructed and estimated over pre and post-crisis periods. The resulting model is used to decompose credit spreads into risk premium and credit-event components. For most countries in our study, credit-event components weight more than risk-premiums, suggesting that, in the long term, investors are perhaps more concerned with the prospect of sovereign-specific credit events than systemic sovereign credit risks.
    Date: 2013–12
  8. By: Vanda Almeida; Gabriela Lopes de Castro; Ricardo Mourinho Félix; Paulo Júlio; José R. Maria
    Abstract: This article presents a detailed description of PESSOA - Portuguese Economy Structural Small Open Analytical model. PESSOA is a dynamic general equilibrium model that can be applied to any small economy integrated in a monetary union. The main theoretical reference behind its structure is Kumhof, Muir, Mursula, and Laxton (2010). The model features non-Ricardian characteristics, a multi-sectoral production structure, imperfect market competition, and a number of nominal, real, and financial rigidities. PESSOA has been calibrated to match Portuguese and euro area data and used to illustrate a number of key macroeconomic issues, ranging from the effects of structural reforms to alternative fiscal policy options.
    JEL: E62 F41 H62
    Date: 2013
  9. By: Christopher Gandrud; Mark Hallerberg
    Abstract: Bank supervisors should provide publicly accessible, timely and consistent data on the banks under their jurisdiction. Such transparency increases democratic accountability and leads to greater market efficiency. There is greater supervisory transparency in the United States compared to the member states of the European Union. The US supervisors publish data quarterly and update fairly detailed information on bank balance sheets within a week. By contrast, based on an attempt to locate similar data in every EU country, in only 11 member states is this data at least partially available from supervisors, and in no member state is the level of transparency as high as in the US. Current and planned European Union requirements on bank transparency are either insufficient or could be easily sidestepped by supervisors. A banking union in Europe needs to include requirements for greater supervisory transparency.
    Date: 2014–01

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