nep-eec New Economics Papers
on European Economics
Issue of 2014‒02‒15
thirteen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. The negative feedback loop between banks and sovereigns By Paolo Angelini; Giuseppe Grande; Fabio Panetta
  2. Financial sector-output dynamics in the euro area: Non-linearities reconsidered By Schleer, Frauke; Semmler, Willi
  3. Are there any contagion effects from Greek bonds? By Pragidis, Ioannis; Chionis, Dionisios
  4. European Integration: Partisan Motives or Economic Benefits? By Patricia Esteve-González; Bernd Theilen
  5. Econometric analysis of regime switches and of fiscal multipliers By Sylvérie Herbert
  6. Eurozone Macroeconomic Framework: Reducing Internal and External Imbalances By Wood, richard
  7. Household Risk Management and Actual Mortgage Choice in the Euro Area By Michael Ehrmann; Michael Ziegelmeyer
  8. A multi-country DSGE model with incomplete Exchange Rate Pass-through: application for the Euro area By Tovonony Razafindrabe
  9. Towards a Banking Union: Open issues. A report. By Christian de Boissieu
  10. Assessing the link between price and financial stability By Christophe Blot; Jérôme Creel; Paul Hubert; Fabien Labondance; Francesco Saraceno
  11. A General Financial Transactions Tax. Motives, Effects and Implementation According to the Proposal of the European Commission By Stephan Schulmeister
  12. Prospective Ageing and Economic Growth in Europe By Jesus Crespo Cuaresma; Martin Lábaj; Patrik Pruzinský
  13. Using Twitter to Model the EUR/USD Exchange Rate By Dietmar Janetzko

  1. By: Paolo Angelini (Banca d'Italia); Giuseppe Grande (Banca d'Italia); Fabio Panetta (Banca d'Italia)
    Abstract: More than three years since the outbreak of the sovereign debt crisis in the euro area the banking systems of several countries remain exposed to the vagaries of government bond markets. The paper analyzes the different channels through which sovereign risk affects banking risk (and vice versa), presents some new evidence on bank-sovereign links, and discusses policy options for addressing the related risks.
    Keywords: sovereign risk, sovereign debt crisis, global financial crisis, banking sector risk, bank regulation, contagion, credit crunch
    JEL: E44 E51 E58 G01 G21 G28 H63
    Date: 2014–01
  2. By: Schleer, Frauke; Semmler, Willi
    Abstract: We analyze the feedback mechanisms between economic downturns and financial stress for several euro area countries. Our study employs newly constructed financial condition indices that incorporate banking variables extensively. We apply a non-linear Vector Smooth Transition Autoregressive (VSTAR) model for investigating instabilities in the link between the financial sector and economic activity. The VSTAR model allows for non-linear dynamics and regime changes between low and high stress regimes. It can also replicate the regime-specific amplification effects shown by our theoretical model. The amplification effects, however, change over time. Specifically after the Lehman collapse, we observe the presence of strong non-linearities and amplification mechanisms for some euro area countries. Thus, these strong amplification effects appear to be related to rare but large events, and to a low-frequency financial cycle. Prior to the financial crisis outbreak we find corridor stability even if the financial sector shock takes place in a high stress regime. More important seems to be the shock propagation over time in the economy. Only with the occurrence of the rare but large events we find strong endogenous feedback loops and a loss of stability as described by the high stress regime of our theoretical model. The economy leaves the corridor of stability and is prone to adverse feedback loops. --
    Keywords: Vector STAR,financial stress,financial cycle,real economy,regime-switching,euro area
    JEL: E2 E44 G01
    Date: 2014
  3. By: Pragidis, Ioannis (Democritus University of Thrace, Department of Economics); Chionis, Dionisios (Democritus University of Thrace, Department of Economics)
    Abstract: Since the onset of the global financial crisis, the sovereign risk premium differential and associated government bond yields have been widening so much as to cause the Eurozone crisis. The stylized facts of the 10-year Greek government bond yield attract much interest since there are deepened fears of this spreading to the government bonds of other European countries. Moreover, the impact of the Greek bond market on other European countries during the crisis period has not been examined adequately in the international literature. By employing a set of wellestablished econometric methods, in which we take into account the presence of heteroskedasticity, we do not find any evidence for the existence of contagious effects stemming from the Greek 10-year government bonds to the government bond markets of other European countries.
    Keywords: Greek crisis; sovereign bonds; contagion; EGARCH; dynamic correlation
    JEL: G01
    Date: 2014–01–30
  4. By: Patricia Esteve-González; Bernd Theilen
    Abstract: In this paper we examine the influence of economic factors on partisan support for European integration over the last three decades. We find that partisan support is larger in ‘poorer’ countries with direct economic benefits from EU membership. On the other hand, parties in countries affected by the Maastricht criteria are more Euro-sceptical. We also find weak evidence for larger partisan support in countries with more developed welfare states, and that the support for European integration fluctuates in parallel with the business cycle. Finally, our results indicate that the importance of economic factors in determining partisan support for European integration has grown in recent periods.
    Keywords: European Integration; Partisan Ideology; Maastricht Criteria; European Budget; Benefits from Trade
    JEL: F42 F53 F55 H60
    Date: 2014–02
  5. By: Sylvérie Herbert (Sciences-po)
    Abstract: Debates on the appropriate response of fiscal policy to economic downturns, such as the debates on the merits of austerity measures in Europe, have been centered on the size of the fiscal multipliers. Indeed, empirical and theoretical evidence suggests larger multipliers at times of recession than in expansions,thereby conditioning the success of fiscal consolidation - the higher the multiplier,the more costly the austerity would be in terms of growth of output. We extend the technique of vector autoregressions (VARs) to account for the possibility of time-variant fiscal multipliers for France, Germany, Italy and the United States. We estimate a 3-variable non linear smooth transition vector autoregression, following Auerbach and Gorodnichenko (2012a) Our results suggest that the output multiplier of government purchases is significantly higher in recessions than expansions for the United States.France,and Germany.
    Keywords: Fiscal policy, smooth transition vector autoregression STVAR, fiscal multipliers, impulse response function,monetary policy.
    JEL: E62 E63 H50
    Date: 2014–02
  6. By: Wood, richard
    Abstract: This article reviews internal and external balance policy issues in the Eurozone. The Swan diagram is used as a framework for assessing the policy actions needed to simultaneously restore both internal and external balance in selected Eurozone countries. A critical assessment is provided of using unit labour costs as an indicator of external competitiveness. It is argued that current macroeconomic policy settings are contributing to declining incomes, rising unemployment, high public debt and deflation, while failing to correct intra-Eurozone balance of payments disequilibria. A new macroeconomic policy plan is outlined for restoring economic growth and reducing external imbalances without raising public debt.
    Keywords: Macroeconomic policy; internal and external balance; competitiveness; public debt; deflation.
    JEL: E61
    Date: 2014–02–10
  7. By: Michael Ehrmann; Michael Ziegelmeyer
    Abstract: Mortgages constitute the largest part of household debt. An essential choice when taking out a mortgage is between fixed-interest-rate mortgages (FRMs) and adjustable-interest-rate mortgages (ARMs). However, so far, no comprehensive cross-country study has analyzed what determines household demand for mortgage types, a task that this paper takes up using new data for the euro area. Our results support the hypothesis of Campbell and Cocco (2003) that the decision is best described as one of household risk management: income volatility reduces the take-out of ARMs, while increasing duration and relative size of the mortgages increase it. Controlling for other supply factors through country fixed effects, loan pricing also matters, as expected, with ARMs becoming more attractive when yield spreads rise. The paper also conducts a simulation exercise to identify how the easing of monetary policy during the financial crisis affected mortgage holders. It shows that the resulting reduction in mortgage rates produced a substantial decline in debt burdens among mortgage-holding households, especially in countries where households have higher debt burdens and a larger share of ARMs, as well as for some disadvantaged groups of households, such as those with low income.
    Keywords: Length: 39 pages
    JEL: D12 E43 E52 G21
    Date: 2014–01
  8. By: Tovonony Razafindrabe
    Abstract: This paper develops an estimated multi-country open economy dynamic stochastic general equilibrium (DSGE) model with incomplete Exchange Rate Pass-Through (ERPT) for the Euro-area. It is designed to model global international linkages and to assess international transmission of shocks under an endogenous framework and incomplete ERPT assumption. On the one hand, we relax the small open economy framework (SOEF) but derive a canonical representation of the equilibrium conditions to maintain analytical tractability of the complex international transmission mechanism underlying the model. Namely, the model considers economies of different size that are open and endogenously related. On the other hand, in order to take into account international linkages, possible cointegration relationships within domestic variables and between domestic and foreign variables, and the role of common unobserved and observed global factors such as the oil price, we use the Global VAR model to estimate the steady state of observed endogenous variables of the multi-country DSGE model. Namely, steady states are computed as long-horizon forecasts from a reduced-form cointegrating GVAR model. ERPT analysis conducted from the estimated multi-country DSGE model for the Euro-area in relation with its …ve main trade partners which are the United Kingdom, the United States, China, Japan and Switzerland yields the following results. First, exchange rate volatility contributes to a large part of import price inflation variation of the Euro-area in contrast to foreign mark-up shocks. Second, deviation from inflation objective of the foreign trade partners contributes to another source of the Euro-area import price variability. Third, nominal rigidity induces a persistent but a lower impact of the exchange rate changes on import inflation.
    Keywords: Pass-through, multi-country DSGE, Bayesian estimation, monetary policy
    JEL: F31 F41 E52 C11
    Date: 2014
  9. By: Christian de Boissieu (Université Paris I (Panthéon – Sorbonne); Département des Etudes économiques européennes, Collège d'Europe)
    Abstract: The purpose of this paper is to give an account of the debates regarding the implementation of a banking union in Europe that took place in Bruges in April 2013 at a Conference co-organised by the College of Europe and the European Commission's Joint Research Centre (JRC). The benefits to be expected from the banking union are reviewed. Then its components are analysed and discussed with a special focus on supervision and resolution of banks. The challenges are both functional and institutional. They involve micro-and macro prudential considerations. As regards the ECB, will there be possible conflicts of objectives and conflicts of interest when it cumulates its monetary policy function with its new supervisory role? For banking supervision, how to combine the division of labour between the ECB and the national competent authorities with the necessary coordination between them? The same kind of challenge applies to resolution and deposit insurance. The paper relates the transition to a banking union to other structural issues such as the separation of bank activities and the financing of the real economy in the new regulatory framework.
    Keywords: banking Union, economic and monetary union, financial Integration
    JEL: F36 G21
    Date: 2014–01
  10. By: Christophe Blot (Ofce,Sciences-po); Jérôme Creel (Ofce, Sciences-po, Escp Europe); Paul Hubert (Ofce,sciences-po); Fabien Labondance (Ofce, Sciences-po); Francesco Saraceno (Ofce: Sciences-po, LUISS)
    Abstract: This paper aims at investigating first the (possibly time-varying) empirical relationship between the level and conditional variances of price and financial stability, and second, the effects of macro and policy variables on this relationship in the United States and the Eurozone. Three empirical methods are used to examine the relevance of A.J Schwartz’s conventional wisdom that price stability would yield financial stability. Using simple correlations, VAR and Dynamic Conditional Correlations, we reject the hypothesis that price stability is positively correlated to financial stability. We then discuss the empirical appropriateness of the leaning against the wind monetary policy approach.
    Keywords: Price stability, Financial stability,DCC-GARCH,VAR
    JEL: C32 E31 E44 E52
    Date: 2014–02
  11. By: Stephan Schulmeister (WIFO)
    Abstract: The paper summarises at first the main arguments in favour and against a FTT and provides empirical evidence about the movements of the most important asset prices. It is shown that their long swings result from the accumulation of extremely short-term price runs over time. Therefore a (very) small FTT – between 0.1 and 0.01 percent – would mitigate price volatility not only over the short run but also over the long run. The subsequent section discusses the most important implementation issues if only a group of 11 EU member countries introduces this tax (without the UK). If London subsidiaries of banks established in one of the FTT countries are treated as part of their parent company, overall FTT revenues of the 11 FTT countries are estimated at € 65.8 billion, if London subsidiaries are treated as British financial institutions, tax revenues would amount to only € 28.3 billion.
    Date: 2014–02–07
  12. By: Jesus Crespo Cuaresma (Department of Economics, Vienna University of Economics and Business); Martin Lábaj (Department of Economic Policy, Faculty of National Economy, University of Economics in Bratislava); Patrik Pruzinský (Department of Economic Policy, Faculty of National Economy, University of Economics in Bratislava)
    Abstract: We assess empirically the role played by prospective ageing measures as a predictor of income growth in Europe. We show that prospective ageing measures which move beyond chronological age and incorporate changes in life expectancy are able to explain better the recent long-run growth experience of European economies. The improvement in explanatory power of prospective ageing indicators as compared to standard measures based on chronological age is particularly relevant for long-run economic growth horizons.
    Keywords: Economic growth, ageing, prospective age, old age dependency ratio
    JEL: I15 O15 O52
    Date: 2014–01
  13. By: Dietmar Janetzko
    Abstract: Fast, global, and sensitively reacting to political, economic and social events of any kind, these are attributes that social media like Twitter share with foreign exchange markets. The leading assumption of this paper is that information which can be distilled from public debates on Twitter has predictive content for exchange rate movements. This assumption prompted a Twitter-based exchange rate model that harnesses regARIMA analyses for short-term out-of-sample ex post forecasts of the daily closing prices of EUR/USD spot exchange rates. The analyses used Tweet counts collected from January 1, 2012 - September 27, 2013. To identify concepts mentioned on Twitter with a predictive potential the analysis followed a 2-step selection. Firstly, a heuristic qualitative analysis assembled a long list of 594 concepts, e.g., Merkel, Greece, Cyprus, crisis, chaos, growth, unemployment expected to covary with the ups and downs of the EUR/USD exchange rate. Secondly, cross-validation using window averaging with a fixed-sized rolling origin was deployed to select concepts and corresponding univariate time series that had error scores below chance level as defined by the random walk model. With regard to a short list of 17 concepts (covariates), in particular SP (Standard & Poor's) and risk, the out-of-sample predictive accuracy of the Twitter-based regARIMA model was found to be repeatedly better than that obtained from both the random walk model and a random noise covariate in 1-step ahead forecasts of the EUR/USD exchange rate. This advantage was evident on the level of forecast error metrics (MSFE, MAE) when a majority vote over different estimation windows was conducted. The results challenge the semi-strong form of the efficient market hypothesis (Fama, 1970, 1991) which when applied to the FX market maintains that all publicly available information is already integrated into exchange rates.
    Date: 2014–02

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