nep-eec New Economics Papers
on European Economics
Issue of 2014‒02‒21
eleven papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Contagion in EU Sovereign Yield Spreads By António Afonso; Ana Catarina Ramos Félix
  2. Repatriation of Debt in the Euro Crisis: Evidence for the Secondary Market Theory By Filippo Brutti; Philip Ulrich Sauré
  3. How interdependent are Eastern European economies and the Euro area? By Prettner, Catherine; Prettner, Klaus
  4. On the Self-Fulfilling Prophecy of Changes in Sovereign Ratings By Ingmar Schumacher
  5. Monetary aggregates to improve early output gap estimates in the euro area - an empirical assessment By Jens Boysen-Hogrefe
  6. Revenue Forecast Errors in the European Union By António Afonso; Rui Carvalho
  7. Migration as an Adjustment Mechanism in the Crisis? A Comparison of Europe and the United States By Julia Jauer; Thomas Liebig; John P. Martin; Patrick Puhani
  8. Measuring financial stress and economic sensitivity in CEE countries By Maciej Krzak; Grzegorz Poniatowski; Katarzyna Wasik
  9. A multi-country DSGE model with incomplete Exchange Rate Passthrough:application for the Euro area. By Tovonony Razafindrabe
  10. The interbank market risk premium, central bank interventions, and measures of market liquidity By Alexius, Annika; Birenstam, Helene; Eklund, Johanna
  11. Transatlantic Trade and Investment Partnership: Sectoral and Macroeconomic Perspectives for Germany, the EU and the US By Irawan, Tony; Welfens, Paul J. J.

  1. By: António Afonso; Ana Catarina Ramos Félix
    Abstract: Since the beginning of the sovereign debt crisis in the Euro Area, a main concern for European leaders is the prevention of the possible contagion from distressed countries. In our research, we assess if there is a spillover effect from those countries and which determinants can be considered transmission mechanisms of the sovereign debt crisis. We use a panel of 13 EU countries (Austria, Belgium, Denmark, Finland, France, Greece, Ireland, Italy, The Netherlands, Portugal, Spain, Sweden and the United Kingdom), covering the period Q1:2000 to Q1:2013 and we also analyse each country individually, on the basis of a SUR analysis. We find that those countries with worse macro and fiscal fundamentals are more vulnerable to contagion and are more affected by international liquidity and credit risks.
    Keywords: sovereign yield spreads, spillover effects, contagion.
    JEL: C33 E62 G15 H62
    Date: 2014–01
  2. By: Filippo Brutti; Philip Ulrich Sauré
    Abstract: The Euro Crisis has stopped the process of the European financial integration and triggered a strong repatriation of debt from foreign to domestic investors. We investigate this empirical pattern in light of competing theories of cross-border portfolio allocation. Three empirical regularities stand out: i) repatriation of debt occurred mainly in crisis countries; ii) repatriation affected mainly public debt; iii) public debt of crisis countries was reallocated to politically influential countries within the Euro Area. Standard theories are in line with pattern (i) at best. We argue that the full picture constitutes evidence for the "secondary market theory" of sovereign debt.
    Keywords: Debt Repatriation, Sovereign Risk, Secondary Markets, Euro Crisis, Portfolio Home-Bias
    JEL: F34 F36 G01 G11 G21
    Date: 2014
  3. By: Prettner, Catherine; Prettner, Klaus
    Abstract: This article investigates the interrelations between the Euro area and five Central and Eastern European economies. Using an open economy framework, we derive theoretical restrictions to be imposed on the cointegration space of a structural vector error correction model. We employ generalized impulse response analysis to assess the effects of shocks in output, interest rates, the exchange rate, and relative prices on both areas. The results show strong international spillovers in output with the magnitude being similarly strong in both areas. Furthermore, we find multiplier effects in Central and Eastern Europe and some evidence for the European Central Bank´s desire toward price stability. --
    Keywords: European Economic Integration,Structural Vector Error Correction Model,Generalized Impulse Response Analysis,International Transmission of Shocks
    JEL: C11 C32 F41
    Date: 2014
  4. By: Ingmar Schumacher
    Abstract: We empirically investigate the dynamic interactions between sovereign ratings and the macroeconomic environment using a Panel VAR on annual data for European countries from 1996 to 2013. Our results provide evidence for a significcant two-way interaction between the macroeconomic environment and changes in sovereigns' ratings. Thus, rating changes are able to exacerbate a country's boom-bust cycle.
    Keywords: sovereign ratings, Panel VAR, self-fulfilling prophecy
    JEL: E6 C33
    Date: 2014–01–06
  5. By: Jens Boysen-Hogrefe
    Abstract: Output gap estimates at the current edge are subject to severe revisions. This study analyzes whether monetary aggregates can be used to improve the reliability of early output gap estimates as proposed by several theoretical models. A real-time experiment shows that real M1 can improve output gap estimates for euro area data. For many periods the cyclical component of real M1 shows good results, while a forecasting strategy based on projecting GDP series seems to be more robust and provides superior results during the Great Recession. Broader monetary aggregates provide no superior information for output gap estimates
    Keywords: Output gap; real-time data; M1; M3; euro area; money cycle
    JEL: E32 E37 E41 E58
    Date: 2014–02
  6. By: António Afonso; Rui Carvalho
    Abstract: In this paper we assess the determinants of revenue forecast errors for the EU-15 between 1999 and 2012, based on the forecasts published bi-annually by the European Commission. Our results show that personal income rate changes increase the revenue forecast errors: for forecasts made in t for t, increases in the corporate tax rate implies a decrease in the revenue forecast errors, in t+1 and t+2. Moreover, an increase in GDP forecast errors decreases revenue errors, whereas an increase in the inflation error will increase revenue errors. GDP errors, minority governments, election year and corporate tax rate changes can be associated with optimistic revenue forecasts. On the other hand, yield, inflation errors and VAT tax rate changes are associated with more prudent forecast behaviour.
    Keywords: macro forecasts, revenue forecast errors, EU
    JEL: C23 H20 H68
    Date: 2014–01
  7. By: Julia Jauer; Thomas Liebig; John P. Martin; Patrick Puhani
    Abstract: The question of whether migration can be an equilibrating force in the labour market is an important criterion for an optimal currency area. It is of particular interest currently in the context of high and rising levels of labour market disparities, in particular within the Eurozone where there is no exchange-rate mechanism available to play this role. We shed some new light on this question by comparing pre- and post-crisis migration movements at the regional level in both Europe and the United States, and their association with asymmetric labour market shocks. We find that recent migration flows have reacted quite significantly to the EU enlargements in 2004 and 2007 and to changes in labour market conditions, particularly in Europe. Indeed, in contrast to the pre-crisis situation and the findings of previous empirical studies, there is tentative evidence that the migration response to the crisis has been considerable in Europe, in contrast to the United States where the crisis and subsequent sluggish recovery were not accompanied by greater interregional labour mobility in reaction to labour market shocks. Our estimates suggest that, if all measured population changes in Europe were due to migration for employment purposes – i.e. an upper-bound estimate – up to about a quarter of the asymmetric labour market shock would be absorbed by migration within a year. However, in the Eurozone the reaction mainly stems from migration of third-country nationals. Even within the group of Eurozone nationals, a significant part of the free mobility stems from immigrants from third countries who have taken on the nationality of their Eurozone host country. La question de savoir si la migration peut être une force d'équilibre sur le marché du travail est un critère non négligeable pour l’optimisation d’une zone monétaire. Elle est particulièrement importante dans un contexte où les disparités du marché du travail connaissent des niveaux élevés et croissants, en particulier au sein de la zone euro où il n'existe pas de mécanisme de taux de change à même de jouer ce rôle. Nous espérons apporter un éclairage nouveau sur cette question en comparant les flux migratoires avant et après la crise au niveau régional en Europe et aux États-Unis , et leur combinaison avec les chocs asymétriques du marché du travail. Nous avons constaté que les flux migratoires récents ont réagi de manière assez significative aux élargissements de l'UE en 2004 et 2007 et aux changements du marché du travail, en particulier en Europe. En effet, contrairement à la situation qui prévalait avant la crise et aux résultats des études empiriques antérieures, il semblerait que la réponse de la migration à la crise ait été considérable en Europe, contrairement aux États-Unis où la crise et la faible reprise ultérieure n'ont pas été accompagnées par une plus grande mobilité interrégionale des travailleurs en réaction aux chocs du marché du travail. Nos estimations semblent suggérer que si tous les changements de population mesurés en Europe sont dus à la migration à des fins d'emploi - c'est à dire une estimation de la limite supérieure - jusqu'à environ un quart des chocs asymétriques du marché du travail seraient absorbés par la migration dans l'année. Cependant, dans la zone euro, cette réaction s'explique principalement par la migration de ressortissants de pays tiers. Même au sein du groupe des ressortissants de la zone euro, une partie importante des mouvements de libre circulation émanent de migrants de pays tiers ayant pris la nationalité de leur pays d'accueil de la zone euro.
    Keywords: migration, United States, labour market adjustments, economic crisis, free mobility, Europe, Eurozone
    JEL: F15 F16 F22 J61
    Date: 2014–01–09
  8. By: Maciej Krzak; Grzegorz Poniatowski; Katarzyna Wasik
    Abstract: This report presents the methodology for the construction of the Financial Stress Index (FSI) and the Economic Sensitivity Index (ESI) and investigates the economic situation in twelve Central and East European Countries (CEECs) between 2001 and 2012. The objective of this paper is to capture key features of financial and economic vulnerability and examine the co-movement of economic turmoil and financial disturbances that strongly affected the CEECs in the last decade. Our main finding is that the FSI can be used as a leading indicator and can be used to recognize changing trends in the index. A shift in the value of the index proves that EU accession has a positive, but minor influence on financial stability in the CEECs. On the other hand, the impact of the introduction of the euro in Estonia, Slovakia and Slovenia is ambiguous. For most of the countries in our sample, in 2007, the FSI started to grow rapidly, reaching its peak around the third quarter of 2008. Consequently, financial stress reained high for a few quarters and started to fall gradually. For a number of countries, we observe higher financial stress in the latest period of our analysis, i.e. 2010-2012. However, the value of the FSI was significantly lower than three years earlier. The results show that indices might be helpful in predicting future recessions. However, forecasting properties seem to be limited at this stage of our work.
    Keywords: financial stress, economic sensitivity, economic indicators, Central and Eastern Europe
    JEL: G01 E32 C43
    Date: 2014
  9. By: Tovonony Razafindrabe
    Abstract: This paper develops an estimated multi-country open economy dynamic stochastic gen- eral 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 inter- national 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 di¤erent 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 endoge- nous 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 in‡ation variation of the Euro-area in contrast to foreign mark-up shocks. Second, deviation from in‡ation 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 in‡ation.
    Date: 2014–02–07
  10. By: Alexius, Annika (Dept. of Economics, Stockholm University); Birenstam, Helene (Department of Statistics, Stockholm University); Eklund, Johanna (Sveriges Riksbank)
    Abstract: When the interbank market risk premium soared during the finnancial crisis, it created a wedge between interest rates actually paid by private agents and the rapidly falling policy rates. Many central banks attempted to improve the situation by supplying liquidity to the domestic interbank market. This paper studies the Swedish interbank market risk premium using a unique data set on traded volume between banks and between banks and the Riksbank. We find that the main determinants of the Swedish interbank premium are international variables, such as US and EURO area risk premia. International exchange rate volatility and the EURO/USD deviations from CIP also matters, while standard mesures of domestic market liquidity and domestic credit risk have insignificant effects. Our measure of actual turnover in the interbank market is however associated with a significant reduction of the interbank market risk premium, as are credit provisions by the central bank.
    Keywords: Interbank market risk premium; liquidity risk; credit risk; credit provisions.
    JEL: F31 F41
    Date: 2014–02–06
  11. By: Irawan, Tony (University of Wuppertal); Welfens, Paul J. J. (University of Wuppertal)
    Abstract: The EU and the US have started negotiations on a Transatlantic Trade and Investment Partnership Agreement (TTIP) which could bring a considerable increase of exports and output as well as changes in the composition of output and employment. Thus export simulation studies in combination with input output analysis and employment analysis is useful. In the analysis presented the focus is mainly on sectoral output and employment effects where the key sectors are the automotive sector, chemical industry, information and communication technology production, pharmaceuticals and machinery and equipment. Backward sector links are analyzed and found to be quite important in the automotive sector, the chemical industry, the machinery and equipment sector in both Germany and the US; in Germany also in ICT production. However, most of the observed sectors have weak forward linkage. Input output analysis is also used to identify employment effects in various sectors: the pure employment effect of a 20% export expansion in Germany amounts to about 800 000 new jobs. Looking only at the US and German perspective turns out to be misleading – the high imports of intermediate inputs of German firms from EU partner countries suggests that a comparison EU-US is analytically required for some key issues and that considering the effects on EU partners is also useful. There is a host of key policy issues, including the issue of extended sustainability reporting.
    Keywords: employment, input output analysis, labor, foreign direct investment, trade, TTIP
    JEL: F15 F16 F21 J21
    Date: 2014–01

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