nep-eec New Economics Papers
on European Economics
Issue of 2014‒03‒15
thirteen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Euro-Crisis and Spillover Effects on the Emerging Economies By Hamidreza Tabarraei
  2. On the relationship between public and private investment in the euro area By Dreger, Christian; Reimers, Hans-Eggert
  3. An update on emu sovereign yield spread drivers in times of crisis: a panel data analysis By Marta Gómez-Puig; Simón Sosvilla-Rivero; María del Carmen Ramos-Herrera
  4. The determinants of inflation differentials in the euro area By Moretti, Laura
  5. Lucas paradox and allocation puzzle: Is the euro area different? By Herrmann, Sabine; Kleinert, Jörn
  6. Measuring the Impact of Exchange Rate Movements on Domestic Prices: A Cointegrated VAR Analysis By Nidhaleddine Ben Cheikh; Waël Louhichi
  7. Sovereign and bank CDS spreads: two sides of the same coin? By John Cotter; Davide Avino
  8. Euroskepticism in the Crisis: More Mood than Economy By Ritzen, Jo; Zimmermann, Klaus F.; Wehner, Caroline
  9. The shift-contagion effect of global financial crisis and the European debt crisis on OECD Countries By Irfan Akbar Kazi; Mohamed Mehanaoui; Farhan Akbar
  10. Anatomy of a Bail-In By Thomas Conlon; John Cotter
  11. Consolidation under the Europe’s New Fiscal Rules: Analyzing the Implied Minimum Fiscal Effort By Kuusi, Tero
  12. The distribution of debt across euro area countries: The role of individual characteristics, institutions and credit conditions By Bover, Olympia; Casado, Jose Maria; Costa, Sonia; Du Caju, Philip; McCarthy, Yvonne; Sierminska, Eva; Tzamourani, Panagiota; Villanueva, Ernesto; Zavadil, Tibor
  13. Output-gaps in the PIIGS Economies: An Ingredient of a Greek Tragedy By João Sousa Andrade; António Portugal Duarte

  1. By: Hamidreza Tabarraei (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - École des Hautes Études en Sciences Sociales (EHESS) - École des Ponts ParisTech (ENPC) - École normale supérieure [ENS] - Paris - Institut national de la recherche agronomique (INRA), EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: I present some evidence showing that the advanced economies' banks were contributing in spreading the Euro-crisis to the emerging economies. For this purpose, I test the common lender channel among other channels of contagion, by using international banking flows data. Based on a constructed crisis-index for the Euro area, I find that countries with higher level of exposure to GIIPS, deleveraged more in riskier periods, i.e. during periods with high crisis index. Among all emerging economies in our sample, the Latin American countries were not affected as much as the emerging economies Asia and Europe, despite their high exposures to Spain. While the impact of the Euro-crisis stopped to show sign in Asia after 2011, it continued to affect the emerging Europe. The Euro-area banks were deleveraging more in the Emerging Europe than their peers in non-Euro advanced economies, whereas most of their deleveraging in Asia happened in 2010. Although the results present evidence in favour of local impacts of the Euro-crisis, they show the importance of spillover through multinational banks.
    Keywords: Sovereign risk ; Contagion ; euro crisis ; emerging economies
    Date: 2014–02
  2. By: Dreger, Christian; Reimers, Hans-Eggert
    Abstract: This paper explores the long run relationship between public and private investment in the euro area in terms of capital stocks and gross investment flows. Panel techniques accounting for international spillovers are employed. While private and public capital stocks are cointegrated, the evidence is quite fragile for public and private investment flows. They enter a long run relationship only after fundamental drivers of private investment, such as demand and financing costs are included. According to the impulse response analysis, private investment reacts to shocks in public investment both in terms of stock and flow variables. In contrast, public investment is rather exogenous. Therefore, the lack of public investment might have restricted private investment and GDP growth in the euro area. The results have strong implications for the future direction of fiscal austerity programs to combat the euro area debt crisis. --
    Keywords: public and private investment,fiscal austerity,panel VAR
    JEL: C23 E22 E62
    Date: 2014
  3. By: Marta Gómez-Puig (Department of Economic Theory, Universitat de Barcelona); Simón Sosvilla-Rivero (Department of Quantitative Economics, Universidad Complutense de Madrid); María del Carmen Ramos-Herrera (Department of Quantitative Economics, Universidad Complutense de Madrid)
    Abstract: We empirically investigate the determinants of EMU sovereign bond yield spreads with respect to the German bund. Using panel data techniques, we examine the role of a wide set of potential drivers. To our knowledge, this paper presents one of the most exhaustive compilations of the variables used in the literature to study the behaviour of sovereign yield spreads and, in particular, to gauge the effect on these spreads of changes in market sentiment and risk aversion. We use a sample of both central and peripheral countries from January 1999 to December 2012 and assess whether there were significant changes after the outbreak of the euro area debt crisis. Our results suggest that the rise in sovereign risk in central countries can only be partially explained by the evolution of local macroeconomic variables in those countries. Besides, without exception, the marginal effects of sovereign spread drivers (specifically, the variables that measure global market sentiment) increased during the crisis compared to the pre-crisis period, especially in peripheral countries.
    Keywords: Sovereign bond spreads, Panel data, Eurozone
    JEL: C33 C52 E44 F36 G15
    Date: 2014–03
  4. By: Moretti, Laura
    Abstract: Inflation differentials in the euro area have been persistent since the adoption of the single currency. This paper analyzes the impact of product and labor market regulation on inflation in a sample of 11 countries. The results show that, after the adoption of the euro, product market deregulation has a relevant and significant effect on the level of inflation, while higher labor market regulation increases the responsiveness of inflation to the output gap. --
    Keywords: Labor Market Deregulation,Product Market Deregulation,EMU,Inflation Rate
    JEL: E31 E58 E65 L51
    Date: 2014
  5. By: Herrmann, Sabine; Kleinert, Jörn
    Abstract: This paper examines the Lucas Paradox and the Allocation Puzzle of international capital flows referring to a panel data set of EMU countries and major industrialized and emerging economies. Overall, the results do not provide evidence in favour of the Lucas Paradox and the Allocation Puzzle. Rather, in line with neoclassical expectations, net capital flows are allocated according to income and growth differentials. The 'downhill' flow of capital from rich to poor economies was particularly pronounced in intra-euro area capital flows and after the introduction of the common currency. If we control for the fact that the assumptions of the neoclassical model are not perfectly given in emerging markets, the Lucas Paradox and the Allocation Puzzle can be dismissed for these countries too. However, in periods of financial stress, the neoclassical behaviour of financial flows is to some extent dampened. --
    Keywords: Financial integration,International Capital Flows,European Monetary Union
    JEL: E22 F21 F36 O16 O
    Date: 2014
  6. By: Nidhaleddine Ben Cheikh; Waël Louhichi
    Abstract: This paper measures the pass-through of exchange rate changes into domestic inflation within a cointegrated VAR (CVAR) framework. This issue is of particular interest for the euro area (EA) as Member Sates cede their national currencies and no longer have options of using monetary policy to respond to local conditions. In fact, a common exchange rate shock, in the absence of a national monetary policy, may have differential impact on EA countries, leading notably to possible divergence in inflation levels. Using quarterly data for 12 EA covering 1980:1 to 2010:4, we report a large degree of heterogeneity in the rates of pass-through across our sample, especially, between "peripheral" and "core" EA economies. For instance, prices rise by 84% in Portugal following one percent depreciation of exchange rate, while for the German economy the extent of pass-through is not exceeding 0.20%. This outcome would have important implications for the general risk perceived by foreign firms and investors regarding the inflationary environment within each EA country.
    Keywords: Exchange Rate, Domestic prices, Cointegration, Euro area
    JEL: C32 E31 F31
    Date: 2014–03
  7. By: John Cotter (UCD School of Business, University College Dublin); Davide Avino (UCD School of Business, University College Dublin)
    Abstract: This paper investigates the relationship between sovereign and bank CDS spreads with reference to their ability to convey timely signals on the default risk of European sovereign countries and their banking systems. By using a sample including six major European economies, we find that sovereign and bank CDS spreads are cointegrated variables at the country level. We then perform a more in-depth investigation of the underlying price discovery mechanisms, and find that both variables have an important price discovery role in the period preceding the financial crisis of 2007-2009. However, during the global financial crisis and the subsequent European sovereign debt crisis, sovereign CDS spreads dominate the price discovery process. Our findings suggest that, especially during crisis periods, sovereign CDS spreads incorporate more timely information on the default probability of European banks than their corresponding bank CDS spreads.
    Keywords: Credit default swap spreads; price discovery; information flow; financial crisis; banks; sovereign risk; bank capital
    JEL: G01 G12 G14 G20 D8
    Date: 2014–02–19
  8. By: Ritzen, Jo (IZA and Maastricht University); Zimmermann, Klaus F. (IZA and University of Bonn); Wehner, Caroline (IZA)
    Abstract: Before the Great Recession, rising income inequality within the European Union member states has been considered to be one driver for an increasing Euroskepticism. Using rich data on attitudes towards European integration from the Eurobarometer (EB) surveys, we revisit the issue by analyzing the relation between macroeconomic indicators, socio-economic background variables, individual attitudes and the level of Euroskepticism within the 27 EU member states for the period 2006 to 2011. Our analysis shows that Euroskepticism has increased by on third during the financial crisis, while income inequality on average stayed stable. We find that the increase in Euroskepticism is mostly due to “mood:” the fear of losing cultural identity and financial expectations and by large unrelated to economic background variables like income inequality. We find evidence that negative financial expectations are positively related to Euroskepticism in Western European countries and negatively related to Euroskepticism in Eastern European countries. That suggests that financially pessimistic people in Western Europe might interpret European integration as a threat to their financial situation, while Eastern European people might view it as a chance to improve their economic situation.
    Keywords: Euroskepticism, income inequality, expectations, economic growth, unemployment
    JEL: D31 J31 O43 O52 P48 Z18
    Date: 2014–02
  9. By: Irfan Akbar Kazi; Mohamed Mehanaoui; Farhan Akbar
    Abstract: This article investigates shift-contagion as defined by Forbes and Rigobon (2002) in 16 OECD member economies during most recent financial crisis i.e. global financial crisis (2008 -2009) and European sovereign debt crisis (2009-2012), using multivariate asymmetric dynamic conditional correlation model developed by Cappiello et al. (2006). The empirical analyses provide substantial evidence of shifts in the dynamic correlations and hence confirm shiftcontagion during the global financial crisis that originated from U.S. However, there is no evidence in support of shift-contagion during the European sovereign debt crisis which originated from events in Greece. The results provide important implications for investors and policy makers.
    Keywords: Global financial crisis, European sovereign debt crisis, Asymmetric Dynamic Conditional correlations, Shift contagion.
    JEL: C58 G01 G15
    Date: 2014–02–25
  10. By: Thomas Conlon (UCD School of Business, University College Dublin); John Cotter (UCD School of Business, University College Dublin)
    Abstract: To mitigate potential contagion from future banking crises, the European Commission recently proposed a framework which would provide for the bail-in of bank creditors in the event of failure. In this study, we examine this framework retrospectively in the context of failed European banks during the global nancial crisis. Empirical ndings suggest that equity and subordinated bond holders would have been the main losers from the e535 billion impairment losses realized by failed European banks. Losses attributed to senior debt holders would, on aggregate, have been proportionally small, while no losses would have been imposed on depositors. Cross-country analysis, incorporating stress-tests, reveals a divergence of outcomes with subordinated debt holders wiped out in a number of countries, while senior debt holders of Greek, Austrian and Irish banks would have required bail-in.
    Keywords: Bank Resolution, Bail-In, European Bank Failure, Global Financial Crisis, Impairment Charges.
    Date: 2014–02–21
  11. By: Kuusi, Tero
    Abstract: The new EU fiscal framework builds on several overlapping target measures and convergence rules. Thus, it is not clear how strict goals the framework sets for public finances. In this paper we build a simulation framework that solves the minimum fiscal effort under different assumptions on the initial state of the economy and the expected economic conditions during the consolidation. We then use the model to analyze several fiscal consolidations. We find that Germany, France, Spain and Italy are currently in compliance with our measure of minimum fiscal effort, but Spain is at risk of falling behind the required pace of consolidation in the near future. As a historical reference we revisit the Finnish Great Depression of the early 1990s. We find that the consolidation was in compliance with the fiscal rules, but during the first years of the consolidation the difficulty of detecting the phase of the business cycle could have considerably increased the restrictiveness of the rules. Finally, we address the looming sustainability gap in the Finnish public finances that reflects the cost of aging population. Under no policy change the required correction is found to become substantial by 2030.
    JEL: E61 E62 H6
    Date: 2014–02–28
  12. By: Bover, Olympia; Casado, Jose Maria; Costa, Sonia; Du Caju, Philip; McCarthy, Yvonne; Sierminska, Eva; Tzamourani, Panagiota; Villanueva, Ernesto; Zavadil, Tibor
    Abstract: The aim of this paper is twofold. First, we present an up-to-date assessment of the differences across euro area countries in the distributions of various measures of debt conditional on household characteristics. We consider three different outcomes: the probability of holding debt, the amount of debt held and, in the case of secured debt, the interest rate paid on the main mortgage. Second, we examine the role of legal and economic institutions in accounting for these differences. We use data from the first wave of a new survey of household finances, the Household Finance and Consumption Survey, to achieve these aims. We find that the patterns of secured and unsecured debt outcomes vary markedly across countries. Among all the institutions considered, the length of asset repossession periods best accounts for the features of the distribution of secured debt. In countries with longer repossession periods, the fraction of people who borrow is smaller, the youngest group of households borrow lower amounts (conditional on borrowing), and the mortgage interest rates paid by low-income households are higher. Regulatory loan-to-value ratios, the taxation of mortgages and the prevalence of interest-only or fixed-rate mortgages deliver less robust results. --
    Keywords: Household debt and interest rate distributions,Time to Foreclose,Taxation,Loanto-Value ratios,Fixed rate mortgages,Financial literacy
    JEL: D14 G21 G28 K35
    Date: 2014
  13. By: João Sousa Andrade (Faculty of Economics, University of Coimbra and GEMF, Portugal); António Portugal Duarte (Faculty of Economics, University of Coimbra and GEMF, Portugal)
    Abstract: The Fiscal Compact has created new responsibilities in terms of quantitative measures of excess demand in the economy. The concept of structural budget balance is dependent on cycle values. As a consequence one of the primary responsibilities of economics is to build a good indicator of the magnitude of short term disequilibrium. Knowledge of the magnitude of the excess demand in the economy is essential for an appropriate application of the Fiscal Compact. The usual empirical concepts of output gap are not sufficiently well designed to give an accurate view of the negative excess demand when there are output breaks in the economy. The information produced by different (quasi-) official output gaps is quite often misleading, contributing to a rise in the unemployment rate. We propose a solution that might contribute to solve this problem that is clearly a crucial one for the PIIGS in times of crisis.
    Keywords: Structural deficit, output gap, Cobb-Douglas production function filter, Beveridge and Nelson filter and Hodrick-Prescott filter.
    JEL: C01 E62 H30 H63
    Date: 2014–05

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