nep-eec New Economics Papers
on European Economics
Issue of 2014‒04‒18
sixteen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. What Drives the German Current Account ?And How Does It Affect Other EU Member States ? By Robert Kollmann; Marco Ratto; Werner Roeger; Jan in'tVeld; Lukas Vogel
  2. Credit Risk in the Euro Area By Simon Gilchrist; Benoît Mojon
  3. The Euro and The Geography of International Debt Flows By Galina Hale; Maurice Obstfeld
  4. Implementation of the Macroeconomic Adjustment Programmes in the Euro Area: State-of-Play By Gros, Daniel; Alcidi, Cinzia; Belke, Ansgar; Coutinho, Leonor; Giovannini, Alessandro
  5. Monetary Policy Switching in the Euro Area and Multiple Equilibria: An Empirical Investigation By Gilles Dufrénot; Anwar Khayat
  6. Current and Future ECB Monetary Policy. By Philip Arestis
  7. Sovereign and bank CDS spreads: two sides of the same coin? By Avino, Davide; Cotter, John
  8. A money-based indicator for deflation risk By Gianni Amisano; Roberta Colavecchio; Gabriel Fagan
  9. Improving competitiveness and trade balance of Greek economy: a coopetitive strategy model By David, Carfì; Daniele, SCHILIRO'
  10. Monetary Dialogue 2009-2014 – Looking Backward, Looking Forward By Ansgar Belke
  11. One Europe or Several? Causes and Consequences of the European Stagnation By Jan Fagerberg; Bart Verspagen
  12. A Culture Based Theory of Fiscal Union Desirability By Guiso, Luigi; Herrera, Helios; Morelli, Massimo
  13. European Export Performance By Angela Cheptea; Lionel Fontagné; Soledad Zignago
  14. Fiscal Devaluation Scenarios: A Quantitative Assessment for the Italian Economy By Barbara Annicchiarico; Fabio Di Dio; Francesco Felici
  15. Early warning indicators: financial and macroeconomic imbalances in Central and Eastern European countries By Orsolya Csortos; Zoltán Szalai
  16. Working Paper 13-13 - A new version of the HERMES model - HERMES III By Delphine Bassilière; Didier Baudewyns; Francis Bossier; Ingrid Bracke; Igor Lebrun; Peter Stockman; Peter Willemé

  1. By: Robert Kollmann; Marco Ratto; Werner Roeger; Jan in'tVeld; Lukas Vogel
    Abstract: We estimate a three-country model using 1995-2013 data for Germany, the Rest of the Euro Area (REA) and the Rest of the World (ROW) to analyze the determinants of Germany’s current account surplus after the launch of the Euro. The most important factors driving the German surplus were positive shocks to the German saving rate and to ROW demand for German exports, as well as German labour market reforms and other positive German aggregate supply shocks. The convergence of REA interest rates to German rates due to the creation of the Euro only had a modest effect on the German current account and on German real activity. The key shocks that drove the rise in the German current account tended to worsen the REA trade balance, but had a weak effect on REA real activity. Our analysis suggests these driving factors are likely to be slowly eroded, leading to a very gradual reduction of the German current account surplus. An expansion in German government consumption and investment would raise German GDP and reduce the current account surplus, but the effects on the surplus are likely to be weak.
    Keywords: current account; intra-european imbalances; monetary union; eurozone crisis; estimated DSGE model
    JEL: F40 F30 F21 E30
    Date: 2014–04
  2. By: Simon Gilchrist; Benoît Mojon
    Abstract: We construct credit risk indicators for euro area banks and non-financial corporations. These are the average spreads on the yield of euro area private sector bonds relative to the yield on German federal government securities of matched maturities. The indicators are also constructed at the country level for Germany, France, Italy and Spain. These indicators reveal that the financial crisis of 2008 has dramatically increased the cost of market funding for both banks and non-financial firms. In contrast, the prior recession following the 2000 U.S. dot-com bust led to widening credit spreads of non-financial firms but had no effect on the credit spreads of financial firms. The 2008 financial crisis also led to a systematic divergence in credit spreads for financial firms across national boundaries. This divergence in cross-country credit risk increased further as the European debt crisis has unfolded since 2010. Since that time, credit spreads for both non-financial and financial firms increasingly reflect national rather than euro area financial conditions. Consistent with this view, credit spreads provide substantial predictive content for a variety of real activity and lending measures for the euro area as a whole and for individual countries. VAR analysis implies that disruptions in corporate credit markets lead to sizable contractions in output, increases in unemployment, and declines in inflation across the euro area.
    JEL: E32 E44 G12
    Date: 2014–04
  3. By: Galina Hale; Maurice Obstfeld
    Abstract: Greater financial integration between core and peripheral EMU members had an effect on both sets of countries. Lower interest rates allowed peripheral countries to run bigger deficits, which inflated their economies by allowing credit booms. Core EMU countries took on extra foreign leverage to expose themselves to the peripherals. The result has been asset-price bubbles and collapses in some of the peripheral countries, area-wide banking crisis, and sovereign debt problems. We analyze the geography of international debt flows using multiple data sources and provide evidence that after the euro’s introduction, Core EMU countries increased their borrowing from outside of EMU and their lending to the EMU periphery.
    JEL: F32 F34 F36
    Date: 2014–04
  4. By: Gros, Daniel; Alcidi, Cinzia; Belke, Ansgar; Coutinho, Leonor; Giovannini, Alessandro
    Abstract: Two of the four macroeconomic adjustment programmes – in Portugal and Ireland – can be considered a success in the sense that the initial expectations in terms of adjustment, both fiscal and external, were broadly fulfilled. A rebound based on exports has taken hold in these two countries, but a full recovery will take years. In Greece the initial plans were insufficient. While the strong impact of the fiscal adjustment on demand could have been partially anticipated at the time, the resistance to structural reforms was more surprising and remains difficult to cure. The fiscal adjustment is now almost completed, but the external adjustment has not proceeded well. Exports are stagnating despite impressive falls in wage costs. In Cyprus, the outcome has so far been less severe than initially feared. It is still too early to find robust evidence in any country that the programmes have increased the long-term growth potential. Survey-based evidence suggests that structural reforms have not yet taken hold. The EU-led macroeconomic adjustment programmes outside the euro area (e.g. Latvia) seem to have been much stricter, but the adjustment was quicker and followed by a stronger rebound.
    Date: 2014–03
  5. By: Gilles Dufrénot (AMSE - Aix-Marseille School of Economics - Centre national de la recherche scientifique (CNRS) - École des Hautes Études en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM), Centre de recherche de la Banque de France - Banque de France, CEPII - Centre d'Etudes Prospectives et d'Informations Internationales - Centre d'analyse stratégique); Anwar Khayat (AMSE - Aix-Marseille School of Economics - Centre national de la recherche scientifique (CNRS) - École des Hautes Études en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM))
    Abstract: This paper provides evidence that the European Central Bank (ECB) has adjusted its interest rate since 1999 nonlinearly according to the macroeconomic and financial environment in the euro zone. Its policy function is described by a Taylor rule with regime shifts implying that the stance of reaction to the inflation-gap and output-gap has varied according to the credit risk in the private and sovereign bond markets, the monetary base and past levels of inflation, output and the shocks affecting the European economies. We provide evidence of regimes corresponding to low to high levels of inflation with the possibility of a situation near a zero low bound (ZLB) for the interest rate. We study the implications of such a rule for the economy in a simple new-Keynesian framework and show that it is consistent with several stable long-run steady states equilibria among which one that is consistent with the recent situation of a near liquidity trap in the euro area. We also find that around this liquidity trap steady state the equilibrium is locally determinate for most plausible parameter values. We discuss the issue of moving from a situation of low nominal interest rate to a policy that have been more typically implemented in the past by relying on an analysis of the impact of shocks (supply and demand) to the economy.
    Keywords: nonlinear Taylor rules; multiple steady state equilibria; euro area
    Date: 2014–03
  6. By: Philip Arestis (Cambridge Centre for Economic and Public Policy, Department of Land Economy, University of Cambridg and University of the Basque Country UPV/EHU)
    Abstract: This paper examines the operations of the European Central Bank (ECB) with respect to monetary policy, along with its effects on inflation, exchange rate and financial stability. It also discusses how the regulatory role of the ECB should be improved in the future. In this way, the paper discusses the involvement of the ECB in regulatory policy towards the financial sector, and the responses of the ECB to the financial crisis, instability and banks’ illiquidity and insolvency, as well as to sovereign insolvency. It begins with the current set up of the European Monetary Union (EMU) along with the theoretical principles of the EMU model, and the extent to which it conforms with the theoretical framework of the New Consensus Macroeconomics and its policy implications, namely inflation targeting. Problems with the current EMU arrangements are then discussed, followed by changes in view of the August 2007 financial crisis and the ‘great recession’. Required ECB changes, and of course changes in monetary policies are discussed before we finally summarize and conclude.
    Keywords: European Central Bank, Monetary Policy, European Monetary Union, Current and Future Developments.
    JEL: E31 E52 E58
    Date: 2014–03–06
  7. By: Avino, Davide; Cotter, John
    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 of 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. By decomposing the noise and speed of adjustment components of the price discovery, we find that both variables have an important price discovery role in the period 2004-2013. Most developed countries (Germany, Sweden) show a clear leading role for bank CDS spreads throughout the sample period, whereas most distressed European economies (Portugal and Spain) are governed by a leading role for their sovereign CDS spreads during both the sub-prime crisis and the subsequent European sovereign debt crisis.
    Keywords: Credit default swap spreads; price discovery; information flow; financial crisis; banks; sovereign risk; bank capital
    JEL: D8 D80 G1 G12 G14 G20
    Date: 2014
  8. By: Gianni Amisano (European Central Bank, DG Research); Roberta Colavecchio (Universität Hamburg (University of Hamburg)); Gabriel Fagan (European Central Bank, DG Research)
    Abstract: We employ a money-based early warning model in order to analyse the risk of a low inflation regime in the euro area, Japan and the US. The model specification allows for three different inflation regimes: Low, Medium and High inflation, while state transition probabilities vary over time as a function of monetary variables. Using Bayesian techniques, we estimate the model with data from the early 1970s up to the present. Our analysis suggests that the risks of a Low inflation regime in the euro area have been increasing in the course of the last six quarters of the sample; moreover, money growth appears to play a significant role in the assessment of such risks. Evidence for Japan and the US, on the other hand, shows that the inclusion of a monetary indicator variable does not substantially change the assessment of the risk of a Low inflation regime in either of the two countries.
    Keywords: Money growth, deflation, inflation regimes, Markov Switching models, Bayesian inference
    JEL: C11 C53 E31
    Date: 2014–04
  9. By: David, Carfì; Daniele, SCHILIRO'
    Abstract: In the present work, we propose a coopetitive model applied to the Greek crisis, which aims both at improving the competitiveness of the Greek productive system and rebalancing the current account balance of the country. Our model of coopetition (based on normal form game theory) is conceived at a macro level, wherein there are two players: Greece and SNC (the Surplus Northern Countries of the euro area). We suggest a model that looks for a win-win solution. The win-win solution entails a cooperative bi-strategy in which SNC should contribute to re-balance its trade surplus with respect to Greece and, in addition,SNC should provide a certain amount of foreign direct investment (FDI) to improve the competitiveness and the growth in Greece. Thus we �nd a transferable utility and properly coopetitive solution, convenient for all the players.
    Keywords: Games and economics; Competitiveness; FDI; Trade Balance; Greek economy;cooperation; coopetition
    JEL: C71 C72 C78 F2 F23 F41 F42 O24
    Date: 2014–04
  10. By: Ansgar Belke
    Abstract: This Paper comments on the role of the Monetary Dialogue in the context of an evolving monetary policy. The discussion is conducted in terms of the adoption of forward guidance on interest rates by the European Central Bank (ECB), the ECB’s model choice and data revision policies in inflation forecasts, its membership in the Troika, its activities as a financial supervisor, as well as regards its bond purchasing activities and the implication for ECB monetary policy stemming from Fed’s envisaged exit from unconventional monetary policies. This paper also assesses on a case-by-case basis the actual exchange of information between the European Parliament (EP) and the ECB. We argue that the new ECB supervisory role has made the Monetary Dialogue exercise even more important “now” than in “normal” times. Still, we suggest changes, both procedural as well as regarding its focus range, to make it even more effective. In our view, the transparency/accountability issue represented by a Supervisory Board ‘hosted’ by ECB needs to be addressed. A crucial challenge for the Monetary Dialogue is also to assess the optimal degree of ECB transparency and accountability towards the EP, the key democratic institution.
    Keywords: Accountability; European Parliament; forward guidance; monetary dialogue; transparency
    JEL: E52 E58
    Date: 2014–03
  11. By: Jan Fagerberg (TIK, University of Oslo; IKE, Aalborg University; CIRCLE, Lund University); Bart Verspagen (UNU-MERIT and Maastricht University)
    Abstract: The European Economy is currently in a slump, the worst since the 1930s. Although this is often seen as a consequence of the financial crisis that hit the capitalist world in 2007-8, we argue that many of the problems that Europe faces today have long term roots to do with the fact that Europe consists of countries with quite different dynamics and capacities for adapting to changes in the global (and European) economic environment. We start by comparing Europe’s growth performance to that of other parts of the world, and then consider some popular but arguably erroneous explanations of the present crisis. Subsequently, we delve into the development of the external balances of various European countries. This leads to the identification of three European “archetypes”, characterized by different adaptability and performance, i.e., the North, the South and the East. We explore the consequences of globalization and European economic integration for the economic performance of these different country groups. The effects have been quite asymmetric; the Southern countries in particular have benefited little if at all. Finally, we summarise the lessons from the analysis and consider the implications for policy. What is needed is a European growth policy, properly adapted to the different capacities across Europe, that places the welfare of the European population as a whole at the center.
    Date: 2014–04
  12. By: Guiso, Luigi (EIEF & CEPR); Herrera, Helios (HEC Montreal); Morelli, Massimo (Columbia University)
    Abstract: If voters of different countries adhere to different and deeply rooted cultural norms, the country leaders may fi…nd it impossible to agree on efficient policies especially in hard times. The conformity constraint -political leaders unwillingness or impossibility to depart from these norms - has resulted in lack of timely intervention which has ampli…ed an initially manageable debt crisis for some European countries to the point of threatening the Euro as a single currency. We show the conditions under which the introduction of a fi…scal union can be obtained with consensus and be bene…cial. Perhaps counter- intuitively, cultural diversity makes a fi…scal union even more desirable. Some general lessons can also be drawn on the interaction of cultural evolution and institutional choice.
    Keywords: Conformity constraint, culture, debt crisis, …fiscal union.
    Date: 2013
  13. By: Angela Cheptea (SMART - Structures et Marché Agricoles, Ressources et Territoires - Agrocampus Ouest - Institut national de la recherche agronomique (INRA) : UMR1302); Lionel Fontagné (CEPII - Centre d'Etudes Prospectives et d'Informations Internationales - Centre d'analyse stratégique, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, Banque de France - -); Soledad Zignago (Centre de recherche de la Banque de France - Banque de France)
    Abstract: Using an econometric shift-share decomposition, we explain the redistribution of world market shares at the level of the product variety and by technological content. We decompose changes in market shares into structural eff ects (geographical and sectoral) and a pure performance e ffect. We regard the EU-27 as an integrated economy, excluding intra-EU trade. Revisiting the competitiveness issue in such a perspective sheds new light on the impact of emerging countries on the reshaping of world trade. Since 1995 the EU-27 withstood the competition from emerging countries better than the United States and Japan. The EU market shares for high-technology products, as well as in the upper price range of the market, proved comparatively resilient, though less so since the crisis.
    Keywords: International Trade, Export Performance, Competitiveness, Market Shares, Shift-Share, European Union.
    Date: 2014
  14. By: Barbara Annicchiarico (CEIS, University of Rome "Tor Vergata"); Fabio Di Dio (Sogei S.p.A., IT Economia); Francesco Felici (Ministero dell’Economia e delle Finanze, Dipartimento del Tesoro)
    Abstract: We study the potential impact of fiscal devaluation policies on the Italian economy using IGEM, a dynamic general equilibrium model for the Italian economy developed at the Department of Treasury of the Italian Ministry of the Economy and Finance. The simulations show that fiscal devaluation policies are likely to produce short-run slight improvements on the external position of the economy, while the output gains seem to persist in the long run. Non-negligible distributional effects across households are also observed, since taxation on consumption tends to be regressive.
    Keywords: Fiscal Devaluation, DGE, Structural Reforms, Italy
    JEL: E10 C50 E60
    Date: 2014–04–09
  15. By: Orsolya Csortos (Magyar Nemzeti Bank (the central bank of Hungary)); Zoltán Szalai (Magyar Nemzeti Bank (the central bank of Hungary))
    Abstract: In this paper we apply the Early Warning System methodology to ten Central and Eastern European Countries to find useful sets of indicators which could predict macroeconomic and financial imbalances. We argue that finding such indicators is crucial in the current monetary policy framework because significant imbalances could build up without any sign of risk to price stability. We examine the stylised behaviour of the most important macroeconomic variables over the business cycle and select the most preferred indicator variables. Our methodology consists of choosing the most useful combination of variables in terms of false alarms and misses, taken as given the preferences of the decision maker in terms of committng various types of errors. We find, that a certain combination of the global financial variable, the real exchange rate, capital flows and credit is a plausible signal macroeconomic imbalances. The results suggest that although the above indicators should not be used mechanically, they could usefully complement analytical tools available to modern central banks.
    Keywords: early warning indicators, signalling approach, macroeconomic stability, financial stability, monetary policy strategy
    JEL: E32 E37 E44 E58
    Date: 2014
  16. By: Delphine Bassilière; Didier Baudewyns; Francis Bossier; Ingrid Bracke; Igor Lebrun; Peter Stockman; Peter Willemé
    Abstract: This Working Paper is aimed at describing the current version of Federal Planning Bureau's medium-term macrosectoral model, named HERMES. This model is used to produce on a regular basis medium-term outlooks for the Belgian economy. In addition to the main macroeconomic aggregates (GDP, private consumption, external trade, investments,…), those outlooks also concern labour market aggregates, detailed public finances, energy  consumption and greenhouse gas emissions. The HERMES model is also used to compute the impact of policy measures and external shocks on the Belgian economy.
    JEL: C5 E1 E2 E6 H2 H5 J3
    Date: 2013–11–08

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