nep-eec New Economics Papers
on European Economics
Issue of 2014‒05‒17
nine papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. “EMU sovereign debt market crisis: Fundamentals-based or pure contagion?” By Marta Gómez-Puig; Simón Sosvilla-Rivero
  2. The process of financial integration of EU economies By Marco Veronese Passarella
  3. The Taylor Rule and Financial Stability: A Literature Review with Application for the Eurozone By Benjamin Käfer
  4. Addressing weak inflation: The European Central Bank's shopping list By Grégory Claeys; Zsolt Darvas; Silvia Merler; Guntram B. Wolff
  5. The Impact of Euro Adoption on Export Performance: Comparison of the Czech Republic and Slovakia By Oliver Polyak
  6. International Capital Flows and the Boom-Bust Cycle in Spain By Jan in'tVeld; Robert Kollmann; Beatrice Pataracchia; Marco Ratto; Werner Roeger
  7. Distributive Effects of the Crisis and Austerity in Seven EU Countries By Manos Matsaganis; Chrysa Leventi
  8. Denmark's fixed exchange rate regime and the delayed recovery from the Global Financial Crisis: A comparative macroeconomic analysis By Andersen, Thomas Barnebeck; Malchow-Møller, Nikolaj
  9. Searching under the lamp-post: the evolution of fiscal surveillance By Deborah Mabbett; Waltraud Schelkle

  1. By: Marta Gómez-Puig (Faculty of Economics, University of Barcelona); Simón Sosvilla-Rivero (Department of Quantitative Economics, Universidad Complutense de Madrid)
    Abstract: We empirically investigate whether the transmission of the recent crisis in euro area sovereign debt markets was due to fundamentals-based or pure contagion. To do so, we examine the behaviour of EMU sovereign bond yield spreads with respect to the German bund for a sample of both central and peripheral countries from January 1999 to December 2012. First we apply a dynamic approach to analyse the evolution of the degree of Grangercausality within the 90 pairs of sovereign bond yield spreads in our sample, in order to detect episodes of significantly increased causality between them (which we associate with contagion) and episodes of significantly reduced interconnection (which we associate with immunisation). We then use an ordered logit model to assess the determinants of the occurrence of the episodes detected. Our results suggest the importance of variables proxying market sentiment and of variables proxying macrofundamentals in determining contagion and immunisation outcomes. Therefore, our findings underline the coexistence of “pure” and “fundamentals-based contagion” uring the recent European debt crisis.
    Keywords: Sovereign bond spreads, contagion, Granger-causality, time-varying approach, euro area, ordered logit model. JEL classification: C35, C53, E44, F36, G15
    Date: 2014–05
  2. By: Marco Veronese Passarella (University of Leeds)
    Abstract: The aim of this document is to complement the analysis of ‘variegated financialisation’ provided (in an associated paper) by Passarella Veronese (2013) with a preliminary examination of the process of financial integration of EU countries, and especially of Euro Area’s member-States. In this regard, figures show that a process of increasing financial interconnectedness between different country-based economic units has been actually operating since the early 1990s within the Euro Area. As pointed out by ECB’s staff and other economics studies, convergences in lending rates and sovereign bond yields have been recorded, coupled with growing cross-border flows of capitals and cross-border interbank market integration (until the outbreak of the recent European crisis at least). However, especially after the launch of the single currency in 2002, this dynamics has gone along with growing current account imbalances (and, symmetrically, financial imbalances) within the Euro Area, due to differences in national growth rates, ‘inefficiencies’ in economies of peripheral countries, and the successful deflationary policies adopted by core countries. As a result, the permanent current account deficits of Euro Area’s peripheral economies have reflected in an increasing amount of financial liabilities placed by their government sectors in international markets (until the outbreak of the crisis at least). Thus, ‘real-world’ financial integration has not led to the development of a net of horizontal links between economic units operating within a uniform supranational economic space. What figures show, is rather a process of concentration and centralisation of capitals within the Euro Area, reinforcing structural imbalances between the core and the periphery. In the absence of radical changes in European institutions, this asymmetric integration is further endangering, instead of improving, the financial soundness of EU.
    Keywords: Financial Crises, Govern Policy and Regulation of Financial Markets, Financial Institutions, Varieties of Financialisation.
    JEL: G01 G18 G21 N20
    Date: 2014–04–03
  3. By: Benjamin Käfer (University of Kassel)
    Abstract: The question of whether central banks should bear responsibility for financial stability is still unan-swered. Regarding interest rate implementation, it is thus not clear if and how the Taylor rule should be augmented by an additional financial stability term. This paper reviews the normative and positive literature on Taylor rules augmented with exchange rates, asset prices, credit, and spreads. These measures have developed as common indicators of financial (in)stability in the Taylor rule literature. In addition, our own analysis describes the development of these indicators for the core and the periphery of the Eurozone. Given the large degree of heterogeneity between euro area countries, the conclusion here is that an interest rate reaction to instability by the European Central Bank would be inappropriate in times of crisis. However, this conclusion is somewhat weakened if there is no crisis.
    Keywords: Taylor rule, financial stability, sovereign debt crisis, Eurozone heterogeneity, exchange rates, asset prices, credit spreads
    JEL: E52 F33 F42
    Date: 2014
  4. By: Grégory Claeys; Zsolt Darvas; Silvia Merler; Guntram B. Wolff
    Abstract: See comments by the authors 'Addressing weak inflation: The ECBâ??s Shopping List' and by Ashoka Mody 'The ECB must - and can - act' Euro-area inflation has been below 1 percent since October 2013, and medium-term inflation expectations are well below 2 percent. Forecasts of the return to target inflation have proved wrong. The European Central Bank should act forcefully, but should undermine neither the major relative price adjustments between the euro-area core and the periphery that are needed, nor the ongoing process of addressing weaknesses in Europeâ??s banking system. Reducing the deposit rate or introducing another long-term refinancing operation could be beneficial, but would be unlikely to change substantially inflation expectations. Government bond purchases would be significantly beneficial, but in a monetary union with 18 different treasuries, such purchases are difficult for economic, political and legal reasons. We recommend a monthly asset-purchase programme of â?¬35 billion with a review of the amount after three months. EFSF/ESM/EU/EIB bonds, corporate bonds and assetbacked securities should be purchased, of which at least â?¬490 billion, â?¬900 billion and â?¬330 billion respectively are suitables. Bonds of sound banks could be considered after the completion of the ECBâ??s assessment of bank balance sheets. While bond purchases distort incentives and make the ECB subject to private and public sector pressure, with potential consequences for inflation, such risks need to be weighed against the risk of persistently low inflation.
    Date: 2014–05
  5. By: Oliver Polyak (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: The present paper is focused on the impact of introducing the common European currency on export performance. There has been a lot written about the possible effects of euro adoption on economies of the first eurozone participants. The contribution of this research is that we explore the impact of euro introduction on Slovakia, in comparison to the Czech Republic which still uses its own national currency. Our findings suggest that the export performance and other export-related indicators evolved largely in parallel in both countries. Positive trade effects brought about by the introduction of the euro are rather moderate – up to 5%. The results to some extent do confirm the existence of the so called ‘Rose effect’ – the effect that two countries sharing the same currency trade more than they would otherwise.
    Keywords: competitiveness, euro adoption, export, Czech Republic, Slovakia
    JEL: F14 F15
    Date: 2014–02
  6. By: Jan in'tVeld; Robert Kollmann; Beatrice Pataracchia; Marco Ratto; Werner Roeger
    Abstract: We study the joint dynamics of foreign capital flows and real activity during the recent boom-bust cycle of the Spanish economy, using a three-country New Keynesian model with credit-constrained households and firms, a construction sector and a government. We estimate the model using 1995Q1-2013Q2 data for Spain, the rest of the Euro Area (REA) and the rest of the world. We show that falling risk premia on Spanish housing and non-residential capital, a loosening of collateral constraints for Spanish households and firms, as well as a fall in the interest rate spread between Spain and the REA fuelled the Spanish output boom and the persistent rise in foreign capital flows to Spain, before the global financial crisis. During and after the global financial crisis, falling house prices, and a tightening of collateral constraints for Spanish borrowers contributed to a sharp reduction in capital inflows, and to the persistent slump in Spanish real activity. The credit crunch was especially pronounced for Spanish households; firm credit constraints tightened later and more gradually, and contributed much less to the slump.
    Keywords: international capital flows; boom-bust cycle; sudden stop; housing market; financial frictions; spain; european monetary union
    JEL: C11 E21 E32 E62
    Date: 2014–04
  7. By: Manos Matsaganis; Chrysa Leventi
    Abstract: European welfare states are under considerable stress. On the one hand, the recession has caused unemployment to rise and household incomes to fall, which both raise the demand for social protection. On the other hand, austerity policies and programme reforms affect the capacity of welfare states to provide social protection. This paper aims to provide an early assessment of the distributional implications of the economic developments in Greece, Spain, Italy, Portugal, Latvia, Lithuania and Romania in the period 2009-13. Using a microsimulation model, we attempt to disentangle the first-order effects of tax-benefit policies from the overall effects of the crisis. Moreover, we estimate how the burden of the crisis has been shared across income groups, and how the differential impact of the crisis may have altered the composition of the population in poverty. We conclude by discussing the methodological pitfalls and policy implications of our research.
    Keywords: austerity, crisis, income distribution, microsimulation, European Union, EU-SILC, EUROMOD
    JEL: C81 D3 I3 H2 H31
    Date: 2014–05
  8. By: Andersen, Thomas Barnebeck (Department of Business and Economics); Malchow-Møller, Nikolaj (Department of Business and Economics)
    Abstract: This paper compares Denmark’s growth performance to that of the other 18 non-Eurozone OECD economies during 2008-12. Denmark is the only country with a fixed exchange rate regime; the other 18 countries all have flexible exchange rates, mostly as part of an inflation-targeting framework. At the same time, Denmark is one of the worst growth performers during 2008-12. Our analysis indicates that the lack of monetary policy independence is central to understanding the meager Danish performance. Aggressive monetary policy during 2008-09 is an important predictor of economic growth during 2008-12; and Denmark, having outsourced monetary policy to the ECB, did not pursue monetary easing as aggressively as most other countries. Overall, the analysis suggests that had Denmark been able to follow Sweden in aggressively cutting interest rates in the wake of the Global Financial Crisis, it would have added three quarters of a percentage point to average annual real GDP growth during 2008-12.
    Keywords: Exchange rate regimes; monetary policy; financial crisis; economic growth
    JEL: E52 E62 E65 F33 O57
    Date: 2014–05–12
  9. By: Deborah Mabbett; Waltraud Schelkle
    Abstract: Fiscal surveillance was developed as a supranational regulatory process to counteract short-termism and deficit biases in government decision-making. With effective monetary policy to stabilize the economy, restraint on the fiscal discretion of national governments was seen as the key to macroeconomic stability. The financial crisis and its aftermath challenge this paradigm. Private debt caused the crisis and monetary policy is so weak that pro-cyclical fiscal retrenchment could worsen fiscal outturns. We argue, contrary to the ‘disciplinarian’ interpretation of the Stability and Growth Pact, that the regulatory process of fiscal surveillance is strongly affected by the potential perversities of fiscal restraint and is therefore resistant to the prescription of austerity. This claim is developed by tracing the technical difficulties encountered by fiscal surveillance since the financial crisis. The crisis has so destabilized expectations of the performance of the economy and the proper scope of government that the statistical and economic norms of surveillance have been undermined. We conclude that the problem with fiscal surveillance is not that the EU inflicts undue fiscal discipline on member states, but rather that the EU institutions are unable to protect member states against bond market panic, and therefore cannot coordinate stabilizing fiscal policies.
    Keywords: economic governance, financial crisis, Stability and Growth Pact
    Date: 2014–05

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