nep-eec New Economics Papers
on European Economics
Issue of 2014‒06‒14
fourteen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. The impact of sovereign and credit risk on interest rate convergence in the euro area By Ivo Arnold; Saskia van Ewijk
  2. Tweets, Google Trends and Sovereign Spreads in the GIIPS By Theologos Dergiades; Costas Milas; Theodore Panagiotidis
  3. International capital flows and the boom-bust cycle in Spain By in 't Veld, Jan; Kollmann, Robert; Pataracchia, Beatrice; Ratto, Marco; Roeger, Werner
  4. Third-country relations in the directive establishing a framework for the recovery and resolution of credit institutions By María J. Nieto
  5. The Financial and Macroeconomic Effects of OMT Announcements By Carlo Altavilla; Domenico Giannone; Michèle Lenza
  6. Monetary policy, long real yields and the financial crisis By Moretti, Laura
  7. Saving Europe?: The Unpleasant Arithmetic of Fiscal Austerity in Integrated Economies By Enrique G. Mendoza; Linda L. Tesar; Jing Zhang
  8. Mutual excitation in eurozone sovereign CDS By Aït-Sahalia, Yacine; Laeven, Roger J. A.; Pelizzon, Loriana
  9. Macroprudential framework:key questions applied to the French case. By Bennani, T.; Després, M.; Dujardin, M.; Duprey, T.; Kelber, A.
  10. Disappearing government bond spreads in the eurozone – Back to normal? By De Grauwe, Paul; Ji, Yuemei
  11. The evaluation of recession magnitudes in EU countries during the global financial crisis 2008-2010 By Mazurek, Jiří
  12. Is it possible to adjust ‘with a human face’? Differences in fiscal consolidation strategies between Hungary and Iceland By Bruno Martorano; UNICEF Innocenti Research Centre
  13. Fiscal rules and compliance expectations: Evidence for the German debt brake By Heinemann, Friedrich; Janeba, Eckhard; Schröder, Christoph; Streif, Frank
  14. The Dynamics of Employment Growth: New Evidence from 18 Countries By Chiara Criscuolo; Peter N. Gal; Carlo Menon

  1. By: Ivo Arnold; Saskia van Ewijk
    Abstract: This paper employs a time-varying parameter state space model to explore the impact of the crisis on bank retail rates in the euro area. We show that σ-convergence in interest rates has been adversely affected by the crisis and quantify the role of sovereign and credit risk as two alternative explanations for the increase in financial fragmentation. A key finding is that the heterogeneity in sovereign risk across member states accounts for a sizable part of the increase in the cross-sectional dispersion of various lending and deposit rates. In contrast, the impact of the increased heterogeneity in credit risk on bank retail rates is negligible. Our results suggest that efforts to reduce sovereign tensions - as exemplified by the ECB's OMT program - may help to reduce financial fragmentation.
    Keywords: bank retail rates; σ-convergence; sovereign risk; credit risk; state space model
    JEL: E43 G21 H63
    Date: 2014–06
  2. By: Theologos Dergiades (School of Science and Technology, International Hellenic University, Greece); Costas Milas (Management School, University of Liverpool, United Kingdom); Theodore Panagiotidis (Department of Economics, University of Macedonia)
    Abstract: We examine whether the information contained in social media (Twitter, Facebook & Google Blogs) and web search intensity (Google) influences financial markets. Using a multivariate system and focussing on Eurozone’s peripheral countries, the GIIPS (Greece, Ireland, Italy, Portugal and Spain) as well as two of Eurozone’s core countries (France and the Nethelands), we show that social media discussion and search-related queries for the Greek debt crisis provide significant short-run information primarily for the Greek-German and Irish-German government bond yield differential even when other financial control variables (international risk, Eurozone’s risk, default risk and liquidity risk) are accounted for, and to a much lesser extent for Portuguese, Italian and Spanish sovereign yield differentials. Social media discussion and Google search-related queries for the Greek debt crisis do not affect spreads in France and the Netherlands.
    Keywords: Google, social media, Greek crisis, frequency domain analysis, GIIPS.
    JEL: C10 G01 G02
    Date: 2014–06
  3. By: in 't Veld, Jan (DG-ECFIN, EU Commission); Kollmann, Robert (ECARES, Université Libre de Bruxelles and CEPR); Pataracchia, Beatrice (JRC, EU Commission); Ratto, Marco (JRC, EU Commission); Roeger, Werner (DG-ECFIN, EU Commission)
    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: capital flows; boom-bust cycle; global financial crisis
    JEL: C11 E21 E32 E62
    Date: 2014–05–01
  4. By: María J. Nieto (Banco de España)
    Abstract: This article presents a critical analysis of the principles behind the scope and forms of cooperation between EU Member States and third-country resolution authorities in the context of the 2014 Bank Recovery and Resolution Directive. The article also explores the future responsibilities of the prospective Single Resolution Authority regarding relations between the euro area and third-country resolution authorities.
    Keywords: European Union, banks, international economics, bankruptcy
    JEL: F39 G18 G33 G38 K33 L51
    Date: 2014–05
  5. By: Carlo Altavilla; Domenico Giannone; Michèle Lenza
    Abstract: This study evaluates the macroeconomic effects of Outright Monetary Transaction (OMT)announcements by the European Central Bank (ECB). Using high-frequency data, we find that OMTannouncements decreased the Italian and Spanish 2-year government bond yields by about 2percentage points, while leaving unchanged the bond yields of the same maturity in Germany andFrance. These results are used to calibrate a scenario in a multi-country model describing the macrofinanciallinkages in France, Germany, Italy, and Spain. The scenario analysis suggests that thereduction in bond yields due to OMT announcements is associated with a significant increase in realactivity, credit, and prices in Italy and Spain with relatively muted spillovers in France and Germany.
    Keywords: outright monetary transactions; event study; news; multi-country vector autoregressive model
    JEL: E47 E58
    Date: 2014–06
  6. By: Moretti, Laura
    Abstract: This paper investigates the role of monetary policy in the collapse in the long-term real interest rates in the decade before the onset of the financial crisis using a sample of five advanced economies (United States, United Kingdom, the euro area, Sweden and Canada). The results from an estimated panel VAR with monthly data show that, while monetary policy shocks had negligible effects on long-term real interest rates, shocks to the long-term real interest rates had a one-to-one effect on the short nominal rate. --
    Keywords: monetary policy,long-term real interest rates,panel VAR
    JEL: E43 E52 E58
    Date: 2014
  7. By: Enrique G. Mendoza; Linda L. Tesar; Jing Zhang
    Abstract: What are the macroeconomic effects of tax adjustments in response to large public debt shocks in highly integrated economies? The answer from standard closed-economy models is deceptive, because they underestimate the elasticity of capital tax revenues and ignore cross-country spillovers of tax changes. Instead, we examine this issue using a two-country model that matches the observed elasticity of the capital tax base by introducing endogenous capacity utilization and a partial depreciation allowance. Tax hikes have adverse effects on macro aggregates and welfare, and trigger strong cross-country externalities. Quantitative analysis calibrated to European data shows that unilateral capital tax increases cannot restore fiscal solvency, because the dynamic Laffer curve peaks below the required revenue increase. Unilateral labor tax hikes can do it, but have negative output and welfare effects at home and raise welfare and output abroad. Large spillovers also imply that unilateral capital tax hikes are much less costly under autarky than under free trade. Allowing for one-shot Nash tax competition, the model predicts a "race to the bottom" in capital taxes and higher labor taxes. The cooperative equilibrium is preferable, but capital (labor) taxes are still lower (higher) than initially. Moreover, autarky can produce higher welfare than both Nash and Cooperative equilibria.
    JEL: E6 E62 F34 F42 H6
    Date: 2014–06
  8. By: Aït-Sahalia, Yacine; Laeven, Roger J. A.; Pelizzon, Loriana
    Abstract: We study self- and cross-excitation of shocks in the Eurozone sovereign CDS market. We adopt a multivariate setting with credit default intensities driven by mutually exciting jump processes, to capture the salient features observed in the data, in particular, the clustering of high default probabilities both in time (over days) and in space (across countries). The feedback between jump events and the intensity of these jumps is the key element of the model. We derive closed-form formulae for CDS prices, and estimate the model by matching theoretical prices to their empirical counterparts. We find evidence of self-excitation and asymmetric cross-excitation. Using impulse-response analysis, we assess the impact of shocks and a potential policy intervention not just on a single country under scrutiny but also, through the effect on cross-excitation risk which generates systemic sovereign risk, on other interconnected countries. --
    Keywords: CDS,Sovereign risk,Systemic risk,Jumps,Feedback,Hawkes processes,Mutually exciting processes,Impulse-response
    JEL: C13 G12
    Date: 2014
  9. By: Bennani, T.; Després, M.; Dujardin, M.; Duprey, T.; Kelber, A.
    Abstract: This paper presents the main features of macroprudential policy with a focus on the French case. We first recall the ultimate objective of this policy, which is to prevent and to mitigate systemic risk, i.e. the risk of “widespread disruptions to the provision of financial services that have serious consequences for the real economy” (CGFS, 2012). We put forward two goals to achieve this ultimate objective, namely (i) increasing the resilience of the financial sector and (ii) leaning against the financial cycle. Then, in the context of the ongoing reflections on the organisation of macroprudential policy at the national and European level, we analyse the macroprudential institutional framework recently adopted in France. We discuss the instruments available to macroprudential authorities in light of the two main goals of macroprudential policy. Drawing on theoretical considerations and past experience, we favour a macroprudential toolkit broadly consistent with the European CRD IV/CRR package. Finally, we emphasise the need for macroprudential authorities to be able to monitor and detect systemic risk. To this end, several indicators and their reliability are analysed.
    Keywords: macroprudential policy, central bank, systemic risk, financial crisis
    JEL: E58 G28 G18 G01 C50
    Date: 2014
  10. By: De Grauwe, Paul; Ji, Yuemei
    Abstract: Since the announcement of the Outright Monetary Transactions (OMT) programme by Mario Draghi, President of the ECB, in 2012, the government bond spreads began a strong decline. This paper finds that most of this decline is due to the positive market sentiments that the OMT programme has triggered and is not related to underlying fundamentals, such as the debt-to-GDP ratios or the external debt position that have continued to increase in most countries. The authors even argue that the market’s euphoria may have gone too far in taking into account the same market fundamentals. They conclude with some thoughts about the future governance of the OMT programme.
    Date: 2014–05
  11. By: Mazurek, Jiří
    Abstract: The aim of the article is to compare 2008-2010 recessions in individual EU countries. For the comparison a new quantitative measure – recession magnitude scale – is used. The scale is derived from (negative) quarterly GDP growth rates during a recession and its duration. Moreover, recessions are classified on the basis of their magnitudes into one of four categories: minor, major, severe and ultra. The strongest recession (of severe category) took place in Latvia, Estonia, Lithuania and Ireland, while the majority of EU countries experienced recessions of major category. Magnitude of Greek recession will be evaluated after the end of the ongoing event. The weakest recessions in EU occurred in France, Malta and Cyprus (the only recession of minor category). A comparison of EU’s recession with the US Great Depression in the 1930s revealed that the recent crisis was more than eight times smaller than that of 1930s. Furthermore, it was found out that recession magnitudes in EU countries were positively correlated to the countries’ economic growth prior to the recession and this relationship was statistically significant at 0.01 level.
    Keywords: European Union, global financial crisis, recession, recession classification, recession magnitude.
    JEL: C23 E32 O52
    Date: 2014–07–05
  12. By: Bruno Martorano; UNICEF Innocenti Research Centre
    Abstract: Before the recent economic crisis, Hungary and Iceland were considered to be two excellent models of development. Hungary and Iceland were among the countries affected earliest and most by the recent macroeconomic shock, suffering a similar drop in GDP.While the Hungarian government implemented a flat tax reform in order to stimulate economic activity, the Icelandic government replaced its flat tax system with a progressive one increasing the participation of high income groups in the adjustment process. The aim of this paper is to compare the opposite adjustment paths followed by Hungary and Iceland on selected outcomes.
    Keywords: crisis; financial analysis; financial systems; inequality; tax reforms; tax revenues;
    Date: 2014
  13. By: Heinemann, Friedrich; Janeba, Eckhard; Schröder, Christoph; Streif, Frank
    Abstract: Fiscal rules have become popular to limit deficits and high debt burdens in industrialized countries. A growing literature examines their impact based on aggregate fiscal performance. So far, no evidence exists on how fiscal rules influence deficit expectations of fiscal policy makers. In the context of the German debt brake, we study this expectation dimension. In a first step, we introduce a simple dynamic model in an environment characterized by the lagged implementation of a new rule. Lagged implementation characterizes the setup of the German debt brake and raises credibility issues. In a second step, we analyze a unique survey of members of all 16 German state parliaments and show that the debt brake's credibility is far from perfect. The heterogeneity of compliance expectations in the survey closely corresponds to our theoretical predictions regarding states' initial fiscal conditions, specific state fiscal rules and bailout perceptions. In addition, there is a robust asymmetry in compliance expectations between insiders and outsiders (both for in-state vs out-of-state politicians and the government vs opposition dimension), which we attribute to overconfidence rather than noisy information. These results suggest that national fiscal rules can be strengthened through nobailout rules, sustainable initial fiscal conditions and complementary sub-national rules. --
    Keywords: Budget Deficits,Debt Brake,Credibility,Survey,Fiscal Rules
    JEL: H6 H7
    Date: 2014
  14. By: Chiara Criscuolo; Peter N. Gal; Carlo Menon
    Abstract: Motivated by the on-going interest of policy makers in the sources of job creation, this paper presents results from a new OECD project on the dynamics of employment (DynEmp) based on an innovative methodology using firm-level data (i.e. national business registers or similar sources). It demonstrates that among small and medium sized enterprises (SMEs), young firms play a central role in creating jobs, whereas old SMEs tend to destroy jobs. This pattern holds robustly across 17 OECD countries and Brazil, extending recent evidence found in the United States. The paper also shows that young firms are always net job creators throughout the business cycle, even during the financial crisis. During the crisis, entry and post-entry growth by young firms were affected most heavily, although downsizing by old firms was responsible for most job losses. The results also highlight large cross-country differences in the growth potential of young firms, pointing to the role played by national policies in enabling successful firms to create jobs.
    Keywords: Business dynamics, employment growth, small businesses, business demography, startups, great recession, job creation and destruction
    JEL: D22 L26 E24 L25
    Date: 2014–06

This nep-eec issue is ©2014 by Giuseppe Marotta. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.