nep-eec New Economics Papers
on European Economics
Issue of 2014‒06‒22
fifteen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Assessing the Interest Rate and Bank Lending Channels of ECB Monetary Policies By Jerome Creel; Paul Hubert; Mathilde Viennot
  2. Systemic Sovereign Risk: Macroeconomic Implications in the Euro Area By Saleem Bahaj
  3. The impact of the Euro area macroeconomy on energy and non-energy global commodity prices By Papież, Monika; Śmiech, Sławomir; Dąbrowski, Marek A.
  4. Banking and Sovereign Debt Crises in a Monetary Union Without Central Bank Intervention By Jin Cheng; Meixing Dai; Frédéric Dufourt
  5. Medium and long run prospects for UK growth in the aftermath of the financial crisis By Nicholas Oulton
  6. Optimal fiscal policy of a monetary union member By Orjasniemi, Seppo
  7. Finance and Productivity Growth: Firm-level Evidence By Levine, Oliver; Warusawitharana, Missaka
  8. Scotland’s Currency Options By Angus Armstrong; Monique Ebell
  9. Do export price elasticities support tensions in currency markets? Evidence from China and six OECD countries By Aiello, Francesco; Bonanno, Graziella; Via, Alessia
  10. 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
  11. Role and impact of different types of financial institutions on economic performance and stability of the real sector in selected EU member states By Michal Jurek
  12. Does bank market power affect SME financing constraints? By Ryan, Robert M.; O'Toole, Conor M.; McCann, Fergal
  13. International division of labour and countries’ competitiveness: the case of Italy and Germany By Garbellini, Nadia
  14. WHEN CREDIT DRIES UP: JOB LOSSES IN THE GREAT RECESSION By Samuel Bentolila; Marcel Jansen; Gabriel Jiménez; Sonia Ruano
  15. Evaluating Asset-Market Effects of Unconventional Monetary Policy: A Cross-Country Comparison By Rogers, John H.; Scotti, Chiara; Wright, Jonathan H.

  1. By: Jerome Creel (OFCE - Sciences Po, and ESCP Europe); Paul Hubert (OFCE - Sciences Po); Mathilde Viennot (ENS Cachan)
    Abstract: This paper assesses the transmission of ECB monetary policies, conventional and unconventional, to both interest rates and lending volumes for the money market, sovereign bonds at 6-month, 5-year and 10-year horizons, loans inferior and superior to 1M€ to non-financial corporations, cash and housing loans to households, and deposits, during the financial crisis and in the four largest economies of the Euro Area. We first identify two series of ECB policy shocks at the euro area aggregated level and then include them in country-specific structural VAR.The main result is that only the pass-through from the ECB rate to interest rates has been really effective, consistently with the existing literature, while the transmission mechanism of the ECB rate to volumes and of quantitative easing (QE) operations to interest rates and volumes has been null or uneven over this sample. One argument to explain the differentiated pass-through of ECB monetary policies is that the successful pass-through from the ECB rate to interest rates, which materialized as a huge decrease in interest rates during the sample period, had a negative effect on the supply side of loans, and offset itself its potential positive effects on lending volumes
    Keywords: Transmission Channels, Unconventional Monetary Policy, Pass-through
    JEL: E51 E58
    Date: 2013–12–01
  2. By: Saleem Bahaj (University of Cambridge, Faculty of Economics; Centre for Macroeconomics (CFM))
    Abstract: What are the macroeconomic implications of changes in sovereign risk premia? In this paper, I use a novel identication strategy coupled with a new dataset for the Euro Area to answer this question. I show that exogenous innovations in sovereign risk premia were an important driver of the economic dynamics of crisis-hit countries, explaining 30-50% of the forecast error of unemployment. I also shed light on the mechanisms through which this occurs. Fluctuations in sovereign risk premia explain 20-40% of the variance of private borrowing costs. Increases in sovereign risk result in substantial capital ight, external adjustment and import compression. In contrast, governments appear not to increase their primary balances in response to increases in sovereign risk. Identifying these causal effects involves isolating a source of uctuations in sovereign borrowing costs exogenous to the economy in question. I address this problem by relying upon the transmission of country-specic events during the crisis in Europe to the sovereign risk premia in the remainder of the union. I construct a new dataset of critical events in foreign crisis-hit countries and I measure the impact of these events on yields in the economy of interest at an intraday frequency. An aggregation of foreign events serves as a proxy variable for structural innovations to the yield to identify shocks in a proxy SVAR. I extend this methodology into a Bayesian setting to allow for exible panel assumptions. A counterfactual analysis is used to remove the impact of foreign events from the bond yields of crisis hit countries: I find that 40-60% of the trough-to-peak moves in bond yields in crisis-hit countries are explained by foreign events, thereby suggesting that the crisis was not purely a function of weak local economic conditions.
    Keywords: High frequency identication, Narrative identication, Contagion, Bayesian VARs, Proxy SVARs, Panel VARs
    JEL: E44 E65 F42
    Date: 2014–05
  3. By: Papież, Monika; Śmiech, Sławomir; Dąbrowski, Marek A.
    Abstract: The aim of the paper is the analysis of the links between the real and financial processes in the euro area and energy and non-energy commodity prices. Monthly data spanning from 1997:1 to 2013:12 and the structural VAR model are used to analyse the relations between global commodity prices and the euro area economy. The analysis is performed for three sub-periods in order to capture potential changes in these relations in time. The main finding of the study reveals that commodity prices in the euro area do not respond to impulses from production (the economic activity), while commodity prices strongly react to impulses from financial processes, that is, the interest rates in the euro area and the dollar exchange rate to the euro (especially in the period before the global financial crisis). The study also indicates tightening the relations between energy and non-energy commodity prices.
    Keywords: commodity prices, real economy, financial market, SVAR
    JEL: C3 E3 E4 Q1 Q4
    Date: 2014–06–14
  4. By: Jin Cheng (BETA - Bureau d'économie théorique et appliquée - CNRS : UMR7522 - Université Louis Pasteur - Strasbourg I); Meixing Dai (BETA - Bureau d'économie théorique et appliquée - CNRS : UMR7522 - Université Louis Pasteur - Strasbourg I); Frédéric Dufourt (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), IUF - Institut Universitaire de France - Ministère de l'Enseignement Supérieur et de la Recherche Scientifique)
    Abstract: We analyze the conditions of emergence of a twin banking and sovereign debt crisis within a monetary union in which: (i) the central bank is not allowed to provide direct financial support to stressed member states or to play the role of lender of last resort in sovereign bond markets, and (ii) the responsibility of fighting against large scale bank runs, ascribed to domestic governments, is ensured through the implementation of a financial safety net (banking regulation and government deposit guarantee). We show that this broad institutional architecture, typical of the Eurozone at the onset of the financial crisis, is not always able to prevent the occurrence of a twin banking and sovereign debt crisis triggered by pessimistic investors' expectations. Without significant backstop by the central bank, the financial safety net may actually aggravate, instead of improve, the financial situation of banks and of the government.
    Keywords: banking crisis; sovereign debt crisis; bank runs; financial safety net; liquidity regulation; government deposit guarantee; self-fulfilling propheties
    Date: 2014–06
  5. By: Nicholas Oulton (London School of Economics (LSE), Centre for Economic Performance (CEP); Centre for Macroeconomics (CFM))
    Abstract: In this paper I argue that the financial crisis is likely to have a long term impact on the level of labour productivity in the UK while leaving the long run growth rate unaffected. Based entirely on pre-crisis data, and using a two-sector growth model, I project the future growth rate of GDP per hour in the market sector to be 2.61% p.a. Based on a cross-country panel analysis of 61 countries over 1950-2010, the permanent reduction in the level of GDP per worker resulting from the crisis could be substantial, about 5½%. The cross-country evidence also suggests that there are permanent effects on employment, implying a possibly even larger hit to the level of GDP per capita of about 9%.
    Keywords: productivity, potential output, growth, financial, banking crisis, recession
    JEL: J24 E32 O41 G01 H63
    Date: 2013–12
  6. By: Orjasniemi, Seppo (University of Oulu and Bank of Finland)
    Abstract: In this essay we study the optimal non-coordinated fiscal policy in a monetary union, where a common and independent monetary authority commits to optimally set the union-wide nominal interest rate. The national governments in the monetary union implement independent fiscal policies by choosing the level of government expenditures. We show that under a non-coordinated optimal fiscal policy rule government spending should react counter cyclically to the local output gap and inflation, while the union-wide aggregate fluctuations are stabilized by the common monetary policy. We also show that the spillovers caused by asymmetric shocks depend on the relative size of the country subject to these shocks.
    Keywords: monetary union; monetary policy; fiscal policy
    JEL: E52 E62 F41
    Date: 2014–06–10
  7. By: Levine, Oliver (University of Wisconsin); Warusawitharana, Missaka (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: Using data on a broad set of European firms, we find a strong positive relationship between the use of external financing and future productivity (TFP) growth within firms. This relationship is robust to various measures of financing and productivity, and strengthens as financing costs increase. We provide evidence against a reverse-causality explanation by showing that this relationship arises from the component of TFP that is outside the information set of the firm. These findings indicate that financial development supports productivity growth within firms, and helps explain why economic activity remains persistently depressed following financial crisis.
    Keywords: Finance-growth nexus; financial crisis; total factor productivity (TFP)
    Date: 2014–02–24
  8. By: Angus Armstrong (National Institute of Economic and Social Research (NIESR); Centre for Macroeconomics (CFM)); Monique Ebell (National Institute of Economic and Social Research (NIESR); Centre for Macroeconomics (CFM))
    Abstract: The objective of this paper is to consider which currency option would be best for an independent Scotland. We examine three currency options: being part of a sterling currency union, adopting the euro, or having an independent currency. No currency option is the best when considered against all criteria. Therefore, making the decision requires deciding which criteria are most important.
    Keywords: monetary policy
    JEL: E52
    Date: 2013–10
  9. By: Aiello, Francesco; Bonanno, Graziella; Via, Alessia
    Abstract: The empirical literature on trade imbalances does not make currency tensions easy to understand, because tensions across traders originate from the assumption that export-price elasticity is high. This paper provides new evidence by analysing the export-behaviour of China, France, Germany, Italy, Japan, UK, and the USA from 1990 to 2012. Estimates of export-price elasticities have been made using panel data techniques for non-stationary data. Long run relationships are stable to any structural break and indicate that exports are heavily dependent on world income, with long run income elasticity significantly higher than unity in many cases (China, Japan, Germany, UK and USA). Conversely, exports are price inelastic for most of the countries in the sample, in both the long and short runs. The exception is France, whose exports in the long run would increase by 2 percent if the country experienced a 1 percent depreciation of its real exchange rate.
    Keywords: Export elasticity, competitive Devaluation, currency wars, panel data
    JEL: C23 F10 F17 F37 P33
    Date: 2014–06–18
  10. By: Bover, Olympia (Banco de Espana); Casado, Jose Maria (Banco de Espana); Costa, Sonia (Banco de Portugal); Du Caju, Philip (National Bank of Belgium); McCarthy, Yvonne (Central Bank of Ireland); Sierminska, Eva (CEPS/INSTEAD Research Institute); Tzamourani, Panagiota (Bank of Greece and Deutsche Bundesbank); Villanueva, Ernesto (Banco de Espana); Zavadil, Tibor (National Bank of Slovakia)
    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, Loan-to-Value ratios, Fixed rate mortgages, Financial literacy.
    JEL: D14 G21 G28 K35
    Date: 2014–03
  11. By: Michal Jurek (Poznan University of Economics)
    Abstract: The purpose of this report is to analyse the impact of the financial sector on the real sector of the economy in the selected old (France, Germany, Italy, Sweden, the United Kingdom) and new (the Czech Republic, Hungary, Poland) EU member states. The specific objectives are: 1. Analysis of the influence of financial institutions on financing the real economy. 2. Identification of sectoral and national differences in the financial sectors and consequences of these divergences for the real sectors in analysed countries. In order to accomplish this target, extensive research is undertaken. It encompasses the analysis of types of financial institutions functioning in the selected EU member states. Linkages between different types of financial institutions and the real sector of the economy are identified and described, and differences in impact of the financial sector on the real sector of the economy in the analysed EU member states are recognized. Finally, comparative analysis of evolution of structure of financial sector and driving forces in the process of its evolution in selected countries and group of countries is presented. Conducted analysis allowed formulating many remarks. Among them, the most important appears to be that the proper regulatory environment is crucial to prevent negative influence of financialisation on the real sector of the economy. Public authorities should be more proactive in creating a financial sector able to reconcile the private financial institutions striving for profit with interests of the real sector and of general public ones. To achieve this target public authorities should, on the one hand, effectively regulate and supervise all financial institutions, and, on the other, create favourable conditions for development of other than private-owned profit-oriented financial institutions. Policy goals should include promoting both competition and plurality. Competition is necessary for efficient functioning of financial institutions. Plurality, by protecting diversity of financial sectors, builds up systemic trust and helps maintaining the stability of this sector. Efficient, but less oligopolistic market structures within the framework of prudential regulation should enforce financial sectors’ stability in the analysed countries. Therefore, optimum regulatory structures should be aimed at the protection of the diversity within the framework of harmonization of financial sectors within the EU.
    Keywords: financial institutions, financial sector, banking and finance, ownership structure, market concentration, mergers and acquisitions, privatization
    JEL: E44 E50 G21 G22 G32 G34 N24
  12. By: Ryan, Robert M. (Central Bank of Ireland); O'Toole, Conor M. (Central Bank of Ireland); McCann, Fergal (Central Bank of Ireland)
    Abstract: This paper examines the extent to which bank market power alleviates or magnifies SME credit constraints using a large panel dataset of more than 118,000 SMEs across 20 European countries over the period 2005-2008. To our knowledge, this is the first study to examine bank market power and SME credit constraints in an international, developed economy setting. More- over, our study is the first to address a number of econometric considerations simultaneously, in particular by controlling for the availability of profitable investment opportunities using a structural Q model of investment. Our results strongly support the market power hypothesis, namely, that increased market power results in increased financing constraints for SMEs. Ad- ditionally, we find that the relationship exhibits heterogeneity across firm size and opacity in a manner that suggests that the true relationship between bank market power and financing constraints might not be fully explained by the existing theory. Finally, we find that the effect of bank market power on financing constraints increases in financial systems that are more bank dependent.
    Keywords: Bank Competition, Bank Concentration, Financing Constraints, Tobin's Q, Firmlevel Investment
    JEL: G21 G31 G32 F34
    Date: 2014–02
  13. By: Garbellini, Nadia
    Abstract: The paper is going to use the WIOD to analyse the structure, extent and evolution of production processes outsourcing in Italy and Germany from 1995 to 2011 by means of global vertically integrated sectors, in order to single out and compare the different sources of gains/losses in competitiveness. Secondly, global vertically integrated sectors are going to be employed to get a measure of labour productivity changes in the two countries. By comparing the trends of these two sets of indicators, it is possible to shed light on the evolution of international competitiveness in the two countries, to assess the extent to which competitiveness gains/losses are associated to actual productivity increases/decreases and to what extent they are simply due to a different geographical allocation of production stages.
    Keywords: Labour productivity, International fragmentation of production, offshoring
    JEL: B51 F14 R15
    Date: 2014–06–09
  14. By: Samuel Bentolila (CEMFI, Centro de Estudios Monetarios y Financieros); Marcel Jansen (Universidad Autónoma de Madrid); Gabriel Jiménez (Banco de España); Sonia Ruano (Banco de España)
    Abstract: We use a unique dataset to estimate the impact of a large credit supply shock on employment in Spain. We exploit marked differences in banks’ health at the onset of the Great Recession. Several weak banks were rescued by the State and they reduced credit more than other banks. We compare employment changes from 2006 to 2010 at firms heavily indebted to weak banks before the crisis and the rest. Our estimates imply that these firms suffered an additional employment drop between 3 and 13.5 percentage points due to weak-bank attachment, representing between 8% and 36% of aggregate job losses.
    Keywords: Job losses, Great Recession, credit constraints.
    JEL: D92 G33 J23
    Date: 2013–11
  15. By: Rogers, John H. (Board of Governors of the Federal Reserve System (U.S.)); Scotti, Chiara (Board of Governors of the Federal Reserve System (U.S.)); Wright, Jonathan H. (Johns Hopkins University)
    Abstract: This paper examines the effects of unconventional monetary policy by the Federal Reserve, Bank of England, European Central Bank and Bank of Japan on bond yields, stock prices and exchange rates. We use common methodologies for the four central banks, with daily and intradaily asset price data. We emphasize the use of intradaily data to identify the causal effect of monetary policy surprises. We find that these policies are effective in easing financial conditions when policy rates are stuck at the zero lower bound, apparently largely by reducing term premia.
    Keywords: Large scale asset purchases; quantitative easing; zero bound; term premium
    Date: 2014–03–07

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