nep-eec New Economics Papers
on European Economics
Issue of 2014‒06‒28
thirteen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. A macro-financial analysis of the euro area sovereign bond market By Hans Dewachter; Leonardo Iania; Marco Lyrio; Maite de Sola Perea
  2. Determinants of OECD countries’ sovereign yields: safe havens, purgatory, and the damned. By C. Bortoli; L. Harreau; C. Pouvelle
  3. What Happened in Cyprus? The Economic Consequences of the Last Communist Government in Europe By Orphanides, Athanasios
  4. Did the EBA Capital Exercise Cause a Credit Crunch in the Euro Area? By J-S. Mésonnier; A. Monks
  5. Real unit labour costs in Eurozone countries: Drivers and clusters By Javier Ordóñez; Hector Sala Lorda; Hector José I. Silva
  6. Household wealth in the euro area: The importance of intergenerational transfers, homeownership and house price dynamics By Thomas Y. Mathä; Alessandro Porpiglia; Michael Ziegelmeyer
  7. The Eurocrisis: Muddling Through, or On the Way to a More Perfect Euro Union? By Joshua Aizenman
  8. Forecasting Short-Term Real GDP Growth in the Euro Area and Japan Using Unrestricted MIDAS Regressions By Maxime Leboeuf; Louis Morel
  9. Foreign direct investment drivers and growth in Central and Eastern Europe in the aftermath of the 2007 global financial crisis By R. Jimborean; A. Kelber
  10. EuroMInd-C: a Disaggregate Monthly Indicator of Economic Activity for the Euro By Stefano Grassi; Tommaso Proietti; Cecilia Frale; Massimiliano Marcellino; Gianluigi Mazzi
  11. Hierarchical structure of the European countries based on debts as a percentage of GDP during the 2000-2011 period By Ersin Kantar; Bayram Deviren; Mustafa Keskin
  12. Procyclicality and path dependence of sovereign credit ratings: The example of Europe By Freitag L.
  13. Accounting for Spanish business cycles. By Jesús Rodríguez-López; Mario Solís-García

  1. By: Hans Dewachter (National Bank of Belgium, Research Department; Center for Economic Studies, University of Leuven; CESifo); Leonardo Iania (Louvain School of Management, Université Catholique de Louvain; Center for Economic Studies, University of Leuven); Marco Lyrio (Insper Institute of Education and Research); Maite de Sola Perea (National Bank of Belgium, Research Department)
    Abstract: We estimate the 'fundamental' component of euro area sovereign bond yield spreads, i.e. the part of bond spreads that can be justified by country-specific economic factors, euro area economic fundamentals, and international influences. The yield spread decomposition is achieved using a multi-market, no-arbitrage affine term structure model with a unique pricing kernel. More specifically, we use the canonical representation proposed by Joslin, Singleton, and Zhu (2011) and introduce next to standard spanned factors a set of unspanned macro factors, as in Joslin, Priebsch, and Singleton (2013). The model is applied to yield curve data from Belgium, France, Germany, Italy, and Spain over the period 2005-2013. Overall, our results show that economic fundamentals are the dominant drivers behind sovereign bond spreads. Nevertheless, shocks unrelated to the fundamental component of the spread have played an important role in the dynamics of bond spreads since the intensification of the sovereign debt crisis in the summer of 2011.
    Keywords: Euro area sovereign bonds, yield spread decomposition, unspanned macro factors, fair spreads
    JEL: E43 E44 E47
    Date: 2014–06
  2. By: C. Bortoli; L. Harreau; C. Pouvelle
    Abstract: In this paper, we estimate the determinants of the spreads between the 10-year sovereign bond yields and the (interest rate) swap rate for a sample of 22 OECD countries over the January 1999-December 2013 period, using various models. Our main, fixed-effect, model highlights the crucial role of GDP growth, public deficit and debt liquidity in explaining the level of spreads, while the public debt-to-GDP ratio plays a lesser role. We find that our results are mainly driven by observations on euro area countries after the onset of the 2008 crisis, with observed spreads found to significantly exceed estimated values during the crisis for a number of euro area countries. We also shed light on the effect of unconventional monetary policies, while Target 2 balances are used for euro area countries in order to reflect concerns on the stability of the euro area. Finally, according to our cointegration model, we find a long-term relationship between the spread, the debt-to-GDP ratio, and potential GDP growth, with a larger impact of the latter variable.
    Keywords: interest rates; sovereign spreads; public debt; panel data.
    JEL: C23 E43 E44 G15
    Date: 2014
  3. By: Orphanides, Athanasios
    Abstract: This paper reviews developments in the Cypriot economy following the introduction of the euro on 1 January 2008 and leading to the economic collapse of the island five years later. The main cause of the collapse is identi?ed with the election of a communist government in February 2008, within two months of the introduction of the euro, and its subsequent choices for action and inaction on economic policy matters. The government allowed a rapid deterioration of public finances, and despite repeated warnings, damaged the country’s creditworthiness and lost market access in May 2011. The destruction of the island’s largest power station in July 2011 subsequently threw the economy into recession. Together with the intensification of the euro area crisis in the summer and fall of 2011, these events weakened the banking system which was vulnerable due to its exposure in Greece. Rather than deal with its ?scal crisis, the government secured a loan from the Russian government that allowed it to postpone action until after the February 2013 election. Rather than protect the banking system, losses were imposed on banks and a campaign against them was coordinated and used as a platform by the communist party for the February 2013 election. The strategy succeeded in delaying resolution of the crisis and avoiding short-term political cost for the communist party before the election, but also in precipitating a catastrophe right after the election. --
    Keywords: Cyprus,euro area,crisis,sovereign debt,populism.
    JEL: D72 E32 E65 F34 H12 H63
    Date: 2014
  4. By: J-S. Mésonnier; A. Monks
    Abstract: We exploit a unique monthly dataset of bank balance sheets to document the lending behaviour of euro area banks that were subject to the EBA's 2011/12 Capital Exercise. This exercise was announced in October 2011 and required large European banking groups to meet a higher Tier 1 capital ratio by June 2012, after accounting for an unprecedented temporary buffer against exposure to sovereign debt. Controlling for bank characteristics and demand at the level of country of residence, we find that banks in a banking group that had to increase its capital by 1 percent of risk-weighted assets tended to have annualized loan growth (over the 9 month period of the exercise) that was between 1.2 and 1.6 percentage points lower than for banks in groups that did not have to increase their capital ratio. Looking at aggregate effects at the country level, we also find that banks that did not have to recapitalize did not substitute for more constrained lenders. Our results are of particular relevance for the decisions facing the new European Single Supervisor in advance of its Asset Quality Review due in November 2014.
    Keywords: bank capital ratios, credit supply, EBA, euro area, asset quality review.
    JEL: C21 E51 G21 G28
    Date: 2014
  5. By: Javier Ordóñez (Departament d’Economia, Universitat Jaume I de Castelló); Hector Sala Lorda (Departament d'Economia Aplicada, Universitat Autonoma de Barcelona); Hector José I. Silva (School of Economics, Keynes College, University of Kent,)
    Abstract: We examine the trajectories of the real unit labour costs (RULCs) in a selection of Eurozone economies. Strong asymmetries in the convergence process of the RULCs and its components —real wages, capital intensity, and technology— are uncovered through decomposition and cluster analyses. In the last three decades, the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) succeeded in reducing their RULCs by more than their northern partners. With the exception of Ireland, however, technological progress was weak; it was through capital intensification that periphery economies gained efficiency and competitiveness. Cluster heterogeneity, and lack of robustness in cluster composition, is a reflection of the difficulties in achieving real convergence and, by extension, nominal convergence. We conclude by outlining technology as the key convergence factor, and call for a renewed attention to real convergence indicators to strengthen the process of European integration.
    Keywords: Real unit labour costs, Eurozone, Real wages, Capital intensity, Technology
    JEL: F43 O47 O52
    Date: 2014–06
  6. By: Thomas Y. Mathä; Alessandro Porpiglia; Michael Ziegelmeyer
    Abstract: Results from the Eurosystem Household Finance and Consumption Survey reveal substantial variation in household net wealth across euro area countries that await explanation. This paper focuses on three main factors for the wealth accumulation process, i) homeownership, ii) housing value appreciation and iii) intergenerational transfers. We show that these three factors, in addition to the common household and demographic factors, are relevant for the net wealth accumulation process in all euro area countries, and moreover that, using various decomposition techniques, differences therein, in particular in homeownership rates and house price dynamics, are important for explaining wealth differences across euro area countries.
    Keywords: household wealth, homeownership, property prices, inheritance, euro area
    JEL: D31 E21 O52 C42
    Date: 2014–06
  7. By: Joshua Aizenman
    Abstract: This paper looks at the short history of the Eurozone through the lens of an evolutionary approach to forming new institutions. The euro has operated as a currency without a state, under the dominance of Germany. This has so far allowed the euro to achieve a number of design objectives, and this may continue, as long as Germany does not shirk its growing responsibility for the euro’s future. Germany’s resilience and dominant size within the EU may explain its “muddling-through” approach towards the Eurozone crisis. We review several manifestations of this muddling through process. Greater mobility of labor and lower mobility of under-regulated capital may be the costly “second best” adjustment until the arrival of more mature institutions in the Eurozone.
    JEL: F32 F36 F41
    Date: 2014–06
  8. By: Maxime Leboeuf; Louis Morel
    Abstract: In this paper, the authors develop a new tool to improve the short-term forecasting of real GDP growth in the euro area and Japan. This new tool, which uses unrestricted mixed-data sampling (U-MIDAS) regressions, allows an evaluation of the usefulness of a wide range of indicators in predicting short-term real GDP growth. In line with previous Bank studies, the results suggest that the purchasing managers’ index (PMI) is among the best-performing indicators to forecast real GDP growth in the euro area, while consumption indicators and business surveys (the PMI and the Economy Watchers Survey) have the most predictive power for Japan. Moreover, the results indicate that combining the predictions from a number of indicators improves forecast accuracy and can be an effective way to mitigate the volatility associated with monthly indicators. Overall, our preferred U-MIDAS model specification performs well relative to various benchmark models and forecasters.
    Keywords: Econometric and statistical methods, International topics
    JEL: C C5 C50 C53 E E3 E37 E4 E47
    Date: 2014
  9. By: R. Jimborean; A. Kelber
    Abstract: In the context of the recent deceleration of growth in emerging Europe, we reassess empirically the effect of foreign direct investment (FDI) inflows on economic growth in Central and Eastern European countries (CEECs) through an analysis carried out over the period 1993-2013. In a first step, we show that the main domestic determinants of FDI inflows are the market size, risk premia, unit labour costs, the openness, as well as progress in structural reforms (mainly related to privatisation process and banking sector) and institutional reforms (namely the lack of trade barriers, the ability for individuals to accumulate private property and progress in fighting corruption) in the host economy. Moreover, the macroeconomic conditions in the euro area also play an important role in explaining FDI flows to the region. In a second step, we analyse the impact of FDI inflows on economic growth. Our findings add to the strand of literature pointing out a positive effect of FDI inflows on growth. We consider the occurrence of the 2007 and 2011 crises and show their negative impact on the FDI - economic growth link, both crises reducing the positive impact of FDI on economic growth.
    Keywords: foreign direct investment; Central and Eastern Europe.
    JEL: F21 O52 P33
    Date: 2014
  10. By: Stefano Grassi; Tommaso Proietti; Cecilia Frale; Massimiliano Marcellino; Gianluigi Mazzi
    Abstract: The paper deals with the estimation of monthly indicators of economic activity for the Euro area and its largest member countries that possess the following attributes: relevance, representativeness and timeliness. Relevance is obtained by referring our monthly indicators to gross domestic product at chained volumes, the most important measure of the level of economic activity. Representativeness is achieved by entertaining a very large number of (timely) time series on monthly indicators relating to the level of economic activity, providing a more or less complete coverage. The indicators are modelled with a large scale parametric factor model. We discuss its specification and provide details on the statistical treatment. Computational efficiency is crucial for estimating a large scale parametric factor model of the dimension considered in our application (considering about 170 series). To achieve it we apply state of the art state space methods that can handle temporal aggregation, and any pattern of missing values.
    Keywords: Index of coincident indicators. Temporal Disaggregation. Multivariate State Space Models. Dynamic factor Models. Quarterly National accounts
    JEL: E32 E37 C53
    Date: 2014–05
  11. By: Ersin Kantar; Bayram Deviren; Mustafa Keskin
    Abstract: We investigate hierarchical structures of the European countries by using debt as a percentage of Gross Domestic Product (GDP) of the countries as they change over a certain period of time. We obtain the topological properties among the countries based on debt as a percentage of GDP of European countries over the period 2000-2011 by using the concept of hierarchical structure methods (minimal spanning tree, (MST) and hierarchical tree, (HT)). This period is also divided into two sub-periods related to 2004 enlargement of the European Union, namely 2000-2004 and 2005-2011, in order to test various time-window and observe the temporal evolution. The bootstrap techniques is applied to see a value of statistical reliability of the links of the MSTs and HTs. The clustering linkage procedure is also used to observe the cluster structure more clearly. From the structural topologies of these trees, we identify different clusters of countries according to their level of debts and economic ties. Our results show that by the debt crisis, the less and most affected Eurozones economies are formed as a cluster with each other in the MSTs and hierarchical trees.
    Date: 2014–06
  12. By: Freitag L. (GSBE)
    Abstract: This paper investigates empirically the behavior of Credit Rating Agencies CRAs when assessingsovereign solvency for European countries. Using Probit regressions I find that even after controllingfor macroeconomic factors, CRAs take the business cycle into account. Also, there is a clear case ofpath dependence in sovereign ratings. Additionally, it turns out that there seems to be a discrepancybetween upgrades and downgrades. These results are robust to a number of different specifications.
    Keywords: International Financial Markets; Investment Banking; Venture Capital; Brokerage; Ratings and Ratings Agencies;
    JEL: G15 G24
    Date: 2014
  13. By: Jesús Rodríguez-López (Department of Economics, Universidad Pablo de Olavide de Sevilla); Mario Solís-García (Department of Economics, Macalester College, Saint Paul (USA))
    Abstract: We apply the business cycle methodology proposed by Chari, Kehoe, and McGrattan (2007) to identify the sources of Spanish business fluctuations during two outstanding cyclical episodes: the recession alongside the transition to democracy in 1977 and the great recession of 2008. We find that the labor wedge plays a key role during both recessions and that taxes and labor market institutions are likely behind the wedge movements. We conclude that any model that tries to understand the causes of recessions that occurred in the last three decades should focus on the labor wedge.
    Keywords: Business cycle accounting, efficiency wedge, labor wedge, investment wedge
    JEL: E32 O11 O41 O47 O53
    Date: 2014–06

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