nep-eec New Economics Papers
on European Economics
Issue of 2014‒09‒25
nine papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Euro-Crisis and Spillover Effects on the Emerging Economies By Hamidreza Tabarraei
  2. The Impact of Market Regulations on Intra-European Real Exchange Rates By Agnès Bénassy-Quéré; Dramane Coulibaly
  3. Fiscal consolidation, public debt and output dynamics in the euro area : lessons from a simple model with time-varying fiscal multipliers By Christophe Blot; Marion Cochard; Bruno Ducoudré; Danielle Schweisguth; Xavier Timbeau; Jérôme Creel
  4. Operational targets and the yield curve: The euro area and Switzerland By Kedan, Danielle; Stuart, Rebecca
  5. Labour Market Reforms and Current Account Imbalances: Beggar-thy-neighbour policies in a currency union? By Baas, Timo; Belke, Ansgar
  6. Is Greece turning the corner? A theory-based assessment of recent Greek macro-policy By Arghyrou, Michael G
  7. Fiscal Unions By Emmanuel Farhi; Ivan Werning
  8. Making the Banking Sector More Resilient and Reducing Household Debt in the Netherlands By Rafał Kierzenkowski; Olena Havrylchyk; Pierre Beynet
  9. More facts about prices: France before and during the Great Recession By Nicoletta Berardi; Erwan Gautier; Hervé Le Bihan

  1. By: Hamidreza Tabarraei (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - École des Hautes Études en Sciences Sociales (EHESS) - École des Ponts ParisTech (ENPC) - École normale supérieure [ENS] - Paris - Institut national de la recherche agronomique (INRA), EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: I present some evidence showing that the advanced economies' banks were contributing in spreading the Euro-crisis to the emerging economies. For this purpose, I test the common lender channel among other channels of contagion, by using international banking flows data. Based on a constructed crisis-index for the Euro area, I find that countries with higher level of exposure to GIIPS, deleveraged more in riskier periods, i.e. during periods with high crisis index. Among all emerging economies in our sample, the Latin American countries were not affected as much as the emerging economies Asia and Europe, despite their high exposures to Spain. While the impact of the Euro-crisis stopped to show sign in Asia after 2011, it continued to affect the emerging Europe. The Euro-area banks were deleveraging more in the Emerging Europe than their peers in non-Euro advanced economies, whereas most of their deleveraging in Asia happened in 2010. Although the results present evidence in favour of local impacts of the Euro-crisis, they show the importance of spillover through multinational banks.
    Keywords: Sovereign risk ; Contagion ; euro crisis ; emerging economies
    Date: 2014–02
  2. By: Agnès Bénassy-Quéré (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CEPII - Centre d'Etudes Prospectives et d'Informations Internationales - Centre d'analyse stratégique); Dramane Coulibaly (EconomiX - CNRS : UMR7166 - Université Paris X - Paris Ouest Nanterre La Défense)
    Abstract: We study the contribution of market regulations in the dynamics of the real exchange rate within the European Union. Based on a model proposed by De Gregorio et al. (1994a), we show that both product market regulations in montradable sectors and employment protection tend to inflate the real exchange rate. We then carry out an econometric estimation for European countries over 1985-2006 to quantify the contributions of the pure Balassa-Samuelson effect and those of market regulations in real exchange-rate variations. Based on this evidence and on a counter-factual experimient, we conclude that the relative evolution of product market regulations and employment protection across countries play a very significant role in real exchange-rate variations within the European Union and especially within the Euro area, through theirs impacts on the relative price of nontradable goods.
    Keywords: Real exchange rate; Balassa-Samuelson effect; product market regulations; employment protection
    Date: 2013–01
  3. By: Christophe Blot (OFCE Sciences Po); Marion Cochard (OFCE Sciences Po); Bruno Ducoudré (Ofce,Sciences Po); Danielle Schweisguth (OFCE Sciences Po); Xavier Timbeau (OFCE Sciences Po); Jérôme Creel (OFCE Sciences Po, ESCP Europe)
    Abstract: EMU countries have engaged in a consolidation of fiscal policies since 2011. This paper deals with the public debt and output dynamic consequences of this strategy. To thisend, we develop a simple macroeconomic modelof the Euro area, where fiscal multipliers time-varying. Recent empirical evidence has indeed shown that fiscal multipliers werehigher in time of crisis. We then analyze the ability of EMU countries to comply with thenew fiscal rules on public debt. he path of public debt and output gap is simulated according to different hypothesis related to fiscal multiplier, monetary policy andhysteresis effects. Not all EMU countries would be able to reach a 60% debt-to-GDP ratio in 2032. An alternative strategy may be to spread austerity in order to report part of consolidation to periods where the fiscal multiplier will be weaker. The gain of spreading austerity may yet be partly offset by higher risk premium. There is then a need to find institutional arrangements to avoid panics in the sovereign debt markets. Finally, it is shown that it would not be very efficient to implement an expansionary fiscal policy in Germany in order to balance austerity in the Euro area. Since output gap is nearly closed in Germany, the multiplier effect of a positive fiscal stance would be low and spillover effects would not be significant
    Date: 2014–07
  4. By: Kedan, Danielle (Central Bank of Ireland); Stuart, Rebecca (Central Bank of Ireland)
    Abstract: When setting monetary policy, central banks seek to aect the entire term structure of interest rates. Most central banks with a price stability or in ation mandate do this by targeting a very short-term market rate. This Letter presents a comparative analysis of the correlation between policy rate changes and bond yields in the euro area, where the implicit target of monetary policy is the overnight rate, and Switzerland, where the target is a three- month rate. The analysis indicates that unanticipated policy rate changes by the European Central Bank and Swiss National Bank are signicantly and positively correlated with changes in German and Swiss government bond yields out to 6 years and 20 years, respectively.
    Date: 2014–06
  5. By: Baas, Timo; Belke, Ansgar
    Abstract: Member countries of the Economic and Monetary Union (EMU) initiated wide-ranging labour market reforms in the last decade. This process is ongoing as countries that are faced with serious labour market imbalances perceive reforms as the fastest way to restore competitiveness within a currency union. This fosters fears among observers about a beggar-thy-neighbour policy that leaves non-reforming countries with a loss in competitiveness and an increase in foreign debt. Using a two-country, two-sector search and matching DSGE model, we analyse the impact of labour market reforms on the transmission of macroeconomic shocks in both non-reforming and reforming countries. By analysing the impact of reforms on foreign debt, we contribute to the debate on whether labour market reforms increase or reduce current account imbalances.
    Date: 2014–09
  6. By: Arghyrou, Michael G (Cardiff Business School)
    Abstract: We use a macro-theory framework of analysis to assess Greek economic policy, with emphasis on the current period of the Greek debt crisis. We argue that this is mainly the result of misguided past internal policies deviating substantially from the policy lessons of modern macroeconomics. The current policy, however, is consistent with mainstream macro and provides a credible platform for achieving sustainable growth. We argue that Greece has entered the process of economic recovery, but this is still fragile and exposed to risks. Overall, we support the continued participation of Greece to the euro: Although a country’s currency is not per se a determinant of long-term economic prosperity, supply-side reforms and institutional performance are; and both these objectives are better served for Greece within the EMU rather than outside.
    Keywords: Macroeconomics; Greece; euro
    JEL: B22 E00 F4
    Date: 2014–09
  7. By: Emmanuel Farhi; Ivan Werning
    Abstract: We study cross-country risk sharing as a second-best problem for members of a currency union using an open economy model with nominal rigidities and provide two key results. First, we show that, if financial markets are incomplete, the value of gaining access to any given level of aggregate risk sharing is greater for countries that are members of a currency union. Second, we show that, even if financial markets are complete, privately optimal risk sharing is constrained inefficient. A role emerges for government intervention in risk sharing to both guarantee its existence and to influence its operation. The constrained efficient risk sharing arrangement can be implemented by contingent transfers within a fiscal union. The benefits of such a fiscal union are larger, the bigger the asymmetric shocks affecting the members of the currency union, the more persistent these shocks, and the less open the member economies.
    Date: 2014–01
  8. By: Rafał Kierzenkowski; Olena Havrylchyk; Pierre Beynet
    Abstract: Dutch banks were put under heavy strains early in the global downturn and have comparatively weak financial buffers to cope with new shocks. Falling house prices have increased the share of households with negative home equity to nearly 35% for home-owning households and 40% for mortgage holders. Even though defaults have so far been limited, mortgage amortisation is low and risks are concentrated among younger borrowers who often do not have sufficient resources to cope with adverse shocks. Banks are very large relative to the size of the domestic economy, have sizeable cross-border exposures and rely significantly on wholesale funding. Resolution procedures should be strengthened to reduce the potential cost for the taxpayer and the regulator’s tools available to reduce risks should be expanded. In particular, banks should set aside sufficient provisions for expected losses and problem loans, which requires some harmonisation of the definition of non-performing loans across banks. Higher capital buffers would bolster financial stability and help ensure access to market funding while lowering its cost. Welcome measures have been taken to encourage household deleveraging, but deeper and broader steps are needed to bolster financial stability and improve consumer protection when the housing market starts to recover durably and over the medium term. The stock of existing mortgages should be gradually converted into amortising mortgages, the cap on the loanto- value ratio reduced significantly below 100% and housing subsidies to homeownership cut more decisively. This Working Paper relates to the 2014 OECD Economic Survey of the Netherlands ( Renforcer la capacité de résistance du secteur bancaire et réduire la dette des ménages aux Pays-Bas Les banques néerlandaises ont été mises à rude épreuve au début de la récession mondiale et sont dotées de réserves financières relativement modestes pour faire face à de nouveaux chocs. La baisse des prix immobiliers a fait augmenter la proportion de ménages ayant un patrimoine en logements négatif, qui s'établissait à près de 35 % pour les ménages propriétaires de leur habitation et 40 % pour les titulaires d'un emprunt hypothécaire. Même si les défauts de paiement ont été limités jusqu'ici, l'amortissement des prêts hypothécaires est faible et les risques sont concentrés dans la catégorie des emprunteurs les plus jeunes, qui n'ont souvent pas des ressources suffisantes pour absorber des chocs négatifs. Les banques sont de très grande taille au regard de celle de l'économie néerlandaise, sont très exposées à des risques extérieurs et sont fortement tributaires des financements de marché. Il faudrait renforcer les procédures de résolution des défaillances bancaires afin de réduire leur coût potentiel pour les contribuables, et la palette d'instruments dont dispose l'autorité de régulation pour réduire les risques devrait être élargie. Il conviendrait en particulier que les banques constituent des provisions suffisantes au regard des pertes attendues et des prêts à problème, ce qui passe par une harmonisation de la définition des créances improductives entre les banques. Une augmentation des volants de fonds propres renforcerait la stabilité financière et contribuerait à garantir l'accès aux financements de marché tout en réduisant leur coût. Des mesures bienvenues ont été prises pour encourager les ménages à se désendetter, mais des initiatives plus ambitieuses et de portée plus générale seront nécessaires pour renforcer la stabilité financière et améliorer la protection des consommateurs dès que le marché du logement sera entré dans une phase de redressement durable et à moyen terme. Il faudrait que l'encours de crédits hypothécaires soit converti progressivement en prêts à amortissement régulier, que la quotité de financement maximale soit abaissée à un taux nettement inférieur à 100 %, et que les aides au logement dont bénéficient les propriétaires occupants soient réduites de manière plus décisive. Ce Document de travail se rapporte à l’Étude économique de l’OCDE des Pays Bas, 2014 ( ).
    Keywords: house prices, Netherlands, household, non-performing loans, capital, banks, amortisation, mortgages, deleveraging, financial stability, banques, fonds propres, créances improductives, amortissement, désendettement, Pays-Bas, ménages, stabilité financière, prêts hypothécaires
    JEL: D14 D18 G21 G28
    Date: 2014–08–28
  9. By: Nicoletta Berardi (Centre de recherche de la Banque de France - Banque de France); Erwan Gautier (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272); Hervé Le Bihan (Centre de recherche de la Banque de France - Banque de France,)
    Abstract: Using micro price data, we document new facts on price rigidity in France: (i) each month 20.1% of prices are changed, which compares with 24.1% in the United States. Excluding sales, however, the fraction of prices modified each month is about the same in France and in the United States (around 17%); (ii) the distribution of price changes is quite dispersed; (iii) the frequencies of price increases and decreases contribute a lot to inflation variations, and price increases are more frequent in January even when sales are excluded; (iv) sales contribute significantly to the volatility of inflation but are much less sensitive to macroeconomic fluctuations than regular price changes; (v) during the Great Recession patterns of price adjustment were only slightly modified.
    Keywords: Price stickiness; inflation; consumer prices; sales; product substitution
    Date: 2014–09–03

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.