nep-eec New Economics Papers
on European Economics
Issue of 2014‒11‒01
seventeen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Can interest rate spreads stabilize the euro area? By Michał Brzoza-Brzezina; Jacek Kotłowski; Kamil Wierus
  2. Common Macroeconomic Shocks and Business Cycle Fluctuations in Euro Area Countries By Antonella Cavallo; Antonio Ribba
  3. EMU sovereign debt market crisis: Fundamentals-based or pure contagion? By Marta Gómez-Puig; Simón Sosvilla-Rivero
  4. Macroeconomic Imbalances and Structural Change in the EMU By Stefan Ederer; Peter Reschenhofer
  5. Analysing and forecasting price dynamics across euro area countries and sectors: A panel VAR approach By Stéphane Dées; Jochen Güntner
  6. Exploring price and non-price determinants of trade flows in the largest euro-area countries By Claire Giordano; Francesco Zollino
  7. Inspecting the Mechanism Leverage and the Great Recession in the Eurozone By Philippe Martin; Thomas Philippon
  8. Why does the Euro fail? The DCCA approach By Paulo Ferreira; Andreia Dionisio; Gilney Zebende
  9. Sovereign Defaults, Bank Runs, and Contagion By Stephan Luck; Paul Schempp
  10. Euro Area (cross-border?) banking By Pierluigi Bologna; Marianna Caccavaio
  11. So far apart and yet so close: Should the ECB care about inflation differentials? By Zsolt Darvas; Guntram B. Wolff
  12. Secular Stagnation: Evidence and Implications for Economic Policy By Łukasz Rawdanowicz; Romain Bouis; Kei-Ichiro Inaba; Ane Kathrine Christensen
  13. Liquidity Constraints, Loss Aversion, and Myopia: Evidence from Central and Eastern European Countries By Ramiz Rahmanov
  14. Interactions between Monetary Policy and Fiscal Policy By António Afonso; Raquel Balhote
  15. The Euroization of Bank Deposits in Eastern Europe By Brown, Martin; Stix, Helmut
  16. EU bank deleveraging By Pierluigi Bologna; Marianna Caccavaio; Arianna Miglietta
  17. Making the Labour Market Work Better in Poland By Hervé Boulhol

  1. By: Michał Brzoza-Brzezina (Narodowy Bank Polski and Warsaw School of Economics); Jacek Kotłowski (Narodowy Bank Polski; Warsaw School of Economics); Kamil Wierus (Narodowy Bank Polski)
    Abstract: Since the creation of the euro area significant interest rate spreads have arisen between euro area countries, both for public and private debt. We check whether these spreads could be made to work towards the goal of providing more stability to the euro area. In particular we focus on reducing the imbalances that arose between the core and peripheral members of the euro area in the first decade of its existence. The idea is that stable positive spreads in peripheral countries could have decreased domestic demand, preventing the boom-bust cycles that plagued these economies. They could also prevent such developments in the future. We find that spreads on real interest rates of 0.6 to 5.5 percentage points would have been necessary to stabilize external positions of the four peripheral euro area member countries.
    Keywords: Euro area, imbalances, current account, panel estimation
    JEL: E32 E43 E52
    Date: 2014
  2. By: Antonella Cavallo; Antonio Ribba
    Abstract: This paper investigates the dynamic effects of common macroeconomic shocks in shaping business cycle fluctuations in a group of Euro-area countries. In particular, by using the structural (near)VAR methodology, we investigate the effect of area-wide shocks, with particular attention to monetary policy shocks. The main conclusion is that: (a) contractionary monetary policy shocks cause similar recessionary effects in all countries; (b) as far as business cycle fluctuations are concerned, there is a separation into two distinct groups of countries, with a first group including the biggest European economies in which business cycle fluctuations are mainly explained by common, area-wide shocks and a second one, including Greece, Ireland and Portugal, in which the national shocks play, instead, a much greater role
    Keywords: Business Cycle Fluctuations; Euro area; Common Shocks; Near-Structural VARs.
    JEL: E31 C32
    Date: 2014–09
  3. By: Marta Gómez-Puig (Department of Economic Theory, Universitat de 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 Granger-causality 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” during the recent European debt crisis.
    Keywords: Sovereign bond spreads, contagion, Granger-causality, time-varying approach, euro area, ordered logit model
    JEL: C35 C53 E44 F36 G15
    Date: 2014–05
  4. By: Stefan Ederer; Peter Reschenhofer
    Abstract: Macroeconomic imbalances in the EMU are at the heart of the current crisis. A widely popular explanation for the high current account deficits in the Southern European countries is that they lack a large, competitive and export-oriented industrial sector. The paper tests the hypothesis that parts of the structural change which happened in the EU before 2008 were supported by the divergent unit labour cost developments in the EMU. We look into patterns of structural change and sectoral competitiveness in all EU member countries and assess their linkages by means of a descripitve analysis as well as through econometric estimations. Our results broadly support the hypothesis. Structural policies alone to foster new competitive export-oriented industries in Southern Europe in order to reduce macroeconomic imbalances in the EMU would not be efficient without accompanying adjustments in relative labour costs.
    Keywords: Macroeconomic imbalances, structural change, labour costs, dynamic panel regression
    JEL: C33 F41 J31 O40
    Date: 2014–10
  5. By: Stéphane Dées; Jochen Güntner
    Abstract: This paper uses a panel VAR (PVAR) approach to estimating, analysing and forecasting price dynamics in four different sectors - industry, services, construction, and agriculture - across the four largest euro area economies - Germany, France, Italy and Spain - and the euro area as a whole. By modelling prices together with real activity, employment and wages, we can disentangle the role of unit labour costs and profit margins as the factors affecting price pressures on the supply side. In out-of-sample forecast exercises, the PVAR model fares comparatively well against common alternatives, although short-horizon forecast errors tend to be large when we consider only the period of the recent financial crisis. The second part of the paper focuses on Spain, for which prediction errors during the crisis are particularly large. Given that its economy faced dramatic sectoral changes due to the burst of a housing bubble, we use the PVAR model for studying the transmission of shocks originating from the Spanish construction sector to other sectors. In a multi-country extension of the model, we also allow for spillovers to the other euro area countries in our sample.
    Keywords: Cost pressures, forecasting, impulse response analysis, panel VAR models
    JEL: C33 C53 E31 E37
    Date: 2014–09
  6. By: Claire Giordano (Banca d'Italia); Francesco Zollino (Banca d'Italia)
    Abstract: Since the mid-2000s standard price-competitiveness indicators for some European countries have been providing conflicting signals, particularly in Italy. Against a broad stability of the producer price (PPI)-based measure, the manufacturing unit labour cost (ULCM)-deflated indicator points to a major cumulated loss of competitiveness in Italy. We find that this discrepancy mostly reflects the divergence of ULCM and PPI trends in competitor countries while in Italy they have actually progressed hand in hand. Owing to the internationalization of production processes and to the subsequent fading representativeness of labour in respect of overall costs, seen to a different degree across countries, price-based indicators are arguably more appropriate than those based on ULCMs to assess external competitiveness and external performance. We provide empirical evidence that points in the same direction. In Italy ULC-based indicators play a less important role relative to price-deflated measures in explaining both export and import trends; this result does not hold for Germany and France. Moreover, a proxy for non-price competitiveness proves important in explaining Italian, German and, in particular, Spanish exports.
    Keywords: price competitiveness, non-price competitiveness, unit labour costs, producer prices
    JEL: F14
    Date: 2014–09
  7. By: Philippe Martin (Département d'économie); Thomas Philippon (Department of Mechanical Engineering, Massachusetts Institute of Technology)
    Abstract: We provide a first comprehensive account of the dynamics of Eurozone countries from the creation of the Euro to the Great recession. We model each country as an open economy within a monetary union and analyze the dynamics of private leverage, fiscal policy and spreads. Our parsimonious model can replicate the time-series for nominal GDP, employment, and net exports of Eurozone countries between 2000 and 2012. We then ask how periphery countries would have fared with: (i) more conservative fiscal policies; macro-prudential tools to control private leverage; (iii) a central bank acting earlier to limit sovereign spreads; and (iv) the possibility to recoup the competitiveness they lost in the boom. To perform these counterfactual experiments, we use U.S. states as a control group that did not suffer from a sudden stop. We find that periphery countries could have stabilized their employment if they had followed more conservative fiscal policies during the boom. This is especially true in Greece. For Ireland, however, given the size of the private leverage boom, such a policy would have required buying back almost all of the public debt. Macro-prudential policy would have been helpful, especially in Ireland and Spain. However, in presence of a spending bias in fiscal rules, macro-prudential policies would have led to less prudent fiscal policies in the boom. Central bank actions would have stabilized employment during the bust but not public debt. Finally, if these countries had been able to regain in the bust the competitiveness they lost in the boom, they would have experienced a shorter and milder recession.
    Date: 2014–10
  8. By: Paulo Ferreira (CEFAGE-UE, IIFA, Inst. Sup. de Línguas e Administração de Leiria, Dep. de Ciência e Tecnologia Animal - ESAE, Instituto Politécnico de Portalegre, Portugal); Andreia Dionisio (CEFAGE-UE, IIFA and Departamento de Gestão, Universidade de Évora, Portugal); Gilney Zebende (Computational Modeling Program – SENAI CIMATEC, Bahia, Brazil and Department of Physics – UEFS , Bahia, Brazil)
    Abstract: The present crisis in the Euro is one of the most serious crises reported in history. The fact that different countries that adopted the Euro have different conditions to support asymmetric shocks in their economies could explain some of the consequences currently affecting the Eurozone. In this paper we apply detrended cross-correlation analysis and its correlation coefficient to evaluate the degree of financial integration of the first set of countries to adopt the common currency. Detrended cross correlation analysis is a methodology which has some advantages, namely the fact it can also be used in non-stationary series. It is the first time this methodology has been applied to study financial integration. We conclude that the degree of financial integration is unequal in several countries using the common currency. The fact that countries like Greece, Ireland or Portugal are the ones facing most problems in verification of the parity used in this paper could help to explain the present instability in the Eurozone.
    Keywords: Financial integration; Long-range correlation; Detrended cross-correlation analysis.
    JEL: G15 E43 E44 F36
    Date: 2014
  9. By: Stephan Luck (Max Planck Institute for Research on Collective Goods, Bonn); Paul Schempp (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: We provide a model that unifies the notion of self-fulfilling banking crises and sovereign debt crises. In this model, a bank run can be contagious by triggering a sovereign default, and vice versa. A deposit insurance scheme can eliminate the adverse equilibrium only if the government can repay its debt and credibly insure deposits irrespective of the performance of the financial sector. Moreover, we analyze how banking crises and sovereign defaults can be contagious across countries. We give conditions under which the implementation of a banking union is effective and costless. Finally, we discuss the current proposals for a banking union in the euro area and argue that it should be extended by a supranational Deposit Guarantee Scheme.
    Keywords: bank run, financial crisis, sovereign default, vicious cycle, financial contagion, banking union, deposit insurance
    JEL: G21 G28 H81 H63
    Date: 2014–09
  10. By: Pierluigi Bologna (Bank of Italy); Marianna Caccavaio (Bank of Italy)
    Abstract: This paper presents stylized facts of the segmentation of the Euro Area (EA) banking system and investigates cross-border banking dynamics. Results show that the determinants of cross-border banking change substantially over-time: (i) in the pre-crisis period of financial integration the physical distance and the financial distance between countries were the main drivers; (ii) during the global financial crisis banks reduced the concentration in their foreign claims portfolio and retrenched from the more externally vulnerable countries but kept on investing in the still profitable countries with a sound fiscal position; and (iii) during the EA sovereign tensions, while portfolio diversification and the pull-back from externally vulnerable countries continued, foreign claims were also driven by the deteriorating sovereign conditions, the bank-sovereign link, and opportunities for flight-to-quality. During the crisis the structure of banks’ international organization also mattered as banks retrench more when they do not operate through foreign branches and subsidiaries.
    Keywords: Euro Area; Cross-border banking; Foreign claims; Financial stability
    JEL: F36 G01 G21
    Date: 2014–09
  11. By: Zsolt Darvas; Guntram B. Wolff
    Abstract: Inflation rates can differ across regions of monetary unions. We show that in the euro area, the US, Canada, Japan and Australia, inflation rates have been substantially and persistently different in different regions. Differences were particularly substantial in the euro area. Inflation differences can reflect normal adjustment processes such as price convergence or the Balassa-Samuelson effect, or can reflect the different cyclical position of regions. But they can also be the result of economic distortions resulting from segmented markets or unsustainable demand and credit developments fueled by low real interest rates. In normal times, the European Central Bank cannot influence such developments with its single interest rate instrument. However, unconventional policy measures can have different effects on different countries depending on the chosen instrument, and should be used to reduce fragmentation and ensure the proper transmission of monetary policy. The new macro prudential policy tools are unlikely to be practical in addressing inflation divergences. It is crucial to keep the average inflation rate close to two percent so that inflation differentials are possible without deflation in some parts of the euro area, which in turn might endanger area-wide financial stability and price stability.
    Date: 2014–09
  12. By: Łukasz Rawdanowicz; Romain Bouis; Kei-Ichiro Inaba; Ane Kathrine Christensen
    Abstract: This paper investigates whether OECD countries are facing secular stagnation. Secular stagnation is defined as a situation when policy interest rates bounded at zero fail to stimulate demand sufficiently, due to low or negative neutral real interest rates and low inflation, and when ensuing prolonged and subdued growth undermines potential growth via labour hysteresis and discouraged investment. Obtaining firm evidence is complicated by considerable uncertainties surrounding estimates of economic slack and its impact on inflation, crisis-related hit to potential output and neutral interest rates. However, signs of secular stagnation are most evident in the euro area, particularly in the vulnerable members, in contrast to the United States and the United Kingdom, where evidence is less firm. Japan is arguably in the advanced stage of secular stagnation that started almost two decades ago. In countries with symptoms of secular stagnation, more monetary and fiscal stimulus should be accompanied by structural reforms to boost potential growth and neutral rates. Evidence on hysteresis effects strengthens the case for accommodative policies. In general, the large uncertainty about the size and persistence of hysteresis and risks associated with certain measures pose policy dilemmas and call for a comprehensive policy response. Stagnation séculaire : Evidences et répercussions sur la politique économique Ce document cherche à déterminer si les pays de l’OCDE sont dans une stagnation séculaire. La stagnation séculaire désigne une situation dans laquelle les taux d’intérêt directeurs nuls ne parviennent pas à stimuler suffisamment la demande, en raison de taux d’intérêts réels neutres bas ou négatifs et d’une inflation faible, conjugués à une croissance durablement atone qui affaiblit la croissance potentielle via des effets d’hystérèse sur le marché du travail et un investissement découragé. Obtenir des évidences robustes est difficile du fait des incertitudes considérables entourant les estimations de la sous-utilisation des capacités de production et de son impact sur l’inflation, des effets négatifs de la crise sur la production potentielle et des taux d’intérêt neutres. Toutefois, les signes de stagnation séculaire sont les plus flagrants dans la zone euro, surtout dans les États membres vulnérables, contrairement aux États-Unis et au Royaume-Uni où les évidences sont moins tranchées. Le Japon se trouve probablement en phase avancée de stagnation séculaire, qui a débuté il y a près de vingt ans. Dans les pays montrant des signes de stagnation séculaire, de nouvelles mesures de relance monétaire et budgétaire devraient s’accompagner de réformes structurelles destinées à stimuler la croissance potentielle et les taux neutres. Les effets d’hystérèse plaident en faveur de politiques accommodantes. De manière générale, les incertitudes importantes entourant l’ampleur et la persistance des effets d’hystérèse et les risques associés à certaines mesures posent des dilemmes en termes de politique et nécessitent une réponse politique globale.
    Keywords: monetary policy, inflation, potential output, secular stagnation, neutral interest rates, taux d’intérêt neutres, stagnation séculaire, politique monétaire, production potentielle, inflation
    JEL: E3 E4 E5 E6 J21 O47
    Date: 2014–10–14
  13. By: Ramiz Rahmanov
    Abstract: This paper adopts the asymmetric error correction technique to investigate the dynamics of household consumption in Central and Eastern European (CEE) countries. The asymmetric co-integration testing shows that households in all CEE countries but Bulgaria respond asymmetrically to negative and positive shocks. Further, the estimates of the asymmetric error correction equations show that despite underdeveloped banking sectors, households in all CEE countries asymmetrically responding to deviations but Slovakia exhibit loss aversion. As an explanation for this finding, we suggest that to smooth consumption, households in these countries deplete their savings.
    Keywords: loss aversion, liquidity constraints, consumption, asymmetric error correction model, Central and Eastern Europe.
    JEL: C22 D11 D12 E21
    Date: 2014–08–01
  14. By: António Afonso; Raquel Balhote
    Abstract: Using a panel data set of 14 EU countries from 1970 to 2012, we study the type of monetary and fiscal policies of both authorities, and assess how they are influenced by certain economic variables and events (the Maastricht Treaty, the Stability and Growth Pact, the Euro and crises). Results show that inflation has a significant impact on monetary policy, and that governments raise their primary balances when facing increases in debt. Another goal is to characterise the type of interactions established between central banks and national governments, i.e. if their policies complement one another, or whether there is a more dominant one. Still, our results point to the lack of evidence concerning central banks’ response to fiscal policy.
    Keywords: interactions, monetary policy, fiscal policy, reaction functions.
    JEL: E52 E62 E63 H62
    Date: 2014–07
  15. By: Brown, Martin; Stix, Helmut
    Abstract: In Eastern Europe a substantial share of bank deposits are denominated in foreign currency. Deposit euroization poses key challenges for monetary policy and financial sector supervision. On the one hand, it limits the effectiveness of monetary policy interventions. On the other hand, it increases financial sector fragility by exposing banks to currency risk or currency induced credit risk. Policymakers disagree on whether Eastern European countries should tackle deposit euroization with “dedollarization” policies or should rather strive to adopt the Euro as their legal tender. Assessing the potential effectiveness of “dedollarization” policies requires a clear understanding of which households hold foreign currency deposits and why they do so. Based on survey data covering 16,375 households in ten countries in 2011 and 2012, we provide the first household-level analysis of deposit euroization in Eastern Europe. We examine how households’ preferences for and holding of foreign currency deposits are related to individual expectations about monetary conditions and network effects. We also examine to what extent monetary expectations, network effects and deposit euroization are the legacy of past financial crises or the outflow of current policies and institutions in the region. Our findings suggest that deposit euroization in Eastern Europe can be partly tackled by prudent monetary and economic decisions by today’s policymakers. The preferences of households for Euro deposits are partly driven by their distrust in the stability of their domestic currency, which in turn is related to their assessment of current policies and institutions. However, our findings also suggest that a stable monetary policy may not be sufficient to deal with the hysteresis of deposit euroization across the region. First, we confirm that the holding of foreign currency deposits has become a “habit” in the region. Second, we find that deposit euroization is still strongly influenced by households’ experiences of financial crises in the 1990s.
  16. By: Pierluigi Bologna (Banca d'Italia); Marianna Caccavaio (Banca d'Italia); Arianna Miglietta (Banca d'Italia)
    Abstract: We analyse the deleveraging process with reference to a sample of European banks from December 2011 to June 2013 and find that the leverage ratio (measured as assets to equity) has declined on average from 28.6 to 25.0. Its standard deviation fell from 8.2 to 6.5. About 2/3 of the deleveraging has been achieved by raising common equity while 1/3 took place by reducing balance sheet assets. The deleveraging has been more “good” (raising capital and reducing non-core assets) than “ugly” (indiscriminate asset sales) even though only a few banks in our sample managed to pursue it also through a reduction in bad assets. Based on the US experience, we argue that European banks have not yet completed their deleveraging, although what has been done to date is more substantive that it appears prima facie given the generalized increase in banks’ sovereign exposure.
    Keywords: leverage, deleveraging, European banks, financial stability
    JEL: G21 G01 G28
    Date: 2014–09
  17. By: Hervé Boulhol
    Abstract: Poor labour-market outcomes remain one of Poland’s major structural weaknesses, impeding firms’ competitiveness and the nation’s potential output. Boosting employment prospects is also critical, as the country will soon be ageing at a fast pace. Despite long working hours, labour utilisation is only average due to structurally low employment rates, particularly at both ends of the age spectrum, with some marked regional differences. The female employment rate is especially low, in part due to poorly designed family and pension policies. Insufficient product-market competition and obstacles to internal mobility induce significant resource misallocation. Employment protection is not particularly stringent, but the labour market is nonetheless heavily segmented. This is likely to weigh on economic performance by limiting investment in human capital and making some specific groups bear a large share of adjustment costs. Public employment services suffer from a lack of resources and function inefficiently. Local labour offices have limited incentives to adopt best practices; the government plans to start benchmarking them. There is ample scope to tighten jobseeker obligations and reform social and tax policies to make work pay. This Working Paper relates to the 2014 OECD Economic Survey of Poland ( Améliorer le fonctionnement du marché du travail en Pologne Les résultats médiocres obtenus sur le front de l'emploi restent une des principales faiblesses structurelles de la Pologne, entravant la compétitivité des entreprises et la production potentielle du pays. Il est également crucial d'améliorer les perspectives d'emploi dans la mesure où la population va bientôt vieillir rapidement. Malgré le nombre élevé d'heures travaillées, le niveau d'utilisation de la main-d'oeuvre est seulement moyen en raison de la faiblesse structurelle des taux d'emploi, en particulier aux deux extrémités de l'échelle des âges, avec des différences régionales marquées. Le taux d'emploi des femmes est particulièrement bas, ce qui tient en partie aux défauts de conception des politiques familiales et du système de retraite. L'insuffisance de la concurrence sur les marchés de produits et les obstacles à la mobilité interne se traduisent par des problèmes importants d'affectation des ressources. La protection de l'emploi n'est pas particulièrement rigoureuse, mais le marché du travail n'en demeure pas moins fortement segmenté. Cela pèse probablement sur les performances de l'économie, en limitant l'investissement dans le capital humain et en faisant assumer à certains groupes une part importante des coûts d'ajustement aux chocs économiques. Les services publics de l'emploi pâtissent d'un manque de ressources et fonctionnent de manière inefficace. Les agences locales de l'emploi ne sont guère incitées à adopter les meilleures pratiques ; le gouvernement projette de commencer à les soumettre à des évaluations comparatives. Les autorités disposent d'amples marges de manoeuvre pour durcir les obligations imposées aux demandeurs d'emploi et réformer les politiques sociales et fiscales de manière à valoriser le travail. Ce Document de travail se rapporte à l’Étude économique de l’OCDE de la Pologne 2014 ( ique-pologne.htm).
    Keywords: unemployment, education, employment, employment service, labour market policies, labour market, employment protection, pensions, emploi, services de l'emploi, marchés du travail, pensions, protection de l'emploi, politique du marché du travail, éducation, chômage
    JEL: J1 J13 J21 J24 J26 J31 J65 J8
    Date: 2014–06–04

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