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on European Economics |
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Issue of 2014‒11‒07
eighteen papers chosen by Giuseppe Marotta Università degli Studi di Modena e Reggio Emilia |
| By: | C.Jardet; A. Monks |
| Abstract: | We use high-frequency intraday interest rate data to measure euro area monetary policy shocks on the days of ECB interest rate announcements between 2002 and 2013. In line with Gürkaynak et al. (2005), we look at monetary policy shocks along two time dimensions: one related to the current level of short-term interest rates and a second related to expectations for the future path of these rates. We undertake regression analysis in order to determine the impact of monetary policy shocks on euro-denominated financial asset prices and confirm that shocks related to the future path of monetary policy are an important driver, particularly for longer-term bond yields. We find that this relationship has changed for certain asset classes since the onset of the crisis, notably the sovereign bonds of stressed euro area countries. These findings highlight the changed nature of the monetary policy transmission mechanism for some euro area countries during the sovereign debt crisis. |
| Keywords: | Monetary policy, ECB, Transmission mechanism, financial crisis. |
| JEL: | E43 E52 E58 E61 E65 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:512&r=eec |
| By: | Antonella Cavallo; Antonio Ribba |
| Abstract: | The stability of inflation differentials is an important condition for the smooth working of a currency area, such as the European Economic and Monetary Union. In the presence of stability, changes in national inflation rates, while holding Euro-area inflation fixed contemporaneously, should be only transitory. If this is the case, the rate of inflation of the whole area can also be interpreted as a predictor, at least in the long run, of the different national inflation rates. However, in this paper we show that this condition is satisfied only for a small number of countries, including France and Italy. Better convergence results for inflation differentials are, instead, found for the USA. Some policy implications are drawn for the Eurozone. |
| Keywords: | Inflation Differentials; Euro area; Structural Cointegrated VARs; Permanent-transitory Decompositions; |
| JEL: | E31 C32 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:mod:dembwp:0022&r=eec |
| By: | Eckhard Hein (Berlin School of Economics and Law and Institute for International Political Economy); Daniel Detzer (Berlin School of Economics and Law and Institute for International) |
| Abstract: | In this paper we outline alternative policy recommendations addressing the problems of differential inflation, divergence in competitiveness and associated current account imbalances within the Euro area. The major purpose of these alternative policy proposals is to generate sustainably high demand and output growth in the Euro area as a whole, providing high levels of non-inflationary employment, as well as preventing ‘export-led mercantilist’ and ‘debt-led consumption boom’ types of development, both within the Euro area and with respect to the role of the Euro area in the world economy. We provide a basic framework in order to systematically address the related issues making use of Thirlwall’s (1979; 2002) model of a ‘balance-of-payments-constrained growth rate’ (BPCGR). Based on this framework, we outline the required stance for alternative economic policies and then we discuss the implications for alternative monetary, wage/incomes and fiscal policies in the Euro area as a whole, as well as the consequences for structural and regional policies in the Euro area periphery, in particular. |
| Keywords: | Differential inflation rates, current account imbalances, competitiveness, Euro area economic policies |
| JEL: | E61 E62 E63 E64 |
| Date: | 2014–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:fes:wpaper:wpaper63&r=eec |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/78jqkj5bb48tgb9ah9a0kqhplu&r=eec |
| By: | Londono, Juan M. (Board of Governors of the Federal Reserve System (U.S.)); Tian, Mary (Board of Governors of the Federal Reserve System (U.S.)) |
| Abstract: | Using a novel dataset on central bank interventions to financial institutions, we examine the impact of capital injection announcements on systemic risk for the banking sector in the U.S. and the euro area between 2008 and 2013. We propose a new measure of options-based systemic risk called downside correlation risk premium (DCRP), which quantifies the compensation investors demand for being exposed to the risk of large correlated drops in bank stock prices. DCRP is calculated using options that provide a hedge against large drops in the price of a bank index and its individual components. We find that, irrespective of their characteristics, intervention announcements significantly reduce DCRP in the U.S. while for the euro area, interventions were largely unsuccessful at reducing DCRP. |
| Keywords: | Systemic Risk; Downside Correlation Risk Premium; Bank Interventions; Variance Risk Premium; European Banking Union |
| JEL: | F36 G15 G21 G28 |
| Date: | 2014–09–04 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1117&r=eec |
| By: | Nidhaleddine Ben Cheikh; Christophe Rault |
| Abstract: | This paper provides an update on the exchange rate pass-through (ERPT) estimates for 12 Euro area (EA) countries. First, based on quarterly data over the 1990-2012 period, our study does not find a significant heterogeneity in the degree of pass-through across the monetary union members, in contrast to previous empirical studies. As we use a longer time span for the post-EA era than existing studies, this is not surprising, since the process of monetary union has entailed some convergence towards more stable macroeconomic conditions across Euro Area (EA) Member States. Second, when assessing the stability of pass-through elasticities we find very weak evidence of a decline around the inception of the Euro in 1999. However, our results reveal that a downtrend in ERPT estimates became apparent starting from the beginning of the 1990s. This observed decline was synchronous to the shift towards reduced inflation regimes in our sample of countries. Finally, we notice that the distinction between “peripheral” and “core” EA economies in terms of pass-through has significantly decreased over the last two decades. |
| Keywords: | Exchange Rate Pass-Through, Import Prices, Euro area |
| JEL: | E31 F31 F40 |
| Date: | 2014–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2014-1080&r=eec |
| By: | Juan Equiza Goni |
| Abstract: | At a time when debt-to-GDP ratios are closely monitored in the Euro area, thispaper generates a set of stylized facts about sovereign debt and yields. First, Ipresent a new dataset on outstanding debt securities and yields for six EA countries(Belgium, Finland, France, Germany, Italy and Spain) from 1991 to 2013 that Ibuilt combining different sources. Thus, I can document, for example, that EAdebt duration increased by 2 years, mainly driven by demand. Second, based onthe government budget constraint, I calculate past contributions of returns on debtwith different maturities, inflation and other factors to EA debt-to-GDP changes andcompare them with the US experience. While primary deficits played an importantrole in the latter, returns on debt is the key factor in EA countries, especially whenlarge capital gains were paid to long-term bondholders before the introduction of theEuro. Also, although GDP growth contributions were similar, the EA relied moreon inflation and the US on real output growth. Finally, I estimate that 1% futurepermanently higher inflation would reduce EA debt ratios by 4%, an effect 2.4 timeshigher than the expected change in the US. |
| JEL: | E23 E31 E43 G12 H63 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:eca:wpaper:2013/176559&r=eec |
| By: | Timo Baas; Ansgar Belke |
| Abstract: | Member countries of the European Monetary Union (EMU) initiated wideranging labor market reforms in the last decade. This process is ongoing as countries that are faced with serious labor market imbalances perceive reforms as the fastest way to restore competitiveness within a currency union. This fosters fears among observers about a beggar-thy-neighbor 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 analyze the impact of labor market reforms on the transmission of macroeconomic shocks in both, non-reforming and reforming countries. By analyzing the impact of reforms on foreign debt, we contribute to the debate on whether labor market reforms increase or reduce current account imbalances. |
| Keywords: | Current account deficit; labor market reforms; DSGE models; search and matching labor market |
| JEL: | E24 E32 J64 F32 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0505&r=eec |
| By: | Pawel Gajewski (University of Lodz, Faculty of Economics and Sociology) |
| Abstract: | This paper re-examines the problem of monetary policy stress in the EMU, both prior to the crisis as well as after its outbreak. It aims to (firstly) reconfirm that monetary policy during the great moderation (i.e. until late 2008) was responsible for fuelling the process of imbalance accumulation in the EMU, and (secondly) to determine to what extent the stress was caused by macroeconomic divergences. We employ a forward-looking Taylor-type monetary policy reaction function with realtime forecasted data to mimic the ECB monetary policy during the great moderation. The estimated coefficients are subsequently used to create counterfactual series of ruleconsistent country-specific interest rates and compute monetary policy stress in EMU individual member states. The results confirm that peripheral countries were exposed to risks emerging from excessively low interest rates, while the “core” countries had to live with too-high interest rates, and the stress was generally stronger in the former case. Interestingly, the bulk of it was non-fundamental, i.e. not caused by inflation and output gap differentials between countries. There are several potential sources of this stress and we show that missed forecasts were making an important contribution and they were mainly responsible for pushing the interest rate below its rule-consistent level. |
| Keywords: | monetary stress, crisis, Taylor rule, EMU |
| JEL: | C22 E52 E58 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:ann:wpaper:2/2014&r=eec |
| By: | Marianna Riggi (Bank of Italy); Fabrizio Venditti (Bank of Italy) |
| Abstract: | Between 2013 and 2014, following the recession triggered by the sovereign debt crisis, euro-area inflation decreased sharply. Although a fall in the inflation rate was to be expected, given the severity of the recession, professional forecasters failed to anticipate it. A possible explanation for this forecast failure lies in a break in the cyclicality of inflation, which was unaccounted for in forecasting models. We probe this explanation in the context of a simple backward-looking Phillips curve and find that the sensitivity of inflation to the output gap has recently increased. We rationalize this result through a structural model, in which a steepening of the Phillips curve arises either from lower nominal rigidities (a decrease in the average duration of prices) or from fewer strategic complementarities in price-setting due to a reduction in the number of firms in the economy. |
| Keywords: | inflation, Phillips curve, structural break, strategic complementarities |
| JEL: | E31 E37 C53 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_237_14&r=eec |
| By: | Martin Berka; Michael B. Devereux; Charles Engel |
| Abstract: | We investigate the link between real exchange rates and sectoral total factor productivity measures for countries in the Eurozone. Real exchange rate patterns closely accord with an amended Balassa-Samuelson interpretation, both in cross-section and time series. We construct a sticky price dynamic general equilibrium model to generate a crosssection and time series of real exchange rates that can be directly compared to the data. Under the assumption of a common currency, estimates from simulated regressions are very similar to the empirical estimates for the Eurozone. Our findings contrast with previous studies that have found little relationship between productivity levels and the real exchange rate among high-income countries, but those studies have included country pairs which have a floating nominal exchange rate. |
| Keywords: | Balassa-Samuelson, Real Exchange Rates, Eurozone, Total Factor Productivity, Unit Labor Cost |
| JEL: | F41 F31 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2014-66&r=eec |
| By: | Christine Lewis; Nigel Pain; Jan Strasky; Fusako Menkyna |
| Abstract: | The downturn in fixed investment among advanced economies from the onset of the global crisis was unusually severe, widespread and long-lasting relative to comparable episodes in the past. As a result, investment gaps are large in many countries, not only in relation to past norms but also relative to projected future steady-state levels, with a gap of 2 percentage points of GDP or more in several countries. A significant proportion of this investment shortfall is attributable to soft demand conditions (the accelerator effect) but financial factors and heightened uncertainty have also played a role. In addition to continued support to demand from macroeconomic policies, the recovery in investment could be boosted by tackling longer-term policy issues that bear on investment decisions indirectly, by reducing financial fragmentation in the euro area and by undertaking growth-friendly structural reforms. Écarts relatifs à l'investissement après la crise Le ralentissement conjoncturel de l'investissement fixe dans les économies avancées depuis le début de la crise économique mondiale a été exceptionnellement défavorable, répandu et persistant par rapport à des épisodes comparables ayant eu lieu dans le passé. En fait, les écarts relatifs à l'investissement sont considérables dans de nombreux pays, non seulement par rapport aux normes du passé, mais aussi par rapport aux niveaux futurs prévus de l'état d'équilibre, avec un écart de 2 points de pourcentage du PIB ou plus dans plusieurs pays. Une part importante de cet écart de placement est attribuable à des conditions de faible demande (effet d’accélérateur) mais des facteurs financiers et une incertitude accrue ont également joué un rôle. En plus d’un soutien continu de la demande par des politiques macro-économiques, la reprise de l'investissement pourrait être stimulée en luttant contre les problèmes de politique de long terme pesant indirectement sur les décisions d’investissement, en réduisant la fragmentation du système financier dans la zone euro et en mettant en oeuvre des réformes structurelles favorables à la croissance économique. |
| Keywords: | uncertainty, economic outlook, balance sheet, cost of capital, investment, investissement, coût du capital, bilans, perspectives économiques, incertitude |
| JEL: | D24 E22 G31 O16 |
| Date: | 2014–10–14 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:1168-en&r=eec |
| By: | Platon Monokroussos |
| Abstract: | The present paper studies the evolution of the Greek public debt ratio under different assumptions regarding the size and the degree of persistence of fiscal multiplies, the implementation profile of the applied fiscal adjustment and the response of financial markets to fiscal consolidation. The main results of our simulation exercise can be summarized as follows: a) taking into account Greece’s present debt ratio, a fiscal adjustment can lead to a contemporaneous increase in the ratio if the fiscal multiplier is higher than ca 0.5; b) despite the unprecedented improvement in the underlying fiscal position since 2010, the concomitant increase in the public debt ratio can be mainly attributed to its high initial level, a very wide initial structural deficit as well as the ensuing economic recession; c) notwithstanding its negative initial effects on domestic economic activity, the enormous fiscal effort undertaken over the last 5 years leaves the country’s debt ratio in a more sustainable path relative to a range of alternative scenarios assuming no adjustment or a more gradual implementation profile of fiscal consolidation relative to that implemented thus far. |
| Keywords: | Self-defeating consolidations, fiscal multiplier, public debt, Greece, European Commission. |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:hel:greese:87&r=eec |
| By: | António Afonso; José Alves |
| Abstract: | We study the effect of public debt on economic growth for annual and 5-year average growth rates, as well as the existence of non-linearity effects of debt on growth for 14 European countries from 1970 until 2012. We also consider debt-to-GDP ratio interactions with monetary, public finance, institutional and macroeconomic variables. Our results show a negative impact of -0.01% for each 1% increment of public debt, although debt service has a 10 times worse effect on growth. In addition, we find average debt ratio thresholds of around 75%. Belonging to the Eurozone has a detrimental effect of at least -0.5% for real per capita GDP, and the banking crisis is the most harmful crisis for growth. |
| Keywords: | government debt, economic growth, debt thresholds. |
| JEL: | E62 H63 O47 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:ise:isegwp:wp162014&r=eec |
| By: | Daniel Detzer (Berlin School of Economics and Law, Institute for International Political Economy); Eckhard Hein (Berlin School of Economics and Law, Institute for International Political Economy) |
| Abstract: | Germany’s recent export successes and the fast recovery from the 2007 -2009 crisis made it Europe’s “economic superstar” in public opinion. This paper interprets the German performance against the background of financialisation. After an examination of the pre-crisis demand and growth regime, the focus is on how financialisation has contributed to the German ‘export-led mercantilist’ regime. The paper focuses subsequently on the determinants of the German current account balance, to then interpret the development of Germany during the financial and economic crisis and the causes for the quick recovery in light of the previous analysis. |
| Keywords: | current account imbalances, financialisation, financial and economic crisis, Germany, trade balance |
| JEL: | E25 E61 E63 E64 E65 F40 F43 |
| Date: | 2014–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:fes:wpaper:wpaper54&r=eec |
| By: | Haluk Yener (Department of Business Administration, Istanbul Bilgi University); Thanasis Stengos (Department of Economics and Finance, University of Guelph); M. Ege Yazgan (Department of Economics, Kadir Has University) |
| Abstract: | The paper involves the analysis of the seeds of the recent debt crisis that occurred in the Eurozone area. For the analysis we use the model of Fleming and Stein (2004). This model has two risk drivers arising from uncertainties in the return on capital and the effective rate of return on net foreign assets. Given the risk drivers, we model the net worth value process of an economy under a stochastic setting and show that opening to the rest of the world by pursuing the growth maximizing leverage strategy is better than remaining closed as that strategy enhances the growth of the net worth process. Second, we provide an extra condition to show when the excessive leverage poses threat to the sustainable growth of an economy. This condition allows us to improve upon the predictive ability of the model introduced by Fleming and Stein (2004). |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:gue:guelph:2014-06&r=eec |
| By: | Oana TOADER |
| Keywords: | banks, implicit subsidy, ratings, resolution mechanism, rating |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:leo:wpaper:1378&r=eec |
| By: | Eva Schlenker; Kai D. Schmid |
| Abstract: | In this paper, we estimate the effect of changes in capital income shares on inequality of gross household income. Using EU-SILC data covering 16 EU countries from 2005 to 2011 we find that the level of capital income shares is positively associated with the concentration of gross household income. Moreover, we show that the transmission of a shift in capital income shares into the personal distribution of income depends on the concentration of capital income in an economy. At the mean of the distribution of capital income a 1 percentage point increase of the capital share is associated with a 0.8 percentage point increase of the Gini coefficient of gross household income. Our findings imply that in many industrialized countries income inequality has by no means evolved independently from the observed structural shift in factor income towards a higher capital income share over the last decades. |
| Keywords: | Factor Income Shares, Income Inequality, EU-SILC, Fixed Effects |
| JEL: | D31 D33 E6 E25 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:iaw:iawdip:109&r=eec |