nep-eec New Economics Papers
on European Economics
Issue of 2014‒11‒17
nine papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Extreme Returns in the European Financial Crisis By Chouliaras, Andreas; Grammatikos, Theoharry
  2. Contagion in the Euro crisis: capital flows and trade linkages By Eleonora Cutrini and Giorgio Galeazzi
  3. Labor Market Reforms and Current Account Imbalances – Beggar-thy-neighbor Policies in a Currency Union? By Ansgar Belke; Timo Baas
  4. Fiscal devaluation in the euro area: a model-based analysis By Sandra Gomes; P. Jacquinot; M. Pisani
  5. Monetary Policy, the Composition of GDP, and Crisis Duration in Europe By Nicolas Cachanosky; Andreas Hoffmann
  6. Governing by Panic: The Politics of the Eurozone Crisis By David M. Woodruff
  7. Real-Time Information Content of Macroeconomic Data and Uncertainty: An Application to the Euro Area By Katharina Glass; Ulrich Fritsche
  8. The volume of euro coins held for transaction purposes in Germany By Altmann, Markus; Bartzsch, Nikolaus
  9. Young People (not) in the Labour Market in Rich Countries during the Great Recession By Dominic Richardson; Yekaterina Chzhen; UNICEF Innocenti Research Centre

  1. By: Chouliaras, Andreas; Grammatikos, Theoharry
    Abstract: We examine the transmission of extreme stock market returns among three groups of countries: the Euro-periphery countries (Portugal, Ireland, Italy, Greece, Spain), the Euro-core countries (Germany, France, the Netherlands, Finland, Belgium), and the major European Union -but not euro- countries (Sweden, UK, Poland, Czech Republic, Denmark). Using extreme returns on daily stock market data from January 2004 till March 2013, we find that transmission effects are present for the tails of the returns distributions for the Pre-crisis, the US-crisis and the Euro-crisis periods from the Euro-periphery group to the Non-Euro and the Euro-core groups. Within group effects are stronger in the crisis periods. We find that the transmission channel does not seem to have intensified during the crisis periods, but it transmitted larger shocks (in some cases, extreme bottom returns doubled during the crisis periods). Thus, as extreme returns have become much more "extreme" during the financial crisis periods, the expected losses on extreme return days have increased significantly. Given the fact that stock market capitalisations in these country groups are trillions of Euros, a 1% or 2% increase in extreme bottom returns (in crisis periods) can lead to aggregate losses of tens of billions Euros in one single trading day.
    Keywords: Financial Crisis, Financial Contagion, Spillover, Euro-crisis, Stock Markets.
    JEL: G00 G01 G15
    Date: 2014–09–29
  2. By: Eleonora Cutrini and Giorgio Galeazzi (University of Macerata)
    Abstract: Against the backdrop of the contagion literature, the paper analyses the impact of financial and trade linkages on sovereign bonds spreads in the Eurozone crisis. Using quarterly data for a sample of EMU countries during the period 2000-2013, we estimate fixed-effect panel models with Driscoll and Kraay standard errors that are robust to general forms of spatial and temporal dependence. Our main results can be summarized as follows. First, we suggest that the "sudden stop" of capital inflow toward the peripheral sovereign debt triggered a re-segmentation of financial markets and economic systems along national borders, with negative implications for risk sharing and the efficient allocation of capital. The "home bias" effect - i.e. the increase in the share of sovereign debt held by domestic banks - worsened the country-specific risk because the twin crisis (sovereign and banking) began to be conceived as more closely intertwined within countries than before. Second, the structure of international trade helps to account for the geographic scope of contagion, even after controlling for macroeconomic and fiscal vulnerabilities. Finally, the potential influence of wider financial spillovers related to the emerging markets' decoupling hypothesis is confirmed by our analysis. However, the "substitution-effect" of public debt securities of stand-alone emerging countries has affected more the sovereign spreads in the core than in the periphery.
    Keywords: Eurozone,decoupling,sovereign debt crisis,contagion,trade and financial linkages,foreign debt
    JEL: E44 F36 F40 F42 G12 H63
    Date: 2014–10
  3. By: Ansgar Belke; Timo Baas
    Abstract: Member countries of the European Monetary Union (EMU) initiated wide-ranging 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 beggarthy- 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
  4. By: Sandra Gomes; P. Jacquinot; M. Pisani
    Abstract: We assess the effects of a temporary fiscal devaluation enacted in Spain or Portugal on the trade balance by simulating EAGLE, a large-scale multi-country dynamic general equilibrium model of the euro area. Social contributions paid by firms are reduced by 1 percent of GDP for four years and are financed by increasing the consumption tax. Our main results are the following. First, in the first year following implementation, the Spanish trade balance improves by 0.5 percent of GDP, the (before-consumption tax) real exchange rate depreciates by 0.7 percent and the terms of trade deteriorate by 1 percent. Second, similar results are obtained in the case of Portugal. Third, the trade balance improves when the fiscal devaluation is also enacted in the rest of the euro area, albeit to a lower extent than in the case of unilateral (country-specific) implementation. Fourth, quantitative results crucially depend on the degree of substitutability between domestic and imported tradables.
    JEL: F32 F47 H20
    Date: 2014
  5. By: Nicolas Cachanosky; Andreas Hoffmann
    Abstract: This paper analyzes the effects of changes in interest rates on the composition of production in ten European countries during the boom period of the 2000s. We find that output elasticity differs across industries and across countries for similar industries. The paper suggests that in the run-up to the 2008 crisis, the ECB’s low interest rate policy affected the allocation of resources across industries. This may explain the sluggish overall recovery from the crisis in Europe.
    Keywords: Monetary Policy; Interest Rate Sensitivity; Crisis Duration; GDP Composition
    JEL: E32 E52 E58
    Date: 2014–10
  6. By: David M. Woodruff
    Abstract: The Eurozone’s reaction to the economic crisis beginning in late 2008 involved both efforts to mitigate the arbitrarily destructive effects of markets and vigorous pursuit of policies aimed at austerity and deflation. To explain this paradoxical outcome, this paper builds on Karl Polanyi’s account of how politics reached a similar deadlock in the 1930s. Polanyi argued that democratic impulses pushed for the protective response to malfunctioning markets. However, under the gold standard the prospect of currency panic afforded great political influence to bankers, who used it to push for austerity, deflationary policies, and the political marginalization of labor. Only with the achievement of this last would bankers and their political allies countenance surrendering the gold standard. The paper reconstructs Polanyi’s theory of “governing by panic” and uses it to explain the course of the Eurozone policy over three key episodes in the course of 2010-2012. The prospect of panic on sovereign debt markets served as a political weapon capable of limiting a protective response, wielded in this case by the European Central Bank (ECB). Committed to the neoliberal “Brussels-Frankfurt consensus,” the ECB used the threat of staying idle during panic episodes to push policies and institutional changes promoting austerity and deflation. Germany’s Ordoliberalism, and its weight in European affairs, contributed to the credibility of this threat. While in September 2012 the ECB did accept a lender-of-last-resort role for sovereign debt, it did so only after successfully promoting institutional changes that severely complicated any deviation from its preferred policies.
    Keywords: Euro, European Central Bank (ECB), austerity, lender of last resort, Ordoliberalism, gold standard
    Date: 2014–10
  7. By: Katharina Glass (Universität Hamburg (University of Hamburg)); Ulrich Fritsche (Universität Hamburg (University of Hamburg))
    Abstract: Most macroeconomic data is continuously revised as additional information becomes available. We suggest that revisions of data is an important source of uncertainty about the state of the economy. This paper evaluates the quality of major real macroeconomic Euro area variables, published by Eurostat since 2001. The real time data set contains 159 vintages, covering the period of January 1991 until March 2014. The information content or informativeness of revision is measured using three methods: descriptive error statistics, signal-to-noise ratios and entropy measures. Our results document a trend of growing data uncertainty over the past decade for Euro area variables. As a robustness check, we reckon our results using US data and additionally show that uncertainty calculations are robust towards changes in final revision definition. Moreover, Euro area signal-noise-ratios and entropy measures are correlated with popular uncertainty proxies, Euro area news-based EPU and the VSTOXX. Our finding corresponds to the recent literature on increased macroeconomic uncertainty and especially economic policy uncertainty during and after the “Great Recession”.
    Keywords: forecasting, information content, uncertainty, revisions, revision errors, entropy, signal-to-noise ratio, integrated signal-to-noise ratio, recession, EPU, VSTOXX
    JEL: C53 C8 D80 E3
    Date: 2014–06
  8. By: Altmann, Markus; Bartzsch, Nikolaus
    Abstract: According to estimates using the seasonal method, the volume of euro coins held for transaction purposes in Germany in 2011 stood at €2.3 billion; this corresponds to around 36% of the total volume of German (ie issued by the Deutsche Bundesbank) euro coins in circulation. 76% of the total volume of coins held for transaction purposes was accounted for by €1 and €2 coins. Only in the case of €2 coins has the cash stock held for transaction purposes made a significant contribution to the growth in the volume of coins in circulation in recent years. Therefore, structural models are the most suitable method of determining the demand for this denomination. Given the overall weakness in the growth of the cash held for transaction purposes, coin processing costs have, all other things being equal, risen less sharply than the volume of coins in circulation. Small denomination coins (1 and 2 cent coins) account for comparatively low shares of the coins held for transaction purposes (less than 30%). This is because they are hoarded to a greater extent in order to lighten one’s wallet or purse, or are lost. This could be used as an argument for applying a rounding rule (to nearest five cents). It is presumed that abroad German euro coins are, on balance, only held outside the euro area. There they are being hoarded on a permanent basis. Due to the inadequate data availability, the cash balance held for domestic transactions by sector cannot be fully recorded. Estimates for 2011 put them at between €0.7 billion and €1.0 billion. Households and credit institutions accounted for the largest share.
    Keywords: Coins, transaction balance, hoarding, foreign demand, seasonal method, introduction of euro cash
    JEL: E41 E42
    Date: 2014–08
  9. By: Dominic Richardson; Yekaterina Chzhen; UNICEF Innocenti Research Centre
    Abstract: The global financial crisis of 2007/2008 spilled over into the real economy reducing demand for labour and increasing unemployment. Young people were hit hard, with record numbers of 15-24-year-olds out of work and many of them not in education, employment or training (NEET). More than five years since the outbreak of the financial crisis, the economic recovery remains weak and uneven. The study documents a substantial worsening in the youth labour market situation during the Great Recession across the EU and/or OECD, particularly in countries that suffered greater falls in economic output per capita.
    Keywords: european union; temporary employment; unemployment; youth;
    JEL: J13 J24 J64
    Date: 2014

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