nep-eec New Economics Papers
on European Economics
Issue of 2014‒11‒28
fifteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Wealth shocks, credit-supply shocks, and asset allocation: evidence from household and firm portfolios By Kick, Thomas; Onali, Enrico; Ruprecht, Benedikt; Schaeck, Klaus
  2. Analysing and forecasting price dynamics across euro area countries and sectors: a panel VAR approach By Dées, Stéphane; Güntner, Jochen
  3. Market perception of sovereign credit risk in the euro area during the financial crisis By Camba-Méndez, Gonzalo; Serwa, Dobromil
  4. Inflation, deflation, and uncertainty: What drives euro area option-implied inflation expectations and are they still anchored in the sovereign debt crisis? By Scharnagl, Michael; Stapf, Jelena
  5. An Unemployment Insurance Scheme for the Euro Area? A Comparison of Different Alternatives using Micro Data By Dolls, Mathias; Fuest, Clemens; Neumann, Dirk; Peichl, Andreas
  6. Financial fragility of euro area households By Ampudia, Miguel; van Vlokhoven, Has; Żochowski, Dawid
  7. Receiving Countries' Perspectives: The Case of Sweden By Gerdes, Christer; Wadensjö, Eskil
  8. Rule Bending in International Organizations: Explaining Instability in the Stability and Growth Pact By Baerg, Nicole Rae; Hallerberg, Mark
  9. Finance-dominated capitalism in Germany: Deep recession and quick recovery By Detzer, Daniel; Hein, Eckhard
  10. Robustness, validity, and significance of the ECB's asset quality review and stress test exercise By Steffen, Sascha
  11. Overleveraging in the banking sector: Evidence from Europe By Schleer, Frauke; Semmler, Willi; Illner, Julian
  12. The costs and benefits of leaving the EU By Ottaviano, Gianmarco; Pessoa, João Paulo; Sampson, Thomas; Van Reenen, John
  13. EIRE Mod- A DSGE Model for Ireland By Clancy, Daragh; Merola, Rossana
  14. Health, Austerity and Economic Crisis: Assessing the Short-term Impact in OECD countries By Kees van Gool; Mark Pearson
  15. Procyclical and Countercyclical Fiscal Multipliers: Evidence from OECD Countries By Daniel Riera-Crichton; Carlos A. Vegh; Guillermo Vuletin

  1. By: Kick, Thomas; Onali, Enrico; Ruprecht, Benedikt; Schaeck, Klaus
    Abstract: We use a unique dataset with bank clients’ security holdings for all German banks to examine how macroeconomic shocks affect asset allocation preferences of households and non-financial firms. Our analysis focuses on two alternative mechanisms which can influence portfolio choice: wealth shocks, which are represented by the sovereign debt crisis in the Euro area, and credit-supply shocks which arise from reductions in borrowing abilities during bank distress. While households with large holdings of securities from stressed Euro area countries (Greece, Ireland, Italy, Portugal, and Spain) decrease the degree of concentration in their security portfolio as a result of the Euro area crisis, non-financial firms with similar levels of holdings from stressed Euro area countries do not. Credit-supply shocks at the bank level result in lower concentration, for both households and non-financial corporations. Only shocks to corporate credit bear ramifications on bank clients’ portfolio concentration. Our results are robust to falsification tests, and instrumental variables estimation. JEL Classification: D12, D13, G11, G21
    Keywords: asset allocation, bank distress, credit-supply shocks, sovereign debt crisis
    Date: 2014–04
  2. By: Dées, Stéphane; Güntner, Jochen
    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. JEL Classification: C33, C53, E31, E37
    Keywords: cost pressures, forecasting, impulse response analysis, panel VAR models
    Date: 2014–08
  3. By: Camba-Méndez, Gonzalo; Serwa, Dobromil
    Abstract: We study market perception of sovereign credit risk in the euro area during the financial crisis. In our analysis we use a parsimonious CDS pricing model to estimate the probability of default (PD) and the loss given default (LGD) as perceived by financial markets. We find that separate identification of PD and LGD appears empirically tractable for a number of euro area countries. In our empirical results the estimated LGDs perceived by financial markets stay comfortably below 40% in most of the samples. We also find that macroeconomic and institutional developments were only weakly correlated with the market perception of sovereign credit risk, whereas financial contagion appears to have exerted a non-negligible effect. JEL Classification: C11, C32, G01, G12, G15
    Keywords: CDS spreads, euro area, loss given default. ECB, probability of default, sovereign credit risk
    Date: 2014–08
  4. By: Scharnagl, Michael; Stapf, Jelena
    Abstract: We tackle two questions in this paper: In the sovereign debt crisis, what moves the euro area inflation outlook and has the firm anchoring of medium to long-term inflation expectations been touched? Deriving densities from a new data set on options on the euro area harmonized index of consumer prices provides us with the full distribution of inflation expectations. The daily data set allows us to analyze effects of monetary policy announcements and macro news in a time varying event study framework despite the short sample period from 2009 to 2013. Due to renewed fears of deflation we compare option-implied and statistical density functions to gain insight into deflation risk. Inflation expectations show a decreasing mean but growing uncertainty especially since the intensification of the sovereign debt crisis in mid-2011. Around the same time the influence of monetary policy announcements on inflation expectations diminished. Tail events such as deflation although still contained became more probable. The impact of macroeconomic news to explain inflation probabilities overall decreased and shifted towards countries more affected by the crisis. Concerning the anchoring of inflation expectations the paper provides a twofold result: The mean and low sensitivity to actual news speak for anchored inflation expectations whereas the growing uncertainty reveals market participants concerns about possible extreme inflation or deflation outcomes in the future.
    Keywords: Inflation expectations,Deflation,Options,Monetary policy,Financial crisis
    JEL: C58 E31 E44 G13
    Date: 2014
  5. By: Dolls, Mathias (ZEW Mannheim); Fuest, Clemens (ZEW Mannheim); Neumann, Dirk (Université catholique de Louvain); Peichl, Andreas (ZEW Mannheim)
    Abstract: We analyze different alternatives how a common unemployment insurance system for the euro area (EA) could be designed and assess their effectiveness to act as an insurance device in the presence of asymmetric macroeconomic shocks. Running counterfactual simulations based on micro data for the period 2000-13, we highlight and quantify the trade-off between automatic stabilization effects and the degree of cross-country transfers. In the baseline, we focus on a non-contingent scheme covering short-term unemployment and find that it would have absorbed a significant fraction of the unemployment shock in the recent crisis. However, 5 member states of the EA18 would have been either a permanent net contributor or net recipient. Our results suggest that claw-back mechanisms and contingent benefits could limit the degree of cross-country redistribution, but might reduce desired insurance effects. We also discuss moral hazard issues at the level of individuals, the administration and economic policy.
    Keywords: European fiscal integration, unemployment insurance, automatic stabilizers
    JEL: F55 H23 J65
    Date: 2014–10
  6. By: Ampudia, Miguel; van Vlokhoven, Has; Żochowski, Dawid
    Abstract: We propose a novel framework to identify distressed households by taking account of both the solvency and the liquidity situation of an individual household. Using the data from the Household Finance and Consumption Survey and the country-level data on non-performing loans we calibrate our metric of distress and estimate stress-test elasticities in response to an interest rate shock, an income shock and a house price shock. We find that, albeit euro area households are relatively resilient as a whole, there are large discrepancies in the impact of macroeconomic shocks across countries. Furthermore, while losses given default as calculated using our framework are low, they are sensitive to house prices changes. Hence, any factors hindering the seizure of the collateral or lowering its value, such as inefficient legal systems, moratoria on foreclosures or bottlenecks in judicial procedures may significantly increase losses facing banks. Finally, we demonstrate that our framework could be used for macroprudential purposes, in particular for the calibration of country level loan-to-value ratio caps. JEL Classification: D10, D14, G21
    Keywords: financial stability, household finance, household indebtedness, stress testing
    Date: 2014–10
  7. By: Gerdes, Christer (SOFI, Stockholm University); Wadensjö, Eskil (Stockholm University)
    Abstract: Sweden has made its labour market more open for labour immigration since the mid1990s: becoming member of the common labour market of EES/EU in 1994, no transitional rules introduced at the enlargement of European Union in 2004 and 2007, and opening up for labour migration from non-EES/EU countries in December 2008. The changes have led to increased labour immigration. The labour immigration expanded for example after the enlargement in 2004 but not so much as in for example the United Kingdom and Ireland. Other forms of immigration have been more important. On the other hand, the migration has been rather stable in the years after the crisis in 2008. The main explanation is most likely that the recession in Sweden was only for one year, 2009, and that it was concentrated to some parts of the manufacturing industry where few migrant workers were employed. If the present EMU crisis is spreading to Sweden the result may of course be different.
    Keywords: immigration, wages, EU enlargement, Sweden
    JEL: F22 J15 J31 J61
    Date: 2014–08
  8. By: Baerg, Nicole Rae; Hallerberg, Mark
    Abstract: In this paper, we consider how European institutions contributed to the euro crisis. In principle, the Stability and Growth Pact was intended to minimize externalities by preventing macro-economic "bad behavior" in the form of large budget deficits. In practice, it has had a difficult history, with several Member States running "excessive deficits" and the Pact clearly failing to prevent the crisis. An important part of the story, and one that is often ignored, is that Member States not only broke the rules but repeatedly bent them by augmenting and amending the European Commission's assessments. We operationalize what it means to bend rules under the Pact, and we consider explanations for why some Member States repeatedly bent the rules in the run-up to the crisis while others did not. Using a new dataset of Commission assessments of member state economic programmes and Council of Minister revisions of those assessments for the period 1998-2012, we find that big states and states with euroskeptic populations regularly undermined the "watchdog" function of the Commission. The evidence leads us to conclude that unlike some domains where rule flexibility leads to better, and deeper cooperation, such flexibility eroded cooperation in the run-up to the euro crisis.
    Keywords: Eurocrisis, Political Economy, Stability and Growth Pact, Fiscal Governance
    JEL: E6 E62 H5 H6 H87
    Date: 2014–10–31
  9. By: Detzer, Daniel; Hein, Eckhard
    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
  10. By: Steffen, Sascha
    Abstract: As we are moving toward a eurozone banking union, the European Central Bank (ECB) is going to take over the regulatory oversight of 128 banks in November 2014. To that end, the ECB conducted a comprehensive assessment of these banks, which included an asset quality review (AQR) and a stress test. The fundamental question is how accurately will the financial condition of these banks have been assessed by the ECB when it commences its regulatory oversight? And, can the comprehensive assessment lead to a full repair of banks' balance sheets so that the ECB takes over financially sound banks and is the necessary regulation in place to facilitate this? Overall, the evidence presented in this paper based on the design of the comprehensive assessment as well as own stress test exercises suggest that the ECB's assessment might not comprehensively deal with the problems in the financial sector and risks may remain that will pose substantial threats to financial stability in the eurozone.
    Keywords: Stress Test,Comprehensive Assessment,Asset Quality Review,European Central Bank,European Banking Authority,Single Supervisory Mechanism
    Date: 2014
  11. By: Schleer, Frauke; Semmler, Willi; Illner, Julian
    Abstract: Overleveraging of the banking sector has been considered as one of the main causes of the 2007-09 financial crisis and the subsequent great recession. It was also of major concern for the subsequent BIS regulatory policies resulting in Basel III and its request for higher capital requirements. It has now become highly relevant for the planned European banking union. Overleveraging of the banking sector exposes the financial sector and the macroeconomy to vulnerabilities, but also, as critics state, seems to constrain credit flows to the private sector. We present here a measure of overleveraging, defined as the difference of actual and sustainable debt, conduct an empirical study on overleveraging for 40 banks in Europe, and study the vulnerabilities and credit contractions that can arise subsequently. Before the year 2004 overleveraging has not been a serious problem as leverage was on a sustainable level. However, in the run-up to the financial crisis, actual and optimal debt ran apart and the banking sector began to suffer from overleveraging. We use a nonlinear Vector STAR model to evaluate the hypothesis that periods of increasing debt levels are accompanied by more severe credit constraints than periods of low leveraging. We demonstrate this for country groups across Europe.
    Keywords: Overleveraging,banking sector,Vector STAR,real economy,credit flows,regime switch
    JEL: C61 E32 G01
    Date: 2014
  12. By: Ottaviano, Gianmarco; Pessoa, João Paulo; Sampson, Thomas; Van Reenen, John
    Abstract: What would be the economic effects of the UK leaving the European Union on living standards of British people? We focus on the effects of trade on welfare net of lower fiscal transfers to the EU. We use a standard quantitative static general equilibrium trade model with multiple sectors, countries and intermediates, as in Costinot and Rodriguez-Clare (2013). Static losses range between 1.13% and 3.09% of GDP, depending on the assumptions used in our counterfactual scenarios. Including dynamic effects could more than double such losses.
    Keywords: Trade,European Union,welfare
    JEL: F13 F17
    Date: 2014
  13. By: Clancy, Daragh (Central Bank of Ireland); Merola, Rossana (Economic and Social Research Institute)
    Abstract: We develop ´EIRE Mod (Elementary Irish Real Economy Model), a core DSGE model suitable for policy analysis in Ireland. The model’s underlying structure, with a distinction between the traded and non-traded sectors and an import content of exports component, is designed to replicate the highly open nature of the Irish economy. Ireland’s membership of EMU is accounted for through exogenous nominal interest and exchange rates. New Keynesian features, such as sticky prices and wages, mean the model’s dynamics can replicate the sluggish reaction of economic variables found in the empirical literature. The model is calibrated in order to match key observed ratios in the Irish data. The usefulness of the model as a policy tool is highlighted through the simulation of various structural reforms aimed at boosting efficiency and competitiveness. Our results show that overall, reforms aimed at boosting productivity and price and wage competitiveness lead to the desired increase in output. Nevertheless, particular care should be paid to the effect of domestic reforms on Ireland’s external competitiveness and employment. This work is the first step towards the development of a suite of DSGE models for Ireland. Extensions of the core ´EIRE Mod will be necessary to fully capture key aspects of the economy’s adjustment path following these reforms. Accordingly, the results presented in this initial paper should be treated with caution.
    Keywords: Ireland, corporate liquidations, rm default, survival analysis.
    JEL: E12
    Date: 2014–09
  14. By: Kees van Gool; Mark Pearson
    Abstract: The economic crisis that started in 2008 has had a profound impact on the lives of citizens. Millions of people lost their job, saw their life-savings disappear and experienced prolonged financial hardship. The economic crisis has also led a number of OECD governments to introduce austerity measures to reduce public deficits. The health sector, like many other social welfare programmes, has witnessed extensive spending cuts and has also been the subject of substantial reforms. The combined effects of economic crisis, austerity and reforms have led many OECD health systems into unchartered territory.<p> This paper looks at the impact of economic crisis on health and health care. It summarises findings from the published literature on the effects of economic crisis that took place over the past few decades and also describes recent health policy reforms, focusing on those countries where the economic crisis has hit hardest. Finally, this paper analyses the empirical relationship between unemployment and health care use, quality and health outcomes, using data from OECD Health Statistics. In doing so, it investigates whether the effects of unemployment on health outcomes have been extenuated by austerity measures...<BR>La crise économique qui a débuté en 2008 a eu d’importantes répercussions pour des millions de personnes, qui ont perdu leur travail ou l’épargne de toute leur vie et se trouvent confrontées à des difficultés financières de longue durée. La crise a également conduit plusieurs pays de l’OCDE à adopter des mesures d’austérité pour réduire leur déficit public. Le secteur de la santé, comme beaucoup d’autres programmes de protection sociale, a ainsi été soumis à d’importantes restrictions budgétaires et a fait l’objet de réformes de grande ampleur. Suite à l’effet conjugué de la crise économique, des mesures d’austérité et des réformes, les systèmes de santé de nombre de pays de l’OCDE doivent aujourd’hui se réinventer.<p> Ce document passe en revue les retombées de la crise économique sur la santé et les soins de santé. Il fait la synthèse des résultats de diverses publications sur les effets des crises économiques des dernières décennies et décrit les récentes réformes des politiques de santé, en s’intéressant plus particulièrement aux pays les plus touchés. Enfin, il analyse, à partir des Statistiques de l’OCDE sur la santé, les relations empiriques qui existent entre le chômage et l’utilisation, la qualité et l’efficacité des soins de santé. Dans cette optique, il s’interroge sur la question de savoir si les mesures d’austérité ont contribué à atténuer les effets du chômage sur les résultats en matière de santé...
    JEL: C23 H51 I10 I18
    Date: 2014–09–01
  15. By: Daniel Riera-Crichton; Carlos A. Vegh; Guillermo Vuletin
    Abstract: Using non-linear methods, we argue that existing estimates of government spending multipliers in expansion and recession may yield biased results by ignoring whether government spending is increasing or decreasing. In the case of OECD countries, the problem originates in the fact that, contrary to one's priors, it is not always the case that government spending is going up in recessions (i.e., acting countercyclically). In almost as many cases, government spending is actually going down (i.e., acting procyclically). Since the economy does not respond symmetrically to government spending increases or decreases, the "true" long-run multiplier for bad times (and government spending going up) turns out to be 2.3 compared to 1.3 if we just distinguish between recession and expansion. In extreme recessions, the long-run multiplier reaches 3.1.
    JEL: E62 F41
    Date: 2014–09

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