nep-eec New Economics Papers
on European Economics
Issue of 2014‒12‒08
fourteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Current Accounts in the Eurozone Countries: The Role of Euro, Fiscal Policies and Financial Developments By Jaromír Baxa; Tomáš Olešòaník
  2. "An Outline of a Progressive Resolution to the Euro-area Sovereign Debt Overhang: How a Five-year Suspension of the Debt Burden Could Overthrow Austerity" By Dimitris P. Sotiropoulos; John Milios; Spyros Lapatsioras
  3. Inspecting the Mechanism: Leverage and the Great Recession in the Eurozone By Philippe Martin; Thomas Philippon
  4. Reforming the architecture of EMU: Ensuring stability in Europe By Jakob de Haan; Jeroen Hessel; Niels Gilbert
  5. The Phillips Curve: (In)stability, the role of credit, and implications for potential output measurement By Schleer, Frauke; Kappler, Marcus
  6. The financial and macroeconomic effects of OMT announcements By Altavilla, Carlo; Giannone, Domenico; Lenza, Michele
  7. Is there a threat of self-reinforcing deflation in the euro area? A view through the lens of the Phillips curve By Wieland, Volker; Wolters, Maik
  8. A Joint Unemployment Insurance for the European Economic and Monetary Union? By Eichhorst, Werner; Wozny, Florian
  9. Does the Clarity of Inflation Reports Affect Volatility in Financial Markets? By Ales Bulir; Martin Cihak; David-Jan Jansen
  10. Unemployment and Structural Unemployment in the Baltics By Christian Ebeke; Greetje Everaert
  11. Contagion in the European Sovereign Debt Crisis By Brent Glover; Seth Richards-Shubik
  12. Employment policy implementation mechanisms in the European Union, the United Kingdom and Germany By Zimmermann, Katharina; Fuertes, Venesa
  13. Fiscal Sustainability in the Presence of Systemic Banks: the Case of EU countries By Agnès Bénassy-Quéré; Guillaume Roussellet
  14. Central bank macroeconomic forecasting during the global financial crisis: the European Central Bank and Federal Reserve Bank of New York experiences By Alessi, Lucia; Ghysels, Eric; Onorante, Luca; Peach, Richard; Potter, Simon

  1. By: Jaromír Baxa (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic. Institute of Information Theory and Automation, Academy of Sciences of the Czech Republic, Pod Vodárenskou veží 4, 182 08 Prague 8, Czech Republic); Tomáš Olešòaník (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic)
    Abstract: Should we blame the euro for widening of current account deficits in the EMU? In this paper, we employ time-specific fixed effect estimator to study determinants of the current account deficits of the EU countries before and after adoption of the euro. Our aim is to assess to what extent the increased current account deficits could be attributed to the single currency and to the role of other variables, especially fiscal policy and developments of financial sector. We show that euro had negative effect on current account balances of southern countries. Moreover, we provide evidence that the role of fiscal policy in current account dynamics changed with euro adoption and twin deficits emerged in many countries. Finally, we document significant role of growing credits to private sector for built-up of persistent current account deficits, hence the negative effects of excessive lending on external balance should be addressed by the regulators and policy makers in the future.
    Keywords: current account, euro, fiscal balance, financial system
    JEL: E42 E62 F14
    Date: 2014–09
  2. By: Dimitris P. Sotiropoulos; John Milios; Spyros Lapatsioras
    Abstract: The present study puts forward a plan for solving the sovereign debt crisis in the euro area (EA) in line with the interests of the working classes and the social majority. Our main strategy is for the European Central Bank (ECB) to acquire a significant part of the outstanding sovereign debt (at market prices) of the countries in the EA and convert it to zero-coupon bonds. No transfers will take place between individual states; taxpayers in any EA country will not be involved in the debt restructuring of any foreign eurozone country. Debt will not be forgiven: individual states will agree to buy it back from the ECB in the future when the ratio of sovereign debt to GDP has fallen to 20 percent. The sterilization costs for the ECB are manageable. This model of an unconventional monetary intervention would give progressive governments in the EA the necessary basis for developing social and welfare policies to the benefit of the working classes. It would reverse present-day policy priorities and replace the neoliberal agenda with a program of social and economic reconstruction, with the elites paying for the crisis. The perspective taken here favors social justice and coherence, having as its priority the social needs and the interests of the working majority.
    Keywords: Euro Area; Sovereign Debt; European Central Bank; Unconventional Monetary Policies
    JEL: E58 E61 H12 H63
    Date: 2014–11
  3. By: Philippe Martin; Thomas Philippon
    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; (ii) 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.
    JEL: E2 E3 E4 E6 F3 F4
    Date: 2014–10
  4. By: Jakob de Haan; Jeroen Hessel; Niels Gilbert
    Abstract: This paper analyses the reforms in the architecture of EMU since the eruption of the euro crisis in 2010. We describe major weaknesses in the original set-up of EMU, such as lack of fiscal discipline, diverging financial cycles and competitiveness positions, and a lack of crisis instruments. These weaknesses appeared against the background of a strong increase in financial integration and financial imbalances since the Maastricht treaty was signed. European policymakers have addressed all weaknesses in the EMU architecture in some way or the other, which is a major achievement. Yet, the effectiveness of the new framework will crucially depend on strict implementation. We discuss whether in the longer run the current balance between policy coordination and risk sharing can be improved upon.
    Keywords: Economic and Monetary Union; Financial Cycles; Financial crisis; European debt crisis
    JEL: E44 E58 F36 G15 G21
    Date: 2014–11
  5. By: Schleer, Frauke; Kappler, Marcus
    Abstract: The path of output prior to the financial and economic crisis turned out to be not sustainable and lower than previously estimated in some European crisis countries. Specifically, the output gaps have been underestimated (and inversely potential output overestimated) before the recent crisis. It is fair to say that the employed estimation techniques failed to provide valid real-time assessments of the state of the credit boom driven euro area economies. One reason for this may be the breakdown of the Phillips curve relationship during the last years. Against this backdrop, we comprehensively analyse the validity of the Phillips curve for five European countries with a focus on the recent crisis. We find that a mostly insignificant relation between inflation and the output gap or unemployment gap, which questions the adequacy of the Phillips curve to identify the sustainable level of output in an economy. The credit-driven boom in crisis countries has made clear that (disadvantageous) financial markets conditions may result in structural and long-term real economic distortions that are not yet taken into account in conventional methods for the estimation of potential output and the output gap. Since both, potential output and output gaps, are a key notion in policymaking, incorporating financial factors could improve the reliability of the estimates. Our results point in this direction.
    Keywords: Phillips curve,potential output,output gap,financial cycle,credit cycle,NAIRU
    JEL: E32 E44 E60
    Date: 2014
  6. By: Altavilla, Carlo; Giannone, Domenico; Lenza, Michele
    Abstract: This study evaluates the macroeconomic effects of Outright Monetary Transaction (OMT) announcements by the European Central Bank (ECB). Using high-frequency data, we find that OMT announcements decreased the Italian and Spanish 2-year government bond yields by about 2 percentage points, while leaving unchanged the bond yields of the same maturity in Germany and France. These results are used to calibrate a scenario in a multi-country model describing the macro-financial linkages in France, Germany, Italy, and Spain. The scenario analysis suggests that the reduction in bond yields due to OMT announcements is associated with a significant increase in real activity, credit, and prices in Italy and Spain with relatively muted spillovers in France and Germany. JEL Classification: E47, E58, C54
    Keywords: event study, multi-country vector autoregressive model, news, Outright Monetary Transactions
    Date: 2014–08
  7. By: Wieland, Volker; Wolters, Maik
    Abstract: The recent decline in euro area inflation has triggered new calls for additional monetary stimulus by the ECB in order to counter the threat of a self-reinforcing deflation and recession spiral. This note reviews the available evidence on inflation expectations, output gaps and other factors driving current inflation through the lens of the Phillips curve. It also draws a comparison to the Japanese experience with deflation in the late 1990s and the evidence from Japan concerning the output-inflation nexus at low trend inflation. The note concludes from this evidence that the risk of a self-reinforcing deflation remains very small. Thus, the ECB best await the impact of the long-term refinancing operations decided in June that have the potential to induce substantial monetary accommodation once implemented for the first time in September.
    Date: 2014
  8. By: Eichhorst, Werner (IZA); Wozny, Florian (IZA)
    Abstract: More and more policy makers tend to declare that the loss of exchange rate adjustments within the European Economic and Monetary Union (EMU) has to be compensated by an increase in fiscal policy. A joint unemployment insurance is seen as one opportunity. After comparing a basic design with a "kicking-in" style unemployment insurance, we recommend the latter as it captures the main motivation of such a transnational transfer mechanism, combating credit market constraints.
    Keywords: European Economic and Monetary Union, European unemployment insurance, automatic stabilizers
    JEL: J65 J68
    Date: 2014–10
  9. By: Ales Bulir; Martin Cihak; David-Jan Jansen
    Abstract: We study whether clarity of central bank inflation reports affects return volatility in financial markets. We measure clarity of reports by the Czech National Bank, the European Central Bank, the Bank of England, and Sveriges Riksbank using the Flesch-Kincaid grade level, a standard readability measure. We find some evidence, mainly for the euro area, of a negative relationship between clarity and market volatility prior to and during the early stage of the global financial crisis. As the crisis unfolded, there is no longer robust evidence of a negative connection. We conclude that reducing noise using clear reports is possible but not without challenges, especially in times of crisis.
    Keywords: Inflation;Central banks;Public information;Capital market volatility;Financial markets;central bank communication, clarity, financial markets, inflation reports, volatility
    Date: 2014–09–24
  10. By: Christian Ebeke; Greetje Everaert
    Abstract: While the unemployment rate in the Baltics has fallen sharply from its crisis-peaks, it remains close to double digits. This paper estimates the structural component of the jobless rate in the three Baltic countries and analyzes its causes. Our main findings are that the current still elevated levels of unemployment mostly reflect structural factors. We then turn to why structural unemployment is so high. This paper points to skill mismatches, high tax wedges, and unemployment and inactivity traps as potential causes.
    Keywords: Unemployment;Estonia;Latvia;Lithuania;Baltics;Labor markets;Skilled labor;Migrations;Unemployment, Structural Unemployment, Baltics, Estonia, Latvia, Lithuania
    Date: 2014–08–19
  11. By: Brent Glover; Seth Richards-Shubik
    Abstract: We use a network model of credit risk to measure market expectations of the potential spillovers from a sovereign default. Specifically, we develop an empirical model, based on the recent theoretical literature on contagion in financial networks, and estimate it with data on sovereign credit default swap spreads and the detailed structure of financial linkages among thirteen European sovereigns from 2005 to 2011. Simulations from the estimated model show that a sovereign default generates only small spillovers to other sovereigns. These results imply that credit markets do not demand a significant premium for the interconnectedness of sovereign debt in Europe.
    JEL: D85 F34 F36 G01 L14
    Date: 2014–10
  12. By: Zimmermann, Katharina; Fuertes, Venesa
    Abstract: This paper discusses the employment policy mechanisms in the EU and the United Kingdom and Germany.
    Keywords: employment policy, governance, EU countries, Germany, UK, politique de l'emploi, gouvernance, pays de l'UE, Allemagne, Royaume-Uni, política de empleo, gobernabilidad, países de la UE, Alemania, Reino Unido
    Date: 2014
  13. 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); Guillaume Roussellet (ENSAE - École Nationale de la Statistique et de l'Administration Économique - ENSAE ParisTech, Centre de recherche de la Banque de France - Banque de France, CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris IX - Paris Dauphine)
    Abstract: We provide a first attempt to include off-balance sheet, implicit insurance to SIFIs into a consistent assessment of fiscal sustainability, for 27 countries of the European Union. We first calculate tax gaps à la Blanchard (1990) and Blanchard et al. (1990). We then introduce two alternative measures of implicit off-balance sheet liabilities related to the risk of a systemic bank crisis. The first one relies on microeconomic data at the bank level. The second one is based on econometric estimations of the probability and the cost of a systemic banking crisis. The former approach provides an upper evaluation of the fiscal cost of systemic banking crises, whereas the latter one provides a lower one. Hence we believe that the combined use of these two methodologies helps to gauge the range of fiscal risk.
    Keywords: fiscal sustainability ; tax gap ; systemic banking risk ; off-balance sheet liabilities
    Date: 2014
  14. By: Alessi, Lucia; Ghysels, Eric; Onorante, Luca; Peach, Richard; Potter, Simon
    Abstract: This paper documents macroeconomic forecasting during the global financial crisis by two key central banks: the European Central Bank and the Federal Reserve Bank of New York. The paper is the result of a collaborative effort between staff at the two institutions, allowing us to study the time-stamped forecasts as they were made throughout the crisis. The analysis does not exclusively focuses on point forecast performance. It also examines methodological contributions, including how financial market data could have been incorporated into the forecasting process. JEL Classification: C53, E37
    Keywords: forecast evaluation, mixed frequency data sampling
    Date: 2014–07

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