nep-eec New Economics Papers
on European Economics
Issue of 2014‒12‒13
twenty papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Credit supply dynamics and economic activity in euro area countries: a time-varying parameter VAR analysis By Bijsterbosch, Martin; Falagiarda, Matteo
  2. Euro Area business cycles in turbulent times: convergence or decoupling? By F. Ferroni; B. Klaus
  3. A Fragmentation Indicator for Euro Area Sovereign Bond Markets By Moloney, Kitty; Killeen, Neill; Givlarry, Oliver
  4. Towards deeper financial integration in Europe: What the Banking Union can contribute By Buch, Claudia M.; Körner, Tobias; Weigert, Benjamin
  5. Measuring bilateral spillover and testing contagion on sovereign bond markets in Europe By Claeys, Peter; Vašíček, Bořek
  6. Fiscal devaluation in the euro area: a model-based analysis By Gomes, Sandra; Jacquinot, Pascal; Pisani, Massimiliano
  7. Exports and capacity constraints - a smooth transition regression model for six euro area countries By Belke, Ansgar; Oeking, Anne; Setzer, Ralph
  8. A Model-Based Analysis of Spillovers: The Case of Poland and the Euro Area By Michal Andrle; Roberto Garcia-Saltos; Giang Ho
  9. Does Money Matter in the Euro area? Evidence from a new Divisia Index By Zsolt Darvas
  10. Demand Patterns in France, Germany, and Belgium: Can We Explain the Differences? By Igor Lebrun; Esther Pérez Ruiz
  11. Measuring Bank Contagion in Europe Using Binary Spatial Regression Models By Raffaella Calabrese; Johan A. Elkink; Paolo Giudici
  12. Unemployment and labor reallocation in Europe By Hogrefe, Jan; Sachs, Andreas
  13. Real Exchange Rates and Sectoral Productivity in the Eurozone By Martin Berka; Michael B. Devereux; Charles Engel
  14. Short-term determinants of the idiosyncratic sovereign risk premium: a regime-dependent analysis for european credit default swaps By Calice, Giovanni; Miao, RongHui; Štěrba, Filip; Vašíček, Bořek
  15. Collateral imbalances in intra-european trade? Accounting for the difference between gross and value added trade balances By Nagengast, Arne J.; Stehrer, Robert
  16. Sovereign Debt and Economic Growth Revisited: The Role of (Non-)Sustainable Debt Thresholds By Nikolaos Antonakakis
  17. One currency and many modes of wage formation: Why the eurozone is too heterogeneous for the euro By Höpner, Martin; Lutter, Mark
  18. Analysis of Public, Private and Financial Sectors in European Countries Through the Statis Methodology By Catarina Lourenço Soares; Adelaide Maria de Sousa Figueiredo; Fernanda Otília de Sousa Figueiredo
  19. The growth impact of discretionary fiscal policy measures By Attinasi, Maria-Grazia; Klemm, Alexander
  20. The Impact of Yuan Internationalization on the Euro-Dollar Exchange Rate By Agnès Bénassy-Quéré; Yeganeh Forouheshfar

  1. By: Bijsterbosch, Martin; Falagiarda, Matteo
    Abstract: This paper aims to shed light on the role of credit supply shocks in euro area countries during the recent pre-crisis, bust, and post-crisis periods. A time-varying parameter vector autoregression (TVP-VAR) with stochastic volatility à la Primiceri (2005) is estimated for each country, and the structural shocks are identified by imposing sign restrictions on impulse response functions based on the theoretical model by Gerali et al. (2010). The results suggest that credit supply shocks have been an important driver of business cycle fluctuations in euro area countries, and that their effects on the economy have generally increased since the recent crisis. Moreover, we report evidence that credit supply shocks contributed positively to output growth during the pre-crisis period and negatively during the downturn in economic activity in 2008-2009 in all the countries considered. In the post-crisis period, by contrast, we observe a strong rise in cross-country heterogeneity, reflecting financial fragmentation in the euro area. Although this heterogeneity across euro area countries seems to have declined since around 2012, the contribution of credit supply shocks to GDP growth and credit growth remains negative in most euro area countries, suggesting that constraints in the supply of credit continue to weaken economic activity. JEL Classification: C11, C32, E32, E51
    Keywords: credit supply shocks, euro area, sign restrictions, TVP-VAR
    Date: 2014–08
  2. By: F. Ferroni; B. Klaus
    Abstract: We study the business cycles properties of the four largest European economies in the wake of the recent recession episodes. The analysis is based on the factors estimated from a multi-country and multi-sector data rich environment. We measure alikeness of business cycles by studying the synchronization of up and down phases, the convergence properties of country fluctuations towards the Euro Area cycles and the contribution of the Euro Area factor to national GDPs volatilities. While the economic fluctuations of the four Euro Area member states were similar before the global financial turmoil, we gather compelling evidence of an asymmetric behavior of Spanish fluctuations relative to the Euro Area one.
    Keywords: Hierarchical factor models; International business cycles; Synchronization and Convergence.
    JEL: C51 E32 O52
    Date: 2014
  3. By: Moloney, Kitty (Central Bank of Ireland); Killeen, Neill (Central Bank of Ireland); Givlarry, Oliver (Central Bank of Ireland)
    Abstract: This Letter presents a simple indicator which can be used to monitor fragmentation in euro area sovereign bond markets. The indicator is a moving average cross-correlation of bond yield log returns between Germany and other euro area countries. We suggest that a lower correlation implies greater market fragmentation. We do not distinguish between fragmentation based on fundamentals and that based on market sentiment, although we expect sentiment to play a key role. We compare the simple indicator to a bivariate dynamic conditional correlation (DCC) GARCH estimate which accounts for heteroskedasticity. The estimates indicate that the core countries decouple from Germany and then re-attach, whereas the peripheral countries remain fragmented during the entire sample period.
    Date: 2014–10
  4. By: Buch, Claudia M.; Körner, Tobias; Weigert, Benjamin
    Abstract: The European Banking Union is a major step forward in fixing major deficiencies in the institutional framework of the Euro area. The absence of effective banking supervision and resolution powers at the European level promoted excessive private risk-taking in the up-run to the Euro crisis. Effective private risk sharing once risks materialized has been hampered. A properly designed Banking Union facilitates and improves private risk sharing, and it is thus a necessary institutional complement to a monetary union. Yet, the institutional framework of the Banking Union needs further strengthening in three regards. First, the supervisory framework needs to ensure uniform supervisory standards for all banks, including those located in non-Euro area countries. Also, conflicts of interest between monetary policy and banking supervision need to be mitigated. Second, bank resolution suffers from a highly complex governance structure. Restructuring and bail-in rules allow for a high degree of discretion at the level of the resolution authority. We propose to introduce a statutory systemic risk exception, by which the exercise of discretion would be reduced, thereby strengthening the credibility of the bail-in. Third, in order to enhance the credibility of creditor involvement, fiscal backstops and ex-ante specified cross-border burden-sharing agreements are needed.
    Keywords: European Banking Union,Single Supervisory Mechanism,Single Resolution Mechanism,Risk Sharing
    JEL: E02 E42 G18
    Date: 2014
  5. By: Claeys, Peter; Vašíček, Bořek
    Abstract: The global financial crisis rapidly spread across borders and financial markets, and also distressed EU bond markets. The crisis did not hit all markets in the same way. We measure the strength and direction of linkages between 16 EU sovereign bond markets using a factor-augmented version of the VAR model in Diebold and Yilmaz (2009). We then provide a novel test for contagion by applying the multivariate structural break test of Qu and Perron (2007) on this FAVAR detecting significant sudden changes in shock transmission. Results indicate substantial spillover, especially between EMU countries. Differences in bilateral linkages are due to a combination of fiscal trouble and a large banking sector, as Belgium, Italy and Spain are central to shock transmission during the financial crisis. Contagion has been a rather rare phenomenon limited to a few well defined moments of uncertainty on financial assistance packages for Greece, Ireland and Portugal. Most of the frequent surges in market co-movement are driven by larger shocks rather than by contagion. JEL Classification: G12, C14, E43, E62, H62, H63
    Keywords: contagion, eurozone, FAVAR, financial crisis, fiscal policy, spillover
    Date: 2014–04
  6. By: Gomes, Sandra; Jacquinot, Pascal; Pisani, Massimiliano
    Abstract: We assess the effects on trade balance of a temporary fiscal devaluation enacted by Spain or Portugal 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 consumption tax. Our main results are the following. First, 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 enacted also 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 Classification: F32, F47, H20
    Keywords: dynamic general equilibrium modeling, fiscal devaluation, trade deficit
    Date: 2014–08
  7. By: Belke, Ansgar; Oeking, Anne; Setzer, Ralph
    Abstract: This paper argues that, under certain conditions, firms consider export activity as a substitute of serving domestic demand. Our econometric model for six euro area countries suggests domestic demand pressure and capacity constraint restrictions as additional variables of a properly specified export equation. As an innovation to the literature, we assess the empirical significance through the logistic and the exponential variant of the non-linear smooth transition regression model. We find that domestic demand developments are relevant for the short-run dynamics of exports in particular during more extreme stages of the business cycle. A strong substitutive relationship between domestic and foreign sales can most clearly be found for Spain, Portugal and Italy providing evidence of the importance of sunk costs and hysteresis in international trade. JEL Classification: F14, C22, C50, C51, F10
    Keywords: domestic demand, exports, hysteresis, smooth transition models, sunk costs
    Date: 2014–11
  8. By: Michal Andrle; Roberto Garcia-Saltos; Giang Ho
    Abstract: This paper studies economic and financial spillovers from the euro area to Poland in a two-country semi-structural model. The model incorporates various channels of macrofinancial linkages and cross-border spillovers. We parameterize the model through an extensive calibration process, and provide a wide range of model properties and evaluation exercises. Simulation results suggest a prominent role of foreign demand shocks (euro area and global) in driving Poland’s output, inflation and interest rate dynamics, particularly in recent years. Our model also has the capability for medium-term conditional forecasting and policy analysis.
    Keywords: Spillovers;Poland;Euro Area;Demand;External shocks;Business cycles;Cross country analysis;Econometric models;Poland, Euro area, semi-structural model, spillovers
    Date: 2014–10–17
  9. By: Zsolt Darvas
    Abstract: The purpose of this paper is to examine the possible role of money shocks on output and prices in the euro area. Since no Divisia monetary aggregates are available for the euro area, we first create and make available a database on euro-area Divisia monetary aggregates. We plan to update the dataset in the future and keep it publicly available. Using different SVAR models, we find sensible and statistically significant responses to Divisia money shocks, while the responses to simple-sum measures of money and interest rates are not statistically significant, and sometimes even the point estimates are not sensible.
    Date: 2014–11
  10. By: Igor Lebrun; Esther Pérez Ruiz
    Abstract: The need to revive Euro area growth highlights the importance of the evolution of domestic and external demand in the core. This paper puts recent demand patterns in France, Germany, and Belgium into historical perspective. We find that, first, dynamics for private consumption, non-residential business investment, and exports since 2008 is dominated by conventional determinants, with no discernible structural break as a result of the crisis. Second, although country-specific factors matter in some cases, demand patterns in these countries are largely driven by common determinants. Third, developments in common fundamentals tend to dominate demand dynamics, coupled, in a few cases, with structurally different elasticities across countries. Fourth, short-term analysis suggests a role for confidence and uncertainty factors in explaining temporary deviations of these variables from long-term fundamentals.
    Keywords: Demand;France;Germany;Belgium;Private consumption;Disposable income;Capital expenditure;Exports;Cross country analysis;Econometric models;growth, demand patterns, Germany, France, Belgium.
    Date: 2014–09–12
  11. By: Raffaella Calabrese (Essex Business School, University of Essex); Johan A. Elkink (University College Dublin); Paolo Giudici (Department of Economics and Management, University of Pavia)
    Abstract: The recent European sovereign debt crisis clearly illustrates the importance of measuring the contagion effects of bank failures. Indeed, to better understand and monitor contagion risk, the European Central Bank is assuming the supervision of the largest banks in each of the member states. We propose a measure of contagion risk based on the spatial autocorrelation parameter of a binary spatial autoregressive model. Using different specifications of the interbank connectivity matrix and of the determinants of bank failures, we estimate the contagion parameter for banks within the Eurozone, between 1996 and 2012. We provide evidence of high levels of systemic risk due to contagion.
    Keywords: Contagion risk, spatial autoregressive models, European banks, binary data.
    Date: 2014–11
  12. By: Hogrefe, Jan; Sachs, Andreas
    Abstract: We ask whether sectoral shocks and the subsequent labor reallocation are responsible for unemployment within selected European economies. Our measure of sectoral labor reallocation is adjusted for aggregate influences and the remaining variation is linked to unemployment in country specific dynamic models. For Spain, the ADL-model estimation reveals a significant impact of sectoral reallocation on unemployment that goes beyond usual business cycle patterns. In Italy, there is weaker yet detectable evidence for this mechanism. In Ireland, Portugal and France, no significant influence of sector level shocks on unemployment is found. The results emphasize the potential structural supply side policies have for reducing unemployment in Spain.
    Keywords: unemployment,sectoral shocks,labor reallocation,Europe
    JEL: E24 J62 J64
    Date: 2014
  13. 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 cross-section 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.
    JEL: F31 F41
    Date: 2014–09
  14. By: Calice, Giovanni; Miao, RongHui; Štěrba, Filip; Vašíček, Bořek
    Abstract: This study investigates the dynamics of the sovereign CDS term premium for five European countries. The CDS term premium can be regarded as a forward-looking measure of idiosyncratic sovereign default risk as perceived by financial markets. Using a Markov-switching unobserved component model, we decompose the daily CDS term premium into two components of statistically different nature and link them in a vector autoregression to various daily observed financial market variables. We find that such decomposition is vital for understanding the short-term dynamics of this premium. The strongest impacts can be attributed to CDS market liquidity, local stock returns, and overall risk aversion. By contrast, the impact of shocks from the sovereign bond market is rather muted. Therefore, the CDS market microstructure effect and investor sentiment play the main roles in sovereign risk evaluation in real time. Moreover, we also find that the CDS term premium response to shocks is regime-dependent and can be ten times stronger during periods of high volatility. JEL Classification: G01, G15, G21, G24
    Keywords: credit default swaps, markov switching model, sovereign risk, state space model, term premium
    Date: 2014–08
  15. By: Nagengast, Arne J.; Stehrer, Robert
    Abstract: One of the main stylised facts that has emerged from the recent literature on global value chains is that bilateral trade imbalances in gross terms can differ substantially from those measured in value added terms. However, the factors underlying the extent and sign of the differences between the two measures have so far not been investigated. Here, we propose a novel decomposition of bilateral gross trade balances that accounts for the differences between gross and value added concepts. The bilateral analysis contributes conceptually to the literature on double counting in trade by identifying the trade flow in which value added is actually recorded for the first time in international trade statistics. We apply our decomposition framework to the development of intra-EU27 trade balances from 1995-2011 and show that a growing share of intra-EU bilateral trade balances is due to demand in countries other than the two direct trading partners. JEL Classification: F1, F2, C67, R15
    Keywords: global value chains, input-output tables, trade balances, value added, vertical specialisation
    Date: 2014–07
  16. By: Nikolaos Antonakakis (Department of Economics, Vienna University of Economics and Business)
    Abstract: Contributing to the contentious debate on the relationship between sovereign debt and economic growth, I examine the role of theory-driven (non-)sustainable debt-ratios in combination with debt-ratio thresholds on economic growth. Based on both dynamic and non-dynamic panel data analyses in the euro area (EA) 12 countries over the period 1970-2013, I find that non-sustainable debt-ratios above and below the 60% threshold, have a detrimental effect on short-run economic growth, while sustainable debt-ratios below the 90% threshold exert a positive influence on short-run economic growth. In the long-run, both non-sustainable and sustainable debt-ratios above the 90% threshold, as well as non-sustainable debt-ratios below the 60% compromise economic growth. Robustness analysis supports these findings, and provides additional evidence of a positive effect of sustainable debt-ratios below the 60% threshold, as predicated by the Maastricht Treaty criterion, on (short- and long-run) economic growth. Overall, these results suggest that debt sustainability in addition to debt non-linearities should be considered simultaneously in the debt-growth nexus. In addition, the results indicate the importance of a timely reaction of fiscal policy in countries with non-sustainable debts, as implied by fiscal rules, in an attempt to ensure fiscal sustainability and, ultimately, promote long-run economic growth.
    Keywords: Government debt, growth, sustainability, threshold, government budget constraint
    JEL: C23 E62 F43 H63 O40
    Date: 2014–10
  17. By: Höpner, Martin; Lutter, Mark
    Abstract: Synchronization of national price inflation is the crucial precondition for a well-functioning fixed exchange rate regime. Given the close relationship between wage inflation and price inflation, convergence of price inflation requires the synchronization of wage inflation. Why did the convergence of wage inflation fail during the first ten years of the euro? While differences in economic growth shape the inflation of labor costs, our argument is that the type of wage regime has an additional, independent impact. In coordinated labor market regimes, increases in nominal unit labor costs tended to fall below the ECB's inflation target, while in uncoordinated labor regimes, the respective increases tended to exceed the European inflation target. To show this, we analyze data from 1999-2008 for twelve euro members. We estimate the increases of nominal unit labor costs both in the overall economy and in manufacturing as dependent variables, test a variety of labor- and wage-regime indicators, and control for a battery of economic, political, and institutional variables. Neither the transfer of wage coordination from the North to the South nor the transfer of adjustment pressure from the South to the North is likely to solve the problem of inner-European exchange-rate distortions.
    Abstract: Die Synchronisation nationaler Inflationsraten ist die entscheidende Voraussetzung für ein funktionsfähiges Regime fester Wechselkurse. Wegen des engen Zusammenhangs zwischen Lohn- und Preisinflation ist hierfür eine Synchronisation der Steigerungen der Lohnstückkosten vonnöten. Warum kam während der ersten zehn Euro-Jahre keine Konvergenz der Lohnauftriebe zustande? Dies lag zum einen an den unterschiedlichen Wachstumsdynamiken der Euro-Teilnehmer, zum anderen an einem institutionellen Unterschied zwischen den Euro-Ländern: den Lohnregimen. In Ländern mit koordinierten Lohnregimen unterschritten die Steigerungen der Lohnstückkosten im Trend das Inflationsziel der Europäischen Zentralbank, in Ländern mit unkoordinierten Lohnregimen fielen die Lohnsteigerungen hingegen höher aus. Um dies zu zeigen, analysieren wir Daten von zwölf Euro-Ländern für die Jahre 1999 bis 2008. Wir betrachten die nominalen Steigerungen der Lohnstückkosten sowohl gesamtwirtschaftlich als auch bezogen auf das verarbeitende Gewerbe und verwenden unterschiedliche Lohnregime-Indikatoren als erklärende Variablen. Zudem kontrollieren wir für zahlreiche ökonomische, politische und institutionelle Kontextbedingungen. Weder eine etwaige Übertragung der Lohnkoordination vom Norden auf den Süden noch eine Übertragung der ökonomischen Anpassungslast vom Süden auf den Norden scheinen geeignet, das Problem der innereuropäischen realen Wechselkursverzerrungen zu lösen.
    Date: 2014
  18. By: Catarina Lourenço Soares (NOS); Adelaide Maria de Sousa Figueiredo (Faculdade de Economia da Universidade do Porto); Fernanda Otília de Sousa Figueiredo (Faculdade de Economia da Universidade do Porto)
    Abstract: The subprime crisis quickly became a global financial crisis, affecting a large number of countries, including the European economies. Europe also faces a crisis of public debt, particularly since the beginning of 2010, having the Greek debt served as a fuse. In this economic context and with the twenty-seven European countries being mentioned as having very different economies, it becomes interesting to identify, analyse and discuss the main weaknesses and similarities of the public states, private and financial sectors of these economies. For this purpose, inspired by the early warning systems, fourteen variables are analysed through the Statis methodology during the period 2002-2011. Accordingly, we concluded that this methodology highlighted the economic developments in this period and allowed to obtain some interesting conclusions about what have the public, private and financial sectors of the twenty-seven European countries in common and what differentiate them to each other.
    Keywords: European countries, financial crisis, public debt crisis, Statis methodology
    JEL: C38 F00 G01 H11
    Date: 2014–09
  19. By: Attinasi, Maria-Grazia; Klemm, Alexander
    Abstract: This paper looks at the impact of discretionary fiscal policy on economic growth for a sample of 18 EU countries over the period 1998-2011. The main novelty of this paper is the use, on the revenue side, of a dataset of fiscal measures based on the yield of actual legislative and budgetary measures, rather than approximations, such as changes in cyclically-adjusted variables. Using static and dynamic panel data techniques, we find that fiscal consolidation can be a drag on economic growth in the short-term, although some specific budget categories are not found to be statistically significant. In general, the results also indicate that expenditure-based adjustment tends to be less harmful than revenue-based adjustment. Among expenditure cuts, reductions in government investment and consumption are found to be growth reducing. Among revenues, indirect tax increases are found to have a particularly strong negative impact. Dynamic specifications suggest that consolidation reduces growth mainly in the year of fiscal adjustment, while future growth rates are affected only through the usual time persistence. Nonlinear specifications indicate that spreading out consolidation reduces the negative impact on growth, but only very slightly and in the absence of financial market pressures and/or fiscal sustainability considerations. Additionally, front-loading fiscal consolidation appears to be less detrimental for growth when it is based on expenditure cuts rather than tax increases JEL Classification: H20, H30, H50, C33
    Keywords: fiscal multipliers, fiscal policy and growth, panel data.
    Date: 2014–07
  20. 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); Yeganeh Forouheshfar (Université Paris-Dauphine - Université Paris-Dauphine)
    Abstract: We study the implication of a multipolarization of the international monetary system on crosscurrency volatility. More specifically, we analyze whether the internationalization of the yuan could modify the impact of asset supply and trade shocks on the euro-dollar exchange rate, within a threecountry, three-currency portfolio model. Our static model shows that the internationalization of the yuan (defined as a rise in the yuan in international portfolios) would be either neutral or stabilizing for the euro-dollar rate, whatever the exchange-rate regime of China. Moving to a dynamic, stockflow framework, we show that the internationalization of the yuan would make exchange-rate variations more efficient to stabilize net foreign asset positions after a trade shock.
    Keywords: China ; Yuan ; Exchange-rate regime ; Euro ; Dollar
    Date: 2013–02

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