nep-eec New Economics Papers
on European Economics
Issue of 2014‒12‒19
thirteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Fiscal Devaluation in a Monetary Union By Philipp Engler; Giovanni Ganelli; Juha Tervala; Simon Voigts
  2. Signalling fiscal stress in the euro area - a country-specific early warning system By Hernández de Cos, Pablo; Koester, Gerrit B.; Moral-Benito, Enrique; Nickel, Christiane
  3. Household wealth in the euro area: the importance of intergenerational transfers, homeownership and house price dynamics By Mathä, Thomas Y.; Porpiglia, Alessandro; Ziegelmeyer, Michael
  4. The Impact of Market Regulations on Intra-European Real Exchange Rates By Agnès Bénassy-Quéré; Dramane COULIBALY
  5. Euro area external imbalances and the burden of adjustment By di Mauro, Filippo; Pappadà, Francesco
  6. On the European debt crisis By Beker, Victor
  7. Financial Sector and Output Dynamics in the Euro Area: Non-linearities Reconsidered By Frauke Schleer; Willi Semmler
  8. Fiscal policy and the real exchange rate: Some evidence from Spain By Oscar Bajo-Rubio; Burcu Berke
  9. Sovereign spreads and financial market behavior before and during the crisis By Pawel Gajewski; ; ;
  10. Was the ECB’s Comprehensive Assessment up to standard? By De Groen, Willem Pieter
  11. Measuring the effectiveness of cost and price competitiveness in external rebalancing of euro area countries: What do alternative HCIs tell us? By Christodoulopoulou, Styliani; Tkacevs, Olegs
  12. Policy-making of the European Central Bank during the crisis: Do personalities matter? By Basham, James; Roland, Aanor
  13. The Effects of Unconventional Monetary Policies on Bank Soundness By Frederic Lambert; Kenichi Ueda

  1. By: Philipp Engler; Giovanni Ganelli; Juha Tervala; Simon Voigts
    Abstract: Using a DSGE model calibrated to the euro area, we analyze the international effects of a fiscal devaluation (FD) implemented as a revenue-neutral shift from employer's social contributions to the Value Added Tax. We find that a FD in ‘Southern European countries’ has a strong positive effect on output, but mild effects on the trade balance and the real exchange rate. Since the benefits of a FD are small relative to the divergence in competitiveness, it is best addressed through structural reforms.
    Keywords: Fiscal devaluation;Monetary unions;Euro Area;Southern Europe;Fiscal policy;Fiscal reforms;Value added taxes;General equilibrium models;Fiscal devaluation, fiscal policy, euro area, currency union, current account
    Date: 2014–10–30
  2. By: Hernández de Cos, Pablo; Koester, Gerrit B.; Moral-Benito, Enrique; Nickel, Christiane
    Abstract: The sovereign debt crisis in the euro area has increased the interest in early warning indicators, with the aim to indicate the build?up of fiscal stress early on and to facilitate crisis prevention by a timely counteraction of fiscal and macroeconomic policies. This paper presents possible improvements to enhance existing early warning indicators for fiscal stress, especially for the euro area. We show that a country?specific approach could strongly increase the signalling power of early warning systems. Finally we draw policy conclusions for the setting?up and application of a system of early warning indicators for fiscal stress. JEL Classification: E62, E65, E66, H62, H63, F34
    Keywords: debt management, deficit surplus, fiscal policy, general outlook and conditions, international lending and debt problems, sovereign debt, studies of particular policy episodes
    Date: 2014–08
  3. By: Mathä, Thomas Y.; Porpiglia, Alessandro; Ziegelmeyer, Michael
    Abstract: Results from the Eurosystem Household Finance and Consumption Survey reveal substantial variation in household net wealth across euro area countries that await explanation. This paper focuses on three main factors for the wealth accumulation process, i) homeownership, ii) housing value appreciation and iii) intergenerational transfers. We show that these three factors, in addition to the common household and demographic factors, are relevant for the net wealth accumulation process in all euro area countries, and moreover that, using various decomposition techniques, differences therein, in particular in homeownership rates and house price dynamics, are important for explaining wealth differences across euro area countries. JEL Classification: D31, E21, O52, C42
    Keywords: euro area, homeownership, household wealth, inheritance, property prices
    Date: 2014–07
  4. By: Agnès Bénassy-Quéré (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CESifo - CESifo, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne); Dramane COULIBALY (EconomiX - CNRS : UMR7166 - Université Paris X - Paris Ouest Nanterre La Défense)
    Abstract: We study the contribution of market regulations in the dynamics of the real exchange rate within the European Union. Based on a model proposed by De Gregorio et al. (1994a), we show that both product market regulations in nontradable sectors and employment protection tend to inflate the real exchange rate. We then carry out an econometric estimation for European countries over 1985-2006 to quantify the contributions of the pure Balassa-Samuelson effect and those of market regulations in real exchange-rate variations. Based on this evidence and on a counter-factual experiment, we conclude that the relative evolution of product market regulations and employment protection across countries play a very significant role in real exchange-rate variations within the European Union and especially within the Euro area, through theirs impacts on the relative price of nontradable goods.
    Keywords: Real exchange rate ; Balassa-Samuelson effect ; Product market regulations ; Employment protection
    Date: 2014–01
  5. By: di Mauro, Filippo; Pappadà, Francesco
    Abstract: The objective of this paper is to explore the consequences of the correction of Euro area trade imbalances on real exchange rates. This analysis requires one additional dimension with respect to the standard Global Imbalances framework à la Obstfeld and Rogoff (2005), since the adjustment takes place within and outside the Euro area. Both types of adjustments are analysed in a three-country general equilibrium model with a tradable and a non-tradable sectors, and heterogeneous firms built upon Pappadà (2011). ECB (CompNet) data are used to measure the differences infirm size and productivity dispersion across Euro area countries. With respect to the surplus country (Germany), countries running a trade deficit (Spain, Italy) are characterised by a productivity distribution with a lower mean and a less fat right tail. This increases the relative price movement associated with the external adjustment because of the limited role played by the extensive margin. We show that the real exchange rate movements are underestimated when the cross-country differences in terms of productivity distributions are neglected. JEL Classification: F32, F41
    Keywords: firm heterogeneity, trade imbalances, transfer problem
    Date: 2014–05
  6. By: Beker, Victor
    Abstract: A common explanation for the European debt crisis has been that the introduction of the euro in 2001 caused interest rates to fall in those countries where expectations of high inflation previously kept interest rates high. Bond buyers assumed that a bond issued by any government in the European Monetary Union was equally safe. As a result, the interest rates on Greek, Italian, etc. government bonds were not significantly different from the interest rate on the German government bonds. Governments responded to the low interest rates by increasing their borrowing. However, data do not endorse this explanation, as is shown in the paper. An alternative explanation has been that the European debt crisis was just a consequence of the American subprime one. Again, data do not entirely support this hypothesis although the connection between both crises is explored in the paper. A third argument states that the introduction of the euro, and its effects on external competitiveness, triggered mounting disequilibria and debt accumulation in the noncore countries or periphery. This argument seems to be valid to a certain extent just in the cases of Greece and Portugal, but not for the rest of the countries involved in the crisis where other factors seem to have played a major role. A distinction is made between a first group of countries whose debt problems have roots before 2007 but did not worsen significantly after that year and a second one of ¨new¨ highly indebted countries. Finally, Spain appears as a special case. The development of the indebtedness process in these three different types of countries allows isolating the factors which were determinant in each case. The conclusion is that the European indebtedness process does not accept a unique explanation and its solution will necessarily require resource transfers from the richer to the poorer countries of the euro-zone.The mechanism of the European redemption pact proposed in the 2011 annual report of the German Council of Economic Experts (GCEE) may be one way of doing this.
    Keywords: Keywords: sovereign-debt crisis, euro-zone, budget deficit.
    JEL: F3 F34
    Date: 2014–05
  7. By: Frauke Schleer; Willi Semmler (Schwartz Center for Economic Policy Analysis (SCEPA))
    Abstract: We analyze the feedback mechanisms between economic downturns and financial stress for several euro area countries. Our study employs newly constructed financial condition indices that incorporate banking variables extensively. We apply a non-linear Vector Smooth Transition Autoregressive (VSTAR) model for investigating instabilities in the link between the financial sector and economic activity. The VSTAR model allows for non-linear dynamics and regime changes between low and high stress regimes. It can also replicate the regime-specifc amplification effects shown by our theoretical model. The amplification effects, however, change over time. Specifically after the Lehman collapse, we observe the presence of strong non-linearities and amplification mechanisms for some euro area countries. Thus, these strong amplification effects appear to be related to rare but large events, and to a low-frequency financial cycle. Prior to the financial crisis outbreak we find corridor stability even if the financial sector shock takes place in a high stress regime. More important seems to be the shock propagation over time in the economy. Only with the occurrence of the rare but large events we find strong endogenous feedback loops and a loss of stability as described by the high stress regime of our theoretical model. The economy leaves the corridor of stability and is prone to adverse feedback loops.
    Keywords: Vector STAR, financial stress, financial cycle, real economy, regime switching, euro area
    JEL: E2 E44 G01
    Date: 2014–03
  8. By: Oscar Bajo-Rubio (Universidad de Castilla-La Mancha); Burcu Berke (Nigde University, Nigde, Turkey)
    Abstract: The factors influencing the real exchange rate are an important issue for a country’s price competitiveness, which is especially relevant to those countries belonging to a monetary union. In this paper, we analyse the relationship between fiscal policy and the real exchange rate for the case of Spain. In particular, we explore how changes in government spending, differentiating between consumption and investment, can affect the long-run evolution of the real exchange rate vis-à-vis the euro area. The distinction between two alternative definitions of the real exchange rate, based on consumption price indices and export prices, respectively, will also prove to be crucial for the results.
    Keywords: Real exchange rate, Government consumption, Government investment
    JEL: E62 F31 F41
    Date: 2014–11
  9. By: Pawel Gajewski (University of Lodz, Faculty of Economics and Sociology); ; ;
    Abstract: This paper aims at shedding some light on the mechanisms of pricing the EMU countries’ sovereign bonds in financial markets. Employing the Augmented Mean Group (AMG) estimator, we find that major changes have occurred in terms of variables underlying sovereign risk. Since 2009, macroeconomic and fiscal fundamentals has started to play a more important role, but only those that capture domestic demand evolution. In contrast, price competitiveness seems less important. The second conclusion lies in reversed attitude towards banking sector imbalances, as compared to the earlier period. One of the problems addressed concerns the horizon of projected macroeconomic and fiscal variables taken into account. The paper presents some evidence that financial markets have become more myopic and started to rely on short-term forecasts, whilst they had tended to encompass longer-term forecast horizon before the crisis.
    Keywords: financial crisis, fiscal policy, EMU, panel estimation
    JEL: C23 E43 E62 F34 G01 G12 H60
    Date: 2014–09
  10. By: De Groen, Willem Pieter
    Abstract: The Comprehensive Assessment conducted by the European Central Bank (ECB) represents a considerable step forward in enhancing transparency in euro-area banks’ balance sheets. The most notable progress since the previous European stress test has been the harmonisation of the definition of non-performing loans and other concepts as well as uncovering hidden losses, which resulted in a €34 billion aggregate capital-charge net of taxes. Despite this tightening, most banks were able to meet the 5.5% common equity tier 1 (CET1) threshold applied in the test, which suggests that the large majority of the euro-area banks have improved their financial position sufficiently that they should no longer be constrained in financing the economy. As shown in this CEPS Policy Brief by Willem Pieter de Groen, however, the detailed results provide a more nuanced picture: there remain a large number of the banks in the euro area that are still highly leveraged and in many cases unable to meet the regulatory capital requirements that will be introduced in the coming years under the adverse stress test scenario.
    Date: 2014–11
  11. By: Christodoulopoulou, Styliani; Tkacevs, Olegs
    Abstract: This study examines the marginal effects of traditional determinants of exports and imports with a focus on the role of price competitiveness in restoring external balances. It is a first attempt to compare marginal effects of various harmonised competitiveness indicators (HCIs) on both exports and imports of both goods and services across individual euro area countries. We find evidence that HCIs based on broader cost and price measures have a larger marginal effect (with some exceptions) on exports of goods. Exports of services are sensitive to HCIs in big euro area countries and Slovakia, where exports of services are also found more sensitive to competitiveness indicators based on broader price measures. Imports of goods and imports of services are quite insensitive to changes in relative prices. Finally, in some cases measures of fit indicate that a large unexplained residual part is present, implying that other non-price related factors might play an important role in driving foreign trade. JEL Classification: F14, F31, F41
    Keywords: euro area, export, imports, price competitiveness, real exchange rate
    Date: 2014–09
  12. By: Basham, James; Roland, Aanor
    Abstract: The European sovereign debt crisis represents an interesting opportunity to investigate the reaction of the European Central Bank as a crisis fighting institution and the importance of central bank personalities in policy execution. Accordingly, this paper aims at investigating to what extent the policy-making of the ECB during the crisis has been influenced by Trichet's and Draghi's different personalities. Based on Friedman's hypothesis that "accidents of personality" have a great impact on the functioning of a rulebased institution, we find that the clear differences in policy-making between Trichet and Draghi can be explained by specific features of their respective personalities. Institutions matter, but so do personalities.
    Keywords: European Central Bank,Central Bankers,Personality Theory,European Sovereign Debt Crisis,Monetary Policy
    JEL: E5 E6
    Date: 2014
  13. By: Frederic Lambert; Kenichi Ueda
    Abstract: Unconventional monetary policy is often assumed to benefit banks. However, we find little supporting evidence. Rather, we find some evidence for heightened medium-term risks. First, in an event study using a novel instrument for monetary policy surprises, we do not detect clear effects of monetary easing on bank stock valuation but find a deterioration of medium-term bank credit risk in the United States, the euro area, and the United Kingdom. Second, in panel regressions using U.S. banks’ balance sheet information, we show that bank profitability and risk taking are ambiguously affected, while balance sheet repair is delayed.
    Keywords: Monetary policy;Interest rate policy;United States;Euro Area;United Kingdom;Banks;Credit risk;Bank soundness;Balance sheets;Regression analysis;Monetary Policy, Bank Profitability, Bank Risk, Balance Sheet Repair
    Date: 2014–08–13

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