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on European Economics |
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Issue of 2015‒01‒26
sixteen papers chosen by Giuseppe Marotta Università degli Studi di Modena e Reggio Emilia |
| By: | Laura Puglisi |
| Abstract: | In recent years, the concept of a fiscal devaluation has been advocated as fiscal policy alternative to nominal exchange rate devaluations for peripheral deficit countries in the euro area to regain competitiveness. This paper investigates if countries in the euro area implemented fiscal devaluations in the aftermath of the economic and financial crisis and if so, how these reforms are expected to affect their competitiveness positions. Despite much discussion, no country has yet undertaken a substantial fiscal devaluation. Some (targeted) reductions in social security contributions were introduced, mainly to create job incentives, while consumption taxes (VAT) were increased – in some cases substantially – mainly for consolidation purposes. Although countries could benefit from a fiscal devaluation, their feasibility is politically constraint and effects are likely to be small in magnitude relative to the size of economic problems. Overall, fiscal devaluations cannot be a substitute for deep structural reforms that are urgently needed to address the underlying weaknesses of European economies. |
| Keywords: | Taxation; European Union; Euro Area; tax policy; fiscal devaluation; VAT; social security contributions; political economy; cost competitiveness |
| JEL: | F10 H24 H87 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:tax:taxpap:0047&r=eec |
| By: | Marta Gómez-Puig (Department of Economic Theory - Universitat de Barcelona); Manish K. Singh (Department of Economic Theory, Universitat de Barcelona); Simón Sosvilla-Rivero (Department of Quantitative Economics, Universidad Complutense de Madrid) |
| Abstract: | This study attempts to identify and trace inter-linkages between sovereign and banking risk in the euro area. To this end, we use an indicator of banking risk in each country based on the Contingent Claim Analysis literature, and 10-year government yield spreads over Germany as a measure of sovereign risk. We apply a dynamic approach to testing for Granger causality between the two measures of risk in 10 euro area countries, allowing us to check for contagion in the form of a significant and abrupt increase in short-run causal linkages. The empirical results indicate that episodes of contagion vary considerably in both directions over time and within the different EMU countries. Significantly, we find that causal linkages tend to strengthen particularly at the time of major financial crises. The empirical evidence suggests the presence of contagion, mainly from banks to sovereigns. |
| Keywords: | sovereign debt crisis, banking crisis, Granger-causality, time-varying approach, “distance-to-default”, euro area. |
| JEL: | C22 E44 G01 G13 G21 |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:aee:wpaper:1501&r=eec |
| By: | Jef Boeckx (Research Department, NBB); Maarten Dossche (Research Department, NBB, ECB); Gert Peersman (Ghent University) |
| Abstract: | We estimate the effects of exogenous innovations to the balance sheet of the ECB since the start of the financial crisis within a structural VAR framework. An expansionary balance sheet shock stimulates bank lending, stabilizes financial markets, and has a positive impact on economic activity and prices. The effects on bank lending and output turn out to be smaller in the member countries that have been more affected by the financial crisis, in particular those countries where the banking system is less well-capitalized. |
| Keywords: | unconventional monetary policy, ECB blance sheet, euro area, VAR |
| JEL: | C32 E30 E44 E51 E52 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:201412-275&r=eec |
| By: | Ulrich van Suntum |
| Abstract: | It is argued that the stronger member states of the European Monetary Union should find their way out of the Euro in order to avoid being dragged into a disastrous course of inflation and over-indebtedness by the weaker members. A sudden exit would presumably cause financial turmoil as well as political damage and is, thus, no realistic option. However, by creating a parallel currency called “Hard-Euro” as an intermediate solution, there would indeed be a way of separating the EMU into two parts, with a weaker Euro in the southern countries and a stronger Euro in the northern countries. Using a small macro-model, the paper discusses this idea and its economic consequences in more detail. Following the early idea of separating the functions of money by Eisler (1932), the Hard-Euro is invented in the form of a pure book-money, while the Euro is still the only cash money until further notice. The Hard-Euro is designed as an index-currency such that its exchange rate exactly compensates for the inflation rate of the common Euro. Hence, it is absolutely stable in terms of consumer prices, and at the same time the exchange rate can never overshoot. By this means, savers in the stronger member states are protected from both inflation and financial repression, while the weaker member states can improve their competitiveness by inflating the Euro. It is shown, that this approach is likely to increase both investment and total output in the EMU. Later on, this intermediate regime could be substituted by the definite separation of the Euro-Zone into a stronger northern and a weaker southern part. |
| Keywords: | Monetary policy, parallel currency |
| JEL: | E50 E58 |
| URL: | http://d.repec.org/n?u=RePEc:muc:wpaper:201288&r=eec |
| By: | Schock, Matthias |
| Abstract: | A "lost decade" for the Eurozone is looming on the horizon. Under these circumstances, stable indicators for future economic activity are especially valuable to decision makers. This paper examines the predictive power of the yield spread, one of the most reliable indicators for gross domestic product (GDP) growth. Despite the continuously high level of yield spreads, growth is sparse in the Eurozone. We find this to be caused by default risks, which are distorting the long-term interest rates of many Eurozone countries. Therefore, a new method of risk adjustment is introduced. We employ credit default swap (CDS) spreads on sovereign bonds, which provide a direct measure of credit risk. Incorporating those spreads significantly enhances the in- and out-of-sample predictive power of the yield-spread approach. Ordinary least squares (OLS) and fixed-effects models are used to forecast GDP growth in the Eurozone, and a probit model is used for recession prediction. The results show that the accuracy of predicting growth and recessions using the yield spread is high, provided that biases associated with Eurozone sovereign default risk are considered. |
| Keywords: | yield curve, CDS spreads, economic activity |
| JEL: | G1 E37 E43 E44 |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:han:dpaper:dp-542&r=eec |
| By: | Martin S. Feldstein |
| Abstract: | All of the attempts to end the euro crisis and to return the Eurozone countries to healthy growth rates of income and employment have failed. The options that are currently being discussed are not likely to be more successful. If there is a politically feasible way out of the crisis, it will be through revenue neutral fiscal incentives adopted by the individual Eurozone countries. I describe some of these fiscal options after reviewing the history of failed attempts and the options that are currently on the table. |
| JEL: | E5 E6 H2 |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20862&r=eec |
| By: | De Grauwe, Paul; Ji, Yuemei |
| Abstract: | In this paper we test two theories of the determination of the government bond spreads in a monetary union. The first one is based on the efficient market theory. According to this theory, the surging spreads observed from 2010 to the middle of 2012 were the result of deteriorating fundamentals (e.g. domestic government debt, external debt, competitiveness, etc.). The second theory recognizes that collective movements of fear and panic can have dramatic effects on spreads. These movements can drive the spreads away from underlying fundamentals, very much like in the stock markets prices can be gripped by a bubble pushing them far away from underlying fundamentals. The implication of that theory is that while fundamentals cannot be ignored, there is a special role for the central bank that has to provide liquidity in times of market panic, so as to avoid that countries are pushed into a bad equilibrium. We tested these theories and concluded that there is strong evidence for the second theory. The policy implications are that the role of the ECB as lender of last resort in the government bond markets is an important one. The recent attempts by the German Constitutional Court risk undermining this role and by the same token the stability of the Eurozone. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:fmpwps:28&r=eec |
| By: | Giri, Federico |
| Abstract: | The aim of this paper is to assess the impact of the interbank market on the business cycle fluctuations. In order to do that, we build a DSGE model with heterogeneous households and banks. The surplus bank can allocate its resources between interbank lending and risk free government bonds. This portfolio choice is affected by an exogenous counterpart risk shock on the interbank lending. An increase of the counterpart risk diverts funds from the interbank markets toward the risk free market. This mechanism allow us to capture the collapse of the interbank market and the fly to quality mechanism underlying the 2007 financial crisis. The main result is that an interbank riskiness shock seems to explain part of the 2007 downturn and especially the rise of the interest rates on the credit market during and just after the financial turmoil. |
| Keywords: | DSGE model,financial frictions,interbank market,Bayesian estimation |
| JEL: | E30 E44 E51 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:fmpwps:27&r=eec |
| By: | Yutaka Suzuki |
| Abstract: | We use a Contract Theory framework to analyze the mechanisms of Eurozone Financial Governance, with a focus on centralization vs. decentralization and incentive problems. By constructing a Stackelberg game model with n Ministries of Finance as the first movers, and European Central Bank as the second mover, we show that each government can create growth in its own country (self-benefit) by increasing government spending, but it will increase inflation and the euro value will fall. Since these effects are shared equally by euro countries (cost sharing), there exists an incentive to free-ride on other countries. We then analyze a solution to the free-rider problem through the penalty scheme, and derive a second best solution where a commitment not to renegotiate penalties ex-post is impossible. Lastly, we derive the parameter conditions for optimizing the EU¡¯s current allocation of authority, ¡°divided authority structure,¡± which consists of Monetary Centralization and Fiscal Decentralization. We find that what is effective is ¡°contingency dependent governance¡± based on ¡°relative sovereignty,¡± where there is a division of authority as the basic structure and the main body governs with leading sovereignty depending on the contingency. Length: 38 pages |
| URL: | http://d.repec.org/n?u=RePEc:tcr:wpaper:e72&r=eec |
| By: | Sensoy, Ahmet; Hacihasanoglu, Erk; Rostom, Ahmed |
| Abstract: | This paper focuses on developments in the European Economic and Monetary Union sovereign debt markets in the past decade. The ?rst part analyzes the integration and segmentation structure of the bond markets of the Economic and Monetary Union before and after the sovereign debt crisis, by introducing the novel concept of correlation-based stable networks. Accordingly, a fair integration is observed between the bond markets during the pre-crisis period. However, a strict segmentation emerges, separating the members struggling with debt problems and the ones with relatively strong ?scal performances during the sovereign debt turmoil. The segmentation structure is clearly visualized, revealing the potential paths for crisis and recovery transmission in the future. In the second part, the paper comments on the recent decreasing trend in Economic and Monetary Union member bond yields and their increasing degree of co-movement. Accordingly, the paper argues that these changes do not depend on the ?scal performances of the member countries, but depend on the illusion of quality that appeared with the Fed (U.S. Federal Reserve) tapering signals in early 2013. |
| Keywords: | Debt Markets,Emerging Markets,Currencies and Exchange Rates,Financial Intermediation,Deposit Insurance |
| Date: | 2015–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:7149&r=eec |
| By: | Brousseau, Vincent (European Central Bank); Nikolaou, Kleopatra (Board of Governors of the Federal Reserve System (U.S.)); Pill, Huw (Goldman Sachs) |
| Abstract: | We quantify the effect of refinancing risk on euro area money market spreads, a major factor driving spreads during the financing crisis. With the advent of the crisis, market participants' perception of their ability to refinance over a given period of time changed radically. As a result, borrowers preferred to obtain funding for longer tenors and lenders were willing to provide funding for shorter tenors. This discrepancy resulted in a need to refinance more frequently in order to borrow over a given horizon, thus increasing refinancing risk. We measure refinancing risk by quantifying the sensitivity of the spread to the refinancing frequency. In order to do so we introduce a model to price EURIBOR-based money market spreads vis-à-vis the overnight index swap. We adopt a methodology akin to a factor model in which the parameters determining the spreads are the intensity of the crisis, its expected half-life, and the sensitivity of spreads to the refinancing frequency. Results suggest that refinancing risk affects the spread significantly across time, albeit in a largely varying manner. Central bank interventions have reduced the spreads as well as the effect of refinancing risk on them. |
| Keywords: | Financial crisis; liquidity risk; money market spread; money markets; refinancing risk |
| JEL: | E58 G12 G21 |
| Date: | 2014–11–19 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2014-112&r=eec |
| By: | Mendoza, Enrique G.; Tesar, Linda L.; Zhang, Jing |
| Abstract: | Europe's debt crisis casts doubt on the effectiveness of fiscal austerity in highly-integrated economies. Closed-economy models overestimate its effectiveness, because they underestimate tax-base elasticities and ignore cross-country tax externalities. In contrast, we study tax responses to debt shocks in a two-country model with endogenous utilization that captures those externalities and matches the capital-tax-base elasticity. Quantitative results show that unilateral capital tax hikes cannot restore fiscal solvency in Europe, and have large negative (positive) effects at "home" ("abroad"). Restoring solvency via either Nash competition or Cooperation reduces (increases) capital (labor) taxes significantly, and leaves countries with larger debt shocks preferring autarky. |
| Keywords: | European debt crisis,capacity utilization,fiscal austerity,tax competition |
| JEL: | E61 E62 E66 F34 F42 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:80&r=eec |
| By: | Lang, Michael; Schröder, Michael |
| Abstract: | This paper examines the treatment of sovereign debt exposure within the Basel framework and measures the impact of bank regulation on the demand of Monetary Financial Institutions (MFI) for marketable sovereign debt. Our results suggest that bank regulation has a significant positive impact on MFI demand for domestic government securities. The results are representative for the MFI in the euro zone. They remain highly robust and significant after controlling for other influential factors and potential endogeneity. |
| Keywords: | Monetary Financial Institutions,Financial sector regulation,Sovereign bond holdings,Investment incentives |
| JEL: | G11 G21 G28 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:14123&r=eec |
| By: | Binder, Jens-Hinrich |
| Abstract: | In the aftermath of the global financial crisis, both resolution planning, i.e. contingency planning by both regulated institutions and public authorities in order to prepare their actions in financial crisis, and concepts for structural bank reform have been identified as possible solutions to ending 'Too Big To Fail' and foster market discipline among bank owners, bank managers and investors in bank debt. Both concepts thus complement the global quest for reliable procedures and tools for bank resolution that would minimise systemic implications once large and complex financial institutions have reached the stage of insolvency. Given the complex task of orchestrating swift and effective resolution actions, especially with regard to cross-border banking groups and financial conglomerates, planning ahead in good times has since been widely recognised as crucial for enhancing resolvability. At least part of the impediments to resolution will be found in organisational, financial and legal complexity that has evolved in banks and groups over time. To remove these impediments, interference with existing corporate and group structures is all but inevitable. However, in both international standard setting and at the European Union level, issues related to resolution planning (within the context of bank resolution reform) and structural banking reforms to date have been discussed rather separately. This lack of consistency is questionable, given the obvious need to reconcile both approaches in order to facilitate effective implementation and enforcement especially with regard to large, complex banking groups. Based on an analysis both of the Bank Recovery and Resolution Directive and the SRM Regulation, this paper explores how these problems could be dealt with within the context of the European Banking Union. |
| Keywords: | Bank Resolution,Banking Union,Living Wills,Resolution Planning,Structural Bank Reform |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:81&r=eec |
| By: | Malgorzata Olszak (University of Warsaw, Faculty of Management); Mateusz Pipien (Cracow University of Economics, Economic Institute, National Bank of Poland); Sylwia Roszkowska (Faculty of Economic and Social Sciences, University of £ódŸ, National Bank of Poland); Iwona Kowalska (University of Warsaw, Faculty of Management) |
| Abstract: | This paper aims to find out what is the impact of bank capital ratios on loan supply in the EU and what factors explain potential diversity of this impact. Applying Blundell and Bond (1998) two step GMM estimator, we show that, in the EU context, the role of capital ratio for loan growth is stronger than previous literature has found for other countries. Our study sheds some light on whether procyclicality of loan loss provisions and income smoothing with loan loss provisions contribute to procyclical impact of capital ratio on loan growth. We document that loan growth of banks that have more procyclical loan loss provisions and that engage less in income smoothing is more sensitive to capital ratios. This sensitivity is slightly increased in this sample of banks during contractions. Moreover, more restrictive regulations and more stringent official supervision reduce the magnitude of effect of capital ratio on bank lending. Taken together, our results suggest that capital ratios are important determinant of lending in EU large banks. |
| Keywords: | loan supply, capital crunch, procyclicality of loan loss provisions, income smoothing, bank regulation, bank supervision |
| JEL: | E32 G21 G28 G32 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:sgm:fmuwwp:52014&r=eec |
| By: | Gaëlle Garnier (European Commission); Endre György (European Commission); Kees Heineken (European Commission); Milena Mathé (European Commission); Laura Puglisi; Savino Rua (European Commission); Agnieszka Skonieczna (European Commission); Astrid Van Mierlo (European Commission) |
| Abstract: | This paper reviews the tax reforms implemented by EU Member States since the adoption of the first country-specific recommendations in the framework of the Europe 2020 strategy. Even though there is a need for more action, as evidenced by the number of tax recommendations, overall many Member States have put in place reforms that follow the logic of the EU policy recommendations in most priority areas. A large number of Member States have recently introduced targeted reductions in the tax burden on labour and have shifted the tax burden towards less detrimental tax bases, although these changes have been of a limited magnitude. Tax incentives to support research and development have grown in importance, and have contributed to sustaining R&D investment during the crisis. Regarding private debt, which was one of the roots of the crisis, several Member States have taken measures to reduce the debt bias in their tax system. Almost half of the Member States have shifted some of the tax burden to recurrent immovable property taxes, even if significant increases were only observed in a few countries. Finally, many Member States have worked on strengthening tax compliance with some of them reporting tangible financial results. However, progress has been more limited in relation to environmental tax reforms and VAT. |
| Keywords: | European Union; European Semester; taxation, tax policy; VAT; fraud; corporate taxation; personal income taxation; environment; research and development; compliance |
| JEL: | H11 H20 H24 H25 H26 H27 H87 |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:tax:taxpap:0049&r=eec |