nep-eec New Economics Papers
on European Economics
Issue of 2015‒02‒22
eighteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Monetary policy, bank bailouts and the sovereign-bank risk nexus in the euro area By Rieth, Malte; Fratzscher, Marcel
  2. Fiscal Policy Stance Reaction to the Financial/Economic Crisis in the EMU: The Case of Slovenia By Mencinger, Jernej; Aristovnik, Aleksander
  3. How Large Is the Stress from the Common Monetary Policy in the Euro Area? By Quint, Dominic
  4. Getting into GEAR: German and the Rest of Euro Area Fiscal Policy During the Crisis By Stähler, Nikolai; Gadatsch, Niklas; Hauzenberger, Klemens
  5. A Feasible Unemployment-Based Shock Absorber for the Euro Area By Brandolini, Andrea; Carta, Francesca; D'Amuri, Francesco
  6. Eurozone bank resolution and Bail-In - Intervention, triggers and writedowns By Thomas Conlon; John Cotter
  7. A money-based indicator for deflation risk By Colavecchio, Roberta; Amisano, Gianni; Fagan, Gabriel
  8. MIDAS regressions with time-varying parameters: An application to corporate bond spreads and GDP in the Euro area By Schumacher, Christian
  9. Optimum Currency Areas, Real and Nominal Convergence in the European Union By João Sousa Andrade; António Portugal Duarte
  10. The Greek saga: competing explanations of the Greek crisis By Mavroudeas, Stavros D.
  11. Model Pooling and Changes in the Informational Content of Predictors: an Empirical Investigation for the Euro Area By Tim Schwarzmüller
  12. Transcript of a hearing before members of the House of Lords (UK) in Frankfurt on genuine economic and monetary union and its implication for the UK By Issing, Otmar; Krahnen, Jan Pieter
  13. Politically acceptable debt restructuring in the euro zone: Is it really better than the redemption fund? By Faia, Ester
  14. The Eurozone: Similitudes and differences with Keynes's Plan By Marc Lavoie
  15. The fiscal crisis as a crisis in trust By Haliassos, Michael
  16. Government Forecasts of Budget Balances Under Asymmetric By Rülke, Jan-Christoph; Pierdzioch, Christian
  17. On the role of the ECB's collateral framework in preventing fire sales By Podlich, Natalia
  18. Interest Rates and Structural Shocks in European Transition Economies By Mirdala, Rajmund

  1. By: Rieth, Malte; Fratzscher, Marcel
    Abstract: The paper analyses the empirical relationship between bank risk and sovereign credit risk in the euro area. Using structural VAR with daily financial markets data for 2003-13, the analysis confirms two-way causality between shocks to sovereign risk and bank risk, with the former being overall more important in explaining bank risk, than vice versa. The paper focuses specifically on the impact of non-standard monetary policy measures by the European Central Bank and on the effects of bank bailout policies by national governments. Testing specific hypotheses formulated in the literature, we find that bank bailout policies have reduced solvency risk in the banking sector mostly at the expense of raising the credit risk of sovereigns. By contrast, monetary policy was in most, but not all cases effective in lowering credit risk among both sovereigns and banks. Finally, we find spillover effects in particular from sovereigns in the euro area periphery to the core countries.
    JEL: E52 G10 E60
    Date: 2014
  2. By: Mencinger, Jernej; Aristovnik, Aleksander
    Abstract: The article evaluates the current economic crisis’ impact on changes in the adoption of fiscal policy measures for 16 euro-area countries in the 2004–2012 period and compares those changes with fiscal policy measures introduced in Slovenia. In general, the results suggest that the adopted fiscal policy measures in most euro-area countries were more expansionary in the period before the current economic crisis started. The evaluation of the fiscal stance in Slovenia suggests expansionary and pro-cyclical fiscal behaviour during the 2005–2008 period, whereas the response of the fiscal authorities in Slovenia in 2011 and 2012 due to fiscal consolidation was more restrictive and pro-cyclical. Finally, we emphasize that inconsistent fiscal policy without structural reforms also being carried out may lead to a further deterioration of the fiscal position and macroeconomic situation of euro-area countries, including during a period of cyclical recovery.
    Keywords: fiscal stance, economic crisis, cyclical adjusted balance, output gap, EMU, Slovenia
    JEL: E60 E62
    Date: 2014–12
  3. By: Quint, Dominic
    Abstract: The ECB's one size monetary policy is unlikely to fit all euro area members, which raises a discussion about how much monetary policy stress this causes at the national level. We measure monetary policy stress as the difference between actual ECB interest rates and Taylor-rule implied optimal rates at the member state level. Optimal rates explicitly take into account the natural rate of interest to capture changes in trend growth. We find that monetary policy stress within the euro area has been steadily decreasing prior to the recent financial crisis. Current stress levels are not only lower today than in the late 1990s, they are also in line with what is commonly observed among U.S. states or pre-euro German L nder.
    JEL: E58 E52 C22
    Date: 2014
  4. By: Stähler, Nikolai; Gadatsch, Niklas; Hauzenberger, Klemens
    Abstract: In this paper, we use the estimated three-region DSGE model GEAR, which pictures Germany, the Euro Area and the Rest of the world and which is used by the Deutsche Bundesbank for policy analysis, to analyze how discretionary fiscal policy in Germany and the rest of EMU affected GDP growth and unemployment during the crisis. Not surprisingly, stimulus programmes positively affected domestic GDP growth rates while consolidation measures had a negative impact. The contribution of fiscal policy on domestic GDP growth was only small, however, amounting to a maximum of 1.6% for Germany and 0.8% for the rest of the Euro Area in terms of annualized quarter-on quarter growth rates. The main driver for the evolution of GDP were rest of the world and risk premia shocks, followed by domestic non-fiscal shocks, amongst them the technology shock being the most important one. Spillovers of fiscal policy shocks are negligibly small, which holds for spillovers of fiscal shocks in Germany to the rest of the Euro Area and vice versa. This latter finding is confirmed by an impulse-response analysis and by calculating the corresponding multipliers. Hence, relating these findings to current discussions, our analysis suggests that domestic fiscal policy has little effects on the other regions' GDP within EMU and can, therefore, contribute only little to solving the imbalances problem.
    JEL: E62 E32 H20
    Date: 2014
  5. By: Brandolini, Andrea (Bank of Italy); Carta, Francesca (Bank of Italy); D'Amuri, Francesco (Bank of Italy)
    Abstract: This paper contributes to the debate on the design of a centralised fiscal tool absorbing country-specific negative shocks in the euro area. Based on theoretical insights, it identifies the broad characteristics that a shock absorber based on unemployment should have in order to be incentive-compatible and politically feasible. It then derives empirically the combination of activation thresholds, experience rating, eligibility criteria, and benefit generosity which define the systems offering the highest stabilisation for given levels of redistribution, accounting for the large variation in benefit take-up rates across European countries. The analysis suggests that the shock absorber should: i) give rise to macro cross-national transfers, mimicking those that would be generated by a notional euro-wide unemployment benefit scheme of minimal coverage and generosity; ii) be activated by a trigger; and iii) feature partial experience rating. The simulation results, confirmed by robustness checks, show that even systems that do not redistribute resources between countries can have a non-negligible stabilisation impact in the medium run. Low benefit take-up rates in Southern Europe substantially reduce the stabilisation properties and the size of the scheme.
    Keywords: unemployment benefits, absorption of macroeconomic shocks, fiscal union
    JEL: E6 J65 H53
    Date: 2015–02
  6. By: Thomas Conlon (UCD School of Business, University College Dublin); John Cotter (UCD School of Business, University College Dublin)
    Abstract: The European Union has recently introduced the Single Resolution Mechanism (SRM) to provide a consistent set of rules concerning Eurozone bank resolution. In this study, we retrospectively examine the implications of the SRM for Euro- zone banks during the global nancial crisis. Empirical results indicate that large, systemically important Eurozone banks would have exclusively required equity writedowns to cover impairment losses. However, to ensure adequate capitaliza- tion post bail-in, the majority of large, listed banks would have required conversion to equity for all subordinated and some senior debt creditors. Depositors would not have experienced writedowns in any of the banks examined. Given the subjec- tive nature of resolution triggers outlined in the SRM, we also study the potential benets of market and balance sheet dependent triggers. While our ndings sug- gest some weak evidence of a capacity to dierentiate between failed and surviving banks, the results are indicative of the diculties in mandating predened quan- titative resolution triggers.
    Date: 2015–02–05
  7. By: Colavecchio, Roberta; Amisano, Gianni; Fagan, Gabriel
    Abstract: We employ a money-based early warning model in order to analyse the risk of a low inflation regime in the Euro Area, Japan and the US. The model specification allows for three different inflation regimes: "Low", "Medium" and "High" inflation, while state transition probabilities vary over time as a function of monetary variables. Using Bayesian techniques, we estimate the model with data from the mid 1970s up to the present. Our analysis suggests that the risks of a "Low" inflation regime in the Euro Area have been increasing in the course of the last six quarters of the estimation sample; moreover, money growth plays a significant role in the assessment of such risks. Evidence for Japan and the US shows that for both countries the inclusion of an indicator variable does not substantially change the assessment of the risk of a "Low" inflation regime.
    JEL: C11 C53 E31
    Date: 2014
  8. By: Schumacher, Christian
    Abstract: Mixed-data sampling (MIDAS) regressions allow to estimate dynamic equations that explain a low-frequency variable by high-frequency variables and their lags. To account for temporal instabilities in this relationship, this paper discusses an extension to MIDAS with time-varying parameters, which follow random-walk processes. The non-linear functional forms in the MIDAS regression necessitate the use of non-linear ltering techniques. In this paper, the Particle Fi lter is used to estimate the time-varying parameters in the model. Simulations with time-varying DGPs help to assess the properties of the estimation approach. A real-time application to the relationship between daily corporate bond spreads and quarterly GDP growth in the Euro area shows that the leading indicator property of the spreads ahead of GDP has diminished during the recent crisis. During that period, corporate bond spreads rather seem to be coincident indicators of GDP growth.
    JEL: C51 C53 E37
    Date: 2014
  9. By: João Sousa Andrade (Faculty of Economics, University of Coimbra and GEMF, Portugal); António Portugal Duarte (Faculty of Economics, University of Coimbra and GEMF, Portugal)
    Abstract: It is well known and widely accepted by economists that the characteristics of the European countries that become the Eurozone in 1999 did not match the requirements of an Optimum Currency Area (OCA). The only criteria for membership of the new area were nominal. A strict level of convergence in inflation and interest rates was imposed. In addition to the nominal convergence (monetary), a process of convergence of nominal incomes in the new monetary unit was expected to be generated with the monetary integration. After summarizing the criteria for a successful currency area in the context of the OCA theory, we study the real and nominal convergence process for an older group (11) of countries to establish whether or not these countries form an OCA. We apply the original conditions imposed on ADF tests, together with the Schmidt-Phillips tests, and we estimate fractional differential process to overcome the disadvantages of the traditional tests. We conclude that a process of real divergence and nominal convergence does exist. We think this is a source of genuine imbalance in the European integration process that can destroy the harmonious development of a European Monetary Union.
    Keywords: Monetary integration, Optimum Currency Areas, real and nominal convergence, spectral analysis and total factor productivity.
    JEL: C01 E24 F31 J31
    Date: 2015–01
  10. By: Mavroudeas, Stavros D. (University of Macedonia)
    Abstract: This paper reviews the alternative explanations offered to explain the Greek crisis and checks there analytical and empirical validity. The first part focuses on the mainstream explanations. It distinguishes three main versions (‘Greek disease’, EMU is an unrectifiable non-OCA, EMU has problems but can be rectified). Mainstream explanations are criticized for failing to comprehend properly the deep structural dimensions of the Greek crisis and attributing it to policy errors. The second part reviews the radical explanations and particularly those around the ‘financialization thesis’. It also distinguishes three versions (EMU is the problem, Minskian case, equilibrium of class struggle). These explanations are criticized for offering a weak structural explanation of the Greek crisis by focusing upon policy or conjectural elements. The last part surveys the more classical Marxist explanations of the Greek crisis. These have a different understanding of the relationship between real and financial accumulation from all the previous explanations. Three versions are presented (TRPF, TRPF and underconsumption, TRPF and imperialist exploitation). It is argued that Marxist explanations grasp better than the rest the deep structural dimensions of the Greek crisis.
    Keywords: Greek economic crisis; Eurozone crisis
    JEL: B50 E65 F50 H60
    Date: 2015–02–10
  11. By: Tim Schwarzmüller
    Abstract: I study the performance of single predictor bridge equation models as well as a wide range of model selection and pooling techniques, including Mallows model averaging and Cross-Validation model averaging, for short-term forecasting euro area GDP growth. I explore to what extend model selection and model pooling techniques are able to outperform a simple autoregressive benchmark model in the periods before, during and after the Great Recession. I find that single predictor bridge equation models suffer a great variation in the forecast performance relative to the benchmark model over the analysed sub-samples. Moreover, model selection techniques turn out to produce quite poor forecasts in some sub-samples. On the contrary, model pooling based on the Cross-Validation and the Mallows criterion provide a very stable and accurate forecast performance
    Keywords: Short-term forecasting, Great Recession, mixed frequency data, model selection and model pooling
    JEL: C53 E37
    Date: 2015–01
  12. By: Issing, Otmar; Krahnen, Jan Pieter
    Abstract: On November 8, 2013, several members of the British House of Lords' Subcommittee A conducted a hearing at the ECB in Frankfurt, Germany, on "Genuine Economic and Monetary Union and its Implications for the UK". Professors Otmar Issing and Jan Pieter Krahnen were called as expert witnesses. The testimony began with a general discussion on the elements considered necessary for a functioning internal market. Do economic union and monetary union require a fiscal union or even a political union, beyond the elements of the banking union currently being prepared? In this context, also the critique of the German current account surplus and the international expectations that Germany stimulate internal demand to support growth in crisis countries, were discussed. With regard to the monetary union, the members of the subcommittee asked for an assessment of how European nations and the banking industry would have fared in the banking crisis that followed the Lehman collapse, had there not been a common currency. Given the important role that the ECB has played in the course of the crisis management, the members further asked for an evaluation of the OMT-program of the ECB and also if the monetary union is in need of common debt instruments, in order to provide the ECB with the possibility of buying EU liabilities, comparable to the Fed buying US Treasury bonds. Finally, the dual role of the ECB for monetary policy and banking supervision was an issue touched on by several questions.
    Keywords: European Central Bank,Monetary Union,Outright Monetary Transactions,UK
    Date: 2014
  13. By: Faia, Ester
    Abstract: This article discusses the recent proposal for debt restructuring in the euro zone by Pierre Paris and Charles Wyplosz. It argues that the plan cannot realize the promised debt relief without producing moral hazard. Ester Faia revisits the Redemption Fund proposed in November 2011 by the German Council of Economic Experts and argues that this plan, up to date, still remains the most promising path towards succesful debt restructuring in Europe.
    Keywords: public debt,debt restructuring
    Date: 2014
  14. By: Marc Lavoie
    Abstract: The eurozone is often considered to be the brainchild of Robert Mundell, who has often bragged about his paternity. In reality, the Eurozone setup, most specifically the TARGET2 settlement system, has several characteristics that look alike the plan for an international currency union that Keynes proposed in the early 1940s. The main objective of the paper is to show the similitudes and the differences between the Eurozone currency union and Keynes' Plan. The paper will also discuss some of the confusions that have arisen from the analysis of the TARGET2 system and the decision of the German constitutional court; and it will deal with the question of whether or not the European financial crisis of the GIIPS countries was akin to a balance-of-payments crisis as argued by some authors and denied by others.
    Date: 2015
  15. By: Haliassos, Michael
    Abstract: Neither Northerners are willing to invest in a South they perceive as unwilling to undertake necessary structural reforms, nor are Southerners willing to invest in their countries in a climate of austerity and policy uncertainty imposed, in their view, by the North. This results in a vicious cycle of mistrust. However, as the author argues, big steps in the direction of reforms may provide just enough thrust to break out of this vicious cycle, propel southern countries - and especially Greece - to a much happier future, and promote the chances for more balanced economic performance in North and South.
    Keywords: fiscal crisis,household liquidity,economic reforms,Greece
    Date: 2014
  16. By: Rülke, Jan-Christoph; Pierdzioch, Christian
    Abstract: We study the loss function of 15 European governments as implied by their budget balance forecasts. Results suggest that the shape of the loss function varies across countries. The loss function becomes more asymmetric as the forecast horizon increases and in advance of parliamentary election. Compared to that, government ideology does not affect the shape of the loss function. Under a fiscal rule, government agencies experience a higher loss when overpredicting the fiscal balance compared to an underprediction of the same size. We also document that under an asymmetric loss function government forecasts look more rational compared to a symmetric loss function. This may explain why government agencies' forecasts have been found to be too optimistic (Frankel 2012).
    JEL: E62 H50 E27
    Date: 2014
  17. By: Podlich, Natalia
    Abstract: In this paper, I analyze the impact of the extension of the ECB s collateral framework on securities sales. In addition, I evaluate the impact of different macroeconomic and bank-specific characteristics on banks selling behavior. At this, I distinguish between healthy banks and banks rescued from the German government hypothesizing that distressed banks manage sales of their assets differently. My analysis is based on quantile regressions for panel data containing securities holdings of 27 German banks, which allows an assessment of extremely large sales. Such selling behavior could cause a collapse of prices and lead to fire sales adversely impacting other financial institutions. I find clear evidence that the ECB s collateral framework has a stabilizing impact on sales of assets, especially for impaired banks and during the crisis the relationship is significant.
    JEL: B26 C21 E58
    Date: 2014
  18. By: Mirdala, Rajmund
    Abstract: European transition economies are still suffering from negative implications of economic crisis. Significant decrease in the key interest rates was followed by reduced maneuverability of central banks in providing incentives into real economies. Low interest rate environment together with effects of quantitative easing induced economists to examine sources of interest rates volatility. Responsiveness of short-term interest rates to the structural shocks provides unique platform to investigate sources of their unexpected volatility and associated effects on monetary policy decision making. Moreover, sources of interest rates volatility may help to reveal side effects of the exchange rate regime choice. Empirical investigation of interest rates determination under different exchange rate regimes highlights substantial implications of relative exchange rate diversity and its importance during the crisis period. In the paper we analyze sources of the short-term nominal interest rates volatility in ten European transition economies by employing SVAR methodology. We observed unique patterns of the short-term interest rates responsiveness in countries with different exchange rate arrangements that contributes to the fixed versus flexible exchange rate dilemma.
    Keywords: interest rates, structural shocks, exchange rate arrangements, economic crisis, VAR, impulse-response function
    JEL: C32 E43 F41
    Date: 2014–08

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