nep-eec New Economics Papers
on European Economics
Issue of 2015‒02‒28
thirteen 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 Marcel Fratzscher ; Malte Rieth
  2. How does foreign demand activate domestic value added? A comparison among the largest euro-area economies By Rita Cappariello ; Alberto Felettigh
  3. Medium-term forecasting of euro-area macroeconomic variables with DSGE and BVARX models By Lorenzo Burlon ; Simone Emiliozzi ; Alessandro Notarpietro ; Massimiliano Pisani
  4. Deflation is coming : economic perspectives for the euro area and euro area countries in 2014,2015,2016: The independant annual Growth Survey 2015 By Xavier Timbeau ; Lars Anderson ; Christophe Blot ; Jérôme Creel ; Andrew Watt
  5. On the Size of the Government Spending Multiplier in the Euro Area By P. Fève ; J-G. Sahuc
  6. Shareholding Network in the Euro Area Banking Market By Nicolò Pecora ; Alessandro Spelta
  7. Income inequality and Germany’s current account surplus By Patrick Grüning ; Thomas Theobald ; Till van Treeck
  8. "Europe at the Crossroads: Financial Fragility and the Survival of the Single Currency" By Jan Kregel
  9. Risk-Return Trade-Off for European Stock Markets By Aslanidis, Nektarios ; Christiansen, Charlotte ; Savva, Christos S.
  10. Financial Fragmentation and Economic Growth in Europe By Isabel Schnabel ; Christian Seckinger
  12. Globalization and international risk-sharing: do political and social factors matter more than economic integration? By Faruk Balli ; Eleonora Pierucci
  13. Why did bank lending rates diverge from policy rates after the financial crisis? By Anamaria Illes ; Marco Lombardi ; Paul Mizen

  1. By: Marcel Fratzscher ; Malte Rieth
    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, but partly 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.
    Keywords: Credit risk, banks, sovereigns, monetary policy, bank bailout, heteroscedasticity, spillovers
    JEL: E52 G10 E60
    Date: 2015
  2. By: Rita Cappariello (Bank of Italy ); Alberto Felettigh (Bank of Italy )
    Abstract: We propose an analysis for the largest euro-area countries (France, Germany, Italy and Spain), based on the framework developed by Koopman et al. (2014) for tracing value added in a country’s exports by source and use. We integrate their approach by introducing an additional dimension: the domestic-sector origin of value added embodied in exports. While providing an accurate picture of these countries’ participation in global value chains, we estimate the impact on their GDP of a shock to foreign demand and disentangle individual contributions along a geographical dimension in a period running from the introduction of the euro to the beginning of the sovereign debt crisis.
    Keywords: global value chains, final internal demand, domestic value added activation, trade in value added
    JEL: F14 F15
    Date: 2015–01
  3. By: Lorenzo Burlon (Bank of Italy ); Simone Emiliozzi (Bank of Italy ); Alessandro Notarpietro (Bank of Italy ); Massimiliano Pisani (Bank of Italy )
    Abstract: The paper assesses the performance of medium-term forecasts of euro-area GDP and inflation obtained with a DSGE model and a BVARX model currently in use at the Bank of Italy. The performance is compared with that of simple univariate models and with the Eurosystem projections; the same real time assumptions underlying the latter are used to condition the DSGE and the BVARX forecasts. We find that the performance of both forecasts is similar to that of Eurosystem forecasts and overall more accurate than that of simple autoregressive models. The DSGE model shows a relatively better performance in forecasting inflation, while the BVARX model fares better in forecasting
    Keywords: forecasting, DSGE, BVARX, euro area
    JEL: C53 E32 E37
    Date: 2015–01
  4. By: Xavier Timbeau (OFCE ); Lars Anderson (Economic Council of the Labour Movement (ECLM) ); Christophe Blot (OFCE ); Jérôme Creel (OFCE ); Andrew Watt (Macroeconomic Policy Institute (IMK) )
    Abstract: Six years after the start of the Great Recession, the economic and socialsituation in the euro area is still depressed and fragile as shown by key macroeco-nomic indicators. Growth will not exceed 0.8% in 2014 after two consecutiveyears of recession. The risk of deflation is increasing as inflation has now been below 0.5% since May 2014.Employment has improved moderately but unemployment remains at an unacceptably high level. Consequently, inequality andthe risk of poverty are increasing significantly. In short the euro area still suffers the aftermath of the crisis and has not yet engaged in a buoyant recovery.
    Date: 2015–02
  5. By: P. Fève ; J-G. Sahuc
    Abstract: This article addresses the existence of a wide range of estimated government spending multipliers in a dynamic stochastic general equilibrium model of the euro area. Our estimation results and counterfactual exercises provide evidence that omitting the interactions of key ingredients at the estimation stage (such as Edgeworth complementarity/substitutability between private consumption and government expenditures, endogenous government spending policy and general habits in consumption) paves the way for potentially large biases. We argue that uncertainty on the quantitative assessments of fiscal programmes could partly originate from these biases.
    Keywords: Government spending multiplier, DSGE models, Estimation bias, Euro area.
    JEL: C32 E32 E62
    Date: 2015
  6. By: Nicolò Pecora (Università Cattolica del Sacro Cuore ); Alessandro Spelta (Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore )
    Abstract: Analyzing the topological properties of the network of shareholding relationships among the Euro Area banks we evaluate the relevance of a bank in the ?nancial system respect to ownership and control of other banks. We ?nd that the degree distribution of the European banking network displays power laws in both the binary and the weighted case. We also ?nd that the exponents are linked by a scaling relation revealing a direct connection between an increase of control diversi?cation and an increase of market power. Results also reveal Single Supervisory Mechanism, recently introduced by the European Central Bank and based on banks? total assets is a good proxy for the systemic risk associated to a particular ?nancial institution. Moreover we study how control and wealth are structured and concentrated within the banking system. Interestingly, our analysis reveals that control is highly concentrated at banking level, namely, lying in the hands of very few important shareholders that have weak relationships between them. This means that each main holder controls approximately a separate subset of banks.
    Keywords: Shareholding network, European banking system, Weighted graph, Power law
    JEL: D85 E58 L14
    Date: 2014–06
  7. By: Patrick Grüning ; Thomas Theobald ; Till van Treeck
    Abstract: Germany entered the euro with a current account deficit but over the entire past decade has run large and persistent current account surpluses. Besides joining the common currency, the increase of Germany’s current account since the late 1990s has been accompanied by strong shifts in the personal and, in particular, the functional income distribution. In this paper, we argue that income inequality should always be analyzed with respect to both the personal and the functional distribution of income. We present a dynamic stochastic general equilibrium (DSGE) model in which a current account surplus arises as an endogenous result of a decrease in the share of household income in national income. On the one hand, this result complements existing literature where current account deficits result from rising personal income inequality. On the other hand, we find that current account imbalances will be more pronounced when accompanied by changes in the financial system. Accordingly, if we link Germany’s accession to the European monetary union to lower exchange rate costs for German bank lending, the current account surplus becomes larger.
    Keywords: income inequality, functional income distribution, household debt, financial system, current account
    JEL: D31 E17 F32
    Date: 2015
  8. By: Jan Kregel
    Abstract: Given the continuing divergence between progress in the monetary field and political integration in the euro area, the German interest in imposing austerity may be seen as representing an attempt to achieve, de facto, accelerated progress toward political union; progress that has long been regarded by Germany as a precondition for the success of monetary unification in the form of the common currency. Yet no matter how necessary these austerity policies may appear in the context of the slow and incomplete political integration in Europe, they are ultimately unsustainable. In the absence of further progress in political unification, writes Senior Scholar Jan Kregel, the survival and stability of the euro paradoxically require either sustained economic stagnation or the maintenance of what Hyman Minsky would have recognized as a Ponzi scheme. Neither of these alternatives is economically or politically sustainable.
    Date: 2015–02
  9. By: Aslanidis, Nektarios ; Christiansen, Charlotte ; Savva, Christos S.
    Abstract: This paper adopts dynamic factor models with macro-finance predictors to test the intertemporal risk-return relation for 13 European stock markets. We identify country specific, euro area, and global macro-finance factors to determine the conditional risk and return. Empirically, the risk- return trade-off is generally negative. However, a Markov switching model documents that there is time-variation in this trade-off that is linked to the state of the economy. Keywords: Risk-return trade-off; Dynamic factor model; Macro-finance predictors; European stock markets; Markov switching model JEL Classifications: C22; G11; G12; G17
    Keywords: Mercats financers -- Europa, Finances -- Models economètrics, Gestió de cartera, 336 - Finances. Banca. Moneda. Borsa,
    Date: 2015
  10. By: Isabel Schnabel ; Christian Seckinger (Department of Economics, Johannes Gutenberg-Universitaet Mainz, Germany )
    Abstract: Using industry data from Eurostat and applying the Rajan-Zingales methodology, we investigate the real growth effects of banking sector integration in the European Union. Our sample stretches from 2000 until 2012 and includes the phase of rapid financial integration before the crisis as well as the following phase of financial fragmentation and bank deleveraging. We find evidence that banking sector integration had a more than four times stronger growth effect during the crisis than in normal times. Growth effects are also stronger in times of domestic bank deleveraging. We conclude that concerns of European policy makers about fragmentation in the European banking sector are justified and that future reintegration is an important building block of future growth perspectives in the European Union.
    Keywords: Financial fragmentation; financial integration; foreign banks; crossborder lending; economic growth; financial crisis; Rajan-Zingales methodology
    JEL: F36 G01 G15
    Date: 2014–02–13
  11. By: Renata Karkowska (University of Warsaw, Faculty of Management )
    Abstract: We measure a systemic risk faced by European banking sectors using the CoVaR measure. We propose the conditional value-at-risk (CoVaR) for measuring a spillover risk which demonstrates the bilateral relation between the tail risks of two financial institutions. The aim of the study is to estimate the contribution systemic risk of the bank i in the analyzed banking sector of a country in conditions of its insolvency. The study included commercial banks from 8 emerging markets from Europe, which gave a total of 40 banks, traded on the public market, which provided a market valuation of the bank's capital. The conclusions are that the CoVaR seems to be a better measure for systemic risk in the banking sector than the VaR, which is more individual. And banks in developing countries in Europe do not provide significant risk for the banking sector as a whole. But it must be taken into account that some individuals that may find objectionable. Our results hence tend to a practical use of the CoVaR for supervisory purposes.
    Keywords: Systemic Risk, Value at Risk, Risk Spillovers, Banking Sector
    JEL: G01 G10 G20 G28 G38
    Date: 2015–02
  12. By: Faruk Balli ; Eleonora Pierucci
    Abstract: We explore the impact of various forms of globalization upon international risk-sharing applying the KOF globalization indices. The empirical literature, so far, has only investigated economic and financial sides of globalization. By decomposing globalization into its economic, social and political aspects, we gauge the impact of these aspects on the extent of risk-sharing among Organization for Economic Cooperation and Development (OECD), European Monetary Union (EMU) and low and middle income (LMY) countries, obtaining unprecedented results that might shed a light on the open question about the role of globalization in risk-sharing. Our main finding is that noneconomic aspects of globalization are relevant in shaping risk-sharing opportunities. When non-economic aspects are taken into account, economic integration loses relevance, whereas social and political globalization improve risk-sharing. These remarkable unprecedented results entail new policy implications, particularly for EMU and OECD countries, and call for further investigation.
    Keywords: International risk-sharing, globalization, social and political integration
    JEL: C33 D80 E2 F15
    Date: 2015–01
  13. By: Anamaria Illes ; Marco Lombardi ; Paul Mizen
    Abstract: The global finance crisis prompted central banks in many countries to cut short-term policy rates to near zero levels. Yet, lending rates did not fall as much as the decline in policy rates would have suggested. We argue that comparing lending rates to policy rates is misleading: banks do not obtain all their funds at policy rates, and after the crisis, costs of funding rose substantially. Comparing lending rates with a weighted average cost of funds suggests that banks did not substantially change their rate setting behaviour after the financial crisis: interest rate pass-through relationships across eleven countries in Europe appear to have remained stable.
    Keywords: lending rates, policy rates, panel cointegration, financial crisis
    Date: 2015–02

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