nep-eec New Economics Papers
on European Economics
Issue of 2015‒03‒05
fifteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Euro-area governance: what to reform and how to do it By Guntram B. Wolff; André Sapir
  2. International liquidity shocks and the European sovereign debt crisis: Was euro area unconventional monetary policy successful? By Mary M. Everett
  3. Dissecting the brains of central bankers: the case of the ECB's Governing Council members on reforms By Bennani, Hamza
  4. The road towards the establishment of the European Banking Union By Papanikolaou, Nikolaos
  5. Sovereign Debt, Bail-Outs and Contagion in a Monetary Union By Eijffinger, Sylvester C W; Kobielarz, Michal L.; Uras, Rasim Burak
  6. Structural reforms and zero lower bound in a monetary union By Andrea Gerali; Alessandro Notarpietro; Massimiliano Pisani
  7. Can Firms Grow Without Credit? Evidence from the Euro Area, 2005-2011: A Quantile Panel Analysis By Sophia Dimelis, Ioannis Giotopoulos and Helen Louri
  8. Fast ML estimation of dynamic bifactor models: an application to European inflation By Fiorentini, Gabriele; Galesi, Alessandro; Sentana, Enrique
  9. Tracking banks' systemic importance before and after the crisis By Piergiorgio Alessandri; Sergio Masciantonio; Andrea Zaghini
  10. An employment-oriented investment strategy for Europe By International Labour Office
  11. Multivariate Forecasting with BVARs and DSGE Models By Berg, Tim Oliver
  12. Cross-country differences in unemployment: fiscal policy,unions and household preferences in general equilibrium By Brecht Boone; Freddy Heylen
  13. The Pass-Through of Sovereign Risk By Luigi Bocola
  14. Effects of fiscal policy in the North and South of Italy By Piacentini, Paolo; Prezioso, Stefano; Testa, Giuseppina
  15. Comparing systemic risk in European government bonds and national indices By Jan Jurczyk; Alexander Eckrot; Ingo Morgenstern

  1. By: Guntram B. Wolff; André Sapir
    Abstract: The Issue Reform of the governance of the euro area is being held back by disagreement on what is at the root of the euro areaâ??s woes. Pre-crisis, the euro area suffered from the built-up of financial imbalances, price and wage divergence and an insufficient focus on debt sustainability. During the crisis, the main problems were slow resolution of banking problems, an inadequate fiscal policy stance in 2011-13 for the area as a whole, insufficient domestic demand in surplus countries and slow progress with structural reforms to overcome past divergences. Policy Challenge Euro-area governance needs to move beyond the improvements brought about by banking union and should establish institutions to prevent divergences of wages from productivity. We propose the creation of a European Competitiveness Council composed of national competitiveness councils, and the creation of a Eurosystem of Fiscal Policy (EFP) with two goals: fiscal debt sustainability and an adequate area-wide fiscal position. The EFP should have the right in exceptional circumstances to declare national deficits unlawful and to be able to force parliaments to borrow more so that the euro-area fiscal stance is appropriate. A euro-area chamber of the European Parliament would have to approve such decisions. No additional risk-sharing would be introduced. In the short term, domestic demand needs to be increased in surplus countries, while in deficit countries, structural reform needs to reduce past divergences.
    Date: 2015–02
  2. By: Mary M. Everett
    Abstract: Using novel data on individual euro area banks' balance sheets this paper shows that exposure to stressed European sovereigns manifested in a liquidity shock to their international funding through two channels: (i) a contraction in cross-border funding, and (ii) a contraction in US wholesale funding. The effectiveness of the ECB's unconventional monetary policy measures, in the form of the 3-year Long-Term Refinancing Operations (VLTROs), in mitigating effects of the European sovereign debt crisis on the supply of private sector credit is assessed. Controlling for banks' risk factors and credit demand, the first round of VLTROs in December 2011 is not found to have been successful in offsetting the decline in credit supply to Households and non-financial corporates. In contrast, the VLTROs in February 2012 are found to have mitigated the effect of the European sovereign debt crisis on credit supply. Moreover, a contraction in credit supply to non-financial corporates, but not households, is documented for euro area banks affected by the international liquidity shock and that drew on ECB liquidity under the VLTRO facilities.
    Keywords: European sovereign crisis, cross-border banking, sovereign debt, international transmission, non-standard measures, ECB liquidity
    JEL: G21 G15 H63
    Date: 2015–02
  3. By: Bennani, Hamza
    Abstract: Since 2009, European central bankers have supported some reforms, in order to draw roadmaps to get out of the euro debt crisis. This paper tests whether the educational and professional background of European central bankers matter for the type of reforms each of them advocated. Through a textual analysis of public speeches delivered by the European central bankers, we draw a cognitive map for each of them and, thus, of the reforms they propose as ways out of the euro debt crisis. Our results show that their occupational background is an important determinant of their respective economic reform proposals.
    Keywords: European Central Bank, Monetary Policy, Euro debt crisis, Cognitive mapping
    JEL: E42 E52 E58 H12
    Date: 2015–01
  4. By: Papanikolaou, Nikolaos
    Abstract: The rising delinquencies in the U.S. subprime mortgage market in 2006 and the succeeding collapse in housing prices had a considerably negative impact on the functioning of the European financial systems and the smooth operation of European economies. Indeed, in the Euro-area, what started as a financial crisis escalated to a twin crisis after being doubled by the eruption of a massive sovereign debt crisis in 2010. The lack of an established set of bank supervision and resolution strategies at the Euro-area level, the vicious circle between banks and European nation-states, the threats for the sustainability of the common currency, and the deterioration of the market conditions were the key factors which lately led to the acceleration of the steps towards the creation of a banking union in Europe. The principal aim of the European Banking Union is to shape the necessary legal and institutional framework and provide the authorities with powers and tools to deal with ailing banks in order to prevent the devastating effects that a future shock may have on the financial system, the real economy, and the society. This paper presents the formal reactions of the sovereigns and the European Central Bank to the twin crisis, and critically discusses the key problems and the inherent weaknesses which led to the establishment of a banking union for the Euro-area member states. The structure of the banking union, the various aspects of its operation, and its future prospects are also presented and discussed.
    Keywords: Eurozone; European Banking Union; bank regulation and supervision; sovereign risk
    JEL: E58 F33 F36 F39 F55 G21 G28 H63
    Date: 2015–02–28
  5. By: Eijffinger, Sylvester C W; Kobielarz, Michal L.; Uras, Rasim Burak
    Abstract: The European sovereign debt crisis is characterized by the simultaneous surge in borrowing costs in the GIPS countries after 2008. We present a theory, which can account for the behavior of sovereign bond spreads in Southern Europe between 1998 and 2012. Our key theoretical argument is related to the bail-out guarantee provided by a monetary union, which endogenously varies with the number of member countries in sovereign debt trouble. We incorporate this theoretical foundation in an otherwise standard small open economy DSGE model and explain (i) the convergence of interest rates on sovereign bonds following the European monetary integration in late 1990s, and (ii) - following the heightened default risk of Greece - the sudden surge in interest rates in countries with relatively sound economic and financial fundamentals. We calibrate the model to match the behavior of the Portuguese economy over the period of 1998 to 2012.
    Keywords: bail-out; contagion; interest rate spreads; sovereign debt crisis
    JEL: F33 F34 F36 F41
    Date: 2015–03
  6. By: Andrea Gerali (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: We assess the short- and medium-term macroeconomic effects of competition-friendly reforms in the service sector when the monetary policy rate is stuck at the zero lower bound (ZLB) in a monetary union. We calibrate a large-scale multi-country multi-sector dynamic general equilibrium model to one region within the euro area, the rest of the euro area and the rest of the world. We find first, that unilateral reforms by a single country do not affect the number of periods for which the ZLB holds and have mild medium-term expansionary effects on GDP. Second, reforms simultaneously implemented in the entire euro area can favor an earlier exit from the ZLB if they have sufficiently inflationary effects, which happens when the gradual increase in the supply of goods and services is matched by a sufficiently large increase in investment, associated with higher expected levels of output. Reforms have expansionary effects because of their positive wealth effect, which more than counterbalances the recessionary substitution effect associated with higher real interest rates. If investment cannot immediately react to the reforms, then the latter has a deflationary impact and the duration of the ZLB is not reduced.
    Keywords: competition, markups, monetary policy, zero lower bound
    JEL: C51 E31 E52
    Date: 2015–01
  7. By: Sophia Dimelis, Ioannis Giotopoulos and Helen Louri
    Abstract: This paper explores the effects of bank credit on firm growth before and after the recent financial crisis, taking into account different structural characteristics of banking sectors and domestic economies. Panel quantile analysis is used on a sample of 2075 euro area firms in 2005- 2011. The post-2008 credit crunch is found to seriously affect only small, slow-growth firms and especially those operating in concentrated and domestic-dominated banking systems, and in riskier and less financially developed economies. Large, high-growth firms seem to be able to find alternative financial sources and, thus, may act as carriers and facilitators of a credit-less recovery.
    JEL: L1 L25 E51
    Date: 2015–02
  8. By: Fiorentini, Gabriele; Galesi, Alessandro; Sentana, Enrique
    Abstract: We generalise the spectral EM algorithm for dynamic factor models in Fiorentini, Galesi and Sentana (2014) to bifactor models with pervasive global factors complemented by regional ones. We exploit the sparsity of the loading matrices so that researchers can estimate those models by maximum likelihood with many series from multiple regions. We also derive convenient expressions for the spectral scores and information matrix, which allows us to switch to the scoring algorithm near the optimum. We explore the ability of a model with a global factor and three regional ones to capture inflation dynamics across 25 European countries over 1999-2014.
    Keywords: euro area; inflation convergence; spectral maximum likelihood; Wiener-Kolmogorov filter
    JEL: C32 C38 E37
    Date: 2015–03
  9. By: Piergiorgio Alessandri (Bank of Italy); Sergio Masciantonio (Bank of Italy); Andrea Zaghini (Bank of Italy)
    Abstract: We develop a methodology to identify and rank ‘systemically important financial institutions’ (SIFIs). Our approach is consistent with that followed by the Financial Stability Board but, unlike the latter, it is free of judgment and it is based entirely on publicly available data, thus filling the gap between the official views of the regulator and those that market participants form with their own information set. We apply the methodology on three samples of banks (global, EU and euro area) for the years 2007-12.
    Keywords: systemic risk, too big to fail
    JEL: G21 G01 G18
    Date: 2015–01
  10. By: International Labour Office
    Abstract: The employment situation remains a major source of concern in the majority of countries in the European Union. Half of the region’s unemployed have been without work for more than a year, and unless the policy approach changes, the prospects are for a sluggish employment recovery. The Investment Plan proposed by the European Commission is thus a welcome initiative that recognizes the immediate need for stimulating growth, fostering Europe’s competitiveness and tackling the employment crisis. This report finds that for the Investment Plan to make a significant dent in unemployment, the design of the programme is crucial. Taking into account the magnitude and diversity of the labour market challenges, placing greater emphasis on complementary labour market policies and ensuring that small enterprises have access to credit will lead to better outcomes. In addition, any measures developed as part of the Investment Plan need to form the basis of a medium-term employment strategy that aims at quality job creation and avoids a “race to the bottom” in terms of wages and working conditions.
    Keywords: employment creation, investment policy, economic recovery, public investment, plan of action, EIB, EU, création d'emploi, politique d'investissement, reprise économique, investissement public, plan d'action, BEI, UE, creación de empleos, política de inversiones, recuperación económica, inversiones públicas, plan de acción, BEI, UE
    Date: 2014
  11. By: Berg, Tim Oliver
    Abstract: In this paper I assess the ability of Bayesian vector autoregressions (BVARs) and dynamic stochastic general equilibrium (DSGE) models of different size to forecast comovements of major macroeconomic series in the euro area. Both approaches are compared to unrestricted VARs in terms of multivariate point and density forecast accuracy measures as well as event probabilities. The evidence suggests that BVARs and DSGE models produce accurate multivariate forecasts even for larger datasets. I also detect that BVARs are well calibrated for most events, while DSGE models are poorly calibrated for some. In sum, I conclude that both are useful tools to achieve parameter dimension reduction.
    Keywords: BVARs, DSGE Models, Multivariate Forecasting, Large Dataset, Simulation Methods, Euro Area
    JEL: C11 C52 C53 E37
    Date: 2015–02–24
  12. By: Brecht Boone; Freddy Heylen (-)
    Abstract: We develop and parameterize an overlapping generations model that explains hours worked, education, and unemployment within one coherent framework. We extend previous work in this tradition by introducing individuals with heterogeneous ability and a unionized labour market for lower ability workers. Unemployment is due to above market-clearing wages for these workers. Our calibrated model's predictions match the facts remarkably well in a sample of continental European, Nordic and Anglo-Saxon countries. We then use the model to explain the cross-country variation in unemployment. A Shapley decomposition reveals an almost equal role for differences in fiscal policy variables and in union preferences. Both account for about half of the explained variation in unemployment rates. While it is the above market-clearing wage chosen by the unions that directly leads to unemployment, the fiscal policy variables determine most of its magnitude. As to specific fiscal variables, differences in unemployment benefit generosity play a much more important role than tax differences. Controlling for fiscal variables and union preferences, any differences in the taste for leisure of the households have no role to play in determining cross-country variation in unemployment.
    Date: 2015–02
  13. By: Luigi Bocola (University of Pennsylvania)
    Abstract: This paper examines the aggregate implications of sovereign credit risk in a business cycle model in which banks are exposed to risky government debt. An increase in the probability of a future sovereign default leads to a reduction in credit to firms because of two channels. First, it lowers the value of government debt on the balance sheet of banks, tightening their funding constraints and leaving them with fewer resources to lend to firms. Second, it raises the required premia demanded by banks for lending to firms because this activity has become riskier: if the sovereign default occurs, the economy falls in a major recession and claims to the productive sector pay out little. I estimate the nonlinear model with Italian data using Bayesian techniques. I find that sovereign credit risk led to a rise in the financing premia of firms that peaked 100 basis points, and cumulative output losses of 4.75% by the end of 2011. Both channels were quantitatively important drivers of the propagation of sovereign credit risk to the real economy. I then use the model to evaluate the effects of subsidized long term loans to banks, calibrated to the ECB's Longer Term Refinancing Operations. The presence of a significant risk channel at the policy enactment explains the limited stimulative effects of these interventions.
    Date: 2014
  14. By: Piacentini, Paolo; Prezioso, Stefano; Testa, Giuseppina
    Abstract: Abstract: This paper contributes to a growing body of work within ‘fiscal policy studies’, investigating for the recent role of fiscal policy on the Italian economy. Using annual data collected on regional basis, this study estimates and compares the (impact and cumulative) fiscal multipliers across the North and the South, the less developed area, of Italy. With recourse to a simultaneous equation model for the two macro-regions of Italy, it estimates the overall impact of the measures of budget consolidation policies in the period 2011-2013. Our analysis reveals that tax rises and spending cuts hit the South harder than the North.
    Keywords: Keywords: Tax multiplier, Government spending multiplier, Fiscal Policy.
    JEL: E23 E62 H20 H24
    Date: 2015–02–24
  15. By: Jan Jurczyk; Alexander Eckrot; Ingo Morgenstern
    Abstract: It has been shown, that the systemic risk contained in financial markets can be indicated by the change of cross-correlation between different indices and stocks. This change is tracked by using principle component analysis (PCA). We use this technique to investigate the systemic risk contained in European economy by comparing government long term bonds and indices.
    Date: 2015–02

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