nep-eec New Economics Papers
on European Economics
Issue of 2015‒03‒13
fourteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Quantitative easing with bite: a proposal for conditional overt monetary financing of public investment By Andrew Watt
  2. European Economic and Monetary Union Sovereign Debt Markets By Ahmet Sensoy; Ahmed Rostom; Erk Hacihasanoglu
  3. “Sovereigns and banks in the euro area: a tale of two crises” By Marta Gómez-Puig; Simón Sosvilla-Rivero; Manish K. Singh
  4. Spillover of the ECB's Monetary Policy Outside the Euro Area: How Different is Conventional From Unconventional Policy? By Oxana Babecka Kucharcukova; Peter Claeys; Borek Vasicek
  5. Cross-Border Liquidity, Relationships and Monetary Policy: Evidence from the Euro Area Interbank Crisis By Abbassi, Puriya; Bräuning, Falk; Fecht, Falko; Peydró, José Luis
  6. “Financial stress transmission in EMU sovereign bond market volatility: a connectedness analysis” By Fernando Fernández-Rodríguez; Marta Gómez-Puig; Simón Sosvilla-Rivero
  7. Market reactions to the ECB's Comprehensive Assessment By Cenkhan Sahin; Jakob de Haan
  8. The relevance of the EU banking sector to economic growth and the recent financial crisis By Cândida Ferreira
  9. Modern Populism in Greece By Mavrozacharakis, Emmanouil; Tsagarakis, Stelios; Kamekis, Apostolos
  10. Searching for Money Illusion in Europe By Alberto Montagnoli; Andrea Vaona
  11. Innovations in mortgage finance and the onset of the Great Recession in a small open economy with a euro peg By Andersen, Thomas Barnebeck; Malchow-Møller, Nikolaj
  12. The Political Economy of European Integration By Spolaore, Enrico
  14. EuroMInd-D: A Density Estimate of Monthly Gross Domestic Product for the Euro Area By Tommaso Proietti; Martyna Marczak; Gianluigi Mazzi

  1. By: Andrew Watt
    Abstract: To address the on-going crisis in the euro area it is proposed to introduce a scheme of conditional, overt monetary financing of public investment (COMFOPI). The inadequate response of monetary and fiscal policy is shown to explain the weak performance of the euro area compared with other advanced countries since the crisis. The measures currently on the table, including the Juncker Plan and quantitative easing QE, are unlikely to bring about the needed substantial improvement in economic growth, while putting growth on a sustainable footing. Advantages and dangers of monetary financing of fiscal policy are discussed in the light of the recent literature. COMFOPI is a form of QE in which bonds newly issued by the European Investment Bank are purchased, on secondary markets, by the ECB, and the financial resources are made available to national governments to finance investment projects. The scheme is explicitly time-limited by being made subject to a price-stability criterion ("conditional"). The provision of central bank money leads directly to higher spending in the economy ("overt"), unlike with QE which relies on indirect channels. A number of ways to operationalise the scheme are discussed.
    Keywords: Euro area, monetary financing, quantitative easing, European Central Bank, European Investment Bank, public investment, sustainable growth
    Date: 2015
  2. By: Ahmet Sensoy; Ahmed Rostom; Erk Hacihasanoglu
    Abstract: We focus on the developments in the EMU sovereign debt markets in the last decade. First, we show the integration structure of the EMU bond markets before and after the sovereign debt crisis. Accordingly, a fair integration is observed between EMU bond markets during the pre-crisis period. However, a strict segmen-tation emerges with the sovereign debt turmoil. Second, we comment on the recent decreasing trend in EMU member bond yields and their increasing co-movement degree. Accordingly, these changes are argued to de-pend on not the fiscal performances but the illusion of quality appeared with the Fed tapering signals in 2013.
    Keywords: EMU, global financial crisis, eurozone sovereign debt crisis, systemic risk, ight to quality, Fed tapering, dynamic conditional correlation
    JEL: C58 D85 E58 E62 F34 F36
    Date: 2015–03
  3. By: Marta Gómez-Puig (Faculty of Economics, University of Barcelona); Simón Sosvilla-Rivero (Universidad Complutense de Madrid); Manish K. Singh (Faculty of Economics, University of Barcelona)
    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 classification: C22, E44, G01, G13, G21
    Date: 2015–01
  4. By: Oxana Babecka Kucharcukova; Peter Claeys; Borek Vasicek
    Abstract: This paper studies the macroeconomic impact of ECB policy on the euro area and six non-EMU countries. The analysis is based on the evolution of a synthetic index of overall euro area monetary conditions (MCI) that can be decomposed into conventional and unconventional policy measures. A standard monetary VAR including the MCI subcomponents shows that the transmission of unconventional monetary policy in the euro area is quite different than under conventional policy: prices react quickly, but the response of output (industrial production) is muted. A block-restricted VAR analysis confirms that euro area monetary policy spills over to the macroeconomic developments of non-EMU countries. While conventional monetary policy has a generalised effect on economic activity, exchange rates and prices, unconventional measures have generated a variety of responses. Exchange rates respond rather quickly, but an effect on the real economy is found only for some countries, and inflation remains largely unaffected.
    Keywords: ECB, monetary policy, synthetic indicator, unconventional measures, VAR
    JEL: E58 F42
    Date: 2014–12
  5. By: Abbassi, Puriya; Bräuning, Falk; Fecht, Falko; Peydró, José Luis
    Abstract: We analyze the impact of financial crises and monetary policy on the supply of wholesale funding liquidity, and also on the compositional supply effects through cross-border and relationship lending. For empirical identification, we draw on the proprietary bank-to-bank European interbank dataset extracted from Target2 and also exploit the Lehman and sovereign crisis shocks as well as the main Eurosystem non-standard monetary policy measures. The robust results imply that the crisis shocks lead to worse access, volumes and spreads (in both the overnight and longer-term maturities). The quantitative impact on interbank access and volume is stronger than on spreads. Liquidity supply restrictions are exacerbated for cross-border lending after the Lehman failure; for banks headquartered in periphery countries, the impact is quantitatively stronger in the sovereign debt crisis. Moreover, the interbank market – unlike other credit markets – allows to exploit the price dispersion from different lenders on identical credit contracts, i.e. overnight uncollateralized loans in the same morning for the same borrower. This price dispersion increases massively with the crisis, and even more for riskier borrowers. Cross-border and previous relationship lenders charge higher prices for identical contracts in the crisis. Importantly, this price dispersion substantially decreases when the Eurosystem promises unlimited access to liquidity at a fixed price in October 2008 and announces the 3-year LTRO in December 2011, with economically stronger effects for borrowers in weaker countries.
    Keywords: credit rationing; credit supply; euro area; financial crises; financial globalization; information asymmetry; interbank liquidity; monetary policy
    JEL: E44 E58 G01 G21 G28
    Date: 2015–03
  6. By: Fernando Fernández-Rodríguez (Department of Quantitative Methods in Economics, Universidad de Las Palmas de Gran Canaria); Marta Gómez-Puig (Faculty of Economics, University of Barcelona); Simón Sosvilla-Rivero (Complutense Institute of International Studies, Universidad Complutense de Madrid)
    Abstract: This paper measures the connectedness in EMU sovereign market volatility between April 1999 and January 2014, in order to monitor stress transmission and to identify episodes of intensive spillovers from one country to the others. To this end, we first perform a static and dynamic analysis to measure the total volatility connectedness in the entire period (the system-wide approach) using a framework recently proposed by Diebold and Yilmaz (2014). Second, we make use of a dynamic analysis to evaluate the net directional connectedness for each country and apply panel model techniques to investigate its determinants. Finally, to gain further insights, we examine the time-varying behaviour of net pair-wise directional connectedness at different stages of the recent sovereign debt crisis.
    Keywords: Sovereign debt crisis, Euro area, Market Linkages, Vector Autoregression, Variance Decomposition. JEL classification:C53, E44, F36, G15
    Date: 2015–02
  7. By: Cenkhan Sahin; Jakob de Haan
    Abstract: Using an event study approach, we examine financial markets' reactions to the publication of the ECB's Comprehensive Assessment of banks in the euro area. Our results suggest that banks' stock market prices and CDS spreads generally did not react to the publication of the results of the Comprehensive Assessment. This conclusion also holds for banks with a capital shortfall. Only for banks in some countries do we find weak evidence for (mixed) effects on stock prices, while CDS spreads for German banks declined.
    Keywords: ECB Comprehensive Assessment; stress tests; bank equity returns; CDS Spreads
    JEL: G21 G28
    Date: 2015–02
  8. By: Cândida Ferreira
    Abstract: Using static and dynamic panel estimates in a sample including all 28 European Union countries during the last decade, this paper seeks to improve upon the existing literature with empirical evidence on the important role that well-functioning EU banking institutions can play in promoting economic growth. The banking sector performance is proxied by the evolution of some relevant financial ratios and economic growth is represented by the annual Gross Domestic Product growth rate. In order to analyse the possible differences arising after the outbreak of the recent international financial crisis, the estimations consider two panels: one for the time period 1998– 2012 and another for the subinterval 2007–2012. The results obtained allow us to draw conclusions not only on the importance of the variation of different operational, capital, liquidity and assets quality financial ratios to economic growth but also on some differences evidenced in the two considered panels, reflecting the consequences of the recent financial crisis and the correspondent reactions of the European banking institutions.
    Keywords: bank performance, economic growth, European Union, financial crisis, panel estimates
    JEL: G21 F43 F36 C23
    Date: 2015–02
  9. By: Mavrozacharakis, Emmanouil; Tsagarakis, Stelios; Kamekis, Apostolos
    Abstract: Financial crisis has connected Europe with an obvious common pattern which consists the rapidly rise of protest parties that challenge the established political systems. The basic and new feature of these schemes is the intense war rhetoric against the European Union and the vehement rejection of the selected modes of euro rescue. In this sense, populism appears as a new specter haunting European democracies, as active risk, causing serious concerns. Unfortunately, the growing concern does not coincide with policies aiming at finding viable solutions, as the center-right parties and governments believe that the only solution to the crisis is to adopt austerity measures and Social Democrats have not yet found effective alternatives.
    Keywords: Populism, Europe , Greece , Syriza ,financial crisis, antieuropean attitudes
    JEL: I3 I31 I38 J2 J21 O1 O10 Z10 Z18
    Date: 2015–03–04
  10. By: Alberto Montagnoli (University of Sheffiled); Andrea Vaona (Department of Economics (University of Verona))
    Abstract: We apply recent money illusion tests on data on individual life satisfaction from the Eurobarometer for the period 1980–2003. The null hypothesis of no money illusion cannot be rejected. Different nominal rigidities across European countries and EMU countries, specifically, cannot be explained by different degrees of money illusion.
    Keywords: cost of living; subjective well-being; price index; money illusion
    JEL: I31 D12 D60 C23 D31
    Date: 2015–03
  11. By: Andersen, Thomas Barnebeck (Department of Business and Economics); Malchow-Møller, Nikolaj (Department of Business and Economics)
    Abstract: The Global Financial Crisis (GFC) of 2008 hit Denmark particularly hard. In this paper we argue that a combination of innovation in mortgage finance and the need to defend a euro exchange rate peg was partly responsible. Sustained pressure against the Danish krone forced the central bank to increase policy interest rates consecutively in the last quarter of 2008. Monetary tightening in the midst of the GFC deepened the ongoing recession for the usual Keynesian aggregate demand reasons. Innovations in mortgage finance, which had made the economy more sensitive to changes in the policy rate, exacerbated this effect.
    Keywords: Global Financial Crisis; Great Recession; currency peg; financial innovation; adjustable-rate mortgages
    JEL: E20 E30 E40 F33
    Date: 2015–03–10
  12. By: Spolaore, Enrico (Tufts University)
    Abstract: This paper discusses the process of European institutional integration from a political economy perspective, linking the long-standing political debate on the nature of the European project to the recent economic literature on political integration and disintegration. First, we introduce the fundamental trade-off between economies of scale associated with larger political unions and the costs from sharing public goods and policies among more heterogeneous populations, and examine the implications of the trade-off for European integration. Second, we describe the two main political theories of European integration - intergovernmentalism and functionalism - and argue that both theories capture important aspects of European integration, but that neither view provides a complete and realistic interpretation of the process. Finally, we critically discuss the successes and limitations of the actual process of European institutional integration, from its beginnings after World War II to the current crisis.
    Date: 2015
  13. By: Gabriele Fiorentini (Università di Firenze); Alessandro Galesi (CEMFI, Centro de Estudios Monetarios y Financieros); Enrique Sentana (CEMFI, Centro de Estudios Monetarios y Financieros)
    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: 2015–02
  14. By: Tommaso Proietti (University of Rome “Tor Vergata" and CREATES); Martyna Marczak (University of Hohenheim); Gianluigi Mazzi (Statistical Office of the European Communities)
    Abstract: EuroMInd-D is a density estimate of monthly gross domestic product (GDP) constructed according to a bottom–up approach, pooling the density estimates of eleven GDP components, by output and expenditure type. The components density estimates are obtained from a medium-size dynamic factor model of a set of coincident time series handling mixed frequencies of observation and ragged–edged data structures. They reflect both parameter and filtering uncertainty and are obtained by implementing a bootstrap algorithm for simulating from the distribution of the maximum likelihood estimators of the model parameters, and conditional simulation filters for simulating from the predictive distribution of GDP. Both algorithms process sequentially the data as they become available in real time. The GDP density estimates for the output and expenditure approach are combined using alternative weighting schemes and evaluated with different tests based on the probability integral transform and by applying scoring rules.
    Keywords: Density Forecast Combination and Evaluation, Mixed–Frequency Data, Dynamic Factor Models, State Space Models
    JEL: C32 C52 C53 E37
    Date: 2015–02–24

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