nep-eec New Economics Papers
on European Economics
Issue of 2015‒03‒22
eighteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Bank and Sovereign Risk Interdependence in the Euro Area By Kollintzas, Tryphon; Tsoukalas, Konstantinos
  2. Sovereign Debt, Bail-Outs and Contagion in a Monetary Union By Eijffinger, S.C.W.; Kobielarz, M.L.; Uras, R.B.
  3. Monetary Union with A Single Currency and Imperfect Credit Market Integration. By V. Bignon; R. Breton; M. Rojas Breu
  4. Causality and Contagion in EMU Sovereign Bonds Revisited: Novel Evidence from Nonlinear Causality Tests By Vassilios Babalos; Rangan Gupta; Clement Kyei; Evangelos I. Poutos
  5. Comparison of monetary policy effects on lending channel in EMU and non-EMU countries: Evidence from period 1999-2012 By Tomáš Heryán; Iveta PaleÄková; Nemanja Radić
  6. Sovereign Risk and the Pricing of Corporate Credit Default Swaps By Haerri, Matthias; Morkoetter, Stefan; Westerfeld, Simone
  7. Can the Provision of Long-Term Liquidity Help to Avoid a Credit Crunch? Evidence from the Eurosystem's LTROs. By P. Andrade; C. Cahn; H. Fraisse; J-S. Mésonnier
  8. Public Capital Expenditure and Debt Dynamics: Evidence from the European Union By Bhatt Hakhu, Antra; Piergallini, Alessandro; Scaramozzino, Pasquale
  9. Euro-Dollar Polarixation and Heterogeneity in Exchange Rate Pass-Throughs Within the Euro Zone By Mariarosaria Comunale
  10. Gambling for Redemption and Self-Fulfilling Debt Crises By Juan Carlos Conesa; Timothy J. Kehoe
  11. European Central Bank quantitative easing: the detailed manual By Grégory Claeys; Alvaro Leandro; Allison Mandra
  12. The Trade-off Unemployment Rate/External Deficit: Assessing the Economic Adjustment Program of the Troika (European Commission, ECB and IMF) for Portugal using an Input-Output Approach By João Ferreira do Amaral; João Carlos Lopes
  13. The Spanish Productivity Puzzle in the Great Recession By Hospido, Laura; Moreno-Galbis, Eva
  14. The discretionary fiscal effort: an assessment of fiscal policy and its output effect By Nicolas Carnot; Franciso de Castro
  15. The Mutualisation of Sovereign Debt: Comparing the American Past and the European Present By Armin Steinbach
  16. The long road towards the European single market By Mario Mariniello; André Sapir; Alessio Terzi
  18. Immigration Policy and Macroeconomic Performance in France By Hippolyte d’Albis; Ekrame Boubtane; Dramane Coulibaly

  1. By: Kollintzas, Tryphon; Tsoukalas, Konstantinos
    Abstract: We develop a dynamic stochastic general equilibrium model to study bank risk and sovereign risk interdependence in the Euro Area. We find that an increase in capital investment risk shock, results in a considerably deeper recession when sovereign risk is also present. This result has three policy implications. First, Euro Area policies dealing with failing banks aggravated the recession. Second, although there has been a supranational effort with the creation of the EFSF/ESM to provide loans to sovereigns, as long as there is no direct mechanism for financial sector rescues, Euro Area policies continue to exacerbate the recession. Third, in favor of austerity measures used in the EA, we find that government spending multipliers are smaller in the presence of sovereign risk.
    Keywords: bank rescues; cyclicality; DSGE model; government spending multiplier; investment risk; sovereign risk
    JEL: E32 E44 E52 E58 E62 E63 G21 H3
    Date: 2015–03
  2. By: Eijffinger, S.C.W. (Tilburg University, Center For Economic Research); Kobielarz, M.L. (Tilburg University, Center For Economic Research); Uras, R.B. (Tilburg University, Center For Economic Research)
    Abstract: 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<br/>economy over the period of 1998 to 2012.
    Keywords: EMU; sovereign debt crisis; contagion; bail-out; interest rate spread
    JEL: F33 F34 F36 F41
    Date: 2015
  3. By: V. Bignon; R. Breton; M. Rojas Breu
    Abstract: With the Euro Area context in mind, we show that currency arrangements impact on credit available through default incentives. To this end we build a symmetric two-country model with money and imperfect credit market integration. Differences in credit market integration are captured by variations in the cost for banks to grant credit for cross-border purchases. We show that for high enough levels of this cost, currency integration may magnify default incentives, leading to more stringent credit rationing and lower welfare than in a regime of two currencies. The integration of credit markets restores the optimality of the currency union.
    Keywords: banks, currency union, monetary union, credit, default.
    JEL: E42 E50 F3 G21
    Date: 2015
  4. By: Vassilios Babalos (Department of Banking and Financial Management, University of Piraeus, Greece); Rangan Gupta (Department of Economics, University of Pretoria); Clement Kyei (Department of Economics, University of Pretoria); Evangelos I. Poutos (Department of Social Sciences, Hellenic Open University, Greece)
    Abstract: This paper investigates the possible existence of Granger-causal relationships in the behavior of sovereign bond markets within the European Monetary Union (EMU), with special focus on higher order causality accounting for nonlinear dependence between the variables. With the above in mind both traditional linear and the nonlinear variants of the Granger causality test are conducted. An extensive sample of yields on 10-year sovereign bonds issued by 12 EMU countries and USA over the period running from January 2000 to June of 2014 is employed. Our findings reveal interesting causality patterns both at first and second order moment of sovereign yields. In particular, a bi-directional causality in mean and variance within the group of the southern Europe countries and a weak evidence of causality both in mean and variance running from southern to northern Europe sovereign yields is observed. Our results entail significant policy implications for market regulators and bond portfolio investors and useful insights for researchers interested in the developments of EMU sovereign debt markets. Length: 17 pages
    Keywords: Sovereign debt, European Monetary Union, Linear causality, Nonlinear causality
    JEL: C14 C22 C32 G12
    Date: 2015–03
  5. By: Tomáš Heryán (Department of Finance and Accounting, School of Business Administration, Silesian University); Iveta PaleÄková (Department of Finance and Accounting, School of Business Administration, Silesian University); Nemanja Radić (The Business School, Middlesex University, The Burroughs, London NW4 4BT)
    Abstract: Current study has focused on the bank lending channel of monetary transmission in EU countries. The aim of the paper is to carry out an empirical investigation of the bank lending channel of monetary transmission in EMU and non-EMU countries. As estimation method we use GMM model with pooled annual data as it was used in previous studies. Our estimation period is from 1999 to 2012. Contribution of the study is in three major ways: (i) we investigated independently panel of EMU and non-EMU countries; (ii) we examined the interaction terms between the bank characteristics and both monetary policy indicators, shortterm interest rates and monetary aggregate M2; (iii) we discussed about possible quantitative easing by the European Central Bank. We have proved some differences between the bank lending channels of monetary transmission of both, the EMU and non-EMU. It has also been proved a higher impact of M2 development than a development of short-term interest rates. Finally, there are definitely some monetary policy implications, too.
    Keywords: monetary policy, bank landing channel, EMU countries, non-EMU countries, GMM
    JEL: E52 C51
    Date: 2015–03–17
  6. By: Haerri, Matthias; Morkoetter, Stefan; Westerfeld, Simone
    Abstract: Based on an empirical analysis of European corporations, we investigate the impact of sovereign risk on the pricing of corporate credit risk. In our paper, we show that sovereign credit default swaps (CDS) are positively correlated with corresponding corporate CDS spreads and are a significant factor for corporate CDS pricing models. We also find that this impact in-creases throughout the sovereign debt crisis in 2010-2011 and is more distinctive for Euro-zone countries that were more exposed to the sovereign debt crisis than others. We further observe that this effect is particularly pronounced for corporations with a high dependency on their domestic market.
    Keywords: Credit Default Swaps, Pricing, Sovereign Risk
    JEL: G12 G14 G24
  7. By: P. Andrade; C. Cahn; H. Fraisse; J-S. Mésonnier
    Abstract: We exploit the Eurosystem’s longer-term refinancing operations (LTROs) of 2011-2012 to analyze the effects that a large provision of central bank liquidity to banks has on the credit supply to firms. We control for credit demand by examining firms that borrow from several banks, in addition to controlling for banks’ risk. We find that LTROs enhanced loan supply in France. Nevertheless, the transmission took place mostly with the first operation of December 2011, in which constrained banks bid more, and larger borrowers benefited more. The opportunity to substitute long-term central bank borrowing for short-term borrowing was instrumental in this transmission.
    Keywords: unconventional monetary policy, bank lending channel, euro area, LTRO, credit supply.
    JEL: C21 E51 G21 G28
    Date: 2015
  8. By: Bhatt Hakhu, Antra; Piergallini, Alessandro; Scaramozzino, Pasquale
    Abstract: This paper investigates the relationship between public capital expenditure and public debt in the European Union (EU) on a panel of fifteen countries over the sample period 1980-2013. We find robust evidence of a negative cointegrating relation, according to which increases in the capital expenditure-GDP ratio cause reductions in the debt-GDP ratio in the long run. Our empirical results suggest that current EU fiscal austerity can trigger upward debt spirals if cuts in total expenditure disregard its composition. Consistently with the “golden rule of public finance”, EU fiscal rules should allow for higher levels of capital expenditure in order to foster debt consolidation through growth dividends.
    Keywords: Fiscal sustainability, EU, panel cointegration, public expenditure, public debt.
    JEL: C23 E62 H62 H63
    Date: 2014
  9. By: Mariarosaria Comunale (Economics Department, Bank of Lithuania)
    Abstract: This paper provides an empirical study of the asymmetrical spillovers of the euro-US dollar exchange rate on the inflation in the euro zone, dividing the sample in two groups of countries: core and periphery. Then we test if the euro-US dollar exchange rate is still able to give a different impact on the groups’ performance as in the past US dollar-deutschmark polarization phenomenon studying the intra-euro area differences in exchange rate passthrough (ERPT), as an important element of inflation dynamics. Using a dynamic panel data framework based on an exchange rate pass-through model, we estimate the elasticities of the two groups by system IV-GMM and the common correlated effects mean group estimator, which deals with the presence of cross-sectional dependence. We conclude that the euro-US dollar is still an important factor, but not the only key factor, in determining the asymmetry in HICP inflation between core and periphery. The nominal effective exchange rate instead is an important driver for the inflation, but only considering the euro zone as a whole. The EMU seems to not have insulated enough some member countries from nominal external shocks. The nominal effective exchange rate is also a factor to take into account in order to analyze the recent low inflation in the euro zone, even if the size of the ERPT is relatively small.
    Keywords: Exchange Rate Pass-Through, Dynamic Panel Data, Inflation, Exchange Rates, European Monetary Union, Cross-sectional dependence
    JEL: C33 E31 F31 F36 F41
    Date: 2015–03–13
  10. By: Juan Carlos Conesa; Timothy J. Kehoe
    Abstract: We develop a model for analyzing the sovereign debt crises of 2010–2013 in the Eurozone. The government sets its expenditure-debt policy optimally. The need to sell large quantities of bonds every period leaves the government vulnerable to self-fulfilling crises in which investors, anticipating a crisis, are unwilling to buy the bonds, thereby provoking the crisis. In this situation, the optimal policy of the government is to reduce its debt to a level where crises are not possible. If, however, the economy is in a recession where there is a positive probability of recovery in fiscal revenues, the government may optimally choose to “gamble for redemption,” running deficits and increasing its debt, thereby increasing its vulnerability to crises.
    JEL: F34 G01
    Date: 2015–03
  11. By: Grégory Claeys; Alvaro Leandro; Allison Mandra
    Abstract: â?¢ The European quantitative easing programme, the Public Sector Purchase Programme (PSPP), started on 9 March 2015 and will last at least until September 2016. Purchases will be composed of sovereign bonds and securities from European institutions and national agencies. â?¢ The European Central Bank Governing Council imposed limits to ensure that the Eurosystem will not breach the prohibition on monetary financing. However, these limits will constrain the size and duration of the programme, especially if it is sustained after September 2016. The possibility for national central banks to also buy national agency securities could alleviate this, but the small number of eligible agencies could limit their role as a back-up purchase. â?¢ The Eurosystem should find other eligible agencies, especially in countries in which public debt is small, or waive the limits for countries respecting the investment grade eligibility criteria. The same issue arises with European institutions: their number and outstanding debt securities are limited. The waiver of the limits proposed for sovereigns should be applied to institutions with high ratings. â?¢ The PSPP profits that will ultimately be repatriated to national treasuries will be small. This was to be expected, given current very low yields. Profits will also come from the major increase in reserves resulting from the implementation of QE, combined with the negative deposit rates on excess reserves at the ECB.
    Date: 2015–03
  12. By: João Ferreira do Amaral; João Carlos Lopes
    Abstract: This article presents an evaluation of the economic adjustment program negotiated between the Portuguese government and the Troika (European Commission, ECB and IMF) in May 2011, with an assessment different from the usual exercises. Instead of an ex-post comparison between the actual results and the proposed targets, an ex-ante assessment of the forecast errors is made. It is shown that these errors could be avoided if the productive (input-output) structure of the economy and the unemployment/external deficit trade-off were taken into account. The main conclusion of this assessment, a large under-estimation of the unemployment rate of about 4 percentage points, illustrates the technical incompetence of this adjustment program and the huge economic and social costs it unnecessarily caused. The methodology used can easily be replicated in assessing other similar programs, such those applied in Greece, Ireland and Cyprus.
    Keywords: Unemployment, External deficit; Input-output analysis; Economic adjustment program; Troika; Portugal
    JEL: E61 C67 D57
    Date: 2015–03
  13. By: Hospido, Laura (Bank of Spain); Moreno-Galbis, Eva (Université d'Angers)
    Abstract: While Spain had traditionally under-performed its European counterparts in terms of labor productivity, the trend is reversed after 2007. The evolution of aggregate productivity in Spain during the Great Recession largely responds to the adverse conditions in the labor market, but not only. Using a longitudinal sample of Spanish manufacturing and services companies between 1995 and 2012, we show that the recent increase in Spanish aggregate productivity also responds to the evolution of the total factor productivity (TFP) and to composition effects. By combining the information at the firm level on balance sheet items, collective agreements and imports-exports, we are able to establish that commitment to a collective agreement at the firm level and access to external markets are positively related to TFP performance during the whole period. In addition, we estimate that firm TFP was negatively correlated with the share of temporary workers during the expansion period, 1995-2007, whereas the sign of that correlation reversed completely during the crisis, 2008-2012. Finally, we relate this sign reversal with the changing composition of temporary workers in the labor market.
    Keywords: labor productivity, TFP, temporary workers, collective agreements, exporting firms
    JEL: J24 J21 J52
    Date: 2015–02
  14. By: Nicolas Carnot; Franciso de Castro
    Abstract: This paper presents an indicator of the fiscal stance that combines features of the bottom-up, narrative approach on the revenue side with a refined version of the top-down, traditional approach of the structural balance on the expenditure side. With these characteristics the indicator offers an image of fiscal policy that avoids both the 'endogeneity problems' of the structural balance and the 'indeterminacy' of the narrative approach. This indicator is used to shed light on EU fiscal policies and estimate the average short-term output effects of fiscal policy. Results suggest that, with exceptions, fiscal policy has been conducted in a more stop and go and pro-cyclical fashion over the past decade than suggested by traditional indicators. The average fiscal multiplier is estimated at a bit below unity on average, with higher (resp. lower) multipliers associated with expenditure (resp. revenue) shocks, and higher (resp. lower) multipliers in times of declining (resp. increasing) output gaps.
    JEL: E62 H60
    Date: 2015–02
  15. By: Armin Steinbach (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: This study identifies commonalities between two historical incidents of debt assumption – in the United States in 1791 and in present-day Europe. By comparing the interests and behaviour of key players in these two incidents, we find three major parallels: First, in their strategic interactions, parties both for and against debt mutualisation raise arguments based on notions of fairness and morality. Second, in both historical episodes we find harsh rhetoric levelled against private creditors, who are derided as greedy speculators. Third, bargaining is an essential element of the debt assumption process. Bargaining is directed towards limiting or expanding the scope of debt assumption. Further, bargaining typically leads to some form of conditionality imposed in order to increase the chances of the debts being repaid or to ensure benefits accrue to the parties assuming the debt.
    JEL: H63 F55 N11 E62
    Date: 2015–01
  16. By: Mario Mariniello; André Sapir; Alessio Terzi
    Abstract: â?¢ The single market is often perceived as the panacea for Europeâ??s economic troubles. It is believed that completing the single market would boost welfare, stimulate growth and increase European competitiveness. â?¢ However, identifying and quantifying the channels through which market integration is expected to engender growth is methodologically complex. Although the overwhelming prediction from the literature is for single market integration to generate positive and significant aggregate effects, we conclude that the impact so far has fallen short of initial expectations, because: (1) Barriers continue to prevail in the EU, preventing the exploitation of the potential benefits of full market integration (2) â??Complementary policiesâ?? to support the single market were not, or were insufficiently, put in place (3) The single market project has not sufficiently been framed as a key part of the process of creative destruction that Europe needs to embrace to successfully modernise its economy. â?¢ That single market integration generates positive and significant aggregate effects does not imply that its effects are positive and significant for every sector. There is therefore an important role for European Union and national distributional policies to ensure that losers are sufficiently compensated by the winners, and to overcome political resistance to completing the single market.
    Date: 2015–03
  17. By: Olteanu, Dan
    Abstract: This paper aims to investigate the presence of a creditless economic recovery in Eastern Europe, after de 2008-2009 output collapse. To this end, we use three variables: credit stock, credit flow and money supply M1. We find that the changes in the credit flow, as percentage of GDP, are the most distinctly correlated with the GDP rate. During the growth recovery, the credit flow tends to rise in six of the surveyed countries, although the credit stock declines in some cases. On the other side, the liquid segment of money supply (M1) registered in some countries strong rebounds that boosted demand recovery, due not so much to credit but to the liquidity preference. Within domestic demand, we notice a steeper decline of the fixed capital formation than the consumption one, but also a stronger subsequent upturn. The investment recovery seems to be supported in most of countries by the credit flow growth; there is a stronger dependence of capital formation on the newly created credit than in the case of consumption, which is rather correlated with the whole money supply M1. In conclusion, we can say that there was a “creditless recovery” phenomenon in Eastern Europe after the global crisis, but most countries recorded an increase of credit flow along with the GDP. The new flow of money is mostly used for investment and consumption, and thus supports the revival of domestic demand, especially in countries with a less developed financial system, such as the emerging european ones. On the other hand, the trend in the liquid part of the money supply may evolve, especially in times of financial instability, regardless of credit developments. This, along with other factors, strongly affects the degree to which GDP rely on credit.
    Keywords: Credit, Economic Recovery, Phoenix Miracle
    JEL: E44 E51 G01
    Date: 2014–12
  18. By: Hippolyte d’Albis; Ekrame Boubtane; Dramane Coulibaly
    Abstract: This paper quantitatively assesses the interaction between permanent immigration into France and France's macroeconomic performance as seen through its GDP per capita and its unemployment rate. It takes advantage of a new database where immigration is measured by the ow of newly-issued long-term residence permits, categorized by both the nationality of the immigrant and the reason of permit issuance. Using a VAR model estimation of monthly data over the period 1994-2008, we find that immigration ow significantly responds to France's macroeconomic performance: positively to the country's GDP per capita and negatively to its unemployment rate. At the same time, we find that immigration itself increases France's GDP per capita, particularly in the case of family immigration. This family immigration also reduces the country's unemployment rate, especially when the families come from developing countries.
    Keywords: Immigration, Female and Family Migration, Growth, Unemployment, VAR Models.
    JEL: E20 F22 J61
    Date: 2015

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