nep-eec New Economics Papers
on European Economics
Issue of 2015‒04‒25
fourteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Currency Risk and Business Cycle Risk in the Geography of Debt Flows to Peripheral Europe By Eylem Ersal Kiziler; Ha Nguyen
  2. Eurozone Imbalances: Measuring the Contribution of Expenditure Switching and Expenditure Volumes 1990-2013 By Enno Schröder
  3. A Global Trade Model for the Euro Area By Modugno, Michele; D'Agostino, Antonello; Osbat, Chiara
  4. A Dynamic Yield Curve Model with Stochastic Volatility and Non-Gaussian Interactions: An Empirical Study of Non-standard Monetary Policy in the Euro Area By Geert Mesters; Bernd Schwaab; Siem Jan Koopman
  5. Long-run determinants and misalignments of the real effective exchange rate in the EU By Mariarosaria Comunale
  6. Nowcasting and Forecasting Economic Growth in the Euro Area using Principal Components By Irma Hindrayanto; Siem Jan Koopman; Jasper de Winter
  7. Positive long-run inflation non-super-neutrality in the Euro area By Andrea Vaona
  8. Capital Flows and Financial Intermediation: is EMU different? By Samarina, Anna; Bezemer, Dirk
  9. The Pass-Through of Sovereign Risk By Bocola, Luigi
  10. Global Credit Risk: World, Country and Industry Factors By Bernd Schwaab; Siem Jan Koopman; André Lucas
  11. The Euro Monetary Fund. A proposal for sovereign-debt redemption By Luís Manuel Seixas
  12. A new framework for detecting the short term fiscal vulnerability for the European Union countries By Stoian, Andreea; Obreja Brasoveanu, Laura; Dumitrescu, Bogdan; Brasoveanu, Iulian
  13. The Study of Public Debt. Which Are the Distinctions between the Emerging and Advanced Economies in the European Union? By Stoian, Andreea; Iorgulescu, Filip
  14. The Growth Effects of R&D Spending in the EU: A Meta-Analysis By Kokko, Ari; Gustavsson Tingvall, Patrik; Videnord, Josefin

  1. By: Eylem Ersal Kiziler (Department of Economics, University of Wisconsin - Whitewater); Ha Nguyen (Development Research Group, World Bank)
    Abstract: Since the start of the Eurozone, the pattern of debt ows to Peripheral Europe seems puzzling: they were mostly indirect and intermediated by the large countries of the euro area. This paper examines the euro currency risk and the business cycle risk as two opposing forces: while the currency risk favors Core Europe in lending to Peripheral Europe, business cycle risk favors outsider lenders. We explain the mechanisms and show that both forces are strong. In a 3-country DSGE model with endogenous portfolio choices, without the business cycle risk, currency risk completely pushes outside lenders out of the Peripheral bond market. With both types of risk, Core Europe and outside lenders hold 40 and 60 percents of Peripheral bonds respectively. The results suggest that other factors such as asymmetric information or bailout discrimination are also at play.
    Keywords: Debt Flows, Business Cycle Risk
    JEL: F4
    Date: 2014–08
  2. By: Enno Schröder (Institute for New Economic Thinking, 300 Park Avenue South, New York, NY 10010; Department of Economics, New School for Social Research)
    Abstract: This paper introduces a decomposition of the trade ratio. The dynamics of the trade ratio are composed of contributions from expenditure switching, from the terms of trade, and from relative expenditure (i.e. the ratio of foreign to domestic expenditure). Country-specific, dynamically tradeweighted indicators of foreign expenditure are constructed for use in the application of the decomposition to 11 euro area countries in 1990-2013. Over 1999-2007, Germany and Spain shared the same pattern of expenditure switching; the slack in German expenditure translated into trade surpluses and the boom in Spain into deficits; expenditure was being switched away from domestic output towards foreign output in every country except Austria, Greece, and Ireland; and the magnitude of this unfavorable switching was largest in Finland, France, and Italy.
    Keywords: External adjustment, expenditure switching, competitiveness, decomposition, Euro area
    JEL: F14 F32 F41 F43
    Date: 2015–04
  3. By: Modugno, Michele (Board of Governors of the Federal Reserve System (U.S.)); D'Agostino, Antonello (European Stability Mechanism); Osbat, Chiara (European Central Bank)
    Abstract: We propose a model for analyzing euro area trade based on the interaction between macroeconomic and trade variables. First, we show that macroeconomic variables are necessary to generate accurate short-term trade forecasts; this result can be explained by the high correlation between trade and macroeconomic variables, with the latter being released in a more timely manner. Second, the model tracks well the dynamics of trade variables conditional on the path of macroeconomic variables during the great recession; this result makes our model a reliable tool for scenario analysis. Third, we quantify the contribution of the most important euro area trading partners (regions) to the aggregate extra euro area developments: we evaluate the impact of an increase of the external demand from a specific region on the extra euro area trade.
    JEL: C38 F17 F47
    Date: 2015–02–27
  4. By: Geert Mesters (VU University Amsterdam, the Netherlands); Bernd Schwaab (European Central Bank); Siem Jan Koopman (VU University Amsterdam, the Netherlands)
    Abstract: We develop an econometric methodology for the study of the yield curve and its interactions with measures of non-standard monetary policy during possibly turbulent times. The yield curve is modeled by the dynamic Nelson-Siegel model while the monetary policy measurements are modeled as non-Gaussian variables that interact with latent dynamic factors, including the yield factors of level and slope. Yield developments during the financial and sovereign debt crises require the yield curve model to be extended with stochastic volatility and heavy tailed disturbances. We develop a flexible estimation method for the model parameters with a novel implementation of the importance sampling technique. We empirically investigate how the yields in Germany, France, Italy and Spain have been affected by monetary policy measures of the European Central Bank. We model the euro area interbank lending rate EONIA by a log-normal distribution and the bond market purchases within the ECB's Securities Markets Programme by a Poisson distribution. We find evidence that the bond market interventions had a direct and temporary effect on the yield curve lasting up to ten weeks, and find limited evidence that purchases changed the relationship between the EONIA rate and the term structure factors.
    Keywords: dynamic Nelson-Siegel models, Central bank asset purchases, non-Gaussian, state space methods, importance sampling, European Central Bank
    JEL: C32 C33 E52 E58
    Date: 2014–06–17
  5. By: Mariarosaria Comunale (Bank of Lithuania)
    Abstract: Exchange rate assessment is becoming increasingly relevant for economic surveillance in the European Union (EU). The persistence of different wage, price and productivity dynamics among the Economic and Monetary Union (EMU) countries or EU members with a fixed exchange regime with the euro, coupled with the impossibility of correcting competitiveness differentials via the adjustment of nominal rates, have resulted in divergent dynamics in Real Effective Exchange Rates. This paper explores the role of economic fundamentals, included in the transfer effect theory, in explaining medium/long-run movements in the Real Effective Exchange Rates in the EU over the period 1994–2012 by using heterogeneous, co-integrated panel frameworks in static and dynamic terms. In addition, the paper provides an analysis of the misalignments of the rate for each member state based on the “equilibrium” measure calculated from the permanent component of the fundamentals (the so-called Behavioural Effective Exchange Rate). We find that the coefficients of the determinants are extremely different across groups in magnitude and sometimes in sign as well and the transfer theory does not hold for periphery and the Central and Eastern European countries (CEECs). The relative importance of the transfer variable and the Balassa-Samuelson measure are crucial for the asymmetries. The resulting misalignments in EU28 are huge and the patterns diverge significantly across groups. The core countries have been undervalued for almost the whole period, which entails from an important increase in competitiveness for those countries. Instead the periphery has experienced high rates, especially in Portugal. In addition, the behaviour of CEECs is also driven, as expected, by the catching-up process and the criteria to the accession to the EU. The misalignments in this case are still extremely wide and reflect these phenomena.
    Keywords: real effective exchange rate, European Union, behavioural effective exchange rate, transfer problem, panel co-integration, exchange rate misalignments
    JEL: F31 C23
    Date: 2015–04–17
  6. By: Irma Hindrayanto (De Nederlandsche Bank); Siem Jan Koopman (VU University Amsterdam, the Netherlands); Jasper de Winter (De Nederlandsche Bank, the Netherlands)
    Abstract: Many empirical studies have shown that factor models produce relatively accurate forecasts compared to alternative short-term forecasting models. These empirical findings have been established for different macroeconomic data sets and different forecast horizons. However, various specifications of the factor model exist and it is a topic of debate which specification is most effective in its forecasting performance. Furthermore, the forecast performances of the different specifications during the recent financial crisis are also not well documented. In this study we investigate these two issues in depth. We empirically verify the forecast performance of three factor model approaches and report our findings in an extended empirical out-of-sample forecasting competition for quarterly growth of gross domestic product in the euro area and its five largest countries over the period 1992-2012. We also introduce two extensions of existing factor models to make them more suitable for real-time forecasting. We show that the factor models have been able to systematically beat the benchmark autoregressive model, both before as well as during the financial crisis. The recently proposed collapsed dynamic factor model shows the highest forecast accuracy for the euro area and the majority of countries that we have analyzed. The forecast precision improvements against the benchmark model can range up to 77% in mean square error reduction, depending on the country and forecast horizon.
    Keywords: Factor models, Principal component analysis, Forecasting, Kalman filter, State space method, Publication lag, Mixed frequency
    JEL: C32 C53 E17
    Date: 2014–08–22
  7. By: Andrea Vaona (Department of Economics (University of Verona))
    Abstract: By means of structural VARs we investigate the long-run nexus between inflation and output in the Eurozone under different identification schemes and model specifications. The Eurozone is an interesting case study due to its very low inflation rate and to the official adherence of its monetary authority to the classical dichotomy. We find a strong positive long-run connection between inflation and output, supporting recent theoretical models arguing that this might exist at low long-run inflation rates.
    Keywords: long-run, non-vertical Phillips curve, empirical evidence
    JEL: E31 E40 E50 J64
    Date: 2015–04
  8. By: Samarina, Anna; Bezemer, Dirk (Groningen University)
    Abstract: The share of domestic bank credit allocated to non-financial business declined significantly in EMU economies since 1990. This paper examines the impact of capital inflows on domestic credit allocation, taking account of (future) EMU membership. The study utilizes a novel data set on domestic credit allocation for 38 countriesover 1990?2011 and data on capital inflows into the bank and non-bank sectors. We estimate panel models controlling for initial financial development, income level, inflation, interest rate, credit market deregulation and current account positions. The results suggest that the decline in the share of credit to non-financial business was significantly larger in (future) EMU economies which experienced more capital inflows into their non-bank sectors. We discuss implications.
    Date: 2014
  9. By: Bocola, Luigi (Federal Reserve Bank of Minneapolis)
    Abstract: This paper examines the macroeconomic implications of sovereign credit risk in a business cycle model where banks are exposed to domestic government debt. The news of a future sovereign default hampers financial intermediation. First, it tightens the funding constraints of banks, reducing their available resources to finance firms (liquidity channel). Second, it generates a precautionary motive for banks to deleverage (risk channel). I estimate the model using Italian data, finding that i) sovereign credit risk was recessionary and that ii) the risk channel was sizable. 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 strong precautionary motives at the time of policy enactment implies that bank lending to firms is not very sensitive to these credit market interventions.
    Keywords: Sovereign debt crises; Financial constraints; Risk; Credit policies
    JEL: E32 E44 G01 G21
    Date: 2015–04–16
  10. By: Bernd Schwaab (European Central Bank, Financial Research, Germany); Siem Jan Koopman (VU University Amsterdam, the Netherlands); André Lucas (VU University Amsterdam, the Netherlands)
    Abstract: This paper investigates the dynamic properties of systematic default risk conditions for firms from different countries, industries, and rating groups. We use a high-dimensional nonlinear non-Gaussian state space model to estimate common components in corporate defaults in a 41 country sample between 1980Q1-2014Q4,covering both the global financial crisis and euro area sovereign debt crises. We find that macro and default-specific world factors are a primary source of default clustering across countries. Defaults cluster more than what is implied by shared exposures to macro factors, indicating that other factors are of high importance as well. For all firms, deviations of systematic default risk from macro fundamentals are correlated with net tightening bank lending standards, implying that bank credit supply and systematic default risk are inversely related.
    Keywords: systematic default risk, credit portfolio models, frailty-correlated defaults, international default risk cycles, state space methods
    JEL: G21 C33
    Date: 2015–02–26
  11. By: Luís Manuel Seixas
    Abstract: Debt restructuration is lately a recurring theme in the affairs of the Euro. The economic and financial crisis set for unconventional and extraordinary policies, so that the actions of major Central Banks are to become more decisive in the economic dynamics. This article focuses on a proposal for debt redemption and restructuration with central-bank money emissions. It does so by elaborating in the sense of economic treasury, and consequently of European Treasury. The modern Central Banks (CBs) practices, the present-day money circulation characteristics and the agent’s financial heuristics are therefore assessed. A quantitative plan for debt redemption and restructuration with a nexus on the finance of productive investment is also presented.
    Keywords: debt-restructuration, money circulation, treasury, central-banks.
    Date: 2015–04
  12. By: Stoian, Andreea; Obreja Brasoveanu, Laura; Dumitrescu, Bogdan; Brasoveanu, Iulian
    Abstract: The aim of this study is to develop a new framework (V-L-D) for detecting the short term vulnerabilities in fiscal policy for the European Union countries. The methodology relies ontwo distinct indicators: one showing the vulnerabilities signalled by the size of the cyclically adjusted budget and public debtand one indicatingthe vulnerabilities through their annual changes.V-L-D is able to categorize fiscal vulnerability into five distinct classes having scores from 0 (no fiscal vulnerability) to 4 (extreme fiscal vulnerability). From 1990-2013, we found310 episodes of fiscal vulnerability for the 28 European Union countries out of which 128 episodes of low vulnerability, 94 of moderate, 62 of strong and 26 of extreme fiscal vulnerability. We also explored the correlation between financial market sentiment and fiscal vulnerability. We used V-L-D as a predictor and Credit Default Swaps (CDS)as dependent and proxy for the market sentiment in a balanced panel model consisting in 17 European countries with random effects over the period 2008-2013. The results indicatethat CDS are higher and significant for strong and extreme vulnerability periodscompared with times having zero vulnerability. The CDS for low and moderate fiscal vulnerabilityare also higher but they are not significant, suggesting that investorsoverprice the risk randomly during low and moderate vulnerability.Employing a logit model for a panel consisting of 12 European countries over 2008-2013, we also found that governments are less likely to adjust fiscal policy when it is strong or extremely vulnerable and that the probability of fiscal consolidation increaseswhen market sentiment is negative and CDS are higher.
    Keywords: fiscal policy, budgetary deficit, fiscal sustainability, primary balance, debt dynamics, European Union
    JEL: E62 H12 H6
    Date: 2015–01
  13. By: Stoian, Andreea; Iorgulescu, Filip
    Abstract: The aim of our paper is to provide a comprehensive study of public debt in various aspects across the European Union,emphasizing the existing distinctions between the emerging and advanced economies in Europe. Using annual data ranging from 1995 to 2013 we develop investigation manifold. Firstly, we study the descriptive statistics of key variables affecting public debt dynamics. We found that the ex-communistcountries recorded lower public debt ratios, negative flow costs and primary deficits. By comparison, the advanced economies managed to run primary surpluses in order to balance larger public debt-to-GDP ratios and the positive flow cost. Secondly, using the accounting approach we analyzed the dynamics of public debt. The results indicated unstable dynamics for the cases of CzechRepublic, Latvia, Lithuania, Poland, Slovakia, Slovenia, Cyprus, France, Germany, Greece, Ireland, Italy, Malta, Portugal, Spain and the United Kingdom. Then, employing a logit model with fixed effects, we also showed that running primary deficits is more likely to increase the probability of having unstable dynamics of public debt. Thirdly, we examined the distribution of the flow cost and revealed that there is an increased probability of extreme values which, in the case of large debt ratios, might lead to high debt burdens for the European countries. We also found that the uncertainty of the future debt burden is driven by the variability of the real GDP growth rate.
    Keywords: public debt, flow cost, primary balance, sustainability, European Union
    JEL: E62 H62 H63
    Date: 2015–02
  14. By: Kokko, Ari (Copenhagen Business School); Gustavsson Tingvall, Patrik (The Ratio institute and Söderturn university); Videnord, Josefin (The Ratio institute and Uppsala university)
    Abstract: In this paper we conduct a meta-analysis to examine the link between R&D spending and economic growth in the EU and other regions. The results suggest that the growth-enhancing effect of R&D in the EU15 countries does not differ from that in other countries in general, but it is less significant than that for other industrialized countries. A closer inspection of the data reveals that the weak results for the EU15 stem from comparisons with the US – the US has been able to generate a stronger growth response from its R&D spending. Possible explanations for the US advantage include higher private sector investment in R&D and stronger public-private sector linkages than in the EU. Hence, to reduce the “innovation gap” vis-à-vis the US, it may not be enough for the EU to raise the share of R&D expenditures in GDP: continuous improvements in the European innovation system will also be needed, with focus on areas like private sector R&D and public-private sector linkages.
    Keywords: meta-analysis; R&D; European Union; EU15; USA; Economic Growth
    JEL: F43 O51 O52
    Date: 2015–04–14

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