nep-eec New Economics Papers
on European Economics
Issue of 2015‒05‒30
twelve papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. German and the rest of euro area fiscal policy during the crisis By Gadatsch, Niklas; Hauzenberger, Klemens; Stähler, Nikolai
  2. The interest rate pass-through in the euro area during the sovereign debt crisis By Julia von Borstel; Sandra Eickmeier; Leo Krippner
  3. Income insurance: a theoretical exercise with empirical application for the euro area By Nicolas Carnot; Phil Evans; Serena Fatica; Gilles Mourre
  4. Banking Stress Scenarios for Public Debt Projections By Peter Benczur; Katia Berti; Jessica Cariboni; Francesca Erica Di Girolamo; Sven Langedijk; Andrea Pagano; Marco Petracco Giudici
  5. Legal Risk Premia During the Euro-Crisis: The Role of Credit and Redenomination Risk By Nordvig, Jens
  6. “Twin deficits” in Greece: in search of causality By Michalis Nikiforos; Laura Carvalho, Christian Schoder
  7. Estimation of service sector mark-ups determined by structural reform indicators By Anna Thum-Thysen; Erik Canton
  8. Asymmetric shocks in a currency union: The role of central bank collateral policy. By F. Koulischer
  9. Financial frictions in a DSGE model for Latvia By Ginters, Buss
  10. The Information Content of Monetary Statistics for the Great Recession: Evidence from Germany By Wenjuan Chen; Dieter Nautz; ;
  11. Sovereign Default: The Role of Expectations By Nicolini, Juan Pablo; Teles, Pedro; Ayres, Joao Luiz; Navarro, Gaston
  12. Growth, debt and sovereignty prolegomena to the Greek crisis By Stavros B. Thomadakis

  1. By: Gadatsch, Niklas; Hauzenberger, Klemens; Stähler, Nikolai
    Abstract: We present the estimated large-scale three-region DSGE model GEAR picturing Germany, the Euro Area and the Rest of the world. Compared to existing models of this type, GEAR incorporates a comprehensive fiscal block, involuntary unemployment and a complex international structure. We use the model to evaluate spillovers of fiscal policy, to calculate various present-value multipliers for distinct fiscal instruments, and to assess how discretionary fiscal policy in Germany and the Euro Area affected GDP growth during the global financial crisis. Our analysis suggests that spillovers of fiscal policy shocks in the Euro Area are small. Overall, spending multipliers are higher than revenue-based multipliers and are in line with those found in the literature. We find that, during the crisis, fiscal stimulus packages increased annualized quarter-on-quarter GDP growth substantially, both in Germany and in the rest of the Euro Area. The main drivers of GDP growth in Europe, however, were rest of the world and uncovered interest rate parity shocks, followed by domestic non-fiscal shocks.
    Keywords: Fiscal Policy,Unemployment,DSGE modeling,Bayesian estimation
    JEL: H2 J6 E32 E62
    Date: 2015
  2. By: Julia von Borstel; Sandra Eickmeier; Leo Krippner
    Abstract: We investigate the pass-through of monetary policy to bank lending rates in the euro area during the sovereign debt crisis, in comparison to the pre-crisis period. We make the following contributions. First, we use a factor-augmented vector autoregression, which allows us to assess the responses of a large number of country-specific interest rates and spreads. Second, we analyze the effects of monetary policy on the components of the interest rate pass-through, which reflect banks’ funding risk (including sovereign risk) and markups charged by banks over funding costs. Third, we not only consider conventional but also unconventional monetary policy. We find that while the transmission of conventional monetary policy to bank lending rates has not changed with the crisis, the composition of the IP has changed. Specifically, expansionary conventional monetary policy lowered sovereign risk in peripheral countries and longer term bank funding risk in peripheral and core countries during the crisis, but has been unable to lower banks’ markups. This was not, or not as much, the case prior to the crisis. Unconventional monetary policy helped decreasing lending rates, mainly due to large shocks rather than a strong propagation.
    Keywords: Interest rate pass-through, factor model, sovereign debt crisis, unconventional monetary policy
    JEL: E5 E43 E44 C3
    Date: 2015–05
  3. By: Nicolas Carnot; Phil Evans; Serena Fatica; Gilles Mourre
    Abstract: The recent crisis has shown how economic shocks can lead to considerable and persistent cyclical divergences in the euro area. Successful monetary unions have generally been backed by fiscal arrangements providing income insurance against shocks. This paper reviews the potential issues, the underlying trade-offs and the necessary theoretical conditions to make an income insurance scheme workable, and provides an empirical application for the euro area. It also discusses ‘good’ design features, arguing that such schemes should focus on large shocks and exert a moderating effect during boom times, as well as provide cushioning against adverse shocks.
    JEL: E61 E62 F36 F42 H77
    Date: 2015–03
  4. By: Peter Benczur; Katia Berti; Jessica Cariboni; Francesca Erica Di Girolamo; Sven Langedijk; Andrea Pagano; Marco Petracco Giudici
    Abstract: The euro area sovereign debt crisis brought to light the potential risks to public finances posed by the banking sector. This paper simulates the potential impact of bank defaults on public finances based on stress test scenarios using an advance analytical methodology.
    JEL: C15 E62 G01 G21 H63 H68
    Date: 2015–04
  5. By: Nordvig, Jens (Nomura Securities International, Inc.)
    Abstract: Using several new datasets, I document the role of legal risk premia in bond yields during the Euro-crisis. I find evidence of a rising premium especially in late 2011 and mid-2012 on bonds with foreign governing law relative to those with local governing law (and otherwise similar characteristics). The results illustrate that legal risk premia spiked at the height of the crisis in the Eurozone, when investors were willing to pay a premium for the additional protection offered by foreign law bonds. I show that this governing law premium can be linked to both credit risk (expected haircuts) and redenomination risk (expected currency depreciation). This paper is the first to empirically link the governing law premium to redenomination risk. I find evidence that redenomination risk is an independent driving force of governing law spreads over and above credit risk, although it is analytically challenging to separate the two risk factors. My findings, while not conclusive, are consistent with the consensus in the literature on contract law, which argues that local law financial instruments should be more susceptible to redenomination in a scenario of a country exiting the Eurozone.
    Keywords: General financial markets; International finance; Foreign exchange; Contract law; Financial econometrics; Financial crisis
    JEL: C58 F30 F31 G01 G10 K20
    Date: 2015–05–21
  6. By: Michalis Nikiforos; Laura Carvalho, Christian Schoder
    Abstract: The paper discusses the trajectories of the Greek public deficit and sovereign debt between 1980 and 2010 and its connection to the political and economic environment of the same period. We pay special attention to the causality between the public and the external deficit in the period after 1995, the post-Maastricht treaty period. We argue that, due to the European monetary unification process and the adoption of the common currency, causality ran from the external deficit to the public deficit. This hypothesis is tested econometrically using both Granger Causality and Cointegration analyses. We find empirical support for this hypothesis
    Keywords: Greece; crisis; public debt; twin deficits; imbalances
    JEL: E62 F21 F34 F41
    Date: 2015–05–20
  7. By: Anna Thum-Thysen; Erik Canton
    Abstract: This paper analyses the impact of regulation on product sector mark-ups across the EU and confirms that less strict regulation tends to foster competition and reduce mark-up rates. The results also show that mark-ups in most EU countries and sectors have been declining over the last 15 years as a result of competition-friendly reforms. The paper also casts light on which areas of regulation are most important for mark-ups in individual sectors.
    JEL: D40 E31 L51
    Date: 2015–04
  8. By: F. Koulischer
    Abstract: Currency unions limit the ability of the central bank to use interest rate policy to accommodate asymmetric shocks. I show that collateral policy can serve to dampen asymmetric shocks in a currency area when these shocks also affect the collateral held by banks and when collateral portfolios of banks differ systematically across countries. In my model banks from 2 countries use collateral to borrow from the money market or a central bank that targets a level of interest rate (or investment) in each economy. The distressed bank may enter a “collateral crunch” regime where it is constrained in its access to funding due to a moral hazard problem. The central bank faces an heterogeneous transmission of its interest rate: a unit change in rate has a smaller effect on the economy rate of the distressed country. The central bank therefore sets a high interest rate which is well transmitted in the booming economy and relaxes the haircut on the collateral owned by the distressed bank.
    Keywords: Central banking, currency union, collateral policy, repo, monetary policy.
    JEL: E58 G01 G20
    Date: 2015
  9. By: Ginters, Buss
    Abstract: This paper builds a dynamic stochastic general equilibrium (DSGE) model for Latvia that would be suitable for policy analysis and forecasting purposes at Bank of Latvia. For that purpose, I adapt the DSGE model with financial frictions of Christiano, Trabandt and Walentin (2011) to Latvia’s data, estimate it, and study whether adding the financial frictions block to an otherwise identical (‘baseline’) model is an improvement with respect to several dimensions. The main findings are: i) the addition of financial frictions block provides more appealing interpretation for the drivers of economic activity, and allows to reinterpret their role; ii) financial frictions played an important part in Latvia’s 2008-recession; iii) the financial frictions model beats both the baseline model and the random walk model in forecasting both CPI inflation and GDP, and performs roughly the same as a Bayesian structural vector autoregression.
    Keywords: DSGE model, financial frictions, small open economy, Bayesian estimation, Currency union
    JEL: E0 E3 F0 F4 G0 G1
    Date: 2015–05
  10. By: Wenjuan Chen; Dieter Nautz; ;
    Abstract: This paper introduces a Divisia monetary aggregate for Germany and explores its information content for the Great Recession. Divisia money and the corresponding simple sum aggregate are highly correlated in normal times but begin to diverge before the crisis. Out of sample forecast analysis and a conditional forecast exercise show that the predictive content of this divergence for the Great Recession is not only statistically significant, but also economically important.
    Keywords: Monetary aggregates, Divisia index, recession indicator, Great Recession
    JEL: E27 E32 E51 C43
    Date: 2015–05
  11. By: Nicolini, Juan Pablo (Federal Reserve Bank of Minneapolis); Teles, Pedro (Universidade Catolica Portuguesa); Ayres, Joao Luiz (Federal Reserve Bank of Minneapolis); Navarro, Gaston (New York University)
    Abstract: We study a variation of the standard model of sovereign default, as in Aguiar and Gopinath (2006) or Arellano (2008), and show that this variation is consistent with multiple interest rate equilibria. Some of those equilibria correspond to the ones identified by Calvo (1988), where default is likely because rates are high, and rates are high because default is likely. The model is used to simulate equilibrium movements in sovereign bond spreads that resemble sovereign debt crises. It is also used to discuss lending policies similar to the ones announced by the European Central Bank in 2012.
    Keywords: Sovereign default; Interest rate spreads; Multiple equilibria
    JEL: E44 F34
    Date: 2015–05–14
  12. By: Stavros B. Thomadakis
    Abstract: The paper reflects a basic premise: Greek participation in the Euro-zone marked a definitive institutional break in the process of contracting and managing public debt. Instead of internal debt, used extensively in earlier decades, euro-denominated sovereign issues were now placed in the international market. Thus, the Greek state became a net ‘exporter’ of financial claims to an extent unprecedented in its recent history. In assessing the prolegomena to crisis, I offer a review of the post-junta, pre-euro period, the forces leading to accumulation of (mostly internal) debt and the predominance of a ‘money illusion’ in distributional politics; I also engage an argument that the institutional shift that occurred with Euro-zone entry brought about a fundamental change to the very ‘sovereignty’ of Greek public debt. It expunged ‘money illusion’ but created the ground for policies that embodied ‘financial’ and ‘fiscal’ illusions. The entrapment of elites and electorates in various ‘illusions’ reflected a persistent tendency to underestimate the limits imposed by globalization on Greek economic policies. In the euro era, Greek policy became trapped in a self-feeding loop of debt-driven growth that effectively undermined the country’s sovereignty.
    JEL: F3 G3 E6
    Date: 2015–03

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