nep-eec New Economics Papers
on European Economics
Issue of 2015‒06‒13
seventeen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. The demand for euro banknotes in Germany: Structural modelling and forecasting By Bartzsch, Nikolaus; Seitz, Franz; Setzer, Ralph
  2. Banking union as a shock absorber By Belke, Ansgar; Gros, Daniel
  3. Every cloud has a silver lining. The sovereign crisis and Italian potential output By Andrea Gerali; Alberto Locarno; Alessandro Notarpietro; Massimiliano Pisani
  4. Measuring sovereign contagion in Europe By Caporin, Massimiliano; Pelizzon, Loriana; Ravazzolo, Francesco; Rigobon, Roberto
  5. Time-scale analysis of sovereign bonds market co-movement in the EU By Filip Smolik; Lukas Vacha
  7. Business cycle synchronization of the Visegrad Four and the European Union By Lubos Hanus; Lukas Vacha
  8. Budgetary rigour with stimulus in lean times: Policy advices from an agent-based model By Andrea Teglio; Andrea Mazzocchetti; Linda Ponta; Marco Raberto; Silvano Cincotti
  9. The euro rescue fund @5: Taking stock By Matthes, Jürgen
  10. Estimates of Fundamental Equilibrium Exchange Rates, May 2015 By William R. Cline
  11. Smets-Wouters '03 model revisited - an implementation in gEcon By Klima, Grzegorz; Podemski, Karol; Retkiewicz-Wijtiwiak, Kaja; Sowińska, Anna E.
  12. Macroprudential policies: a discussion of the main issues By Paolo Angelini
  13. Fiscal Archetypes in the European Union By Anton Gerunov
  14. Regulatory influence on market conditions in the banking union: The cases of macro-prudential instruments and the bail-in tool By Tröger, Tobias H.
  15. The role of targeted predictors for nowcasting GDP with bridge models: Application to the Euro area By Kitlinski, Tobias; an de Meulen, Philipp
  16. Changing prices ... changing times: evidence for Italy By Silvia Fabiani; Mario Porqueddu
  17. Reforming the financing of the European Union: A proposal By Fuest, Clemens; Heinemann, Friedrich; Ungerer, Martin

  1. By: Bartzsch, Nikolaus; Seitz, Franz; Setzer, Ralph
    Abstract: This paper explains and forecasts the demand for banknotes issued in Germany. For small and large denomination notes we estimate vector error correction models (VECM). The results suggest that the long-run demand for German small denomination notes is mainly driven by domestic transactions and demand from outside the euro area. The transaction motive in the rest of the euro area is part of the short-term dynamics. The long-run demand for German large denomination notes is mainly driven by foreign demand both from the rest of the euro area and outside the EMU. The global financial crisis led to a one-time increase in the (real) demand for these notes. Our results are in line with estimates according to which the level and dynamics of banknote demand are mainly determined by foreign demand. Additionally, we present RegARIMA models for the medium denominations as it was not possible to build a VECM for these denominations.
    Keywords: banknotes, vector error correction, RegARIMA, forecasts
    JEL: C22 C32 E41
    Date: 2015–06–10
  2. By: Belke, Ansgar; Gros, Daniel
    Abstract: This study investigates the shock-absorbing properties of a banking union by providing a detailed comparison between the way regional financial shocks have been absorbed at the federal level in the US, but have led to severe regional (national) financial dislocation and tensions in the euro area. The extent to which the institutions of the banking union, which is now emerging in the euro area, should increase its capacity to deal with future regional boom and bust cycles is also discussed. Cross-border capital flows in the form of equity appear to be much more stable than those taking the form of credit, especially inter-bank credit. Moreover, credit booms and bust leave a debt overhang and losses can materialise only via insolvencies, whereas equity flows absorb automatically losses in case of a bust and provide the cross border owner with incentives to continue to provide financing. It follows that cross-border banks can absorb regional shocks. But large banks pose the 'too big to fail' problem and they would also propagate regional shocks, especially if they originate in large countries, to the entire area.
    Keywords: banking union,currency union,default,shock absorber,two-tier reinsurance system
    JEL: E42 E50 F3 G21
    Date: 2015
  3. By: Andrea Gerali (Bank of Italy); Alberto Locarno (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: This paper evaluates the direct and indirect effects of the sovereign debt crisis on Italy’s potential output. The direct effects are captured by the increase in the interest rate paid by Italian borrowers in the second half of 2011, the indirect effects by the policy responses to the crisis (fiscal consolidation and structural reforms). Using a New Keynesian dynamic general equilibrium model, we compute potential output as the “natural” level of output in the absence of nominal price and wage rigidities. The evaluation posits a no-crisis scenario in line with the pre-2011 potential output projections and government budget rules. We find first that the fiscal and financial shocks that caused the 2011-2013 recession subtracted 1.6 percentage points from potential output growth, while the structural reforms in 2013 have limited the reduction in output capacity to about 1.4 points; second, that the structural reforms have a long-run growth-enhancing impact on potential output of around 3 points from now to 2030; and third, that once budget balance is achieved in the medium term (2019), reductions in either labor or capital income taxes would boost potential output growth by about 0.2 points per year.
    Keywords: sovereign risk, fiscal policy, potential output
    JEL: C51 E31 E52
    Date: 2015–06
  4. By: Caporin, Massimiliano; Pelizzon, Loriana; Ravazzolo, Francesco; Rigobon, Roberto
    Abstract: This paper analyzes sovereign risk shift-contagion, i.e. positive and significant changes in the propagation mechanisms, using bond yield spreads for the major eurozone countries. By emphasizing the use of two econometric approaches based on quantile regressions (standard quantile regression and Bayesian quantile regression with heteroskedasticity) we find that the propagation of shocks in euro's bond yield spreads shows almost no presence of shift-contagion. All the increases in correlation we have witnessed over the last years come from larger shocks propagated with higher intensity across Europe.
    Keywords: Sovereign Risk,Contagion,Disintegration
    JEL: E58 F34 F36 G12 G15
    Date: 2015
  5. By: Filip Smolik; Lukas Vacha
    Abstract: We study co-movement of 10-year sovereign bond yields of 11 EU countries. Our analysis is focused mainly on changes of co-movement in the crisis pe- riod, especially near two significant dates - the fall of Lehman Brothers, September 15, 2008, and the announcement of increase of Greek's public deficit in October 20, 2009. We study co-movement dynamics using wavelet analysis, it allows us to observe how co-movement changes across scales, which can be interpreted as investment horizons, and through time. We divide the countries into three groups; the Core of the Eurozone, the Periphery of the Eurozone and the states outside the Eurozone. Results indicate that co-movement considerably decreased in the crisis period for all countries pairs, however there are significant differences among the groups. Further- more, we demonstrate that co-movement of bond yields significantly varies across scales.
    Date: 2015–06
  6. By: Adrian Cantemir CALIN (Institute for Economic Forecasting, Romanian Academy, Bucharest); Oana Cristina POPOVICI (Institute for Economic Forecasting, Romanian Academy, Bucharest)
    Abstract: In this paper, we assess the poverty state and the effectiveness of social transfers in Romania and in other three neighbouring countries (Bulgaria, the Czech Republic, Croatia and Poland) as compared to the EU average with the aim to provide measures for improving the social protection system in our country. We find that Romania is the second country in the EU as regards the people at risk of poverty or social exclusion and has the lowest threshold for risk of poverty in the entire EU, of 103.33 euro per month. Unfortunately, the social transfers are not effective for solving the poverty problem and the spending on social assistances cannot be increased, as it represents already over one third of the revenues of the state budget.
    Keywords: poverty, social transfers, Romania, European Union
    JEL: C40 I31 I38
    Date: 2015–05
  7. By: Lubos Hanus; Lukas Vacha
    Abstract: In this paper, we map the process of synchronization of the Visegrad Four within the framework of the European Union using the wavelet techniques. In addition, we show that the relationship of output and key macroeconomic indicators is dynamic and varies over time and across frequencies. We study the synchronization applying the wavelet cohesion measure with time-varying weights. This novel approach allows for studying the dynamic relationship among countries from a different perspective than usual time-domain models. Analysing monthly data from 1990 to 2014, the results for the Visegrad region show an increasing co-movement with the European Union after the countries began with preparation for the accession to the European union. The participation in a currency union possibly increases the co-movement. Further, analysing the Visegrad and South European countries' synchronization with the European Union core countries, we find a high degree of synchronization in long-term horizons.
    Date: 2015–06
  8. By: Andrea Teglio (Department of Economics, Universitat Jaume I, Castell—n, Spain); Andrea Mazzocchetti (Universitˆ di Genova, DIME-CINEF, Genova, Italy); Linda Ponta (Universitˆ di Genova, DIME-CINEF, Genova, Italy); Marco Raberto (Universitˆ di Genova, DIME-CINEF, Genova, Italy); Silvano Cincotti (Universitˆ di Genova, DIME-CINEF, Genova, Italy)
    Abstract: The 2008 financial crisis, and the subsequent global recession, triggered a widespread economic and political debate on the proper policy combination to deal with the crisis and to prevent similar ones in the future. Probably, the main dispute has been around the use of fiscal instruments in order to foster growth while keeping public debt under control. The European Union, for instance, endorsed measures for fiscal consolidation but has been sharply criticized by several scholars as well as Nobel Laureates. This paper aims at contributing to this debate by presenting the outcomes of a computational study performed with the Eurace agent-based model. We set up an experiment with two base policy scenarios, i.e., stability and growth pact and fiscal compact, incrementally enriching them with complementary policies which relax fiscal rigidity and introduce quantitative easing. We are therefore able to compare eight policy combinations, spanning different degrees of fiscal and monetary expansion. Results show that budgetary rigour performs well if and only if some mechanisms of fiscal relaxation and monetary accommodation are considered during bad times; thus confirming in a richer and more realistic model setting the fundamental tenet of Keynesian economics about the importance of sustaining aggregate demand during recessions.
    Keywords: fiscal policy, quantitative easing, financial stability, economic crisis, agent-based modelling
    JEL: E63 G01 H12 C63
    Date: 2015
  9. By: Matthes, Jürgen
    Abstract: On June 7, 2015, the euro rescue fund will celebrate its 5th anniversary. Thus, it is time to take stock regarding the success of the reform strategy, the institutional relevance of the ESM, and current political challenges to the conditionality principle which is an essential pillar of the reformed EMU institutional architecture. First, the rescue and reform strategy of the euro area is on the right track in Ireland, Spain and Portugal. While challenges remain particularly regarding public and private debt levels, all three countries successfully returned to the financial market after implementing a multitude of reforms. The Cologne Institute for Economic Research (IW Köln) analysed the economic progress made since the beginning of the crisis - with the following results: * Ireland performs best, closely followed by Spain and with Portugal coming third. * Economic growth has returned and is particularly buoyant in Ireland and Spain. * Remarkably, domestic demand is also growing relatively rapidly despite the fact that private debt levels are still elevated and deleveraging is ongoing. * Unemployment remains high (particularly in Spain), but is decreasing at a considerable pace. * All three countries have turned their current account from deeply negative into positive digits. This success has been based on a surprisingly strong export performance. [...]
    Abstract: Am 7. Juni 2010 trat der Euro-Rettungsschirm in Kraft. Fünf Jahre später ist es an der Zeit, eine vorläufige Bilanz zu ziehen. Aus ordnungspolitischer Sicht füllt der Rettungsschirm eine institutionelle Lücke. Die Gründungsväter der Europäischen Währungsunion (EWU) hatten nicht ausreichend Vorsorge dafür getroffen, dass nervöse Finanzmärkte einen Staat, der trotz gewisser ökonomischer Probleme fundamental als solvent angesehen werden kann, nicht in die Zahlungsunfähigkeit drängen können. Um dies zu verhindern, ist ein Krisenmechanismus nötig, der für eine begrenzte Zeit Liquiditätshilfen zur Verfügung stellt. Der Rettungsschirm erleichtert auch den Umgang mit reformunwilligen Staaten. Diese können für den Fall, dass die Finanzhilfen eingestellt werden und ihr Land in der Folge in eine tiefe Krise abgleitet, sehr viel weniger mit Ansteckungseffekten auf andere Euroländer drohen. [...]
    Keywords: European Monetary Union,European Union,Public Debt,Europäische Union,Europäische Währungsunion,Staatsverschuldung
    Date: 2015
  10. By: William R. Cline (Peterson Institute for International Economics)
    Abstract: Plummeting oil prices combined with asymmetric phasing of quantitative easing (QE) in the United States versus the euro area and Japan has prompted unusually large changes in major exchange rates over the past year. New estimates of fundamental equilibrium exchange rates (FEERs) find the major currencies are now misaligned, with the US dollar moderately overvalued and the euro and yen modestly undervalued. However, the Chinese yuan is no longer undervalued. Just over half of the 34 economies followed in this series experienced changes in real effective exchange rates (REERs) of about 6 percent or more from April 2014 to April 2015. The most important changes were the large effective appreciations by the US dollar (about 12 percent) and the Chinese yuan (about 12 percent), and the large effective depreciations of the euro (about 11 percent) and the yen (about 8 percent). Although the dollar has risen to about 8 percent above its FEER, it is too early to conclude that any adverse effects of the stronger dollar outweigh the benefits associated with stimulus to global growth from additional QE in the euro area and Japan. However, if the dollar were to continue along a path of further strengthening, the associated distortions could prove counterproductive for both the United States and the world economy at some point.
    Date: 2015–05
  11. By: Klima, Grzegorz; Podemski, Karol; Retkiewicz-Wijtiwiak, Kaja; Sowińska, Anna E.
    Abstract: This paper presents an implementation of the well-known Smets-Wouters 2003 model for Euro Area using the gEcon package - what we call the ``third generation'' DSGE modelling toolbox. Our exercise serves three goals. First, we show how gEcon can be used to implement an important - from both applications and historical perspective - model. Second, through rigorous exposition enforced by the gEcon’s block-agent paradigm we analyse all the Smets-Wouters model’s building blocks. Last, but not least, the implementation presented here serves as a natural starting point for important from applications point of view extensions, like opening the economy, introducing non-lump-sum taxes, or adding sectors to the model economy. Full model implementation is attached.
    Keywords: DSGE; monetary policy; staggered prices; staggered wages
    JEL: C88 E3 E4
    Date: 2015–02–28
  12. By: Paolo Angelini (Bank of Italy)
    Abstract: Systemic risk, which macroprudential policies aim to minimize, is conceptually easy to define, but it is very difficult to identify ex ante. The search for indicators that may allow to activate macroprudential policies in time to prevent or contain crises, has given disappointing results so far, with the important exception of the class of indicators based on credit growth. A set of macroprudential tools is emerging through practice and legislation, but its outlines are not yet well defined. Also, the effects, effectiveness, and mutual interactions of the tools are not quite clear yet. Moreover, little is known about the interactions between macroprudential policy and other policies � e.g. monetary and microprudential. A reliable theoretical-analytical system to understand its functioning, and to calibrate and measure the effectiveness of macroprudential policies, is not available yet. In Europe, additional challenges arise from the complex architecture of the system of financial supervision and the changes introduced recently - the establishment of National Macroprudential Authorities and the start of the Single Supervisory Mechanism. On the economic front, while the macroeconomic developments in the Euro Area would suggest that expansionary macroprudential policies should be implemented, the measures adopted so far in many countries were almost exclusively of a restrictive nature. Overall, the analysis highlights several areas of uncertainty but also the strong potential of the new macroprudential policies, which can contribute, together with monetary policy, to a more stable macrofinancial system.
    Keywords: macroprudential policies, macroprudential instruments, monetary policy, systemic risk
    JEL: G21 E44 E58
    Date: 2015–06
  13. By: Anton Gerunov (St Kliment Ohridski University of Sofia, Faculty of Economics and Business Administration)
    Abstract: A novel statistical approach is used to discern main types of public finance management (or fiscal archetypes) among countries in the European Union. Data, spanning 2002 to 2014, reveals four main archetypes across the dimensions of fiscal policy. Two of them are fiscally sustainable – one comprises big but responsible spenders, and the other – lean governments. Two of the archetypes are not sustainable, with expenditures exceeding revenue. Fiscal archetypes can be fruitfully used to prescribe tailored public policy interventions for countries, taking into account their specific economic and institutional circumstances and thus increasing the efficiency of policy.
    Keywords: Public finance, fiscal aggregates, archetypes, clustering
    JEL: H20 P16
    Date: 2015–03
  14. By: Tröger, Tobias H.
    Abstract: This paper looks into the specific influence that the European banking union will have on (future) bank client relationships. It shows that the intended regulatory influence on market conditions in principle serves as a powerful governance tool to achieve financial stability objectives. From this vantage, it analyzes macro-prudential instruments with a particular view to mortgage lending markets - the latter have been critical in the emergence of many modern financial crises. In gauging the impact of the new European supervisory framework, it finds that the ECB will lack influence on key macro-prudential tools to push through more rigid supervisory policies vis-à-vis forbearing national authorities. Furthermore, this paper points out that the current design of the European bail-in tool supplies resolution authorities with undue discretion. This feature which also afflicts the SRM imperils the key policy objective to re-instill market discipline on banks' debt financing operations. The latter is also called into question because the nested regulatory technique that aims at preventing bail-outs unintendedly opens additional maneuvering space for political decision makers.
    Keywords: banking union,macro-prudential supervision,real estate lending,bail-in,market discipline
    JEL: E44 G01 G18 G21 G28 K22 K23
    Date: 2015
  15. By: Kitlinski, Tobias; an de Meulen, Philipp
    Abstract: Using factor models, it has recently been shown that a pre-selection of indicators improves GDP forecasts in the very short-term. The aim of this paper is to adopt this research to the methodology of bridge models in combination with pooling approaches. Focusing on Euro Area GDP between 2005 and 2013, we find that a selection of targeted predictors by means of soft- and hard-threshold algorithms improves the forecasting performance, especially during periods of economic crisis. While a critical number of indicators are needed to include all relevant information, adding additional indicators has a negative effect on forecasting performance, all the more, if the set of indicators becomes unbalanced.
    Abstract: In der Vergangenheit konnte gezeigt werden, dass eine Vorauswahl von Indikatoren die Prognoseleistung von Kurzfristprognosen, die auf Faktormodellen beruhen, deutlich verbessert. In diesem Papier wird untersucht, ob sich dieses Ergebnis auf Brückengleichungen in Kombination mit verschiedenen 'pooling' Ansätzen übertragen lässt. Dabei werden Prognosen für das Bruttoinlandsprodukts (BIP) des Euroraums im Zeitraum 2005 bis 2013 evaluiert. Es zeigt sich, dass eine Auswahl von Indikatoren durch 'soft- threshold ' und 'hard-threshold' Ansätze die Prognoseleistung deutlich verbessert. Dies gilt insbesondere in Zeiten von Wirtschaftskrisen. So wird zwar eine bestimmte Zahl von Indikatoren benötigt, die die notwendigen Informationen für eine möglichst genaue Prognose enthalten. Aber die Hinzunahme weiterer Indikatoren führt zu einer schlechteren Prognoseleistung. Dies gilt insbesondere dann, wenn zu viele Indikatoren aus einer bestimmten Kategorie berücksichtigt werden.
    Keywords: Forecasting,bridge equations,pooling of forecasts
    JEL: C53 E37
    Date: 2015
  16. By: Silvia Fabiani (Bank of Italy); Mario Porqueddu (Bank of Italy)
    Abstract: This paper examines the process of adjustment of prices in Italy to determine whether nominal flexibility, measured by the frequency of price changes, has increased in the recent years of protracted stagnation and double-dip recession. The analysis is based on a large micro-level dataset of individual prices collected monthly by Istat from 2006 to 2013 for the Consumer Price Index. We find that both the percentage of prices adjusted monthly and the average size of the adjustment have risen significantly since the 1996-2001 period, in particular for downward changes. This greater flexibility is related in part to the spread of modern distribution structures. Our estimates further indicate that the recession has affected the price adjustment mechanism: for manufactures, price cuts have become larger and more frequent, while increases are more moderate; for services, both the frequency and the size of price increases have diminished.
    Keywords: consumer prices, nominal flexibility, frequency of price adjustmen.
    JEL: E31 D21 D40 L11
    Date: 2015–06
  17. By: Fuest, Clemens; Heinemann, Friedrich; Ungerer, Martin
    Abstract: In this paper we propose a reform of the EU financing system. The two most important elements of our proposal are i) to make the contribution of taxpayers to the EU budget more visible by showing an EU VAT share on receipts and ii) to increase the power of the European Parliament in the determination of the structure of EU expenditures by limiting the multiannual financial framework to the overall size of the EU budget while the structure of expenditures will be determined annually. It is the objective of the second reform element to give greater weight to policies with EU wide benefits and to crowd back the influence of 'juste retour' thinking on EU expenditures. The setup of this paper is as follows. In section 2 we briefly summarize the current structure of EU revenues and expenditures. Section 3 discusses the critique of the current system and perspectives for reform. In section 4, we present our reform proposal and section 5 concludes.
    Date: 2015

This nep-eec issue is ©2015 by Giuseppe Marotta. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.