|
on European Economics |
|
Issue of 2015‒06‒27
twenty papers chosen by Giuseppe Marotta Università degli Studi di Modena e Reggio Emilia |
| By: | von Borstel, Julia; Eickmeier, Sandra; Krippner, Leo |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:102015&r=eec |
| By: | Piotr Ciżkowicz; Andrzej Rzońca; Rafał Trzeciakowski |
| Abstract: | We estimate various panel fiscal reaction functions, including those of the main categories of general government revenue and expenditure for the 12 Euro area member states over the 1970-2013 period. We find that in the peripheral countries where sovereign bond yields decreased sharply in the years 1996-2007, fiscal stance ceased to respond to sovereign debt accumulation. This was due to the lack of sufficient adjustment in the government non-investment expenditure and direct taxes. In contrast, in the core member states, which did not benefit from the yields’ convergence related to the Euro area establishment, responsiveness of fiscal stance to sovereign debt increased between 1996 and 2007. This was achieved mainly through pronounced adjustments in the government non-investment expenditure. Our findings are in accordance with the predictions of the theoretical model by Aguiar et al. (2014) and are robust to various changes in the modelling approach. |
| Keywords: | fiscal reaction function, sovereign bond yields’ convergence, fiscal adjustment composition |
| JEL: | C23 E62 F34 H63 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:203&r=eec |
| By: | Oliver Picek (Department of Economics, New School for Social Research) |
| Abstract: | A national public bank may be used to finance the national fiscal policy of a country within the euro zone. The bank would only hold domestic government bonds. It would get its funds from the Eurosystem, pledging government bonds as collateral. The publicly owned bank would apply for funds like any other bank, legally not violating the prohibition of monetary financing provision in EU treaties. Eectively, as the prots of the bank are returned to the government, interest on newly issued bonds can be saved, freeing up additional resources for government spending and investment. The biggest risk to the bank is a margin call by the national central bank in response to a fall in the market price of government bonds. A rule change in the ECB collateral scheme is proposed to remedy this risk. Then, a public bank could insulate the national government from buyer strikes and allow the state to pursue an adequate fiscal policy to create employment while debt servicing costs remain subdued. |
| Keywords: | Government Finance, Euro Crisis, Public Bank, Euro Area, European Central Bank, Financing Stimulus, Fiscal Policy, Public Debt Reduction, Monetary Financing, Government Bonds, Public Investment, Government Spending |
| JEL: | E63 E52 E62 H1 H12 H63 E42 |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:new:wpaper:1512&r=eec |
| By: | Micossi, Stefano |
| Abstract: | This Special Report examines the policies pursued by the European Central Bank (ECB) since the inception of the euro. The ECB was originally set up to pursue price stability, with an eye also to economic growth and financial stability as subsidiary goals, once the primary goal was secured. The application of a single monetary policy to a diverse economic area has entailed a pronounced pro-cyclicality in its real economic effects on the eurozone periphery. Later, monetary policy became the main policy instrument to tackle financial instability elicited by the failure of Lehman Brothers and the sovereign debt crisis in the eurozone. In the process, the ECB emerged as the lender of last resort in the sovereign debt markets of participating countries. Persistent economic depression and deflation eventually brought the ECB into the uncharted waters of unconventional policies. That the ECB could legally perform all of these tasks bears witness to the flexibility of the TFEU and its Statute, but its tools and operating procedures were stretched to their limit. In the end, the place of the ECB amongst EU policy-making institutions has been greatly enhanced, but has entailed repeated intrusions into the broader domain of economic policies – not least because of its market intervention policies – whose consequences have yet to be ascertained. |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:eps:cepswp:10610&r=eec |
| By: | Timm Bönke; Carsten Schröder |
| Abstract: | In view of rising concerns over increasing inequality in the European Union since the financial crisis, this study provides an inequality decomposition of the overall European income distribution by country. The EU Statistics on Income and Living Conditions are our empirical basis. Inequality has risen moderately within the core Euro area, particularly in the last two years of the observation period (2010/11). Widening disparities between EU Member States are the driving force behind this trend, while inequalities within countries do not exhibit systematic changes. An analysis of binational distributions reveals that it is the countries hit worst by the crisis—Greece and Spain—for which the between-country disparities have changed most markedly. |
| Keywords: | Inequality, decomposition, crisis |
| JEL: | D30 D31 D39 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1482&r=eec |
| By: | Feld, Lars P.; Köhler, Ekkehard A.; Nientiedt, Daniel |
| Abstract: | German policy during the Eurozone crisis supposedly follows an ordoliberal tradition. In this paper, we discuss to what extent this contention holds and to what extent Germany pragmatically responded to different crisis phenomena. A proper analysis of ordoliberal thinking reveals that the European Monetary Union can be justified on ordoliberal grounds as an economic constitution for Europe in which several pillars supposedly aim at ensuring sound money in the Eurozone. The policies the German government pushed during the Eurozone crisis have been informed by the ordoliberal tradition. In particular, this tradition may explain why the German government has been hesitant to support the call for Eurobonds and has only reluctantly established the European Stability Mechanism (ESM). However, the decisions on the ESM and the acceptance of unconventional monetary policy in Europe show that German economic policy largely responded pragmatically to the challenges offered by the crisis. |
| Keywords: | ordoliberalism,Eurozone crisis,constitutional economics,monetary and fiscal policy |
| JEL: | B13 B26 B31 D78 E61 E63 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:aluord:1504&r=eec |
| By: | Manish K. Singh (Faculty of Economics, University of Barcelona); Marta Gómez-Puig (Faculty of Economics, University of Barcelona); Simón Sosvilla-Rivero (Complutense Institute of International Economics, Universidad Complutense de Madrid) |
| Abstract: | Given the structural differences in banking sector and financial regulation at country level in European Economic and Monetary Union (EMU), this paper tries to estimate the banking sector risk behavior at country level. Based on contingent claim literature, it computes “Distance-to-default (DtD)” at bank level and analyses the aggregate series at country level for a representative set of banks over the period 2004-Q4 to 2013-Q2. The indices provide an intuitive, forward-looking and timely risk measure having strong correlations with national/regional market sentiment indicators. An underlying trend exists but causality tests suggest no systemic component. Cross-sectional differences in DtD suggests fragility in EMU countries 12-18 months prior to the crisis and better predictive ability than the regulatory index based on large and complex banking institutions at European level. Furthermore, we explore the reasons for this divergence using VAR estimates. |
| Keywords: | contingent claim analysis, Distance-to-default, banking risk JEL classification: G01, G13, G21, G28 |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:ira:wpaper:201517&r=eec |
| By: | Smolik, Filip; Vacha, Lukas |
| 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 period, 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. Furthermore, we demonstrate that co-movement of bond yields significantly varies across scales. |
| Keywords: | financial crisis,co-movement,wavelet,sovereign debt crisis,sovereign bonds |
| JEL: | C32 C49 C58 H63 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:fmpwps:44&r=eec |
| By: | Silke Tober |
| Abstract: | Two recent proposals for overcoming the euro area crisis make the case for monetary financing of the public sector. Watt (2015) proposes that the ECB finances public investment directly, Pâris and Wyplosz (2014) contend that public debt may be effectively restructured by burying parts of it in the balance sheet of the Eurosystem. Both proposals place the ECB at the center of matters generally considered to be fiscal in order to circumvent existing fiscal and political constraints. This paper argues that neither monetary debt retirement nor monetary financing of EU investment are a free lunch. Both proposals fudge the line between monetary and fiscal policy thereby ignoring valid reasons for separating these two macroeconomic policy areas. All monetary policy measures impact on government finances; whether monetary policy actions cross the fiscal policy line, however, depends primarily on the underlying motivation of the action. In the case of the two proposals the motivation is unambiguously fiscal. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:imk:wpaper:152-2015&r=eec |
| By: | Stergios Skaperdas (Department of Economics, University of California-Irvine University) |
| Abstract: | The long-running Greek public debt crisis has been accompanied by an information war that has obscured what has occurred. The misconceptions, self- deceptions, and myths associated with the crisis have been at least partly responsible for the obviously inadequate response to the crisis and for the damage to the economies and societies of primarily Greece but also of other Eurozone countries. I argue against seven such myths about the effects of default, the primary cause of the crisis, the likely effects of an exit from the eurozone, the bargaining power of the Greek government in its negotiations with the EU/ECB/IMF troika, and others. I also discuss the context of the wider slippage of democracy in the European Union and future prospects. |
| Keywords: | Eurozone; Greece; Debt; Default |
| JEL: | D70 E50 H50 H60 |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:irv:wpaper:141511&r=eec |
| By: | Hanus, Lubos; Vacha, Lukas |
| 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 timedomain 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. |
| Keywords: | business cycle synchronization,time-frequency,wavelets,co-movement,Visegrad Four,European Union |
| JEL: | E32 C40 F15 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:fmpwps:42&r=eec |
| By: | Javier Ordóñez (Department of Economics, Universitat Jaume I, Castellón, Spain); Hector Sala (IZA and Department of Economics, Universitat Autònoma de Barcelona, Spain); José I. Silva (Department of Economics, Universitat de Girona, Spain) |
| Abstract: | We examine the trajectories of the real unit labour costs (RULCs) in a selection of Eurozone economies. Strong asymmetries in the convergence process of the RULCs and its components —real wages, capital intensity, and technology— are uncovered through decomposition and cluster analyses. In the last three decades, the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) succeeded in reducing their RULCs by more than their northern partners. With the exception of Ireland, however, technological progress was weak; it was through capital intensification that periphery economies gained efficiency and competitiveness. Cluster heterogeneity, and lack of robustness in cluster composition, is a reflection of the difficulties in achieving real convergence and, by extension, nominal convergence. We conclude by outlining technology as the key convergence factor, and call for a wider strategy in labour market policies, which should be more oriented to promote the sources of productivity growth. |
| Keywords: | Real unit labour costs, Eurozone, Real wages, Capital intensity, Technology |
| JEL: | F43 O47 O52 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:jau:wpaper:2015/09&r=eec |
| By: | De Groen, Willem Pieter |
| Abstract: | The recent crises have shown that the eurozone countries’ government debt is not immune to default. Applying a large-exposure requirement also to eurozone government debt would be a logical measure towards breaking the bank-government doom loop, given the low probability and high loss-given government default. But what would be the impact of the application of the large-exposure requirement on the banking sector as well as on government funding? This CEPS Policy Brief presents the results of a simulation exercise performed for 109 systemic banks in the eurozone, showing that their eurozone government debt portfolios would have to decrease by 3.2% or €63 billion, if a 50% of own-funds cap would be applied on large exposures. The eurozone central banks’ demand for sovereign bonds under the extended asset purchase programme further creates momentum to start gradually implementing the restriction. |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:eps:cepswp:10299&r=eec |
| By: | Nyborg, Kjell G |
| Abstract: | This paper seeks to inform about a feature of monetary policy that is largely overlooked, yet occupies a central role in modern monetary and financial systems, namely central bank collateral frameworks. Their importance can be understood by the observation that the money at the core of these systems, central bank money, is injected into the economy on terms, not defined in a market, but by the collateral frameworks and interest rate policies of central banks. Using the collateral framework of the Eurosystem as a basis of illustration and case study, the paper brings to light the functioning, reach, and impact of collateral frameworks. A theme that emerges is that collateral frameworks may have distortive effects on financial markets and the wider economy. They can, for example, bias the private provision of real liquidity and thereby also the allocation of resources in the economy as well as contribute to financial instability. Evidence is presented that the collateral framework in the euro area promotes risky and illiquid collateral and, more generally, impairs market forces and discipline. The paper also emphasizes the important role of ratings and government guarantees in the Eurosystem’s collateral framework. |
| Keywords: | banks; central bank; collateral; ECB; Eurosystem; financial system; guarantees; haircuts; liquidity; monetary policy; monetary system; money; ratings |
| JEL: | E42 E44 E52 E58 G01 G10 G21 |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10663&r=eec |
| By: | Enrique G. Mendoza (University of Pennsylvania and NBER); Linda L. Tesar (University of Michigan and NBER); Jing Zhang (Federal Reserve Bank of Chicago) |
| Abstract: | What are the macroeconomic effects of tax adjustments in response to large public debt shocks in highly integrated economies? The answer from standard closed-economy models is deceptive, because they underestimate the elasticity of capital tax revenues and ignore cross-country spillovers of tax changes. Instead, we examine this issue using a two-country model that matches the observed elasticity of the capital tax base by introducing endogenous capacity utilization and a partial depreciation allowance. Tax hikes have adverse effects on macro aggregates and welfare, and trigger strong crosscountry externalities. Quantitative analysis calibrated to European data shows that unilateral capital tax increases cannot restore fiscal solvency, because the dynamic Laffer curve peaks below the required revenue increase. Unilateral labor tax hikes can do it, but have negative output and welfare effects at home and raise welfare and output abroad. Large spillovers also imply that unilateral capital tax hikes are much less costly under autarky than under free trade. Allowing for one-shot Nash tax competition, the model predicts a "race to the bottom" in capital taxes and higher labor taxes. The cooperative equilibrium is preferable, but capital (labor) taxes are still lower (higher) than initially. Moreover, autarky can produce higher welfare than both Nash and Cooperative equilibria. |
| Keywords: | fiscal austerity, tax, public debt |
| JEL: | E6 E62 F34 F42 H6 |
| URL: | http://d.repec.org/n?u=RePEc:mie:wpaper:644&r=eec |
| By: | Stark, Oded; Wlodarczyk, Julia |
| Abstract: | Drawing on the premise that the integration of economies revises people's social space and their comparators, we quantify social stress by aggregate relative deprivation, ARD; we calculate the effect of monetary mergers on ARD; and we document the validity of the superadditivity property of ARD for successive adoptions of a common currency by European countries. One feature of monetary unification, which replaces diverse currencies with a common currency, is that it brings about a change in the comparison environment, expanding the reference space of individuals in a given country to encompass individuals from the joining countries. Overall, calculations regarding six enlargements of the Economic and Monetary Union between 1999 and 2011 reveal an increase of ARD on six occasions when we hold incomes constant, and on five when we take into consideration changes in incomes. In addition, we observe an uneven distribution of the costs and benefits from monetary integration among the participating countries when these costs and benefits are measured in terms of ARD. |
| Keywords: | Monetary integration,Aggregate relative deprivation,Superadditivity,Social stress |
| JEL: | D31 D63 E42 E44 F33 P51 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:tuewef:82&r=eec |
| By: | Gehring, Kai; Schneider, Stephan A. |
| Abstract: | We analyse whether there is a relationship between EU Commissioners’ national origin and political outcomes. For this purpose, we argue that examining the Commissioner for Agriculture allows the most precise empirical identification: there is a specific budget for agriculture which accounts for the largest share of the overall EU budget and gives significant leeway to the Commissioner. On average, providing the Commissioners is associated with increases in the share of the overall EU budget that is allocated to their country of origin of about one percentage point. This increase corresponds to half a billion Euro per year, a significant change in particular for smaller member states. Alternative explanations are considered using country-specific time trends, examining pre- and post-treatment trends and modeling endogenous treatment-selection. There are no significant differences in trend behavior between treated and non-treated countries both before and after providing the Commissioner. We demonstrate that our results are not driven by individual countries and show that selection-on-unobservables would have to be implausibly high to account for the estimated coefficient. |
| Keywords: | Fiscal Federalism; Political Economy; Budget Allocation; European Union; EU Commission; EU Commissioners; National Origin |
| Date: | 2015–06–23 |
| URL: | http://d.repec.org/n?u=RePEc:awi:wpaper:0596&r=eec |
| By: | Peter Martey Addo (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS) |
| Abstract: | The turmoil in the sovereign debt markets in Europe has raised concerns on the usefulness of sovereign credit default swaps and government bond yields in periods of distress. In addressing this issue, we introduce a novel nonlinear approach for the analysis of non-stationary multivariate data based on complex networks and recurrence analysis. We show the relevance of the approach in studying joint risk connections, extracting hidden spatial information, time dependence, detection of regime changes and providing early warning indicators. The feasibility and relevance of the approach in studying systemic risk is discussed. Finally, we share more light on possible extensions and applications of the approach to systemic risk. |
| Abstract: | Les turbulences sur les marchés de la dette souveraine en Europe ont suscité les intérêts sur l'utilité des contrats d'échange sur risque de crédits (CDS) et des rendements sur les obligations d'État dans les périodes de crise. En examinant cette question, nous introduisons une nouvelle approche non linéaire pour l'analyse des données à variables multiples non-stationnaires, basée sur les réseaux complexes et l'analyse de récurrence. Nous montrons la pertinence de l'approche en étudiant les risques communs, en extrayant les informations spatiales cachées et la dépendance par rapport au temps, en détectant des changements de régime et en fournissant des indicateurs d'alerte précoce. La faisabilité et la pertinence de l'approche dans l'étude du risque systémique est discutée. Enfin, la lumière est faite sur d'éventuelles extensions et applications de l'approche du risque systémique. |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-01164025&r=eec |
| By: | Sarah Godar; Christoph Paetz; Achim Truger |
| Abstract: | The trend of increasing inequality in the distribution of income and wealth in most developed countries has led to calls for corrective tax increases for the rich and wealthy. Such calls are often confronted with the claim that higher taxes on top personal incomes, corporate income and wealth are detrimental to growth and employment and/or will foster tax avoidance. This paper argues that even the dominating theoretical framework leaves substantial leeway for redistributive taxation. Furthermore, from a Keynesian macroeconomic perspective redistribution may even be systematically conducive to growth and employment. At the same time a change towards such a policy of redistribution may for some economies, particularly the German one, well be the prerequisite for compliance with the European Fiscal Compact if an increase of the macroeconomic imbalances that have come to be seen as a root cause of the global financial and economic crisis 2008/2009 and also the Euro crisis by many observers is to be avoided. Therefore, besides attempts at international tax coordination and harmonisation, national tax policies should actively use their room of manoeuvre for progressive taxation to correct the disparities in the income distribution and at the same time to increase the fiscal space. |
| Keywords: | Macroeconomic effects of taxation, redistribution and macroeconomic performance, macroeconomic imbalances |
| JEL: | E62 H23 E21 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:imk:wpaper:150-2015&r=eec |
| By: | Pablo Hernández de Cos (Banco de España); Enrique Moral-Benito (Banco de España) |
| Abstract: | In an influential paper, Devries et al. (2011) construct narrative series of tax- and spending-based fiscal adjustments for a panel of OECD countries. In this paper, we find that the adjustments based on spending cuts can be predicted on the basis of past output growth and other macroeconomic variables. Moreover, we illustrate that this source of endogeneity may generate significant differences in the estimated multipliers. |
| Keywords: | fiscal adjustment, fiscal multiplier |
| JEL: | H60 E62 |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1516&r=eec |