nep-eec New Economics Papers
on European Economics
Issue of 2015‒07‒04
nineteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Capital inflows and euro area long-term interest rates By Carvalho, Daniel; Fidora, Michael
  2. Financial exposure to the euro area before and after the crisis: home bias and institutions at home By Floreani, Vincent Arthur; Habib, Maurizio Michael
  3. The euro's savior? Assessing the ECB's crisis management performance and potential for crisis resolution By Jörg Bibow
  4. The ICA-based Factor Decomposition of the Eurozone Sovereign CDS Spreads By Frank J. Fabozzi; Rosella Giacometti; Naoshi Tsuchida
  5. Spillovers and euroscepticism By Ioannou, Demosthenes; Kleibl, Johannes; Jamet, Jean-Francois
  6. Jagged Cliffs and Stumbling Blocks: Interest Rate Pass-through Fragmentation during the Euro Area Crisis By Holton, Sarah; Rodriguez d’Acri, Costanza
  7. Challenges for the ECB in times of deflation By Saraceno, Francesco
  8. What has driven inflation dynamics in the Euro area, the United Kingdom and the United States By Melolinna, Marko
  9. Do banks' overnight borrowing rates lead their CDS Price? evidence from the Eurosystem By Jokivuolle, Esa; Tölö, Eero; Virén, Matti
  10. Robustness in Foreign Exchange Rate Forecasting Models: Economics-based Modelling After the Financial Crisis By Medel, Carlos; Camilleri, Gilmour; Hsu, Hsiang-Ling; Kania, Stefan; Touloumtzoglou, Miltiadis
  11. Capturing the financial cycle in Europe By Stremmel, Hanno
  12. Greece withdraws from Euro and runs on Bitcoin; April Fools Prank or Serious Possibility? By Bouoiyour, Jamal; Selmi, Refk
  13. Fiscal consolidation policies in the context of Italy’s two recessions By Figari, Francesco; Fiorio, Carlo
  14. Competitiveness of the European Economy By Michael Landesmann; Sandra M. Leitner; Robert Stehrer
  15. Cohesion Policy as a Function of the EU Budget By Mojmir Mrak; Sandor Richter; Tamás Szemlér
  16. EU Exports to the World: Effects on Employment and Income By Iñaki Arto; José Manuel Rueda-Cantuche; Antonio F. Amores; Erik Dietzenbacher; Nuno Sousa; Letizia Montinari; Anil Markandya
  17. The relationship between structural and cyclical features of the EU financial sector By Stremmel, Hanno; Zsámboki, Balázs
  18. Credit market disequilibrium in Greece (2003-2011) - a Bayesian approach By Vouldis, Angelos
  19. Study on the effects and incidence of labour taxation. Final report By The Consortium consisting of CPB, CAPP, CASE, CEPII, ETLA, IFO, IFS, IHS

  1. By: Carvalho, Daniel; Fidora, Michael
    Abstract: Capital flows into the euro area were particularly large in the mid-2000s and the share of foreign holdings of euro area securities increased substantially between the introduction of the euro and the outbreak of the global financial crisis. We show that the increase in foreign holdings of euro area bonds in this period is associated with a reduction of euro area long-term interest rates by about 1.55 percentage points, which is in line with previous studies that document a similar impact of foreign bond buying on US Treasury yields. These results are relevant both from a euro area and a global perspective, as they show that the phenomenon of lower long-term interest rates due to foreign bond buying is not exclusive to the United States and foreign inflows into euro area debt securities may have added to increased risk appetite and hunt-for-yield at the global level. JEL Classification: E43, E44, F21, F41, G15
    Keywords: Capital flows, long-term interest rates ECB
    Date: 2015–06
  2. By: Floreani, Vincent Arthur; Habib, Maurizio Michael
    Abstract: This paper investigates whether global investors are over or under exposed to- wards the euro area and the role of home bias and institutions at home in shaping this exposure. According to a simple benchmark from standard portfolio theory, euro area investors - in particular those from euro area low-rating economies - are overexposed to euro area securities. Instead, investors outside the EU are underexposed to euro area securities in their total portfolio, proportionally to their degree of home bias, but not in their foreign portfolio. Nevertheless, once we account for gravity factors, the largest foreign investors overweigh euro area securities, especially debt of euro area high rating economies. Crucially, this overexposure was resilient to the euro area crisis. Moreover, we show that institutions at home are important to explain exposure to euro area securities. In particular, the higher the standards of governance at home, the greater the exposure to the euro area debt. JEL Classification: E2, F3, G11, G15
    Keywords: Cross-border portfolio holdings, home bias, institutions, international finance gravity model
    Date: 2015–06
  3. By: Jörg Bibow
    Abstract: his study assesses the ECB's crisis management performance and potential for crisis resolution. The study investigates the institutional and functional constraints that delineate the ECB's scope for policy action under crisis conditions and how the ECB has actually used its leeway since 2007; or might do so in the future. The study finds that the ECB may well stand out positively when compared to other important euro or national authorities involved in managing the euro crisis but that in general the bank did "too little, too late" to prevent the euro area from slipping into recession and protracted stagnation, ending up in its current predicament. The study also finds that expectations regarding the ECB's latest policy initiatives may be excessively optimistic and that proposals featuring the ECB as the euro's savior through even more radical employment of its balance sheet are misplaced hopes. Ultimately the euro's travails can only be ended and the euro crisis resolved by shifting the emphasis towards fiscal policy, by partnering up the ECB with a "Euro Treasury" as a vehicle for the central funding of public investment through common euro treasury debt securities in particular.
    Date: 2015
  4. By: Frank J. Fabozzi (Professor of Finance, EDHEC Business School (E-mail:; Rosella Giacometti (Associate Professor, Department of Management, Economics and Quantitative Methods, University of Bergamo (E-mail:; Naoshi Tsuchida (Deputy director and Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: In this paper, we examine the factors driving Eurozone sovereign credit default swap (CDS) spreads during the Eurozone sovereign debt crisis. For identifying factors we utilize independent component analysis (ICA), a technique similar to principal component analysis (PCA). We identify three factors that impact spreads and capture the features specific to the crisis such as the breakup risk of the Eurozone: peripheral factor, global factor, and Eurozone common factor. In contrast, when PCA is applied, only a single factor is identified. Moreover, using ICA with a GARCH model, we show that the source of volatility for CDS spreads shifted from the global factor in 2009 and the peripheral factor in 2010 to the Eurozone common factor in 2012, and that the dynamic correlation reflects the decoupling between low credit countries such as Germany and high credit countries such as Greece. We also show that the goodness-of-fit of the ICA-based model is better than other models used such as the Student-t copula model.
    Keywords: independent component analysis (ICA), credit default swap (CDS), Eurozone sovereign debt crisis, redenomination risk
    JEL: C18 G01 G15
    Date: 2015–06
  5. By: Ioannou, Demosthenes; Kleibl, Johannes; Jamet, Jean-Francois
    Abstract: During the crisis, support for the EU has declined noticeably in many European Union member states. While previous research on European public opinion has mainly focused on the impact of domestic country- and individual-level factors on public attitudes towards the EU, this paper argues that developments in other EU member states can also have a significant impact on domestic euroscepticism. Specifically, deteriorating economic and fiscal conditions in other member states can lead to concerns in domestic publics about possible negative spillovers on the domestic economy and the ability of the EU to deliver positive economic outcomes. This in turn may lead to rising euroscepticism at the domestic level. The analysis of a panel data set for the EU as a whole and the euro area countries lends support to these arguments by showing that higher unemployment rates and government debt levels in other European countries are systematically related to lower levels of trust in the EU domestically. JEL Classification: D72, E02, F15, H63, J64
    Keywords: Debt, European Union, Euroscepticism, Spillovers, Unemployment
    Date: 2015–06
  6. By: Holton, Sarah (Central Bank of Ireland); Rodriguez d’Acri, Costanza (Central Bank of Ireland)
    Abstract: The financial crisis has been characterised by fragmentation in the transmission of monetary policy, reflected in high dispersion in the cost of bank finance for euro area firms. This paper shows the first results using a new micro dataset on euro area banks to identify individual bank balance sheet characteristics that have contributed to this fragmentation. Interest rate pass-through heterogeneity is estimated using an error correction framework, which captures banks’ funding constraints and balance sheet structures. Our results show incomplete pass-through of changes in money market rates targeted by the central bank to firms’ lending rates charged by banks over the crisis, with increases in sovereign bond yields affecting the cost of finance for firms, particularly in stressed countries. We find that individual bank characteristics have an effect on the pass-through of policy rate cuts over the crisis, even after we control for changes in macroeconomic conditions across countries. The effect is greatest when looking at characteristics that capture bank funding difficulties, with riskier banks transmitting less of the policy rate cuts through to firms. This suggests that a recovery in banks’ balance sheets,funding capacities and risk perception will help reduce fragmentation in the transmission of monetary policy.
    Keywords: Interest rate pass-through, Monetary policy transmission, Financial crises.
    JEL: E52 E58 G01 G20 E43 E44
    Date: 2015–06
  7. By: Saraceno, Francesco
    Keywords: monetary policy, economic recession, deflation, banking, impact evaluation, fiscal policy, EMU, politique monétaire, récession économique, déflation, activité bancaire, évaluation de l'impact, politique fiscale, UEM, política monetaria, recesión económica, deflación, actividad bancaria, evaluación de impacto, política fiscal, UEM
    Date: 2015
  8. By: Melolinna, Marko
    Abstract: This paper studies factors behind inflation dynamics in the euro area, the UK and the US. It introduces a factor-augmented vector autoregression (FAVAR) framework with sign restrictions to study the effects of fundamental macroeconomic shocks on inflation in the three economies. The FAVAR model framework is also applied to study the effects on inflation subcomponents in the more recent past. The FAVAR models suggest that headline inflation in the three economies has reacted in a relatively similar fashion to macroeconomic shocks over the last four decades, with demand shocks causing the most persistent effects on inflation. According to the subcomponent FAVAR models, the responses of inflation subcomponents to macroeconomic shocks have also been relatively similar in the three economies. However, there is evidence of a stronger foreign exchange channel of monetary policy transmission as well as supply shocks in the responses of non-energy tradable goods prices in the UK than the other two economies, while the reaction of services inflation has been more muted to all types of shocks in the euro area than the other two economies. JEL Classification: C22, C32, E31, E52
    Keywords: FAVAR, inflation, macroeconomic shocks, sign restrictions
    Date: 2015–06
  9. By: Jokivuolle, Esa; Tölö, Eero; Virén, Matti
    Abstract: We construct a measure of a bank’s relative creditworthiness from Eurosystem’s proprietary overnight loan data: the bank’s “average overnight borrowing rate spread, relative to overnight rate index” (AOR). We investigate the dynamic relationship between the AOR and the credit default swap spread (CDS) of 60 banks in years 2008 - 2013. We find that in daily differences the AOR leads the CDS at least by one day. The lead is concentrated on days of market stress for banks which mainly borrow from “relationship” lender banks. Such borrower banks are typically smaller, have weak ratings, and likely reside in crisis countries. In longer differences, up to several weeks, both the AOR and the CDS have some predictive power over one another. In sum, overnight borrowing rates may provide additional early-warning indications on certain banks’ deteriorating financial health over and above bank CDS spreads. JEL Classification: G01, G14, G21
    Keywords: credit default swaps (CDS), early-warning indicators, Eurosystem, leadlag relationship, money markets, overnight borrowing rates, TARGET2
    Date: 2015–06
  10. By: Medel, Carlos; Camilleri, Gilmour; Hsu, Hsiang-Ling; Kania, Stefan; Touloumtzoglou, Miltiadis
    Abstract: The aim of this article is to analyse the out-of-sample behaviour of a bunch of statistical and economics-based models when forecasting exchange rates (FX) for the UK, Japan, and the Euro Zone in relation to the US. A special focus is given to the commodity prices boom of 2007-8 and the financial crisis of 2008-9. We analyse the forecasting behaviour of six economic plus three statistical models when forecasting from one up to 60-steps-ahead, using a monthly dataset comprising from 1981.1 to 2014.6. We first analyse forecasting errors until mid-2006 to then compare to those obtained until mid-2014. Our six economics-based models can be classified in three groups: interest rate spreads, monetary fundamentals, and PPP with global measures. Our results indicate that there are indeed changes of the first best models when considering the different spans. Interest rate models tend to be better predicting using the short sample; also showing a better tracking when crisis hit. With the longer sample the models based on price differentials are more promising; however, with heterogeneous results across countries. These results are important since shed some light on what model specification use when facing different FX volatility.
    Keywords: Foreign exchange rates; Economic forecasting; Financial crisis
    JEL: C32 C53 E17 E37
    Date: 2015–06–07
  11. By: Stremmel, Hanno
    Abstract: In this study, we approximate the financial cycle in Europe by combining potential common and relevant financial indicators. We consider different credit aggregates and asset prices but also incorporate banking sector indicators for 11 European countries. We develop seven different synthetic financial cycle measures in order to best capture the characteristics of the financial cycle. We assess the various financial cycle measures using both graphical and statistical investigation techniques. The best fitted financial cycle measure includes the following financial ingredients: credit to GDP ratio, credit growth and house prices to income ratio. This study also highlights potential applications for the financial cycle measure in the macro-prudential policy context. JEL Classification: E30, E44, E61, G18, G28
    Keywords: financial crises, financial cycle, financial regulation, medium-term
    Date: 2015–06
  12. By: Bouoiyour, Jamal; Selmi, Refk
    Abstract: This paper assesses whether the way in which the Greek crisis was communicated by media and social networking increase the debt deal uncertainty and the possibility of abandoning the euro in favor of Bitcoin. Through an improved frequency approach, we attempt to disentangle short-, medium- and long-run causality between Google Trends (search queries) and Twitter (social media) data related to the Greek crisis and Bitcoin unconditionally and conditioning upon relevant control variables. Our results unambiguously show a short-run unidirectional causality running from search queries and the number of tweets to the use of Bitcoin. These findings remain meaningful when a number of control variables are accounted for, while the cycle length becomes shorter. These results change substantially by the arrival of the left-wing Syriza party in power, on January 25th, 2015, with its radical approach to debt negotiations. The cycle becomes longer (short- and medium-run). Not surprisingly, doubts have increased as to whether Athens can appropriately settle its debt repayment obligations. This study indicates that Greece’s withdrawal from euro and running on Bitcoin is likely to be an April fool’s joke rather than serious possibility. It also proves a sharp distinguishability among Googlers and Twitters.
    Keywords: Greek crisis; Social media; Google Trends; Bitcoin; frequency domain causality.
    JEL: E30 F34 G15
    Date: 2015–06–27
  13. By: Figari, Francesco; Fiorio, Carlo
    Abstract: The Italian Great Recession has a double-dip pattern. After the start of the global financial crisis, Italy experienced a second serious recession in 2011 because of the sovereign debt crisis. The reaction of Italian governments was mild at the beginning and more convinced since the start of the sovereign debt crisis in 2011. Adopted policies contributed to realign public finances at a sustainable level, while household real income decreased by 13 per cent and quite unevenly along the household income distribution. The medium-term outlook is still uncertain: a great deal depends on the capacity of the Italian economy to reduce the level of public debt and to return to sustained economic growth, which has been very weak for more than a decade.
    Date: 2015–06–23
  14. By: Michael Landesmann (The Vienna Institute for International Economic Studies, wiiw); Sandra M. Leitner (The Vienna Institute for International Economic Studies, wiiw); Robert Stehrer (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: Summary This paper uses the World Input-Output Database (WIOD) to analyse changes of Europe’s position in global specialisation and location patterns of exporting activity within Europe by means of a number of competitiveness indicators. We consider both manufacturing as well as tradable services. The study analyses the increasing role of services–industry linkages, the differentiation in specialisation and competitiveness patterns amongst groups of EU member countries pointing to the increasing concentration of manufacturing activity in the ‘Central European Manufacturing Core’ and to competitive weaknesses of some of the EU’s core economies as well as of some of the lower- and medium-income economies (‘Europe’s periphery’). We also undertake an econometric analysis of the determinants of a range of competitiveness indicators, including explanatory variables such as labour productivity, skill composition or labour compensation per employee as highlighted by traditional trade theories as well as domestic and foreign business services linkages or vertical cross-border production integration to account for phenomena which have come to shape the global trade landscape more recently. 
    Keywords: competitiveness, European economy, Europe’s periphery, global trade specialisation, international production networks, vertical trade integration, services–manufacturing linkages
    JEL: F02 F14 F15
    Date: 2015–05
  15. By: Mojmir Mrak; Sandor Richter (The Vienna Institute for International Economic Studies, wiiw); Tamás Szemlér
    Abstract: Summary This study analyses the key patterns of cohesion policy within the overall framework of the EU budget, viewed from the perspective of the new Member States of Central and Eastern Europe. In more specific terms, the main objectives are, first, to analyse past trends of cohesion policy and the attitude of various groups of countries towards this policy; second, to assess the position of cohesion policy within the 2014-2020 medium-term financial framework of the EU; and third, to discuss alternative options for cohesion policy within the framework of the EU budget in the post-2020 period. In methodological terms, the conceptual parts are based primarily on a qualitative analysis of the literature while empirical inputs were provided first of all through an expert questionnaire survey and country case studies. The research results convey the important message that the feasibility of scenarios other than maintaining the ‘status quo’ will most probably not depend on the behaviour of the new Member States. Despite their strong and explicit interest in securing ample resources from cohesion policy funds for themselves, the new Member States’ administrative and academic experts with their non-negligible influence on the political decisions of their governments cannot be seen as a stumbling block in the way towards reforms for a modernised and more rule-based EU budget. A resolute shift towards increased EU budgetary support for projects with more European value added and stronger future orientation than today, and a fair and transparent distribution of net financial positions will be far more determined by the outcome of multifaceted interest reconciliation among the ‘major players’ of the ‘old’ EU-15.
    Keywords: European Union, new Member States, EU budget, Multiannual Financial Framework, cohesion policy, net financial positions
    JEL: F15 F36 F42 F53 H19 H39 H49 H87
    Date: 2015–05
  16. By: Iñaki Arto (Basque Center for Climate Change (BC3)); José Manuel Rueda-Cantuche (European Commission – JRC - IPTS); Antonio F. Amores (European Commission – JRC - IPTS); Erik Dietzenbacher (University of Groningen - Faculty of Economics and Business); Nuno Sousa (European Commission - TRADE); Letizia Montinari (European Commission – JRC - IPTS); Anil Markandya (Basque Center for Climate Change (BC3))
    Abstract: For the European Commission a main priority has been to ensure that comprehensive, reliable and comparable economic information is available to support evidence-based policymaking in this regard. As part of such efforts, the DG Joint Research Centre (JRC) of the European Commission has been actively collaborating over the past few years with DG TRADE to construct a series of trade, employment and income indicators based on the World Input-Output Database (WIOD). The main motivation of this report is to provide scientific evidence of the effects of international trade on the EU-27 employment and income. This report is meant to be a valuable statistical tool for DG TRADE to be used in bilateral trade negotiations, European Commission preparatory studies and/or Communications and to show the relevance of international trade in terms of employment and value added creation.
    Keywords: Employment, income, international trade, exports, European Union
    JEL: C67 F14 F15 F16 D33 E01 E24
    Date: 2015–06
  17. By: Stremmel, Hanno; Zsámboki, Balázs
    Abstract: In this study, we explore the relationship between certain structural features of the banking sectors in EU Member States and the performance of the respective banking sectors over the financial cycle. Using the financial cycle indicator developed by Stremmel (2015), we estimate the impact of the structural features of the banking sector on the amplitude of the financial cycle. Our results suggest that the concentration of the banking sector, the share of foreign banks, the size and stability of financial institutions, the share of foreign currency loans and financial inter-linkages contribute to the amplitude and hence the variability of financial cycles. This study provides important insights into the appropriate design of various structural and cyclical policy instruments as well. JEL Classification: E44, E61, G18, G21, G28
    Keywords: banking sector characteristics, financial cycle, financial regulation, financial structure
    Date: 2015–06
  18. By: Vouldis, Angelos
    Abstract: Motivated by the linkage between credit and growth in the Greek economy, and the deceleration of credit since the financial crisis, this paper studies the evolution of credit demand and supply in Greece. A disequilibrium model of demand and supply is estimated spanning the period 2003M1-2011M3. The adopted specification allows for stochastic shocks on both supply and demand. A Bayesian estimation methodology with data augmentation for the latent variables is used. The analysis is carried out separately for each type of loan (short- and long-term business loans, consumer loans and mortgages) enabling the comparative study of the credit rationing and supply constraint effects among loan categories. The results indicate that, for all loan categories, excess demand characterized the boom period. After the intensification of the debt crisis, evidence is provided for the existence of excess demand due to binding constraints on supply. However, demand for short-term business loans has slowed down more than supply, reflecting businesses’ need for stable funding. JEL Classification: D50, E44, E42, C32, G21, G28, P00
    Keywords: Bayesian methods, Credit disequilibrium, Greek credit market, Leading indicators, Stress test
    Date: 2015–06
  19. By: The Consortium consisting of CPB, CAPP, CASE, CEPII, ETLA, IFO, IFS, IHS
    Abstract: In the aftermath of the financial crisis most European countries are continuing to face employment problems. In a number of Member States government intervention has further resulted in increasing debt levels and high tax burdens overall and in particular on labour. Therefore well-targeted tax reforms seem to be in order to improve the labour market outcomes. It is often implicitly assumed that a decrease on the employee side, i.e. in the personal income tax rate or the employee part of social security contribution, leads to a higher labour supply. Similarly, a decrease in the employer labour taxes is often assumed to raise the demand of labour. However, the economic literature argues that in the presence of labour market imperfection economic incidence of a tax change is often different from the legal incidence. In this case the impact of a tax change on labour market outcomes depends on the interaction of the demand and the supply side of the market. This interaction is determined by the behaviou al responses of economic operators, measured by elasticities. Higher (demand or supply) elasticities will cause larger responses to tax changes, with the relatively less elastic side bearing a higher tax burden. Against this background four main goals of this study emerge. First, is to identify from the literature which labour market imperfections result in employment problems and to attribute them to the labour supply or on the labour demand side. Given the heterogeneity in the labour market situation of different groups, we also set out to identify which socioeconomic groups are most vulnerable to employment problems. The next step is to review the literature which assesses the short-run and long-run economic incidence of labour taxation. To further break down the incidence into its underlying determinants we also review the literature on the (tax) elasticities of labour supply and labour demand. Then the literature on the influence of the economic environment on the tax incidence outcome, most notably the wage setting mechanisms and the institutional background, is reviewed. Finally the findings of the literature review are brought together in a framework of indicators to identify the potential of tax reforms to reduce tax related employment problems.
    Keywords: European Union, labour taxation, tax reforms
    JEL: H20 H29 E62
    Date: 2015–06

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