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on European Economics |
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Issue of 2015‒08‒30
fifteen papers chosen by Giuseppe Marotta Università degli Studi di Modena e Reggio Emilia |
| By: | Alho, Kari E.O. |
| Abstract: | Specifying a structurally built NKM model for EMU, and identifying in it the determinants of the potential output and the short-run cyclical factors, we consider structural reforms and monetary and fiscal policies in the euro area. Especially, we analyse whether structural reforms are deflationary or boost the economy in the short run and create spillovers within the euro area under the zero lower bound (ZLB) of the interest rate. We find that a structural reform towards a more competitive economy by lowering the mark ups in the goods and labour market is beneficial both in the short and long run, and both under normal and the ZLB situation in the financial markets. Coordination of reforms within the euro area is also called for, because the spillovers from reforms are typically negative. The national governments searching for an optimal structural policy can delegate the stabilization efforts to the ECB in a long-run equilibrium, but in the short run this separation does not hold in general. We find that in a recession the reform policy is typically curtailed, while in a boom it initially exceeds the long-run equilibrium of reform activity. Proper fiscal policy can alleviate this problematic feature in structural reform policies. |
| Keywords: | structural reform, EMU, coordination |
| JEL: | E63 E61 F42 |
| Date: | 2015–08–24 |
| URL: | http://d.repec.org/n?u=RePEc:rif:wpaper:31&r=all |
| By: | Máximo Camacho; Danilo Leiva-León; Gabriel Pérez-Quiros |
| Abstract: | Previous studies have shown that the effectiveness of monetary policy depends, to a large extent, on the market expectations of its future actions. This paper proposes an econometric framework to address the effect of the current state of the economy on monetary policy expectations. Specifically, we study the effect of contractionary (or expansionary) demand (or supply) shocks hitting the euro area countries on the expectations of the ECB.s monetary policy in two stages. In the first stage, we construct indexes of real activity and inflation dynamics for each country, based on soft and hard indicators. In the second stage, we use those indexes to provide assessments on the type of aggregate shock hitting each country and assess its effect on monetary policy expectations at different horizons. Our results indicate that expectations are responsive to aggregate contractionary shocks, but not to expansionary shocks. Particularly, contractionary demand shocks have a negative effect on short term monetary policy expectations, while contractionary supply shocks have negative effect on medium and long term expectations. Moreover, shocks to different economies do not have significantly different effects on expectations, although some differences across countries arise. |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:764&r=all |
| By: | Crowley, Patrick (Texas A&M University - Corpus Christi); Trombley, Christopher (Texas A&M University - Corpus Christi) |
| Abstract: | Within currency unions, the conventional wisdom is that there should be a high degree of macroeconomic synchronicity between the constituent parts of the union. But this conjecture has never been formally tested by comparing sample of monetary unions with a control sample of countries that do not belong to a monetary union. In this paper we take euro area data, US State macro data, Canadian provincial data and Australian state data — namely real Gross Domestic Product (GDP) growth, the GDP deflator growth and unemployment rate data — and use techniques relating to recurrence plots to measure the degree of synchronicity in dynamics over time using a dissimilarity measure. The results show that for the most part monetary unions are more synchronous than non-monetary unions, but that this is not always the case and particularly in the case of real GDP growth. Furthermore, Australia is by far the most synchronous monetary union in our sample. |
| Keywords: | business cycles; growth cycles; frequency domain; optimal currency area; macroeconomic synchronization; monetary policy; single currency |
| JEL: | C49 E32 F44 |
| Date: | 2015–07–31 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2015_011&r=all |
| By: | Calmfors, Lars (Research Institute of Industrial Economics (IFN)) |
| Abstract: | EU-level fiscal rules have not been able to prevent the large-scale accumulation of government debt in many eurozone countries. One explanation was major flaws in the rules. Some of these flaws have now been corrected. But the failure of the rules depended also on fundamental problems of time inconsistency. The same time-inconsistency problems that the rules were designed to address also apply to the rules themselves. Fiscal councils may be subject to less of such problems than rules. Still it is unlikely that a monetary union where bail-outs of governments are part of the system is viable in the long run. The sustainability of the euro may require a restoration of the no-bail-out clause and a strengthening of the banking union in ways that would allow it to cope with the financial repercussions that could arise from allowing government bankruptcies |
| Keywords: | Fiscal rules; Fiscal councils; European integration |
| JEL: | E61 E63 F55 |
| Date: | 2015–08–05 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:iuiwop:1076&r=all |
| By: | Gopinath, Gita (Harvard University); Kalemli-Ozcan, Sebnem (University of Maryland); Karabarbounis, Loukas (Federal Reserve Bank of Minneapolis); Villegas-Sanchez, Carolina (ESADE - Universitat Ramon Llull) |
| Abstract: | Following the introduction of the euro in 1999, countries in the South experienced large capital inflows and low productivity. We use data for manufacturing firms in Spain to document a significant increase in the dispersion of the return to capital across firms, a stable dispersion of the return to labor across firms, and a significant increase in productivity losses from misallocation over time. We develop a model of heterogeneous firms facing financial frictions and investment adjustment costs. The model generates cross-sectional and time-series patterns in size, productivity, capital returns, investment, and debt consistent with those observed in production and balance sheet data. We illustrate how the decline in the real interest rate, often attributed to the euro convergence process, leads to a decline in sectoral total factor productivity as capital inflows are misallocated toward firms that have higher net worth but are not necessarily more productive. We conclude by showing that similar trends in dispersion and productivity losses are observed in Italy and Portugal but not in Germany, France, and Norway. |
| Keywords: | Misallocation; Productivity; Dispersion; Capital flows; Europe |
| JEL: | D24 E22 F41 O16 O47 |
| Date: | 2015–07–31 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmwp:728&r=all |
| By: | Crowley, Patrick (Texas A&M University - Corpus Christi); Hudgins, David (Texas A&M University - Corpus Christi) |
| Abstract: | This paper first applies the MODWT (Maximal Overlap Discrete Wavelet Transform) to Euro Area quarterly GDP data from 1995 – 2014 to obtain the underlying cyclical structure of the GDP components. We then design optimal fiscal and monetary policy within a large state-space LQ-tracking wavelet decomposition model. Our study builds a MATLAB program that simulates optimal policy thrusts at each frequency range where: (1) both fiscal and monetary policy are emphasized, (2) only fiscal policy is relatively active, and (3) when only monetary policy is relatively active. The results show that the monetary authorities should utilize a strategy that influences the short-term market interest rate to undulate based on the cyclical wavelet decomposition in order to compute the optimal timing and levels for the aggregate interest rate adjustments. We also find that modest emphasis on active interest rate movements can alleviate much of the volatility in optimal government spending, while rendering similarly favorable levels of aggregate consumption and investment. This research is the first to construct joint fiscal and monetary policies in an applied optimal control model based on the short and long cyclical lag structures obtained from wavelet analysis. |
| Keywords: | discrete wavelet analysis; euro area; fiscal policy; LQ tracking; monetary policy; optimal control |
| JEL: | C49 C61 C63 C88 E52 E61 |
| Date: | 2015–08–12 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2015_012&r=all |
| By: | Paulo Júlio; Ricardo Mourinho Félix; Gabriela Lopes de Castro; José R. Maria |
| Abstract: | We define "financial fragmentation shocks" as fluctuations in credit market frictions in a small euro area economy. The shock changes the financial integration status quo of the monetary union, given its negligible international spillover. An increase in credit market frictions triggers a recession in the small economy. Perfect competition and the absence of nominal rigidities attenuate output volatility. Expectations also matter: real impacts weaken when long fragmentation time spans are perceived to be short lived. Contrarily to ""risk shocks", defined as fluctuations in borrowers' riskiness, fragmentation shocks do not imply strongly countercyclical bankruptcy rates. The results are based on PESSOA, a general equilibrium model with a Bernanke-Gertler-Gilchrist financial accelerator mechanism. |
| JEL: | E27 E44 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w201508&r=all |
| By: | Samuel Brazys (School of Politics and International Relations and Geary Institute for Public Policy, University College Dublin); Aidan Regan (School of Politics and International Relations, University College Dublin) |
| Abstract: | The 2008 financial crisis hit few places harder than the European periphery, where five states, Portugal, Italy, Ireland, Greece and Spain, came to be collectively known as the ‘PIIGS’. Yet while the PIIGS experienced a similar adjustment to the crisis, the recoveries have shown significant divergence. Ireland, in particular, has stood out as a beacon of growth, not only in the PIIGS but in all of Europe. We challenge the prevailing narrative that Ireland’s exemplary performance is due to its early and ardent adaptation of fiscal ‘austerity’ measures. Instead we argue that Ireland’s path dependent, state-led, ‘enterprise policy’ situated Ireland to be a recipient of foreign direct investment driven by the low borrowing costs, brought on by the United States’ Quantitative Easing (QE) programs. Using quantitative and qualitative investigation we find evidence that the latent enterprise policy mechanism – operationalized via the impact of QE on investment projects into Ireland (vis-à-vis the other PIIGS) - rather than increased wage competitiveness via austerity, accounts for Ireland’s recovery from the crisis. |
| Keywords: | Austerity, Crisis, Debt, Ireland, PIIGS, Enterprise Policy |
| Date: | 2015–08–25 |
| URL: | http://d.repec.org/n?u=RePEc:ucd:wpaper:201517&r=all |
| By: | Beltratti, Andrea (Bocconi University); Stulz, Rene M. (OH State University and ECGI, Brussels) |
| Abstract: | From 2010 to 2012, the relation between bank stock returns from European Union (EU) countries and the returns on sovereign CDS of peripheral (GIIPS) countries is negative. We use days with tail sovereign CDS returns of peripheral countries to identify the effects of shocks to the cost of borrowing of these countries on EU banks from other countries. A CDS tail return affects banks with greater exposure to the country experiencing that return more, but it has an impact on banks regardless of exposure. Shocks to peripheral countries that are more pervasive impact the returns of banks from countries that experience no shock more than shocks to small individual peripheral countries. In general, the impact of tail returns is asymmetric in that banks suffer less from adverse shocks to peripheral countries than they gain from favourable shocks to such countries. |
| JEL: | F34 G12 G15 G21 H63 |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2015-06&r=all |
| By: | Luís Fonseca; Matteo Crosignani; Miguel Faria-e-Castro |
| Abstract: | We analyze the effect of unconventional monetary policy, in the form of collateralized lending to banks, on sovereign borrowing costs. Using our unique dataset on monthly security- and bank-level holdings of government bonds, we document that Portuguese banks increased their holdings of domestic public debt during the allotment of the three year Long-Term Refinancing Operations (LTRO) of the European Central Bank. We argue that domestic banks engaged in a "collateral trade", which involved the purchase of high-yield bonds with short maturities that could be pledged as collateral for low cost and long-term borrowing from the ECB. This significant increase in bond holdings was concentrated in shorter maturities, as these were especially suited to mitigate funding liquidity risk. The resulting steepening of the sovereign yield curve and the timing and characteristics of government bond auctions are consistent with a strategic response by the debt management agency. |
| JEL: | E44 E52 E63 G21 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w201509&r=all |
| By: | Lane, Philip R. |
| Abstract: | This paper examines the cyclical behaviour of country-level macro-financial variables under EMU. Monetary union strengthened the covariation pattern between the output cycle and the financial cycle, while macro-financial policies at national and area-wide levels were insufficiently counter-cyclical during the 2003-2007 boom period. We critically examine the policy reform agenda required to improve macro-financial stability. |
| Keywords: | EMU; financial stability; macroprudential |
| JEL: | E50 F30 F32 |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10776&r=all |
| By: | Kiesel, F.; Lücke, F.; Schiereck, D. |
| Abstract: | This study aims to analyze the impact and effectiveness of the regulation on the European sovereign Credit Default Swap (CDS) market. The European sovereign debt crisis has drawn considerable attention to the CDS market. CDS have the ability of a speculative instrument to bet against a sovereign default. Therefore, the Regulation (EU) No. 236/2012 was introduced as the worldwide first uncovered CDS regulation. It prohibits buying uncovered sovereign CDS contracts in the European Union (EU). |
| Date: | 2015–08–06 |
| URL: | http://d.repec.org/n?u=RePEc:dar:wpaper:74937&r=all |
| By: | Jérôme Creel (OFCE - OFCE - Sciences Po); Paul Hubert (OFCE - OFCE - Sciences Po); Fabien Labondance (OFCE - OFCE - Sciences Po) |
| Abstract: | This paper aims to quantify the link between financialisation and financial instability, controlling for the financial and macroeconomic environment. Our main identification assumption is to represent these two concepts as a system of simultaneous joint data generating processes whose error terms are correlated. Based on panel data for EU countries from 1998, we test the null hypotheses that financialisation positively affects financial instability -a vulnerability effect- and that financial instability has a negative effect on financialisation -a trauma effect-, using Seemingly Unrelated Regressions and 3SLS. We find a positive causal effect of credit/GDP on non-performing loans - a vulnerability effect- in the EU as a whole, in the Eurozone, in the core of the EU but not at its periphery, and a negative effect of non-performing loans on credit/GDP - a trauma effect - in all samples. Even when relaxing our identification assumption, both opposite effects hold. |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01157936&r=all |
| By: | Petar Sorić (Faculty of Economics and Business, University of Zagreb); Ivana Lolić (Faculty of Economics and Business, University of Zagreb); Mirjana Čižmešija (Faculty of Economics and Business, University of Zagreb) |
| Abstract: | In the last five decades the European Economic Sentiment Indicator (ESI) has positioned itself as a high-quality leading indicator of overall economic activity. Relying on data from five distinct business and consumer survey sectors (industry, retail trade, services, construction and the consumer sector), ESI is conceptualized as a weighted average of the chosen 15 response balances. However, the official methodology of calculating ESI is quite flawed because of the arbitrarily chosen balance response weights. This paper proposes two alternative methods for obtaining novel weights aimed at enhancing ESI's forecasting power. Specifically, the weights are determined by minimizing the root mean square error in simple GDP forecasting regression equations; and by maximizing the correlation coefficient between ESI and GDP growth for various lead lengths (up to 12 months). Both employed methods seem to considerably increase ESI's forecasting accuracy in 26 individual European Union countries. The obtained results are quite robust across specifications. |
| Keywords: | Business and Consumer Surveys, Economic Sentiment Indicator, Nonlinear Optimization with Constraints, Leading Indicator |
| JEL: | C53 C61 E32 E37 |
| Date: | 2015–08–18 |
| URL: | http://d.repec.org/n?u=RePEc:zag:wpaper:1505&r=all |
| By: | Marta C. N. Simões (Faculty of Economics, University of Coimbra, and GEMF, Portugal); Adelaide P. S. Duarte (Faculty of Economics, University of Coimbra, and GEMF, Portugal); João Sousa Andrade (Faculty of Economics, University of Coimbra, and GEMF, Portugal) |
| Abstract: | This paper discusses the possibility that the austerity measures implemented in Portugal, that translate into a reduction of the respective welfare state, can not only hamper short term economic recovery but also compromise long-run macroeconomic performance, based on their impact on income inequality. We estimate a near-VAR model with social spending, inequality and output and perform impulse response analysis over the period 1980-2013 to investigate whether the recent expansion of the Portuguese welfare state constituted an obstacle or an opportunity for this country’s macroeconomic performance. Our results point to social spending as an expansionary fiscal policy instrument that can alleviate the downturn in output in the short-term. The long-term role of social spending is less clear due to its ambiguous effect on overall income inequality. We conclude that more important than the insufficient increase in social benefits due to fiscal consolidation efforts seems to be the need to carefully target social support so that there is no equity-efficiency trade-off. |
| Keywords: | social spending, inequality, economic growth, Portugal, VAR. |
| JEL: | H53 O40 O52 P16 |
| Date: | 2015–07 |
| URL: | http://d.repec.org/n?u=RePEc:gmf:wpaper:2015-16.&r=all |