nep-eec New Economics Papers
on European Economics
Issue of 2015‒09‒18
seventeen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. External debt and real exchange rates' adjustment in the euro area: New evidence from a nonlinear NATREX model By Cécile COUHARDE; Serge REY; Audrey SALLENAVE
  2. Comparisons and contrasts of the impact of the crisis on euro area labour markets By Ad hoc team of the European System of Central Banks; Anderton, Robert; Jarvis, Valerie; Szörfi, Béla; Périnet, Mathilde; Petroulas, Pavlos; Bonthuis, Boele; Beck Nelleman, Peter; Conefrey, Thomas; Soosaar, Orsolya; Nicolitsas, Daphne; Izquierdo, Mario; Verdugo, Gregory; Tommasino, Pietro; Zizza, Roberta; Guarda, Paolo; Veiga, Cindy; Stiglbauer, Alfred; Maria, José R.; Micuch, Marek; Karšay, Alexander
  3. The geography of the great rebalancing in euro area bond markets during the sovereign debt crisis By Beck, Roland; Georgiadis, Georgios; Gräb, Johannes
  4. Financial exposure to the euro area before and after the crisis: home bias and institutions at home By Floreani, Vincent Arthur; Habib, Maurizio Michael
  5. Euro area business cycles in turbulent times: convergence or decoupling? By Klaus, Benjamin; Ferroni, Filippo
  6. Capital inflows and euro area long-term interest rates By Carvalho, Daniel; Fidora, Michael
  7. Shoe-leather costs in the euro area and the foreign demand for euro banknotes By Calza, Alessandro; Zaghini, Andrea
  8. The (De-)Anchoring of Inflation Expectations: New Evidence from the Euro Area By Laura Pagenhardt; Dieter Nautz; Till Strohsal; Strohsal
  9. What has driven inflation dynamics in the Euro area, the United Kingdom and the United States By Melolinna, Marko
  10. Distributional consequences of asset price inflation in the euro area By Adam, Klaus; Tzamourani, Panagiota
  11. Sovereign stress, unconventional monetary policy, and SME access to finance By Ferrando, Annalisa; Popov, Alexander; Udell, Gregory F.
  12. Orderly sovereign debt restructuring procedures for the euro area By Busch, Berthold; Matthes, Jürgen
  13. Euro area macro-financial stability: A flow-of-funds perspective By Beck, Günter W.; Kotz, Hans-Helmut; Zabelina, Natalia
  14. The four unions "PIE" on the Monetary Union "CHERRY": a new index of European Institutional Integration By Dorrucci, Ettore; Ioannou, Demosthenes; Mongelli, Francesco Paolo; Terzi, Alessio
  15. Long-lasting consequences of the European crisis By Jimeno, Juan F.
  16. The Role of Liquidity In Forecasting Office Yields In Europe By S. Tsolacos; K.M. Kim
  17. Financial stability challenges in EU candidate and potential candidate countries By IRC expert group of the ESCB; Ramon-Ballester, Francisco; Pulst, Daniela; Posch, Michaela; Savelin, Li; Manolov, Stoyan; Huljak, Ivan; Kuhles, Winona; Jimborean, Ramona; Oláh, Zsolt; Dancsik, Bálint; Colabella, Andrea; Moder, Isabella; Macki, Piotr; Cervena, Marianna; Other contributors; Shehu, Klodion; Maloku, Krenare; Vaskov, Mihajlo; Bozovic, Borko; Vlahovic, Ana; Vasilijev, Dejan; Çakmak, Bahadır

  1. By: Cécile COUHARDE; Serge REY; Audrey SALLENAVE
    Abstract: In this paper we revisit medium- to long-run real exchange rate determination within the euro area, focusing on the role of external debt. Accordingly, we rely on the NATREX approach which provides an explicit framework of the external debt-real exchange rates nexus. In particular, given the indebtedness levels reached by the euro area economies, we investigate potential non-linearity in real exchange rates dynamics, according to the level of the external debt. Our results evidence that during the monetary union, gross and net external debt positions of the euro area countries have exerted pressures on real exchange rate dynamics within the area. Moreover, we find that, beyond a threshold reached by the external debt, euro area countries are found to be in a vulnerable position, leading to an unavoidable adjustment process. Nevertheless, the adjustment process, while effective, is found to be low and occurs slowly.
    Keywords: Euro area; External debt; NATREX approach; Panel Smooth Transition Regression models; Real exchange rates
    JEL: C23 F31 O47
    Date: 2015–09
  2. By: Ad hoc team of the European System of Central Banks; Anderton, Robert; Jarvis, Valerie; Szörfi, Béla; Périnet, Mathilde; Petroulas, Pavlos; Bonthuis, Boele; Beck Nelleman, Peter; Conefrey, Thomas; Soosaar, Orsolya; Nicolitsas, Daphne; Izquierdo, Mario; Verdugo, Gregory; Tommasino, Pietro; Zizza, Roberta; Guarda, Paolo; Veiga, Cindy; Stiglbauer, Alfred; Maria, José R.; Micuch, Marek; Karšay, Alexander
    Abstract: The global financial and economic crisis – including two euro area recessions in 2008-2009 and 2011-2013 – has had a heavy impact on euro area labour markets. A notable feature throughout the crisis has been the considerable degree of cross-country heterogeneity of labour market adjustments – with some economies emerging relatively unscathed, while others have seen steep and persisting increases in unemployment. This paper analyses the impacts of the crisis on euro area labour markets, paying particular attention to the differential impact of the two euro area recessions of the crisis and the interplay of sectoral and institutional features driving labour market outcomes. Despite ongoing structural reforms in some euro area countries, progress has been partial and uneven across the euro area. Further reductions in labour market rigidities are necessary to increase and accelerate the adjustment capacity of euro area labour markets and help reduce the current high levels of structural unemployment. JEL Classification: D8, E5
    Keywords: employment, Labour Demand, Labour Force, migration, Skill, Underemployment, Unemployment, Vacancies, Wages, Youth
    Date: 2015–02
  3. By: Beck, Roland; Georgiadis, Georgios; Gräb, Johannes
    Abstract: During the sovereign debt crisis investors rebalanced out of stressed and into non-stressed euro area countries, thereby contributing to the tensions in euro area financial markets. This paper examines the geographical pattern of this great rebalancing. Specifically, we test whether euro area and non-euro area investors adjusted their holdings of debt securities of euro area stressed and non-stressed countries dis-proportionately relative to benchmarks derived from a standard gravity model for portfolio choice. We find that non-euro area investors under-invested in stressed euro area countries, but did not over-invest in non-stressed euro area countries. As regards intra-euro area flows, we do not find evidence for a disproportionate slowdown of capital flows from non-stressed into stressed euro area countries. Instead, our results suggest that investors in stressed euro area countries disproportionately shifted capital into debt securities of non-stressed euro area countries. Finally, we find that both non-euro area investors' under-investment in stressed countries and stressed euro area investors' over-investment in non-stressed euro area countries ceased after the announcement of the ECB's OMT programme. JEL Classification: F34, F36, G15
    Keywords: euro area sovereign debt crisis, foreign investment, gravity model, international capital flows
    Date: 2015–08
  4. 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
  5. By: Klaus, Benjamin; Ferroni, Filippo
    Abstract: We study the business cycle properties of the four largest euro area economies in the wake of the recent recession episodes. The analysis is based on the factors estimated from a multi-country and multi-sector data-rich environment. We measure alikeness of business cycles by studying the synchronization of up and down phases, the convergence properties of country fluctuations towards the euro area cycles and the contribution of the euro area factor to national GDP volatilities. While the economic fluctuations of the four euro area member states were similar before the global financial turmoil, we gather compelling evidence of an asymmetric behaviour of Spanish fluctuations relative to the euro area one. JEL Classification: C51, E32, O52
    Keywords: Hierarchical factor models, International business cycles, Synchronization and Convergence ECB
    Date: 2015–06
  6. 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
  7. By: Calza, Alessandro; Zaghini, Andrea
    Abstract: We estimate the shoe-leather costs of inflation in the euro area using monetary data adjusted for holdings of euro banknotes abroad. While we find evidence of marginally negative shoe-leather costs for very low levels of the nominal interest rate, our estimates suggest that the shoe-leather costs are non-negligible even for relatively moderate levels of anticipated inflation. We conclude that, despite the increased circulation of euro banknotes abroad, in the euro area the inflation tax is still predominantly borne by domestic agents, with transfers of resources from abroad remaining small. JEL Classification: E41, C22
    Keywords: currency abroad, euro, money demand, welfare cost of inflation
    Date: 2015–07
  8. By: Laura Pagenhardt; Dieter Nautz; Till Strohsal; Strohsal
    Abstract: Well-anchored inflation expectations are a key factor for achieving economic stability. This paper provides new empirical results on the anchoring of long-term inflation expectations in the euro area. In line with earlier evidence, we find that euro area inflation expectations have been anchored until fall 2011. Since then, however, they respond significantly to macroeconomic news. Our results obtained from multiple endogenous break point tests suggest that euro area inflation expectations have remained de-anchored ever since.
    Keywords: Anchoring of Inflation Expectations, Break-Even Inflation Rates, News-Regressions, Multiple Structural Break Tests
    JEL: E31 E52 E58 C22
    Date: 2015–09
  9. 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
  10. By: Adam, Klaus; Tzamourani, Panagiota
    Abstract: We study the distributional consequences of housing price, bond price and equity price increases for Euro Area households using data from the Household Finance and Consumption Survey (HFCS). The capital gains from bond price and equity price increases turn out to be concentrated among relatively few households, while the median household strongly benefits from housing price increases. The capital gains from bond price increases (relative to household net wealth) do not correlate with household net wealth (or income). Bond price increases thus leave net wealth inequality largely unchanged. In contrast, equity price increases largely benefit the top end of the net wealth (and income) distribution, thus amplify net wealth inequality. Housing price increases display a hump shaped pattern over the net wealth distribution, with the poorest and richest households benefitting least. With regard to the latter finding there exists considerable heterogeneity across Euro Area countries.
    Keywords: monetary policy,asset prices,net wealth distribution,inequality,household survey
    JEL: D14 D31 E21 E31 E52 E58
    Date: 2015
  11. By: Ferrando, Annalisa; Popov, Alexander; Udell, Gregory F.
    Abstract: We investigate the effect of sovereign stress and of unconventional monetary policy on small firms’ financing patterns during the euro area debt crisis. We find that after the crisis started, firms in stressed countries were more likely to be credit rationed, both in the quantity and in the price dimension, and to increase their use of debt securities. We also find evidence that the announcement of the ECB’s Outright Monetary Transactions Program was followed by an immediate decline in the share of credit rationed firms and of firms discouraged from applying. In addition, firms reduced their use of debt securities, trade credit, and government-subsidized loans. Firms with improved outlook and credit history were particularly likely to benefit from easier credit access. JEL Classification: D22, E58, G21, H63
    Keywords: Credit Access, SMEs, Sovereign debt, unconventional monetary policy
    Date: 2015–06
  12. By: Busch, Berthold; Matthes, Jürgen
    Abstract: The case of Greece has reveiled an institutional gap remains in the institutional framework of EMU: an orderly insolvency mechanism for sovereign states. After weighing the pros and cons of such a mechanism, requirements are devised to max-imise the advantages and minimise the potential drawbacks. Overall, an insolvency procedure for sovereign states needs to be effective, reliable and fair. It should limit the negative effects of a default for the debtor country, but must not provide incentives for the debtor country to default strategically. Bearing these requirements in mind and based on a combination and change of existing proposals, this study pro-poses an insolvency regime for sovereign states, but one only as an ultima ratio. As a rule, the debtor country starts the procedure - and is then supported by ESM bridge financing and can benefit from a moratorium on debt service, litigation and enforcement in order to sustain basic government functions. These support measures are time-limited and go hand in hand with a robust reform programme of the ESM to avoid problematic incentives for fiscal policy. The ESM can also trigger the procedure under restrictive conditions as an ultima ratio, if the debtor country clearly delays this step. The ESM treaty (also) has to be changed to ensure that the insolvency mechanism is triggered, if a country applies for ESM loans but proves to be insolvent instead of illiquid. Finally, if an ESM programme for a formely illiquid country ends unsuccessfully, an insolvency procedure is triggered automatically. [...]
    Abstract: In der Folge der Euro-Schuldenkrise sind vielfältige Reformen im institutionellen Regelwerk der Europäischen Währungsunion erfolgt. Doch nicht zuletzt der Fall Griechenland hat deutlich gemacht, dass im reformierten EWU-Regelwerk noch eine wesentliche Lücke klafft. Diese Studie spricht sich daher, nach eingehender Abwägung von Vor- und Nachteilen, für die Schaffung eines Staatsinsolvenzverfahrens für Euroländer aus. Eine Schuldenrestrukturierung darf aber nur die Ultima Ratio sein. Um die No-Bailout-Klausel des EU-Vertrags und die Disziplinierungsfunktion der Finanzmärkte zu stärken, muss ein Staatsinsolvenzverfahren glaubwürdig durchgeführt werden können. Dabei sind Ansteckungseffekte auf andere Euroländer zu begrenzen und vor allem Banken im Euroraum weniger verletzbar gegenüber Staatsbankrotten zu machen. Dazu sollten Anforderungen an die Eigenkapitalbasis der Banken weiter erhöht und die Bevorzugung von Staatsanleihen in der Bankenregulierung abgeschafft werden. Zudem muss ein Staatsinsolvenzverfahren möglichst effektiv, schnell, fair und rechtssicher sein, darf aber keine Einladung zu einer zu leichten Entschuldungsmöglichkeit sein. Um diese Anforderungen möglichst gut zu erreichen, unterbreiten die Autoren (unter Rückgriff, Kombination und Abwandlung bestehender Vorschläge) einen konkreten Vorschlag für ein Staatsinsolvenzverfahren. [...]
    Keywords: Europäische Union,Europäische Währungsunion,Finanzmärkte,Staatsverschuldung
    Date: 2015
  13. By: Beck, Günter W.; Kotz, Hans-Helmut; Zabelina, Natalia
    Abstract: The global financial crisis (as well as the European sovereign debt crisis) has led to a substantial redesign of rules and institutions - aiming in particular at underwriting financial stability. At the same time, the crisis generated a renewed interest in properly appraising systemic financial vulnerabilities. Employing most recent data and applying a variety of largely only recently developed methods we provide an assessment of indicators of financial stability within the Euro Area. Taking a "functional" approach, we analyze comprehensively all financial intermediary activities, regardless of the institutional roof - banks or non-bank (shadow) banks - under which they are conducted. Our results reveal a declining role of banks (and a commensurate increase in non-bank banking). These structural shifts (between institutions) are coincident with regulatory and supervisory reforms (implemented or firmly anticipated) as well as a non-standard monetary policy environment. They might, unintendedly, actually imply a rise in systemic risk. Overall, however, our analyses suggest that financial imbalances have been reduced over the course of recent years. Hence, the financial intermediation sector has become more resilient. Nonetheless, existing (equity) buffers would probably not suffice to face substantial volatility shocks.
    Keywords: bank and non-bank financial intermediation,shadow banking,financial stability,systemic risk,financial regulation
    Date: 2015
  14. By: Dorrucci, Ettore; Ioannou, Demosthenes; Mongelli, Francesco Paolo; Terzi, Alessio
    Abstract: This paper presents a European Index of Regional Institutional Integration (EURII), which maps developments in European integration from 1958 to 2014 on the basis of a monthly dataset. EURII captures what we call: (i) the “Common Market Era”, which lasted from 1958 until 1993; and (ii) the first twenty years of the “Union Era” that started in 1994, but gained new impetus in response to the euro area crisis. The paper complements the economic narratives of the crisis with an institutional approach highlighting the remedies to the flaws in the initial design of Economic and Monetary Union (EMU). In fact, since 2010, EMU’s institutional framework has been substantially reformed. While work on EMU’s new governance is still in progress, the broad contours of a “genuine union” have been outlined in the Four Presidents’ Report of December 2012. The report envisages a more effective economic union, a fiscal union, a financial union, and a commensurate political union. The aim of the EURII index is threefold: (i) to provide a tool to synthesise and monitor the process of European institutional integration since 1958 and, in particular, track institutional reforms since 2010; (ii) to expand a previous integration index by showing that monetary unification – which was initially understood as “the cherry on the Internal Market pie” – implied a major discontinuity in the process and nature of European integration, that is, a new “pie on the cherry”; and (iii) to offer a tool for further research, policy analysis and communication. JEL Classification: F31, F32
    Keywords: Economic and Monetary Integration, euro, Financial Deepening and Integration, Four Presidents' Report, Institutions and Governance, Optimum Currency Area, Sovereign Crisis
    Date: 2015–02
  15. By: Jimeno, Juan F.
    Abstract: The Great Recession and the subsequent European crisis may have long-lasting effects on aggregate demand, aggregate supply, and, hence, on macroeconomic performance over the medium and long-run. Besides the fact that financial crisis last longer and are succeeded by slower recoveries, and apart from the hysteresis effects that may operate after episodes of long-term unemployment, the combination of high (public and private) debt and low population and productivity growth may create significant constraints for monetary and fiscal policies. In this paper I develop an OLG model, one earlier used by Eggertsson and Mehrotra (2014) to rationalize the "secular stagnation hypothesis", to show how high debt, and low population and productivity growth may condition the macroeconomic performance of some European countries over the medium and long-run. JEL Classification: E20, E43, E52, E66
    Keywords: inter-generational transfers, natural rate of interest, population and productivity growth, secular stagnation, zero lower bound
    Date: 2015–07
  16. By: S. Tsolacos; K.M. Kim
    Abstract: The impact of the global financial turmoil and the sovereign debt crisis on the volume of investment transactions has been well publicized. A prominent trend has been the volatility and shifting pattern in investment flows in European investment markets post 2008. This volatility in investment activity levels, which is hardly surprising given the Eurozone woes, has been reflected in pricing which also exhibited significant variation. Capital flows or investment turnover reflect investor sentiment and impact on risk premia. A key research question is to assess the incremental impact of fluctuating turnover volumes on office yields. Existing global research to study yields builds on theoretical frameworks that incorporate economic factors, financial series and fundamentals in the real estate market. Further, this body of research explains yield movements utilising a host of other factors. These include market transparency, currency risks if not hedged, financial risks, lease structures and property rights àwith the list of such factors being more extensive. However, the high volatility in real estate prices and yields in the last five years directs our research attention to investor confidence and sentiment as causes of rapid yield/price adjustments. This guides the setup of our empirical investigation which takes part into two stages. In the first stage a model is built aiming to capture yield movements. This model needs however to be strongly responsive to allow for quick adjustments in yields, which was the case in the period 2007 to 2010. In the second stage the model is augmented to accommodate cross border capital flows. These models are estimated with data from major European office centres. The contribution of the study is threefold. First, the study sheds further light into the determination of European office yields. Second, it identifies the factors which have more immediate effects on yields and are more appropriate to explain their short-term fluctuations. The third implication of the study is deemed the most important one. It quantifies risks for the current office yields in Europe that can arise from the economy and reversals in investment turnover.
    Keywords: Capital flows; Office Yields; Risk Factors
    JEL: R3
    Date: 2015–07–01
  17. By: IRC expert group of the ESCB; Ramon-Ballester, Francisco; Pulst, Daniela; Posch, Michaela; Savelin, Li; Manolov, Stoyan; Huljak, Ivan; Kuhles, Winona; Jimborean, Ramona; Oláh, Zsolt; Dancsik, Bálint; Colabella, Andrea; Moder, Isabella; Macki, Piotr; Cervena, Marianna; Other contributors; Shehu, Klodion; Maloku, Krenare; Vaskov, Mihajlo; Bozovic, Borko; Vlahovic, Ana; Vasilijev, Dejan; Çakmak, Bahadır
    Abstract: This paper reviews financial stability challenges in countries preparing for EU membership, i.e. Albania, Bosnia and Herzegovina, Kosovo*, Iceland, the former Yugoslav Republic of Macedonia, Montenegro, Serbia and Turkey. The paper has been prepared by an expert group of staff from the European System of Central Banks (ESCB) in which experts from EU candidate and potential candidate country central banks also participated. The paper finds that near-term challenges to financial stability primarily relate to credit risks from the generally weak economic dynamics in combination with already high non-performing loan burdens in many banking systems, especially in the Western Balkans. In the medium-term, challenges to financial stability stem from indirect market risks to banks related to foreign currency lending as well as lingering exposures to funding risks, with Western Balkan economies again appearing as relatively more vulnerable. Looking further ahead, the paper highlights that the magnitude of the challenge to reach a ‘new banking normal’ for banking systems in these countries appears to remain sizeable, while noting that the establishment of adequate home-host cooperation channels would be important to help maximise the potential benefits to third parties stemming from centralised banking supervision under the Single Supervisory Mechanism (SSM). JEL Classification: G32, E44
    Keywords: banking sector, banking union, cross-border flows, deleveraging, emerging markets, Europe, foreign exchange lending
    Date: 2015–08

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