nep-eec New Economics Papers
on European Economics
Issue of 2015‒09‒26
eleven papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. The German Question and the European Question. Monetary Union and European Democracy after the Greek crisis By Guido Montani
  2. Euro Area Time Varying Fiscal Sustainability By António Afonso; João Tovar Jalles
  3. Building a Better Union: Incentivizing Structural Reforms in the Euro Area By Angana Banerji; Bergljot Barkbu; James John; Tidiane Kinda; Sergejs Saksonovs; Hanni Schoelermann; Tao Wu
  4. Distributional consequences of asset price inflation in the euro area By Adam, Klaus; Tzamourani, Panagiota
  5. Country shocks, monetary policy expectations and ECB decisions. A dynamic non-linear approach By Camacho, Maximo; Leiva-Leon, Danilo; Pérez-Quirós, Gabriel
  6. Capital Allocation and Productivity in South Europe By Gopinath, Gita; Kalemli-Ozcan, Sebnem; Karabarbounis, Loukas; Villegas-Sanchez, Carolina
  7. Banks and Sovereign Risk: A Granular View By C. M. Buch; Michael Koetter; Jana Ohls
  8. Interconnections between Eurozone and US booms and busts using a Bayesian Panel Markov-Switching VAR mode By Monica Billio; Roberto Casarin; Francesco Ravazzolo; Herman K. van Dijk
  9. The bank lending channel: An empirical analysis of EU accession countries from 2004-2013 By Khosravi, Taha
  10. Pension reforms in the 1990s and during the financial crisis: More of the same? By Grech, Aaron George
  11. Has the crisis affected the behavior of the rating agencies? Panel Evidence from the Eurozone By Periklis Boumparis; Costas Milas; Theodore Panagiotidis

  1. By: Guido Montani (Department of Economics and Management, University of Pavia)
    Abstract: The dramatic clash between creditor and debtor countries in the EU shows that radical reforms are required. In this paper we argue that the EMU is a political project: it is a European public good, which must be provided by a legitimate democratic government. Yet during the crisis, Germany played the role of leading country, and the old dilemma between a German Europe and a European Germany cropped up again. Here we examine two interjurisdictional spillovers caused by asymmetries among the governance and size of the economies in the euro area: the bank-sovereign nexus and the internal deflation trap. In order to avoid social and economic disequilibria, we propose a European economic model for the euro area based on a long-term balance of payment equilibrium, as an alternative to the German export-led economy model. Current account surpluses and deficits are neither a virtue nor a sin. The euro area should be endowed with a federal budget, enabling the European Commission to employ European savings to spur growth, employment and public and private investments. The new European model must be coherent and compatible with the needs of the other states of the world; the stability of the international economy is also a global public good. Indeed we can look at the European model to draw some principles for reforming the old international economic order set up at Bretton Woods, but now in crisis due to global imbalances and international monetary and financial instability.
    Date: 2015–09
  2. By: António Afonso; João Tovar Jalles
    Abstract: We assess the time varying features of fiscal sustainability in the euro area via revisiting the empirical relationship between the primary budget surplus and the debt-to-GDP ratio. Focusing on a sample of 11 Euro-area countries between 1999Q1 and 2013Q4 and by means of time series analyses, we find that: i) fiscal policy seems to have been sustainable in Belgium, France, Germany and Netherlands and a Ricardian (monetary dominant) regime might have been present; ii) debt exhibited a negative response following an innovation in the budget surplus in half of the sample; iii) the time-varying coefficient model shows that the 2008-2009 global economic and financial crisis exerted a sizeable negative impact on fiscal sustainability; iv) expenditure-based fiscal rules are strong determinants of fiscal sustainability. All in all, we found some evidence against the Fiscal Theory of the Price Level.
    Keywords: fiscal sustainability, causality, impulse response functions, time-varying coefficients, fiscal rules, logistic model
    JEL: E62 H62 O52
    Date: 2015–09
  3. By: Angana Banerji; Bergljot Barkbu; James John; Tidiane Kinda; Sergejs Saksonovs; Hanni Schoelermann; Tao Wu
    Abstract: The momentum for structural reforms is waning in the euro area at a time when even faster progress is needed to boost productivity and growth, achieve real economic convergence, and improve the resilience of the monetary union. What can the European Union (EU) institutions do to bridge this divide? This paper argues for greater simplicity, transparency and accountability in the EU governance framework for structural reforms. Our three interrelated proposals—“outcome-based†benchmarking; better use of existing EU processes to strengthen oversight and reduce discretion; and improved financial incentives—could help advance reforms. Ex post monitoring by an independent EU-level “structural council†and ex ante policy innovation by national productivity councils could strengthen accountability and ownership. Deeper governance reforms should be considered in the medium-term with a view toward a greater EU role in promoting convergence.
    Keywords: Fiscal reforms;Euro Area;European Economic and Monetary Union;Institutional framework;Structural reform, European economic governance, European Union
    Date: 2015–09–11
  4. 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
  5. By: Camacho, Maximo; Leiva-Leon, Danilo; Pérez-Quirós, Gabriel
    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.
    Keywords: business cycles; inflation cycles; monetary policy
    JEL: C22 E32 E37
    Date: 2015–09
  6. By: Gopinath, Gita; Kalemli-Ozcan, Sebnem; Karabarbounis, Loukas; Villegas-Sanchez, Carolina
    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: Capital Flows; Dispersion; Europe; Misallocation; Productivity
    JEL: D24 E22 F41 O16 O47
    Date: 2015–09
  7. By: C. M. Buch; Michael Koetter; Jana Ohls
    Abstract: We identify the determinants of all German banks’ sovereign debt exposures between 2005 and 2013 and test for the implications of these exposures for bank risk. Larger, more capital market affine, and less capitalised banks hold more sovereign bonds. Around 15% of all German banks never hold sovereign bonds during the sample period. The sensitivity of sovereign bond holdings by banks to eurozone membership and inflation increased significantly since the collapse of Lehman Brothers. Since the outbreak of the sovereign debt crisis, banks prefer sovereigns with lower debt ratios and lower bond yields. Finally, we find that riskiness of government bond holdings affects bank risk only since 2010. This confirms the existence of a nexus between government debt and bank risk.
    Keywords: sovereign debt, bank-level heterogeneity, bank risk
    JEL: G01 G11 G21
    Date: 2015–09
  8. By: Monica Billio (University Ca’ Foscari of Venice; Italy); Roberto Casarin (University Ca’ Foscari of Venice; Italy); Francesco Ravazzolo (BI Norwegian Business School, and Norges Bank, Norway); Herman K. van Dijk (Erasmus University Rotterdam, the Netherlands)
    Abstract: Interconnections between Eurozone and United States booms and busts and among major Eurozone economies are analyzed using a Panel Markov-Switching VAR model. The model accommodates changes in low and high data frequencies and incorporates endogenous time-varying transition matrices of country-specific Markov chains. These country-specific Markov chains depend on their own past history and the history of other chains, thus allowing for interconnections between cycles, and an endogenous common Eurozone cycle is derived by aggregating the country-specific cycles. The model is estimated using a simulation based Bayesian approach in which an efficient multi-move sampling algorithm is defined to draw time-varying Markov-switching chains. Using industrial production growth and credit spread data for all countries, several empirical results have emerged. Recession, slow gro wth and expansion are empirically identified as three regimes with slow growth becoming persistent in the Eurozone in recent years different from the US. The Eurozone and the US regimes appear not fully synchronized, with evidence of more recessions in the Eurozone. Second, turning point analysis indicates larger synchronization at the beginning of the Great Financial Crisis: this shock affects the US first, leading the Eurozone cycle, and spreads then rapidly among these economies. Third, amplification effects influence recession probabilities for Eurozone countries when shocks occur. The evidence is different for the US where this reinforcement does not exist. In recent years there are more imbalances among regimes in Eurozone countries. Fourth, a credit shock results in substantial negative industrial production growth for several months in Germany, Spain and the US.
    Keywords: Bayesian Modelling; Panel VAR; Markov-switching; International Business Cycles; Interaction mechanisms
    JEL: C11 C15 C53 E37
    Date: 2015–09–15
  9. By: Khosravi, Taha
    Abstract: In this paper a methodical empirical analysis of the bank lending channel of monetary transmission in the European Union’s 10 new member states is conducted. We specifically investigate the influence of monetary policy changes on bank lending activity and if this potential influence is contingent on bank characteristics, such as banks’ size, capital, liquidity and risk factor. Panel data compiled from a large number of banks from 2004 to 2013, and dynamic panel estimation methods are used. The results indicate the existence of a bank lending channel through bank liquidity; however, while liquidity and GDP growth maintain a beneficial and substantial impact on bank loan growth, the other bank characteristics are not considered to be important factors. Additionally, there is an indication of the effect of bank risk and liquidity from 2008 to 2010. Nevertheless, the lending channel has been weakened, serving as an additional refutation of bank-specific traits in allowing banks to maintain lending activity and growth during a financial crisis.
    Keywords: Bank lending channel, EU-10 countries, Monetary policy transmission, Panel data.
    JEL: C23 E51 E52 G21
    Date: 2015–09–19
  10. By: Grech, Aaron George
    Abstract: Many EU countries have been carrying out substantial pension reforms since the mid-1990s. This article studies whether the reforms that were carried out in ten EU countries before and after the financial crisis of 2008 are different. This is done through an analysis of the different elements of these reforms and also by comparing entitlements of statutory pension systems after each set of reforms. The main conclusion is that the pre-crisis reforms were much stronger and had a more negative impact on women than the post-crisis reforms. It is harder to determine whether this represents a temporary break in the reform process or a permanent change in the orientation of pension reforms in these ten countries.
    Keywords: Social Security and Public Pensions; Retirement; Poverty; Retirement Policies
    JEL: H55 I38 J26
    Date: 2015–09
  11. By: Periklis Boumparis (Department of Economics, University of Macedonia); Costas Milas (University of Liverpool, UK); Theodore Panagiotidis (Department of Economics, University of Macedonia)
    Abstract: We examine the determinants of credit ratings for the Eurozone countries over the period 2002-2013 within a panel framework that allows for cross-sectional dependence. We find that government debt and the cumulative current account exert a stronger positive impact on ratings post-2008 compared to the period before. .
    Keywords: credit ratings; sovereign debt; panel data.
    JEL: C5 C13 F3
    Date: 2015–09

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