nep-eec New Economics Papers
on European Economics
Issue of 2015‒10‒04
ten papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. The Impact of the ECB's Asset Purchase Programmes on Sovereign Bond Spreads in the Euro Are By Gibran Watfe
  2. What drives the labour wedge? A comparison between CEE countries and the Euro Area By Ma³gorzata Skibiñska
  3. Labor Market Distortions under Sovereign Default Crises By Tavares, Tiago
  4. Cross-border effects of fiscal policy in the Eurozone By Bicu A.C.; Lieb L.M.
  5. Negative Policy Rates, Banking Flows and Exchange Rates By Anwar Khayat
  6. European identity and redistributive preferences By Joan Costa-i-Font; Frank Cowell
  7. “Short-run and long-run effects of public debt on economic performance: Evidence from EMU countries” By Marta Gómez-Puig; Simón Sosvilla-Rivero
  8. Disclosure, banks CDS spreads and the European sovereign crisis By Hervé ALEXANDRE; François GUILLEMIN; Catherine Refait-Alexandre
  9. Real Exchange Rates and Sectoral Productivity in the Eurozone By Berka, M; Devereux, MB; Engel, C
  10. Real Wage Cyclicality in the Eurozone before and during the Great Recession: Evidence from micro data By G. Verdugo

  1. By: Gibran Watfe (European Economic Studies Department, College of Europe)
    Abstract: This paper estimates the immediate impact of the European Central Bank's asset purchase programmes on sovereign bond spreads in the euro area between 2008 and 2015 using a country-by-country GARCH model. The baseline estimates are rigorously diagnosed for misspecication and subjected to a wide range of sensitivity tests. Among others, changes in the dependent variable, the independent variables and the number of (G)ARCH terms are tested. Moreover, the model is applied to subsamples and dynamic conditional cor- relations are analyzed to estimate the eects of the asset purchases on the contagion of spread movements. Generally, it is found that the asset purchase programmes triggered an reduction of sovereign bond spreads. More specically, the Securities Markets Programme (SMP) had the most signicant immediate eects on sovereign bond spreads across the euro area. The announcements related to the Outright Monetary Transactions (OMT) programme also yielded substantial spread compression in the periphery. In contrast to that, the most recent Public Sector Purchase Programme (PSPP) announced in January 2015 and implemented since March 2015 had no signicant immediate eects on sovereign bond spreads, except for Irish spreads. Hence, immediate eects seem to be dependent upon the size of the programme, the extent to which it targets distressed sovereigns and the way in which it is communicated.
    Keywords: European Central Bank, asset purchase programmes, sovereign bond yield spreads, event study, GARCH model
    JEL: E52 E58 E44 G12
    Date: 2015–09
  2. By: Ma³gorzata Skibiñska
    Abstract: We use a structural macroeconomic model with search and matching frictions on the labour market to analyse the di?erences in the business cycle ?uctuations of the labour wedge between two CEE countries and the Euro Area. Our results indicate that the observed higher volatility of this wedge in the CEE region re?ects mainly di?erent characteristics of stochastic disturbances rather than country-speci?c features of the labour market. We also ?nd signi?cant di?erences in the sources of labour wedge ?uctuations across the considered economies. While the labour wedge dynamics in Poland is to large extent explained by shocks originating in the labour market, most of its variations in the Czech Republic and in the Eurozone are attributable to changes in households’ preferences. Overall, our results suggest that labour market frictions in Poland are relatively more severe and generate ?uctuations that are more harmful for social welfare.
    Keywords: labour wedge, search and matching frictions, business cycle, CEE countries
    JEL: E32 J64
    Date: 2015–09
  3. By: Tavares, Tiago
    Abstract: Risk of sovereign debt default has frequently affected emerging market and developed economies. Such financial crisis are often accompanied with severe declines of employment that are hard to justify using a standard dynamic stochastic model. In this paper, I document that a labor wedge deteriorates substantially around swift reversals of current accounts or default episodes. I propose and evaluate two different explanations for these movements by linking the wedges to changes in labor taxes and in the cost of working capital. With these two features included, a dynamic model of equilibrium default is able to replicate the behavior of the labor wedge observed in the data around financial crisis. In the model, higher interest rates are propagated into larger costs of hiring labor through the presence of working capital. As an economy is hit with a stream of bad productivity shocks, the incentives to default become stronger, thus increasing the cost of debt. This reduces firm demand for labor and generates a labor wedge. A similar effect is obtained with a counter-cyclical tax rate policy. The model is used to shed light on the recent events of the Euro Area debt crisis and in particular of the Greek default event.
    Keywords: Sovereign default, labor markets, distortionary taxation, external debt, debt renegotiation, labor wedge
    JEL: E62 F32 F34 F41
    Date: 2015–05–01
  4. By: Bicu A.C.; Lieb L.M. (GSBE)
    Abstract: We empirically assess spillovers from fiscal policy in the Euro area. We propose a structural multi-country factor-augmented vector autoregression model identified with sign restrictions and analyse the domestic and international effects of fiscal policy measures. By extracting information from an extended set of country specific and cross-border variables, we are able to account for the different channels through which government expenditure shocks are transmitted within as well as across borders. We find significant negative effects of fiscal consolidations on domestic output, private consumption and investment. More importantly, spending cuts in Italy and Spain induce significant and persistent output spillovers on Germany and France.
    Keywords: Fiscal Policy; International Policy Coordination and Transmission;
    JEL: E62 F42
    Date: 2015
  5. By: Anwar Khayat (AMSE - Aix-Marseille School of Economics - EHESS - École des hautes études en sciences sociales - Centre national de la recherche scientifique (CNRS) - Ecole Centrale Marseille (ECM) - AMU - Aix-Marseille Université)
    Abstract: Setting negative nominal rates is one of the unconventional policies implemented after the Great Recession to overcome the Zero Lower Bound. Using data from the euro area and Denmark, I assess the impact of introducing a negative interest rate on reserves. I find that it did put a depreciation pressure on the currency due to a reversal in banking flows. This effect is not only caused by policy differentials, but also by a distinct impact of going into negative territory from lowering interest rates.
    Keywords: monetary policy,negative nominal rates,exchange rates,banking flows
    Date: 2015–09
  6. By: Joan Costa-i-Font; Frank Cowell
    Abstract: How important is spatial identity in shifting preferences for redistribution? This paper takes advantage of withincountry variability in the adoption of a single currency as an instrument to examine the impact of the rescaling of spatial identity in Europe. We draw upon data from the last three decades of waves of the European Values Survey and we examine the impact of joining the single currency on preferences for re-distribution. Our instrumentation strategy relies on using the exogenous effect of joining a common currency, alongside a battery of robustness checks and alternative instruments. Our findings suggest that joining the euro has a boosting effect on European identity; an opposite and comparable effect is found for national pride. We find that European identity increases preferences for redistribution, and that national pride exerts an equivalent reduction in preferences for redistribution.
    Keywords: Spatial identity; Europe; welfare state support
    JEL: D69 H53 O52
    Date: 2015–07
  7. By: Marta Gómez-Puig (Faculty of Economics, University of Barcelona); Simón Sosvilla-Rivero (Complutense Institute for International Studies, Universidad Complutense de Madrid)
    Abstract: This paper contributes to the literature by examining the possible influence of public debt on economic performance, using data from both central and peripheral countries of the European Economic and Monetary Union for the 1960-2012 period. To this end, a simple aggregate production function augmented for public debt is estimated using the ARDL bounds testing approach. Our findings tend to support the view that the level of public debt always has a negative impact on the long-run performance of EMU countries, whilst its short-run effect may be positive in some specific cases.
    Keywords: Public debt, economic growth, bounds testing, euro area, peripheral EMU countries, central EMU countries. JEL classification: C22, F33, H63, O40, O52
    Date: 2015–09
  8. By: Hervé ALEXANDRE (DRM Finance, Université Paris Dauphine); François GUILLEMIN (CRESE, Univ. Bourgogne Franche-Comté); Catherine Refait-Alexandre (CRESE, Univ. Bourgogne Franche-Comté)
    Abstract: We investigate the impact of banks disclosure on the evolution of their CDS spreads during the European sovereign crisis. The disclosure of information help investors in building expectations so disclosure may participate into the reduction of the information risk premium and reduces CDS spread. We analyze the CDS spread changes following the announcement of sovereign credit rating downgrades. We consider 16 dates in the period 2011-2013 and for each one, we assess the cumulative abnormal CDS spread change (CASC). We build two disclosure indexes: one general and one specifically dedicated to sovereign exposure.We show that the bank exposure to sovereign risk has a positive impact on the CASC. Disclosure about sovereign exposure has a negative impact on CASC showing that information reduce risk premiums. However, the global disclosure increases the CASC; investors may disapprove the disclosure of too much abundant and broad information.
    Keywords: bank, sovereign crisis, disclosure, CDS
    JEL: G14 G21
    Date: 2015–09
  9. By: Berka, M; Devereux, MB; Engel, C
    Abstract: We investigate the link between real exchange rates and sectoral total factor productivity measures for countries in the Eurozone. We show that real exchange rate variation, both in cross-country and time series, closely accords withan amended Balassa-Samuelson interpretation, incorporating shocks both to sectoral productivity and a labor market wedge. We construct a sticky price dynamic general equilibrium model to generate a cross-section and time series of real exchange rates that can be directly compared to the data. Under the assumption of a common currency, estimates from simulated regressions are very similar to the empirical estimates for the Eurozone. Our findings contrast with previous studies that have found little relationship between productivity levels and the real exchange rate among high-income countries, but those studies have included country pairs which have a floating nominal exchange rate.
    Date: 2015
  10. By: G. Verdugo
    Abstract: We study the response of real wages to the business cycle in eight major Eurozone countries before and during the Great Recession. Average real wages are found to be acyclical, but this reflects, in large part, the effect of changes in the composition of the labour force related to unemployment variations over the cycle. Using longitudinal micro data from the ECHP and SILC panels to control for composition effects, we estimate the elasticities of real wage growth to unemployment increases between -0.6 and -1 over the period 1994-2011. Composition effects have been particularly large since 2008, and they explain most of the stagnation or increase in the average wage observed in some countries from 2008 to 2011. In contrast, at a constant labour force composition in terms of education and experience, the figures indicate a significant decrease in average wages during the downturn, particularly in countries most affected by the crisis. Overall, there is no evidence of downward nominal wage rigidity during the Great recession in most countries in our sample.
    Keywords: age cyclicality, wage rigidity, Great recession, Euro zone.
    JEL: J30 E32
    Date: 2015

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