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

  1. Jagged cliffs and stumbling blocks: interest rate pass-through fragmentation during the Euro area crisis By Holton, Sarah; Rodriguez d'Acri, Costanza
  2. The perils of debt deflation in the euro area: A multi regime model By Semmler, Willi; Haider, Alexander
  3. The determinants of long-term debt issuance by European banks: evidence of two crises By Adrian Van Rixtel; Luna Romo González; Jing Yang
  4. Modeling financial sector joint tail risk in the euro area By Lucas, André; Schwaab, Bernd; Zhang, Xin
  5. Characterising the financial cycle: a multivariate and time-varying approach By Hiebert, Paul; Schüler, Yves S.; Peltonen, Tuomas A.
  6. Inflation forecasts: Are market-based and survey-based measures informative? By Grothe, Magdalena; Meyler, Aidan
  7. (Why) Is the Euro system intrinsically unstable? By Bernardo Maggi
  8. Beggar-thy-neighbor? The international effects of ECB unconventional monetary policy measures By Bluwstein, Kristina; Canova, Fabio
  9. Macroeconomic Imbalance Procedure in the EU: a Welfare Evaluation By Torój, Andrzej
  10. Private wealth across European countries: the role of income, inheritance and the welfare state By Fessler, Pirmin; Schürz, Martin
  11. The Long-Run Phillips Curve: A Structural VAR Investigation By Luca Benati
  12. Sovereign debt exposure and the bank lending channel: impact on credit supply and the real economy By Margherita Bottero; Simone Lenzu; Filippo Mezzanotti
  13. The side effects of national financial sector policies: framing the debate on financial protectionism By Beck, Roland; Beirne, John; Paternò, Francesco; Peeters, Jolanda; Ramos-Tallada, Julio; Rebillard, Cyril; Reinhardt, Dennis; Weissenseel, Lisa; Wörz, Julia
  14. Systemic risk rankings and network centrality in the European banking sector By De Bruyckere, Valerie

  1. By: Holton, Sarah; Rodriguez d'Acri, Costanza
    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. Using micro-level bank data across a number of euro area countries, we identify individual bank balance sheet characteristics that 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. Results show incomplete pass-through of changes in money market rates targeted by the central bank to firms' lending rates, with increases in sovereign bond yields affecting the cost of finance for firms, particularly in stressed countries. Individual bank characteristics have an effect on pass-through during the crisis, even after controlling for changes in macroeconomic conditions. The effect is greatest when looking at characteristics that capture bank funding difficulties, suggesting that a recovery in banks' funding capacities is an important element in reducing fragmentation in the transmission of monetary policy. JEL Classification: E52, E58, G01, G20, E43
    Keywords: financial crises, Interest rate pass-through, monetary policy transmission
    Date: 2015–09
  2. By: Semmler, Willi; Haider, Alexander
    Abstract: Academic research and policy makers in the Euro area are currently concerned with the threat of debt deflation and secular stagnation in Europe. Empirical evidence seems to suggest that secular stagnation and debt deflation in the Euro area may be rather slowly developing. Yet what appears as major peril is that debt deflation with a lack of economic growth, rising real interest rates and further rising debt may trigger household defaults, defaults of firms and banks, rise of risk premia, and default risk of certain sectors of the economy or sovereign defaults. It is this rising default and financial risk then that may lead to a regime change to a slowly moving debt crisis with high financial risk and high financial stress. In order to explore those issues, a macro policy model of Svensson type is introduced, exhibiting a regime of low and high financial stress. Then, a four dimensional multi-regime VAR is employed to an Euro area data set to support the theoretical model and the claim that in particular Southern Euro area countries are affected by debt deflation and financial market stress.
    Keywords: Debt Deflation,Secular Stagnation,Euro Area,Interest Rate Spread,Multi Regime Model
    JEL: E43 F36
    Date: 2015
  3. By: Adrian Van Rixtel; Luna Romo González; Jing Yang
    Abstract: This paper is one of the first to investigate the determinants of bond issuance by European banks. We use a unique database of around 50,000 bonds issued by 63 banks from 14 European countries, allowing us to differentiate between different types of long-term debt securities. By investigating at the individual bank level, we are able to test explicitly a broad set of hypotheses from both the corporate finance and banking literature on the drivers of bond issuance. We use both country and bank-specific financial characteristics as explanatory variables. With respect to the country determinants, our findings suggest that "market timing" (low interest rates) drove issuance before but not during the crisis, when access to funding became more important than its cost. Moreover, during the crisis years, country-risk characteristics became drivers of bond issuance, while for banks from the euro area periphery central bank liquidity substituted for unsecured long-term debt. We also show that heightened financial market tensions were detrimental to bond issuance, and more strongly so during crisis episodes. Our results yield strongly significant coefficients for the bank-specific variables, with signs as expected. We find evidence of "leverage targeting" by issuing long-term debt during the crisis years. The positive and significant coefficient for the capital ratio supports the "risk absorption" hypothesis, suggesting that larger capital buffers enhanced the risk-bearing capacity of banks and allowed them to issue more debt. Moreover, banks with deposit supply constraints and relatively large loan portfolios issued more bonds, both before and since the crisis years. We also find that higher rated banks were more likely to issue bonds, also during the crisis period. Stronger banks issued especially unsecured debt, while weaker banks resorted more to issuance of covered bonds. Overall, our results suggest that stronger banks - including those from peripheral countries - maintained better access to longer-term funding markets, even during crisis periods. Our results pass several robustness tests. We present an additional aggregated country analysis in a separate appendix.
    Keywords: bank funding, bond issuance, banking crisis, Europe
    Date: 2015–10
  4. By: Lucas, André (VU University Amsterdam); Schwaab, Bernd (European Central Bank); Zhang, Xin (Research Department, Central Bank of Sweden)
    Abstract: We develop a novel high-dimensional non-Gaussian modeling framework to infer measures of conditional and joint default risk for many financial sector firms. The model is based on a dynamic Generalized Hyperbolic Skewed-t block-equicorrelation copula with time-varying volatility and dependence parameters that naturally accommodates asymmetries, heavy tails, as well as non-linear and time-varying default dependence. We apply a conditional law of large numbers in this setting to define joint and conditional risk measures that can be evaluated quickly and reliably. We apply the modeling framework to assess the joint risk from multiple defaults in the euro area during the 2008–2012 financial and sovereign debt crisis. We document unprecedented tail risks during 2011–2012, as well as their steep decline after subsequent policy actions.
    Keywords: dynamic equicorrelation; generalized hyperbolic distribution; law of large numbers; large portfolio approximation
    JEL: C32 G21
    Date: 2015–06–01
  5. By: Hiebert, Paul; Schüler, Yves S.; Peltonen, Tuomas A.
    Abstract: We introduce a methodology to characterise financial cycles combining a novel multivariate spectral approach to identifying common cycle frequencies across a set of indicators, and a time varying aggregation emphasising systemic developments. The methodology is applied to 13 European Union countries as well a synthetic euro area aggregate, based on a quarterly dataset spanning 1970-2013. Results suggest that credit and asset prices share cyclical similarities, which, captured by a synthetic financial cycle, outperform the credit-to-GDP gap in predicting systemic banking crises on a horizon of up to three years. Financial cycles tend to be long, particularly in upswing phases and with important dispersion across country cases. Concordance of financial and business cycles is observed only 2/3 of the time. While a similar degree of concordance for financial cycles is apparent across countries, heterogeneity is high – whereby a cluster of countries tends to exhibit a high synchronisation in their financial cycle phases. JEL Classification: E30, E40, C54
    Keywords: financial cycle, macroprudential policy, power cohesion, spectral analysis
    Date: 2015–09
  6. By: Grothe, Magdalena; Meyler, Aidan
    Abstract: This paper analyses the predictive power of market-based and survey-based inflation expectations for actual inflation. We use the data on inflation swaps and the forecasts from the Survey of Professional Forecasters for the euro area and United States. The results show that both, market-based and survey-based measures have a non-negligible predictive power for inflation developments, as compared to statistical benchmark models. Therefore, for horizons of one and two years ahead, market-based and survey-based inflation expectations actually convey information on future inflation developments.
    Keywords: inflation expectations; inflation forecasting; inflation swap markets; market-based inflation expectations; Survey of Professional Forecasters; survey-based inflation expectations;
    JEL: E31 E37 G13
    Date: 2015
  7. By: Bernardo Maggi (Sapienza Universita' di Roma)
    Abstract: In this study we focus on the dynamics of taxation, debt, and monetary stability in a currency union area. We specifically adapt our theoretical set up to the Euro zone with special emphasis on the countries affected by critical conditions of public debt. We deal with such a problem in a dynamic optimization perspective by referring to the optimal control literature and find the optimal taxation and composition by maturity of the debt as it follows from the Stability and Growth Pact (SGP). Critical results depend upon the accumulation over time of the past decisions on public expenses and the consequent high level of taxation rate according to which a probability of failure to comply the SGP is evaluated.
    Keywords: Euro, Stability and Growth Pact, public debt.
    JEL: H63 H21 F40 C61
    Date: 2015–10
  8. By: Bluwstein, Kristina; Canova, Fabio
    Abstract: The effects that European Central Bank unconventional monetary policy measures have on nine European countries not adopting the Euro are examined with a novel Bayesian mixed frequency Structural Vector Autoregressive technique. The technique accounts for the fact that macro, monetary and financial data have different frequencies. Unconventional monetary policy disturbances generate important domestic fluctuations. The wealth, the risk, and the portfolio rebalancing channels matter for international propagation; the credit channel does not. International spillovers are larger in countries with more advanced financial systems and a larger share of domestic banks. A comparison with conventional monetary policy disturbances and with announcement surprises is provided.
    Keywords: Bayesian Mixed Frequency SVAR; Financial Spillovers; International Transmission; Unconventional Monetary Policy
    JEL: C11 C32 E52 F42 G15
    Date: 2015–10
  9. By: Torój, Andrzej (Warsaw School of Economics)
    Abstract: We develop a framework for assessing the welfare implications of the new European Union's (EU) Macroeconomic Imbalance Procedure (MIP) implemented in 2012, with a special focus on the current account (CA) constraint, real effective exchange rate (REER) constraint and nominal unit labour cost (ULC) constraint. For this purpose, we apply a New Keynesian 2-region, 2-sector DSGE model, using the second order Taylor approximation of the households' utility around the steady state as a measure of welfare. The compliance with the CA criterion is ensured by modifying the policymakers' loss function in line with Woodford's (2003) treatment of the zero lower bound of nominal interest rates. The introduction of MIP threshold on CA balance results in a welfare loss equivalent to steady-state decrease in consumption of 0.0274% after the euro adoption or 0.0152% before that. If we consider the 4% threshold on current plus capital account (rather than current account alone), this cost decreases to equivalent to 0.0117% steady-state consumption under the euro and approximately a half of that without the euro. The welfare cost for the converging economies is higher due to persistent, but equilibrium-consistent CA deficits, as well as REER appreciation. MIP can also be seen as a factor augmenting the cost of euro adoption. This working paper is an updated version of the working paper Excessive Imbalance Procedure in the EU: a Welfare Evaluation.
    Keywords: Macroeconomic Imbalance Procedure; EMU; DSGE; welfare; constrained optimum policy
    JEL: C54 D60 E42 F32
    Date: 2015–10–01
  10. By: Fessler, Pirmin; Schürz, Martin
    Abstract: Using microdata from the Household Finance and Consumption Survey (HFCS), this study examines the role of inheritance, income and welfare state policies in explaining differences in household net wealth within and between euro area countries. First, about one third of the households in the 13 European countries we study report having received an inheritance, and these households have considerably higher net wealth than those which did not inherit. Second, regression analyses on households' relative wealth position show that, on average, having received an inheritance lifts a household by about 14 net wealth percentiles. At the same time, each additional percentile in the income distribution is associated with about 0.4 net wealth percentiles. These results are consistent across countries. Third, multilevel cross-country regressions show that the degree of welfare state spending across countries is negatively correlated with household net wealth. These findings suggest that social services provided by the state are substitutes for private wealth accumulation and partly explain observed differences in levels of household net wealth across European countries. In particular, the effect of substitution relative to net wealth decreases with growing wealth levels. This implies that an increase in welfare state spending goes along with an increase - rather than a decrease - of observed wealth inequality. JEL Classification: D30, D31
    Keywords: Household microdata, intergenerational transfers, wealth distribution, welfare state
    Date: 2015–09
  11. By: Luca Benati (University of Bern)
    Abstract: I use structural VARs identified based on either long-run restrictions, or a combination of long-run and sign restrictions, to investigate the long-run tradeoff between inflation and the unemployment rate in the U.S., the Euro area, the U.K., Canada and Australia over the post-WWII period. Results based on VARs featuring a single permanent inflation shock do not allow to reject the null hypothesis of a vertical long-run Phillips curve for either country. Results based on VARs allowing for four permanent inflation shocks, which are sorted out from one another by means of DSGE-based robust sign restrictions, produce a very similar picture. The overall extent of uncertainty is however substantial, thus suggesting that the data are compatible with a comparatively wide range of possible slopes of the long-run trade-off. For all countries, Johansen's cointegration tests point towards the presence of cointegration between either inflation and unemployment, or inflation, unemployment, and a short-term interest rate, with the long-run Phillips trade-off implied by the estimated cointegrating vectors being negative and sizeable. I argue however that this evidence should be discounted, as, conditional on the estimated structural VARs--which, by construction, do not feature cointegration between any variable--Johansen's procedure tends to spuriously detect cointegration a non-negligible, and sometimes large, fraction of the times.
    Date: 2015
  12. By: Margherita Bottero (Bank of Italy); Simone Lenzu (University of Chicago); Filippo Mezzanotti (Harvard University)
    Abstract: We study the impact of sovereign market tensions on the real economy through the bank lending channel. Using a large matched bank-firm panel data set that tracks credit relations in Italy over the period 2009-2011, we show that the Greek bailout in the spring of 2010 had a negative impact on the riskiness of government securities held in the portfolio of financial intermediaries, which in turn led to a tightening in credit supply to firms. Firms, especially riskier ones, were unable to smooth out the credit shortage. We estimate that the shock to sovereign bonds led, via the lending channel, to a drop in aggregate bank lending to corporations of almost 2 percent over the subsequent year which translated in a reduction of investment by smaller firms.
    Keywords: sovereign debt, bank lending channel, lending supply, real effects, firm investment
    JEL: E51 G21
    Date: 2015–09
  13. By: Beck, Roland; Beirne, John; Paternò, Francesco; Peeters, Jolanda; Ramos-Tallada, Julio; Rebillard, Cyril; Reinhardt, Dennis; Weissenseel, Lisa; Wörz, Julia
    Abstract: The decrease of financial integration both at the global and European level reflects, to a certain extent, a market response to the crisis. It might, however, also be partly driven by policies such as capital flow management measures (CFMs). In addition, several other measures taken by central banks, regulators and governments in response to the crisis may have had less obvious negative side effects on financial integration. Against this backdrop, this paper explores broad definitions of financial protectionism in order to raise awareness of the fact that the range of policies which could negatively affect financial integration may be much wider than residency-based CFMs. At the same time, the paper acknowledges that these measures have mostly been taken for legitimate financial stability purposes and with no protectionist intentions. The paper considers five categories of policy measures which could contribute to financial fragmentation both at the global and at the EU level: currency-based measures directed towards banks, geographic ring fencing, some financial repression policies, crisis resolution policies with a national bias, and some financial sector taxes. JEL Classification: F36, F42, F62
    Keywords: capital controls, Financial integration, financial protectionism, macro-prudential policy
    Date: 2015–09
  14. By: De Bruyckere, Valerie
    Abstract: This paper presents a methodology to calculate the Systemic Risk Ranking of financial institutions in the European banking sector using publicly available information. The pro- posed model makes use of the network structure of financial institutions by including the stock return series of all listed banks in the financial system. Furthermore, a wide set of common risk factors (macroeconomic risk factors, sovereign risk, financial risk and housing price risk) is included to allow these factors to affect the banks. The model uses Bayesian Model Averaging (BMA) of Locally Weighted Regression models (LOESS), i.e. BMA-LOESS. The network structure of the financial sector is analysed by computing measures of network centrality (degree, closeness and betweenness) and it is shown that this information can be used to provide measures of the systemic importance of institutions. Using data from 2005 (2nd quarter) to 2013 (3rd quarter), this paper provides further insight into the time-varying importance of risk factors and it is shown that the model produces superior conditional out-of-sample forecasts (i.e. projections) than a classical linear Bayesian multi-factor model. JEL Classification: C52, C58, G15, G21
    Keywords: bank stock returns, Bayesian model averaging, financial networks, locally weighted regression, systemic risk
    Date: 2015–09

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