nep-eec New Economics Papers
on European Economics
Issue of 2015‒11‒01
fifteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Euro crash risk By Kräussl, Roman; Lehnert, Thorsten; Senulyte, Sigita
  2. Lending-of-last-resort is as lending-of-last-resort does: Central bank liquidity provision and interbank market functioning in the euro area By Garcia de Andoain, Carlos; Heider, Florian; Hoerova, Marie; Manganelli, Simone
  3. Interactions between financial markets and macroeconomic variables in EU: a nonlinear modeling approach By Lucian-Liviu Albu; Radu Lupu; Adrian Cantemir Calin
  4. Debt sustainability and economic convergence of euro-area Member States: Challenges and Solutions By P. Manasse
  5. How How Deep is Your Love? A Quantitative Spatial Analysis of the Transatlantic Trade Partnership By Michael Pflüger; Oliver Krebs
  6. Survey-based indicators vs. hard data: What improves export forecasts in Europe? By Robert Lehmann
  7. Did Foreign Banks “Cut and Run” or Stay Committed to Emerging Europe During the Crises? By John Bonin; Dana Louie
  8. An analysis of Okun?s law for the Spanish provinces By Celia Melguizo
  9. Offshoring, Employment and Wages By Alessandro Bramucci
  10. Asymmetric credit growth and current account imbalances in the euro area By Unger, Robert
  11. The Permanent Effects of Fiscal Consolidations By Fatás, Antonio; Summers, Lawrence
  12. Identifying income and wealth-poor households in the euro area By Müller, Philip; Schmidt, Tobias
  13. Immigration Policy and Macroeconomic Performance in France By Ekrame Boubtane; Dramane Coulibaly; Hippolyte D'Albis
  15. The making of inequality.Capital, labour and the distribution of income. By Maurizio Franzini; Mario Pianta

  1. By: Kräussl, Roman; Lehnert, Thorsten; Senulyte, Sigita
    Abstract: We identify crucial events during the European sovereign debt crisis and investigate their impact on the euro currency. In particular, we analyse how specific announcements related to vulnerable Eurozone member states, European Central Bank (ECB) actions, and credit rating downgrades affect the value and the crash risk of the euro. We proxy the value changes of the euro by its abnormal foreign exchange (FX) rate returns with respect to 35 currencies. The crash risk of the euro is proxied by the conditional skewness of the FX rate return distribution with respect to the same currencies. We find that the market reacts positively to news related to countries under the European and International Monetary Fund (IMF) rescue umbrella. We discover that ECB actions on average result in a euro depreciation on the day of the announcement reflecting obvious concerns of market participants, but the effect is partly corrected the day after. Our analysis also shows that sovereign credit rating downgrades tend to lead to a depreciation of the euro and, more importantly, to an increase of the euro crash risk. Interestingly, we find that specific announcements about Greece on average do not substantially affect the euro exchange rate directly, however, it does have an overall significant effect on the euro rash risk, imposing a substantial risk for the stability of the common currency in the Eurozone.
    Keywords: Sovereign debt crisis,News announcements,Euro value,Euro crash risk
    JEL: G01 G14
    Date: 2015
  2. By: Garcia de Andoain, Carlos; Heider, Florian; Hoerova, Marie; Manganelli, Simone
    Abstract: This paper investigates the impact of ample liquidity provision by the European Central Bank on the functioning of the overnight unsecured interbank market from 2008 to 2014. We use novel data on interbank transactions derived from TARGET2, the main euro area payment system. To identify exogenous shocks to central bank liquidity, we exploit the timing of ECB liquidity operations and use a simple structural vector auto-regression framework. We argue that the ECB acted as a de-facto lender-of-last-resort to the euro area banking system and identify two main effects of central bank liquidity provision on interbank markets. First, central bank liquidity replaces the demand for liquidity in the interbank market, especially during the financial crisis (2008-2010). Second, it increases the supply of liquidity in the interbank market in stressed countries (Greece, Italy and Spain) during the sovereign debt crisis (2011-2013).
    Keywords: central bank policy; financial crisis; interbank markets; lender-of-last-resort; sovereign debt crisis
    JEL: E58 F36 G01 G21
    Date: 2015–10
  3. By: Lucian-Liviu Albu; Radu Lupu; Adrian Cantemir Calin
    Abstract: There is a general acceptance of the fact that a significant direct relationship between financial markets and macroeconomic variables exists, especially by considering the assertion that developed financial markets correspond to high GDP levels. This paper provides an investigation of the correlation between the market capitalization and stock market dynamics on one hand and GDP per capita on the other hand, for two groups of regions in EU (western countries, EU15, and central and eastern countries, EU11). Based on data for a number of EU countries (both western and eastern) and using some special modelling techniques, we provide an analysis of the convergence phenomenon for both the macroeconomic variables and the financial ones. Using a deep time resolution and some spline functions we generated high frequency time series (the so-called virtual monthly GDP) to investigate the correlations with financial markets. In spite of ECB?s carefull monitoring of the financial integration within the euro zone, a possible financial integration process within the non-euro zone continues to be ignored. It seems that due to the weak development of financial markets, the economies outside of the euro zone are relatively more protected against crisis when compared to those inside the euro zone. Therefore, the so-called contagion effect is weaker in the Central and Eastern region of European Union.
    Keywords: macroeconomic variables; financial crisis; convergence; non-linear modeling
    JEL: G01 G15 E44 E47 O47
    Date: 2015–10
  4. By: P. Manasse
    Abstract: This paper argues that fiscal convergence in the Euro area has been achieved at the expenses of real divergence in unemployment, investment and at, at least temporarily, growth. Statistical and econometric analysis support the view that the current fiscal framework has addressed debt sustainability concerns, but has imparted a pro-cyclical bias, which has contributed to economic divergence. The recent flexibility guidelines are a step in the right direction, but they are unlikely to have sizable effects. A reform of the fiscal framework and a mechanism for an intra-European unemployment insurance scheme is proposed.
    JEL: E02 E61 E62 H6
    Date: 2015–10
  5. By: Michael Pflüger; Oliver Krebs
    Abstract: This paper explores the quantitative consequences of transatlantic trade liberalization envisioned in a Transatlantic Trade and Investment Partnership (TTIP) between the United States and the European Union. Our key innovation is to develop a new quantitative spatial trade model and to use an associated technique which is extraordinarily parsimonious and tightly connects theory and data. We take input-output linkages across industries into account and make use of the recently established World Input Output Database (WIOD). We also explore the consequences of labor mobility across local labor markets in Germany and the countries of the European Union. We address the considerable uncertainties connected both with the quantification of non-tariff trade barriers and the outcome of the negotiations by taking a corridor of trade liberalization paths into account.
    Keywords: international trade and trade policy; factor mobility; intermediate inputs; sect
    JEL: F10 F20 F16
    Date: 2015–10
  6. By: Robert Lehmann
    Abstract: We evaluate whether survey-based indicators produce lower forecast errors for export growth than indicators obtained from hard data such as price and cost competitiveness measures. Our pseudo out-of-sample analyzes and forecast encompassing tests reveal that survey-based indicators outperform the benchmark model as well as the indicators from hard data for most of our 20 European states and the aggregates EA-18 and EU-28. The most accurate forecasts are on average produced by the confidence indicator in the manufacturing sector, the economic sentiment indicator and the production expectations. However, large country differences in the forecast accuracy of survey-based indicators emerge. These differences are mainly explained with country-specific export compositions. A larger share in raw material or oil exports worsens the accuracy of soft indicators. The accuracy of soft indicators improves if countries have a larger share in exports of machinery goods. For hard indicators, we find only weak evidence for the export composition to explain differences in forecast accuracy.
    Keywords: export forecasting; export expectations; price and cost competitiveness
    JEL: F01 F10 F17
    Date: 2015–10
  7. By: John Bonin (Department of Economics, Wesleyan University); Dana Louie
    Abstract: Our objective is to examine empirically the behavior of foreign banks regarding real loan growth during a financial crisis for a set of countries in which these banks dominate the banking sectors due primarily to having taken over large existing former state-owned banks. The eight countries are among the most developed in Emerging Europe, their banking sectors having been modernized by the beginning of the time period. We consider a data period that includes an initial credit boom (2004 – 2007) followed by the global financial crisis (2008 & 2009) and the onset of the Eurozone crisis (2010). Our main innovations with respect to the existing literature on banking during the financial crisis are to include explicit consideration of exchange rate dynamics and to separate foreign banks into two categories, namely, subsidiaries of the Big 6 European MNBs and all other foreign-controlled banks. Our results show that bank lending was impacted adversely by the crisis but that the two types of foreign banks behaved differently. The Big 6 banks remained committed to the region in that their lending behavior was not different from that of domestic banks corroborating the notion that these countries are a “second home market” for these banks. Contrariwise, the other foreign banks were primarily responsible for fueling the credit boom prior to the crisis but then “cut and ran” by decreasing their lending appreciably during the crisis. Our results also indicate different bank behavior in countries with flexible exchange rate regimes from those in the Eurozone. Hence, we conclude that both innovations matter in empirical work on bank behavior during a crisis in the region and may, by extension, be relevant to other small countries in which banking sectors are dominated by foreign financial institutions.
    JEL: P34 G01 G15
    Date: 2015–10
  8. By: Celia Melguizo
    Abstract: The inverse relationship between unemployment and Gross Domestic Product (GDP), commonly known as Okun?s law, has been traditionally analysed in the economic literature. Its application to Spain is interesting as the strong impact of business cycles on unemployment is a particular feature of the Spanish economy. During the current economic downturn unemployment rate has more than tripled, accounting in 2013 for 26 percent of the working population. However, this phenomenon is not confined to recession periods. Before this economic crisis, the Spanish economy had experienced continuous growth, reducing unemployment rates from 20 percent of the labour force to levels slightly above the European average. The analysis of the relationship between unemployment and GDP for the Spanish case has been carried out at the national level and for the autonomous communities, but it has not been analysed for provinces, the territorial level closer to local labour markets. The aim of this paper is to analyse the provincial differences in the response of unemployment rates to GDP variations for the period spanning 1985 to 2011. In order to do so, we first test the time series properties of provincial GDP and unemployment. We carry out the Augmented Dickey Fuller and Philips Perrron traditional tests and tests that consider the presence of structural breaks. Then we estimate using the difference version of Okun?s law. The analysis is complemented with the use of VAR and PVAR techniques and the Impulse Response Functions (IRFs) associated to check the robustness of the results obtained from the difference specification in a framework that takes into account the endogeneity of GDP and unemployment. The data is taken out from the Spanish National Institute of Statistics (INE).The main results obtained in this study indicate that the provincial analysis matters. Our analysis provides more information than previous studies for Spain and the results justify resorting to a provincial approach, which is one of the main contributions of this paper. We find that provinces within regions show a different response in unemployment rate with respect to GDP variations, that is, autonomous communities are internally heterogeneous. Moreover, we obtain that provinces that suffer to a higher extent the economic shocks on unemployment are those where economic activity is concentrated and those located in the south.
    Keywords: Unemployment; Output fluctuations; Spanish provinces
    JEL: C32 C33 J23 R11
    Date: 2015–10
  9. By: Alessandro Bramucci (Ph.D. at University of Urbino, Department of Economics, Society, Politics, Università di Urbino "Carlo Bo")
    Abstract: This paper reviews the debate on the economic effect of the international fragmentation of production also known as “offshoring” and provides a preliminary investigation on the impact of imports of intermediate products on labor demand and wages in five European countries (Germany, Spain, France, Italy, United Kingdom). Data are obtained from the Sectoral Innovation Database (SID) of the University of Urbino, a large database that merges statistical material from various sources (LFS; CIS; OECD STAN; WIOD). The first part of this work is devoted to a discussion of the concepts, the economic effects of offshoring and the debate that followed. The second section presents offshoring trends and discusses the results of a preliminary econometric analysis on the offshoring effect on wages and employment. Results suggest that offshoring has a general negative impact on labour demand and wages although at a more careful examination high-tech offshoring appear to have a positive influence on wages of medium and high-skilled workers.
    Keywords: Offshoring, International Outsourcing, Innovation, Employment, Wages
    JEL: F1 F2
    Date: 2015
  10. By: Unger, Robert
    Abstract: The euro area crisis is often linked to the emergence of current account imbalances. As most of the deficit countries experienced pronounced credit booms at the same time that these imbalances were building up, this paper investigates the link between domestic credit developments and the current account balance, distinguishing between a credit pull and a credit push factor. The pull factor captures flows of bank loans to the domestic non-financial private sector. An increase in these flows is expected to lead to higher domestic demand and a deterioration of the current account. The push factor measures flows of claims of domestic banks on debtors in other euro-area countries, and an increase is expected to lead to higher external demand and an improvement in the current account. Using a panel error correction specification, the estimation results confirm that the pull factor is a significant determinant of the current account, whereas the results for the push factor are less clear-cut. The paper also shows that variations in the flows of bank loans to the non-financial private sector (i.e. the pull factor) - together with changes in competitiveness - constituted the most important factor driving the build-up of current account imbalances in the deficit countries. Accordingly, impeding an increase in private sector indebtedness seems to be a promising way to dampen the formation of unsustainable current account imbalances.
    Keywords: banks,credit growth,current account imbalances,euro area
    JEL: E5 F32
    Date: 2015
  11. By: Fatás, Antonio; Summers, Lawrence
    Abstract: The global financial crisis has permanently lowered the path of GDP in all advanced economies. At the same time, and in response to rising government debt levels, many of these countries have been engaging in fiscal consolidations that have had a negative impact on growth rates. We empirically explore the connections between these two facts by extending to longer horizons the methodology of Blanchard and Leigh (2013) regarding fiscal policy multipliers. Using data seven years after the beginning of the crisis as well as estimates on potential output our analysis suggests that attempts to reduce debt via fiscal consolidations have very likely resulted in a higher debt to GDP ratio through their negative impact on output. Our results provide support for the possibility of self-defeating fiscal consolidations in depressed economies as developed by DeLong and Summers (2012).
    Keywords: austerity; fiscal policy; Great Recession; hysteresis; persistence
    JEL: E32 E62 O40
    Date: 2015–10
  12. By: Müller, Philip; Schmidt, Tobias
    Abstract: In this paper, we analyse different measures of asset and income poverty using micro-data for 15 euro area countries from the 2010 Household Finance and Consumption Survey (HFCS). We are particularly interested in the way in which specific definitions of income and wealth poverty affect the number and socio-demographic characteristics of poor households, as well as their portfolio composition and consumption expenditure. We find that adding wealth to the poverty definition mainly influences the percentage of poor households but has a limited effect on the documented socio-demographic composition, portfolio structure and food consumption of poor households compared to the patterns under a pure income poverty measure. Within each country, we document some heterogeneity with regard to the percentage of poor households across different poverty measures. However, across countries, the percentage of households in poverty for any given indicator is relatively homogenous. We find the typical socio-demographic patterns for poor households: the risk of being income and/or wealth-poor is, in almost all countries, higher for smaller households, households with a less educated head and single-parent households. We also show that the percentage of female, old and retired reference persons is higher for poor households than for the population at large. Additionally, the participation rates in real and financial assets for poor households are lower than for the population as a whole. Poor households spend more than 30% of their gross income on food.
    Keywords: Asset-Poverty,Euro Area,Income and Wealth Distribution
    JEL: D31 I32 P46 R20
    Date: 2015
  13. By: Ekrame Boubtane (CERDI - Centre d'études et de recherches sur le developpement international - CNRS - Université d'Auvergne - Clermont-Ferrand I); Dramane Coulibaly (EconomiX - EconomiX - UP10 - Université Paris 10, Paris Ouest Nanterre La Défense); Hippolyte D'Albis (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS)
    Abstract: This paper quantitatively assesses the interaction between permanent immigration into France and France's macroeconomic performance as seen through its GDP per capita and its unemployment rate. It takes advantage of a new database where immigration is measured by the flow of newly- issued long-term residence permits, categorized by both the nationality of the immigrant and the reason of permit issuance. Using a VAR model estimation of monthly data over the period 1994-2008, we find that immigration flow significantly responds to France's macroeconomic performance: positively to the country's GDP per capita and negatively to its unemployment rate. At the same time, we find that immigration itself increases France's GDP per capita, particularly in the case of family immigration. This family immigration also reduces the country's unemployment rate, especially when the families come from developing countries.
    Keywords: VAR Models,Unemployment,growth,Female and Family Migration,immigration
    Date: 2015–03–25
  14. By: Pasquale Tridico
    Abstract: The objective of this paper is to identify the determinants of the increase in income inequality that rich countries have experienced over the last two decades. My hypothesis is that along with the financialisation of economies that has taken place since 1990, inequality increased because labour flexibility intensified, labour market institutions weakened as trade unions lost power, and public social spending started to retrench and did not compensate the vulnerabilities created by the globalization process. Using data from 34 OECD countries from 1990 to 2013, I empirically evaluate this hypothesis. My results clearly suggest that the increase in inequality over the last two decades is caused by an increase in financialisation, a deepening of labour flexibility, the weakening of trade unions, and the retrenchment of the welfare state.
    Keywords: inequality, financialisation, labour market, welfare states
    JEL: I38 G01
    Date: 2015–10
  15. By: Maurizio Franzini (Department of Economics and Law, Sapienza University of Rome); Mario Pianta (Department of Economics, Society & Politics, Università di Urbino "Carlo Bo")
    Abstract: Inequality is a major problem of today’s capitalism. The rise of disparities in income and wealth has been documented by many studies, and this paper provides a concise and updated documentation of facts and trends in advanced countries, contributing to an interpretation of the sources and dynamics of inequality. First, the evolution of relations between capital and labour is investigated, providing empirical evidence on the distribution of income between profits and wages. Second, the market processes that shape disparities of income – of individuals and households, before and after taxes, redistribution and public services – are addressed, showing the complexity of current trends. Third, disparities in wealth are examined, showing a much starker picture than that resulting from income inequality. The explanation of these developments points to four ‘engines of inequality’ – the power of capital over labour, the rise of ‘oligarchs capitalism’, the individualisation of economic conditions, the retreat of politics – that are at the source of today’s inequalities. A full analysis of the dynamics of inequality, an interpretation of its mechanisms and a set of policy proposals to reverse it are developed in our book “Explaining inequality” (Franzini and Pianta, 2015).
    Keywords: Inequality, Income distribution, Profits, Wages
    JEL: D31 D33 E24 I38
    Date: 2015

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