nep-eec New Economics Papers
on European Economics
Issue of 2015‒11‒21
fifteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. The Unbearable Divergence of Unemployment in Europe By Tito Boeri; Juan Francisco Jimeno
  2. The impact of the euro on euro area GDP per capita By Cristina Fernández; Pilar García Perea
  3. Current Account and Real Effective Exchange Rate Misalignments in Central Eastern EU Countries: an Update Using the Macroeconomic Balance Approach By Mariarosaria Comunale
  4. An investment initiative for fiscally constrained EU member states: The role of synergetic financial instruments By Zeilbeck, Severin
  5. The Effect of ECB Monetary Policies on Interest Rates and Volumes By Paul Hubert; Jérôme Creel; Mathilde Viennot
  7. The grand divergence: global and European current account surpluses By Zsolt Darvas
  8. The Distribution of Debt Across Euro Area Countries: The Role of Individual Characteristics, Institutions and Credit Conditions By Bover, Olympia; Casado, José Maria; Costa, Sonia; Du Caju, Philip; McCarthy, Yvonne; Sierminska, Eva; Tzamourani, Panagiota; Villanueva, Ernesto; Zavadil, Tibor
  9. Coordination and Crisis in Monetary Unions By Manuel Amador; Gita Gopinath; Emmanuel Farhi; Mark Aguiar
  10. Modeling Systemic Risk with Correlated Stochastic Processes By Paolo Giudici; Laura Parisi
  11. Exchange Rate Dynamics and its Effect on Macroeconomic Volatility in Selected CEE Countries By Volha Audzei; Frantisek Brazdik
  12. Modelling the time-variation in euro area lending spreads By Boris Blagov; Michael Funke; Richhild Moessner
  13. Do regulations and supervision shape the capital crunch effect of large banks in the EU? By Malgorzata Olszak; Mateusz Pipien; Iwona Kowalska; Sylwia Roszkowska
  14. Pension systems and financial constraints in a three-country OLG model of intra-EMU and global trade imbalances By Karl Farmer; Bogdan Mihaiescu
  15. Financial Heterogeneity and Monetary Union By jae sim; Raphael Schoenle; Egon Zakrajsek; Simon Gilchrist

  1. By: Tito Boeri; Juan Francisco Jimeno
    Abstract: Unemployment in Europe is not only "too high", it is also too different across countries that belong to a monetary union. In this paper we i) document this increasing heterogeneity, ii) try to explain it and iii) draw from our diagnosis indications as to the appropriate set of policies to reduce unemployment and labour market disparities. Our analysis suggests that the divergence in labour market outcomes across Europe is the by-product of interactions between, on the one hand, shocks of varying size and nature, and, on the other hand, country-specific labour market institutions. We argue that EU policy coordination and conditionality during the Great Recession and the euro area debt crisis did not properly take into account these interactions. We also propose a change in the European policy approach for fighting unemployment.
    Keywords: Okuns Law, institutions, financial shocks
    JEL: J3 J5
    Date: 2015–11
  2. By: Cristina Fernández (Banco de España); Pilar García Perea (Banco de España)
    Abstract: This paper poses the following question: what would euro area GDP per capita have been, had the monetary union not been launched? To this end we use the synthetic control methodology. We find that the euro did not bring the expected jump to a permanent higher growth path. During the early years of the monetary union, aggregate GDP per capita in the euro area rose slightly above the path predicted by its counterfactual; but since the mid-2000s, these gains have been completely eroded. Central European countries – Germany, the Netherlands and Austria – did not seem to obtain any gains or losses from the adoption of the euro. Ireland, Spain and Greece registered positive and significant gains, but only during the expansionary years that followed the launch of the euro, while Italy and Portugal quickly lagged behind the GDP per capita predicted by their counterfactual. We test the robustness of the synthetic estimation not only to the exclusion of any particular country from the donor pool but also to the omission of each of the selected determinants of GDP per capita and to the reduction of the dimensions in the optimisation programme, namely the number of GDP determinants.
    Keywords: treatment effects, synthetic control method, monetary union
    JEL: C33 E42 F15 O52
    Date: 2015–11
  3. By: Mariarosaria Comunale (Economics Department, Bank of Lithuania)
    Abstract: Using the IMF Consultative Group on Exchange Rate Issues methodology, we make an assessment of the current account and price competitiveness of the Central Eastern European Countries that joined the EU between 2004 and 2014. We present results for the “Macroeconomic Balance” approach, which provides a measure of current account equilibrium based on its determinants together with misalignments in real effective exchange rates. We believe that a more refined analysis of the misalignments may useful for the Macroeconomic Imbalance Procedure. This is especially the case for these countries, which have gone through a transition phase and boom/bust periods since their independence. Because such a history may have influenced a country’s performance, any evaluation must take account of each country’s particular characteristics. We use a panel setup of 11 EU new member states (incl. Croatia) for the period 1994-2012 in static and dynamic frameworks, also controlling for the presence of cross-sectional dependence and checking specifically for the role of exchange rate regimes, capital flows and global factors. We find that the estimated coefficients of the determinants meet with expectations. Moreover, the foreign capital flows, the oil balance, and relative output growth seem to play a crucial role in explaining the current account balance. Some global factors such as shocks in oil prices or supply might have played a role in worsening the current account balances. Having a pegged exchange rate regime (or being part of the euro zone) affects the current account positively. The real effective exchange rates behave in accord with the current account gaps, which clearly display cyclical behaviour. The current accounts and real effective exchange rates come close to equilibria in 2012 in most of the countries and the rebalancing is completed for some countries that were less misaligned in the past, such as Poland and Czech Republic, but also for Lithuania. When foreign direct investments are introduced as a determinant for these countries, the misalignments are larger in the boom periods (positive misalignments) whereas the negative misalignments are smaller in magnitude.
    Keywords: real effective exchange rate, Central Eastern European Countries, EU new member states, fundamental effective exchange rate, current account.
    JEL: F31 F32 C23
    Date: 2015–11–13
  4. By: Zeilbeck, Severin
    Abstract: The economy of the European Union has not recovered from the impact of the economic and financial crisis. Growth rates remain low and investment activity is weak. This questions current economic policies of the Economic and Monetary Union, known as austerity. In opposition to fiscal contraction measures, expansive fiscal action policies are often called for to initiate economic recovery. But the national interests of austerity's main proponent, performed in an asymmetric intergovernmental bargaining arena, render most of the proposed expansive action plans impossible and hence austerity is expected to prevail. The Juncker-Plan constitutes an expansive action plan which respects the restrictive budgetary rules. Nevertheless an investment volume of 315 billion Euro should be made available, enabled by 21 billion Euro of public money. The budget contribution should lever private funds by a multiplier of 15. The crucial factor of 15 rests on experience with Synergetic Financial Instruments which have been increasingly executed during the last budget period. This work assesses the impact of expansive public investment conducted through these Synergetic Financial Instruments and thus gathers information to undertake an appraisal of the Juncker-Plan, foremost of its crucial mechanisms and resulting numbers. By this, the potential of financial instruments as means of fiscal policy and the validity of the Juncker-Plan can be assessed.
    Keywords: Economic and Monetary Union,austerity,fiscal policy,public investment,financial instruments,Juncker-Plan,European Fund for Strategic Investment
    JEL: G23 E61 E62 E65 G01 G11 H62 H63
    Date: 2015
  5. By: Paul Hubert (OFCE); Jérôme Creel (OFCE); Mathilde Viennot (École normale supérieure - Cachan)
    Abstract: This paper assesses the transmission of ECB monetary policies, conventional and unconventional, to both interest rates and lending volumes or bond issuance for three types of different economic agents through five different markets: sovereign bonds at 6-month, 5-year and 10-year horizons, loans to non-financial corporations, and housing loans to households, during the financial crisis, and for the four largest economies of the Euro Area. We look at three different unconventional tools: excess liquidity, longer-term refinancing operations and securities held for monetary policy purposes following the decomposition of the ECB’s Weekly Financial Statements. We first identify series of ECB policy shocks at the Euro Area aggregate level by removing the systematic component of each series and controlling for announcement effects. We second include these exogenous shocks in countryspecific structural VAR, in which we control for the credit demand side. The main result is that only the pass-through from the ECB rate to interest rates has been effective. Unconventional policies have had uneven effects and primarily on interest rates.
    Keywords: Transmission Channels; Unconventional Monetary Policy; Quantitative Easing; Bank Lending
    Date: 2015–11
  6. By: Renata Karkowska (University of Warsaw, Faculty of Management)
    Abstract: We measure a systemic risk faced by European banking sectors using the CoVaR measure. We propose the conditional value-at-risk (CoVaR) for measuring a spillover risk which demonstrates the bilateral relation between the tail risks of two financial institutions. The aim of the study is to estimate the contribution systemic risk of the bank i in the analyzed banking sector of a country in conditions of its insolvency. The study included commercial banks from 8 emerging markets from Europe, which gave a total of 40 banks, traded on the public market, which provided a market valuation of the bank's capital. The conclusions are that the CoVaR seems to be a better measure for systemic risk in the banking sector than the VaR, which is more individual. And banks in developing countries in Europe do not provide significant risk for the banking sector as a whole. But it must be taken into account that some individuals that may find objectionable. Our results hence tend to a practical use of the CoVaR for supervisory purposes.
    Keywords: Systemic Risk, Value at Risk, Risk Spillovers, Banking Sector
    JEL: G01 G10 G20 G28 G38
    Date: 2015–02
  7. By: Zsolt Darvas (Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences and Bruegel and Corvinus University of Budapest)
    Abstract: Highlights - Global current account imbalances widened before the 2007/2008 crisis and have narrowed since then. While the post-crisis adjustment of European current account deficits was in line with global developments (though more forceful), European current account surpluses defied global trends and increased. - We use panel econometric models to analyse the determinants of medium-term current account balances. Our results confirm that higher fiscal balances, higher GDP per capita, more rapidly aging populations, larger net foreign assets, larger oil rents and better legal systems increase the medium-term current account balance, while a larger growth differential and a higher old-age dependency ratio reduce it. - European current account surpluses became excessive during the past twelve years according to our estimates, while they were in line with model predictions in the preceding three decades. - Generally, the gap between the actual current account and its fitted value by the model has a strong predictive power for future current account changes. Excess deficits adjust more forcefully than excess surpluses. However, in the 2004-07 period, excess imbalances were amplified, which was followed by a forceful correction in 2008-15, with the exception of European surpluses.
    Keywords: Current account imbalances; Current account adjustment
    JEL: F32 F41
    Date: 2015–08
  8. By: Bover, Olympia; Casado, José Maria; Costa, Sonia; Du Caju, Philip; McCarthy, Yvonne; Sierminska, Eva; Tzamourani, Panagiota; Villanueva, Ernesto; Zavadil, Tibor
    Abstract: The aim of this paper is twofold. First, we present an up-to-date assessment of the differences across euro area countries in the distributions of various measures of debt conditional on household characteristics. We consider three different outcomes: the probability of holding secured debt, the amount of secured debt held and the interest rate paid on the main mortgage. Second, we examine the role of legal and economic institutions in accounting for these differences. We use data from the first wave of a new survey of household finances, the Household Finance and Consumption Survey. Adjusting for household composition, we find substantial cross-country variation in secured debt outcomes and in their distribution across age and income groups. Among all the institutions considered, the length of asset repossession periods best accounts for the differences across countries in the distribution of secured debt. In countries with longer repossession periods, the fraction of people who borrow is smaller, the youngest group of households borrow lower amounts (conditional on borrowing), and the mortgage interest rates paid by low-income households are higher. Regulatory loan-to-value ratios, the taxation of mortgages and the prevalence of fixed-rate mortgages deliver less robust results.
    Keywords: Fixed rate mortgages; Household debt and interest rate distributions; Loan-to-Value ratios; Taxation; Time to Foreclose
    JEL: D14 G21 G28 K35
    Date: 2015–11
  9. By: Manuel Amador (Federal Reserve Bank of Minneapolis); Gita Gopinath (Harvard); Emmanuel Farhi (Harvard University); Mark Aguiar (Princeton University)
    Abstract: We study fiscal and monetary policy in a monetary union with the potential for rollover crises in sovereign debt markets. Member-country fiscal authorities lack commitment to repay their debt and choose fiscal policy independently. A common monetary authority chooses inflation for the union, also without commitment. We first describe the existence of a fiscal externality that arises in the presence of limited commitment and leads countries to over borrow; this externality rationalizes the imposition of debt ceilings in a monetary union. We then investigate the impact of the composition of debt in a monetary union, that is the fraction of high-debt versus low-debt members, on the occurrence of self-fulfilling debt crises. We demonstrate that a high-debt country may be less vulnerable to crises and have higher welfare when it belongs to a union with an intermediate mix of high- and low-debt members, than one where all other members are low-debt. This contrasts with the conventional wisdom that all countries should prefer a union with low-debt members, as such a union can credibly deliver low inflation. These findings shed new light on the criteria for an optimal currency area in the presence of rollover crises.
    Date: 2015
  10. By: Paolo Giudici (Department of Economics and Management, University of Pavia); Laura Parisi (Department of Economics and Management, University of Pavia)
    Abstract: In this work we propose a novel systemic risk model, based on stochastic processes and correlation networks. For each country we consider three different spread measures, one for each sector of the economy (sovereign, corporates, banks), and we model each of them as a linear combination of two stochastic processes: a country-specific idiosyncratic component and a common systematic factor. We provide an estimation model for the parameters of the processes and, for each country, we derive the aggregate default probabilities of each sector. Systemic risk is then estimated by means of a network model based on the partial correlations between the estimated processes of all sectors and countries. Our model is applied to understand the time evolution of systemic risk in the economies of the European monetary union, in the recent period. The results show that systemic risk has increased during the crisis years and that, after the crisis, a clear separation between core and peripheral economies has emerged, for all sectors of the economy.
    Date: 2015–11
  11. By: Volha Audzei; Frantisek Brazdik
    Abstract: To understand the potential for forming an optimum currency area it is important to investigate the origins of macroeconomic volatility. We focus on the contribution of exchange rate shocks to macroeconomic volatility in selected Central and Eastern European countries. The contribution of the exchange rate shock relative to other shocks allows us to evaluate whether the Exchange rate is a source of volatility or a buffer against shocks as the theory suggests. The identification of the contributions is based on variance decomposition in two-country structural VAR models, which are identified by the sign restriction method. We identify countries where shocks are predominantly symmetric relative to the effective counterpart and countries where the contribution of real exchange rate shocks is strong. In general, for all the countries considered the results are consistent with the real exchange rate having a shock-absorbing nature. Finally, a significant role of symmetric monetary policy shocks in movements in real exchange rates is found for some of the countries.
    Keywords: Asymmetric shocks, Central and Eastern Europe, monetary union, real exchange rates, sign restrictions method, structural vector autoregression
    JEL: C32 E32 F31 F41
    Date: 2015–09
  12. By: Boris Blagov; Michael Funke; Richhild Moessner
    Abstract: Using a Markov-switching VAR with endogenous transition probabilities, we analyse what has triggered the interest rate pass-through impairment for Italy, Ireland, Spain and Portugal. We find that global risk factors have contributed to higher lending rates in Italy and Spain, problems in the banking sector help to explain the impairment in Spain, and fiscal problems and contagion effects have contributed in Italy and Ireland. We also find that the ECB's unconventional monetary policy announcements have had temporary positive effects in Italy. Due to the zero lower bound these findings are amplified if EONIA is used as a measure of the policy rate. We did not detect changes in the monetary policy transmission for Portugal.
    Keywords: Lending rates, interest rate pass-through
    Date: 2015–11
  13. By: Malgorzata Olszak (Department of Banking and Money Markets, Faculty of Management, University of Warsaw, Poland); Mateusz Pipien (Department of Econometrics and Operations Research, Cracow University of Economics, Poland); Iwona Kowalska (Department of Mathematics and Statistical Methods, Faculty of Management, University of Warsaw, Poland); Sylwia Roszkowska (University of Warsaw, Faculty of Management)
    Abstract: This paper extends the literature on the capital crunch effect by examining the role of public policy for the link between lending and capital in a sample of large banks operating in the European Union. Applying Blundell and Bond (1998) two-step robust GMM estimator we show that restrictions on bank activities and more stringent capital standards weaken the capital crunch effect, consistent with reduced risk taking and boosted bank charter values. Official supervision also reduces the impact of capital ratio on lending in downturns. Private oversight seems to be related to thin capital buffers in expansions, and therefore the capital crunch effect is enhanced in countries with increased market discipline. We thus provide evidence that neither regulations nor supervision at the microprudential level is neutral from a financial stability perspective. Weak regulations and supervision seem to increase the pro-cyclical effect of capital on bank lending.
    Keywords: capital ratio, lending, capital crunch, regulations, supervision, procyclicality
    JEL: E32 G21 G28 G32
    Date: 2015–10
  14. By: Karl Farmer (University of Graz); Bogdan Mihaiescu (University of Graz)
    Abstract: Farmer and Ban (2014) find in a three-country OLG model (= basic model) that financial integration between both EMU core and periphery and between Asia and USA induce trade surpluses in EMU core and in Asia while in EMU periphery and in USA trade balances become negative when the global economy is dynamically inefficient. While exhibiting the right sign, model-generated steady-state trade balance to GDP ratios turn out, however, being too low compared to empirical counterparts. In order to address this problem we first extend the basic OLG model in line with Eugeni (2015) by introducing pay-as-you-go pension systems in EMU and US but not in Asia. Second, we introduce financial constraints following Coeurdacier et al. (2015) to achieve a better data fit compared to the basic model. Both extensions improve the empirical relevance of the basic model.
    Keywords: Trade Imbalances; European Economic and Monetary Union; Overlapping Generations; Three-Country Model; Global imbalances
    JEL: F36
    Date: 2015–11
  15. By: jae sim (Federal Reserve Board); Raphael Schoenle (Brandeis University); Egon Zakrajsek (Federal Reserve Board); Simon Gilchrist (Boston University)
    Abstract: In this paper, we analyze the business cycle and welfare consequences of monetary union among countries that face heterogeneous financial market frictions. We show that facing financial distress in the absence of devaluation, the firms in financially weak countries countries have an incentive to raise their prices to cope with liquidity shortfalls. At the same time, firms in countries with greater financial slack poach from the customer base of the former countries by undercutting their prices, without internalizing the detrimental effects on union-wide aggregate demand. Thus, a monetary union among countries with heterogeneous degrees of financial frictions may create a tendency toward internal devaluation for core countries with greater financial resources, leading to chronic current account deficits of the peripheral countries. A risk-sharing arrangement between the core and the periphery can potentially undo the distortion brought about by the currency union. However, such risk sharing requires unrealistic amounts of wealth transfers from the core to the periphery. We show that unilateral fiscal devaluation carried out by the peripheral countries can substantially improve the situation not only for themselves but also for the core countries if there exists an important degree of pecuniary externality not internalized by the predatory pricing strategies of individual firms.
    Date: 2015

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