nep-eec New Economics Papers
on European Economics
Issue of 2015‒12‒01
thirteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Unemployment Risk and Over-indebtedness A Micro-econometric Perspective By Philip Du Caju; François Rycx; Ilan Tojerow
  2. The effect of ECB monetary policies on interest rates and volumes By Jérôme Creel; Paul Hubert; Mathilde Viennot
  3. Looking for a success in the euro crisis adjustment programs: the case of Portugal By Ricardo Reis
  4. Countercyclical Foreign Currency Borrowing:Eurozone Firms in 2007-2009 By Philippe Bacchetta; Ouarda Merrouche
  5. Did foreign banks “cut and run” or stay committed to Emerging Europe during the crises? By Bonin, John P.; Louie , Dana
  6. Unconventional Monetary Policy in the Euro Zone By John Driffill
  7. Interdependence between Sovereign and Bank CDS Spreads in Eurozone during the European Debt Crisis - The PSI Effect By Papafilis, Michalis-Panayiotis; Psillaki, Maria; Margaritis, Dimitris
  8. The Great Recession and the UK labour market By Millard, Stephen
  9. Labor Market Institutions and Wage Inequality in the OECD countries By Ellen Marie Rossvoll; Victoria Sparrman
  10. The macroeconomic impact of policies on labour market outcomes in OECD countries: A reassessment By Peter Gal; Adam Theising
  11. QE and the Bank Lending Channel in the United Kingdom By Butt, Nick; Churm, Rohan; McMahon, Michael; Morotz, Arpad; Schanz, Jochen
  12. Cross-border banking on the two sides of the Atlantic: does it have an impact on bank crisis management? By Nieto, Maria J.; Wall, Larry D.
  13. From financial to real economic crisis: evidence from individual firm¨Cbank relationships in Germany By Nadja Dwenger; Frank M Fossen; Martin Simmler

  1. By: Philip Du Caju; François Rycx; Ilan Tojerow
    Abstract: We study how unemployment effects the over-indebtedness of households using the new European Household Finance and Consumption Survey (HFCS). First, we assess the role of different labor market statuses (i.e. employed, unemployed, disabled, retired, etc.) and other household characteristics (i.e. demographics, housing status, household wealth and income, etc.) to determine the likelihood of over-indebtedness. We explore these relationships both at the Euro area level and through country-specific regressions. This approach captures countryspecific institutional effects concerning all the different factors which can explain household indebtedness in its most severe form. We also examine the role that each country’s legal and economic institutions play in explaining these differences. The results of the regressions across all countries show that the odds of being over-indebted are much higher in households where the reference person is unemployed. These odds ratios remain fairly stable across different over-indebtedness indicators and specifications. Interestingly, we find similar results for secured debt only. Turning to country specific results, the role of unemployment varies widely across countries. In Spain, France or Portugal, for example, the odds ratio for the unemployed group is just below 2, whereas in Austria, Belgium, or Italy the odds ratio is higher than 4. Secondly, we situate the analysis in a macro-micro frame to identify households and countries that are especially vulnerable to adverse macroeconomic shocks in the labor market. For the Euro area, we find that the percentage of households plagued by overindebtedness increased by more than 10%, suggesting that another unemployment shock could have a major impact on the financial solvency of Euro area households. Finally, the impact of this shock on single-headed households is much higher than on coupleheaded ones.
    Keywords: Household finance; Over-indebtedness; Financial Fragility; Unemployment; Labor market status; HFCS
    JEL: D14 D91 J12
    Date: 2015–11–26
  2. By: Jérôme Creel (OFCE); Paul Hubert (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 country-specific 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; Pass through; Bank lending
    JEL: E51 E52 E58
    Date: 2015–10
  3. By: Ricardo Reis
    Abstract: Portugal’s adjustment program in 2010-14 under the troika was extensive and aimed at addressing its large debt and anemic growth, so it may serve as a blueprint for reforms in the Eurozone. This paper argues that, conditional on a diagnosis of the underlying problems of the Portuguese economy, the adjustment program failed to deliver in definitely addressing the problems in public finances, but succeeded in leaving promising signs of reform in the structure of the economy. In particular, on the negative side, public debt is still high, primary surpluses improved modestly, and public spending barely fell as the problem of ever-rising pension payments remained unsolved. On the positive side, unemployment fell sharply, exports and the current account balance rose, capital and labor reallocated to more productive and tradable sectors, and the country is growing faster than the EU for the first time in 15 years.
    JEL: N0 R14 J01 E6
    Date: 2015
  4. By: Philippe Bacchetta; Ouarda Merrouche
    Abstract: Despite international financial disintegration, we document a dramatic increase in dollar borrowing among leveraged Eurozone corporates during the Great Financial Crisis. Using loan-level data, we trace this increase to the twin crisis in the credit market and in funding markets. The reduction in the supply of credit by Eurozone banks caused riskier borrowers to shift to foreign banks, in particular US banks. The coincident rise in the relative cost of euro wholesale funding and the disruptions in the FX swap market caused a rise in dollar borrowing from US banks, especi ally for firms in export-oriented sectors. Although global bank lending is often reported to amplify the international credit cycle, we show that foreign banking acted as a shock absorber that weathered the real consequences of the credit crunch in Europe.
    Keywords: Money market, swaps, credit crunch, corporate debt, foreign banks
    JEL: G21 G30 E44
    Date: 2015–08
  5. By: Bonin, John P. (BOFIT); Louie , Dana (BOFIT)
    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.
    Keywords: foreign bank lending; financial crisis; multinational banks; Emerging Europe
    JEL: G01 G15 P34
    Date: 2015–11–04
  6. By: John Driffill
    Abstract: The European Central Bank adopted a policy of quantitative easing early in 2015, long after the US and UK, and after implementing a succession of measures to increase liquidity in the Euro zone financial markets, none of which proved sufficient eventually. The paper draws out lessons for the Euro zone from US and UK experience. Numerous event studies have been undertaken to uncover the effects of QE on yields on and prices of financial assets. Estimated effects on long-term government bond yields are then converted into the size of the cut in the policy rate that would normally have been needed to produce them. From these implicit cuts in policy rates, estimates of the effect on GDP and inflation are generated. Euro zone QE appears to have had a much smaller effect on bond yields for the core members states than did QE in the US or UK. Therefore its effects on output and inflation are likely to be proportionately smaller. Its effects on long-term government bond yields in periphery members are greater. QE is compressing interest differential among Euro zone member states. The dangers of QE to which various commentators draw attention, that it creates a danger of inflation in the future, that it creates asset price bubbles, that it allows zombie firms and banks to survive, slowing down the process of adjustment, seem remote. Meanwhile it makes a useful contribution to cutting the costs of debt service and allowing member states more fiscal room for maneouvre.
    Keywords: quantitative easing, unconventional monetary policy, Euro zone, financial crisis, European Central Bank
    JEL: E31 E43 E51 E58 E63
    Date: 2015–11
  7. By: Papafilis, Michalis-Panayiotis; Psillaki, Maria; Margaritis, Dimitris
    Abstract: This paper examines the changes in the interdependence between sovereign and bank credit risk, that were noticed, after the announcement of the voluntary exchange program of Greek bonds, with the participation of the private sector (Private Sector Involvement - PSI). More precisely, we investigate the progress of the credit default swaps (CDS) of eight eurozone countries and of twenty-one banking institutions, for the period of January 2009 to May 2014. We divide the sample into two sub-periods, based on the announcement of the program. We apply Hsiao's methodology (1981), in order to ascertain the causality which is observed between the CDS series and potential changes in their relationship, due to the implementation of the PSI. We identify limited causality relations between countries and banks of the sample examined, in the second sub-period, while the size of the interaction is reduced in the same period. After developing a Difference-in-Difference model, we confirm the weakening of causal relationships between the CDS series studied, for the period, after the announcement of the PSI. Our results suggest that the implementation of the PSI has contributed to the limitation of the interdependence between the CDS spreads of the sovereigns and banks in the period that follows.
    Keywords: CDS spreads, PSI, sovereign credit risk, bank credit risk, debt crisis, contagion, eurozone
    JEL: F34 F42 G28 H12 H63
    Date: 2015–11–24
  8. By: Millard, Stephen (Bank of England)
    Abstract: In line with most of the developed world, the United Kingdom experienced in 2008–09 its worst recession since the Great Depression of the 1920s and 30s: the Great Recession. But despite the 6% peak-to-trough fall in output (as measured by real gross value added at basic prices) the unemployment rate only rose from 5.2% in 2007 Q4 to 8.4 in 2011 Q3. This muted response is often attributed to the flexibility of the UK labour market and, in particular, the willingness of UK workers to see their real wages fall. This paper uses an estimated DSGE model of the UK economy to investigate this hypothesis, assessing which shocks were largely responsible for the Great Recession and the extent to which the effect of these shocks on unemployment would have been worse had the UK labour market responded less flexibly.
    Keywords: Labour market flexibility; Great Recession.
    JEL: E24 E32
    Date: 2015–11–13
  9. By: Ellen Marie Rossvoll; Victoria Sparrman (Statistics Norway)
    Abstract: In this paper we attempt to investigate the effect on income inequality of some recent trends in the labour market, changes in regulations of temporary positions and the surge in immigration in many EU-countries. The empirical results show that less strict regulations of temporary positions and higher immigration increase income inequality. The effects of other labour market institutions, such as tax and benefit replacement ratio, on wage inequality are mainly in line with previous literature, but our results are based on a larger sample size in both the time and country dimension. The empirical analysis is conducted on panel data for 20 OECD countries between 1973 and 2011. We perform two robustness checks to our results. First, we account for indirect effects of changes in labor market institutions on wage inequality via the unemployment rates. The indirect effects suggest that labour market institutions have a larger effect on wage inequality than before. Second, we account for cross-sectional dependence and the results point at lower but significant effects of most of the labour market institutions on wage inequality.
    Keywords: Inflation modelling; pattern wage bargaining; inflation targeting; dynamic econometrics; cointegration; small open economy
    JEL: E24 J08 J31 J51
    Date: 2015–10
  10. By: Peter Gal; Adam Theising
    Abstract: This paper presents a first set of updates and extensions of the large body of existing evidence about the aggregate labour market impact of structural policies, in the context of enhancing the OECD’s supply-side framework for the quantification of reform packages. In line with previous findings, elements of the tax benefit system, activation policies and wage setting institutions are found to be robust policy determinants of the aggregate employment and unemployment rates. Looking beyond the overall employment impact, outcomes for vulnerable groups such as the low educated, the youth and the elderly tend to be more affected by certain structural policies, including specific measures targeted at them. Finally, more competition-friendly product market regulations are also found to impact aggregate employment rates positively and significantly, although less robustly.<P>L'impact macroéconomique des politiques structurelles sur le marché du travail dans les pays de l'OCDE : Une mise à jour<BR>Cette étude vise à mettre à jour et compléter les résultats de la littérature existante concernant l'impact des politiques structurelles sur le marché du travail, et ceci dans le contexte de l’amélioration du cadre de modélisation pour la quantification de l’impact des réformes sur l’offre globale. Conformément aux résultats des études antérieures, nous trouvons que les éléments du système de prélèvements et de transferts fiscal, les politiques d'activation et les modes de détermination des salaires sont des déterminants robustes du taux d'emploi et du taux de chômage. Au-delà de l'impact global sur l'emploi, les résultats pour les groupes vulnérables tels que les travailleurs peu qualifiés, les jeunes et les travailleurs âgés ont tendance à être plus touchées par certaines politiques structurelles, y compris des mesures spécifiques ciblées sur eux. Enfin, nous trouvons aussi qu’une réglementation des marchés de produits moins restrictive pour la concurrence encourage le taux d'emploi de manière significative, bien que de façon moins robuste.
    Keywords: employment, unemployment, labour force, labour market policies, participation au marché du travail, politiques du marché du travail, emploi, chômage
    JEL: E24 J08
    Date: 2015–11–27
  11. By: Butt, Nick (Bank of England); Churm, Rohan (Bank of England); McMahon, Michael (University of Warwick, CEPR, CAGE (Warwick), CfM (LSE), and CAMA (ANU)); Morotz, Arpad (Bank of England); Schanz, Jochen (Bank for International Settlements)
    Abstract: We test whether quantitative easing (QE), in addition to boosting aggregate demand and inflation via portfolio rebalancing channels, operated through a bank lending channel (BLC) in the UK. Using Bank of England data together with an instrumental variables approach, we find no evidence of a traditional BLC associated with QE. We show, in a simple framework, that the traditional BLC is diminished if the bank receives `flighty' deposits (deposits that are likely to quickly leave the bank). We show that QE gave rise to such flighty deposits which may explain why we find no evidence of a BLC.
    Keywords: Monetary policy; Bank lending channel; Quantitative Easing JEL Classification: E51, E52, G20
    Date: 2015
  12. By: Nieto, Maria J. (Banco de España); Wall, Larry D. (Federal Reserve Bank of Atlanta)
    Abstract: In the United States and the European Union (EU), political incentives to oppose cross-border banking have been strong in spite of the measurable benefits to the real economy from breaking down geographic barriers. Even a federal-level supervisor and safety net are not by themselves sufficient to incentivizing cross-border banking although differences in the institutional set-up are reflected in the way the two areas responded to the crisis. The U.S. response was a coordinated response, and the cost of resolving banks was borne at the national level. Moreover, the Federal Deposit Insurance Corporation (FDIC) could market failed banks to other banks irrespective of state boundaries, reducing the cost of the crisis to the U.S. economy and the sovereign finances. In the EU, the crisis resulted in financial market fragmentation and unbearable costs to some sovereigns. Moreover, the FDIC could market failed banks to other banks irrespective of state boundaries, reducing the cost of the crisis to the U.S. economy and the sovereign finances. In the EU, the crisis resulted in financial market fragmentation and unbearable costs to some sovereigns.
    Keywords: cross-border banking; financial crisis; bankruptcy; European Union; United States
    JEL: G01 G21 G28 K20 L51
    Date: 2015–11–01
  13. By: Nadja Dwenger (Universitat Hohenheim, CESifo); Frank M Fossen (Freie Universitat Berlin, DIW and IZA); Martin Simmler (Oxford University Centre for Business Taxation and DIW Berlin)
    Abstract: What began as a financial crisis in the United States in 2007¨C2008 quickly evolved into a massive crisis of the global real economy. We investigate the importance of the bank lending and firm borrowing channel in the international transmission of bank distress to the real economy ¡ªin particular, to real investment and labour employment by nonfinancial firms. We analyse whether and to what extent firms are able to compensate for the shortage in loan supply by switching banks and by using other types of financing. The analysis is based on a unique matched data set for Germany that contains firm-level financial statements for the 2004¨C2010 period together with the financial statements of each firm¡¯s relationship bank(s). We use instrumental variable estimations in first differences to eliminate firm and bank-specific effects. The first stage results show that banks that suffered losses due to proprietary trading activities at the onset of the financial crisis reduced their lending more strongly than non-affected banks. In the second stage, we find that firms whose relationship banks reduce credit supply downsize their real investment and labour employment significantly. This effect is larger for firms that are unable to provide much collateral. We document that firms partially offset reduced credit supply by establishing new bank relationships, using internal funds, and issuing new equity.
    Keywords: financial crisis; contagion; credit rationing; relationship lending; investment
    JEL: D22 D92 E44 G01 G20 G31 H25 H32
    Date: 2015

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