nep-eec New Economics Papers
on European Economics
Issue of 2016‒01‒03
sixteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Unemployment Risk and Over-Indebtedness: A Micro-Econometric Perspective By Du Caju, Philip; Rycx, Francois; Tojerow, Ilan
  2. Whose inflation is it anyway? The inflation spillovers between the euro area and small open economies By Aleksandra Hałka; Karol Szafranek
  3. The US$/€ exchange rate: Structural modeling and forecasting during the recent financial crises By Claudio, Morana
  4. Cross-border banking and business cycles in asymmetric currency unions By Dräger, Lena; Proaño, Christian R.
  5. Is Switzerland an interest rate island after all? Time series and non-linear switching regime evidence By Feld, Lars P.; Köhler, Ekkehard A.
  6. Deleveraging, deflation and depreciation in the euro area By Kuvshinov, Dmitry; Müller, Gernot; Wolf, Martin
  7. The relation between sovereign credit default swap premium and banking sector risk in Poland By Åukasz GÄ…tarek; Marcin Wojtowicz
  8. Has Austerity Worked in Spain? By David Rosnick; Mark Weisbrot
  9. International Spillovers of ECB’s Unconventional Monetary Policy: The Effect on Central and Eastern Europe By Klara Halova; Roman Horvath
  10. Financial deepening and income distribution inequality in the euro area By Donatella Baiardi; Claudio Morana
  11. Transparency and Trust: The Case of the European Central Bank By Roman Horvath; Dominika Katuscakova
  12. Cross-border finance, trade imbalances and competitiveness in the euro area By Gabrisch, Hubert
  13. Autonomous demand and economic growth:some empirical evidence By Daniele Girardi; Riccarco Pariboni
  14. How can it work? On the impact of quantitative easing in the Eurozone By Francesco Saraceno; Roberto Tamborini
  15. Unconventional Monetary Policy Shocks in OECD Countries: How Important is the Extent of Policy Uncertainty? By Rangan Gupta; Charl Jooste
  16. The productivity gap among European countries. By Giorgio Calcagnini; Germana Giombini; Giuseppe Travaglini

  1. By: Du Caju, Philip (National Bank of Belgium); Rycx, Francois (Free University of Brussels); Tojerow, Ilan (Free University of Brussels)
    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 country-specific 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 over-indebtedness 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 couple-headed ones.
    Keywords: household finance, over-indebtedness, financial fragility, unemployment, labor market status, HFCS
    JEL: D14 D91 J12
    Date: 2015–12
  2. By: Aleksandra Hałka; Karol Szafranek
    Abstract: For the last two years inflation has been systematically falling across countries in the European Union and lately it exhibits rising deflationary pressures. Recent studies suggest that apart from global determinants influencing broad inflation measures, e.g. plummeting commodity prices, core inflation components are subjected to the rising influence of globalization. Our analysis focuses on two aspects: the extent of the HICP components infected with deflation and the spillovers of headline, core, non-energy goods as well as services inflation between the euro area and distinguished small open economies. In order to answer the question of inflation broadness we calculate the percentages of HICP components which dynamics fall into certain thresholds and introduce a simple measure - the Discrepancy Index showing the relative strength of deflationary and inflationary groups. To address the problem of quantifying the inflation spillovers across distinguished economies we use the Diebold and Yilmaz (2012) spillover indices. Results indicate that the share of deflationary groups for most countries has been consistently rising since 2010 with the Discrepancy Index approximating its all-time lows in the fourth quarter of 2014. Simultaneously we show that the spillover index for non-energy industrial goods and services inflation has lately risen considerably with the measure for headline inflation remaining elevated and for core inflation dropping. The euro area remains a net inflation transmitter in most cases.
    Keywords: inflation, spillovers, VAR, disaggregation, small open economy, euro area.
    JEL: C32 C53 E31 E37
    Date: 2015
  3. By: Claudio, Morana
    Abstract: The paper investigates the determinants of the US$/€ exchange rate since its introduction in 1999, with a special focus on the recent subprime mortgage and sovereign debt financial crises. The econometric model is grounded on the asset pricing theory of exchange rate determination, which posits that current exchange rate fluctuations are determined by the entire path of current and future revisions in expectations about fundamentals. In this perspective, we innovate the literature by conditioning on Fama-French and Charart risk factors, which directly measures changing market expectations about the economic outlook, as well as on new financial condition indexes and a large set of macroeconomic variables. The macro-finance augmented econometric model has a remarkable in-sample and out of sample predictive ability, largely outperforming a standard autoregressive specification neglecting macro-financial information. We also document a stable relationship between the US$/€-Charart momentum conditional correlation (CCW) and the euro area business cycle, potentially exploitable also within a system of early warning indicators of macro-financial imbalances. Comparison with available measures of economic sentiments shows that CCW yields a more accurate assessment, signaling a progressive weakening in euro area economic conditions since June 2014, consistent with the sluggish and scattered recovery from the sovereign debt crisis and the new Greek solvency crisis exploded in late spring/early summer 2015.
    Keywords: US$/€ exchange rate, asset pricing theory of exchange rate determination, macroeconomic and financial determinants, risk factors, subprime mortgage financial crisis, sovereign debt crisis, early warning indicators of macroeconomic and financial stress
    JEL: E32 E44 G01 G15 C22
    Date: 2015–12–28
  4. By: Dräger, Lena; Proaño, Christian R.
    Abstract: Against the background of the emergence of macroeconomic imbalances within the European Monetary Union (EMU), we investigate in this paper the macroeconomic consequences of cross-border banking in monetary unions such as the euro area. For this purpose, we incorporate in an otherwise standard two-region monetary union DSGE model a global banking sector along the lines of Gerali et al. (2010), accounting for borrowing constraints of entrepreneurs and an internal constraint on the bank's leverage ratio. We illustrate in particular how rule-of-thumb lending standards based on the macroeconomic performance of the dominating region within the monetary union can translate into destabilizing spill-over effects into the other region, resulting in an overall higher macroeconomic volatility. Thereby, we demonstrate a channel through which the financial sector may have exacerbated the emergence of macroeconomic imbalances within the EMU. This effect may be partly mitigated if the central bank reacts to loan rate spreads, at least relative to the case with constant lending standards.
    Keywords: cross-border banking,euro area,monetary unions,DSGE,monetary policy
    JEL: F41 F34 E52
    Date: 2015
  5. By: Feld, Lars P.; Köhler, Ekkehard A.
    Abstract: Has the 'Swiss interest rate anomaly' persisted after the financial crisis? Regarding the hypothesis that the Swiss interest rate anomaly results from systemic risk anticipation, we discuss whether Switzerland remains an interest rate island in the wake of the financial crisis. We find evidence for the demise of the interest rate bonus of the Swiss franc (CHF) vis-à-vis the Euro (EUR) after the Swiss National Bank (SNB) started to advocate an exchange rate floor with the Euro. After the compression of the bonus to insignificant levels, the uncovered interest parity (UIRP) holds again. We find evidence for a recent regime switch after the SNB has discontinued the exchange rate floor with the Euro.
    Keywords: Uncovered Interest Rate Parity (UIRP),Swiss Interest Rate Anomaly,Error Correction,Heteroscedasticity,Markov Regime Switching
    JEL: E42 E43 F43 G15
    Date: 2015
  6. By: Kuvshinov, Dmitry; Müller, Gernot; Wolf, Martin
    Abstract: During the post-crisis period, economic performance has been highly heterogenous across the euro area. While some economies rebounded quickly after the 2009 output collapse, others are undergoing a protracted further decline as part of an extensive deleveraging process. At the same time, inflation has been subdued throughout the whole of the euro area and intra-euro-area exchange rates have hardly moved. We interpret these facts through the lens of a two-country model of a currency union. We find that deleveraging in one country generates deflationary spillovers which cannot be contained by monetary policy, as it becomes constrained by the zero lower bound. As a result, the real exchange rate response becomes muted, and the output collapse---concentrated in the deleveraging economies.
    Keywords: currency union; deflationary spillovers; deleveraging; downward wage rigidity; paradox of flexibility; real exchange rate; zero lower bound
    JEL: E42 F41
    Date: 2015–12
  7. By: Åukasz GÄ…tarek; Marcin Wojtowicz
    Abstract: We investigate causality between returns on sovereign CDSs and bank equities for Poland between 2004 and 2014 to provide evidence on contagion between sovereign and banking sector risk pricing. We find some evidence of contagion from Polish sovereign CDS returns to bank equity returns during the crisis period. We benchmark the results for Poland against a sample ofWestern European countries. We document strong negative correlation between sovereign CDS and bank equity returns for individual countries as well as strong commonality of both sovereign and banking sector risks across different countries. We do not however find a clear pattern of contagion between these two markets across European countries. To further investigate drivers of CDS and bank equity returns, we conduct principal component analysis and we find that first three principal components explain as much as 97% of variation with the third principal component mostly associated with Polandspecific risk.
    Keywords: Contagion, sovereign CDS, bank equity returns, financial crisis.
    JEL: G01 G12 G14 G19 G21
    Date: 2015
  8. By: David Rosnick; Mark Weisbrot
    Abstract: This paper examines Spain’s recent economic history, both before and after its recession, with a focus on employment, contributions to GDP growth, and the current account balance. The paper notes that Spain has pursued a set of economic policies since 2011 based on internal currency devaluation, labor market reform, fiscal consolidation, and structural and deregulatory reforms aimed at boosting growth through increased efficiency. It concludes that the economic recovery that began in the second half of 2013 is not the result of austerity policies, and is unlikely to rescue Spain from mass unemployment in the foreseeable future.
    Keywords: austerity, Spain, unemployment, euro, European Central Bank, International Monetary Fund, current account balance, labor force participation, construction, eurozone, recession
    JEL: E E2 E24 E5 E58 F N N9 N94
    Date: 2015–12
  9. By: Klara Halova; Roman Horvath
    Abstract: We examine how unconventional monetary policy of the European Central Bank influences macroeconomic stability in Central and Eastern European economies. We estimate various panel vector autoregressions using monthly data from 2008-2014. Using the shadow policy rate and central bank assets as measures of unconventional policies, we find that output and prices in Central and Eastern Europe temporarily increase following an expansionary unconventional monetary policy shock by the European Central Bank. Using both impulse responses and variance decompositions, we find that the effect of unconventional policies on output is much stronger than the effect on inflation. In addition, our results provide evidence that unconventional policy tends to reduce market uncertainty and domestic interest rates but that the effect on the real exchange rate is not significant.
    Keywords: Unconventional Monetary Policy, ECB, Central and Eastern Europe, Panel Vector Autoregression
    JEL: E52 E58
    Date: 2015–10
  10. By: Donatella Baiardi (Università di Milano Bicocca); Claudio Morana (Università di Milano Bicocca and CeRP)
    Abstract: The paper introduces a new specification of the Kuznets curve, where turning point per capita income is conditioned to the level of financial development. Within the proposed framework, it then provides new evidence on real income convergence for the euro area (EA) since the mid-1980s, with a special focus on the subprime and sovereign debt financial crises. We find strong empirical evidence in favor of an EA-wide steady-state financial Kuznets curve and of ongoing convergence across EA members toward a common per capita income turning point level. By means of a counterfactual analysis, we then detect a worsening in income inequality for all the EA countries during the financial crises, and not only for the peripheral countries, which were most strongly hit. From a policy perspective, our findings highlight the role of financial stability in fostering not only economic growth, but also to achieve a more even distribution of income.
    Date: 2015–12
  11. By: Roman Horvath (Charles University, Prague); Dominika Katuscakova
    Abstract: We examine how the transparency of the European Central Bank’s monetary policy affects the amount of trust that the citizens of the European Union have in this institution. We use nearly half a million individual responses from the European Commission’s Eurobarometer survey from 2000-2011 and estimate probit regressions with sample selection. We find that transparency exerts a non-linear effect on trust. Transparency increases trust, but only up to a certain point; too much transparency harms trust. This result is robust to controlling for a number of macroeconomic conditions, financial stability transparency measures, and economic and socio-demographic characteristics of respondents, including examining respondents in European Union countries that do not use the euro and addressing clustering issues.
    Keywords: European Central Bank, trust, transparency, survey
    JEL: E52 E58
    Date: 2015–10
  12. By: Gabrisch, Hubert
    Abstract: The nearly exclusive explanation for current account imbalances in the euro area blames real economy differences between countries, prominently the competitiveness of the participating states. This essay questions the common opinion that wage policy is crucial for rebalancing the European economies. This essay attempts to unfurl the real economy processes from the perspective of money and finance. This essay identifies an interregional asset-price-interest mechanism at work in the monetary union: A general change in the state of confidence provokes asset prices and the effective long-run interest rate to change and to affect aggregate demand and trade flows. A change in competitive positions of countries follows as the second-round effect. The policy implications prefer a downscaling of the financial sector against government interventions into wage formation.
    Keywords: Financial flows, liquidity-preference, trade imbalances, competitiveness, euro area
    JEL: E1 E4 F1 F3 G1
    Date: 2015–12–15
  13. By: Daniele Girardi; Riccarco Pariboni
    Abstract: According to the Sraffian supermultiplier model, economic growth is driven by the autonomous components of aggregate demand (exports, public spending and autonomous consumption). This paper tests empirically some major implications of the model. For this purpose, we calculate time-series of the autonomous components of aggregate demand and of the supermultiplier for the US, France, Germany, Italy and Spain and describe their patterns in recent decades. We observe that changes in output and in autonomous demand are tightly correlated, both in the long and in the short-run. The supermultiplier is substantially higher and more stable in the US, while in the European countries it is lower and strongly decreasing. Consistently with theory, we find that where the supermultiplier is reasonably stable - i.e., in the US since the 1960s - autonomous demand and output share a common long-run trend (i.e, they are cointegrated). The estimation of a Vector Error-Correction model (VECM) on US data suggests that autonomous demand exerts a long-run effect on GDP, but also that there is simultaneous causality between the two variables. We propose an explanation based on the idea that autonomous demand is socially and historically determined. We then estimate the multiplier of autonomous spending through a panel instrumental-variables approach, finding that a one dollar increase in autonomous demand raises output by 1.6 dollars over four years. A further implication of the model that we test against empirical evidence is that increases in autonomous demand growth tend to be followed by increases in the investment share. Through Granger-causality tests and instrumental variables analysis, we find that this is the case in all five countries. An additional 1% increase in autonomous demand raises the investment share by 0.57 percentage points of GDP in the long-run
    Keywords: Growth, Effective Demand, Supermultiplier
    JEL: E11 E12 B51 O41
    Date: 2015–08
  14. By: Francesco Saraceno; Roberto Tamborini
    Abstract: How can the quantitative easing (QE) programme launched in March 2015 by the ECB be successful in the Eurozone (EZ)? What will be its impact on the member countries? And how will it relate to countries' fiscal policies? To address these questions, we use a simple extension of the three-equation New Keynesian model. We modify the benchmark model in two respects: 1) we (re)-introduce an LM money supply and demand equation to capture the fact that the ECB operates at the zero lower bound and hence cannot use a standard Taylor rule; and 2) we extend the model to a two-country framework. The model supports the ECB official view that the channel whereby QE is meant to operate is the reversal of deflationary expectations. It also highlights that instrumental to this goal is the elimination of persistent output gaps, both at the EZ and at the country level, and hence the reduction of country-specific interest-rate spreads − the "unofficial" objective of the programme. We show that QE, if large enough, can succeed for the EZ as a whole. The ECB nevertheless cannot also close individual countries' output gaps, unless specific and unrealistic conditions are met. In this case fiscal accommodation at the country level should also intervene. We show that QE can enhance the effectiveness of fiscal policy, and therefore conclude that the coordination of fiscal and monetary policies is of paramount importance
    Keywords: Monetary Policy, ECB, Deflation, Zero-Lower-Bound, Fiscal Policy
    JEL: E3 E4 E5
    Date: 2015
  15. By: Rangan Gupta (Department of Economics, University of Pretoria); Charl Jooste (Department of Economics, University of Pretoria)
    Abstract: We study the effects of unconventional monetary policy shocks on output, inflation and uncertainty using a sign restricted panel VAR over the monthly period of 2008:1-2015:1. Our sample includes primarily OECD countries (Canada, Germany, France, Italy, Japan, Spain, UK and US) that reached the interest rate zero lower bound in response to the recent financial crisis. Central bank balance sheets are used to gauge the size of unconventional monetary policy reactions to the crisis. We control for the degree of uncertainty by estimating the economic response to balance sheet shocks in two economic states: high versus low uncertainty. We use sign restrictions to identify our shocks, but remain agnostic regarding price and output responses to balance sheet shocks. We show that the mean group response of prices and output increases in response to monetary policy. The results, however, vary by country and are sensitive to the degree of uncertainty. Prices and output do not necessarily increase uniformly across countries.
    Keywords: Unconventional monetary policy, Economic policy uncertainty, Macroeconomic effects, OECD countries
    JEL: C33 E58
    Date: 2015–11
  16. By: Giorgio Calcagnini (Department of Economics, Society & Politics, Università di Urbino "Carlo Bo"); Germana Giombini (Department of Economics, Society & Politics, Università di Urbino "Carlo Bo); Giuseppe Travaglini (Department of Economics, Society & Politics, Università di Urbino "Carlo Bo)
    Abstract: This paper aims at analyzing Total Factor Productivity (TFP) in four European countries (France, Germany, Italy and the Netherlands) between 1950 and 2011. It uses the common trend - common cycle approach to decompose series in trends and cycles. We find that the four economies share three common trends and a common cycle. Further, we show that in the case of Italy and the Netherlands trend and cycle innovations have a negative relationship that supports the ‘opportunity cost’ approach to productivity growth, and that trend innovations are generally larger than cycle innovations. Finally, while we do not explore what drives the three common trends, we show that countries’ differences in TFP performance in recent years may be due to the so-called “deep”determinants in growth literature such as the presence of efficient mechanisms of creation and transmission of knowledge, international integration, and efficient markets and institutions.
    Keywords: Total factor productivity, Cointegration analysis, Market imperfections
    JEL: D24 D43 E02 E23
    Date: 2015

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