nep-eec New Economics Papers
on European Economics
Issue of 2016‒01‒29
twelve papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Liquidity, Government Bonds and Sovereign Debt Crises By Francesco Molteni
  2. Policy alternatives for the relationship between ECB monetary and financial policies and new member states By Michal Jurek; Pawel Marszalek
  3. Clustering European Welfare Systems through a Performance Index By Maria Alessandra Antonelli; Valeria De Bonis
  4. European lending channel: differences in transmission mechanisms due to the global financial crisis By Tomáš Heryán; Panayiotis G. Tzeremes; Roman Matousek
  5. Economic Volatility and Sovereign Yields’ Determinants: a Time-Varying Approach By António Afonso; João Tovar Jalles
  6. Le plan Juncker peut-il nous soritr de l'ornière ? By Francesco Saraceno; Sébastien Villemot; Mathilde Lemoigne
  7. Politically driven cycles in fiscal policy: In depth analysis of the functional components of government expenditures By Vítor Castro; Rodrigo Martins
  8. Distributional Effects of Social Security Reforms: the Case of France By Raquel Fonseca; Thepthida Sopraseuth
  9. Oil price volatility and stock returns in the G7 economies By Elena María Díaz; Juan Carlos Molero; Fernando Pérez de Gracia
  10. Disentangling goods, labor and credit market frictions in three European economies By Thomas Brzustowski; Nicolas Petrovsky-Nadeau; Etienne Wasmer
  11. Economic Governance of Northern European Countries by the European Union 2010- 2015: The Cases of Finland, Germany, Lithuania and Sweden By Anne Drumaux; Paul Joyce
  12. Heterogeneity in Returns to Wealth and the Measurement of Wealth Inequality By Andreas Fagereng; Luigi Guiso; Davide Malacrino; Luigi Pistaferri

  1. By: Francesco Molteni
    Abstract: This paper analyses the European financial crisis through the lens of sovereign bond liquidity. Using novel data we show that government securities are the prime collateral in the European repo market, which is becoming an essential source of funding for the banking system in the Euro area. We document that repo haircuts on peripheral government bonds sharply increased during the crisis, reducing their liquidity and amplifying the raise in the yields of these securities. We study the systemic impact of a liquidity shock on the business cycle and asset prices through a dynamic stochastic general equilibrium model with liquidity frictions. The model predicts a drop in economic activity, inflation and value of illiquid government bonds. We show that an unconventional policy which consists of purchasing illiquid bonds by issuing liquid bonds can alleviate the contractionary effect of liquidity shock. A Bayesian structural vector autoregressive model for the Irish economy confirms empirically the negative impact of a rise in haircuts on the value of government bonds.
    Keywords: repo;haircuts;government bonds;liquidity shock;quantitative easing
    JEL: E44 E58 G12
    Date: 2015–12
  2. By: Michal Jurek (Department of Money and Banking, Poznan University of Economics); Pawel Marszalek (Department of Money and Banking, Poznan University of Economics)
    Abstract: The global financial crisis has cast doubt on existing within the mainstream economics consensus on monetary policy. So called ‘New Consensus Monetary Policy’ appeared to lack many important operational, political and institutional issues, especially with regard to consistency of the monetary-fiscal policy mix within the eurozone, as well as with reference to policy mix in the individual member countries. When crisis emerged, problems with monetary- fiscal coordination turned to be more complicated. The crisis has proved also inefficiency of the “one size fits all” monetary policy, implemented by the ECB. The divergences of economic performance, business cycles, and financial development – all attending the financialisation process – have become eye striking among the EMU members. Extremely low inflation rates have brought new challenges into focus resulting i.a. from the zero bound on nominal short-term interest rates. Taking this into consideration, the aim of this paper is to investigate the ways in which the monetary and financial policies of the ECB can be conducted in a low interest rates environment. Undertaken analysis allows understanding the strengths and weaknesses of these policies. It also creates a background for formulating alternative policy proposals aimed at dealing with divergence and disparities between EU member countries
    Keywords: central banking, financial system, monetary policy, policy coordination, banking union, euro zone
    JEL: E42 E58 E63
    Date: 2015–09–01
  3. By: Maria Alessandra Antonelli; Valeria De Bonis (Università Sapienza di Roma - Dipartimento di Studi Giuridici, Filosofici ed Economici)
    Abstract: We construct a composite performance indicator to assess the relative performance of welfare policies in the EU countries. We show that the variability of performances cannot be explained only by the amount of resources devoted to social policies, but also by the composition of social expenditure: countries with higher shares of redistributive public expenditure obtain better results in the social sector. This result confirms the association between the type of welfare system, according to the traditional four-way classification, and the performance level. However, considering a more complete set of indicators of the structure of the welfare systems, we find that European countries cannot be grouped according to the traditional classification. Considering expenditure-side indicators and financing-side indicators together, three groups form: one comprising the UK and Iceland, one the Nordic countries and the Netherlands, one the continental (and southern) countries and Ireland.
    Keywords: welfare systems; European integration; cluster analysis.
    JEL: H11 H53 I3
    Date: 2016–01
  4. By: Tomáš Heryán (Department of Finance and Accounting, School of Business Administration, Silesian University); Panayiotis G. Tzeremes (Department of Economics, University of Thessaly); Roman Matousek (University of Kent, Kent Business School)
    Abstract: This study focuses on the bank lending channels and transmission mechanisms of monetary policy in European Union (EU) countries. In accordance with previous empirical studies, we deploy the generalized method of moments (GMM) with pooled annual data. We examine the period from 1999 to 2012. We extend the current research on the transmission mechanisms of monetary policy in the following way: first, we compare the differences between the ‘old’ Economic Monetary Union (EMU) and ‘new’ EU countries. Second, we examine the interaction terms between bank characteristics and both monetary policy indicators. In particular, we examine the impact of short-term interest rates and monetary aggregate M2 on bank behaviour. Assuming a more obvious transmission mechanism, we argue that, in the group of ‘old’ EMU countries, the lending channel is affected by smaller banks that are less liquid or are strongly capitalized. For ‘new’ EU countries, we find similar results, i.e., the lending channel affects smaller banks. However, in terms of liquidity and capital adequacy and assuming a more obvious transmission mechanism, we find an opposing result. Those countries’ lending channel is affected by smaller banks with higher levels of liquidity and lower bank capital. Third, we describe how transmission mechanisms changed during the crises period.
    Keywords: lending channel, transmission mechanism, crisis times, old EMU and new EU countries
    JEL: C58 G01 G21 G28
    Date: 2016–01–04
  5. By: António Afonso; João Tovar Jalles
    Abstract: Using quarterly data for 10 Euro Area countries we assess the determinants of government bond yield spreads; compute bivariate time-varying coefficient models of each determinant; and use these estimates to explain economic volatility. We find that better fiscal positions or higher than expected growth prospects reduce the yield spreads, while increases in the VIX, and bid ask, debt-to-GDP ratio or real effective exchange rate increase the spreads. Moreover, the responsiveness of the yield spread determinants increased in the run-up to the Global Financial Crisis. Finally, for the case of the budget balance and real GDP growth (bid ask spread, debt-to-GDP ratio, real effect exchange rate and VIX), the larger (higher) in absolute value the corresponding spread’s responsiveness, the lower (higher) is economic volatility. Key Words – volatility, fiscal policy, bond spreads, weighted least squares, time-varying coefficients
    JEL: C23 E62 G01 H62
    Date: 2016–01
  6. By: Francesco Saraceno (OFCE); Sébastien Villemot (OFCE); Mathilde Lemoigne (OFCE (OFCE))
    Abstract: Dans cet article nous effectuons un exercice quantitatif simple permettant d’évaluer l’impact du plan Juncker au sein de la zone euro et sa capacité à faire sortir les économies européennes de la situation de trappe à liquidités dans laquelle elles sont à présent. Nous estimons un modèle d’équilibre général inter- temporel et stochastique (DSGE) de l’économie à partir de données agrégées sur la zone euro, dans lequel nous introduisons l’existence de capital public, dans l’esprit de ce qui a été proposé par Leeper et al. (2010). Nous simulons alors un plan d’investissement avec une composante publique et une composante privée, reproduisant l’effet de levier privé attendu dans le plan Juncker.
    Keywords: Investissement; Investissement public; Trappe à liquidités; Plan Juncker
    Date: 2015–12
  7. By: Vítor Castro (Faculty of Economics, University of Coimbra, and Economic Policies Research Unit (NIPE)); Rodrigo Martins (Faculty of Economics, University of Coimbra and Group for Monetary and Fiscal Studies (GEMF))
    Abstract: This article analyses the incidence of politically driven cycles on the functional components and sub-components of government expenditures over a group of 18 European countries during the period 1990-2012. An LSDVC estimator is employed in the empirical analysis. The results point out to the presence of political opportunism at aggregated and disaggregated levels of public expenditures, but no significant evidence of partisan or other political effects is found. The expenditure components that have proved to be more related to that behaviour are public services, health, education and social protection. These include items able to generate more visible outcomes to voters and, consequently, of increasing government’s chance of re-election.
    Keywords: Government Expenditures; Political Cycles; Elections; Europe, Fiscal Policy
    JEL: E60 H72 D78
    Date: 2016
  8. By: Raquel Fonseca; Thepthida Sopraseuth
    Abstract: This paper uses a calibrated dynamic life-cycle model to quantify the long-run distributional impact of two opposite Social Security reforms: modifying the parameters of a defined benefit (DB) plan (such as in France with Ayrault’s reform) or switching to a notional defined contribution (NDC) plan (such as in Italy). Both reforms yield an inequal distribution of welfare losses. Low-skilled workers are the main losers of the reforms. This is so for different reasons in each reform. In the case of Ayrault’s reform, low-skilled individuals delay retirement by 2 years, up to age 62. In switching to a NDC scheme, low-skilled workers’pensions fall substantially. In NDC schemes, inequalities along the working-life are directly translated into inequalities in pension levels. The switch from a DB plan to the Italian reform yields substantial welfare losses, pensions drastically fall, and individuals save more. Since low-skilled workers do not save as much as middle or high-skilled workers, the switch to NDC schemes leads to a more unequal society in terms of asset distribution.
    Keywords: Pension reforms, life-cycle heterogeneous-agent model, distributional effects
    JEL: E24 H31 H55 J26
    Date: 2015
  9. By: Elena María Díaz (University of Navarra); Juan Carlos Molero (University of Navarra); Fernando Pérez de Gracia (University of Navarra)
    Abstract: This study examines the relationship between oil price volatility and stock returns in the G7 economies (Canada, France, Germany, Italy, Japan, the UK and the US) using monthly data for the period 1970 to 2014. In order to measure oil volatility we consider alternative specifications for oil prices (world, nominal and real prices). We estimate a vector autoregressive model with the following variables: interest rates, economic activity, stock returns and oil price volatility taking into account the structural break in the year 1986. We find a negative response of G7 stock markets to an increase in oil price volatility. Results also indicate that world oil price volatility is generally more significant for stock markets than the national oil price volatility.
    Keywords: stock returns, oil price volatility, G7 economies, Vector autoregressive (VAR) model
    JEL: C40 G12 Q43
    Date: 2016–01–11
  10. By: Thomas Brzustowski (London School of Economics and Political Science (LSE)); Nicolas Petrovsky-Nadeau (Tepper School of Business); Etienne Wasmer (Département d'économie)
    Abstract: We build a flexible model with search frictions in three markets: credit, labor, and goods markets. We then apply this model (called CLG) to three different economies: a flexible, finance-driven economy (the UK), an economy with wage moderation (Germany), and an economy with structural rigidities (Spain). In the three countries, goods and credit market frictions play a dominant role in entry costs and account for 75% to 85% of total entry costs. In the goods market, adverse supply shocks are amplified through their propagation to the demand side, as they also imply income losses for consumers. This adds up to, at most, an additional 15% to 25% to the impact of the shocks. Finally, the speed of matching in the goods market and the credit market accounts for a small fraction of unemployment: Most of the variation in unemployment comes from the speed of matching in the labor market.
    Keywords: Goods market; Credit market; Unemployment
    Date: 2015–12
  11. By: Anne Drumaux; Paul Joyce
    Abstract: Four European countries have been selected from the northern part of Europe tocarry out cross-case comparisons of their strategic state capabilities. They areFinland, Germany, Lithuania and Sweden.Each of the cases has some distinctive features in terms of their recentdevelopments or their strategic reputations. Finland’s national government hasbeen frequently identified as taking a strategic approach to governance. Thegovernment has made reports on the future to parliament and the parliamenthad its Committee for the Future. Germany, in contrast, has a reputation forbeing more strategic at local and regional government level and the nationallevel of government is portrayed as much less strategic. It is plausible to arguethat the strength of the constitution is a major influence on how publicgovernance works in Germany, and it maybe for this reason that strategic-statecapabilities appear to be emerging quite slowly. Lithuania is an interesting casebecause of its apparently well-institutionalized system of strategic planning thatwas introduced in 2000. There is now a long-term Lithuania 2030 strategy.Central capacity for strategic planning is partly established through ministry unitsand a governmental Strategic Planning Committee dating from 2013. Finally,Sweden’s system of public governance is interesting in part because of the 1997reforms that created a more integrated approach, a whole of governmentapproach, in which the ministers were appointed by the prime minister andworked collaboratively, which has been termed as ministerial decision makingaccording to a collegiality norm. This implies quite a step change in strategicstatecapabilities in the sense of moving away from ministerial silos.
    Keywords: Strategic Management; European Governance; Europe 2020; Sustainable Development
    JEL: L38 N64 O52 Q56
    Date: 2016–01–11
  12. By: Andreas Fagereng (Statistics Norway); Luigi Guiso (EIEF); Davide Malacrino (Stanford University); Luigi Pistaferri (Stanford University and NBER)
    Abstract: Lacking a long time series on the assets of the very wealthy, Saez and Zucman (2015) use US tax records to obtain estimates of wealth holdings by capitalizing asset income from tax returns. They document marked upward trends in wealth concentration. We use data on tax returns and actual wealth holdings from tax records for the whole Norwegian population to test the robustness of the methodology. We document that measures of wealth based on the capitalization approach can lead to misleading conclusions about the level and the dynamics of wealth inequality if returns are heterogeneous and even moderately correlated with wealth.
    Date: 2016

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