nep-eec New Economics Papers
on European Economics
Issue of 2016‒02‒04
twenty-one papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. How does labour market structure affect the response of economies to shocks? By Dabusinskas, Aurelijus; Konya, Istvan; Millard, Stephen
  2. Which fiscal capacity for the euro-area: Different cyclical transfer schemes in comparison By Sebastian Dullien
  3. Austerity in the European periphery: the Irish experience By Niamh Hardiman; Spyros Blavoukos; Sebastian Dellepiane-Avellaneda; George Pagoulatos
  4. Sources of Real Exchange Rate Fluctuations in New EU Member Countries By Rajmund Mirdala
  5. TCross-Border Banking and Business Cycles in Asymmetric Currency Unions By Lena Dräger; Christian Proaño
  6. The Determinants of Country´s Risk Premium Volatility: Evidence from Panel VAR Model By Petra Palic; Petra Posedel Simovic; Maruska Vizek
  7. Determinants of non-resident government debt ownership By António Afonso; Jorge Silva
  8. Short-Selling Bans and Bank Stability By Alessandro Beber; Daniela Fabbri; Marco Pagano
  9. From the Investment Plan to the Capital Markets Union: European Financial Structure and Cross Border Risk-sharing By Jesper Berg; Laurent Clerc; Olivier Garnier; Erik Nielsen; Natacha Valla
  10. What do household surveys suggest about the top 1% incomes and inequality in OECD countries? By Nicolas Ruiz; Nicolas Woloszko
  11. Global or domestic? Which shocks drive inflation in European small open economies? By Aleksandra Hałka; Jacek Kotłowski
  12. Finland and Its Northern Peers in the Great Recession By Suni, Paavo; Vihriälä, Vesa
  13. Animal Spirits, the Stock Market, and the Unemployment Rate: Some Evidence for German Data By Ulrich Fritsche; Christian Pierdzioch
  14. The redistributive and stabilising effects of an EMU unemployment benefit scheme under different hypothetical unemployment scenarios By Jara Tamayo, Holguer Xavier; Tumino, Alberto; Sutherland, Holly
  15. The countercyclical capital buffer in spain: an analysis of key guiding indicators By Christian Castro; Ángel Estrada; Jorge Martínez
  16. The Suitability of Tax Data to Study Trends in Inequality. A Theoretical and Empirical Review with Tax Data from Switzerland By Oliver Hümbelin; Rudolf Farys
  17. Wage-led growth in the EU15 member states: The effects of income distribution on growth, investment, trade balance, and inflation By Özlem Onaran; Thomas Obst
  18. Optimal Monetary and Macroprudential Policy in a Currency Union By Jakob Palek; Benjamin Schwanebeck
  19. Liquidity and Equity Short term fragility: Stress-tests for the European banking system By Guillaume Arnould; Catherine Bruneau; Zhun Peng
  20. The EU’s Fiscal Targets and Their Economic Impact in Finland By Keränen, Henri; Kuusi, Tero
  21. The Sovereign-Bank Diabolic Loop and ESBies By Markus K. Brunnermeier; Luis Garicano; Philip R. Lane; Marco Pagano; Ricardo Reis; Tano Santos; David Thesmar; Stijn Van Nieuwerburgh; Dimitri Vayanos

  1. By: Dabusinskas, Aurelijus (Lietuvos Bankas); Konya, Istvan (Centre for Economic and Regional Studies of the Hungarian Economy of Sciences and Central European University); Millard, Stephen (Bank of England)
    Abstract: The recent crisis in the Eurozone has led to much discussion about the structure of labour markets in different Eurozone economies. In particular, there has been much talk of the need for structural labour market reform in the Eurozone periphery. But, there are many aspects of labour market structure – eg, wage flexibility, flexibility in hiring and firing, generosity of welfare schemes, etc — and it is not clear a priori which aspects really matter. In this paper, we analyse how cross-country differences in labour market characteristics — in particular, wage and employment rigidities — shape the response of different countries to a variety of macroeconomic shocks. To address this question, we use a calibrated small open economy model in which we set the parameters governing the structural characteristics of the labour market based on three European countries: Estonia, Finland and Spain. We find that, given our labour market calibrations, we would expect output and unemployment to be much more adversely affected by the shocks associated with the financial crisis in countries with high job turnover rates.
    Keywords: Labour market structure; labour market flexibility
    JEL: E24
    Date: 2016–01–22
  2. By: Sebastian Dullien
    Abstract: The paper compares different recently discussed proposals for a „fiscal capacity“ for the EuropeanMonetary Union with respect of their ability to stabilize the EMU business cycle and hence tocontribute to a better policy mix in Europe. The term fiscal capacity has sprung up in a number ofofficial documents over the past years, among others the EU Commission’s roadmap for a morecohesive EMU. One interpretation of the „fiscal capacity“ is the introduction of cross-border fiscaltransfers to stabilize the business cycle in EMU member countries. The paper takes a look at recentproposals for such transfer systems. Here, especially, Notre Europe’s Cyclical Shock Insurance (CSI)Scheme (Enderlein et al. 2013, 2013a), Dullien’s (2014) European Basic Unemployment Insurance andCEPS‘ (2014) Catastrophic Unemployment Insurance are compared. It is argued that the CSI carriesthe danger to actually exacerbate cyclical variations in the euro-area. Among the basic and thecatastrophic unemployment insurance, the advantage of the catastrophic unemployment insuranceis that it is far easier to implement and to administer while the basic unemployment insurance hasthe advantage that it offers the widest and strongest stabilization impact among the proposedschemes.
    Keywords: EMU, fiscal capacity, shock absorber, European unemployment insurance
    JEL: F15 E63 J65
    Date: 2015–12
  3. By: Niamh Hardiman (School of Politics and International Relations and Geary Institute for Public Policy, University College Dublin); Spyros Blavoukos (Athens University of Economics and Business, Athens); Sebastian Dellepiane-Avellaneda (School of Government and Public Policy, University of Strathclyde, Glasgow); George Pagoulatos (Athens University of Economics and Business, Athens)
    Abstract: Ireland has come to be seen as an exemplary case of the successful practice of austerity, both economically and politically. But these inferences would be misleading. The real story about fiscal adjustments in Ireland is more problematic, the reasons for recovery are more complex, and the political consequences are a good deal more nuanced. This paper sets the Irish experience alongside that of the other Eurozone periphery countries. It argues that these countries’ recovery prospects depend on the EU economic policy framework, but that Ireland’s connections to non-Eurozone economies also shape its growth prospects. Political stability is problematic in all the periphery countries, with the rise of challenger parties articulating values and priorities that may be difficult to accommodate within the current European policy regime. This is connected to a wider problem of the decay of older political identities and loyalties and the emergence of a new legitimation gap for EU member states.
    Keywords: Austerity, fiscal adjustment, Ireland, Eurozone, periphery, recovery, EU economic policy, political stability.
    JEL: F15 F21 F55 N14 O52 O57 P16
    Date: 2016–01–28
  4. By: Rajmund Mirdala
    Abstract: Fixed versus flexible exchange rate dilemma has become a subject of rigorous academic discussions for decades. Advantages of exchange rates flexibility contrasted benefits of exchange rate stability though a phenomenon known as the fear of floating favoured exchange rate variability and its positive effects on economies. Relative diversity in the exchange rate regimes in EU11 countries motivated many authors to investigate the sources of their real exchange rate volatility provided that even fixed exchange rates may fluctuate via adjustments in prices and wages. However, fixed exchange rate perspective associated with Eurozone membership may induce changed patterns in the real exchange rate determination in countries that benefit from nominal exchange rate flexibility prior to euro adoption. In the paper we analyse sources of real exchange rates fluctuations in EU11 countries. SVAR methodology and impulse-response functions will be employed to examine the responsiveness of real exchange rates to the underlying structural shocks by employing SVAR methodology. Our results indicate an increased responsiveness of real exchange rates in EMU non-member countries to demand and supply shocks, particularly due to the effects of the crisis period. At the same time, real exchange rates in EMU member countries became more responsive to nominal shocks.
    Keywords: real exhange rates, exogenous shocks, economic crisis, structural vector auto regression, impulse-response function
    JEL: C32 E52
    Date: 2015–12
  5. By: Lena Dräger; Christian Proaño
    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: 2016
  6. By: Petra Palic (The Institute of Economics, Zagreb); Petra Posedel Simovic (Zagreb School of Economics and Management); Maruska Vizek (The Institute of Economics, Zagreb)
    Abstract: We use data for 24 European countries, spanning from 1994 to 2015, in order to examine how changes in macroeconomic conditions influence the country’s risk premium volatility proxied by sovereign spreads variance. In the first part of the empirical analysis we estimate the univariate generalised autoregressive conditional heteroskedasticity (GARCH) model in order to obtain the conditional variance of sovereign bond spreads. We show that the increase of this variance coincides with economic and financial crisis occurring either in the country or globally. In the second part of the empirical analysis we estimate panel vector autoregression (panel VAR) model in order to model the interplay among macroeconomic fundamentals (inflation, output gap, public debt and interest rates) and the country´s risk premium volatility. We show that overheating of the economy, along with the unexpected increase in public debt, inflation and interest rates increase the country´s risk premium volatility. We also show that sudden increase in country´s risk premium volatility depresses the economy, exerts deflationary pressures on consumer prices, and is followed by strong and permanent increase in public debt.
    Keywords: sovereign bond markets, panel VAR, European Union
    JEL: C33 E44 F34 G15
    Date: 2015–12
  7. By: António Afonso; Jorge Silva
    Abstract: We examine the determinants of non-resident government debt ownership, accounting for domestic and external factors and financial variables during the period 2000Q2-2014Q4, focussing on a small euro area open economy: Portugal. Our results show that better fiscal positions, higher systematic stress in Europe, and higher shares of MFI cross-border holdings of public debt, increase the share of non-resident held debt, and rising sovereign yields decrease that ratio. Key Words – sovereign debt, central bank, financial markets, monetary and financial institutions, Portugal.
    JEL: C22 E44 F34 G15 H63
    Date: 2016–01
  8. By: Alessandro Beber (Cass Business Schooland CEPR); Daniela Fabbri (Cass Business School); Marco Pagano (Università di Napoli Federico II, CSEF, EIEF and CEPR)
    Abstract: In both the 2008-09 crisis and the 2011-12 euro debt crisis, security regulators imposed short selling bans, targeting them mainly at financial institutions. Their motivation was that a collapse in the stock price of banks could lead them to experience funding problems, which would trigger further price drops: short-selling bans of bank stocks would break this loop, stabilizing banks and enhancing their solvency. We test this hypothesis by canvassing the evidence produced by both crises, by estimating panel data regressions for 13,473 stocks in 2008 and 16,424 stocks in 2011 from 25 countries, taking also the endogeneity of short-selling bans into account. Contrary to the regulators’ intentions, in neither crisis short-selling bans have been associated with increased bank stability: upon being subject to a short-selling ban, financial institutions featured larger stock price drops, return volatility and probability of default, these effects being larger for more vulnerable banks. Moreover, the 2011 ban did not help to mitigate the “diabolic loop” between bank and sovereign insolvency risk during the euro-area sovereign debt crisis
    Keywords: short selling, ban, financial crisis, bank stability, systemic risk
    JEL: G01 G12 G14 G18
    Date: 2015–12–31
  9. By: Jesper Berg; Laurent Clerc; Olivier Garnier; Erik Nielsen; Natacha Valla
    Abstract: Following the financial crisis, Europe is suffering from a significant investment deficit. It has long been appreciated that growth will suffer in Europe over the medium term unless the shortfall in investment is addressed, but considerable disagreement on how to achieve this, and in particular on the role public investment should play. In addition, mobilising finance to increase investment in Europe requires both a good understanding of Europe’s financial structure, and a fine knowledge of the composition of cross-border financial imbalances. In this paper, we take stock of the state of play regarding investment, financial structures and cross-border imbalances. We contend that any initiative meant to provide a sound basis for long-term, stable investment flows has to acknowledge the fact that Europe is engaged in a debt-deflation deleveraging phase, with accompanying disintermediation, the full extent of which is as yet unknown. We then draw policy conclusions that would allow for a sustainable investment revival, insisting on the need to have an overall strategic vision for the main EU policy initiatives - the Investment Plan, the Capital Markets Union, and the €1,100bn new money issued by the ECB within its Large Asset Purchase Programme.
    Keywords: ECB;Capital Markets Union;Policy Srategy;Securitization;Covered Bonds;Financial Structure;Quantitative Easing;Cross-border Capital Flows
    JEL: E42 E44 E52 E58 E63
    Date: 2015–12
  10. By: Nicolas Ruiz; Nicolas Woloszko
    Abstract: Standard income inequality figures, based on official household survey statistics covering most of the population, report a steady rise of inequality across a majority of advanced countries. The usefulness of these data sources in providing a timely and internationally comparable picture of inequality is undisputed, but one well-known limitation is their under-reporting of top incomes. This matters insofar as separate data sources devoted specifically to top incomes evolution report substantially faster inequality growth in recent years compared to conventional statistics. This paper proposes a methodology to adjust household survey data for the under-reporting of top incomes. More specifically, the analysis delivers a set of top incomes-adjusted income distribution series that bring together the bottom 99% and the top 1%. Unsurprisingly, the results point to a significant increase of the level of inequality measured by standard statistics based on official figures: the Gini coefficient adjusted for top incomes was in 2011 on average 6 percentage points higher, moving from 0.31 to 0.37 for the average OECD country; similarly, the gap between the mean income of the richest and the poorest 10% rises from 10 to 15 as a result from the adjustment. Inequality trends are also significantly altered, albeit in ways that differ across countries. Que peut-on apprendre des hauts revenus à partir de données d'enquêtes dans les pays de l'OCDE ? Les chiffres sur les inégalités de revenus, basés sur les enquêtes auprès des ménages, couvrent la plupart de la population et font état d'une augmentation constante de l'inégalité dans la majorité des pays avancés. L'utilité de ces sources afin de fournir une image satisfaisante et comparables à l'échelle internationale de l'inégalité est reconnue, mais une limite bien connue est leur sous-déclaration des hauts revenus. Cela importe dans la mesure où des sources de données distinctes consacrées spécifiquement aux hauts revenus décrivent une évolution de l'inégalité sensiblement plus rapide au cours des dernières années par rapport aux statistiques classiques. Cet article propose une méthodologie pour ajuster les données d'enquêtes auprès des ménages pour la sous-déclaration des hauts revenus. Plus précisément, l'analyse fournit un ensemble de série sur la répartition des revenus ajustés pour les hauts revenus et qui rassemblent ainsi les 99% et les 1% des ménages les plus riches. Les résultats montrent une augmentation significative du niveau de l'inégalité par rapport aux statistiques standard basées sur des chiffres officiels: le coefficient de Gini corrigé des hauts revenus a été en 2011 en moyenne de 6 points de pourcentage supérieur, passant de 0,31 à 0,37 pour la moyenne des pays de l'OCDE ; De même, l'écart entre le revenu moyen des plus riches et les plus pauvres passe de 10 à 15 suite à l'ajustement. L'évolution des inégalités est également modifiée de façon significative, quoique de manière hétérogène selon les pays.
    Keywords: household survey, inequality, income, top incomes, enquête auprès des ménages, hauts revenus, inégalité, revenu
    JEL: D31 D63 O15
    Date: 2016–01–23
  11. By: Aleksandra Hałka; Jacek Kotłowski
    Abstract: In the paper we investigate, which shocks drive inflation in small open economies. We proceed in two steps. First, we use the SVAR approach to identify the global shocks. In the second step we regress the disaggregated price indices for selected European economies - the Czech Republic, Poland and Sweden- on the global shocks controlling for the domestic variables. Our results show that in two out of three analyzed countries the fluctuations of inflation are to the largest extent determined by the cyclical movements of the domestic output gap with the commodity shock being also the important source of inflation variability while for the third country the contribution of the commodity shock dominates over the output gap in explaining inflation fluctuations. We find that the direct impact of the global demand shock on the price dynamics is negligible, while it affects the country’s inflation mainly through the domestic output gap. The role of the non-commodity global supply shock is less prominent, however, this shock, interpreted to some extent as a globalization shock, for most of the analyzed period lowers the prices of semi-durable and durable goods and therefore the inflation. Nonetheless, in the aftermath of the global financial crisis, this shock reversed what may be interpreted as a weakening of the globalization process.
    Keywords: Inflation, monetary policy, globalization, disaggregated price indices, output gap, exchange rate pass-through, SVAR models.
    JEL: C53 E31 E37 E52
    Date: 2016
  12. By: Suni, Paavo; Vihriälä, Vesa
    Abstract: Abstract The report focuses on the relative macroeconomic performance since the global financial crisis of six Northern European countries with a special emphasis on Finland. While fiscal and monetary policies have definitely impacted on macroeconomic outcomes in the six countries examined, as a whole they do not appear to be the key driving forces of the differences observed between the countries. The initial vulnerabilities, the nature of shocks and the resilience of the economies appear more important in explaining the differences. In particular, the weakness of growth in Finland can best be explained by a series of exceptional negative shocks in combination with a too weak capacity of the economy to improve its cost competitiveness in the absence of exchange rate flexibility.
    Keywords: Macro economy, fiscal policy, monetary union, competitiveness, Finland
    JEL: F47 E63 E65 P52
    Date: 2016–01–15
  13. By: Ulrich Fritsche (Universität Hamburg (University of Hamburg)); Christian Pierdzioch (Helmut-Schmidt-Universität (Helmut-Schmidt-University))
    Abstract: Models recently studied by Farmer (2012, 2013, 2015) predict that, due to labor-market frictions and "animal spirits", stock-market fluctuations should Granger cause fluctuations of the unemployment rate. We performed several Granger-causality tests on more than half a century of data of German data to test this hypothesis. Confirming findings documented by Farmer (2015) for U.S. data, we found that the stock market Granger causes unemployment in the short run and the long run when we control for a deterministic trend in the unemployment rate. Results of a frequency-domain test show that, in the short run, feedback cannot be rejected, whereas the causality clearly runs from the stock market to the unemployment rate in the medium to long run.
    Keywords: Cointegration, Granger causality, frequency domain, animal spirits, stock market, unemployment rate
    JEL: E12 E44 C32
    Date: 2016–01
  14. By: Jara Tamayo, Holguer Xavier; Tumino, Alberto; Sutherland, Holly
    Abstract: The idea of a common unemployment benefit system for the European Monetary Union (EMU) has provoked increasing interest in both the political and academic spheres because of its potential to smooth fluctuations in income across member states and to strengthen income security for the unemployed. In this paper, we simulate two hypothetical negative employment shocks and make use of the microsimulation model EUROMOD to explore the implications for income protection of the introduction of an EMU unemployment insurance (EMU-UI) scheme, for a selected number of countries of the Monetary Union. Our results show that the EMU-UI has the potential to reduce the risk of poverty for those affected by the negative employment shock and to have an additional positive effect on within-country income stabilisation, although the effects of the EMU-UI vary considerably in size across the countries analysed.
    Date: 2015–12–24
  15. By: Christian Castro (Banco de España); Ángel Estrada (Banco de España); Jorge Martínez (Banco de España)
    Abstract: This paper analyses a group of quantitative indicators to guide the Basel III countercyclical capital buffer (CCB) in Spain. Using data covering three stress events in the Spanish banking system since the early 1960s, we describe a number of conceptual and practical issues that may arise with the Basel benchmark buffer guide (i.e. the credit-to-GDP gap) and study alternative specifications plus a number of complementary indicators. In this connection, we explore ways to deal with structural changes that may lead to some shortcomings in the indicators. Overall, we find that indicators of credit ‘intensity’ (where we propose the ratio of changes in credit to GDP), private sector debt sustainability, real estate prices and external imbalances can usefully complement the credit-to-GDP gap when taking CCB decisions in Spain.
    Keywords: countercyclical capital buffer, credit-to-GDP gap, guiding indicators, build-up phase, credit intensity, real estate prices, external imbalances, private sector debt sustainability, macroprudential policy
    JEL: E58 G01 G21 G28 G32
    Date: 2016–01
  16. By: Oliver Hümbelin; Rudolf Farys
    Abstract: In many countries results of inequality trends are ambiguous, because different methodological approaches blur the picture or because reliable data are not available. In this paper we assess whether tax data are suitable for inequality trend analysis. We do this by comparing tax data measurement concepts concerning income definition, statistical units and population coverage to theoretical ideal concepts. To get a sense of direction and magnitude of potential biases, we estimate the impact of tax data-related methodological options for inequality measures with Swiss tax data. Where possible and meaningful, we compare tax data results to corresponding results from surveys. While there are clear advantages of tax data like long-term availability and reliable population coverage in more recent years, there are also drawbacks that lead to an overestimation of inequality and hinder comparability over time. In sum, tax data are a source that should be used with care, but nonetheless seem to be indispensable for inequality analysis. As a substantive result for Switzerland, our tax data analysis raises doubts about the declining inequality trend reported by survey data for the last decades.
    Keywords: Tax Data, Inequality Trend, Income Distribution, Switzerland
    JEL: D31 H24
    Date: 2015–11–30
  17. By: Özlem Onaran (University of Greenwich); Thomas Obst
    Abstract: This paper estimates a multi-country demand-led growth model for EU15 countries. A decrease in the share of wages in national income in isolation leads to lower growth in Finland, France, Germany, Greece, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden and the United Kingdom, whereas it stimulates growth in Austria, Belgium, Denmark and Ireland. However, a simultaneous decline in the wage share leads to an overall decline in EU15 GDP; hence EU15 as a whole is a wage-led economy. Furthermore, Austria and Ireland also experience negative effects on growth when they decrease their wage share along with their trading partners. The results indicate that a decline in the wage share has had significant negative effects on growth in the EU15 countries and supports the case of wage coordination. We present different wage-led recovery scenarios taking into account further effects of a change in the wage share on prices, nominal unit labour costs, investment, and net exports.
    Keywords: Wage share, Growth, European Multiplier, Demand Regime
    JEL: E12 E22 E25
    Date: 2016–01
  18. By: Jakob Palek (University of Kassel); Benjamin Schwanebeck (University of Kassel)
    Abstract: The financial crisis proved strikingly that stabilizing the price level is a necessary but not a sufficient condition to ensure macroeconomic stability. The obvious candidate for addressing systemic risk is macroprudential policy. In this paper we study the optimal monetary and macroprudential policy mix in a currency union in the case of different kinds of aggregate and idiosyncratic shocks. The monetary and macroprudential instruments are modelled as independent tools. With a union-wide macroprudential tool, full absorption on the aggregate level is possible, but welfare losses due to fluctuations in relative variables prevail. With country-specific macroprudential tools, full absorption of shocks is always possible. But it is only optimal as long as there is no inefficient labor allocation. Comparing different policy regimes, we get the following ranking in terms of welfare: discretion outperforms strict inflation targeting which outperforms a (euro-area based) Taylor Rule.
    Keywords: financial frictions, credit spreads, borrowing constraint, monetary policy, macroprudential policy, optimal policy mix, currency union
    JEL: E32 E44 E58
    Date: 2015
  19. By: Guillaume Arnould (Centre d'Economie de la Sorbonne); Catherine Bruneau (Centre d'Economie de la Sorbonne); Zhun Peng (Université d'Evry - EPEE)
    Abstract: This paper investigates the impact of extreme shocks on stock and bond markets on listed European banks. The originality of our approach consists in dealing jointly with stock and bond markets and taking into account their interdependencies in case of extreme events by using a specific CVRF (CVine Risk Factor) model which combines copulas and a factorial structure. Moreover, contrary to what is generally done in the literature, we do not focus only on the responses of the stock returns but we also examine the response of the balance sheets of the banks and particularly of their short term assets in order to assess their fragility in terms of liquidity. Our main findings are the following: 1) the nature of the banks' fragility has changed: today, the interest rate risk should be the first concern before the equity risk, as the banks have extensively increased their exposition to bond market due to flight-to-quality reactions and to large investments in governments bonds after the rescue operations the banks have benefited; 2) in case of a surge in the interest rate and in the links between stock and bond returns, the portfolios of the biggest banks in Europe would experience very severe shortfalls for both equity and liquidity buffers. Accordingly regulators should monitor the evolution of dependencies between assets and should pay utmost attention to the positive links between stock and bond returns
    Keywords: Stress-test; Financial Stability; Extreme Risks; Bank Balance Sheet; Systemic Risk; Copula; Risk factors
    JEL: F32 G17 G21
    Date: 2015–12
  20. By: Keränen, Henri; Kuusi, Tero
    Abstract: In this paper, we quantify time-varying fiscal multipliers using Finnish economic data and address questions about the design of the fiscal adjustment currently needed to comply with the EU's fiscal targets. We find that the necessary adjustment is likely to be larger than what is proposed in the current fiscal plans. The consolidation measures slow the economic recovery, and their cumulative multiplier effect on economic activity is close to 1 in the period 2016-2019. Despite the large fiscal multipliers, we do not find significant benefits in delaying the fiscal consolidation in terms of the present value of the GDP, at least given the current economic forecasts. Our results suggest that the emphasis of the government's fiscal plans on net revenue measures (defined as gross revenues minus transfers) seems to be well-placed.
    Date: 2016–01–26
  21. By: Markus K. Brunnermeier (Princeton University); Luis Garicano (LSE London); Philip R. Lane (Trinity College Dublin); Marco Pagano (Università di Napoli Federico II, CSEF, EIEF and CEPR); Ricardo Reis (Columbia University); Tano Santos (Columbia University); David Thesmar (HEC Paris); Stijn Van Nieuwerburgh (New York University); Dimitri Vayanos (LSE London)
    Abstract: We propose a simple model of the sovereign-bank diabolic loop, and establish four results. First, the diabolic loop can be avoided by restricting banks domestic sovereign exposures relative to their equity. Second, equity requirements can be lowered if banks only hold senior domestic sovereign debt. Third, such requirements shrink even further if banks only hold the senior tranche of an internationally diversified sovereign portfolio known as ESBies in the euro-area context. Finally, ESBies generate more safe assets than domestic debt tranching alone; and, insofar as the diabolic loop is defused, the junior tranche generated by the securitization is itself risk-free.
    Date: 2016–01–25

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