nep-eec New Economics Papers
on European Economics
Issue of 2016‒03‒06
fifteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. International liquidity and the European sovereign debt crisis: Was euro area unconventional monetary policy successful? By Everett, Mary M.
  2. Monetary Developments and Expansionary Fiscal Consolidations: Evidence from the EMU By António Afonso; Luis Martins
  3. Recent Estimates of Exchange Rate Pass-Through to Import Prices in the Euro Area By Nidhaleddine Ben Cheikh; Christophe Rault
  4. Exchange Rate Pass-Through in the Euro Area By Mirdala, Rajmund
  5. A daily indicator of economic growth for the euro area By Valentina Aprigliano; Claudia Foroni; Massimiliano Marcellino; Gianluigi Mazzi; Fabrizio Venditti
  6. Forecasting euro area recessions in real-time By Pirschel, Inske
  7. Volatility spillovers in EMU sovereign bond markets By Fernando Fernández-Rodríguez; Marta Gómez-Puig; Simón Sosvilla-Rivero
  8. Tax Reforms and the Underground Economy: A Simulation-Based Analysis By Barbara Annicchiarico; Claudio Cesaroni
  9. The State Dependent Impact of Bank Exposure on Sovereign Risk By Maximilian Podstawski; Anton Velinov
  10. The Swiss black swan bad scenario: is Switzerland another casualty of the Eurozone crisis By Sebastien Lleo; Bill Ziemba
  11. What's so special about specialization in the euro area? By Mongelli, Francesco Paolo; Reinhold, Elisa; Papadopoulos, Georgios
  12. Uncertainty and Employment Dynamics in the Euro Area and the US By Aleksei Netsunajev; Katharina Glass; ;
  13. Assessing the efficacy of borrower-based macroprudential policy using an integrated micro-macro model for European households By Gross, Marco; Población García, Francisco Javier
  14. Dynamics in European Exports in times of Crisis: The Impact of Growth at Home and Abroad. By Janez Kren,; T.Huw Edwards,; Jan Van Hove,
  15. What Is Behind the Weakness in Global Investment? By Maxime Leboeuf; Robert Fay

  1. By: Everett, Mary M.
    Abstract: Using novel data on individual euro area bank balance sheets this paper shows that exposure to stressed European sovereigns is associated with a contraction in international funding. The loan component of euro area bank asset portfolios is most adversely affected by this decline in international liquidity. Controlling for bank risk and credit demand, during the sovereign debt crisis credit supply to households declined less for non-stressed country banks, with relatively greater exposure to stressed sovereigns, and that accessed the ECB's unconventional monetary policy measures in the form of the first 3-year Long-Term Refinancing Operations (VLTROs) in December 2011. In contrast, the VLTROs in February 2012 were not effective in mitigating the effect of the European sovereign debt crisis on private non-financial sector credit supply.
    Keywords: European sovereign crisis, cross-border banking, international shock transmission, unconventional monetary policy, ECB liquidity
    JEL: G21 G15 H63
    Date: 2015–06
  2. By: António Afonso; Luis Martins
    Abstract: We provide new insights into the existence of expansionary fiscal consolidations in the Economic and Monetary Union, using annual panel data from 14 European Union countries, over the period of 1970-2013. Different measures were calculated for assessing fiscal consolidations, based on the changes in the cyclically adjusted primary balance. A similar ad-hoc approach was used to compute monetary episodes. Panel estimations for private consumption show that, in some cases, when fiscal consolidations are coupled with monetary expansions, the traditional Keynesian signals are reversed for general government final consumption expenditure, social transfers and taxes. Keynesian effects prevail when fiscal consolidations are not matched by monetary easing. Panel probit estimations suggest that longer consolidations contribute positively to its success, whilst the opposite is the case for revenue-based ones.
    JEL: C23 E21 E5 E62 H5 H62
    Date: 2016
  3. By: Nidhaleddine Ben Cheikh (ESSCA - Ecole Supérieure des Sciences Commerciales d'Angers - ESSCA); Christophe Rault (LEO - Laboratoire d'économie d'Orleans - UO - Université d'Orléans - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This paper provides an update on the exchange rate pass-through (ERPT) estimates for 12 euro area (EA) countries. First, based on quarterly data over the 1990-2012 period, our study does not find a significant heterogeneity in the degree of pass-through across the monetary union members, in contrast to previous empirical studies. As we use a longer time span for the post-EA era than existing studies, this is not surprising, since the process of monetary union has entailed some convergence towards more stable macroeconomic conditions across EA member states. Second, when assessing the stability of pass-through elasticities, we find very weak evidence of a decline around the inception of the euro in 1999. However, our results reveal that a downtrend in ERPT estimates became apparent starting from the beginning of the 1990s. This observed decline was synchronous to the shift towards reduced inflation regimes in our sample of countries. Finally, we notice that the distinction between “peripheral” and “core” EA economies in terms of pass-through has significantly decreased over the last two decades.
    Abstract: Dans ce papier, nous étudions le niveau de rapprochement des économies du Maghreb vers les économies de l’Europe de l’Ouest. Nous faisons également une comparaison avec le niveau de convergence des Pays d’Europe Centrale et Orientale PECO-5 vers les pays de la zone euro. Pour ce faire, nous utilisons une modélisation VAR Structurelle pour l’identification des chocs d’offre et des chocs de demande. Nous faisons également appel à l’Analyse en composante Principale ACP dans l’étude de la dynamique de convergence. Nos résultats montrent un niveau différencié de rapprochement des économies des pays du Maghreb vers l’Europe : la Tunisie et le Maroc dans une moindre mesure, sont sur le sentier de la convergence et à un niveau qui se rapproche de celui des PECO-5 ; l’Algérie et la Libye restent très éloignés de la convergence en dépit de leur capacités. Ce résultat confirme le rôle important joué par le commerce bilatéral et plus particulièrement celui des produits manufacturés. La convergence de la Tunisie et du Maroc est également le fruit d’une dé-spécialisation de production des secteurs agroalimentaire et textile vers des secteurs moyennement et hautement technologiques.
    Keywords: Exchange rate pass-through, Import prices, Euro area,Transmission des variations des taux de change, prix à l'importation, zone euro
    Date: 2015
  4. By: Mirdala, Rajmund
    Abstract: Time-varying exchange rate pass-through effects to domestic prices under fixed euro exchange rate perspective represent one of the most challenging implications of the common currency. The problem is even more crucial when examining crisis related redistributive effects associated with relative price changes. The degree of the exchange rate pass-through to domestic prices reveals its role as the external price shocks absorber especially in the situation when the leading path of exchange rates is less vulnerable to the changes in the foreign prices. Adjustments in domestic prices followed by exchange rate shifts induced by sudden external price shocks are associated with changes in the relative competitiveness among member countries of the currency area. In the paper we examine exchange rate pass-through to domestic prices in the Euro Area member countries to examine crucial implications of the nominal exchange rate rigidity. Our results indicate that absorption capabilities of nominal effective exchange rates clearly differ in individual countries. As a result, an increased exposure of domestic prices to the external price shocks in some countries represents a substantial trade-off of the nominal exchange rate stability.
    Keywords: exchange rate pass-through, inflation, Euro Area, VAR, impulse-response function
    JEL: C32 E31 F41
    Date: 2015–06
  5. By: Valentina Aprigliano; Claudia Foroni; Massimiliano Marcellino; Gianluigi Mazzi; Fabrizio Venditti
    Abstract: In this paper we study alternative methods to construct a daily indicator of growth for the euro area. We aim for an indicator that (i) provides reliable predictions, (ii) can be easily updated at the daily frequency, (iii) gives interpretable signals, and (iv) it is linear. Using a large panel of daily and monthly data for the euro area we explore the performance of two classes of models: bridge and U-MIDAS models, and di¤erent forecast combination strategies. Forecasts obtained from U-MIDAS models, combined with the inverse MSE weights, best satisfy the required criteria. JEL classi…cation: C51, C53, E27. Keywords: Nowcasting, mixed-frequency data.
    Date: 2016
  6. By: Pirschel, Inske
    Abstract: I present evidence that the linear mixed-frequency Bayesian VAR provides very sharp and well calibrated monthly real-time recession probabilities for the euro area for the period from 2004 until 2013. The model outperforms not only the univariate regime-switching models for a number of hard and soft economic indicators and their optimal linear combinations, but also a real-time recession index obtained with Google Trends data. This result holds irrespective of whether the joint predictive distribution of several economic indicators or the marginal distribution of real GDP growth is evaluated to extract the real-time recession probabilities of the mixed-frequency Bayesian VAR. The inclusion of the confidence index in industry turns out to be crucial for the performance of the model.
    Keywords: Density nowcasting,Real-time recession forecasting,Mixed-frequency data,Bayesian VAR,Regime-switching models,Linear opinion pool,Google Trends
    JEL: C53 E32 E37
    Date: 2016
  7. By: Fernando Fernández-Rodríguez (Department of Quantitative Methods in Economics - Universidad de Las Palmas de Gran Canaria); Marta Gómez-Puig (Department of Economic Theory - Universitat de Barcelona); Simón Sosvilla-Rivero (Department of Quantitative Economics, Universidad Complutense de Madrid)
    Abstract: We analyse volatility spillovers in EMU sovereign bond markets. First, we examine the unconditional patterns during the full sample (April 1999-January 2014) using a measure recently proposed by Diebold and Yılmaz (2012). Second, we make use of a dynamic analysis to evaluate net directional volatility spillovers for each of the eleven countries under study, and to determine whether core and peripheral markets present differences. Finally, we apply a panel analysis to empirically investigate the determinants of net directional spillovers of this kind.
    Keywords: Sovereign debt crisis, Euro area, Market Linkages, Vector Autoregression, Variance Decomposition.
    JEL: C53 E44 F36 G15
    Date: 2015–03
  8. By: Barbara Annicchiarico (University of Rome "Tor Vergata"); Claudio Cesaroni (DEF, Università di Roma "Tor Vergata")
    Abstract: This paper studies the effects of several tax reforms in an economy in which taxes are partially evaded by means of undeclared work. To this purpose, we consider a two-sector dynamic general equilibrium model calibrated to Italy which explicitly accounts for underground production. We construct various tax reform scenarios, such as deductibility of labor costs from business tax, ex-ante budget-neutral tax shifts from direct to indirect taxes, and various tax cuts financed by decreases of government spending. We find the following results. First, neglecting the existence of the underground sector may lead to severely miscalculate the macroeconomic impact effects of tax reforms, especially in the short run, where policy interventions produce direct and indirect effects on the markup. Second, partial deductibility of labor costs from the business tax base proves to be highly expansionary and highly detrimental to the size of the underground sector. Third, the dimension of the underground sector is permanently and considerably reduced by changes in the tax mix that diminish the labor tax wedge. Finally, all the considered tax reforms take the public-debt-to-output ratio toward a prolonged downward path.
    Keywords: Dynamic General Equilibrium Model, Underground Economy, Tax Reforms, Italy
    JEL: E62 O41 O52
    Date: 2016–02–10
  9. By: Maximilian Podstawski; Anton Velinov
    Abstract: The theoretical literature remains inconclusive on whether changes in bank exposure towards the domestic sovereign have an adverse effect on the sovereign risk position via a diabolic loop in the sovereign-bank nexus or reduce perceived default risk by acting as a disciplinary device for the sovereign. In this paper we empirically analyze the impact of exogenous changes in bank exposure on the risk position of the sovereign within a Markov switching structural vector autoregressive in heteroscedasticity (MSH-SVAR) framework for a set of EMU countries. We add to the methodological literature by allowing for regime dependent shock transmissions according to the volatility state of the financial system. Finding support for both, a stabilizing and a destabilizing effect, we document a clear clustering among the country sample: Rising bank exposure increased default risk for the EMU periphery, but decreased credit risk for the core EMU countries during times of financial stress.
    Keywords: Markov-switching, heteroscedasticity, identification, sovereign-bank interlinkages, sovereign risk, credit default swap, contagion
    JEL: C32 E44 G10
    Date: 2016
  10. By: Sebastien Lleo; Bill Ziemba
    Abstract: Financial disasters to hedge funds, bank trading departments and individual speculative traders and investors seem to always occur because of non-diversification in all possible scenarios, being overbet and being hit by a bad scenario. Black swans are the worst type of bad scenario: unexpected and extreme. The Swiss National Bank decision on January 15, 2015 to abandon the 1.20 peg against the euro was a tremendous blow for many Swiss exporters, but also Swiss and international investors, hedge funds, global macro funds, banks as well as the Swiss central bank. In this paper we discuss the causes for this action, the money losers and the few winners, what it means for Switzerland, Europe and the rest of the world, what kinds of trades lost and how they have been prevented.
    Keywords: Swiss franc; euro peg; black swans; currency trading losses; Swiss exports; quantitative easing; negative interest rates. intermediation
    JEL: B41 C12 C52 G11
    Date: 2015–08
  11. By: Mongelli, Francesco Paolo; Reinhold, Elisa; Papadopoulos, Georgios
    Abstract: Euro area countries exhibited modest convergence prior to the financial crisis and diverged thereafter. Such divergence has been examined from many angles, and various narratives of the crisis have developed. Surprisingly, the gradual transformation of the economic structures of euro area countries over the last 15-20 years has, however, received less attention. This paper brings together several strands of evidence - both macro and micro - on such economic transformation. It makes three contributions. First, profound changes are found in the allocation of countries’ resources across sectors as had been predicted prior to the launch of the euro. In some cases, transformation precedes the launch of the euro, such as the industrial sector, and might reflect different comparative advantages. Such specialisation is not problematic, and is generally accompanied by diverse risk sharing channels. Yet, the second contribution of this paper is to show instead that in some euro area countries productive resources were misallocated to less efficient and lower productivity sectors. In order to distinguish between good and bad specialisation, a firm-based database is examined. The third contribution shows that frictions play an important role in preventing the shift of resources towards more productive firms and thus reduce the potential growth of some countries. This might then explain in part the modest convergence and then divergence of euro area countries. JEL Classification: E01, F45, J21, O47
    Keywords: convergence, euro area, productivity, risk-sharing, specialisation
    Date: 2016–02
  12. By: Aleksei Netsunajev; Katharina Glass; ;
    Abstract: In this paper we investigate transmission and spillovers of local and foreign economic policy uncertainty shocks to unemployment in two largest economic regions in the world - the United States (US) and the Euro area (EA). For this purpose we deploy Bayesian Markov-switching structural vector autoregressive (MS-SVAR) model identified via heteroskedasticity. In addition to local effects we find foreign uncertainty shocks influence the Euro area but not the US unemployment. Moreover we document weaker spillovers of both local and foreign uncertainty shocks in the more volatile times.
    Keywords: Downside risk, Value-at-Risk, long memory, fractional integration, Risk-return
    JEL: D80 C32 C11 E24
    Date: 2016–01
  13. By: Gross, Marco; Población García, Francisco Javier
    Abstract: We develop an integrated micro-macro model framework that is based on household survey data for a subset of the EU countries that the Household Finance and Consumption Survey (HFCS) contains. The model can be used for conducting scenario and sensitivity analyses with regard to the factors that drive households' income and expenses as well as their asset values and hence the structure of their balance sheet. Moreover, we use it for the purpose of assessing the efficacy of borrower-based macroprudential instruments, namely loan-to-value (LTV) ratio and debt service to income (DSTI) ratio caps. The simulation results from the model can be attached to bank balance sheets and their risk parameters to derive the impact of the policy measures on their capital position. The model framework also allows quantifying the macroeconomic feedback effects that would result from the policy-induced reduction of demand for mortgage loans. The model allows answering the question as to which of the two measures – LTV or DSTI caps – are more effective, both with respect to their ability to reduce household loss rates as well as their impact on the economy. JEL Classification: C33, E58, G18
    Keywords: household balance sheets, macro-financial linkages, macroprudential policy, stress-testing
    Date: 2016–02
  14. By: Janez Kren, (Katholieke Universiteit, Leuven); T.Huw Edwards, (School of Business and Economics, Loughborough University); Jan Van Hove, (Katholieke Universiteit, Leuven)
    Abstract: While the financial crisis of 2008-2009 led to the great collapse of international trade, the European debt crisis in 2010-2013 did not have such a drastic impact on trade. The collapse has been studied a lot in recent empirical literature, but the European debt crisis has not been investigated thoroughly yet. This paper looks into the impact of economic growth in European exporters and in their export destination markets on export performance as reflected in total export growth and growth in various export margins. Our findings point to an important role for both demand and supply side factors.
    Keywords: trade collapse, trade structure, European trade, economic crisis
    JEL: F14
    Date: 2016–02
  15. By: Maxime Leboeuf; Robert Fay
    Abstract: The recovery in private business investment globally remains extremely weak more than seven years after the financial crisis. This paper contributes to the ongoing policy debate on the factors behind this weakness by analyzing the role of growth prospects and uncertainty in explaining developments in non-residential private business investment in large advanced economies since the crisis. Augmenting the traditional models of investment with measures of growth expectations for output and uncertainty about global demand improves considerably the ability to explain investment growth. Our results suggest that the main driver behind the weakness in global investment in recent years is primarily a pessimistic outlook on the part of firms regarding the strength of future demand. Lower levels of uncertainty have supported investment growth modestly over 2013–14. Similarly, diminishing credit constraints, lower borrowing costs and relatively stronger corporate profits have also supported the recovery in business investment from 2010 onward. Our findings have two important implications for the global outlook for investment. First, the expected improvements in global growth should support a recovery in investment; however, a slowdown in growth in emerging-market economies or further growth disappointment in advanced economies could restrain this recovery. Second, the ongoing recovery in investment remains vulnerable to uncertainty shocks.
    Keywords: Business fluctuations and cycles, Central bank research, Domestic demand and components, Economic models, International topics, Recent economic and financial developments, Uncertainty and monetary policy
    JEL: C23 C33 D24 E22 D80 D84 F01 G31
    Date: 2016

This nep-eec issue is ©2016 by Giuseppe Marotta. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.