nep-eec New Economics Papers
on European Economics
Issue of 2016‒03‒10
nineteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Lending-of-last-resort is as lending-of-last-resort does: central bank liquidity provision and interbank market functioning in the euro area By Garcia-de-Andoain, Carlos; Heider, Florian; Hoerova, Marie; Manganelli, Simone
  2. Which fiscal union for the euro area? By Agnès Bénassy-Quéré; Xavier Ragot; Guntram B. Wolff
  3. Bank Lending Margins in the Euro Area: The Effects of Financial Fragmentation and ECB Policies By Helen Louri; Petros M. Migiakis
  4. Macroeconomic and Financial Effects of Oil Price Shocks: Evidence for the Euro Area By Claudio, Morana
  5. Current Account Determinats in Central Eastern European Countries By Jonida Bollano; Delina Ibrahimaj
  6. The Post-Crisis Slump in the Euro Area and the US: Evidence from an Estimated Three-Region DSGE Model By Robert Kollmann; Beatrice Pataracchia; RAFAL Raciborski; Marco Ratto; Werner Roeger; Lukas Vogel
  7. Wage Moderation in Crises; Policy Considerations and Applications to the Euro Area By Jörg Decressin; Raphael A. Espinoza; Ioannis Halikias; Michael Kumhof; Daniel Leigh; Prakash Loungani; Paulo A. Medas; Susanna Mursula; Antonio Spilimbergo; TengTeng Xu
  8. Domestic and Cross-Border Auction Cycle Effects of Sovereign Bond Issuance in the Euro Area By Beetsma, Roel; de Jong, Frank; Giuliodori, Massimo; Hanson, Jesper
  9. Lenders on the storm of wholesale funding shocks: Saved by the central bank? By de Haan, Leo; Vermeulen, Philip; van den End, Jan Willem
  10. On the differential impact of securitization on bank lending during the financial crisis By Clemens Bonner; Daniel Streitz; Michael Wedow
  11. Asymmetric Credit Growth and Current Account Imbalances in the Euro Area By Robert Unger
  12. Macroprudential Policies in Southeastern Europe By Dilyana Dimova; Piyabha Kongsamut; Jérôme Vandenbussche
  13. Potential growth of the spanish economy By Pilar Cuadrado; Enrique Moral-Benito
  14. The effect of interest rate and communication shocks on private inflation expectations By Paul Hubert
  15. Multivariate Filter Estimation of Potential Output for the Euro Area and the United States By Ali Alichi; Olivier Bizimana; Silvia Domit; Emilio Fernández Corugedo; Douglas Laxton; Kadir Tanyeri; Hou Wang; Fan Zhang
  16. The Impact of Unconventional Monetary Policy Measures by the Systemic Four on Global Liquidity and Monetary Conditions By Yevgeniya Korniyenko; Elena Loukoianova
  17. Financial Transaction Taxes in the European Union By Thomas Hemmelgarn; Gaëtan Nicodème; Bogdan Tasnadi; Pol Vermote
  18. More unequal, but more mobile?: Earnings inequality and mobility in OECD countries By Andrea Garnero; Alexander Hijzen; Sébastien Martin
  19. Recession, austerity and gender By Hélène Périvier-Timbeau

  1. By: Garcia-de-Andoain, Carlos; Heider, Florian; Hoerova, Marie; Manganelli, Simone
    Abstract: This paper investigates the impact of ample liquidity provision by the European Central Bank on the functioning of the overnight unsecured interbank market from 2008 to 2014. We use novel data on interbank transactions derived from TARGET2, the main euro area payment system. To identify exogenous shocks to central bank liquidity, we exploit the timing of ECB liquidity operations and use a simple structural vector auto-regression framework. We argue that the ECB acted as a de-facto lender-of-last-resort to the euro area banking system and identify two main effects of central bank liquidity provision on interbank markets. First, central bank liquidity replaces the demand for liquidity in the interbank market, especially during the financial crisis (2008-2010). Second, it increases the supply of liquidity in the interbank market in stressed countries (Greece, Italy and Spain) during the sovereign debt crisis (2011-2013). JEL Classification: E58, F36, G01, G21
    Keywords: central bank policy, financial crisis, interbank markets, lender-of-last-resort, sovereign debt crisis
    Date: 2016–02
  2. By: Agnès Bénassy-Quéré; Xavier Ragot; Guntram B. Wolff
    Abstract: HIGHLIGHTS Fully-fledged federations assign fiscal policy stabilisation largely to the federal level, based on a relatively large budget. In the euro area, a large federal budget is unrealistic at the current level of political and societal integration, and fiscal stabilisation will continue to rely mainly on national policies. For aggregate fiscal policy to become more stabilising with respect to the economic cycle, while achieving long-term sustainability, it is necessary (i) to avoid imposing self-defeating fiscal adjustments on crisis countries by making sovereign debt restructuring a real possibility (which involves strengthening the banking sector and extending the remit of the European Stability Mechanism); (ii) to task the planned independent European Fiscal Board with delineating exceptional times during which fiscal coordination is needed on top of monetary policy; (iii) to make national fiscal policies more stabilising by allowing incremental investment and unemployment spending to be shifted from bad to good times based on national adjustment accounts. We also recommend a move towards a European unemployment (re-)insurance scheme targeted at ‘large’ shocks, with varying contributions from countries and a minimum set of labour-market harmonisation criteria, which in any case are desirable for the functioning of monetary union. For footnotes and references, please see the PDF version of this publication. Summary The construction of the euro area left aside the question of a fiscal union, but the crisis re-opened the debate. Of the three classical functions of fiscal policy – provision of public goods, redistribution and stabilisation – only the last provides a clear justification for fiscal policy at euro-area level. Unsustainable fiscal policies in one member state could destabilise the entire euro area, and national policies could also have direct and indirect demand effects with an impact on area-wide inflation. ‘Every man for himself’ is not an option. But coordination is difficult because it involves 19 national budgetary processes and a common central bank. Empirically, fiscal policy in the euro area and elsewhere often tends to accentuate rather than attenuate the economic cycle. The discretionary part of fiscal policy, as opposed to automatic stabilisers, is responsible for this unfortunate feature, while automatic stabilisers generally work well. Fully-fledged federations assign fiscal policy stabilisation largely to the federal level, based on a relatively large budget. In the euro area, a large federal budget is unrealistic at the current level of political and societal integration, and fiscal stabilisation will continue to rely mainly on national policies. We make three recommendations that would lead national fiscal policies to be more stabilising with respect to the economic cycle, while achieving long-term sustainability. First, the euro area should avoid imposing self-defeating fiscal adjustments on crisis countries. To achieve this, sovereign debt restructuring should be made possible by further strengthening the banking sector and extending the remit of the European Stability Mechanism. Second, fiscal policy in exceptionally good or bad times should be guided by the planned independent European fiscal board, while the Stability and Growth Pact (SGP) would apply strictly in ‘normal’ times. Of course, fiscal coordination is mostly needed in exceptional times, when the European Central Bank can no longer by itself stabilise the euro area. Third, the Stability and Growth Pact should be able to adapt in a more flexible way to the economic cycle by shifting incremental investment and unemployment spending from bad to good times based on national adjustment accounts, rather than through unclearly defined discretionary measures as is presently the case. This third proposal would strengthen automatic stabilisers that were in fact cut in some cases during the crisis. In addition, we recommend a move towards ‘federal’ insurance for very large shocks. This should be based on automatic stabilisers and should not involve conditionality when it is activated. The best option is likely to be a European unemployment (re-)insurance scheme for large shocks. All countries that comply with a minimum set of labour-market harmonisation criteria would be required to participate, with their payments into the scheme based on objective criteria. Labour market harmonisation is also desirable for the functioning of monetary union and could be incentivised by the re-insurance scheme. Introduction The idea to complement European Monetary Union with some form of fiscal federalism is not new. In 1977, the MacDougall report suggested the introduction of a small budget of around 5-7 percent of GDP as a first step, the long-term objective being “a Federation in Europe in which federal public expenditure is around 20-25 percent of gross product as in the USA and the Federal Republic of Germany” (Commission of the European Communities, 1977, pp10-11).
    Date: 2016–02
  3. By: Helen Louri; Petros M. Migiakis
    Abstract: In the present paper we study the determinants of the margins paid by euro-area non-financial corporations (NFCs) for their bank loans on top of the rates they earn for their deposits (bank lending margins). We use panel VAR techniques, in order to test for causality relationships and produce impulse response functions for eleven euro-area countries from 2003:1 to 2014:12. The countries are separated into two groups (distressed and non-distressed), in order to examine for heterogeneities in the relationships between lending margins; the period is also separated with reference to the peak of the global financial crisis (before and after the collapse of Lehman in September 2008). We find that significant heterogeneities existed even before the global financial crisis and remained in its aftermath, although the magnitude and the direction of the effects exercised by the explanatory variables have changed. Furthermore, apart from finding that market concentration and the prudence of banks’ management increase the lending margins NFCs pay for their loans, there is evidence of substitution effects between financing obtained from banks and corporate bond markets. The provision of ample liquidity from the ECB, in the aftermath of the global financial crisis was found to be effective only for the core countries, suggesting that further policy actions are needed in order to reduce the fragmentation of bank lending and promote financial integration to the benefit of the euro-area real economy.
    Keywords: bank lending margins, financial fragmentation, global financial crisis, ECB, euro area
    JEL: E44 E51 E58 F36 F42
    Date: 2016–02
  4. By: Claudio, Morana
    Abstract: The paper investigates the macroeconomic and financial effects of oil prices shocks in the euro area since its creation in 1999, with a special focus on the recent slump. The analysis is carried out episode by episode, within a time-varying parameter framework, consistent with the view that "not all the oil price shocks are alike", yet without imposing any a priori identification assumption. We find evidence of recessionary effects triggered not only by oil price hikes, but also by oil price slumps in some cases, likewise for the most recent episode, which is also rising deflation risk and financial distress. In addition through uncertainty effects, the current slump might then be depressing aggregate demand by increasing the real interest rate, as ECB monetary policy is already conducted at the zero lower bound. The increase in real money balances following the slump points to the accommodation of the shock by the ECB, concurrent with the implementation of the Quantitative Easing policy (Q.E.). Yet, in so far as Q.E. failed to generate inflationary expectations within the current and expected environment of soft oil prices, the case for a more expansionary use of fiscal policy than in the past would become compelling, in order to counteract the deflationary and recessionary threats to the euro area.
    Keywords: oil price shocks, oil price-macroeconomy relationship, risk factors, semiparametric dynamic conditional correlation model, time-varying parameter models
    JEL: E30 E50 C32
    Date: 2016–02–24
  5. By: Jonida Bollano (Bank of Albania); Delina Ibrahimaj (Bank of Albania)
    Abstract: This paper empirically investigates the determinants of current accounts for a sample of 11 Central and East European Countries outside the Euro area. To this end we rely on the estimation of a panel VAR model with fixed effects over the period Q1 2005 to Q42014. Consistent with existing literature, we show that domestic GDP, the fiscal deficit, and the real effective exchange rate are key determinants of the current accounts of these countries. The dynamic relationships revealed in the paper complement the empirical literature on several fronts by providing new evidence from these emerging market economies.
    Keywords: Current account determinants, Central East Europe, P-VAR, GMM estimation
    JEL: F31 F32 F41 F42
    Date: 2015–10–01
  6. By: Robert Kollmann; Beatrice Pataracchia; RAFAL Raciborski; Marco Ratto; Werner Roeger; Lukas Vogel
    Abstract: The global financial crisis (2008-09) led to a sharp contraction in both Euro Area (EA) and US real activity, and was followed by a long-lasting slump. However, the post-crisis adjustment in the EA and the US shows striking differences—in particular, the EA slump has been markedly more protracted. We estimate a three-region (EA, US and Rest of World) New Keynesian DSGE model (using quarterly data for 1999-2014) to quantify the drivers of the divergent EA and US adjustment paths. Our results suggest that financial shocks were key drivers of the 2008-09 Great Recession, for both the EA and the US. The post-2009 slump in the EA mainly reflects a combination of adverse aggregate demand and supply shocks, in particular lower productivity growth, and persistent adverse shocks to capital investment, linked to the continuing poor health of the EA financial system. Adverse financial shocks were less persistent for the US. The financial shocks identified by the model are consistent with observed performance indicators of the EA and US banking systems.
    Keywords: post-crisis slump; euro area; united states; estimated DSGE model; demand and supply shocks and financial shocks
    JEL: F40 F30 E20 E30 E50 E60 C50
    Date: 2016–02
  7. By: Jörg Decressin; Raphael A. Espinoza; Ioannis Halikias; Michael Kumhof; Daniel Leigh; Prakash Loungani; Paulo A. Medas; Susanna Mursula; Antonio Spilimbergo; TengTeng Xu
    Abstract: The paper studies the impacts of wage moderation in the euro area. Simulation results show that if a single euro area crisis-hit economy undertakes wage moderation, the impact on output is positive for that economy and for the entire euro area. If all crisis-hit economies undertake wage moderation together, their output still expands, albeit to a lesser degree. If the wage moderation is accompanied by cuts in policy interest rates by the central bank—and by quantitative easing once interest rates hit the zero lower bound—then output for the entire euro area expands as well.
    Keywords: Wage bargaining;Euro Area;Wage adjustments;Negative spillovers;Monetary policy;Euro area, Crisis, Current account, Internal devaluation, Unemployment, Wage moderation, economies, devaluation, monetary policy, economy, General, Open Economy Macroeconomics, International Policy Coordination and Transmission, International Business Cycles, All Countries,
    Date: 2015–11–17
  8. By: Beetsma, Roel; de Jong, Frank; Giuliodori, Massimo; Hanson, Jesper
    Abstract: This paper provides evidence of spillovers from foreign primary public debt issues into domestic secondary market auction cycles in the euro area. It also confirms the presence of such auction cycles in response to domestic debt issues. These results are consistent with the theory of primary dealers' limited risk-bearing capacity. Consistent with the theory, domestic auction cycles in response to new debt issues are stronger during the crisis period, while the cross-border effects tend to be stronger in the pre-crisis period, possibly as a result of reduced integration of euro area sovereign bond markets during the crisis.
    Keywords: auction cycles; auctions; crisis; cross-border effects; limited risk-bearing capacity; primary dealers; primary markets; public debt; secondary markets
    JEL: G12 G18
    Date: 2016–02
  9. By: de Haan, Leo; Vermeulen, Philip; van den End, Jan Willem
    Abstract: We provide empirical evidence on banks’ responses to shocks in wholesale funding, using data of 181 euro area banks over the period August 2007 to June 2013. Banks’ adjustments of loan volumes and lending rates in response to funding liquidity shocks are analysed in a panel VAR framework. The results show that shocks in the securities and interbank markets have significant effects on loan rates and credit supply, particularly of banks in stressed countries. The results also suggest that central bank liquidity has mitigated this effect most clearly on lending volumes. Lending to non-financial corporations is more sensitive to wholesale funding shocks than lending to households. Moreover, bank characteristics matter for monetary transmission: loan growth of large banks that are typically more dependent on wholesale funding and of banks with large exposure to government bonds shows relatively stronger responses to wholesale funding shocks. JEL Classification: G21, G32
    Keywords: banking/financial intermediation, financial crisis
    Date: 2016–02
  10. By: Clemens Bonner; Daniel Streitz; Michael Wedow
    Abstract: This paper analyzes the effect of securitization on bank loan supply over the 2001 to 2013 period using a large sample of Eurozone banks. We document that an increase in banks' ABS issuances positively correlates with bank loan supply before the 2007-08 financial crisis but not afterwards. The underlying collateral of the securitization is correlated with changes of loan supply of the respective type. The main motivation for banks to issue ABS and covered bonds is their use as a funding tool. Since the required skills are similar, ABS issuers were better able to switch to covered bonds, allowing them to gain from the higher liquidity of covered bonds during and right after the financial crisis. We do not find evidence of ABS issuances increasing bank risk.
    Keywords: Securitization; Credit Supply; Financial Crisis
    JEL: G21
    Date: 2016–02
  11. By: Robert Unger
    Abstract: The euro area crisis is often linked to the emergence of current account imbalances. As most of the deficit countries experienced pronounced credit booms at the same time that these imbalances were building up, this paper investigates the link between domestic credit developments and the current account balance. Using a panel error correction specification, the estimation results show that flows of bank loans to the non-financial private sector are a significant determinant of the current account and that they – together with changes in competitiveness – constituted the most important factor driving the build-up of current account imbalances in the deficit countries. Accordingly, impeding an increase in private sector indebtedness seems to be a promising way to dampen the formation of unsustainable current account imbalances.
    Keywords: banks, credit growth, current account imbalances, euro area
    JEL: E50 F32 G21
    Date: 2016–02
  12. By: Dilyana Dimova; Piyabha Kongsamut; Jérôme Vandenbussche
    Abstract: This paper presents a detailed account of the rich set of macroprudential measures taken in four Southeastern European countries—Bulgaria, Croatia, Romania, and Serbia—during their synchronized boom and bust cycles in 2003–12, and assesses their effectiveness. We find that only strong measures helped contain domestic credit growth, the share of foreigncurrency- denominated loans provided by the domestic banking sector, or the domestic banking sector’s reliance on foreign borrowing during the boom years. We also find that circumvention via direct external borrowing often fully offset the effectiveness of these strict measures, and thatmeasures taken during the bust had no discernible impact. We conclude that (i) proper calibration of macroprudential measures is of the essence; (ii) only strong, broad-based macroprudential measures can contain credit booms; (iii) econometric studies of macroprudential policy effectiveness should focus on measures rather than on instruments (i.e. classes of measures) and in so doing allow for possible non-linear and state-contingent effects.
    Date: 2016–02–15
  13. By: Pilar Cuadrado (Banco de España); Enrique Moral-Benito (Banco de España)
    Abstract: This paper presents an estimate of the Spanish economy’s potential growth. This estimate is based on a production function methodology that includes certain refi nements on previous versions and generates less procyclical potential output growth estimates than those traditionally considered in the literature. As a result, the (positive) output gap estimated in expansions is higher and that estimated in recessions is lower. According to these results, given the available population projections and under the assumption that total factor productivity (TFP) and structural unemployment will behave in line with historical patterns, the Spanish economy’s potential growth is expected to recover gradually over the coming years but, in line with projections by international organisations, to lower rates than those in the expansion period. However, per capita growth rates fully recover to the pre-crisis levels, which highlights the importance of population projections in shaping the Spanish potential growth.
    Keywords: potential growth, output gap, Spain
    JEL: E23 E32 E13 O47 O52
    Date: 2016–02
  14. By: Paul Hubert (OFCE – Sciences Po)
    Abstract: The European Central Bank publishes inflation projections quarterly. This paper aims at establishing empirically whether they influence private inflation forecasts and whether they may be considered as an enhanced means of implementing policy decisions by facilitating private agents’ information processing. We compare the effect of an ECB inflation projection shock to an ECB interest rate shock.We provide original evidence that ECB inflation projections do influence private inflation expectations positively. We find that ECB projections convey signals about future ECB rate movements. This paper suggests that ECB projections enable private agents to correctly interpret and predict policy decisions.
    Keywords: Monetary Policy, ECB, Private Forecasts, Influence, Structural VAR
    JEL: E52 E58
    Date: 2015–09–01
  15. By: Ali Alichi; Olivier Bizimana; Silvia Domit; Emilio Fernández Corugedo; Douglas Laxton; Kadir Tanyeri; Hou Wang; Fan Zhang
    Abstract: The estimates of potential output and the output gap presented in this paper are not official IMF estimates. The programs and potential output estimates in this paper can be downloaded from views expressed in this paper are those of the authors and do not necessarily represent those of the IMF or IMF policy. The authors would like to thank the European Department of the IMF for helpful comments. All errors and omissions are our own.
    Keywords: Economic theory;Parameter estimation;Potential output;Econometric models;United States;United States;Euro Area;Macroeconomic Modeling, inflation, unemployment, gdp, productivity, Model Construction and Estimation, Monetary Policy (Targets, Instruments, and Effects),
    Date: 2015–12–01
  16. By: Yevgeniya Korniyenko; Elena Loukoianova
    Abstract: The paper examines the impact of unconventional monetary policy measures (UMPMs) implemented since 2008 in the United States, the United Kingdom, Euro area and Japan— the Systemic Four—on global monetary and liquidity conditions. Overall, the results show positive significant relationships. However, there are differences in the impact of the UMPMs of individual S4 countries on these conditions in other countries. UMPMs of the Bank of Japan have positive association with global liquidity but negative association with securities issuance. The quantitative easing (QE) of the Bank of England has the opposite association. Results for the quantitative easing measures of the United States Federal Reserve System (U.S. Fed) and the ECB UMPMs are more mixed.
    Keywords: Asia and Pacific;United Kingdom;Western Hemisphere;Global liquidity;Euro Area;Europe;Japan;Monetary aggregates;Spillovers;unconventional monetary policy, capital flows, liquidity, monetary policy, securities, balance sheets, issuance, International Policy Coordination and Transmission, Government Policy and Regulation, capital flows.,
    Date: 2015–12–30
  17. By: Thomas Hemmelgarn (European Commission); Gaëtan Nicodème (European Commission); Bogdan Tasnadi (European Commission); Pol Vermote (European Commission)
    Abstract: The merits and demerits of financial transaction taxes have been heavily debated among economists, who remain divided on the effects of the taxes on trading volumes, market liquidity, and quotes volatility. In 2011, the European Commission put forth a legislative proposal for a common system of financial transaction taxes in the European Union. The proposal did not gather unanimity among all Member States and eleven asked to go ahead under the so-called enhanced cooperation procedure. In parallel, countries such as France and Italy have introduced their own taxes, while others of the group of eleven already had an FTT in place (Belgium and Greece). Discussions between Member States on the final design of the financial transaction tax are progressing, but to date no final decision has been made. This paper reviews the most recent economic literature on the effects of financial transaction taxes, with a focus on those recently introduced. It also details the proposals made by the European Commission.
    Keywords: taxation, financial sector, financial transaction taxes, European Union
    JEL: G18 G28 G38 H21 H32
    Date: 2016–02
  18. By: Andrea Garnero; Alexander Hijzen; Sébastien Martin
    Abstract: This paper provides comprehensive cross-country evidence on the relationship between earnings inequality and intra-generational mobility by simulating individual earnings and employment trajectories in the long-term using short panel data for 24 OECD countries. On average across countries, about 25% of earnings inequality in a given year evens out over the life cycle as a result of mobility. Moreover, mobility is not systematically higher in countries with more earnings inequality in general. However, a positive and statistically significant relationship is found only in the bottom of the distribution. This reflects the role of mobility between employment and unemployment and not that of mobility up and down the earnings ladder. Ce document fournit une analyse approfondie de la relation entre l’inégalité des revenus d’activité et la mobilité intra-générationnelle en simulant les trajectoires professionnelles à l’aide de données de panel sur une courte période pour 24 pays de l’OCDE. En moyenne et pour l’ensemble des pays, environ 25% de l'inégalité des revenus observée une année donnée s’égalise au cours du cycle de vie du fait de la mobilité. De plus, la mobilité n’est pas systématiquement plus élevée dans les pays généralement plus inégalitaires en termes de revenus. Toutefois, on observe une relation positive et statistiquement significative entre inégalité et mobilité dans la partie inférieure de la distribution. Cela reflète le rôle de la mobilité entre emploi et chômage, et non celui de la mobilité ascendante et descendante sur l'échelle des salaires.
    Keywords: simulation, intra-generational mobility, earnings-experience profiles, life-time inequality
    JEL: E24 J30 J62 O57
    Date: 2016–02–26
  19. By: Hélène Périvier-Timbeau (OFCE)
    Abstract: The GDP collapse phase of the economic crisis has less affected female employment than male employment, whereas the austerity phase was particularly harsh for women. This gendered impact of the different stages of the crisis is described in the literature as follows: “from he-cession to sh(e)austerity”. This article aims to analyse the gendered trends in labour market for eight European countries. The quarterly evolution of the participation of women and men and the employment at the sectorial level are decomposed. The “he-cession to sh(e)austerity” scenario does not apply to all the selected countries. The other channels through which austerity policies can jeopardize gender equality and women’s rights are identified by referring to a typology of these policies.
    Keywords: Gender; Recession; Austerity; Segregation; Economic policies; Employment
    JEL: J16 J21 J22
    Date: 2016–02

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