nep-eec New Economics Papers
on European Economics
Issue of 2016‒03‒29
nineteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Lender of last resort versus buyer of last resort: The impact of the European Central Bank actions on the bank-sovereign nexus By Acharya, Viral; Pierret, Diane; Steffen, Sascha
  2. Trade (dis)Integration and Imbalances in the EMU By Esposito, Piero
  3. Did quantitative easing affect interest rates outside the US? New evidence based on interest rate differentials By Belke, Ansgar; Gros, Daniel; Osowski, Thomas
  4. Current account and REER misalignments in Central Eastern EU countries: an update using the macroeconomic balance approach By Comunale, Mariarosaria
  5. Deadly Embrace: Sovereign and Financial Balance Sheets Doom Loops By Emmanuel Farhi; Jean Tirole
  6. Conditional PPP and Real Exchange Rate Convergence in the Euro Area By Paul R. Bergin; Reuven Glick; Jyh-Lin Wu
  7. How to monitor the exit from the Eurosystem's unconventional monetary policy: Is EONIA dead and gone? By Ronald Heijmans; Richard Heuver; Zion Gorgi
  8. Public debt and economic growth: Economic systems matter By Ahlborn, Markus; Schweickert, Rainer
  9. Aggregate Employment, Job Polarization and Inequalities: A Transatlantic Perspective By Julien Albertini; Jean Olivier Hairault; ;
  10. Value Chains and the Great Recession: Evidence from Italian and German Firms By Antonio Accetturo; Anna Giunta
  11. Balance-of-Payments Adjustment in the Eurozone By Micossi, Stefano
  12. Financial Regulation in Europe: Foundations and Challenges By Beck, Thorsten; Carletti, Elena; Goldstein, Itay
  13. The debt of Italian non-financial firms: an international comparison By Antonio De Socio; Paolo Finaldi Russo
  14. Do inflation expectations matter in a stylised New Keynesian model? The case of Poland By Tomasz Łyziak
  15. Inflation uncertainty, disagreement and monetary policy: Evidence from the ECB Survey of Professional Forecasters By Glas, Alexander; Hartmann, Matthias
  16. Mind the gap: The difference between U.S. and European loan rates By Berg, Tobias; Saunders, Anthony; Steffen, Sascha; Streitz, Daniel
  17. Estimating the money market microstructure with negative and zero interest rates By Edoardo Rainone; Francesco Vacirca
  18. Fragmentation in the european retail deposit market and implications for loan availability in european member states By Wahrenburg, Mark; Kaffenberger, Bijan
  19. The Impact of Monetary Policy on Inequality in the UK. An Empirical Analysis By Haroon Mumtaz; Angeliki Theophilopoulou

  1. By: Acharya, Viral; Pierret, Diane; Steffen, Sascha
    Abstract: In summer 2011, elevated sovereign risk in Eurozone peripheral countries increased the solvency risk of Eurozone banks, precipitating a run on their short-term debt. We assess the effectiveness of different European Central Bank (ECB) interventions that followed - lender of last resort vs. buyer of last resort - in stabilizing the European financial sector. We find that (i) by being lender of last resort to banks via the long-term refinancing operations (LTRO), ECB temporarily reduced funding pressure for banks, but did not help to contain sovereign risk. In fact, banks of the peripheral countries used the public funds to increase their exposure to risky domestic debt, so that when solvency risk in the Eurozone worsened the run of private short-term investors from Eurozone banks intensified. (ii) In contrast, ECB's announcement of being a potential buyer of last resort via the Outright Monetary Transaction program (OMT) significantly reduced the bank-sovereign nexus. The OMT increased the market prices of sovereign bonds, leading to a permanent reversal of private funding flows to Eurozone banks holding these bonds.
    Keywords: money market funds,repos,bank risk,sovereign debt,ECB
    JEL: G01 G21 G28
    Date: 2016
  2. By: Esposito, Piero (LUISS School of European Political Economy)
    Abstract: The aim of this paper is to assess the role of competitiveness and financial integration on trade flows for countries belonging to the European Monetary Union (EMU). We argue that these two factors contributed both to the dynamics of trade imbalances and to the reduction of intra-EMU share in total trade. The latter effect adds to the physiological reduction of intra-EMU trade due to lower than average growth and competitiveness losses. We use a gravity-type bilateral trade model in order to estimate the impact on both imports and exports, providing a more detailed explanation for the developments of total and net trade. The results indicate that both competitiveness and financial opening significantly increased trade imbalances, particularly within the EMU. In addition, financial opening also played a strong role in the reduction of the intra-area trade share.
    Keywords: Imbalances; euro area; Competitiveness; Financial flows; Panel data
    JEL: C23 F15 F32 F36 O52
    Date: 2015–07–13
  3. By: Belke, Ansgar; Gros, Daniel; Osowski, Thomas
    Abstract: This paper explores the effects of non-standard monetary policies on international yield relationships. Based on a descriptive analysis of international long-term yields, we find evidence that long-term rates followed a global downward trend prior to as well as during the financial crisis. Comparing interest rate developments in the US and the eurozone, it is difficult to detect a distinct impact of the first round of the Fed’s quantitative easing programme (QE1) on US interest rates for which the global environment – the global downward trend in interest rates – does not account. Motivated by these findings, we analyse the impact of the Fed’s QE1 programme on the stability of the US-euro long-term interest rate relationship by using a CVAR (cointegrated vector autoregressive) model and, in particular, recursive estimation methods. Using data gathered between 2002 and 2014, we find limited evidence that QE1 caused the break-up or destabilised the transatlantic interest rate relationship. Taking global interest rate developments into account, we thus find no significant evidence that QE had any independent, distinct impact on US interest rates.
    Date: 2016–01
  4. By: Comunale, Mariarosaria
    Abstract: Using the IMF CGER methodology, we make an assessment of the current account and price competitiveness of the Central Eastern European Countries (CEEC) that joined the EU between 2004 and 2014. We present results for the "€œMacroeconomic Balance (MB)"€ approach, which provides a measure of current account equilibrium based on its determinants together with mis-alignments in real effective exchange rates. We believe that a more refined analysis of the mis-alignments may useful for the Macroeconomic Imbalance Procedure (MIP). This is especially the case for these countries, which have gone through a transition phase and boom/bust periods since their independence. Because such a history may have influenced a country’s performance, any evaluation must take account of each country'€™s particular characteristics. We use a panel setup of 11 EU new member states (incl. Croatia) for the period 1994-2012 in static and dynamic frameworks, also controlling for the presence of cross-sectional dependence and checking specifically for the role of exchange rate regimes, capital flows and global factors. We find that the estimated coefficients of the determinants meet with expectations. Moreover, the foreign capital flows, the oil balance, and relative output growth seem to play a crucial role in explaining the current account balance. Some global factors such as shocks in oil prices or supply might have played a role in worsening the current account balances of the CEECs. Having a pegged exchange rate regime (or being part of the euro zone) affects the current account positively. The real effective exchange rates behave in accord with the current account gaps, which clearly display cyclical behaviour. The CAs and REERs come close to equilibria in 2012 in most of the countries and the rebalancing is completed for some countries that were less misaligned in the past, such as Poland and Czech Republic, but also for Lithuania. When Foreign Direct Investment (FDI) is introduced as a determinant for these countries, the misalignments are larger in the boom periods (positive misalignments) whereas the negative misalignments are smaller in magnitude.
    Keywords: real effective exchange rate, Central Eastern European Countries, EU new member states, fundamental effective exchange rate, current account
    JEL: F31 F32 C23
    Date: 2015–10–07
  5. By: Emmanuel Farhi; Jean Tirole
    Abstract: The recent unravelling of the Eurozone’s financial integration raised concerns about feedback loops between sovereign and banking insolvency, and provided an impetus for the European banking union. This paper provides a “double-decker bailout” theory of the feedback loop that allows for both domestic bailouts of the banking system by the domestic government and sovereign debt forgiveness by international creditors or solidarity by other countries. Our theory has important implications for the re-nationalization of sovereign debt, macroprudential regulation, and the rationale for banking unions.
    JEL: E0 F34 F36 G28 H63
    Date: 2016–01
  6. By: Paul R. Bergin; Reuven Glick; Jyh-Lin Wu
    Abstract: While economic theory highlights the usefulness of flexible exchange rates in promoting adjustment in international relative prices, flexible exchange rates also can be a source of destabilizing shocks. We find that when countries joining the euro currency union abandoned their national exchange rates, the adjustment of real exchange rates toward purchasing power parity (PPP) became faster. To disentangle the possible causes for this finding we develop a novel methodology for conducting counterfactual simulations of an estimated VECM that distinguishes between the roles of the nominal exchange rate as an adjustment mechanism and as a source of shocks. We find evidence that prior to joining the euro currency union, member countries relied upon exchange rate adjustments as a mechanism to correct for PPP deviations arising from divergent domestic inflation rates. But the loss of the exchange rate as an adjustment mechanism after the introduction of the euro was more than compensated by the elimination of the exchange rate as a source of shocks, in combination with faster adjustment in national price indices. These findings support claims that flexible exchange rates are not necessary to promote long-run international relative price adjustment.
    JEL: F0 F15 F31
    Date: 2016–02
  7. By: Ronald Heijmans; Richard Heuver; Zion Gorgi
    Abstract: This paper investigates the impact of the "unconventional" monetary policy measures taken by the Eurosystem on both the unsecured and the secured money markets. Furthermore, we provide insight into the shifts between the unsecured and secured markets. We provide a euro area overview and a Core-versus-Periphery breakdown. Our results show that: 1) there is a clear segmentation between Core and Periphery; 2) the use of the unsecured money market has decreased substantially and is no longer representative as a reflection of the euro area as a whole; and 3) the use of the secured money markets has increased substantially in value terms since the start of the crisis. Both the secured and the unsecured money markets reacted strongly to the first 3-year long term refinancing operations and quantitative easing. It is not to be expected that turnover in the money markets will revert to pre-crisis levels, in part because new regulation, such as the Basel III requirements, dissuades banks from engaging in short-term lending. Therefore, monetary policy experts should also devote their attention to steering the rates in the secured money market.
    Keywords: monetary policy; repo; GC Pooling; MTS Repo; unsecured money market; central bank; Basel III
    JEL: E42 E44 E58 G01
    Date: 2016–03
  8. By: Ahlborn, Markus; Schweickert, Rainer
    Abstract: Most studies on the relationship between public debt and economic growth implicitly assume homogeneous debt effects across their samples. We - in accordance with recent literature - challenge this view and state that there likely is a great deal of cross-country heterogeneity in that relationship. However, other than scholars assuming that all countries are different, we expect that clusters of countries differ. We identify three country clusters with distinct economic systems: Liberal (Anglo Saxon), Continental (Core EU members) and Nordic (Scandinavian). We argue that different degrees of fiscal uncertainty at comparable levels of public debt between those economic systems constitute a major source of heterogeneity in the debt-growth relationship. Our empirical evidence supports this assumption. Continental countries face more growth reducing public debt effects than especially Liberal countries. There, public debt apparently exerts neutral or even positive growth effects, while for Nordic countries a non-linear relationship is discovered, with negative debt effects kicking in at public debt values of around 60% of GDP.
    Keywords: public debt,economic growth,economic systems,fiscal policy,welfare state
    JEL: E62 P10 P51 H10
    Date: 2016
  9. By: Julien Albertini; Jean Olivier Hairault; ;
    Abstract: This paper develops a multi-sectorial search and matching model with endogenous occupational choice in a context of structural change. Our objective is to shed light on the way labor market institutions aect aggregate employment, job polarization and inequalities observed in the US and in European countries. We consider the cases of the US, France and Germany that are representative of alternative institutional settings, having the potential to induce divergent time-paths in the evolution of labor market outcomes during the process of technological transition. In the US and in Germany, we nd employment gains from technological change and job polarization, whereas, in France, the technological change reduces aggregate employment in a context of job polarization. In the US, an half of these employment gains are due to the technological change, and the other half to the changes in the LMI, the contribution of the rise in share of skilled worker being negligible. In France, the change in LMI aects new job opportunities in manual jobs: the reallocation of routine workers towards manual jobs is obstructed for want of job creations of manual services. Hence, without technological change, the fall in French employment would have been cut by 70%. The model also predicts that, without the increase in skilled labor supply, the fall in French employment would have doubled. The improvement in educational attainment dampened the unfavorable consequences of technological change. we show that Germany transforms this structural change in employment gains, only after the labor reforms implemented after the middle of the 90s.
    Keywords: Search and matching, job polarization, reallocation, labor market institutions
    JEL: E24 J62 J64 O33
    Date: 2016–03
  10. By: Antonio Accetturo (Banca d'Italia); Anna Giunta (Università Roma Tre)
    Abstract: Global Value Chains (GVCs) have been one of the main transmission mechanisms of 2009 the Great Trade Collapse. Our paper provides a description of the effects of the crisis from a perspective that is both country-comparative (Germany and Italy) and on firm level. Two are the main conclusions: i) intermediate firms were hit by the crisis more than final firms; ii) firms’ position in GVCs and their strategies explain part of the performance gap between Italian and German firms.
    Keywords: Global Value Chains, Germany, Italy, Industrial Firms, Firm Organization, World Trade
    JEL: D23 L22 F14 F23
    Date: 2016–01
  11. By: Micossi, Stefano
    Abstract: This policy contribution describes the unresolved adjustment problems confronting the eurozone, and places them in historical perspective by comparing developments in key real economic variables under EMU with those observed under the Bretton Woods system. The main finding is that the eurozone is afflicted by a strong deflationary bias and that, therefore, under current trends, deep economic and social strains will continue to project a dark cloud over its future survival.
    Date: 2016–01
  12. By: Beck, Thorsten; Carletti, Elena; Goldstein, Itay
    Abstract: This chapter discusses recent regulatory reforms and relates them to different market failures in banking, based on the recent theoretical and empirical literature with focus on insights from the recent crisis. We also provide a broader discussion of challenges in financial sector regulation, related to the regulatory perimeter and financial innovation as tools financial market participants use to evade tighter regulatory frameworks. We argue for a dynamic view of regulation that takes into account the changing nature of risk-taking activities and regulatory arbitrage efforts. We also stress the need for a balanced approach between complex and simple tools, a strong focus on systemic in addition to idiosyncratic regulation, and a stronger emphasis on the resolution phase of financial regulation.
    Keywords: Banking; Basel III; financial stability; regulation
    JEL: G21 G28
    Date: 2016–03
  13. By: Antonio De Socio (Bank of Italy); Paolo Finaldi Russo (Bank of Italy)
    Abstract: In the run-up to the financial crisis Italian firms significantly increased their debt in absolute terms and in relation to equity and GDP. The positive gap in firms’ leverage between Italy and other euro-area countries has widened in recent years, despite the outstanding debt of Italian firms has decreased since 2011. In this work we document the magnitude of this gap using both aggregate macro data and firm-level information. We find that, controlling for several firm-specific characteristics (i.e. age, profitability, asset tangibility, asset liquidity, turnover growth), the leverage of Italian firms is about 10 percentage points higher than in other euro area countries. Differences are systematically larger among micro and small firms, whereas they are small and weakly significant for firms with assets above 300 million euros.
    Keywords: leverage, financial structure, euro area
    JEL: G32
    Date: 2016–02
  14. By: Tomasz Łyziak
    Abstract: This paper estimates different versions of a stylised New Keynesian model of the Polish economy, in which alternative measures of inflation expectations are used. They include: model-based (rational) expectations as well as survey measures of inflation expectations formed by consumers, enterprises and financial sector analysts. After estimating the models we verify to what extent the use of different measures of inflation expectations affects the assessment of the monetary transmission mechanism, the exchange rate pass-through and the sacrifice ratio. Simulation results show different responses in all the analysed areas. For example, the maximum reaction of CPI inflation to the interest rate impulse is almost twice bigger if the direct measures of financial sector analysts are used instead of model-consistent expectations. Also the model with survey-based measures of producer inflation expectations displays stronger response of inflation to monetary policy impulse than the model, in which rational expectations are assumed. Estimates of the exchange rate pass-through from the models with survey-based expectations are very similar to each other, but stronger than in the model with rational expectations. The sacrifice ratio seems similar in the case of all versions of the New Keynesian model except its version with consumer inflation expectations that shows significantly larger output loss resulting from a permanent reduction of the inflation target than the other models. Differences in the assessment how monetary factors affect macroeconomic variables, particularly inflation, pose the question which model should be treated as the most adequate. To answer this question we run in-sample simulations, calculating inflation forecasting errors of all the models under consideration. We conclude that the model that assumes rational inflation expectations displays the lowest forecasting accuracy, while the model using inflation expectations of enterprises is the best-performing model. It suggests that the assumption of rational inflation expectations does not match the actual data well. Inflation expectations of Polish enterprises seem the most relevant from the macroeconomic point of view – more relevant than inflation expectations of consumers and financial sector analysts.
    Keywords: Inflation expectations, survey, New Keynesian model, monetary transmission mechanism, Poland.
    JEL: C54 D84 E17 E43
    Date: 2016
  15. By: Glas, Alexander; Hartmann, Matthias
    Abstract: We analyze the determinants of average individual inflation uncertainty and disagreement based on data from the European Central Bank's Survey of Professional Forecasters. We empirically confirm the implication from a theoretical decomposition of inflation uncertainty that disagreement is an incomplete approximation to overall uncertainty. Both measures are associated with macroeconomic conditions and indicators of monetary policy, but the relations differ qualitatively. In particular, average individual inflation uncertainty is higher during periods of expansionary monetary policy, whereas disagreement rises during contractionary periods.
    Keywords: Inflation uncertainty; Disagreement; Density forecast; Central banking;Survey of Professional Forecasters.
    Date: 2016–03–15
  16. By: Berg, Tobias; Saunders, Anthony; Steffen, Sascha; Streitz, Daniel
    Abstract: We analyze differences in the pricing of syndicated loans between U.S. and European loans. For credit lines, U.S. borrowers pay significantly higher spreads, but also lower fees, resulting in similar total costs of borrowing in both markets. For term loans, U.S. firms pay significantly higher spreads. While European firms across the rating spectrum issue terms loans, only low quality U.S. firms rely on term loans. U.S. issuers perform worse after loan origination compared to European issuers, which explains 30% of the spread differential. Increasing loan supply by institutional lenders in the U.S. since 2003 eventually fully removed the term loan pricing gap.
    Keywords: loans,corporate debt,fees,market integration,globalization
    JEL: G30 G20 G15
    Date: 2016
  17. By: Edoardo Rainone (Bank of Italy); Francesco Vacirca (ECB and Bank of Italy)
    Abstract: Money market microstructure is fundamental to studying bank behaviour, to evaluating monetary policy and to assessing the financial stability of the system. Given the lack of granular data on interbank loans, Furfine (1999) proposed an algorithm to estimate the microstructure using data from the payment system. We propose an econometric methodology to assess and improve the quality of the money market microstructure estimated by the Furfine algorithm in the presence of zero and negative rates, exploiting information coming from market regularities. We first extend the standard Furfine algorithm to include negative rates and verify the presence of significant noise at a specific rate. Secondly, we propose an inferential procedure that enriches and corrects the standard algorithm based on the economic likelihood of loans. Market regularities observed in this decentralized market are used to increase the reliability of the estimated interbank network. Thirdly, the methodology is applied to TARGET2, the European wholesale payment system. The main impacts of recent monetary policy decisions on key interest rates are studied, comparing the standard algorithm with the new econometric procedure.
    Keywords: interbank markets, money, payment systems, trading networks, measurement error
    JEL: E52 E40 C21 G21 D40
    Date: 2016–02
  18. By: Wahrenburg, Mark; Kaffenberger, Bijan
    Abstract: European households face tremendous obstacles when intending to open a savings account outside their home country. The shortage of deposits has become a major reason for banks´ declining loan supply and ultimately is responsible for a substantial part of the investment weakness and GDP decline in affected European countries. Policy makers have made important efforts to promote European deposit market integration and to stimulate cross border flows of savings within the European Union. But these efforts will only yield the intended benefits if a number of additional non-tariff trade barriers are removed. Currently, these barriers prevent households in surplus countries to transfer their savings to banks in deficit countries where their deposits are most urgently needed.
    Keywords: European market fragmentation,deposits,household finance
    Date: 2015
  19. By: Haroon Mumtaz (Queen Mary University of London); Angeliki Theophilopoulou (University of Westminister)
    Abstract: The UK has experienced a dramatic increase in earnings and income inequality over the past four decades. We use detailed micro level information to construct quarterly historical measures of inequality from 1969 to 2012. We investigate whether monetary policy shocks played a role in explaining this increase in inequality. We find that contractionary monetary policy shocks lead to a deterioration in earnings, income and consumption inequality and contribute to their fluctuation. The response of income and consumption at different quantiles suggests that contractionary policy has a larger negative effect on low income households and those that consume the least when compared to those at the top of the distribution. Our evidence also suggests that the policy of quantitative easing contributed to the increase in inequality over the Great Recession.
    Keywords: Inequality, Earnings, Income, SVAR, Monetary policy shocks
    JEL: E2 E3 E4 E5
    Date: 2016–02

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