nep-eec New Economics Papers
on European Economics
Issue of 2016‒04‒16
twelve papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Interest rates, Eurobonds and intra-European exchange rate misalignments: The challenge of sustainable adjustments in the Eurozone. By Vincent Duwicquet; Jacques Mazier; Jamel Saadaoui
  2. Sectoral Wage Rigidities and Labour and Product Market Institutions in the Euro Area By Robert Anderton; Arno Hantzsche; Simon Savsek; Mate Toth
  3. How can it work? On the impact of quantitative easing in the Eurozone By Saraceno, Francesco; Tamborini , Roberto
  4. Revisiting Sovereign Bond Spreads’Determinants in the EMU By António Afonso,; Manuel Reis
  5. The EU debt crisis: Testing and revisiting conventional legal doctrine By Paul De Grauwe; Yuemei Ji; Armin Steinbach
  6. Central Banks' Predictability: An Assessment by Financial Market Participants By Bernd Hayo; Matthias Neuenkirch
  7. The institutional underpinnings of the prospective euro adoption in Poland By Rapacki, Ryszard
  8. Short-termism of long-term investors? The investment behaviour of Dutch insurance companies and pension funds By Patty Duijm; Sophie Steins Bisschop
  9. THE POLITICAL GEOGRAPHY OF THE EUROCRISIS By Beramendi, Pablo; Stegmueller, Daniel
  10. Are Banking Shocks Contagious? Evidence from the Eurozone By Thomas Flavin; Dolores Lagoa-Varela
  11. Probably Too Little, Certainly Too Late. An Assessment of the Juncker Investment Plan By Mathilde Le Moigne; Francesco Saraceno; Sébastien Villemot
  12. Public spending, monetary policy and growth: Evidence from EU countries By Papaioannou, Sotiris

  1. By: Vincent Duwicquet; Jacques Mazier; Jamel Saadaoui
    Abstract: The euro crisis shed lights on the nature of alternative adjustment mechanisms in a monetary union characterized by a large heterogeneity. Exchange rate adjustments being impossible, it remains very few efficient alternative mechanisms. At the level of the whole eurozone the euro is close to its equilibrium parity. But the euro is strongly overvalued for Southern European countries, France included, and largely undervalued for Northern European countries, especially Germany. This paper gives a new evaluation of these exchange rate misalignments inside the eurozone, using a FEER approach, and examines the evolution of competitiveness. In a second step, we use a two-country SFC model of a monetary union with endogenous interest rates and Eurobonds issuance. Three main results are found. Firstly, facing a competitiveness loss in southern countries due to exchange rates misalignments, increasing intra-European financing by banks of northern countries or other institutions could contribute to reduce the debt burden and induce a partial recovery but public debt would increase. Secondly, the implementation of Eurobonds as a tool to partially mutualize European sovereign debt would have a rather similar positive impact, but with a public debt limited to 70 percent of GDP. Finally, Eurobonds could also be used to finance large European projects which could impulse a stronger recovery in the entire zone with stabilized current account imbalances. However, the creation of a European institution in charge of the issuance of the Eurobonds would face strong political obstacles.
    Keywords: Euro Crisis, Exchange Rate Misalignments, Eurobonds, Interest Rate.
    JEL: F31 F32 F37 F41 E12
    Date: 2016
  2. By: Robert Anderton; Arno Hantzsche; Simon Savsek; Mate Toth
    Abstract: We estimate wage Phillips curve relationships between sectoral wage growth, unemployment and productivity in a country-industry panel of euro area countries. We find that institutional rigidities – such as labour and product market institutions and regulations – limit the adjustment of euro area wages to unemployment, in both upturns and downturns, particularly in manufacturing and, to a lesser extent, in the construction and service sectors. In addition, there are also further limitations in the response of wages to changes in unemployment during economic downturns which suggests that euro area wages are also characterised by significant downward wage rigidities, especially in the manufacturing sector. These results are robust to specifications that account for factors that may affect structural unemployment (such as duration-dependent unemployment effects), as well as changes in the skill composition of employment that may affect the evolution of aggregate wages. The results also hold for panels including or excluding the public sector (where wages may be determined differently to the private sector also due to the effects of fiscal consolidation on public sectorwages during the crisis). From a policy perspective, reforms in product and labour markets which reduce wage rigidities can facilitate employment growth and enhance the rebalancing process in the euro area.
    Keywords: sector wages, wage rigidity, wage Phillips curve, labour market institutions, product market institutions
    Date: 2016
  3. By: Saraceno, Francesco (LUISS School of European Political Economy); Tamborini , Roberto (University of Trento)
    Abstract: How can the quantitative easing (QE) programme launched in March 2015 by the ECB be successful in the Eurozone (EZ)? What will be its impact on the member countries? And how will it relate to countries' fiscal policies? To address these questions, we use a simple extension of the three-equation New Keynesian model. We modify the benchmark model in two respects: 1) we (re)-introduce an LM money supply and demand equation to capture the fact that the ECB operates at the zero lower bound and hence cannot use a standard Taylor rule; and 2) we extend the model to a two-country framework. The model supports the ECB official view that the channel whereby QE is meant to operate is the reversal of deflationary expectations. It also highlights that instrumental to this goal is the elimination of persistent output gaps, both at the EZ and at the country level, and hence the reduction of country-specific interest-rate spreads - the "unofficial" objective of the programme. We show that QE, if large enough, can succeed for the EZ as a whole. The ECB nevertheless cannot also close individual countries' output gaps, unless specific and unrealistic conditions are met. In this case fiscal accommodation at the country level should also intervene. We show that QE can enhance the effectiveness of fiscal policy, and therefore conclude that the coordination of fiscal and monetary policies is of paramount importance.
    Keywords: Monetary Policy; ECB; Deflation; Zero-­Lower-­Bound; Fiscal Policy
    JEL: E30 E40 E50
    Date: 2016–03–15
  4. By: António Afonso,; Manuel Reis
    Abstract: We study the determinants of 10-year sovereign bond yield spreads of 11 EMU member states, covering the lifetime of the euro, up until the end of 2014. Panel and SUR analyses coupled with qualitative variables show that the pricing of European debt has not been static across time and EMU countries, and market participants became increasingly aware of macroeconomic and fiscal fundamentals. Key Words : Sovereign bond spreads; panel data; EMU
    JEL: C23 E43 G12 H60 E62
    Date: 2016–04
  5. By: Paul De Grauwe; Yuemei Ji; Armin Steinbach
    Abstract: Controversies surrounding the European sovereign debt crisis loom prominent in the public debate. From a legal perspective, the no-bailout rule and the ban on monetary financing constitute the main principles governing the legality review of financial assistance and liquidity measures. Interpretation of these rules are full of empirical claims. According to conventional legal doctrine, bond spreads only depend on the country’s debt position, largely ignoring other causal factors including liquidity. We test the hypotheses implicit in conventional legal reasoning. We find evidence that a significant part of the surge in the spreads of the peripheral Eurozone countries was disconnected from underlying fundamentals and particularly from a country’s debt position, and was associated rather strongly with market sentiments and liquidity concerns. We apply our empirical findings to the legal principles as interpreted by recent jurisprudence arguing that application of the no- bailout principle and the ban on monetary financing should be extended to capture non-debt related factors. Also, the empirical results suggest taking recourse to alternative legal grounds for reviewing the legality of anti-crisis instruments and allowing for a lender of last resort in the euro zone.
    Date: 2016–04
  6. By: Bernd Hayo; Matthias Neuenkirch
    Abstract: In this paper, we examine the relationship between market participants' perception of central bank predictability and their assessment of central bank communication skills and success in conveying objectives as well as the importance of transparency-enhancing measures, such as voting records, transcripts or minutes of policy meetings, and conditional interest rate projections. Our analysis is based on a unique dataset of almost 500 market participants worldwide who were asked questions with respect to the performance of the Bank of England, the Bank of Japan, the European Central Bank, and the Federal Reserve. Our results indicate a positive and economically notable relationship between central banks’ ability to convey their objectives and their overall communication skills on the one hand, and market participants’ perception of the banks’ predictability on the other hand, for all four central banks. The dissemination of more specific information does not appear to contribute to better central bank predictability. This raises doubts about the widely-held notion that implementing ever more transparency-enhancing measures will improve central bank predictability.
    Keywords: Central Bank, Communication, Financial Market Participants, Objectives, Predictability, Survey, Transparency
    JEL: E52 E58
    Date: 2016
  7. By: Rapacki, Ryszard
    Abstract: This paper aims to assess both the explicit and implicit convergence criteria for Poland's possible membership in the Economic and Monetary Union, with special emphasis on institutional underpinnings of the country's prospects of adopting the euro. While the former set of criteria (embedded in the Maastricht Treaty) comprises fiscal and monetary indicators of nominal convergence, the latter highlight the resilience of a country to adverse asymmetric shocks and its ability to compete internationally, and point to the importance of labor mobility in particular and institutional quality in general as key shock-absorbing mechanisms and main drivers of a sustainable comparative advantage of a country. The paper focuses therefore on the evaluation of existing institutions and their evolution in Poland vis-à-vis the standards prevailing in the euro zone, as key determinants of the country's readiness to become an EMU member. The theoretical background of the assessment involved comprises two chief pillars: the optimum currency area theory (OCA) and the 'diversity of capitalism' (DoC) approach.
    Keywords: euro adoption,convergence
    JEL: E66 B52
    Date: 2015
  8. By: Patty Duijm; Sophie Steins Bisschop
    Abstract: Countercyclical long-term investment strategies of insurance companies and pension funds (ICPFs) can support the stability of the financial system. Yet there is limited understanding of how ICPFs invest during market shocks, such as the global financial crisis and the European sovereign debt crisis. The intention of this paper is to fill that lacuna by investigating Dutch ICPFs' equity and sovereign bond portfolios. A first analysis shows that while ICs massively sold equities during the crisis, PFs kept buying equities as markets tumbled. Results from our regression analysis over a longer time horizon suggest procyclical behaviour by ICs, while for PFs we do not find evidence for procyclical or countercyclical investment behaviour. Moreover, both ICs and PFs sold their affected sovereign bonds prior to a rating downgrade. This could be considered as destabilising at a macro-level, as it may accelerate the deteriorating financing conditions of the affected countries.
    Keywords: microprudential; macroprudential; investment behaviour; pension funds; insurance companies; procyclicality; Solvency II; global financial crisis
    JEL: E44 G01 G11 G22 G28
    Date: 2015–12
  9. By: Beramendi, Pablo (Duke University); Stegmueller, Daniel (University of Mannheim)
    Abstract: Contrary to the expectations from currency unions theory and historical precedent, the EURO area has failed to integrate fiscally in response to the crisis. At the same time, however, significant horizontal transfers towards financial stabilization have taken place. What explains this co-existence of persistent reluctance by domestic leaders in core EU countries to pursue fiscal integration and large scale financial transfers between nations within the union? We analyze responses to the crisis as a result of the geography of income and production. Heterogeneity of constituencies’ redistribution preferences associated with a diverse economic geography accounts for the political constraints on national governments keeping them from furthering fiscal integration. In turn, cross-unit externalities in the form of potential financial risks shift the preferences of citizens potentially exposed to negative side-effects and open up the possibility of efforts towards international insurance/redistribution. The paper presents first an analytical framework to study these two mechanisms. Subsequently, we perform empirical analyses of the determinants of preferences for social insurance/redistribution, fiscal integration, and international redistribution in the aftermath of the Eurocrisis.
    Keywords: JEL Classification:
    Date: 2016
  10. By: Thomas Flavin (Department of Economics, Finance and Accounting, Maynooth University.); Dolores Lagoa-Varela (Universidad La Coruña, Spain.)
    Abstract: We test for contagion between banking stocks – global and domestic – and the domestic nonfinancial sector for eleven Eurozone countries. Using a Markov-switching Factor augmented VAR (MS-FAVAR) model, we assess changes to the transmission mechanism of shocks as we move from ‘normal’ market conditions to a high-volatility, ‘crisis’ regime. Results confirm the role of contagion in propagating shocks between the global and domestic banking sectors but show that the non-financial sector suffered little contagion. In general, the nonfinancial sectors appear to ‘de-couple’ from the global and domestic banking sectors.
    Keywords: Contagion; Shock transmission; Financial market crises.
    JEL: G01 G21 C32
    Date: 2016
  11. By: Mathilde Le Moigne (École normale supérieure - Paris); Francesco Saraceno (OFCE); Sébastien Villemot (OFCE)
    Abstract: This paper aims at quantifying the impact of a stimulus plan based on a public investment push, within a dynamic stochastic general equilibrium model of the Eurozone economy. We estimate an extension of Leeper et al.’s (2010) model with public capital and time-to-build, to quantify the impact of the European Commission’s Investment Plan for Europe (the “Juncker plan”). The public investment push is assessed in normal times and starting from the zero lower bound, making different hypotheses on private investment leverage and on capital productivity. Then, in order to assess the effectiveness of the Juncker plan, we compare it with the stimulus plan implemented by the Obama administration in 2009. The main conclusion of the paper is that, had it been implemented at the beginning of the crisis, the Juncker plan would have had a significant positive impact. But as it is being launched very late in the crisis, to be effective the plan should be significantly larger in size.
    Keywords: public investment; leverage; Juncker plan; zero lower bound
    JEL: E22 E32 E65
    Date: 2016–03
  12. By: Papaioannou, Sotiris
    Abstract: This study examines whether differences in monetary policy are associated with diverging effects of public spending on growth. At first stage, we estimate public spending multipliers for each country of the European Union (EU). Their size varies considerably across countries. Then we incorporate in the analysis the role of monetary policy and examine whether real interest rates affect the relationship between public spending and growth. The main result of the econometric analysis is that government spending can affect growth positively only when real interest rates become negative. This result remains robust to several changes in the econometric specification and measures of interest rate.
    Keywords: Public spending, Fiscal multipliers, Monetary policy, Economic growth.
    JEL: E43 E62 O40
    Date: 2016–03–15

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