nep-eec New Economics Papers
on European Economics
Issue of 2016‒04‒30
eight papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Drivers of global liquidity and global bank flows: A view from the euro area By Mary Everett
  2. One EMU Fiscal Policy for the EURO By Alexandre Lucas Cole; Chiara Guerello; Guido Traficante
  3. Debt deflation, financial market stress and regime change: Evidence from Europe using MRVAR By Ernst, Ekkehard; Semmler, Willi; Haider, Alexander
  4. Is uncertainty over Brexit damaging the UK and European equities? By Bouoiyour, Jamal; Selmi, Refk
  5. Crimea and Punishment: The Impact of Sanctions on Russian and European Economies By Konstantin A. Kholodilin; Aleksei Netsunajev
  6. Life after Brexit : what are the UK’s options outside the European union? By Swati Dhingra; Thomas Sampson
  7. Demand effects of fiscal policy since 2008 By Engelbert Stockhammer; Walid Qazizada; Sebastian Gechert
  8. Hoarding and short-squeezing in times of crisis: Evidence from the Euro overnight money market By Olivier Brossard; Susanna Saroyan

  1. By: Mary Everett
    Abstract: This paper exploits a novel bank-level monthly dataset to assess the effects of global liquidity on the global flows of euro area banks. The period associated with the European sovereign debt crisis has witnessed increased growth in euro area bank claims on extra-euro area residents, against a background of contracting euro area credit supply. Controlling for bank risk, global credit demand, and price effects such as interest rate differentials and exchange rates, empirical evidence supports a range of determinants of global liquidity - including global risk, global bank equity and unconventional monetary policy in the US, UK, Japan and euro area - as drivers of the global flows of euro area banks. Moreover, regression analysis indicates heterogeneity in the influence of global liquidity on global flows across euro area bank type, defined by their balance sheet composition and country of residence (stressed versus non-stressed euro area countries). The results highlight the importance of exogenous factors as drivers of global bank flows and the potential for international leakages of unconventional monetary policy.
    Keywords: Global bank flows, cross-border banking, global risk, global liquidity, European sovereign crisis, unconventional monetary policy spillovers, credit supply
    JEL: F60 G15 G21
    Date: 2016–03
  2. By: Alexandre Lucas Cole (LUISS "Guido Carli" University); Chiara Guerello (LUISS "Guido Carli" University); Guido Traficante (European University of Rome)
    Abstract: We build a Two-Country Open-Economy New-Keynesian DSGE model of a Currency Union to study the effects of fiscal policy coordination, by evaluating the stabilization properties of different degrees of fiscal policy coordination, in a setting where the union-wide monetary policy affects fiscal policies and viceversa, because of price rigidities and distortionary taxation. We calibrate the model to represent two groups of countries in the European Economic and Monetary Union and run numerical simulations of the model under a range of alternative shocks and under alternative scenarios for fiscal policy. We also compare welfare under the different scenarios, bringing to policy conclusions for the proper macroeconomic management of a Currency Union. We find that: a) coordinating fiscal policy by targeting net exports, rather than output, produces more stable dynamics, b) consolidating government budget constraints across countries and moving tax rates jointly provides greater stabilization, c) taxes on wage income are exponentially more distortionary than taxes on firm sales. Our policy prescriptions for the Eurozone are then to use fiscal policy to reduce international demand imbalances, either by stabilizing trade fl ows across countries or by creating some form of fiscal union or both, while avoiding the excessive use of labour taxes, in favour of sales taxes.
    Keywords: Fiscal Policy, International Policy Coordination, Monetary Union, New Keynesian.
    JEL: E62 E63 F42 F45 E12
    Date: 2016
  3. By: Ernst, Ekkehard; Semmler, Willi; Haider, Alexander
    Abstract: The economic meltdown since 2008-9 has created disinflation, and even deflation in some countries in the Euro-area, in a period with large debt overhang, creating the condition for a continuing financial market stress in the Euro-area. As disinflation and deflation push up the real interest rate, while growth and income declines, the leveraging problem becomes more severe and the economy risks shifting into a regime with high insolvency risk, high financial stress, rising credit spreads, possibly accompanied by strong adverse macroeconomic feedback loops. Investigating the consequences of those magnifying feedback loops, given the debt deflation, we demonstrate the possibility of unstable dynamics and downward spirals in the presence of regime-dependent macro feedback loops, using a theoretical model with decentralized matching mechanisms on both labor and financial markets. To explore the amplifying linkages between deflation, output, labor and financial markets, we employ a new solution procedure called NMPC to solve our models variants for out-of-steady-state dynamics. We empirically explore deflationary trends in Europe and employ a Global VAR (GVAR) model for a large euro area macro data set to estimate the impact of deflation on output. Moreover, we use a four variable Multi-Regime VAR (MRVAR) model with regime dependent IRs to study deflationary as well as well as the financial risk drivers in a MRVAR setting. New measures for financial risk drivers are employed and multi-regime IRs for output, inflation rates, interest rates and financial stress are explored. We also study regime changes in central macro relationships such as regime change in the credit - output link, the Phillips curve and in Okun's law.
    Date: 2016
  4. By: Bouoiyour, Jamal; Selmi, Refk
    Abstract: The possibility the UK might leave the European Union –also known as Brexit– is a major source of concern. This article seeks to assess the costs of uncertainty over Brexit by delving into the impacts of the attention given to this event (via Google Trends and Twitter) on UK, German and French equities, while controlling for the effects of global financial and economic factors. We use different econometric tools enable to measure the strength of Brexit’ effect as alternative to tail distributions (quantile regression approach) and spectral components (frequency domain causality test). Despite a heaviest awareness that it is difficult to properly quantify the costs of uncertainty over Brexit, this study provides evidence that the severity of Brexit’ impact was not uniform across the investigated equities. Germany suffered most if the British exit from Europe happens, followed by France and UK. These results are fairly robust among the different methods and the internet proxies used.
    Keywords: Brexit; uncertainty; social media; equities; UK; Europe.
    JEL: G0 G15
    Date: 2016–04–21
  5. By: Konstantin A. Kholodilin; Aleksei Netsunajev
    Abstract: The conflict between Russia and Ukraine that started in March 2014 resulted in bilateral economic sanctions imposed by Russia and Western countries, including the members of the euro area (EA). The paper investigates the impact of sanctions on the real side of the economy of Russia and the EA. Using an index that measures intensity of sanctions the effects of sanctions shocks are analyzed by the means of structural vector autoregression. The direct effect on GDP growth is documented for Russia but not for the EA. While, on average, 1.97% of the GDP quarter-on-quarter growth is estimated to be lost due to sanctions by Russia, the corresponding estimate for the aggregate EA is very small. On the contrary, the indirect effect through depreciation of the currency is shown to be more important for the EA.
    Keywords: Political conflict, sanctions, economic growth, Russia, euro area, structural vector autoregression
    JEL: C32 F51
    Date: 2016
  6. By: Swati Dhingra; Thomas Sampson
    Abstract: Suppose the UK votes to leave the European Union (EU): what happens next? This report outlines some of the options for the UK outside the EU and discusses the costs and benefits of each alternative.
    JEL: J1
    Date: 2016–02–12
  7. By: Engelbert Stockhammer (Kingston University); Walid Qazizada; Sebastian Gechert
    Abstract: The Great Recession 2007-09 has led to controversies around the role of fiscal policy. Academically this has translated into renewed interest in the effects of fiscal policy. Several studies have since suggested that fiscal multipliers are substantially larger in downswings or depressions than in the upswing. In terms of economic policy reactions countries have differed substantially in the fiscal stance. It is an important open question how big the impact of these policies on economic growth has been. The paper uses the regime-dependent multiplier estimates by Qazizada and Stockhammer (2015) and by Gechert and Rannenberg (2014) to calculate the demand effects of fiscal policy for Germany, USA, UK, Greece, Ireland, Italy, Portugal and Spain since 2008. This allows assessing to what extent fiscal policy explains different economic performances across countries. We find expansionary fiscal policy in 2008/09 in all countries, but since 2010 fiscal policies have differed. While the fiscal impact was roughly neutral in Germany, the UK, and the USA, it was large and negative in Greece, Ireland, Italy, Portugal, and Spain.
    Keywords: multiplier, fiscal policy, austerity, recession
    JEL: C36 E62
    Date: 2016–04
  8. By: Olivier Brossard (LEREPS - Laboratoire d'Etude et de Recherche sur l'Economie, les Politiques et les Systèmes Sociaux - UT1 - Université Toulouse 1 Capitole - UT2 - Université Toulouse 2 - Institut d'Études Politiques [IEP] - Toulouse - École Nationale de Formation Agronomique - ENFA); Susanna Saroyan (LEREPS - Laboratoire d'Etude et de Recherche sur l'Economie, les Politiques et les Systèmes Sociaux - UT1 - Université Toulouse 1 Capitole - UT2 - Université Toulouse 2 - Institut d'Études Politiques [IEP] - Toulouse - École Nationale de Formation Agronomique - ENFA)
    Abstract: We study at an individual level the prices that banks pay for liquidity, measured here by overnight rates charged for unsecured loans on the e-MID trading platform, which is an important and transparent money market for European banks. Using data from both before and within crisis sub-periods, we provide evidence that borrower's and lender's own liquidity status has a significant impact on overnight rates, both before and during the turmoil periods. We first review the literature focused on the role of liquidity risk in the recent interbank turmoil. We then implement an integrative LSDV estimation to assess the determinants of e-MID overnight rates. In these regressions, we put together measures of the three types of factors that have received theoretical and empirical support, namely, counterparty risk, liquidity factors and market imperfections. We find that even when counterparty risk and market imperfections are controlled for, banks with higher funding liquidity risk pay an interest rate premium. We show that this is probably explained by hoarding and short-squeezing behavior of liquidity-long banks. These phenomena disappeared when the ECB launched its full allotment policy in October 2008.
    Keywords: short-squeezing ,Funding liquidity,Liquidity risk,Overnight interest rates,hoarding
    Date: 2016

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