nep-eec New Economics Papers
on European Economics
Issue of 2016‒05‒08
eleven papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Convergence Patterns in Sovereign Bond Yield Spreads: Evidence from the Euro Area By Nikolaos Antonakakis; Christina Christou; Juncal Cunado; Rangan Gupta
  2. EAGLE-FLI. A macroeconomic model of banking and financial interdependence in the euro area By Nikola Bokan; Andrea Gerali; Sandra Gomes; Pascal Jacquinot; Massimiliano Pisani
  3. A European Disease? Non-tradable inflation and real interest rate divergence By Sophie Piton
  4. Strengthening the role of local currencies in EU candidate and potential candidate countries By Windischbauer, Ulrich
  5. The Greek “Rescue†: Where Did the Money Go? An Analysis By Pablo G. Bortz
  6. Exchange Rate Pass-Through in the Euro Area By Rajmund Mirdala
  7. Should the marketing of subordinated debt be restricted/different in one way or the other? What to do in the case of mis-selling? By Götz, Martin R.; Tröger, Tobias
  8. Underinvestment and unemployment: the double hazard in the euro area By Nicos Christodoulakis; Christos Axioglou
  9. Common faith or parting ways? A time varying parameters factor analysis of euro-area inflation By Delle Monache,; Ivan Petrella; Fabrizio Venditti
  10. The banking sector and the Swiss financial account during the financial and European debt crises By Raphael Anton Auer; Cédric Tille
  11. Lost in translation? ECB's monetary impulses and financial intermediaries' responses By Beck, Günter Wilfried; Kotz, Hans-Helmut; Zabelina, Natalia

  1. By: Nikolaos Antonakakis (Department of Economics and Finance, University of Portsmouth; Department of Business and Management, Webster Vienna Private University); Christina Christou (University of Pireaus, Department of Banking & Financial Management, Greece); Juncal Cunado (University of Navarra, School of Economics, Spain); Rangan Gupta (Department of Economics, University of Pretoria)
    Abstract: This study examines the convergence patterns of Euro Area (EA) 17 countries’ sovereign bond yield spreads (relative to German bund) over the period of March 2002 to December 2015, by employing the convergence algorithm developed by Phillips and Sul (2007). The empirical findings suggest rejection of full convergence across the EA17 countries’ bond yields spreads, and the presence of a certain number of clubs. In particular, three subgroup convergence clubs emerge, with Cyprus, Spain, France, Greece, Ireland, Lithuania, Luxembourg, Latvia, Portugal and Slovenia in the first; Belgium, Italy and Malta in the second; and Austria, Finland, Netherlands and Slovakia in the third club. Moreover, there is also evidence that the first two clubs could be merged to form a larger convergence club. The transitional curves indicate that, despite short-run divergences, EU17 sovereign bond yield spreads tend to converge over the long, with the exception of those in Greece and Cyprus, indicating the strong attempts of most of the countries under investigation to adopt fiscal policies that eventually contribute to a convergence pattern.
    Keywords: Sovereign bond yield spreads, Club convergence, Euro Area
    JEL: C33 E61 G12 H77
    Date: 2016–03
  2. By: Nikola Bokan (European Central Bank); Andrea Gerali (Bank of Italy); Sandra Gomes (Bank of Portugal); Pascal Jacquinot (European Central Bank); Massimiliano Pisani (Bank of Italy)
    Abstract: We incorporate financial linkages in EAGLE, a New Keynesian multi-country dynamic general equilibrium model of the euro area (EA) by including financial frictions and country-specific banking sectors. In this new version, termed EAGLE-FLI (Euro Area and GLobal Economy with Financial LInkages), banks collect deposits from domestic households and cross-country interbank market and raise capital to finance loans issued to domestic households and firms. In order to borrow from local (regional) banks, households use domestic real estate whereas firmsuse both domestic real estate and physical capital as a collateral. These features – together with the full characterization of trade balance and real exchange rate dynamics and with a rich array of financial shocks – allow to properly assess domestic and cross-country macroeconomic effects of financial shocks. Our results support the views that (1) the business cycles in the EA can be driven not only by real shocks, but also by financial shocks, (2) the financial sector could amplify the transmission of (real) shocks, and (3) the financial/banking shocks and the banking sectors can be sources of business cycle asymmetries and spillovers across countries in a monetary union.
    Keywords: Banks, DSGE models, econometric models, financial frictions, open-economy macroeconomics, policy analysis
    JEL: E51 E32 E44 F45 F47
    Date: 2016–04
  3. By: Sophie Piton
    Abstract: This paper studies the contribution of real interest rate divergence to the dynamics of the relative price of non-tradables within Europe. Based on a model by De Gregorio et al. (1994), it shows that the real interest rate fall in the Euro Area (EA) periphery following the single currency's inception induced an increase in the relative price of non-tradable goods. Using a new dataset, it documents the dynamics of the tradable and the non-tradable sectors over 1995-2013 and the expansion of the non-tradable sector in the periphery before the euro crisis. It then carries out an econometric estimation for 11 EA countries over 1995-2013 and quantifies the contribution of the pure Balassa-Samuelson effect and the impact of the interest rate on non-tradable relative prices. Diverging evolution in the interest rate impacted greatly the evolution of non-tradable relative prices within the euro area over the period. In Greece, the fall in the real interest rate over 1995-2008 could explain almost half of the non-tradable price increase relative to the EA average, while in Germany the increase in the real interest rate might have contributed up to 7% of the decrease of the non-tradable price relative to the average of the EA.
    Keywords: Non-tradable prices;Balassa-Samuelson effect;Real interest rate
    JEL: F41 F45 E43
    Date: 2016–04
  4. By: Windischbauer, Ulrich
    Abstract: This paper deals with the phenomenon of high levels of unofficial euroisation in countries preparing for EU membership (Albania, Bosnia and Herzegovina, the former Yugoslav Republic of Macedonia, Serbia and Turkey). The challenges stemming from unofficial euroisation are particularly relevant for central banks as high degrees of euroisation reduce the effectiveness of monetary policy and create risks to financial stability. Unofficial euroisation in these countries is fuelled by legacies of inflation and macroeconomic imbalances, close economic and financial linkages with the euro area, as well as the perspective of EU membership. While euroisation (or, more generally, dollarisation) is typically a sticky phenomenon that is difficult to reverse, entrenched as it is in the behaviour and mind-set of economic agents, the paper finds - based also on the experience of countries outside the region - that there is a set of policies under the competence of domestic authorities which are conducive to strengthening the use of domestic currencies, even though efforts to bring down dollarisation or euroisation rates typically take a long time to show results. In this context, macroeconomic stabilisation is a necessary but not sufficient condition. It needs to be flanked by targeted prudential and regulatory measures, as well as efforts to develop local currency capital markets. Authorities in EU candidate and potential candidate countries have already engaged in such endeavours and euroisation rates have gone down to some extent in recent years, though at different levels and at an uneven pace. Nevertheless, further efforts are needed, while acknowledging that some specific factors like the strong presence of euro area headquartered banks in these countries as well as their EU accession perspective are conducive to euroisation. JEL Classification: E42, E52, E58, F31, F41, G28
    Keywords: bank regulation, capital markets, currency, dollarisation, euroisation, financial stability, monetary policy, prudential policy, South-East Europe
    Date: 2016–04
  5. By: Pablo G. Bortz (University of San Martín, Argentina)
    Abstract: This paper analyses the financial assistance provided to Greece in the first two rescue packages granted by the Troika (European Union, European Central Bank and IMF). It looks particularly carefully at claims by Sinn that a third of the public credit granted to Greece financed its current account deficit, while another third funded capital flight by Greek nationals, with only the remaining third used to pay creditors. The paper shows that Sinn inflates the assistance given to Greece by mixing several different concepts in the total. It also critically reviews the claim that the assistance was used to finance the current account deficit or capital flight by Greek citizens. Realistic accounting shows that 54% of the financial assistance provided to Greece was used to repay (foreign) debt, while another 21% was used to recapitalize Greek banks (some of which were owned by foreign institutions). Other claims about the rescue package are also analysed in relation to the treatment of Greek and foreign banking exposure to sovereign debt.
  6. By: Rajmund Mirdala
    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: 2016–04
  7. By: Götz, Martin R.; Tröger, Tobias
    Abstract: An important prerequisite for the efficiency of bail-in as a regulatory tool is that debt holders are able to bear the cost of a bail-in. Examining European banks' subordinated debt we caution that households may be investors in bail-in able bonds. Since households do not fulfil the aforementioned prerequisite, we argue that European bank supervisors need to ensure that banks' bail-in bonds are held by sophisticated investors. Existing EU market regulation insufficiently addresses mis-selling of bail-in instruments.
    Keywords: bail-in,BRRD,subordinated debt,EU market regulation
    Date: 2016
  8. By: Nicos Christodoulakis (Athens University of Economics and Business; Hellenic Observatory; London School of Economics); Christos Axioglou (Ministry of Finance, Greece)
    Abstract: An alarming legacy of the austerity programs in the euro area is the vast disinvestment that has taken place over the recent years, and especially so in the peripheral economies. Unless it is quickly reversed, disinvestment not only hinders long-term growth but also undermines the prospects of a gradual reduction of unemployment and risks further imbalances in, and threats to, the monetary union. Combining a neoclassical Diamond model with labour market imperfections, the paper shows that unemployment is a function of capital investment under either CES or Cobb-Douglas production functions. A cross-section estimate for the euro area economies confirms the theoretical findings.
    Keywords: euro area; investment; unemployment; capital-labour substitution; production function
    JEL: E22 E24
    Date: 2016–04
  9. By: Delle Monache, (Bank of Italy); Ivan Petrella (Department of Economics, Mathematics & Statistics, Birkbeck; Bank of England); Fabrizio Venditti (Bank of Italy)
    Abstract: We analyze the interaction among the common and country specific components for the inflation rates in twelve euro area countries through a factor model with time varying parameters. The variation of the model parameters is driven by the score of the predictive likelihood, so that, conditionally on past data, the model is Gaussian and the likelihood function can be evaluated using the Kalman filter. The empirical analysis uncovers significant variation over time in the model parameters. We find that, over an extended time period, inflation persistence has fallen over time and the importance of common shocks has increased relatively to the idiosyncratic disturbances. According to the model, the fall in inflation observed since the sovereign debt crisis, is broadly a common phenomenon, since no significant cross country inflation differentials have emerged. Stressed countries, however, have been hit by unusually large shocks.
    Keywords: inflation, time-varying parameters, score driven models, state space models, dynamics factor models.
    JEL: E31 C22 C51 C53
    Date: 2015–07
  10. By: Raphael Anton Auer; Cédric Tille
    Abstract: The US financial crisis and the later eurozone crisis have substantially impacted capital flows into and out of financial centers like Switzerland. We focus on the pattern of capital flows involving the Swiss banking industry. We first rely on balance-of-payment statistics and show that net banking inflows rose during the acute phases of the crises, albeit with a contrasting pattern. In the wake of the collapse of Lehman Brothers, net inflows were driven by a substantial retrenchment into the domestic market by Swiss banks. By contrast, net inflows from mid-2011 to mid-2012 were driven by large flows into Switzerland by foreign banks. We then use more detailed data from Swiss banking statistics which allow us to differentiate the situation across different banks and currencies. We show that, during the US financial crisis, the bank flows cycle was driven strongly by exposures in US dollars, and to a large extent by Swiss-owned banks. During the eurozone crisis, by contrast, the flight to the Swiss franc and move away from the euro was also driven by banks that are located in Switzerland, yet are foreign-owned. In addition, while the demand for the Swiss franc was driven by both foreign and domestic customers from mid-2011 to early 2013, domestic demand took a prominent role thereafter.
    Keywords: capital flows, safe haven, Switzerland, financial globalization, international banking.
    JEL: E51 G15 G21 F21 F32 F36 F65
    Date: 2016
  11. By: Beck, Günter Wilfried; Kotz, Hans-Helmut; Zabelina, Natalia
    Abstract: Non-bank (-balance sheet) based financial intermediation has become considerably more important over the last couple of decades. For the U.S., this trend has been discussed ever since the mid-1990s. As a consequence, traditional monetary transmission mechanisms, mainly operating through bank balance sheets, have apparently become less relevant. This in particular applies to the bank lending channel. Concurrently, recent theoretical and empirical work uncovered a "risk-taking channel" of monetary policy. This mechanism is not confined to traditional banks but has been found to operate also across the spectrum of financial intermediaries and intermediation devices, including securitization and collateralized lending/borrowing. In addition, recent empirical evidence suggests that the increasing importance of shadow-banking activities might have given rise to a so-called "waterbed effect". This is a mediating mechanisms, dampening or counteracting typically to be expected reactions to monetary policy impulses. Employing flow-of-funds data, we can document also for the Euro Area that a trend towards non-bank (not necessarily more 'market'-based) intermediation has occurred. This is, however, a fairly recent development, substantially weaker than in the U.S. Nonetheless, analyzing the response of Euro Area bank and nonbank financial intermediaries to monetary policy impulses, we find some notable behavioral differences between mainly deposit-funded and more 'market'-based financial intermediaries. We also detect, inter alia, the existence of a (still) fairly weak, but potentially policyrelevant, "waterbed" effect.
    Keywords: non-bank financial intermediation,interest-rate channel,credit channel,risk-taking channel of monetary policy,market-based financial intermediation,monetary transmission mechanism,waterbed effect
    Date: 2016

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