nep-eec New Economics Papers
on European Economics
Issue of 2016‒05‒14
ten papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Is there an alternative way to avoid another eurozone crisis to the Five Presidents' Report? By Wickens, Michael R.
  2. Easier said than done? Reforming the prudential treatment of banks� sovereign exposures By Michele Lanotte; Giacomo Manzelli; Anna Maria Rinaldi; Marco Taboga; Pietro Tommasino
  4. Network Dependence in the Euro Area Money Market By Rünstler, Gerhard
  5. Fiscal Consolidation, Public Debt and Output Dynamics in the Euro Area: lessons from a simple model with time-varying fiscal multipliers By Christophe Blot; Marion Cochard; Jérôme Creel; Bruno Ducoudré; Danielle Schweisguth; Xavier Timbeau
  6. How can it work ? On the impact of quantitative easing in the Eurozone By Roberto Tamborini; Francesco Saraceno
  7. "Maximizing Price Stability in a Monetary Economy" By Warren Mosler; Damiano B. Silipo
  8. The macroeconomics effects of the implementation of the euro in Poland in relation to the experience of other countries By Bajan Bartlomiej
  9. Assessing Euro Crises from a Time Varying International CAPM Approach By Richard T. Baillie; Dooyeon Cho
  10. Dutch disease, real effective exchange rate misalignments and their effect on GDP growth in the EU By Mariarosaria Comunale

  1. By: Wickens, Michael R.
    Abstract: The EU Commission's Five Presidents' Report proposes new rules for the eurozone covering fiscal policy, banking and financial markets designed to avert another eurozone crisis. This paper examines the causes of the current eurozone crisis and discusses whether the Report's proposals are likely to succeed. It is argued that the main causes of the crisis were EMU and the failure of financial markets to price risk correctly. It is claimed that the Report may not solve these problems. Having already lost their monetary policy instrument, the Report's fiscal proposals would remove their fiscal policy instrument too and deprive countries of the means of economic stabilisation. The proposals would also transfer to an undemocratic and unaccountable Commission important national competences.
    Keywords: eurozone crisis; financial markets; Fiscal policy; Monetary policy; pricing risk
    JEL: E52 E61 E63
    Date: 2016–04
  2. By: Michele Lanotte (Bank of Italy); Giacomo Manzelli (Bank of Italy); Anna Maria Rinaldi (Bank of Italy); Marco Taboga (Bank of Italy); Pietro Tommasino (Bank of Italy)
    Abstract: In the aftermath of the euro-area sovereign debt crisis, several commentators have questioned the favourable treatment of banks� sovereign exposures allowed by the current prudential rules. In this paper, we assess the overall desirability of reforming these rules. We conclude that the microeconomic and macroeconomic costs of a reform could be sizeable, while the benefits are uncertain. Furthermore, we highlight considerable implementation issues. Specifically, it is widely agreed that credit ratings of sovereigns issued by rating agencies present important drawbacks, but sound alternatives still need to be found; we argue that consideration could be given to the use of quantitative indicators of fiscal sustainability, similar to those provided by international bodies such as the IMF or the European Commission.
    Keywords: sovereign risk, prudential regulation, sustainability of public finances
    JEL: E58 G21 G28 H63
    Date: 2016–04
  3. By: Ulrich Heilemann (Universität Leipzig); Susanne Schnorr-Bäcker (Statistisches Bundesamt)
    Abstract: Given that the Great Recession in Germany was neither predicted nor identified at the time, this paper examines whether data available could have helped to predict or identify the crisis in real time. We inspect forecasts published during April–December 2008 by 12 major institutions, for available data: real-time data from official statistics for Germany and the European Union, major surveys, and indicators. Although annual real GDP forecasts for 2008 were rather accurate, forecasters failed to observe the onset of the recession in Q2 2008, though from May onward, an increasing amount of data—neither ambiguous nor misleading—indicated that the economy was in recession or would likely enter one soon. Nevertheless, forecasters recognised the recession only in mid-November, when the country was already seven months into the recession, thereby confirming forecasters’ ‘low priors about the likelihood of a recession’.
    Keywords: Forecast accuracy; Great Recession; real-time analysis; data processing
    JEL: C53 E32 E37
    Date: 2016–02
  4. By: Rünstler, Gerhard
    Abstract: I estimate network dependence effects in the euro area unsecured overnight interbank market during the ?financial crisis. I use linear spatial regressions to estimate the dependence of individual banks?trading volumes (and interest rates) on the trading volumes (and interest rates) of their network neighbours. Neighbours are de?fined from past trading relations. I ?find that banks?net lending volumes and lending-borrowing interest rate spread depend negatively on their neighbours? respective outcomes. By contrast, there arise positive effects for total trading volume and borrowing rates. Overall, however, these effects are small and signi?ficant only in periods of market turmoil or of major policy interventions. The results suggest that neighbours act as a buffer in absorbing idiosyncratic liquidity shocks. JEL Classification: C21, E42
    Keywords: euro area money markets, financial crisis, network analysis, spatial regressions
    Date: 2016–03
  5. By: Christophe Blot (OFCE); Marion Cochard (Banque de France); Jérôme Creel (OFCE); Bruno Ducoudré (OFCE (OFCE)); Danielle Schweisguth (OFCE); Xavier Timbeau (OFCE)
    Abstract: EMU countries have engaged in fiscal consolidation since 2011. This paper deals with the public debt and output dynamic consequences of this strategy. To this end, we develop a simple macroeconomic model of the Euro area, where fiscal multiplier is time-varying. Recent empirical evidence has indeed shown that fiscal multipliers were higher in time of crisis. We then analyze the ability of EMU countries to comply with the new fiscal rules on public debt. The path of public debt and output gap is simulated according to different hypotheses related to fiscal multiplier, monetary policy and hysteresis effects. Not all EMU countries would be able to reach a 60 % debt-to-GDP ratio in 2032. An alternative strategy may be to spread austerity in order to report part of consolidation to periods where the fiscal multiplier will be weaker. The gain of spreading austerity may yet be partly offset by higher risk premium. There is then a need to find institutional arrangements to avoid panics in the sovereign debt markets. Finally, it is shown that it would not be very efficient to implement an expansionary fiscal policy in Germany in order to balance austerity in the Euro area. Since output gap is nearly closed in Germany, the multiplier effect of a positive fiscal stance would be low and spillover effects would not be significant.
    Keywords: Fiscal consolidation; Fiscal multiplier; Public debt; Macroeconomic Performance
    Date: 2014–11
  6. By: Roberto Tamborini; Francesco Saraceno (OFCE)
    Abstract: How can quantitative easing (QE) work in the Eurozone (EZ)? We model the EZ as the aggregate of two countries characterised by New Keynesian output and inflation equations with a Tobinian money market equation that determines each country's interest rate as a spread above the common policy rate. High spreads determine negative output gaps and deflationary pressure. With the ECB policy rate at the zero lower bound, QE expands money supply throughout the EZ. We show that QE, if large enough, can indeed be effective by reducing country spreads and the ensuing output gaps. However, zero output and deflation gaps can be obtained for the EZ on average, but not for all single countries unless fully symmetric conditions are met. Therefore fiscal accommodation at the country level should also intervene, and we conclude that the coordination of fiscal and monetary policies is of paramount importance.
    Keywords: Monetary policy; European Central Bank; Deflation; Zero-lower-Bound; Fiscal Policy
    JEL: E3 E4 E5
    Date: 2016–05
  7. By: Warren Mosler; Damiano B. Silipo
    Abstract: In this paper we analyze options for the European Central Bank (ECB) to achieve its single mandate of price stability. Viable options for price stability are described, analyzed, and tabulated with regard to both short- and long-term stability and volatility. We introduce an additional tool for promoting price stability and conclude that public purpose is best served by the selection of an alternative buffer stock policy that is directly managed by the ECB.
    Keywords: European Central Bank; Monetary Policy Tools and Price Stability; Buffer Stock Policy
    JEL: E52 E58
    Date: 2016–04
  8. By: Bajan Bartlomiej (Poznan University of Life Sciences)
    Abstract: In the chapter attempts have been taken to assess the potential impact of Polish accession to the euro zone. The analysis covers costs and benefits of monetary integration which are mostly pointed in literature, alluding to the experience of European Union countries. The analysis covers the years 1996-2004. A comparison was made between countries which have adopted the euro in 1999, and those that remained with the national currencies. There are differences between these two groups of countries in increments of GDP per capita, since the introduction of the euro in paper form, despite an earlier convergence of this indicator, however much smaller differences occurred in the case of the inflation rate. Both groups of countries have recorded a significant increase in foreign trade turnover since the inception of the euro area. The data used in the analysis come from the European Statistical Office (Eurostat) and the United Nations Conference on Trade and Development (UNCTAD).
    Keywords: monetary union; euro zone
    JEL: E02 E52 E59 F45
    Date: 2016–05
  9. By: Richard T. Baillie (Department of Economics, Michigan State University, USA; School of Economics and Finance, Queen Mary University of London, UK; The Rimini Centre for Economic Analysis, Italy); Dooyeon Cho (Department of Economics, Sungkyunkwan University, Seoul, Republic of Korea)
    Abstract: This paper initially reviews the current empirical literature on the Euro exchange rate. We consider the relationship between the euro and other floating currencies in terms of excess returns on bond markets and also the relationship between the euro-dollar and the US and European equity markets. One novelty in the paper is to consider the variation in the euro-dollar rate from an international capital asset pricing model (CAPM) perspective. The second new innovation is to use a kernel weighted time varying parameter regression approach which allows structural parameters and risk premium terms to evolve over time. We find evidence that the euro-dollar rate is substantially influenced by equity markets in the US and in the Eurozone.
    Date: 2016–02
  10. By: Mariarosaria Comunale
    Abstract: In this article we study the impact of real effective exchange rate misalignments, based on determinants, including different types of foreign capital inflows, on GDP growth in the EU. This can provide a useful contribution to understanding the causal link between inflows, real effective exchange rate disequilibria and GDP growth during both the boom and the crisis period. For this analysis, we use a panel of 27 EU countries for the period 1994-2012, with annual frequency. We find that the core countries have been mostly undervalued from the crisis onwards, while the periphery (excluding Ireland) were overvalued starting from 2003-2004, as expected. Concerning the new Member States, these are persistently overvalued for the entire time span. The results seem to be generally driven by the inflows of banking loans more than by FDIs or portfolio investments. In the second stage, we study the influence of exchange rate misalignments and volatilities on growth. We argue that the real effective exchange rate misalignments associated with the inflows have been a further cause for decline in GDP, in a long-run perspective, while they do not play a role in the short run. The exchange rate volatilities and the undervaluation dummy are not robust in affecting GDP growth, while spillovers and global factors seem to matter in all the specifications both in the short and long run.
    Keywords: real effective exchange rate, behavioural effective exchange rate, foreign capital inflows, FDIs, Dutch disease, GDP growth, European Union
    JEL: F31 F43 C23
    Date: 2016–05

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