nep-eec New Economics Papers
on European Economics
Issue of 2016‒07‒02
twelve papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. The Effectiveness of a Fiscal Transfer Mechanism in a Monetary Union : A DSGE Model for the Euro Area By Verstegen, Loes; Meijdam, Lex
  2. A Dynamic Analysis of the Determinants of the Greek Credit Default Swaps By Maria do Rosario Correia; Christian Gokus; Andrew Hughes Hallett; Christian Richter
  3. The impact of unconventional monetary policy on the sovereign bank nexus within and across EU countries. A time-varying conditional correlation analysis By Giulio Cifarelli; Giovanna Paladino
  4. The European Central Bank's QE: A new hope By Garcia Pascual, Antonio; Wieladek, Tomasz
  5. Does slack influence public and private labor market interactions? By Lamo, Ana; Moral-Benito, Enrique; Pérez, Javier J.
  6. The use of short-term indicators and survey data for predicting turning points in economic activity: A performance analysis of the OECD system of CLIs during the Great Recession By Roberto Astolfi; Michela Gamba; Emmanuelle Guidetti; Pierre-Alain Pionnier
  8. Brexit: the impact on UK trade and living standards By Swati Dhingra; Gianmarco Ottaviano; Thomas Sampson; John Van Reenen
  9. Credit risk spillover between financials and sovereigns in the euro area during 2007-2015 By Vergote, Olivier
  10. The collateral channel of open market operations By Cassola, Nuno; Koulischer, François
  11. Sovereign risk and bank risk-taking By Ari, Anil
  12. Brexit: the final assessment By John Van Reenen

  1. By: Verstegen, Loes (Tilburg University, Center For Economic Research); Meijdam, Lex (Tilburg University, Center For Economic Research)
    Abstract: In this paper, we incorporate a transfer mechanism into a DSGE model with a rich fiscal sector to assess the effectiveness of fiscal transfers for a monetary union, in particular for the Economic and Monetary Union. Using a heterogeneous setup, the model is estimated for the North and the South of Europe using Bayesian methods. The results show that the transfer mechanism is effective in stabilizing the economy of the southern block of countries during the financial crisis, although the total welfare effect for the EMU is negative, though small. Ex ante, a transfer mechanism would be beneficial for both the North and the South in terms of welfare and stabilization purposes.
    Keywords: Two-country DSGE; Fiscal Federalism; Monetary union; fiscal policy
    JEL: E62 E63 F42
    Date: 2016
  2. By: Maria do Rosario Correia (Faculty of Management Technology, The German University in Cairo); Christian Gokus (Dept of Economics, University of Duisburg-Essen); Andrew Hughes Hallett (School of Public Policy, George Mason University); Christian Richter (Faculty of Management Technology, The German University in Cairo)
    Abstract: There is a consensus in finance literature that credit default swap spreads can be used to calculate the default probability of a government bond. The question is therefore what determines the credit default swap spreads and also what is a good indicator that predicts the future behaviour of this security spreads. In this paper, we investigate several variables which have been used in the past to predict the CDS spreads. We do this by analysing the behaviour of credit swaps spreads of Greek sovereign debt over the recent financial crisis. We take into account the changes on the data generating process as the crisis evolves. Moreover, we also investigate which part of the dynamic process of CDS spreads is explained by each possible determinant. In order to do so, we use a time-frequency approach. As it turns out, some determinants are better in explaining the short term behaviour of the CDS spreads whilst others explain the long term behaviour. We can also say by how many months one factor determines the behaviour of the CDS spreads for Greek sovereign debt. With this information we are able to determine the probability of default and what it depends upon.
    Keywords: National Eurozone Crisis, Government Default, Greek Default, Credit Default Swap, Default Probability
    JEL: C22 C58 G14 G15 H63 H68
    Date: 2016–03
  3. By: Giulio Cifarelli (Dipartimento di Scienze per l'Economia e l'Impresa); Giovanna Paladino
    Abstract: We investigate the time varying dynamics of the linkages between sovereign and bank default risks over the period 2006-2015, using the credit default swap (CDS) spreads of the bonds of major international banks and of sovereign issuers as indicators of risk within four major European countries. The nexus between bank risk in core countries and sovereign risk of peripheral countries is also analyzed, under the hypothesis that higher bond yields and preferential treatment of bond issued by euro sovereigns under Basle II may have favored the stocking of peripheral sovereign bonds in core bank portfolios. The use of a time-varying regime switching correlation analysis, the STCC-GARCH, allows to identify the economic variable behind the state shifts, the so-called “transition variable†, and to date precisely the changes in the size of the correlations that are due to shocks (viz. the Lehman crisis, the evolution of the Greek crisis) or to unconventional monetary policies such as Quantitative Easing and TLTRO.
    Keywords: CDS spreads, Unconventional monetary policy, STCC-GARCH correlation analysis
    JEL: E43 E52 F36 C32
    Date: 2016
  4. By: Garcia Pascual, Antonio; Wieladek, Tomasz
    Abstract: We examine the impact of the ECB’s QE on Euro Area real GDP and core CPI with a Bayesian VAR, estimated on monthly data from 2012M6 to 2016M4. We assess the total impact via a counter-factual exercise, country-by-country and through alternative transmission channels. QE anouncement shocks are identified with four different identification schemes as in Weale and Wieladek (2016). We find that in absence of the first round of ECB QE, real GDP and core CPI would have been 1.3% and 0.9% lower, respectively. The effect is roughly 2/3 times smaller than in the UK/US. Impulse response analysis suggests that the policy is transmitted via the portfolio rebalancing, the signalling, credit easing and exchange rate channels. Spanish real GDP benefited the most and Italian the least.
    Keywords: ECB unconventional monetary policy; Transmission mechanism.
    JEL: E50 E51 E52
    Date: 2016–06
  5. By: Lamo, Ana; Moral-Benito, Enrique; Pérez, Javier J.
    Abstract: We empirically analyze the impact of public employment and wages' shocks on private labor market outcomes by studying if policies operate differently in periods of economic slack than in normal times. We use local projection methods and focus on the Spanish and euro area aggregate cases. We find that the degree of economic slack is key to determine: (i) if public employment crowds-out private employment, and (ii) the degree and extent of public wage influence on the private sector. In addition, we find that the specific features of the economy also count. In the case of Spain, when fiscal consolidation is implemented at times of economic distress, the contractionary effects of public employment cuts appear more damaging for the economy than those of public wage cuts, while the opposite happens for the euro area as a whole. These differences are likely to be related to specific features of the labor markets in both cases. JEL Classification: E62, E65, H6, C3, C82
    Keywords: fiscal policies, public employment, unemployment, wages
    Date: 2016–04
  6. By: Roberto Astolfi; Michela Gamba; Emmanuelle Guidetti; Pierre-Alain Pionnier
    Abstract: After reviewing the main features of the statistics available in the MEI to inform policy makers, this paper discusses the performance of the CLIs during the Great Recession. This performance is assessed using both ex-post and real-time analyses. The analyses evaluate the ability of the OECD CLIs to anticipate the peak and the subsequent trough of the Great Recession in G7 countries, and the extent to which the initial signal has been maintained over time. Après un examen des principales caractéristiques des statistiques disponibles dans les PIE, ce document évalue la performance des Indicateurs Composites Avancés de l’OCDE pendant la Grande Récession. Des analyses ex-post et en temps réel sont menées pour apprécier la capacité de ces indicateurs à anticiper le pic et le creux de la Grande Récession dans les pays du G7, ainsi que la stabilité dans le temps des points de retournement détectés.
    Date: 2016–05–25
  7. By: Maria Gerhardt; Rudi Vander Vennet (-)
    Abstract: During the financial crisis, European governments implemented emergency rescue packages to support struggling banks. No less than 114 European banks benefited from goverment support in the period 2007 to 2013. We investigate the financial condition of banks before and after receiving state support by running logit regressions. Our results indicate that the equity ratio is the decisive indicator to predict distress. Bank-specific variables, such as loan provision, nonperforming loans and bank size also perform well in detecting bank bailouts. Surprisingly, the aided banks hardly improve their performance indicators after they have been rescued but maintain similar risk profiles/business models.
    Keywords: Bank bailout, state aid, financial crisis, logit analysis
    JEL: G21 G28
    Date: 2016–05
  8. By: Swati Dhingra; Gianmarco Ottaviano; Thomas Sampson; John Van Reenen
    Abstract: For over two years, a CEP research team has been studying the likely impact on the living standards of UK households of a referendum vote to leave the European Union. The first of three reports summarised here focuses on the impact of 'Brexit' through changing trade patterns.
    Keywords: trade, Brexit, living standards, UK economy, EU Referendum
    Date: 2016–06
  9. By: Vergote, Olivier
    Abstract: This paper presents time-varying contagion indices of credit risk spillover and feedback between 64 financials and sovereigns in the euro area, where spillover is identified based on bilateral Granger causality regressions. Over-identification of contagion between financials’ true credit risk and sovereign credit risk is avoided 1) by controlling for common factors; 2) by relying on fair value CDS spreads as the credit risk measure for financials. The results show that in particular the run-up to the financial crisis and the more intense phases of the crisis were associated with credit risk contagion and feedback. The institutions identified as most central to the network during those episodes are known to have played important roles during the crisis. Furthermore, the tense periods were short-lived and sovereign-to-bank spillover is found to normalise when policy makers took measures to stem the crisis. Finally, a proxy for the value of implicit government guarantees to the financial sector was still positive towards the end of the sample, suggesting the financial-sovereign nexus had not been removed yet by new bank resolution mechanisms and regulatory changes. JEL Classification: C45, E44, E65, G01, G13, G28, H81
    Keywords: bank-sovereign nexus, contagion, credit risk, feedback loops, Granger causality, spillover
    Date: 2016–04
  10. By: Cassola, Nuno; Koulischer, François
    Abstract: We build a model of collateral choice by banks that allows to recover the opportunity cost of collateral use and the access of banks to the interbank market. We estimate the model using country-level data on assets pledged to the European Central Bank from 2009 to 2011. The model can be used to quantify how changes in haircuts affect the collateral used by banks and can provide proxies for the funding cost of banks. Our results suggest for example that a 5% higher haircut on low rated collateral would have reduced the use of this collateral by 10% but would have increased the average funding cost spread between high yield and low yield countries by 5% over our sample period. JEL Classification: E52, E58, G01, F36
    Keywords: central bank, collateral, haircut, money market
    Date: 2016–05
  11. By: Ari, Anil
    Abstract: In European countries recently hit by a sovereign debt crisis, the share of domestic sovereign debt held by the national banking system has sharply increased, raising issues in their economic and financial resilience, as well as in policy design. This paper examines these issues by analyzing the banking equilibrium in a model with optimizing banks and depositors. To the extent that sovereign default causes bank losses also independently of their holding of domestic government bonds, under-capitalized banks have an incentive to gamble on these bonds. The optimal reaction by depositors to insolvency risk imposes discipline, but also leaves the economy susceptible to self-fulfilling shifts in sentiments, where sovereign default also causes a banking crisis. Policy interventions face a trade-off between alleviating funding constraints and strengthening incentives to gamble. Liquidity provision to banks may eliminate the good equilibrium when not targeted. Targeted interventions have the capacity to eliminate adverse equilibria. JEL Classification: E44, E58, F34, G21, H63
    Keywords: bank risk-taking, Eurozone, financial constraints, sovereign debt crises
    Date: 2016–04
  12. By: John Van Reenen
    Abstract: John Van Reenen summarises the economic impact of a vote to leave the EU.
    Keywords: EU Referendum, UK economy, UK politics, Brexit
    Date: 2016–06

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