nep-eec New Economics Papers
on European Economics
Issue of 2016‒08‒21
twelve papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Unsecured and Secured Funding By Ranaldo, Angelo; Wrampelmeyer, Jan
  2. Cross-border Spillover Effects of Unconventional Monetary Policies on Swiss Asset Prices By Severin Bernhard; Till Ebner
  3. A Closer Look at EU Current Accounts By Mariarosaria Comunale
  4. Contagion in Eurozone Sovereign Bond Markets? The Good, the Bad and the Ugly By Cronin, David; Flavin, Thomas J.; Sheenan, Lisa
  5. VAT Evasion in Bulgaria: A General-Equilibrium Approach By Vasilev, Aleksandar
  6. Negative Interest Rate Policies: Sources and Implications By Arteta, Carlos; Kose, Ayhan; Stocker, Marc; Taskin, Temel
  7. Ambiguity and Time-Varying Risk Aversion in Sovereign Debt Markets By Christoph Große Steffen; Maximilian Podstawski
  8. A mechanism to regulate sovereign debt restructuring in the euro area By Andritzky, Jochen; Christofzik, Désirée I.; Feld, Lars P.; Scheuering, Uwe
  9. The euro zone crisis: What would John Maynard do? By Ehnts, Dirk
  10. Euro Area Imbalances: Measuring the Contribution of Expenditure Growth and Expenditure Switching By Enno Schröder
  11. Economic discourse and the European integration of financial infrastructures and financial markets By Krarup, Troels
  12. Are Euro-Area Corporate Bond Markets Irrelevant? The Effect of Bond Market Access on Investment By von Beschwitz, Bastian; Howells, Conor T.

  1. By: Ranaldo, Angelo; Wrampelmeyer, Jan
    Abstract: We provide the first joint analysis of the secured and unsecured money markets of the euro area using bank-level data. After the Lehman crisis, two important substitution mechanisms emerge: banks with higher credit risk offset reductions of unsecured borrowing with secured funding. Riskier banks replace unsecured lending by granting more secured loans. However, high leverage and reliance on short-term funding hamper banks' ability to substitute. Moreover, banks enduring money market strains contribute to the credit crunch. Overall, our findings suggest that the secured segment of the euro money market contributes to financial stability, mitigating systemic effects such as short-term funding strains and contagion.
    Keywords: Money markets, bank funding, short-term debt, financial crisis, counterparty risk, liquidity
    JEL: E42 E43 E58 G01 G21 G28
    Date: 2016
  2. By: Severin Bernhard; Till Ebner
    Abstract: Unconventional monetary policies (UMPs) by the Federal Reserve, the European Central Bank, the Bank of England and the Bank of Japan exert important spillover effects on asset prices in Switzerland if market anticipation of UMP announcements is properly accounted for. Using a broad event set and a long-term bond futures-based measure as a proxy for market anticipation of the announcements, we show that the unexpected part of those UMPs boost Swiss government and corporate bond prices, induce the CHF to appreciate, and dampen Swiss equity prices. Four extensions provide additional insights: First, the estimated effects are strongest for announcements by the ECB. Second, the impact on government bonds is largest for bonds with residual maturities of 7-10 years. Third, the impact of foreign UMP shocks on exchange rates and Swiss bond yields is less pronounced after the introduction of the EURCHF-floor by the Swiss National Bank on September 6, 2011. Fourth, the sign of spillover effects differs for positive and negative UMP surprises, but their strength does not. Our results hint at an important role played by both international portfolio re-balancing channels and international signalling channels in the transmission of foreign monetary policy shocks to Swiss asset prices.
    JEL: E52 E58 E65 F31 F42 G12
    Date: 2016
  3. By: Mariarosaria Comunale (Economics Department, Bank of Lithuania)
    Abstract: In this paper, we look at the determinants of current accounts in twenty-seven EU countries over the period 1994-2014. The twenty-seven countries of interest are divided into three sub-groups, namely: core, periphery and CEE new member states. We also assess the current accounts based on computed equilibrium values, and we provide a measure of misalignment for the medium run. As determinants we include capital flows as well as demographic, fiscal and relative development factors. The initial Net Foreign Asset position and oil balance seem to matter more in the core countries than in the periphery and CEE new member states. In contrast, the periphery and CEE new member states seem to be more strongly affected by capital flows. Fiscal balance negatively affects only the periphery, while an increase in government spending is positive for the current account for CEE new member states. In the past twenty years these misalignments have shown a cyclical behaviour in most EU countries, and the magnitude of the cycles themselves are highly heterogeneous across groups. Lastly, we compute an adjusted current account equilibrium, which tries to correct the equilibrium value by the role of expectations (proxied by IMF projections). This factor has more of an impact in the UK than in the euro-area countries.
    Keywords: Current account misalignments; foreign capital ?ows; European Union.
    JEL: F32 F31 C33
    Date: 2016–08–11
  4. By: Cronin, David (Central Bank of Ireland); Flavin, Thomas J. (Maynooth University); Sheenan, Lisa (Central Bank of Ireland)
    Abstract: We analyse the stability of linkages across Eurozone bond markets during the sovereign debt crisis. We distinguish between contagion and interdependencies as mechanisms for spreading the turmoil across bond markets. Using a three-regime Markov switching VAR, we identify two distinct phases of the crisis - the bad and the ugly - and find differences in shock transmission between them. Overall, evidence of contagion is scant and interdependence is the more common determinant of market comovements.
    Keywords: Eurozone sovereign debt crisis, contagion, Markov-switching VAR
    JEL: G01 G15
    Date: 2016–05
  5. By: Vasilev, Aleksandar
    Abstract: This paper utilizes an otherwise standard micro-founded general-equilibrium setup, which is augmented with a revenue-extraction mechanism to assess the magnitude of VAT evasion. The model is calibrated to Bulgaria after the introduction of the currency board (1999-2014), as one of the very few countries in Europe with a non-differentiated consumption tax rate, and an economy where VAT revenue makes almost half of total government tax revenue. A computational experiment performed within this setup estimates that on average, the size of evaded VAT is a bit more than one-fourth of output, an estimate which is in line with the figures provided in both Philip (2014) and the European Commission (2014). In addition, model-based simulations suggest that increases in spending on law and order could generate substantial welfare gains by decreasing VAT evasion.
    Keywords: VAT evasion,general equilibrium,Bulgaria
    JEL: D58 E26 H26 K42
    Date: 2016
  6. By: Arteta, Carlos; Kose, Ayhan; Stocker, Marc; Taskin, Temel
    Abstract: Against the background of continued growth disappointments, depressed inflation expectations, and declining real equilibrium interest rates, a number of central banks have implemented negative interest rate policies (NIRP) to provide additional monetary policy stimulus over the past few years. This paper studies the sources and implications of NIRP. We report four main results. First, monetary transmission channels under NIRP are conceptually analogous to those under conventional monetary policy but NIRP present complications that could limit policy effectiveness. Second, since the introduction of NIRP, many of the key financial variables have evolved broadly as implied by the standard transmission channels. Third, NIRP could pose risks to financial stability, particularly if policy rates are substantially below zero or if NIRP are employed for a protracted period of time. Potential adverse consequences include the erosion of profitability of banks and other financial intermediaries, and excessive risk taking. However, there has so far been no significant evidence that financial stability has been compromised because of NIRP. Fourth, spillover implications of NIRP for emerging market and developing economies are mostly similar to those of other unconventional monetary policy measures. In sum, NIRP have a place in a policy maker’s toolkit but, given their domestic and global implications, these policies need to be handled with care to secure their benefits while mitigating risks.
    Keywords: developing countries; emerging markets; event study; financial stability; negative yields; quantitative easing; bank profitability; Unconventional Monetary Policy
    JEL: E52 E58 E60
    Date: 2016–08
  7. By: Christoph Große Steffen; Maximilian Podstawski
    Abstract: This paper introduces changes in the level of ambiguity as a complementary source of time-varying risk aversion. We show in a consumption-based asset pricing model with simultaneously risky and ambiguous assets that a rise in the level of ambiguity raises investors' risk aversion. The effect is quantified in an application to European sovereign debt markets using a structural VAR to achieve identification in the data. We proxy for ambiguity using a measure of macroeconomic uncertainty and decompose empirically credit default swaps (CDS) for Spain and Italy into three shocks: fundamental default risk, risk aversion, and uncertainty. We find that shocks to uncertainty significantly increase international investors' risk aversion, accounting for about one fifth of its variation at a five week horizon, and have a significant and economically relevant impact on sovereign financing premia
    Keywords: Time-varying risk aversion, Ambiguity, Uncertainty, Sovereign debt, Identification via heteroscedasticity, Maxmin
    JEL: C32 D80 E43 G01 H63
    Date: 2016
  8. By: Andritzky, Jochen; Christofzik, Désirée I.; Feld, Lars P.; Scheuering, Uwe
    Abstract: To make the no-bailout clause credible and enhance the effectiveness of crisis assistance, a consistent institutional and legal framework is needed to ensure that private creditors contribute to crisis resolution. Getting activated as part of ESM crisis assistance, we propose a two-stage mechanism that allows to postpone the fateful distinction between liquidity and solvency crises: At the onset of a ESM programme, the framework demands an immediate maturity extension if the debt burden is high, followed by deeper debt restructuring if post-crises debt proves unsustainable. The mechanism is easily implemented by amending ESM guidelines and compelling countries to issue debt with Creditor Participation Clauses (CPCs). As debt is rolled over, the mechanism gradually phases in, leaving countries time to reduce debt. Given that private sector involvement reduces financing needs, the ESM could provide longer programmes and more time for reforms.
    Date: 2016
  9. By: Ehnts, Dirk
    Abstract: In his letter to US President Franklin D. Roosevelt Keynes (1933) wrote about "the technique of recovery itself". An increase in output is brought about by an increase in purchasing power, Keynes argues, which can come from three sectors: households, firms and government. Using the IS/MY macroeconomic model developed by Ehnts (2014), which features sectoral balances and endogenous money, the situation of some euro zone members is examined with a focus on the three techniques of recovery: increases in debt of the respective sectors as defined by Keynes. A fourth technique, an increase in spending by the rest of the world, is added. The conclusion is that the policy recommendation given by Keynes in his letter also holds for the euro zone at present: a rise in debt-financed government expenditure. Some reform at the institutional level in Europe would enable "the technique of recovery" to work via the TARGET2 payment system, which is organized along Keynes' International Clearing Union proposal and a solid foundation to build on.
    Keywords: deficit spending,fiscal policy,sectoral balances,Keynes,Keynesian economics
    JEL: E12 E32 E62
    Date: 2016
  10. By: Enno Schröder (Institute for New Economic Thinking, 300 Park Avenue South, New York, NY 10010; Department of Economics, New School for Social Research)
    Abstract: The article introduces a decomposition of trade flows that allows to measure expenditure-growth effects (changes in domestic and foreign final demand) and expenditure-switching effects (changes in the allocation of demand across domestic and foreign producers). The decomposition is applied to 11 euro members 1990-2014. Most countries, including Germany, recorded unfavorable expenditure-switching effects (demand shifted from domestic to foreign producers); expenditure switching was most unfavorable in Finland, France, and Italy. There is no correlation between unit labor cost growth and expenditure switching.
    Keywords: Competitiveness, euro area, external adjustment, expenditure switching, macroeconomic imbalances
    JEL: F4 F41 F45
    Date: 2016–08
  11. By: Krarup, Troels
    Abstract: European integration of financial markets appears to repeatedly encounter specific kinds of problems about the substance and limits of the notion of "the market" undergoing integration, and about the status and role of money, market infrastructures, and government within it. Moreover, these problems and the controversies around them parallel classical discussions in economic theory such as that between conceptions of the market as a frictionless space and as a process of competition. A "competitive conception of the market" is identified as producing these parallel problems and controversies in European market integration and economic theory because it implies a contradictory "integration of fragmentation". These themes and parallels can be specifically identified in a recent major project to integrate financial market infrastructures: a pan-European settlement platform - "Target2-Securities (T2S)" - to overcome existing fragmentation between the systems that perform the actual delivery of money and securities from financial transactions. Moreover, a close analysis of T2S answers a question that existing sociological and political economy approaches to European integration - focusing primarily on the interests and ideas of powerful players - struggle with: why T2S will become de facto a monopoly for the European Central Bank when early on in the integration process EU institutions emphasized an industry-led integration. Foucault's notion of "discursive formation" is employed to conceptualize these arguments.
    Keywords: European integration,financial infrastructures,financial markets,money,discourse analysis,Target2-Securities,European Central Bank
    Date: 2016
  12. By: von Beschwitz, Bastian; Howells, Conor T.
    Abstract: We compare how bond market access affects firms’ investment decisions in the United States and the euro area. Having a bond rating enables US corporations to invest more and undertake more acquisitions. In contrast, in the euro area, bond ratings have no effect on investment decisions. Similarly, firms with bond ratings have higher leverage in the United States, but not in the euro area. This difference may be due to euro-area firms getting sufficient financing from banks. Consistent with this explanation, euro-area bond ratings became more relevant for investment after the banking crisis of 2008, when banks reduced their lending to firms.
    Keywords: Mergers and acquisitions ; Bond ratings ; Investment ; Financing constraints
    JEL: G31 G32 G34
    Date: 2016–06–30

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