nep-eec New Economics Papers
on European Economics
Issue of 2016‒08‒28
fourteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Impact of the asset purchase programme on euro area government bond yields using market news By De Santis, Roberto A.
  2. The role of price and cost competitiveness for intra- and extra-euro area trade of euro area countries By Bobeica, Elena; Christodoulopoulou, Styliani; Tkačevs, Olegs
  3. The fiscal and macroeconomic effects of government wages and employment reform By Pérez, Javier J.; Aouriri, Marie; Campos, Maria M.; Celov, Dmitrij; Depalo, Domenico; Papapetrou, Evangelia; Pesliakaitė, Jurga; Ramos, Roberto; Rodríguez-Vives, Marta
  4. Have monetary data releases helped markets to predict the interest rate decisions of the European Central Bank? By Jung, Alexander
  5. Explaining non-performing loans in Greece: a comparative study on the effects of recession and banking practices By Platon Monokroussos; Dimitrios D. Thomakos; Thomas A. Alexopoulos
  6. How competitiveness shocks affect macroeconomic performance across euro area countries By Staehr, Karsten; Vermeulen, Robert
  7. Violating the law of one price: the role of non-conventional monetary policy By Corradin, Stefano; Rodriguez-Moreno, Maria
  8. Bond risk premia, macroeconomic factors and financial crisis in the euro area By Garcí­a, Juan Angel; Werner, Sebastian E. V.
  9. Labour market modelling in the light of the financial crisis By Lafourcade, Pierre; Gerali, Andrea; Brůha, Jan; Bursian, Dirk; Buss, Ginters; Corbo, Vesna; Haavio, Markus; Håkanson, Christina; Hlédik, Tibor; Kátay, Gábor; Kulikov, Dmitry; Lozej, Matija; Micallef, Brian; Papageorgiou, Dimitris; Vanhala, Juuso; Zeleznik, Marin
  10. Credit spreads, economic activity and fragmentation By De Santis, Roberto A.
  11. VAT multipliers and pass-through dynamics By Simon Voigts; ;
  12. A portfolio demand approach for broad money in the euro area By Jung, Alexander
  13. Brexit and the Finnish Economy By Lehmus, Markku; Suni, Paavo
  14. On the Causes of Brexit By Agust Arnorsson; Gylfi Zoega

  1. By: De Santis, Roberto A.
    Abstract: Assessing the impact of the Asset Purchase Programme (APP) by the European Central Bank (ECB) on euro area sovereign yields is challenging, because the monetary policy announcement in January 2015 was already implicitly communicated to the market in the second half of 2014. Therefore, to identify the APP for the euro area, we rely upon Bloomberg news on euro area APP. The econometric results suggest that the impact of APP on euro area long-term sovereign yields is sizeable, albeit the programme was announced at a time of low fi?nancial distress. Most of the impact took place before the purchases took place with the vulnerable countries bene?fiting most. JEL Classification: E43, E52, E58, G14
    Keywords: APP, quantitative easing, sovereign yields
    Date: 2016–07
  2. By: Bobeica, Elena; Christodoulopoulou, Styliani; Tkačevs, Olegs
    Abstract: This paper studies the importance of price and cost competitiveness for intra- and extra-euro area trade flows of euro area countries. A standard error correction framework shows that price competitiveness is a relatively more important driver of trade flows outside the euro area as compared to those within the monetary union, especially for exports, that tend to be more sensitive to relative prices than imports. We consider various measures of competitiveness and conclude that it is difficult to single out one that outperforms the others; based on an encompassing test, measures based on labour costs appear to contain relatively more information for trade flows, particularly for exports outside the euro area. The key policy implication is that to adjust competitiveness disequilibria within the monetary union, measures besides those aimed at price and cost adjustments should be pursued in the deficit countries, such as structural policies fostering non-price competitiveness. JEL Classification: F14, F15, F41
    Keywords: error correction model, intra- and extra-euro area trade, price and cost competitiveness
    Date: 2016–07
  3. By: Pérez, Javier J.; Aouriri, Marie; Campos, Maria M.; Celov, Dmitrij; Depalo, Domenico; Papapetrou, Evangelia; Pesliakaitė, Jurga; Ramos, Roberto; Rodríguez-Vives, Marta
    Abstract: This paper examines the overall macroeconomic impact arising from reform in government wages and employment, at times of fiscal consolidation. Reform of these two components of the government wage bill appeared necessary for containing the deterioration of the public finances in several EU countries, as a consequence of the financial crisis. Such reforms entailed in some instances, but not always, the implementation of cost-cutting measures affecting the government wage bill, as part of broader consolidation packages that typically hinged more heavily on other fiscal instruments, like public investment. While such measures have adverse short-term macroeconomic effects, public wage bill restraining policy changes present the idiosyncrasy that they can yield medium- to longer-term benefits due to possible competitiveness and efficiency gains through their impact on labour market dynamics. This paper provides some evidence of such medium- to long-run effects, based on a wealth of micro and macro data in the euro area and the EU. It concludes that appropriately designed government wage bill moderation could indeed produce positive dividends to the economy, which depend on certain country-specific conditions. These gains can be reinforced by relevant fiscal-structural reforms. JEL Classification: H50, E62, J45
    Keywords: fiscal consolidation, fiscal policies, labour market, public employment, public wages
    Date: 2016–08
  4. By: Jung, Alexander
    Abstract: This paper examines whether monetary data releases by the European Central Bank (ECB) have provided markets with additional clues about the future course of its monetary policy. It conducts a novel econometric approach based on a combination of an Ordered Probit model explaining future policy rate changes (sample 2000 to 2014) and the Vuong test for model selection. Overall, our results suggest that information contained in press releases on monetary developments for the euro area has helped markets in forming their expectations on the next monetary policy decision. JEL Classification: C34, D78, E52, E58
    Keywords: communication, monetary analysis, predictability, Probit model, Vuong test
    Date: 2016–07
  5. By: Platon Monokroussos; Dimitrios D. Thomakos; Thomas A. Alexopoulos
    Abstract: Using a new dataset of macroeconomic and banking-related variables we attempt to explain the evolution of “bad” loans in Greece over the period 2005-2015. Our findings suggest that the primary cause of the sharp increase in non-performing loans (NPLs) following the outbreak of the sovereign debt crisis can be mainly attributed to the unprecedented contraction of domestic economic activity and the subsequent rise in unemployment. Furthermore, our results offer no empirical evidence in support of a range of examined hypotheses assuming overly aggressive lending practices by major Greek credit institutions or any systematic efforts to boost current earnings by extending credit to lower credit quality clients. We find that the transmission of macroeconomic shocks to NPLs takes place relatively fast, with the estimated magnitude of the respective responses being broadly comparable with that documented in some earlier studies for other euro area periphery economies. Overall, our results support a swift implementation of reforms agreed with official lenders in the context of the new (3rd) bailout programme. These envisage the modernization the county’s private sector insolvency framework and the creation of a more efficient model for the management of NPLs. A vigorous implementation of these reforms is key for allowing a resumption of positive credit creation, by freeing up valuable resources that are currently trapped in unproductive sectors of the domestic economy. This, in turn, would facilitate a speedier return to positive economic growth and a gradual reduction in unemployment.
    JEL: N0
    Date: 2016–08
  6. By: Staehr, Karsten; Vermeulen, Robert
    Abstract: This paper considers the short-term effects of competitiveness shocks on macroeconomic performance in the euro area. Vector autoregressive models are estimated on quarterly data from 1995 to 2013 for individual countries and the whole euro area. The results show that competitiveness shocks help to explain subsequent GDP developments in most countries but have little explanatory power for the current account balance and domestic credit. These results apply for all of the competitiveness measures considered, but a non-traditional competitiveness measure accounting for quality differences fares better in some cases. The effects of the competitiveness measures vary substantially across the countries in the euro area, which likely reflects their different economic structures and institutions. This heterogeneity suggests that policy measures seeking to improve competitiveness may have very different effects on economic performance and financial stability in different countries. JEL Classification: E32, E61, F32
    Keywords: competitiveness, euro area, macroeconomic variables, transmission
    Date: 2016–07
  7. By: Corradin, Stefano; Rodriguez-Moreno, Maria
    Abstract: We document that a large yield spread, a basis, developed between USD- and EUR-denominated comparable bonds issued by the same euro area country over the 2008 – 2013 period. We find evidence that the basis varies over time, depending on liquidity withdrawn by strongly-constrained banks from the ECB and haircuts applied in the repo market, on the one hand, and the collateral policy and the liquidity supply conditions determined by the ECB, on the other. Overall, ECB collateral and liquidity factors explain a relevant share of the total variation in the basis and help to explain cross country dispersion in the basis. JEL Classification: G01, G12
    Keywords: financial frictions, law of one price, margin constraints, non-conventional monetary policy
    Date: 2016–07
  8. By: Garcí­a, Juan Angel; Werner, Sebastian E. V.
    Abstract: This paper investigates the power of macroeconomic factors to explain euro area bond risk premia using (i) a large dataset that captures the nowadays data-rich environment (ii) the Elastic Net variable selection. We find that macroeconomic factors, in particular economic activity and sentiment indicators, explain 40% of the variability of risk premia before the crisis, and up to 55% during the financial crisis, and both for core countries (from 40% to 60%) and periphery countries (from 35% to 44%). Moreover, macroeconomic factor models clearly outperform financial indicators like the CP-factor and credit default swap (CDS) premia, even in periods of significant market turbulence. JEL Classification: E43, E44, G01, G12, C52, C55
    Keywords: bond risk premium, financial crisis, macro factors, model selection, variable selection
    Date: 2016–07
  9. By: Lafourcade, Pierre; Gerali, Andrea; Brůha, Jan; Bursian, Dirk; Buss, Ginters; Corbo, Vesna; Haavio, Markus; Håkanson, Christina; Hlédik, Tibor; Kátay, Gábor; Kulikov, Dmitry; Lozej, Matija; Micallef, Brian; Papageorgiou, Dimitris; Vanhala, Juuso; Zeleznik, Marin
    Abstract: This paper revisits the empirical relationship between unemployment and output, and its evolution following the financial crisis of 2008, with the aim of drawing potential consequences for labour market modelling strategies in place within the European System of Central Banks (ESCB). First, the negative correlation between output and unemployment (Okun’s law) at cyclical frequencies is found to be a robust feature of macro data across time, countries and identification schemes. Focusing on the euro area, the financial distress seems to have altered the dynamics of output and unemployment mainly at lower frequencies, interpreted as trend developments by the statistical filters used in the analysis. Looking at the implications for modelling strategies, we propose an extension of the standard labour search and matching model in which financial frictions impinge directly on the labour market rather than on the capital market, opening the way to protracted and lagged response of employment after a “financial” crisis. In terms of policy implications, the importance of the interplay between financial and labour market frictions in trend developments should be read as strong support for an ambitious structural reform agenda in Europe, so as to make our labour (and goods) markets more flexible and resilient. JEL Classification: E1, E32, J64
    Keywords: financial crisis, labour market, macroeconomic models of the labour market, output, unemployment
    Date: 2016–08
  10. By: De Santis, Roberto A.
    Abstract: Credit spreads may be jointly driven by developments that are orthogonal to the current state of the economy. We show that this unobserved systematic component is demanded to hedge against adverse economic fl?uctuations. Using either yield-to-maturity spreads or asset swap spreads for 2345 Eurobonds across euro area non-fi?nancial industries, we estimate a market-wide relative excess bond premium - a function of the unobserved systematic component -, which can predict real economic activity, the stock market and survey-based economic sentiment. This premium was highly negative between March 2003 and June 2007 in all bond segments and turned positive since then up to the launch of the 3-years long term re?financing operations in December 2011, predicting the ?financial crisis and the two recessions. Finally, using the countries?excess bond premia, we fi?nd that fragmentation risk increased sharply after Lehman?s bankruptcy and during the sovereign debt crisis. JEL Classification: C32, F36, G12, G15
    Keywords: corporate credit spreads, forecasts, fragmentation, sentiment
    Date: 2016–07
  11. By: Simon Voigts; ;
    Abstract: To quantify fiscal multipliers in Eurozone countries, ECB, European Commission and IMF draw heavily on large-scale DSGE models. In these models, the value added tax (VAT) is implemented as consumption tax, implying essentially full contemporaneous pass-through of changes in the tax liability to consumers. However, empirical evidence suggests that VAT pass-through in Europe occurs only gradually. To investigate how realistic pass-through dynamics affect VAT multipliers, a DSGE model is augmented by a retail sector, which allows to replicate empirical pass- through estimates. The resulting short-run multipliers are dramatically smaller than those from a consumption tax, suggesting systematic over- estimation in institutional research.
    Keywords: Fiscal multipliers, value added tax, tax pass-through, DSGE models.
    JEL: E62
    Date: 2016–08
  12. By: Jung, Alexander
    Abstract: The aim of the paper is to reassess the issue of money demand stability by estimating a portfolio demand approach for broad money M3 in the euro area covering the sample 1999 to 2013. The question is relevant, since in view of the massive shocks observed since the start of the financial crisis in 2007 relationships may have changed. Overall, the paper finds that the main components of euro area M3 are largely stable and can be explained by fundamental factors such as a transaction variable and opportunity costs. Nevertheless, the analysis detects some instabilities originating from the demand for currency in circulation linked to the euro cash changeover and for marketable instruments in an environment of very low interest rates. JEL Classification: C22, C52, E41
    Keywords: cointegration analysis, components of M3, financial crisis, money demand stability
    Date: 2016–07
  13. By: Lehmus, Markku; Suni, Paavo
    Abstract: Leaving the EU reduces the UK output significantly relative to the baseline in all three trade scenarios (EEA, FTA and WTO) analyzed in the paper. The WTO scenario assumes the loosest links with the EU and biggest barriers to trade and hence, it implies the greatest negative impact on the UK economy, whereas the negative impact is the smallest in the EEA scenario. Brexit affects the Finnish economy via the weakening British economy along with its global impacts. Nevertheless, the effects on the Finnish economy seem to be to some extent more positive than what is observed in analyzed countries. The better development is due to the improved price competitiveness born by adjustments in the effective exchange rates and, also, a favorable combination of relevant trade partners, comprising for instance Russia and China that are relatively immune to the negative effects of Brexit. After the negative short-run hit caused by Brexit, the Finnish export industries are able to win new market shares from the UK industries. This simulation result concerning the long-run development looks very optimistic for Finland. It does not take into account the possible negative effects of Brexit on the EU integration process that may disrupt the single market. For these reasons, there is a substantial probability for more negative effects on the Finnish economy as well.
    Date: 2016–08–23
  14. By: Agust Arnorsson (University of Iceland); Gylfi Zoega (University of Iceland; Birkbeck, University of London)
    Abstract: We analyse the voting pattern in the June 23rd referendum on the continued participation of the United Kingdom in the European Union and evaluate the reasons for the results. We find that regions where GDP per capita is low, a high proportion of people have low education, a high proportion is over the age of 65 and there is strong net immigration are more likely to be apprehensive of the E.U., consider the enlargement of the E.U. as having gone too far, be suspicious of immigrants and not want them as neighbours and, most importantly, to vote for Brexit. The fear of immigration does not seem to be fully justified in terms of the literature on the labour market effects of immigrants in the UK. Looking at the response of the sterling exchange to poll numbers we find that investors appear to view Brexit as a negative event.
    Keywords: Brexit referendum, European Union.
    JEL: E24 J6
    Date: 2016–08

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