nep-eec New Economics Papers
on European Economics
Issue of 2016‒09‒04
eight papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Intraday dynamics of euro area sovereign credit risk contagion By Lubos Komarek; Kristyna Ters
  2. The Effect of Unconventional Fiscal Policy on Consumption Expenditure By Francesco D’Acunto; Daniel Hoang; Michael Weber
  3. What Caused the Great Recession in the Eurozone? By Hetzel, Robert L.
  4. The Complexity of Liquidity: The Extraordinary Case of Sovereign Bonds By Jacob Boudoukh; Jordan Brooks; Matthew Richardson; Zhikai Xu
  5. Bank Business Models at Zero Interest Rates By Andre Lucas; Julia Schaumburg; Bernd Schwaab
  6. Score-Driven Systemic Risk Signaling for European Sovereign Bond Yields and CDS Spreads By Rutger-Jan Lange; Andre Lucas; Arjen H. Siegmann
  7. Housing collateral and small firm activity in Europe By Ryan Niladri Banerjee; Kristian S Blickle
  8. Employment Protection, Investment in Job-Specific Skills, and Inequality Trends in the United States and Europe By Ruben Gaetani; Matthias Doepke

  1. By: Lubos Komarek; Kristyna Ters
    Abstract: We examine the role of the CDS and bond markets during and before the recent euro area sovereign debt crisis as transmission channels for credit risk contagion between sovereign entities. We analyse an intraday dataset for GIIPS countries as well as Germany, France and central European countries. Our findings suggest that, prior to the crisis, the CDS and bond markets were similarly important in the transmission of sovereign risk contagion, but that the importance of the bond market waned during the crisis. We find flight-to-safety effects during the crisis in the German bond market that are not present in the pre-crisis sample. Our estimated sovereign risk contagion was greater during the crisis, with an average timeline of one to two hours in GIIPS countries. By using an exogenous macroeconomic news shock, we can show that, during the crisis period, increased credit risk was not related to economic fundamentals. Further, we find that central European countries were not affected by sovereign credit risk contagion, independent of their debt level and currency.
    Keywords: sovereign credit risk, credit default swaps, contagion, spillover, sovereign debt crisis, panel VAR
    Date: 2016–07
  2. By: Francesco D’Acunto; Daniel Hoang; Michael Weber
    Abstract: Unconventional fiscal policy uses announcements of future increases in consumption taxes to generate inflation expectations and accelerate consumption expenditure. It is budget neutral and time consistent. We exploit a unique natural experiment for an empirical test of the effectiveness of unconventional fiscal policy. To comply with European Union law, the German government announced in November 2005 an unexpected 3-percentage-point increase in value-added tax (VAT), effective in 2007. The shock increased households' inflation expectations during 2006 and actual inflation in 2007. Germans' willingness to purchase durables increased by 34% after the shock, compared to before and to matched households in other European countries not exposed to the VAT shock. Income, wealth effects, or intratemporal substitution cannot explain these results.
    JEL: D12 D84 D91 E21 E31 E32 E52 E65
    Date: 2016–08
  3. By: Hetzel, Robert L. (Federal Reserve Bank of Richmond)
    Abstract: Since 2008, the Eurozone has undergone two recessions, which together constitute the "Great Recession." The combination of a decline in output and disinflation as well as a persistent decline in inflation suggests that contractionary monetary policy was one factor. This paper makes two methodological points. First, in analyzing the causes of the Great Recession, it is important to distinguish between credit and monetary policy. Second, a multiplicity of estimated models can "explain" the Great Recession. In practice, economists choose between models through an associated narrative that adds additional information about causation.
    JEL: E52 E58
    Date: 2016–08–23
  4. By: Jacob Boudoukh; Jordan Brooks; Matthew Richardson; Zhikai Xu
    Abstract: It is well-documented that government bonds with almost identical cash flows can trade at different prices. The explanation is that due to higher liquidity the most recently issued bond tends to trade at a premium to previously issued bonds. This paper analyzes the cross-section of bond spreads across developed countries over a 17-year time period. Indeed, liquidity has commonality across countries in the expected direction. However, the paper documents a novel finding that questions the standard view of liquidity. Under certain conditions, especially related to credit deterioration and flight to quality, new issue bond spreads tighten and can be negative. In other words, the liquid bonds become cheaper, not more expensive, relative to their less liquid counterparts. We offer an explanation based on price pressure and provide empirical support using data on net flows of investors in sovereign bonds. Of some interest, we are able to reconcile the differential behavior of bond spreads of the U.S. and Germany versus Belgium, Spain and Italy during the Eurozone crisis period.
    JEL: F3 G1 G12 G15
    Date: 2016–08
  5. By: Andre Lucas (VU University Amsterdam, the Netherlands); Julia Schaumburg (VU University Amsterdam, the Netherlands); Bernd Schwaab (European Central Bank, Germany)
    Abstract: We propose a novel observation-driven dynamic finite mixture model for the study of banking data. The model accommodates time-varying component means and covariance matrices, normal and Student's $t$ distributed mixtures, and economic determinants of time-varying parameters. Monte Carlo experiments suggest that units of interest can be classified reliably into distinct components in a variety of settings. In an empirical study of 208 European banks between 2008Q1--2015Q4, we identify six business model components and discuss how these adjust to post-crisis financial developments. Specifically, bank business models adapt to changes in the yield curve.
    Keywords: bank business models; clustering; finite mixture model; score-driven model; low interest rates
    JEL: C33 G21
    Date: 2016–08–29
  6. By: Rutger-Jan Lange (VU University Amsterdam, Erasmus University Rotterdam, the Netherlands); Andre Lucas (VU University Amsterdam, the Netherlands); Arjen H. Siegmann (VU University Amsterdam, the Netherlands)
    Abstract: We compute joint sovereign default probabilities as coincident systemic risk indicators. Instead of commonly used CDS spreads, we use government bond yield data which provide a longer data history. We show that for the more recent sample period 2008--2015, joint default probabilities based on CDS and bond yield data yield similar results. For the period 1987-2008, only the bond yield data can be used to shed light on European sovereign systemic stress. We also show that simple averages of rolling pairwise correlations do not always yield intuitive systemic risk indicators.
    Keywords: systemic risk; conditional default; credit default swaps; bond yields
    JEL: G01 G17 C32
    Date: 2016–08–29
  7. By: Ryan Niladri Banerjee; Kristian S Blickle
    Abstract: We investigate the importance of the housing-based collateral lending channel on firm borrowing, investment and employment. We focus on small firms in France, Italy, Spain and the United Kingdom. To identify a credit supply effect, as opposed to a home-equity driven demand effect, we compare activity in similar firms that differ by the degree of financial opacity, and therefore the degree of their reliance on collateral to overcome borrowing constraints. We find that changing house prices have a more pronounced effect on borrowing, investment and employment in financially more opaque firms. This relationship is particularly strong in southern Europe (Italy and Spain), where financial frictions are larger and the use of collateral more important.
    Keywords: firm financing, capital structure, housing collateral, employment
    Date: 2016–08
  8. By: Ruben Gaetani (Northwestern University); Matthias Doepke (Northwestern University)
    Abstract: Since the 1980s, the United States economy has experienced a sharp rise in education premia in the labor market, with the college premium going up by more than 30 percent. In contrast, most European economies witnessed a much smaller rise in the return to education, and in Germany, Italy, and Spain the college premium actually fell. In this paper, we argue that differences in employment protection can account for a substantial part of these diverging trends. We consider an environment where firms can invest in technologies that are complementary to experienced workers with long tenure, and workers can make corresponding investments in firm-specific skills. The incentive to undertake such investments interact with employment protection. Incentives are particularly strong if employment protection favors older workers and workers with long tenure, as is the case in the European countries where the college premium fell. We use a calibrated dynamic model that allows for different education levels, labor-market search, and investment in relationship-specific capital and skills to quantify the ability of this affect to account for diverging inequality trend in the United States and Europe.
    Date: 2016

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