nep-eec New Economics Papers
on European Economics
Issue of 2016‒09‒18
twenty-one papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Quantitative Easing in the Euro Area: The Dynamics of Risk Exposures and the Impact on Asset Prices. By R. S.J. Koijen; F. Koulischer; B. Nguyen; M. Yogo
  2. Capital and labour (mis)allocation in the euro area: Some stylized facts and determinants By Elisa Gamberoni; Claire Giordano; Paloma Lopez-Garcia
  3. Measuring the Natural Rate of Interest : International Trends and Determinants By Holston, Kathryn; Laubach, Thomas; Williams, John C.
  4. Risk Premiums in Slovak Government Bonds By Ludovit Odor; Pavol Povala
  5. Is the ECB unconventional monetary policy effective? By Inês Pereira
  6. The performativity of potential output: Pro-cyclicality and path dependency in coordinating European fiscal policies By Philipp Heimberger; Jakob Kapeller
  7. A Welfare Analysis of Macroprudential Policy Rules in the Euro Area By Jean-Christophe Poutineau; Gauthier Vermandel
  8. The evolution of bad debts in Italy during the global financial crisis and the sovereign debt crisis: a counterfactual analysis By Alessandro Notarpietro; Lisa Rodano
  9. Has the wage Phillips curve changed in the euro area? By Guido BUlligan; Eliana Viviano
  10. Aging, (Pension) Reforms and the Shadow Economy in Southern Europe By Daniel Baksa; Zsuzsa Munkacsi
  11. Market and Political Power Interactions in Greece:An Empirical Investigation By Tryphon Kollintzas; Dimitris Papageorgiou; Efthymios Tsionas; Vanghelis Vassilatos
  12. Up or down the value chain? The comparative analysis of the GVC position of the economies of the new EU member states By Jan Hagemejer
  13. On the behaviour of the functional components ofgovernment expenditures during fiscal consolidations By Vitor Castro
  14. The Impact of Macroeconomic News on the Euro-Dollar Exchange Rate By Alberto Caruso
  15. Clustering in Dynamic Causal Networks as a Measure of Systemic Risk on the Euro Zone By Monica Billio; Lorenzo Frattarolo; Hayette Gatfaoui; Philippe De Peretti
  16. Spillovers of the ECB's non-standard monetary policy into CESEE economies By Alessio Ciarlone; Andrea Colabella
  17. Social transfers and poverty in Europe: comparing social exclusion and targeting across welfare regimes By Massimo Baldini; Giovanni Gallo; Manuel Reverberi; Andrea Trapani
  18. Re-vitalizing Money Demand in the Euro Area: Still Valid at the Zero Lower Bound By Christian Dreger; Dieter Gerdesmeier; Barbara Roffia
  19. Credit cycles and real activity - the Swiss case By Gregor Bäurle; Rolf Scheufele
  20. Monetary policy transmission in an open economy: new data and evidence from the United Kingdom By Cesa-Bianchi, Ambrogio; Thwaites, Gregory; Vicondoa, Alejandro
  21. Rationality of announcements, business cycle asymmetry, and predictabilityof revisions. The case of French GDP. By M. Mogliani; T. Ferrière

  1. By: R. S.J. Koijen; F. Koulischer; B. Nguyen; M. Yogo
    Abstract: We use new data on security-level portfolio holdings of institutional investors and households in the euro area to understand the impact of the ongoing asset purchase programme of the European Central Bank (ECB) on the dynamics of risk exposures and on asset prices. We develop a tractable measurement framework to quantify the dynamics of euro-area duration, sovereign and corporate credit, and equity risk exposures as the programme evolves. We propose an instrumental-variables estimator to identify the impact of central bank purchases on sovereign bonds on sovereign bond yields. Our results suggest that the foreign sector sells most in response to the programme, followed by banks and mutual funds, while the purchases of insurance companies and pension funds are positively related to purchases by the ECB.
    Keywords: Quantitative Easing, Flow of Risk, Portfolio Rebalancing, Risk Concentration.
    JEL: E52 E58 G2 G15
    Date: 2016
  2. By: Elisa Gamberoni (European Central Bank); Claire Giordano (Banca d'Italia); Paloma Lopez-Garcia (European Central Bank)
    Abstract: We analyse the evolution of capital and labour (mis)allocation across firms in five euro-area countries (Belgium, France, Germany, Italy and Spain) and eight main sectors of the economy during the period 2002-2012. Three key stylized facts stand out. First, in all countries except Germany, capital allocation worsened over time whereas the efficiency of labour reallocation did not change significantly. Second, the observed increase in capital misallocation has been particularly marked in services compared with industry. Third, misallocation of both labour and capital decreased in all countries in 2009 and again for some countries/sectors in 2011-2012. We then take stock of the possible drivers of input misallocation dynamics in a standard panel regression framework. Restrictive bank lending standards and heightened demand uncertainty in certain years led to growth in capital misallocation, whereas since 2002 overall deregulation in both the product and labour markets has helped dampen input misallocation dynamics. Controlling for all variables, the Great Recession per se improved the allocative efficiency of both capital and labour.
    Keywords: total factor productivity, allocative efficiency, capital, labour, Great Recession
    JEL: D24 D61 O47
    Date: 2016–09
  3. By: Holston, Kathryn; Laubach, Thomas; Williams, John C.
    Abstract: U.S. estimates of the natural rate of interest – the real short-term interest rate that would prevail absent transitory disturbances – have declined dramatically since the start of the global financial crisis. For example, estimates using the Laubach-Williams (2003) model indicate the natural rate in the United States fell to close to zero during the crisis and has remained there through the end of 2015. Explanations for this decline include shifts in demographics, a slowdown in trend productivity growth, and global factors affecting real interest rates. This paper applies the Laubach-Williams methodology to the United States and three other advanced economies – Canada, the Euro Area, and the United Kingdom. We find that large declines in trend GDP growth and natural rates of interest have occurred over the past 25 years in all four economies. These country-by-country estimates are found to display a substantial amount of comovement over time, suggesting an important role for global factors in shaping trend growth and natural rates of interest.
    Keywords: Kalman filter; Monetary policy rules; Natural rate of output; Trend growth
    JEL: C32 E43 E52 O40
    Date: 2016–08–19
  4. By: Ludovit Odor (Council for Budget Responsibility); Pavol Povala (Council for Budget Responsibility)
    Abstract: We study risk premiums in Slovak government bonds. We focus on the country-specific part of yields which we associate with the spread to overnight-indexed swaps. In the period 2009-2015, we decompose the term structure of spreads to credit risk premium, liquidity premium, safety/convenience demand, and segmentation effects. While the level of the term structure of spreads is mostly related to sovereign credit risk, non-default components are related to the second principal component of spreads. We also identify a siezable effect of public sector purchase programme conducted by the European Central Bank with a magnitude in excess of 60 basis points for the ten-year bond. To study determinants of spreads in a longer sample 2000-2015, we construct credit spreads from international euro-denominated bonds. We find that debt-to-GDP ratio together with global financial variables explain a substantial fraction of spread variation.
    Keywords: Risk premiums, yield curve models, sovereign credit risk, liquidity
    JEL: F3 G1 G17
    Date: 2016–06
  5. By: Inês Pereira (Erasmus School of Economics)
    Abstract: After the financial crisis in 2008, many central banks began to use unconventional monetary policy in order to boost the effective transmission of monetary policy and to provide additional direct monetary stimulus to the economy. This study will make use of an event study to analyse the impact of those unconventional monetary policies implemented by the European Central Bank on nominal and real long-term interest rates. The long-term interest rates being considered are the 10-year government bond yield, the 5 and 10-year corporate bond yield (AAA and BBB) and the 5y5y swap forward rate for the Eurozone. The results show that unconventional monetary policy conducted by the ECB had a significant effect on real and nominal and long-term interest rates. This effect can be more persistent for a specific group of countries during some announcements, namely the 4th of September of 2014 announcement significantly lowered the 10-year government bond yield and BBB 5-year bond yield for Portugal and the remaining PIIGS.
    Keywords: Inflation expectations, Unconventional monetary policy, European Central Bank, Long-term interest rates, Event study
    JEL: G14 E42 E44
    Date: 2016–09
  6. By: Philipp Heimberger (Vienna Institute for International Economic Studies); Jakob Kapeller (Johannes Kepler University)
    Abstract: This paper analyzes the performative impact of the European Commission’s model for estimating ‘potential output’, which is used as a yardstick for measuring the ‘structural budget balance’ of EU countries and, hence, is crucial for coordinating European fiscal policies. In pre-crisis years, potential output estimates amplified the build-up of private debt, housing bubbles and macroeconomic imbalances. After the financial crisis, they were revised downwards, which increased fiscal consolidation pressures. By focusing on the euro area’s economies during 1999-2014, we identify two performative aspects of the potential output model. First, the political implications of the model led to a pro-cyclical feedback loop, reinforcing general economic developments. Second, the model has contributed to national lock-ins on path dependent debt trajectories, fueling ‘structural polarization’ between core and periphery.
    Keywords: performativity, potential output, path dependency, Eurozone crisis, fiscal policy, austerity.
    JEL: E24 E61 E62 F15
    Date: 2016–08
  7. By: Jean-Christophe Poutineau (CREM - Centre de Recherche en Economie et Management - UR1 - Université de Rennes 1 - Université de Caen Basse-Normandie - CNRS - Centre National de la Recherche Scientifique); Gauthier Vermandel (PSL - PSL Research University, LEDa - Laboratoire d'Economie de Dauphine - Université Paris-Dauphine)
    Abstract: In an estimated DSGE model of the European Monetary Union that accounts for financial differences between core and peripheral countries, we find that country-adjusted macroprudential measures lead to significant welfare gains with respect to a uniform macroprudential policy rule that reacts to union wide financial developments. However, peripheral countries are the winners from the implementation of macroprudential measures while core countries incur welfare losses, thus questioning the interest of adopting coordinated macroprudential measures with peripheral countries.
    Keywords: Bayesian Estimation,DSGE Two-Country Model,Macroprudential policy,Euro Area,Financial Accelerator
    Date: 2016–05–12
  8. By: Alessandro Notarpietro (Banca d'Italia); Lisa Rodano (Banca d'Italia)
    Abstract: This paper presents the results of a counterfactual exercise that aims at quantifying the contribution to the evolution of bad debts made by the two recessions that have hit the Italian economy since 2008. The counterfactual simulations are performed using the Bank of Italy’s Quarterly Model (BIQM). A ‘no-crises scenario’ is built for the period 2008-2015. The counterfactual dynamics of the main macroeconomic and financial variables are used to feed a simple model, in which the new bad debt rate depends on macroeconomic conditions and borrowing costs. The analysis suggests that, in the absence of the two recessions – and of the economic policy decisions that were taken to combat their effects – non-financial corporations’ bad debts at the end of 2015 would have reached €52 billion, instead of €143 billion. The ratio of bad debts to the total amount of loans to non-financial corporations would have reached 5%, a value in line with the pre-crisis period.
    Keywords: business cycle, global financial crisis, sovereign debt crisis, banking, Italian economy
    JEL: E27 E37 E65 G21
    Date: 2016–09
  9. By: Guido BUlligan (Banca d'Italia); Eliana Viviano (Banca d'Italia)
    Abstract: Increasing evidence shows that after a flattening occurred in the immediate aftermath of the global financial crisis, the relationship between price inflation and economic slack became stronger in the euro area. By contrast, there is no clear evidence of a strong(er) relationship between wage inflation and unemployment. In this paper we estimate a standard Phillips curve with time-varying coefficients separately for Italy, Spain, Germany and France. We find that, with the exception of Germany, after the global financial crisis the sensitivity of hourly wage changes to labour market slack increased. Second, using administrative microdata available only for Italy, we relate daily wage changes to the local unemployment rate. The results confirm the steepening of the Phillips curve after 2008, also when controlling for composition effects.
    Keywords: wage growth, Phillips curve, parameter instability JEL Classification: E24, E31, E58
    Date: 2016–09
  10. By: Daniel Baksa (Central European University); Zsuzsa Munkacsi (Bank of Lithuania)
    Abstract: Southern Europe is currently experiencing a double-whammy: high levels of government debt coupled with a rapidly aging population. Thus, the consolidation of (pension) budgets seems inevitable. In this paper we examine the short- and long-run macroeconomic e ects of public old-age pension reforms and other scal policies under conditions of population aging. To do so, we calibrate OGRE, a New Keynesian model with overlapping generations, unemployment and an underground sector to match annual data on Portugal and Spain. Our main nding is that a retirement-age increase is the least harmful policy with respect to long-run output. However, we raise some doubts about the feasibility of implementing this policy.
    Keywords: population aging, public old-age pension reforms, pay-as-you-go, fully funded, shadow economy, informal employment, government debt, New Keynesian model, overlapping generations, demography, unemployment, retirement ageLength: 71 pages
    JEL: E24 E26 H55 J11 J46
    Date: 2016–08–23
  11. By: Tryphon Kollintzas (Athens University of Economics and Business and CEPR); Dimitris Papageorgiou (Bank of Greece, Economic Analysis and Research Departme); Efthymios Tsionas (Athens University of Economics and Business); Vanghelis Vassilatos (Athens University of Economics and Business)
    Abstract: In this paper, using a dynamic panel of 21 OECD countries, we find that, unlike the other OECD countries in the sample, wage setting institutions, competition conditions, public finances and external imbalances can account for the behavior of the public sector wage premium (WPR) and the self employed taxation gap (TSL) in Greece and to a lesser extent in Spain and Portugal, in a manner that is consistent with an “insiders-outsider s society” (IOS). That is, a politicoeconomic system characterized by groups of selfish elites that enjoy market power, but at the same time cooperate in influencing government in protecting and promoting their collective self interests. Then, we find that for Greece as well as Spain and Portugal, WPR and TSL have an adverse effect on both TFP and output growth. Finally, the effect of WPR and TSL on the business cycle (shock propagation mechanism) is investigated via a panel VAR analysis. Again, impulse response function analysis suggests that the shock propagation mechanism of WPR and TSL for Greece and to a lesser extent for Spain and Portugal, are quite different from the rest of the OECD countries. For example, in Greece, unlike the other OECD countries in the sample, a positive temporary shock in WPR causes TFP and output to fall and the public and current account deficits to increase. We take the TFP/output growth and the shock propagation mechanism results to provide strong evidence that Greece and to a lesser extent Spain and Portugal behave like IOS. For that matter, these results are important in order to understand the Greek crisis.
    Keywords: Labor market institutions; Political Institutions; Public sector wage premium; Self employed taxation gap; Growth;Business cycles; Greek crisis
    JEL: J44 J45 O43 O47 O57 P16
    Date: 2016–06
  12. By: Jan Hagemejer (Faculty of Economic Sciences, University of Warsaw; National Bank of Poland)
    Abstract: Since the transition of Central and Eastern European Countries in 1990s, liberalization in trade has changed the structure of these economies. The structural changes occurred as these countries to become the New Member States (NMS) of the European Union in the first decade of the 21st century. In this paper, we shed lights on these changes by analyzing the position of NMS within the global value chains (GVC). By calculation of upstreamness measures proposed by Antras et al. (2012), and tracing both the structure and the evolution of upstreamness over time, we are able to analyze the change in the organization of production around the world and the role the NMS play in the most important export sectors.. Although we observe a global increasing trend in the upstreamness of all countries, we find the convergence in the distance from final demand in trade of NMS and the EU15. There are, however, some large and persistent sectoral differences.
    Keywords: global value chains, upstreamness, European Union, New Member States
    JEL: C67 F10 F15
    Date: 2016
  13. By: Vitor Castro (Faculty of Economics - University of Coimbra and NIPE)
    Abstract: This paper analyses how the functional components and sub-components of government expenditures are affected by fiscal consolidations. A fixed-effects estimator is employed over a panel of 15 European Union countries during the period 1990-2012. The results show that spending on public services increases during fiscal consolidations, while spending on defence, public order, health, education and social protection is significantly cut. A more disaggregated analysis proves that fiscal consolidations are harmful for important social public expenditures, undermining citizens' safety, health assistance, investment in human capital and social protection. Public services are likely to be increased due to a rise in public debt transactions observed during periods of fiscal consolidation. All this evidence has proved to be stronger in a particular group of countries, known in the literature as PIIGS.
    Keywords: Government expenditures; Functional components; Fiscal consolidations; European Union.
    JEL: E62 H50
    Date: 2016
  14. By: Alberto Caruso
    Abstract: This paper studies the effect of macroeconomic "news" (market now-cast errors related to the flow of data releases on macroeconomic fundamentals) on the daily USD/EUR exchange rate. I consider a large number of real-time macroeconomic announcements from both the US and the euro-zone, and the related market expectations as reported by Bloomberg. For the euro-zone I also study country level announcements for the four biggest economies (Germany, France, Italy, Spain). The results for the whole sample (1999-2012) show that both the "news" associated with euro-zone releases and those associated with US ones have a significant impact on the USD/EUR exchange rate. However, the effect of the euro-zone "news" has become larger since the 2008 crisis and it is now more sizeable than that of the US "news".
    Keywords: macroeconomic news; exchange rate; event studies; real-time data
    JEL: E44 E47 F31 G14
    Date: 2016–09
  15. By: Monica Billio (Università Ca' Foscari of Venice - Department of Economics); Lorenzo Frattarolo (Università Ca' Foscari of Venice - Department of Economics); Hayette Gatfaoui (IESEG - School of Management (LEM), CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Philippe De Peretti (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: In this paper, we analyze the dynamic relationships between ten stock exchanges of the euro zone using Granger causal networks. Using returns for which we allow the variance to follow a Markov-Switching GARCH or a Changing-Point GARCH, we first show that over different periods, the topology of the network is highly unstable. In particular, over very recent years, dynamic relationships vanish. Then, expanding on this idea, we analyze patterns of information transmission. Using rolling windows to analyze the topologies of the network in terms of clustering, we show that the nodes' state changes continually, and that the system exhibits a high degree of flickering in information transmission. During periods of flickering, the system also exhibits desynchronization in the information transmission process. These periods do precede tipping points or phase transitions on the market, especially before the global financial crisis, and can thus be used as early warnings of phase transitions. To our knowledge, this is the first time that flickering clusters are identified on financial markets, and that flickering is related to phase transitions.
    Keywords: Causal Network,Topology,Clustering,Flickering,Desynchronisation,Phase transitions
    Date: 2016–05
  16. By: Alessio Ciarlone (Banca d'Italia); Andrea Colabella (Banca d'Italia)
    Abstract: In this paper we provide evidence that the effects of the ECB’s asset purchase programmes spill over into CESEE countries, contributing to easing their financial conditions both in the short and in the long term through different transmission channels. In the short term, a number of variables in CESEE financial markets appear to respond to news related to the ECB’s non-standard policies by moving in the expected direction. Over a longer-term horizon, we found that cross-border portfolio and banking capital flows towards CESEE economies have been ffected by both the announcement and the actual implementation of the ECB’s asset purchase programmes, pointing to the existence of a portfolio rebalancing and a banking liquidity channel.
    Keywords: unconventional monetary policy, ECB, Central and Eastern Europe, international spillovers, event study
    JEL: C32 C33 E52 E58 F32 F36
    Date: 2016–09
  17. By: Massimo Baldini; Giovanni Gallo; Manuel Reverberi; Andrea Trapani
    Abstract: This paper studies whether there are systematic differences in the ability of cash transfers, belonging to different welfare systems, to reach the poor and to lift them out of poverty. We structure the analysis following the classic breakdown of the various European welfare states into welfare regimes, in search of specific features of them that can explain the variable results shown in the ability to effectively tackle economic poverty. The analysis is carried out both with a cross-sectional approach as well as using a more long-run definition of persistent poverty.
    Keywords: Cash transfers; Poverty; Europe; Welfare Regimes; Persistent poverty.
    JEL: I3 I38 H53
    Date: 2016–08
  18. By: Christian Dreger; Dieter Gerdesmeier; Barbara Roffia
    Abstract: The analysis of monetary developments have always been a cornerstone of the ECB’s monetaryanalysis and, thus, of its overall monetary policy strategy. In this respect, money demandmodels provide a framework for explaining monetary developments and assessing price stabilityover the medium term. It is a well-documented fact in the literature that, when interestrates are at the zero lower bound, the analysis of money stocks become even more importantfor monetary policy. Therefore, this paper re-investigates the stability properties of M3 demandin the euro area in the light of the recent economic crisis. A cointegration analysis isperformed over the sample period 1983 Q1 and 2015 Q1 and leads to a well-identified modelcomprising real money balances, income, the long term interest rate and the own rate of M3holdings. The specification appears to be robust against the Lucas critique of a policy dependentparameter regime, in the sense that no signs of breaks can be found when interest ratesreach the zero lower bound. Furthermore, deviations of M3 from its equilibrium level do notpoint to substantial inflation pressure at the end of the sample. Excess liquidity models turnout to outperform the autoregressive benchmark, as they deliver more accurate CPI inflationforecasts, especially at the longer horizons. The inclusion of unconventional monetary policymeasures does not contradict these findings.
    Keywords: Euro area money demand, inflation forecasts, unconventional monetary policy
    JEL: E41 E44 E52 G11 G15
    Date: 2016
  19. By: Gregor Bäurle; Rolf Scheufele
    Abstract: The global Great Recession has sparked renewed interest in the relationships between financial conditions and real activity. This paper considers the Swiss experience, studying the impact of credit market conditions and housing prices on real activity over the last three decades through the lens of a medium-scale structural Bayesian vector autoregressive model (BVAR). From a methodological point of view, the analysis is challenging for two reasons. First, we must cope with a large number of variables which leads to a high-dimensional parameter space in our model. Second, the identification of economically interpretable shocks is complicated by the interaction among many different relevant factors. As to the first challenge, we use Bayesian shrinkage techniques to make the estimation of a large number of parameters tractable. Specifically, we combine a Minnesota prior with information from training observations to form an informative prior for our parameter space. The second challenge, the identification of shocks, is overcome by combining zero and sign restrictions to narrow the plausible range of responses of observed variables to the shocks. Our empirical analysis indicates that while credit demand and, in particular, credit supply shocks explain a large fraction of housing price and credit fluctuation, they have a limited impact on real activity.
    Keywords: Credit supply and demand, housing prices, SVARs, Bayesian shrinkage
    JEL: C11 C32 E30 E44 E51 E52
    Date: 2016
  20. By: Cesa-Bianchi, Ambrogio (Bank of England); Thwaites, Gregory (Bank of England); Vicondoa, Alejandro (European University Institute)
    Abstract: This paper constructs a new series of monetary policy surprises for the United Kingdom and estimates their effects on macroeconomic and financial variables, employing a high-frequency identification procedure. First, using local projections methods, we find that monetary policy has persistent effects on real interest rates and breakeven inflation. Second, employing our series of surprises as an instrument in a SVAR, we show that monetary policy affects economic activity, prices, the exchange rate, exports and imports. Finally, we implement a test of overidentifying restrictions, which exploits the availability of the narrative series of monetary policy shocks computed by Cloyne and Huertgen (2014), and find no evidence that either set of shocks contains any endogenous response to macroeconomic variables.
    Keywords: Monetary policy transmission; external instrument; high-frequency identification; structural VAR; local projections
    JEL: E31 E32 E43 E44 E52 E58
    Date: 2016–09–02
  21. By: M. Mogliani; T. Ferrière
    Abstract: We analyze French GDP revisions and we investigate the rationality of preliminary announcements of GDP. We consider nonlinearities, taking the form of business cycle asymmetry and time changes, and their effect on both unconditional moments of revisions and the rationality of announcements. We find that nonlinearity represents an interesting feature of French GDP announcements and revisions. Our results suggest that revisions are unbiased, but announcements are overall inefficient, conditionally on a set of macro-financial indicators. Finally, we investigate the forecastability of GDP revisions in real-time and we find out that total revisions are predictable.
    Keywords: GDP Revisions, Real-time dataset, Efficiency, Unbiasedness, Forecasting.
    JEL: C22 C52 E37
    Date: 2016

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