nep-eec New Economics Papers
on European Economics
Issue of 2016‒09‒25
fourteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Interest rates, Eurobonds and intra-European exchange rate misalignments By Vincent Duwicquet; Jacques Mazier; Jamel Saadaoui
  2. Debt-growth linkages in EMU across countries and time horizons By Marta Gómez-Puig; Simón Javier Sosvilla-Rivero
  3. Changes in sovereign debt dynamics in Central and Eastern Europe By Juan Carlos Cuestas
  4. The IMF and Euro Area Crises: Review of a Report from the Independent Evaluation Office By Edwin M. Truman
  5. Exports and growth in the New Member States. The role of global value chains By Jan Hagemejer
  6. Below the zero lower bound: A shadow-rate term structure model for the euro area By Lemke, Wolfgang; Vladu, Andreea L.
  7. Economic growth and individual satisfaction in an agent-based economy By António Afonso; Jorge Silva
  8. Exchange Rate Behavior with Negative Interest Rates: Some Early Negative Observations By Hameed, Allaudeen; Rose, Andrew K
  9. What does it take to grow out of recession? An error-correction approach towards growth convergence of European and transition countries By Olivier Damette; Mathilde Maurel; Michael A. Stemmer
  10. Portfolio Diversification in the Sovereign Credit Swap Markets By Consiglio, Andrea; Lotfi, Somayyeh; Zenios, Stavros A.
  11. Trade between Australia and the EU, 1990 - 2015 By Richard Pomfret; Patricia Sourdin
  12. ESBies: Safety in the Tranches By Markus K. Brunnermeier; Sam Langfield; Marco Pagano; Ricardo Reis; Stijn Van Nieuwerburgh Author Email:; Dimitri Vayanos Author Email:
  13. Analyzing volatility shocks to Eurozone CDS spreads with a multicountry GMM model in Stata By Christopher F Baum; Paola Zerilli
  14. Should the Maximum Duration of Fixed-Term Contracts Increase in Recessions? Evidence from a Law Reform By Martins, Pedro S.

  1. By: Vincent Duwicquet (CLERSE - Centre lillois d'études et de recherches sociologiques et économiques - CNRS - Centre National de la Recherche Scientifique - Université de Lille, Sciences et Technologies); Jacques Mazier (CEPN - Centre d'Economie de l'Université Paris Nord - Université Paris 13 - USPC - Université Sorbonne Paris Cité - CNRS - Centre National de la Recherche Scientifique); Jamel Saadaoui (CEPN - Centre d'Economie de l'Université Paris Nord - Université Paris 13 - USPC - Université Sorbonne Paris Cité - CNRS - Centre National de la Recherche Scientifique, BETA - Bureau d'Economie Théorique et Appliquée - Université de Strasbourg - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique)
    Abstract: The euro crisis sheds light on the nature of alternative adjustment mechanisms in a heterogeneous monetary union. Exchange rate adjustments being impossible, it remains very few efficient alternative mechanisms. At the level of the whole eurozone the euro is close to its equilibrium parity. But the euro remains overvalued for Southern European countries, France included, and largely undervalued for Northern European countries, especially for Germany. This paper gives a new evaluation of these exchange rate misalignments inside the eurozone thanks to a FEER approach. In a second step, we use a two-country SFC model of a monetary union with endogenous interest rates and Eurobonds. Overvaluations amount to negative competitiveness shocks in Southern countries. In this respect, three main results are found. Firstly, an increase of intra-European financing by banks of northern countries or other institutions could contribute to reduce the debt burden and induce a partial recovery but public debt would increase. Secondly, the implementation of Eurobonds as a tool to partially mutualize European sovereign debt would have a rather similar positive impact with a public debt limited to 70 percent of GDP. Thirdly, Eurobonds could also be used to finance large European projects which could impulse a stronger recovery in the entire zone with stabilized current account balances.
    Keywords: Euro crisis,Exchange rate misalignments,Eurobonds,Interest rates
    Date: 2016–09–08
  2. By: Marta Gómez-Puig (Instituto Complutense de Estudios Internacionales (ICEI). Universidad Complutense de Madrid.); Simón Javier Sosvilla-Rivero (Instituto Complutense de Estudios Internacionales (ICEI). Universidad Complutense de Madrid.)
    Abstract: This paper contributes to the literature by empirically examining whether the influence of public debt on economic growth differs between the short and the long run and presents different patterns across euro-area countries. To this end, we use annual data from both central and peripheral countries of the European Economic and Monetary Union (EMU) for the 1960-2012 period and estimate a growth model augmented for public debt using the Autoregressive Distributed Lag (ARDL) bounds testing approach. Our findings tend to support the view that public debt always has a negative impact on the long-run performance of EMU countries, whilst its short-run effect may be positive depending on the country.
    Keywords: Public debt; Economic growth; Bounds testing; Euro area; Peripheral EMU countries; Central EMU countries.
    Date: 2016
  3. By: Juan Carlos Cuestas (University of Sheffield)
    Abstract: The aim of this paper is to shed some light on the degree of fiscal debt sustainability for a group of Central and Eastern European countries. We apply a battery of time series econometrics methods to show how the financial crisis has affected the debt-to-GDP ratio and how it has behaved recently. The results provide us with important insights into the way governments in Central and Eastern Europe have reacted to debt accumulation. We distinguish two groups of countries; one group where the sovereign debt stock stabilises after the crisis, and another group where debt has been accumulated more quickly in recent years. The results provide important policy lessons for the authorities responsible.
    Keywords: debt, Central and Eastern Europe, structural breaks, European integration
    JEL: C22 F15
    Date: 2016–10
  4. By: Edwin M. Truman (Peterson Institute for International Economics)
    Abstract: The economic and financial crises in euro area countries since 2010 have tested the viability of the euro area and continue to challenge the future of the seven-decade European integration project. Euro area leaders reluctantly brought the International Monetary Fund (IMF) into the management of six of these crises—in Cyprus, Greece, Ireland, Italy, Portugal, and Spain—through the provision of financing and the design of economic and financial rescue programs. The IMF's Independent Evaluation Office (IEO) reviewed the Fund's handling of four of these crises: in Greece (first program), Ireland, Portugal, and Spain. The report is bureaucratically constrained in its language, but the underlying message is distinctly critical of the IMF: Political influence on IMF decision making was excessive, the IMF did not implement a coherent euro area strategy, and the IMF failed to comply with its own standard for transparency and, therefore, accountability. This Policy Brief provides some background on the IEO and summarizes the conclusions of the IEO report. It then addresses four aspects of the report and its examination of the IMF's performance in these crises: addressing the crises individually rather than as a crisis for the euro area as a whole, the charge of excessive political intervention in the formulation of IMF policies for these countries, the IMF's lack of transparency and accountability both in these programs and vis-à-vis the IEO, and issues surrounding the Greek debt restructuring and the IMF's policy on exceptional access to Fund financial resources.
    Date: 2016–09
  5. By: Jan Hagemejer (Faculty of Economic Sciences, University of Warsaw; Economic Institute, National Bank of Poland)
    Abstract: We analyze the determinants of value added and productivity growth of New Member States in the period between 1995 and 2009. We show that in the analyzed countries exports contributed to between 30 to over 40% of the overall growth of GDP while the contribution of the domestic component varied from negative to over 60%. We show that in the most important export manufacturing industries of the NMS, the growth in exported value added was substantial, while the growth of the domestic component of GDP was mostly due to the growth in services. We associate growth of sectoral productivity with the foreign direct investment and exporting but, more importantly, with the position of a sector/country in the global value chains. We show that sectors that have imported intermediate goods have experienced higher productivity growth. Moreover, productivity growth was found in sectors further away from the final demand and in sectors exporting intermediate goods.
    Keywords: global value chains, productivity, economic growth, openness
    JEL: C23 F21 O33
    Date: 2016
  6. By: Lemke, Wolfgang; Vladu, Andreea L.
    Abstract: We propose an arbitrage-free shadow-rate term structure model to analyze the euro-area yield curve from 1999 to mid-2015, when bond yields turned negative at various maturities. In the model the 'shadow rate' can reach any positive or negative level, while the actual one-month rate cannot fall below some lower bound perceived by market participants. This bound is estimated to have first ranged marginally above zero, before falling to -11 bps in September 2014. We show analytically that the lower bound itself can be interpreted as a 'policy parameter' and interpret the September 2014 ECB rate cut from this perspective. Our model improves upon a standard Gaussian affine model by providing a better match with survey forecasts of short-term rates during the low-rate period and by capturing the decline in yield volatility. The model implies that since mid-2012, the median horizon after which future short rates are expected to return to 25 bps has ranged between 18 and 62 months. However, the liftoff timing, as well as the quantification of forward premia, is highly sensitive to the level of the lower bound.
    Keywords: term structure of interest rates,lower bound,nonlinear state-space model,monetary policy expectations
    JEL: C32 E43 E52
    Date: 2016
  7. By: António Afonso; Jorge Silva
    Abstract: We assess the cyclicality of current account balances for the period 2001Q1-2014Q4, focussing on Portugal and in Germany, as a benchmark. We find that the cyclical component of the current account was positively explained by 3-months Euribor, but negatively by the financial crisis, systemic stress in Europe, employment and compensation of employees. Moreover, the non-cyclical current account was positively affected by the period of the Economic and Financial Adjustment Program and the terms of trade, but negatively influenced by financial integration. Key Words : current account cyclicality, financial markets, Portugal, Germany.
    JEL: C23 F32 G01
    Date: 2016–09
  8. By: Hameed, Allaudeen; Rose, Andrew K
    Abstract: This paper examines exchange rate behavior during the recent period with negative nominal interest rates. We use a daily panel of data of 61 currencies from Jan 2010 through May 2016; during this time five economies (Denmark, EMU, Japan, Sweden, and Switzerland) experienced negative nominal interest rates. We examine both effective exchange rates and bilateral rates, the latter typically measured against the Swiss franc since Switzerland has had the longest period of negative nominal rates. We examine exchange rate volatility, exchange rate changes, deviations from uncovered interest parity, and profits from the carry trade. We find that negative interest rates seem to have little effect on observable exchange rate behavior.
    Keywords: carry; daily; data; deviation; interest; nominal; parity; Trade; uncovered; volatility
    JEL: F31 G15
    Date: 2016–09
  9. By: Olivier Damette (BETA - Bureau d'Economie Théorique et Appliquée - Université de Strasbourg - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique, LEF - Laboratoire d'Economie Forestière - INRA - Institut National de la Recherche Agronomique - AgroParisTech); Mathilde Maurel (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, FERDI - Fondation pour les Etudes et Recherches sur le Développement International - FERDI); Michael A. Stemmer (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Consequences from the subsiding 2008 financial crisis on long-run economic growth are widely debated. Existing literature on previous recessions, such as Cerra and Saxena (2008), emphasizes the long-term loss inflicted on per capita GDP levels. This paper concentrates on typical business cycles in advanced European and transition countries and assumes that lower than normal growth during recessions is followed by a recovery period with above normal growth until the economy reaches its pre-crisis level. The objective is to assess the capacity to rebound, the speed of convergence towards a normal growth path as well as potential nonlinearities. Through exploiting the cointegration relationships among variables in long-run growth regressions and by employing a variety of panel error-correction models, results show a strong evidence of error-correction and different linear speed in the convergence process with the transition economies outpacing Western European countries. Our analysis is further extended into a Panel Smooth Transition Error-Correction Model (PSTR-ECM) to account for different regimes in convergence patterns according to a selection of transition variables. Whereas the velocity of convergence for European core countries exhibits a nonlinear pattern and differs with respect to price and flexibility, transition countries remain linear in their return to the growth trend. Ultimately, our results suggest that internal adjustments remain the key factors for both European and transition countries to recover from negative economic growth shocks.
    Keywords: smooth-transition models,Economic growth,business cycles,transition economies,error-correction models,panel cointegration
    Date: 2016–04
  10. By: Consiglio, Andrea (University of Palermo); Lotfi, Somayyeh (University of Guilan); Zenios, Stavros A. (University of Cyprus and University of Pennsylvania)
    Abstract: We develop models for portfolio diversification in the sovereign credit default swap (CDS) markets and show that, despite literature findings that sovereign CDS spreads are affected by global factors, there is sufficient idiosyncratic risk to be diversified away. However, we identify regime switching in the times series of CDS spreads, and the portfolio diversification strategies may differ between regimes. The models trade of the CVaR risk measure against expected return. They are tested in an active management setting for Eurozone core, periphery, and Central, Eastern and South-Eastern Europe (CESEE) countries. Models are developed for investors with long positions in CDS, speculators that hold uncovered long and short positions, and hedgers with covered long and short exposures. The results compare favorably with the broad S&P/ISDA Eurozone Developed Nation Sovereign CDS index. We also identify several issues that remain unexplored on the way to developing integrated risk management models for CDS portfolios.
    Date: 2016–07
  11. By: Richard Pomfret; Patricia Sourdin (School of Economics, University of Adelaide)
    Abstract: The geographical composition of the EU has changed dramatically since 1989 as the enlargements of 1995 (Austria, Sweden and Finland) and 2004-13 (Eastern European countries plus Cyprus and Malta) more than doubled the number of EU member countries. This paper reviews the level, direction and composition of Australian trade with EU member countries from 1990 to 2015. Australia-EU trade remains dominated by relations with the original six member countries and the UK. A striking feature has been the rapid increase in trade between Australia and the Eastern European countries that joined the EU in 2004. Analysis of the new EU members' trade with Australia highlights intra-EU regional value chains as a pathway by which the new EU members rapidly became exporters of manufactured goods such as cars. Thus, the 2004 EU enlargement benefited Australia by providing cars that fitted many Australian consumers' preferences and budgets, and rapid economic growth in the Eastern European economies provided markets for Australian exports. Part of the reason why EU countries have remained attractive trade partners is that the costs of international trade between Australia and EU countries have remained low relative to trade costs between Australia and other countries; the level and determinants of bilateral trade costs are analyzed using disaggregated ABS data.
    Date: 2016–10
  12. By: Markus K. Brunnermeier (Princeton University); Sam Langfield (European Systemic Risk Board); Marco Pagano (Università di Napoli Federico II, CSEF, EIEF and CEPR); Ricardo Reis (London School of Economics.); Stijn Van Nieuwerburgh Author Email: (New York University); Dimitri Vayanos Author Email: (LSE London)
    Abstract: The euro crisis was fueled by the diabolic loop between sovereign risk and bank risk, coupled with cross-border flight-to-safety capital flows. European Safe Bonds (ESBies), a union-wide safe asset without joint liability, would help to resolve these problems. We make three contributions. First, numerical simulations show that ESBies would be at least as safe as German bunds and approximately double the supply of euro safe assets when protected by a 30%-thick junior tranche. Second, a model shows how, when and why the two features of ESBies — diversification and seniority — can weaken the diabolic loop and its diffusion across countries. Third, we propose a step-by-step guide on how to create ESBies, starting with limited issuance by public or private-sector entities.
    Date: 2016–09–20
  13. By: Christopher F Baum (Boston College; DIW Berlin); Paola Zerilli (University of York)
    Abstract: We model the time series of credit default swap (CDS) spreads on sovereign debt in the Eurozone, allowing for stochastic volatility and examining the effects of country-specific and systemic shocks. A weekly volatility series is produced from daily quotations on 11 Eurozone countries: CDS for 2009–2010. Using Stata's gmm command, we construct a highly nonlinear model of the evolution of realized volatility when subjected to both idiosyncratic and systemic shocks. Evaluation of the quality of the fit for the 24 moment conditions is produced by a Mata auxiliary routine. This model captures many of the features of these financial markets during a turbulent period in the recent history of the single currency. We find that systemic volatility shocks increase returns on "virtuous" borrowers' CDS while reducing returns for the most troubled countries' obligations.
    Date: 2016–09–16
  14. By: Martins, Pedro S. (Queen Mary, University of London)
    Abstract: Fixed-term contracts (FTCs) may be an important tool to promote hirings and employment, particularly in recessions or when permanent contracts are costly. Therefore, it may be useful to let some of the legal parameters of FTCs (as well as those of other labour market institutions) vary systematically over the business cycle, namely increasing their flexibility during downturns. We evaluate this idea by examining the short-term effects of a new law introduced in Portugal, in the midst of a recession, which increased the maximum duration of FTCs from three to four and a half years. Our analysis is based on regression-discontinuity (and difference-in-differences) methods, applied to matched panel data. We find a considerable take up of this measure, as conversions to permanent contracts drop by 20%. Moreover, while we do not detect significant effects on employment status in the subsequent year, worker churning is reduced significantly, as mobility of eligible fixed-term workers to other firms drops by 10%.
    Keywords: employment law, worker mobility, segmentation, counterfactual evaluation
    JEL: J23 J41 J63
    Date: 2016–09

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