nep-eec New Economics Papers
on European Economics
Issue of 2016‒11‒13
sixteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Non-standard monetary policy, asset prices and macroprudential policy in a monetary union By Lorenzo Burlon; Andrea Gerali; Alessandro Notarpietro; Massimiliano Pisani
  2. Financial supply cycles in “new Europe” - introducing a composite index for financial supply By Tomislav Globan
  3. The Effect of ECB Forward Guidance on Policy Expectations By Paul Hubert; Fabien Labondance
  4. Housing and credit markets in Italy in times of crisis By Michele Loberto
  5. Energy costs in Germany and Europe: An assessment based on a (total real unit) energy cost accounting framework By Kaltenegger, Oliver; Löschel, Andreas; Baikowski, Martin; Lingens, Jörg
  6. The European Stability Mechanism - bastion of calm or crisis accelerant? By Alexandra M. D. Hild; Bernhard Herz; Christian Bauer
  7. The European refugee crisis and the natural rate of output By Heinisch, Katja; Wohlrabe, Klaus
  8. Use of unit root methods in early warning of financial crises By Virtanen, Timo; Tölö, Eero; Virén, Matti; Taipalus, Katja
  9. The Impact of regulatory capital regulation on balance sheet structure, intermediation cost and growth By Pierre-Charles Pradier; Hamza El Khalloufi
  10. Which combination of fiscal and external imbalances to determine the long-run dynamics of sovereign bond yields? By M. Ben Salem; B. Castelletti-Font
  11. Who Voted for Brexit? A Comprehensive District-Level Analysis By Sascha O. Becker,; Thiemo Fetzer; Dennis Novy
  12. The politics of labor market reform in coordinated welfare capitalism: comparing Sweden, Germany, and South Korea By Timo Fleckenstein; Soohyun Christine Lee
  13. Are advanced economies at risk of falling into debt traps? By Marek Dabrowski
  14. Changes in the relationship between the financial and the real sector and the present financial crisis in the European Union By Amaia Altuzarra; Patricia Peinado; Carlos Rodriguez; Felipe Serrano
  15. Competitiveness and export performance of CEE countries By Beata Bierut; Kamila Kuziemska-Pawlak
  16. Tracking Changes in the Intensity of Financial Sector's Systemic Risk By Xisong Jin; Francisco Nadal De Simone

  1. By: Lorenzo Burlon (Bank of Italy); Andrea Gerali (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: This paper evaluates the macroeconomic and financial effects of the Eurosystem’s Asset Purchase Programme (APP) and its interaction with a member country’s macroprudential policy. We assume that some households in a euro-area (EA) country are subject to a borrowing constraint, and that their local real estate acts as the collateral. In order to highlight the interaction between the APP and region-specific macroprudential policies, we simulate a situation in which, as the APP is carried out, households in one EA region develop overly optimistic expectations about local real estate prices. We report four main findings. First, a relatively large loan-to-value (LTV) ratio in one region can greatly amplify the expansionary effect of the union-wide non-standard monetary policy measures on domestic households’ borrowing. Second, while the APP is being implemented, an increase in households’ borrowing in one region can be further magnified by the combination of a high LTV ratio and overly optimistic expectations. Third, region-specific macroprudential measures can stabilize private sector borrowing with limited negative effects on economic activity. Fourth, our results hold also in the case of area-wide overly optimistic expectations.
    Keywords: DSGE models, open-economy macroeconomics, non-standard monetary policy, zero lower bound, macroprudential policy
    JEL: E43 E52 E58
    Date: 2016–10
  2. By: Tomislav Globan (Faculty of Economics and Business, University of Zagreb)
    Abstract: This paper introduces a new composite index - the financial supply index (FSI), which measures the level of supply of foreign capital to 11 EU new member states (NMS). We aim to fill the gap in the literature, which has so far focused on creating indices that measure the financial conditions only, while the economic factors, also important determinants of capital flows, have been overlooked. FSI includes both the financial and economic determinants of capital flows and is estimated using Kalman filtering, principal components and variance-equal weights approach. Three financial supply cycles in NMS could be extracted based on the analysis of FSI dynamics. The results indicated that the main drivers of financial supply to NMS are externally determined, with economic sentiment and business climate in the Eurozone carrying the highest weight. In addition, we create a new indicator - the Refinancing Risk Ratio (RRR), which relates the supply and demand for foreign capital, to quantify the external refinancing conditions and risk faced by the government. We are able to distinguish between two main episodes of high refinancing risk faced recently by the EU NMS - one during the global financial crisis, and the other during the European sovereign debt crisis, but the episodes significantly differ in nature.
    Keywords: composite index, financial cycles, financial supply, EU new member states, capital flows, refinancing conditions
    JEL: F21 F36 H63
    Date: 2016–11–09
  3. By: Paul Hubert (OFCE, Sciences Po); Fabien Labondance (Université de Bourgogne Franche-Comté, CRESE)
    Abstract: This paper investigates the instantaneous and dynamic effects of ECB forward guidance announcements on the term structure of private short-term interest rate expectations. We estimate the static and dynamic impact of forward guidance on private agents’ expectations about future short-term interest rates using a high-frequency methodology and an ARCH model, complemented with local projections. We find that ECB forward guidance announcements decrease most of the term structure of private short-term interest rate expectations, this being robust to several specifications. The effect is stronger on longer maturities and persistent.
    Keywords: Central bank communication, Short-term interest rate expectations, OIS
    JEL: E43 E52 E58
    Date: 2016–10
  4. By: Michele Loberto (Bank of Italy Author-Name Francesco Zollino; Bank of Italy)
    Abstract: We investigate the determinants of Italian house prices and residential investments in a structural model with possible disequilibria in the market for lending to both households and firms in the building sector. Based on a structural approach that takes into account the multifold relationships between demand and supply within the housing and the credit markets, we find that, while house prices react mostly to disposable income and demographic pressures, lending conditions also exert a significant impact. During the recent crises the contribution of declining bank rates to household lending was limited, due to the greater deleveraging needs of Italian banks. Conventional monetary policy has supported house prices, albeit with declining intensity as policy rates have gradually approached the lower bound. At the same time, unconventional monetary policy measures have sustained house prices via their effect on Italian sovereign spreads, which have shrunk by a sizeable amount since they peaked in the period between late 2011 and early 2013. Finally, we find that house price developments stayed in line with the fundamentals, during both the global financial and sovereign debt crisis, with only minor and occasional discrepancies.
    Keywords: house prices, credit, system of simultaneous equations
    JEL: E52 G21 R20 R30
    Date: 2016–10
  5. By: Kaltenegger, Oliver; Löschel, Andreas; Baikowski, Martin; Lingens, Jörg
    Abstract: Affordable energy is one of the objectives of EU's energy policy. This goal has been challenged by many factors inuencing energy prices and costs such as developments in global energy markets, the EU ETS and the promotion of renewables. Analysing energy costs (prices times quantity) instead of prices has the advantage of taking into account quantity adjustments. However, it does not allow for monitoring the burden which energy costs pose on firms. For this purpose, both the European Commission and the Energy Expert Commission of the German Government recommend using real unit energy costs, defined as energy costs as fraction of value added. We develop an input-output based (real unit) energy cost accounting framework and study the trends in Germany and the EU between 1995 and 2011. We find that many of the unveiled developments are not adequately represented in the political debate, especially with regard to indirect costs (via energy embodied in intermediate inputs), which are more diffcult to assess. Indirect energy costs are on the rise, are larger than direct costs in many industries, are increasingly imported and amplify the asymmetric impacts of legal exceptions available to energy-intensive industries.
    Keywords: Direct energy costs,Indirect energy costs,Energy costs of intermediate consumption,Real unit energy costs,Energy cost analysis,Input-output based (total real unit) energy cost accounting
    JEL: O14 Q48
    Date: 2016
  6. By: Alexandra M. D. Hild; Bernhard Herz; Christian Bauer
    Abstract: The European Stability Mechanism (ESM) is the permanent crisis resolution mechanism for euro area countries. We analyze the costs of the current (suboptimal) refinancing design of the ESM and evaluate an alternative asset-backed securities (ABS) structure under different scenarios. Our simulation results indicate that switching to an ABS structure could substantially lower ESM refunding costs by up to 3.5%. Moreover, the current structure severely limits the ESM’s potential to stabilize financial markets. In particular, in the most likely type of future crises, namely medium-sized requests for financial support from distressed ESM members accompanied by other ESM countries unwilling or unable to provide new capital, the ESM is likely to unintentionally act as a crisis accelerant rather than a stabilizer.
    Keywords: European Stability Mechanism (ESM), financial instruments, euro area, ABS
    JEL: E6 F34 F55 G15
    Date: 2016
  7. By: Heinisch, Katja; Wohlrabe, Klaus
    Abstract: The European Commission follows a harmonized approach for calculating structural (potential) output for EU member states that takes into account labor as an important ingredient. This paper shows how the recent huge migrants inflow to Europe affects trend output. Due to the fact that the immigrants immediately increase the working population but effectively do not enter the labor market, we illustrate that the potential output is potentially upward biased without any corrections. Taking Germany as an example, we find that the average medium-term potential growth rate is lower if the migration flow is modeled adequately compared to results based on the unadjusted European Commission procedure.
    Keywords: migration, refugee crisis, natural rate of output, filtering, EU-commission
    JEL: F22 J11 J61
    Date: 2016–11–04
  8. By: Virtanen, Timo; Tölö, Eero; Virén, Matti; Taipalus, Katja
    Abstract: Unit root methods have long been used in detection of financial bubbles in asset prices. The basic idea is that fundamental changes in the autocorrelation structure of relevant time series imply the presence of a rational price bubble. We provide cross-country evidence for performance of unit-root-based early warning systems in ex-ante prediction of financial crises in 15 EU countries over the past three decades. We then combine the identified early warning signals from multiple time series into a composite indicator. We also show that a mix of data with different frequencies may be useful in providing timely warning signals. Our results suggest and an early warning tool based on unit root methods provides be a valuable accessory in financial stability supervision.
    Keywords: financial crises, unit root, combination of forecasts
    JEL: G01 G14 G21
    Date: 2016–11–03
  9. By: Pierre-Charles Pradier (Centre d'Economie de la Sorbonne & LabEx RéFi); Hamza El Khalloufi (PRISM & LabEx RéFi)
    Abstract: As Europe is subject to a protracted recession, it should be asked whether the reform of the financial sector is not costly in terms of potential growth. Our analysis shows that the negative effect of the Basel III package excepted by the pre-QE studies are almost annihilated today. The recession must then have other causes: falling corporate lending volumes resulted from falling demand in the aftermath of the financial crisis, but this is longer the case. The EU is trying to incentivize corporate lending, via forward guidance as well as ‘supporting factor’ cutting down the Basel capital requirements. The macroeconomic theorists are trying to account for future success of monetary policy around zero nominal interest rate via the risk-taking channel. All these clever initiatives failed to deliver. As a consequence, we might infer that banks are simply not taking any risks: rather than appealing to risk aversion, we would like to argue that the banks seem especially embarrassed by future regulatory developments, which appear remote and uncertain. The binding constraint for corporate lending and growth in the EU is then plausibly a combination of banks' expectations of future regulation and strong uncertainty aversion. While we offer some mitigation prospects, we hope that the theoretical developments of the recent years will quickly yield both theoretical advances and practical results
    Keywords: banking, financial regulation
    JEL: G22 G28 G01
    Date: 2016–09
  10. By: M. Ben Salem; B. Castelletti-Font
    Abstract: In the aftermath of the crisis, sovereign risk premium differentials have been increasingly widening. Although the perceived risk for core countries remains relatively low, financial markets seem to discriminate among peripheral economies requiring higher risk premia than what is justified by fiscal factors only. Our hypothesis in this study is that in peripheral countries this is not simply the result of fiscal indiscipline but the combination of both internal and external imbalances. We use a yearly post-1980 OECD-country panel data to estimate the joint dynamics of sovereign bond yields and their long-run determinants. We find that a net foreign position that is considered highly deteriorated can be a differentiating factor for investors. Indeed, the existence of a “twin deficit” put substantial upward pressures on sovereign bond yields in many advanced economies over the medium term.
    Keywords: Sovereign bond yields, Public Debt, Net Foreign Assets, Panel error-correction models.
    JEL: C23 E43 G12
    Date: 2016
  11. By: Sascha O. Becker, (University of Warwick); Thiemo Fetzer (University of Warwick); Dennis Novy (University of Warwick)
    Abstract: On 23 June 2016, the British electorate voted to leave the European Union. We analyze vote and turnout shares across 380 local authority areas in the United Kingdom. We find that fundamental characteristics of the voting population were key drivers of the Vote Leave share, in particular their age and education profiles as well as the historical importance of manufacturing employment, low income and high unemployment. Migration was relevant only from Eastern European countries, not from older EU states or non-EU countries. We also find an important role for fiscal cuts being associated with Vote Leave. Our results indicate that modest reductions in fiscal cuts could have swayed the referendum outcome. In contrast, even drastic changes in immigration patterns would probably not have made a difference. We confirm the above findings at the much finer level of wards within cities. Our results cast doubt on the notion that short-term campaigning events had a meaningful influence on the vote.
    Keywords: JEL Classification: Political Economy, Voting, Migration, Austerity, Globalisation, UK, EU
    Date: 2016
  12. By: Timo Fleckenstein; Soohyun Christine Lee
    Abstract: Since the 1990s, coordinated welfare capitalism has been subject to comprehensive change, with workfare measures and the deregulation of employment protection at the heart of labor market reforms. Developments in Sweden, Germany, and South Korea not only challenge the assumption of relative stability that is commonly associated with the study of coordinated mar-ket economies, but also the assertion that this stability is associated with the persistence of established political coalitions. Instead, we contend a collapse of old welfare state coalitions as key political driver of labor market reform, with the withdrawal of employers from previous welfare settlements at the center of this development.
    Keywords: coordinated welfare capitalism; labor markets; Sweden; Germany; South Korea; employers; varieties of capitalism; globalization; dialization
    JEL: N0
    Date: 2016
  13. By: Marek Dabrowski
    Abstract: The gross general government debt-to-GDP ratios in many advanced economies have reached the highest levels in peacetime history and continue to grow, putting into question sovereign solvency in these economies. In case of new adverse shocks, whether economic or political, global or country-specific, which result in the deterioration of growth prospects or higher real interest rates, or both, the situation could easily get out control. Apart from the risk of sovereign default, excessive public debt might also have a negative impact on the stability of financial sector and on economic growth in the medium and long term. Debt sustainability simulations for the group of highly-indebted advanced economies – those in which the general government gross public debt-to-GDP ratio exceeded 80 percent in 2015 – suggest that benefits of the current record-low interest rates and post-crisis growth recovery should be used for fiscal consolidation. The aim of this should be not only to stop further expansion of debt-to-GDP ratios, but also to gradually reduce them. Such corrective measures are needed in six out of seven G7 members (Germany being the exception) and in 10 out of 19 euro-area members. The fiscal situation of Japan, where gross debt has reached 250 percent of GDP, is particularly precarious. In addition, unless there are reforms of public pension, health and long-term care systems, fiscal consolidation in advanced economies must also create room for the higher spending levels in these areas that will result from aging populations.
    Date: 2016–11
  14. By: Amaia Altuzarra (Department of Applied Economics V, University of the Basque Country UPV/EHU); Patricia Peinado (Department of Applied Economics V, University of the Basque Country UPV/EHU); Carlos Rodriguez (Department of Applied Economics V, University of the Basque Country UPV/EHU); Felipe Serrano (Department of Applied Economics V, University of the Basque Country UPV/EHU)
    Abstract: In the first part of the paper we confirm the existence of a financial “vanishing effect” for the Eurozone countries since the 90s. In the 70s and 80s -when credit over GDP was still moderate- credit growth still had a positive effect on real growth, but thereafter during the financialization heydays when credit reached a high level, that link broke apart. In the second part we put forward that a main reason explaining why increasing financial deepening stopped to have a positive effect on growth might be due to NFCs having used an important part of their external resources for the acquisition of securities instead of financing real investment. This process of NFC finacialization and the observed increase in their selffinancing ability are two key reassuring indicators showing the disconnection of NFC financial behaviour with their investment decisions
    Keywords: bank credit, economic growth, NFC financing gap, NFC investment
    JEL: O47 G01 G21 C33
    Date: 2016–06–30
  15. By: Beata Bierut; Kamila Kuziemska-Pawlak
    Abstract: Over the last two decades the share of CEE countries’ exports of goods in world exports more than doubled, despite considerable appreciation of their real effective exchange rates. Inspired by this observation, we set out to establish which factors had impact on their export performance. For that purpose, we run a series of panel regressions in which export market shares are explained by various measures of price/cost competitiveness, technological advancement and institutional environment. We make two important contributions to the subject literature. We show that technological factors, specifically innovative outputs (patent applications), had the most significant positive impact on export performance and that was in addition to their impact through the economic potential. Moreover, we verify the impact of the quality of the institutional environment on exports. Specifically, we show that improvements in the overall regulatory quality were conducive to increasing export market shares. The results regarding price/cost competitiveness are less robust and depend on the measure used. Hence, we conclude that further gains in non-price competitiveness should be considered for the region to compete successfully in international markets in the long run.
    Keywords: Central and Eastern Europe, open economy, trade, export market shares, price/cost competitiveness, technological competitiveness, institutional environment
    JEL: F14 F15 R10
    Date: 2016
  16. By: Xisong Jin; Francisco Nadal De Simone
    Abstract: This study provides the first available estimates of systemic risk in the financial sector comprising the banking and investment fund industries during 2009Q4­2015Q4. Systemic risk is measured in three forms: as risk common to the financial sector; as contagion within the financial sector and; as the build­up of financial sector's vulnerabilities over time, which may unravel in a disorderly manner. The methodology models the financial sector components' default dependence statistically and captures the time­varying non-linearities and feedback effects typical of financial markets. In addition, the study estimates the common components of the financial sector's default measures and by identifying the macro-financial variables most closely associated with them, it provides useful input into the formulation of macro­prudential policy. The main results suggest that: (1) interdependence in the financial sector decreased in the first three years of the sample, but rose again later coinciding with ECB's references to increased search for yield in the financial sector. (2) Investment funds are a more important source of contagion to banks than the other way round, and this is more the case for European banking groups than for Luxembourg banks. (3) For tracking the growth of vulnerabilities over time, it is better to monitor the most vulnerable part of the financial sector because the common components of systemic risk measures tend to lead these measures.
    Keywords: financial stability? macro-prudential policy? banking sector; investment funds; default probability? non-linearities? generalized dynamic factor model? dynamic copulas
    JEL: C1 E5 F3 G1
    Date: 2016–10

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