nep-eec New Economics Papers
on European Economics
Issue of 2016‒11‒27
thirteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Measuring Systemic Stress in European Banking Systems* By Heather D. Gibson; Stephen G. Hall; George S. Tavlas
  2. Is it the "How" or the "When" that Matters in Fiscal Adjustments? By Alesina, Alberto; Azzalini, Gualtiero; Favero, Carlo A.; Giavazzi, Francesco; Miano, Armando
  3. Self-fulfilling dynamics: The interactions of sovereign spreads, sovereign ratings and bank ratings during the euro financial crisis* By Heather D. Gibson; Stephen G. Hall; George S. Tavlas
  4. Fiscal multipliers in non-EMU CEE countries By Piotr Krajewski
  5. Optimal fiscal substitutes for the exchange rate in a monetary union By Kaufmann, Christoph
  6. The European refugee crisis and the natural rate of output By Heinisch, Katja; Wohlrabe, Klaus
  7. Changes in nominal rigidities in Poland - a regime switching DSGE perspective By Paweł Baranowski; Zbigniew Kuchta
  8. Sovereign Risk and Bank Risk-Taking By Anil Ari
  9. Stocks or flows? New thinking about monetary transmission through the lending channel By Javier Villar Burke
  11. Media Coverage and ECB Policy-Making: Evidence from a New Index By Hamza Bennani
  12. Identifying and Measuring the Contagion Channels at Work in the European Financial Crises By Massimo Guidolin; Manuela Pedio
  13. The effects of wage flexibility on activity and employment in the Spanish economy By Rafael Doménech; Juan Ramón García; Camilo Ulloa

  1. By: Heather D. Gibson; Stephen G. Hall; George S. Tavlas
    Abstract: We construct a measure of systemic risk in selected EU banking systems using an indirect measure of the system covariance which is also time-varying. We proceed to examine to what extent the resulting measures of systemic stress provide a convincing narrative of events during the period January 2000 to March 2016. The results provide evidence of: (i) rising stress prior to the outbreak of the international financial crisis in 2007/08 in countries with banks exposed to toxic assets; (ii) stress associated with the euro area sovereign debt crisis from 2009/10; and (iii) continued concerns from 2013 out the need for euro area banks to clean up their balance sheets and raise new capital at a time of sluggish profitability.
    Keywords: euro area financial crisis, systemic stress, financial instability, European banks
  2. By: Alesina, Alberto; Azzalini, Gualtiero; Favero, Carlo A.; Giavazzi, Francesco; Miano, Armando
    Abstract: Using data from 16 OECD countries from 1981 to 2014 we find that the composition of fiscal adjustments is much more important than the state of the cycle in determining their effects on output. Adjustments based upon spending cuts are much less costly than those based upon tax increases regardless of whether they start in a recession or not. Our results appear not to be systematically explained by different reactions of monetary policy. However, when the domestic central bank can set interest rates -that is outside of a currency union- it appears to be able to dampen the recessionary effects of tax-based consolidations implemented during a recession. This finding could help understand the recessionary effects of European austerity, which was mostly tax based and implemented within a currency union.
    Keywords: fiscal adjustments plans; Fiscal multipliers; State-dependency;; output effect
    JEL: H50
    Date: 2016–11
  3. By: Heather D. Gibson; Stephen G. Hall; George S. Tavlas
    Abstract: During the euro-area financial crisis, interactions among sovereign spreads, sovereign credit ratings, and bank credit ratings appeared to have been characterized by self-generating feedback loops. To investigate the existence of feedback loops, we consider a panel of five euro-area stressed countries within a three-equation simultaneous system in which sovereign spreads, sovereign ratings and bank ratings are endogenous. We estimate the system using two approaches. First we apply GMM estimation, which allows us to calculate persistence and multiplier effects. Second, we apply a new, system time-varying-parameter technique that provides bias-free estimates. Our results show that sovereign ratings, sovereign spreads, and bank ratings strongly interacted with each other during the euro crisis, confirming strong doom-loop effects.
    Keywords: euro area financial crisis, sovereign spreads, rating agencies
    JEL: E63 G12
  4. By: Piotr Krajewski (University of Lodz)
    Abstract: The effects of fiscal policy in non-EMU Central and Eastern European counties are analysed in the study. The analysis is based on dynamic stochastic general equilibrium model, which takes into account both optimizing and rule-of-thumb households. Results of the study indicate that the share of rule-of-thumb households has significant impact on government spending multipliers. On one hand, the fiscal multiplier reaches three in Hungary, which is the country with highest share of rule-of-thumb households among non-EMU CEE countries. On the other hand, in the Czech Republic, which is the country with lowest share of rule-of-thumb households, the fiscal multiplier is lower than one. Moreover, the results show that effects of government spending shocks on consumption are very sensitive to the share of rule-of-thumb households.
    Keywords: fiscal multiplier, government spending, rule-of-thumb households
    JEL: E62
  5. By: Kaufmann, Christoph
    Abstract: This paper studies Ramsey-optimal monetary and fiscal policy in a New Keynesian 2-country open economy framework, which is used to assess how far fiscal policy can substitute for the role of nominal exchange rates within a monetary union. Giving up exchange rate flexibility leads to welfare costs that depend significantly on whether the law of one price holds internationally or whether firms can engage in pricing-tomarket. Calibrated to the euro area, the welfare costs can be reduced by 86% in the former and by 69% in the latter case by using only one tax instrument per country. Fiscal devaluations can be observed as an optimal policy in a monetary union: if a nominal devaluation of the domestic currency were optimal under flexible exchange rates, optimal fiscal policy in a monetary union is an increase of the domestic relative to the foreign value added tax.
    Keywords: Monetary union,Optimal monetary and fiscal policy,Exchange rate
    JEL: F41 F45 E63
    Date: 2016
  6. 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
  7. By: Paweł Baranowski (University of Lodz); Zbigniew Kuchta (University of Lodz)
    Abstract: We estimate a dynamic stochastic general equilibrium model that allows for regimes Markov switching (MS-DSGE). Existing MS-DSGE papers for the United States focus on changes in monetary policy or shocks volatility, contributing the debate on the Great Moderation and/or Volcker disinflation. However, Poland which here serves as an example of a transition country, faced a wider range of structural changes, including long disinflation, EU accession or tax changes. The model identifies high and low rigidity regimes,with the timing consistent with menu cost explanation of nominal rigidities. Estimated timing of the regimes captures the European Union accession and indirect tax changes. The Bayesian model comparison results suggest that model with switching in both analyzed rigidities is strongly favored by the data in comparison with switching only in prices or in wages. Moreover, we find significant evidence in support of independent Markov chains.
    Keywords: nominal rigidities, Markov switching DSGE models, bayesian model comparison
    JEL: C11 E31 J30
  8. By: Anil Ari
    Abstract: In European countries recently hit by a sovereign debt crisis, banks have sharply raised their holdings of domestic sovereign debt, reduced credit to firms, and faced rising financing costs, raising concerns about economic and financial resilience. This paper develops a general equilibrium model with optimizing banks and depositors to account for these facts and provide a framework for policy assessment. Under-capitalized banks in default-risky countries have an incentive to gamble on domestic sovereign bonds. Unless there is perfect transparency of bank balance sheets, the optimal reaction by depositors to bank insolvency risk leaves the economy susceptible to self-fulfilling shifts in sentiments. In a bad equilibrium, sovereign risk shocks lead to a prolonged period of financial fragility and a persistent drop in output. The model is quantified using Portuguese data and generates similar dynamics to those observed in the Portuguese economy during the debt crisis. Policy interventions face a trade-off between alleviating funding constraints and strengthening incentives to gamble. Liquidity provision to banks may eliminate the good equilibrium when not targeted. Targeted interventions have the capacity to eliminate adverse equilibria.
    JEL: E44 E58 F34 G21 H63
    Date: 2016–11–21
  9. By: Javier Villar Burke (European Commission)
    Abstract: The lending channel is conventionally understood to transmit monetary policy through the origination of new loans. In this paper, we postulate that the lending channel may also operate via the stock of existing loans. Monetary shocks generate two types of income effects: 1) monthly mortgage payments are impacted when rates are reset; 2) inflation erodes the real value of mortgage payments and increases the disposable income of borrowers. These income effects translate into variations in output due to the heterogeneous propensity to consume of individual economic agents. Three types of factors determine the importance of these income effects for individual households and at macro level: 1) borrowers’ features, such as income distribution, indebtedness and debt burden, 2) loan features, such as the period of rate fixation and 3) price developments. Significant differences in these factors across euro area Member States can distort a homogeneous transmission of the single monetary policy.
    Keywords: Euro area, monetary policy, monetary transmission, income effects, lending channel, mortgages.
    JEL: D33 D47 D90 E43 E51 E52 F36 F42 G21
    Date: 2016
  10. By: Magdalena Olczyk (Gdansk University of Technology, Gdansk, Poland); Aleksandra Kordalska (Gdansk University of Technology, Gdansk, Poland)
    Abstract: The main objective of this paper is to assess the impact of selected determinants on both exports in value added and exports in gross terms for seven CEE economies, based on 13 manufacturing subsectors and for the period 1995-2011. The results of the analysis show a substantial decrease in domestic value added in a majority of the countries, especially in medium-high- and high-tech industries. For the seven CEE countries the impact of the main determinants (except vertical specialisation) are fairly similar when exports are measured in value added or in gross terms. The results indicate a greater impact of labour productivity and highly skilled employees on generating domestic value added in the manufacturing sector. CEE countries do not achieve comparative advantages of a capital-intensive nature in exports of manufactured products. Additionally, manufacturing in CEE countries does not serve a ‘carrier function’ for services to contribute to a country’s export performance.
    Keywords: gross exports, value added exports, CEE economies, manufacturing
    JEL: C23 F12 F14 F40 L60
    Date: 2016–09
  11. By: Hamza Bennani
    Abstract: Using a novel index measuring media's uncertainty regarding the effectiveness of European Central Bank's (ECB) policy actions, this paper estimates the interest rate policy of the ECB with respect to media coverage of its monetary policy decisions. Our results suggest that the monetary institution implements a restrictive (accommodative) monetary policy, through its repo rate, in response to an increase (decrease) of the uncertainty expressed by the media concerning the effectiveness of its past policy actions, in particular since the global financial crisis. These results are robust when considering an alternative proxy of central bank's perceived effectiveness and ECB's unconventional policy measures in the estimation procedure. Our findings thus shed some light on the decision-making procedure of the ECB when the latter has to deal with the uncertain impact of its policy decisions as expressed by media coverage, and thus, address a critical issue related to the political economy of central banking.
    Keywords: Monetary Policy, ECB, Public Media, Taylor Rule.
    JEL: E43 E52 E58
    Date: 2016
  12. By: Massimo Guidolin; Manuela Pedio
    Abstract: We use impulse response functions computed from linear and nonlinear, Markov switching models to investigate the strength of four alternative contagion channels. These are the flight-to-quality, flight-to-liquidity, risk premium, and correlated information channels. We study the differences among estimates and impulse response functions across linear and nonlinear models to identify and measure cross-asset contagion. An application to weekly Eurozone data for a 2007-2014 sample, reveals that a two-state Markov switching model shows accurately estimated but economically weak contagion effects in a crisis regime. These results are mainly explained by a flight-to-quality channel. Furthermore, we extend our analysis the analysis to investigate whether European market may be subject to contagion when exposed to external shocks, such as those originated from the US subprime crisis. Keywords: Contagion channels, Markov switching models, vector autoregressions, impulse response function, flight-to-quality, flight-to-liquidity, risk premium. JEL codes: G12, E43, C32.
    Date: 2016
  13. By: Rafael Doménech; Juan Ramón García; Camilo Ulloa
    Abstract: In this paper we estimate the macroeconomic effects of the greater wage and firms’ internal flexibility promoted by various changes in Spanish labour regulations approved since 2012. To do so, we propose a structural VAR that allows us to break down the changes in the main macroeconomic variables into different structural shocks.
    Keywords: Economic Analysis , Spain , Working Paper
    JEL: C32 E24 J08
    Date: 2016–11

This nep-eec issue is ©2016 by Giuseppe Marotta. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.