nep-eec New Economics Papers
on European Economics
Issue of 2016‒12‒04
fourteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. The evolution of inflation expectations in euro area markets By Ricardo Gimeno; Eva Ortega
  2. Government Debt Deleveraging in the EMU By Alexandre Lucas Cole; Chiara Guerello; Guido Traficante
  3. Capital and labour (mis)allocation in the euro area: some stylized facts and determinants By Gamberoni, Elisa; Giordano, Claire; Lopez-Garcia, Paloma
  4. The Distributional Impact of Structural Reforms By Orsetta Causa; Mikkel Hermansen; Nicolas Ruiz
  5. Absorbing Shocks: National Rainy-Day Funds and Cross-Country Transfers in a Fiscal Union By Timothy J. Goodspeed
  6. Correlation changes between the risk-free rate and sovereign yields of euro area countries By De Santis, Roberto; Stein, Michael
  7. Bank efficiency and regional growth in Europe: new evidence from micro-data By Belke, Ansgar; Haskamp, Ulrich; Setzer, Ralph
  8. An Early Warning System for Macro-prudential Policy in France. By V. Coudert; J. Idier
  9. A sectoral net lending perspective on Europe By Florentin GLÖTZL; Armon REZAI
  10. Collateral, Central Bank Repos, and Systemic Arbitrage By Fecht, Falko; Nyborg, Kjell G; Rocholl, Jorg; Woschitz, Jiri
  11. What impact does the ECB’s quantitative easing policy have on bank profitability? By Maria Demertzis; Guntram B. Wolff
  12. Home bias in bank sovereign bond purchases and the bank-sovereign nexus By C. Andreeva, Desislava; Vlassopoulos, Thomas
  13. Short Run Effects of Fiscal Policy on GDP and Employment: Swedish Evidence By Hjelm, Göran; Stockhammar, Pär
  14. US-euro area term structure spillovers, implications for central banks By Nyholm, Ken

  1. By: Ricardo Gimeno (Banco de España); Eva Ortega (Banco de España)
    Abstract: This paper explores the behaviour of inflation expectations across countries that share their monetary policy, in particular those of the European Monetary Union. We investigate the possible common features at the various horizons, as well as differentials across euro area countries. A multi-country dynamic factor model based on Diebold et al. (2008), where we also add a liquidity risk component, is proposed and estimated using daily data from inflation swaps for Spain, Italy, France, Germany and the euro area as a whole, and for a wide range of horizons. It allows us to calculate the proportion of common vs country-specific components in the term structure of inflation expectations. We find sizable differences in inflation expectations across the main euro area countries only at short maturities, while in general a common component predominates throughout the years, especially at long horizons. The common long-run level of infl ation expectations is estimated to have fallen since late 2014, while an increased persistence of lower expected inflation and for longer horizons is estimated from 2012. There has been no reversal in either of these characteristics following the announcement and implementation of the ECB’s unconventional monetary policy measures.
    Keywords: inflation expectations; monetary union; inflation-linked swaps; multicountry dynamic factor model; liquidity risk premium.
    JEL: E31 C32 G13
    Date: 2016–11
  2. By: Alexandre Lucas Cole (LUISS "Guido Carli" University); Chiara Guerello (LUISS "Guido Carli" University); Guido Traficante (European University of Rome)
    Abstract: We build a Two-Country Open-Economy New-Keynesian DSGE model of a Currency Union, with a debt-elastic government bond spread and incomplete international financial markets, to study the e ects of government debt deleveraging. We evaluate the stabilization properties and welfare implications of di erent deleveraging schemes and instruments, under a range of alternative shocks and under alternative scenarios for fiscal policy coordination, bringing to policy conclusions for the proper government debt management in a Currency Union. We find that: a) coordinating on the net exports gap and consolidating budget constraints across countries when deleveraging provides more stabilization, b) taxes are a better instrument for deleveraging compared to government consumption or transfers, c) by backloading the deleveraging process one can achieve greater stabilization over time, d) deleveraging government debt increases the volatility and persistence of the economy after other shocks. Our policy prescriptions for the Eurozone are to reduce government debt more gradually over time and less during recessions, to do so using distortionary taxes, while concentrating on reducing international demand imbalances and maybe creating some form of fiscal union.
    Keywords: Sovereign Debt, International Policy Coordination, Monetary Union, New Keynesian.
    JEL: H63 E63 F42 F45 E12
    Date: 2016
  3. By: Gamberoni, Elisa; Giordano, Claire; Lopez-Garcia, Paloma
    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 emerge. First, in all countries with the exception of Germany, capital allocation has worsened over time whereas the efficiency of labour reallocation has not changed significantly. Second, the observed increase in capital misallocation has been particularly severe in services as opposed to industry. Third, misallocation of both labour and capital dropped in all countries in 2009 and again for some country-sectors in 2011-2012. We next take stock of the possible drivers of input misallocation dynamics in a standard panel regression framework. Controlling for demand conditions and for the initial level of misallocation, heightened uncertainty, restrictive bank credit standards and tight product and labour market regulation are found to have boosted input misallocation, whereas the Great Recession per se exerted a cleansing effect. JEL Classification: D24, D61, O47
    Keywords: allocative efficiency, capital, Great Recession, labour, total factor productivity
    Date: 2016–11
  4. By: Orsetta Causa; Mikkel Hermansen; Nicolas Ruiz
    Abstract: In a majority of OECD countries, GDP growth over the past three decades has been associated with growing income disparities. To shed some lights on the potential sources of trade-offs between growth and equity, this paper investigates the long-run impact of structural reforms on household incomes across the distribution, hence on income inequality. The paper builds on a macro-micro approach by combining recent macro-level estimates of the impact of structural reforms on macroeconomic growth with micro-level estimates of the impact of structural reforms on household incomes across the income distribution. It considers the sources of macroeconomic growth, by decomposing growth in GDP per capita into growth in labour utilisation and labour productivity. This allows for shedding light on the mechanisms through which growth and its drivers, including policy drivers, benefit household incomes at different points of the income distribution. Most structural reforms are found to have little impact on income inequality when the latter is assessed through measures that emphasise the middle class. By contrast, a higher number of structural reforms, in particular social protection reforms, are found to have an impact on income inequality and thus may raise tradeoffs and synergies between growth equity objectives when inequality is assessed through measures that emphasise relatively more incomes among the poor. This corresponds to higher degrees of inequality aversion. L'impact distributionnel des politiques structurelles Dans la majorité des pays de l'OCDE la croissance du PIB au cours des trois dernières décennies a été associée à des disparités croissantes de revenus. Afin de comprendre le lien entre ces deux phénomènes, cet article étudie l'impact de long terme des réformes structurelles sur la distribution des revenus. Le cadre empirique proposé est une approche macro-micro, combinant des estimations récentes au niveau macro de l'impact des réformes structurelles sur la croissance macroéconomique, avec des estimations au niveau micro de l'impact des réformes structurelles sur les revenus des ménages le long de la distribution. Les sources de la croissance sont aussi décomposées, entre travail et productivité, afin d’illustrer par quels mécanismes la croissance et les politiques structurelles bénéficient aux ménages. La plupart des réformes structurelles se trouvent avoir peu d'impact sur les inégalités de revenu lorsque le focus est sur la classe moyenne. En revanche, un nombre plus élevé de réformes structurelles, en particulier les réformes de la protection sociale, se trouvent avoir un impact significatif lorsque le focus est sur les segments les plus pauvres de la distribution.
    Keywords: growth, inequality, structural policies
    Date: 2016–11–25
  5. By: Timothy J. Goodspeed (Hunter College; Graduate Center, CUNY; CES-Info; GEN)
    Abstract: In this paper we investigate the interplay between national rainy-day funds and supra-national transfers in a fiscal union. Given that the EU has established rules limiting deficits, national rainy-day funds could in theory provide a way for countries to obey the rules and use fiscal policy, yet avoid using austerity measures during a recession. The rainy-day fund is self-insurance and we examine the funding of a national rainy-day fund for a country in isolation. We then introduce a fiscal union while allowing member countries to retain some fiscal policy control. We find that moral hazard leads to lower contributions to a rainy day fund with a fiscal union present, and further that the higher the fiscal transfer, the lower will be the contributions to the rainy-day fund. The optimal size of the fiscal union trades-off the ex-post insurance provided by the union and the moral hazard which reduces national ex-ante preparation for stabilization policies. Optimally, the insurance provided by the fiscal union should be lower (1) the more effective is own-fiscal policy; (2) the more the presence of the fiscal union reduces rainy-day fund savings; (3) the lower is the relative probability of recession; and (4) the lower is the utility gain of redistribution in the union. We also find that commitment to a transfer policy is essential. A fiscal union that is prone to break the rules on transfers negatively impacts the ex-ante contributions to individual members’ rainy day funds.
    Keywords: fiscal union, fiscal transfers, federation, rainy-day funds, fiscal stabilization
    JEL: E6 H1 H6 H7
    Date: 2016–11–07
  6. By: De Santis, Roberto; Stein, Michael
    Abstract: We study correlations between the risk-free rate and sovereign yields of ten euro area countries using smooth transition conditional correlation GARCH (STCC-GARCH) specifications, controlling for credit risk in mean and variance equations and conditioning non-linearly to liquidity risk. Correlations are state-dependent and heterogeneous across jurisdictions. Using panel vector autoregression models, we identify the macro factors influencing the correlations: interbank credit risk, the Greek crisis, and break-up risk. We show that the European Central Bank’s asset purchase programmes helped restore the pass-through relationship. We also make a methodological contribution by estimating all STCC-GARCH parameters at once and introducing an STCC-GARCHX. JEL Classification: G12, G15
    Keywords: euro area, government bonds, monetary policy, smooth transition models
    Date: 2016–11
  7. By: Belke, Ansgar; Haskamp, Ulrich; Setzer, Ralph
    Abstract: This paper examines whether European regions which incorporate banks with a higher intermediation quality grow faster and are more resilient to negative shocks than its less efficient peers. For this purpose, we measure a bank's intermediation quality by estimating its pro t and cost efficiency while taking the changing banking environment after the financial crisis into account. Next, we aggregate the efficiencies of all banks within a NUTS 2 region to obtain a regional proxy for fi nancial quality in twelve European countries. Our results show that relatively more pro t efficient banks foster growth in their region. The link between fi nancial quality and growth is valid both in the pre-crisis and post-crisis period. These results provide evidence to the importance of swiftly restoring bank pro tability in euro area crisis countries through addressing high non-performing loans ratios and decisive actions on bank recapitalization. JEL Classification: G21, O16, O47, O52
    Keywords: bank efficiency, Europe, financial development, regional growth
    Date: 2016–11
  8. By: V. Coudert; J. Idier
    Abstract: We construct an early warning system for detecting banking crises that could be used for the macroprudential policy conduct in France. First, we select macro-financial risk indicators among a large number of candidates by considering their performances both over a panel of ten euro area countries and at the French level, for the 1985:Q1 to 2009:Q4. Second, we run all the logit models including four of these indicators, one being necessarily a measure of credit gap to fit the Basel Committee recommendations. We then retain two sets of models: one including those with all coefficients significant and expected signs, another one, obtained by relaxing these criteria. Third, we aggregate the probabilities estimated by the models, by giving each a weight proportional to its usefulness at predicting crises either at the panel or the country-level. The simulations performed both over and out of the sample show that aggregating more models yields better results than relying on one single model or only a few. Performance is also enhanced by aggregating models’ results with country-specific weights relatively to common panel-weightings.
    Keywords: Macroprudential policy, Banking Crises, Early Warning Indicators
    JEL: E52 G12 C58
    Date: 2016
  9. By: Florentin GLÖTZL (Vienna University of Economics and Business, Welthandelsplatz 1, 1020 Vienna, Austria); Armon REZAI (Vienna University of Economics and Business, Welthandelsplatz 1, 1020 Vienna, Austria)
    Abstract: The paper investigates net lending and net borrowing flows of the institutional sectors in Europe since the introduction of the Euro in 1999. Applying a simple statistical apparatus, this paper is novel in describing the sectoral behavior leading up to and during the crisis. We find that (1) many countries of the Northern group were characterized by low public deficits or even budget surpluses, current account surpluses and a private sector in a net lending position. In countries of the Southern periphery, in the Anglo-Saxon countries as well as in many Eastern European Economies private sector net borrowing coincided with a budget deficit and substantial current account deficits. (2) With the onset of the crisis private net lending soared in all countries while all governments incurred deficits, consistent with the notion of a balance sheet recession. (3) Private net lending is pro-cyclical, reinforcing the economic downturn, while public net lending is countercyclical in all countries. (4) Household net lending tends to lead the business cycle, while corporate net lending tends to lag it especially in the Northern group. (5) Prominent concepts asserting causal relationships in sectoral net lending, such as Ricardian equivalence and the twin deficit hypothesis are not supported by the data. (author's abstract)
    Keywords: net lending and net borrowing / Euro crisis / Ricardian equivalence / twin deficit / current account imbalances
    Date: 2016–07
  10. By: Fecht, Falko; Nyborg, Kjell G; Rocholl, Jorg; Woschitz, Jiri
    Abstract: Central banks are under increased scrutiny because of the rapid growth in, and composition of, their balance sheets. Therefore, understanding the processes that shape these balance sheets and their consequences is crucial. We contribute by studying an extensive dataset of banks' liquidity uptake and pledged collateral in central bank repos. We document systemic arbitrage whereby banks funnel credit risk and low-quality collateral to the central bank. Weaker banks use lower quality collateral to demand disproportionately larger amounts of central bank money (liquidity). This holds both before and after the financial crisis and may contribute to financial fragility and fragmentation.
    Keywords: banks; central bank; Collateral; collateral policy; financial fragmentation; financial stability; interbank market; liquidity; repo; systemic arbitrage
    JEL: E42 E51 E52 E58 G12 G21
    Date: 2016–11
  11. By: Maria Demertzis; Guntram B. Wolff
    Abstract: Quantitative easing (QE) affects banks’ profitability in three main ways. First, as QE drives up bond prices, banks holding such bonds see their balance sheets strengthened. Second, QE reduces long-term yields and thereby reduces term spreads. With this, the lending-deposit ratio spread falls, making it harder for banks to generate net interest income on new loans. Last, QE improves the economic outlook, which should help banks exposed to the economy find new lending opportunities and should reduce problems with non-performing loans. The effects of QE on bank profitability are therefore not one directional. If anything, the immediate effect should be positive. Banks themselves have been quite negative about the impact of QE on their net interest income, but they have also acknowledged its positive impact on capital gains (ECB Bank Lending Survey). Lending-deposit spreads for new lending have fallen significantly. Looking at actual bank profits, net interest income has been stable. Moreover, bank profitability has increased mostly as a result of efforts to clean balance sheets of impaired assets (at least until the end of 2015). This is consistent with a reduction in non-performing loans (NPLs), particularly in countries where NPL levels were abnormally high. Moreover, we show that bank profitability in some countries has been a concern for many years now, starting well before the QE programme. The main drivers of low profitability have been non-performing loans, legal risks and other problems unrelated to net interest income, which has remained fairly stable. Overall, the authors cannot yet see any major bank profitability issue arising out of the ECB’s QE programme.
    Date: 2016–11
  12. By: C. Andreeva, Desislava; Vlassopoulos, Thomas
    Abstract: We study whether a pre-existing link between bank and sovereign credit risk biased euro area banks?' sovereign debt portfolio choices during 2011Q4 and 2012Q1 – ?a period of exceptional increases in their domestic sovereign bond holdings. We ?find that banks whose creditworthiness is linked to that of the respective sovereign tended to purchase higher amounts of domestic sovereign bonds relative to their main assets if the CDS spreads on domestic sovereign bonds were higher. Moreover, for elevated sovereign CDS levels, banks whose creditworthiness is ex ante more strongly positively correlated with that of the local sovereign exhibit larger purchases of domestic government bonds. These ?findings are consistent with ?risk shifting ?behaviour, where by investing in domestic government bonds banks earn the full, high risk premium while the risk is largely borne by their creditors as it materialises in states of the world where the banks are likely to be insolvent anyway. As a result, domestic sovereign debt offers ex ante higher returns to bank shareholders than alternative ways to build up precautionary liquidity buffers or indeed to execute carry trades, such as to invest in non-domestic government bonds. JEL Classification: G01, G11, G21, H6
    Keywords: bank-sovereign nexus, sovereign default
    Date: 2016–11
  13. By: Hjelm, Göran (National Institute of Economic Research); Stockhammar, Pär (National Institute of Economic Research)
    Abstract: Since the financial crisis, there has been a surge in theoretical and empirical studies on the macroeconomic effects of fiscal policy. Moreover, the protracted state of low demand since 2008 together with constrained monetary policy have put emphasis on non-linear effects of fiscal policy. In this paper, we use a newly published quarterly Swedish data set on fiscal variables and estimate the effects on GDP and employment for the period 1980q1–2015q3. We examine the linear and non-linear short run effects of shocks to government consumption, investments, transfers to households, indirect taxes on consumption goods and direct taxes on household income. We find that fiscal policy generally has Keynesian effects although often insignificant. The multipliers are on average greater when estimated during the period of flexible exchange rate, 1993q1–2015q3. Shocks to government investments were found to have the greatest effect on both GDP and employment. Looking at non-linear effects it was interestingly found that all three fiscal spending variables have rather substantial positive effects on employment in slumps while the employment effects of shocks to taxes are small indeed. However, the non-linear results are sensitive both to the instrument used and the definition of “slump”.
    Date: 2016–11–23
  14. By: Nyholm, Ken
    Abstract: Spillovers between the US and euro area term structures of interest rates are examined. Implications for monetary policy are investigated using term-structure metrics that proxy conventional and unconventional instruments, i.e. the short rate, the 10 year term premium, and the 10 year risk-free rate. A new discrete-time arbitrage-free term structure model is used to extract these variables, at a daily frequency during the period covering 2005 to 2016. Relying on forecast error variance decompositions, following Diebold and Yilmaz (2009), it is found that transatlantic spillovers have increased by approximately 11%-points during the examined period, making it more dicult for central banks to directly assess the impact of their policies. JEL Classification: C32, E43, E58
    Keywords: international spillovers, monetary policy, yield curve modelling
    Date: 2016–11

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