nep-eec New Economics Papers
on European Economics
Issue of 2016‒12‒11
ten papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. The Effectiveness of Unconventional Monetary Policy in the Euro Area: An Event and Econometric Study By Steve Ambler; Fabio Rumler
  2. Sources of the small firm financing premium: Evidence from euro area banks By Holton, Sarah; McCann, Fergal
  3. The impact of the legal and operational structures of euro-area banks on their resolvability By Dirk Schoenmaker
  4. The Transfer and Adjustment Problems in the Balkans By Vladimir Gligorov
  5. Predicting the rise of right-wing populism in response to unbalanced immigration By Boris Podobnik; Marko Jusup; H. Eugene Stanley
  6. The Nordic Model and the Oil Nation By Roberto Iacono
  7. Brexit and Trade: Between Facts and Irrelevance By Phedon Nicolaides; Thibault Roy
  8. Assessing the sustainability of Irish residential property prices: 1980Q1-2016Q2 By Kennedy, Gerard; O'Brien, Eoin; Woods, Maria
  9. The Euro’s Trade Effect: A Meta-Analysis By Petr Polak
  10. The Economic Impact of East‐West Migration on the European Union By Kahanec, Martin; Pytlikova, Mariola

  1. By: Steve Ambler (ESG, Université du Québec à Montréal, Canada; C.D. Howe Institute, Canada; The Rimini Centre for Economic Analysis, Italy); Fabio Rumler (Economic Analysis Division, Oesterreichische Nationalbank, Austria)
    Abstract: We use daily data on government bond yields and market-based inflation expectations (from inflation-linked swaps) to measure the effectiveness of unconventional monetary policy (UMP) in the euro area. We focus on the effects of policy announcements on ex-ante real interest rates, since the main transmission mechanism of monetary policy is through real interest rates and their effect on aggregate demand. We find evidence of significant impacts of UMP announcements of the ECB on real interest rates at maturities of five and ten years that operate mainly by raising inflation expectations. When distinguishing among UMP announcements that exceeded or disappointed market expectations, we find that the former significantly reduced nominal and real interest rates and increased inflation expectations while the latter had the opposite effect.
    Date: 2016–11
  2. By: Holton, Sarah (BSI Bank and CEPR); McCann, Fergal (Central Bank of Ireland)
    Abstract: Conditions in the banking sector have been shown to have a meaningful impact on lending flows and real economic activity, with evidence that these effects are more pronounced for smaller and more bank-dependent borrowers. Using monthly panel data on banks across twelve euro area countries from 2007 to 2015, we investigate the role played by banks' market power, the stability of their funding base, their holdings of sovereign debt and measures of their balance sheet health on the relative interest rate they charge on small versus large large loans (the Small Firm Financing Premium, SFFP), as a proxy for the cost of credit to small versus large firms. We find strong evidence that bank market power, sovereign bond holdings and balance sheet weaknesses lead to disproportionate borrowing cost increases for small firms, and that these features act to exacerbate the impact of a weak macroeconomy. This paper provides evidence that smaller firms, who are more dependent on the banking sector, are affected more by bank balance sheet weakness than larger firms.
    Keywords: SMEs, Cost of Credit, Bank Balance Sheets, Bank Market Power
    Date: 2016–12
  3. By: Dirk Schoenmaker
    Abstract: This material was originally published in a paper provided at the request of the Committee on Economic and Monetary Affairs of the European Parliament and commissioned by the Directorate-General for Internal Policies of the Union and supervised by its Economic Governance Support Unit (EGOV). The opinions expressed in this document are the sole responsibility of the authors and do not necessarily represent the official position of the European Parliament. The original paper is available on the European Parliament’s webpage. © European Union, 2016. In the aftermath of the financial crisis, the question of how to handle a big bank’s collapse has arisen. Large banks perform functions that if disrupted could seriously damage the financial sector and the real economy. The European Union’s new resolution regime introduced by the Bank Recovery and Resolution Directive (BRRD) aims at orderly resolution of banks, with creditors – and to greatest the extent possible, not the taxpayer – bearing the cost of bankruptcy, while the banking functions crucial to the financial system and the economy continue to be performed. The Single Resolution Board (SRB) has been set up exactly to carry out this task in the banking union. This Policy Contribution evaluates the obstacles to resolvability that the legal and operational structures of the large euro-area banks could present, assuming that it is possible to liquidate smaller and medium-sized banks through transfer of their relevant activities to other banks. Dirk Schoenmaker classifies the large euro-area banks according to their number of legal entities, foreign assets and their governance. From this, he identifies three groups of banks - domestic banks with a limited number of entities; domestic cooperative banks with more complicated legal and decision-making structures; cross-border banks with complex structures operating in multiple jurisdictions. The paper focuses on specific aspects of the SRB’s resolvability assessment process. The legal and operational structures of banks should facilitate the separation of critical and non-critical bank operations. Non-critical operations should be liquidated when a bank is in resolution. The SRB should take a strict line on critical functions and, if necessary, overrule national resolution authorities (NRAs). The SRB should not only simplify complex legal structures but also streamline protracted decision-making procedures within banks. Only when effective cooperation arrangements with foreign resolution authorities are in place, should the SRB rely on the efficient single-point-of-entry (SPE) approach. Otherwise, a multiple-point-of-entry (MPE) approach is more realistic. Within the banking union, the SRB should promote the more efficient SPE approach in cooperation with NRAs. There is currently no clarity on the provision of liquidity to a resolved bank. Liquidity is important if the resolved bank is to re-open for business. Dirk Schoenmaker recommends that the European Central Bank should clarify that it is prepared to provide emergency liquidity assistance (ELA) to properly resolved banks.
    Date: 2016–12
  4. By: Vladimir Gligorov (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: Abstract How to deal with significant external imbalances due to persistent cross-border financial flows which eventually dry out while accumulated foreign debts need to be financed from increased exports? Keynes and Ohlin, primarily, debated an apparently more specific issue of unilateral transfers in the case of German reparations after the World War I and that debate has had lasting influence on the theory of trade and international finance and even on the understanding of the dynamics of exchange rates in financial and fiscal adjustment. These issues have resurfaced in the discussions of financial crisis in a monetary union, like that of the euro area. The aim of this essay is to use the arguments presented in this debate and in subsequent clarifications and extensions to understand the development of external imbalances in the Balkans and the prolonged adjustment in the context of the financial crisis after 2008. The motivation is that this is an important topic in international macroeconomics and a recurrent problem in this region, though I will look more thoroughly only into the last episode of the financial crisis from 2008 onwards. The essay follows the arguments advanced in this classic debate and applies them to examples of post-crisis adjustment in the Balkans (not just in the post-socialist countries, but also looking at the problems that Greece is having with servicing its large foreign debt). The essay should provide the framework for the understanding of Balkan problems of adjustment to outward transfers to service in some cases of unsustainable foreign debts. It also seeks to develop hypotheses that invite a detailed look at the data and their assessment by somewhat more in depth discussion of particular cases.
    Keywords: macroeconomic imbalances, current account adjustment, debt problems, Greece, Balkans, Keynes
    JEL: E12 E44 F32 F34
    Date: 2016–11
  5. By: Boris Podobnik; Marko Jusup; H. Eugene Stanley
    Abstract: Among the central tenets of globalization is free migration of labor. Although much has been written about its benefits, little is known about the limitations of globalization, including how immigration affects the anti-globalist sentiment. Analyzing polls data, we find that over the last three years in a group of EU countries affected by the recent migrant crisis, the percentage of right-wing (RW) populist voters in a given country depends on the prevalence of immigrants in this country's population and the total immigration inflow into the entire EU. The latter is likely due to the EU resembling a supranational state, where the lack of inner borders causes that "somebody else's problem" easily turns into "my problem". We further find that the increase in the percentage of RW voters substantially surpasses the immigration inflow, implying that if this process continues, RW populism may democratically prevail and eventually lead to a demise of globalization. We present evidence for tipping points in relation to the rise of RW populism. Finally, we model these empirical findings using a complex network framework wherein the success of globalization largely rests on the balance between immigration and immigrant integration.
    Date: 2016–12
  6. By: Roberto Iacono (NTNU - Norwegian University of Science and Technology [Trondheim, Norway])
    Abstract: This paper investigates the long-run economic effects of large natural resource endowments, through a comparative quantitative case study. Focusing on three economic features of the so-called Nordic model, namely low income inequality, high labour productivity growth, and high welfare spending, this study estimates the shocks to these key features in Norway after the country became one of the world's largest oil exporters. A synthetic control unit constructed by weighting Nordic countries that resemble the economy of Norway without being oil producers provides the most reliable comparison unit to estimate the causal effects constituting the papers threefold contribution. First, results show that the resource windfall contributed to relatively higher top income shares, adding natural resources to the set of drivers of income inequality in Norway. Second, the resource windfall boosted labour productivity. Third, resource revenues contributed to financing the steadily increasing gap between Norway and other Nordic countries in the degree of welfare generosity. Sensitivity tests through in-time placebo tests and difference-in-differences estimations confi rm the validity of these results.
    Keywords: Nordic Model, Resource windfall, Synthetic Control Method,Norway
    Date: 2016–09–01
  7. By: Phedon Nicolaides (Director of Studies and Jan Tinbergen Chair, Department of European Economic Studies, College of Europe (Bruges)); Thibault Roy (Academic Assistant, Department of European Economic Studies, College of Europe (Bruges))
    Abstract: This paper examines four claims of Brexit supporters on the United Kingdom’s post-exit arrangement regarding trade with the EU. It reviews the nature and importance of UK-EU trade links and the possible impact on the UK of leaving the EU customs union. It argues that the claims of pro-Brexit supporters on trade possibilities are based on incongruous arguments which are either logically inconsistent or ignore the extent of commitment required by trade agreements that tackle regulatory barriers, not just tariffs and border restrictions. We demonstrate that the “attractiveness” of the UK market will decline as the UK enters in progressively more agreements. We conclude by analysing the implications for the UK of “taking back control” of its trade policy.
    Keywords: United Kingdom, European Union, trade, Brexit
    JEL: F13 F15
    Date: 2016–12
  8. By: Kennedy, Gerard (Central Bank of Ireland); O'Brien, Eoin (Central Bank of Ireland); Woods, Maria (Central Bank of Ireland)
    Abstract: Developing indicators to assess the sustainability of house price movements is a key priority for macroprudential policy makers. Using historical data from the 1980s and cross-country comparisons, this Letter presents a number of indicators to support this requirement. The first approach uses a recursive unit root methodology to identify emerging explosive behaviour in prices based on the historical time series properties of the data and the asset-pricing literature. The second approach uses a simple reduced form model and the empirical housing literature to identify a fundamental house price series against which actual developments can be benchmarked. Such approaches can be used to complement traditional statistical indicators of price misalignments such as deviations of the price- to-rent ratio and the price-to-income ratio from their respective historical averages. Both approaches have some success in identifying "bubble" behaviour or overvaluation in the Irish market prior to the Irish crisis. The recovery in Irish house prices since 2013 has meant that the statistical indicators are currently above long-term averages. As at 2016Q2 prices are assessed to remain just below fundamental values using a suite of valuation models and are not suggestive of emerging bubble-like behaviour. Close monitoring of this market is required given the uncertainty associated with house price movements.
    Date: 2016–11
  9. By: Petr Polak (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic)
    Abstract: The effect of common currency on bilateral trade also called Rose effect has been examined extensively in past decade. There is a huge variance of results in primary research which drives a large debate. Using meta-analysis we exploit 51 studies and 3254 estimates of rose effect and provide empirical review. Our results are in contrast with the most recent studies examining the effect of euro on bilateral trade and we found that publication bias in this area of research is diminishing. This study finds the effect of euro on bilateral trade to be between 2 and 6%. Using meta regression we conclude that data source, data structure and control variables are significantly affecting the estimated effect size, but estimation technique used does not.
    Keywords: Rose effect, euro, trade, meta-analysis, publication bias
    JEL: C83 O12 O32 D24
    Date: 2016–11
  10. By: Kahanec, Martin (Central European University); Pytlikova, Mariola (CERGE-EI)
    Abstract: This study contributes to the literature on destination‐country consequences of international migration with investigations on the effects of immigration from new EU member states and Eastern Partnership countries on the economies of old EU member states over the years 1995‐2010. Using a rich international migration dataset and an empirical model accounting for the endogeneity of migration flows we find positive and significant effects of post‐enlargement migration flows from new EU member states on old member states' GDP, GDP per capita, and employment rate and a negative effect on output per worker. We also find small, but statistically significant negative effects of migration from Eastern Partnership countries on receiving countries' GDP, GDP per capita, employment rate, and capital stock, but a positive significant effect on capital‐to‐labor ratio. These results mark an economic success of the EU enlargements and EU's free movement of workers.
    Keywords: EU enlargement, free mobility of workers, migration impacts, European Single Market, east‐west migration, Eastern Partnership
    JEL: J15 J61 J68
    Date: 2016–11

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