nep-eec New Economics Papers
on European Economics
Issue of 2017‒01‒01
nineteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. The role of price and cost competitiveness for intra- and extra-euro area trade of euro area countries By Elena Bobeica; Olegs Tkacevs; Styliani Christodoulopoulou
  2. Sectoral allocation and macroeconomic imbalances in EMU By Niels Gilbert; Sebastiaan Pool
  3. Policy uncertainty and international financial markets: The case of Brexit By Belke, Ansgar; Dubova, Irina; Osowski, Thomas
  4. Business cycle synchronization in the EMU: Core vs. periphery By Belke, Ansgar; Domnick, Clemens; Gros, Daniel
  5. Uncovering the heterogeneous effects of ecb unconventional monetary policies across euro area countries By Pablo Burriel; Alessandro Galesi
  6. Has the Grexit news spilled over into euro area financial markets? The role of domestic political leaders, supranational executives and institutions By Wildmer Daniel Gregori; Wildmer Agnese Sacchi
  7. Access to Credit and Unconventional Monetary policy in the Eurozone after the Financial Crisis By Petr Korab
  8. Measuring fiscal spillovers in EMU and beyond: A global VAR approach By Belke, Ansgar; Osowski, Thomas
  9. The US$/€ exchange rate: Structural modeling and forecasting during the recent financial crises By Claudio Morana
  10. Banks credit and productivity growth in the EU By Hassan, Fadi; Di Mauro, Filippo; Ottaviano, Gianmarco I. P.
  11. Frequency aspects of information transmission in a network of three Western equity markets By Harald Schmidbauer; Angi Rosch; Erhan Uluceviz
  12. Financial Supply Index and Financial Supply Cycles in New EU Member States By Tomislav Globan
  13. European Unemployment Revisited: Shocks, Institutions, Integration. By Bertola, Giuseppe
  14. Does bank competition reduce cost of credit ? Cross-country evidence from Europe By Zuzana FUNGACOVA; Anastasiya SHAMSHUR; Laurent WEILL
  15. Risk Sharing in Europe By Pilar Poncela; Filippo Pericoli; Anna Manca; Filippo Michela Nardo
  16. From budgetary instrument to the budgetary objective: The Portuguese case By Lopes, Luís; Antunes, Margarida
  17. State-Dependent Transmission of Monetary Policy in the Euro Area By Jan Pablo Burgard; Matthias Neuenkirch; Matthias Nöckel
  18. Delphic and Odyssean monetary policy shocks: Evidence from the euro-area By Philippe Andrade; Filippo Ferroni
  19. Financialisation: Dimensions and determinants. A cross-country study By Ewa Karwowski; Mimoza Shabani; Engelbert Stockhammer

  1. By: Elena Bobeica (European Central Bank); Olegs Tkacevs (Bank of Latvia); Styliani Christodoulopoulou (European Central Bank)
    Abstract: This paper studies the importance of price and cost competitiveness for intra- and extra-euro area trade flows of euro area countries. A standard error correction framework shows that price competitiveness is a relatively more important driver of trade flows outside the euro area as compared to those within the monetary union, especially for exports, that tend to be more sensitive to relative prices than imports. We consider various measures of competitiveness and conclude that it is difficult to single out one that outperforms the others. Using an encompassing test, measures based on labour costs appear to contain relatively more information for trade flows, particularly for exports outside the euro area. The key policy implication is that, in order to adjust competitiveness disequilibria within the monetary union, measures, such as structural policies fostering non-price competitiveness should be pursued in the deficit countries besides those aimed at price and cost adjustments.
    Keywords: price and cost competitiveness, intra- and extra-euro area trade, error correction model
    JEL: F14 F15 F41
    Date: 2016–11–07
  2. By: Niels Gilbert; Sebastiaan Pool
    Abstract: In the decade following the introduction of the euro, many Southern EMU members experienced sizeable capital inflows. We document how, instead of contributing to convergence, these flows mainly fueled growth of the nontradable sectors. We rationalize these developments using a tractable two-sector, two-region ('North' and 'South') model of a monetary union. We show how the sharp fall in Southern interest rates that occurred in the run-up to EMU, leads to a consumption boom, wage growth, growth of the nontradable sector, and a deteriorating external position. In the North, an opposite process occurs. As such, both real exchange rates and external positions of the two regions diverge. Including a third country with a flexible exchange rate vis-à-vis the euro amplifies the effects of monetary integration in the South, while dampening them in the North. Using a panel-BVAR, we confirm empirically that the euro area countries experiencing a fall in interest rates relative to the euro area average, experienced faster growth of the nontradable sector and a deteriorating current account balance. We investigate various policy reforms to speed up the necessary rebalancing process. A deepening of the European market shows most promise, boosting GDP growth while facilitating a rebalancing towards tradables.
    Keywords: EMU; monetary integration; current account imbalances; sectoral allocation
    JEL: F32 F34 F36 F45
    Date: 2016–12
  3. By: Belke, Ansgar; Dubova, Irina; Osowski, Thomas
    Abstract: This study assesses the impact of the uncertainty caused by Brexit, on both the UK and international financial markets, for the first and second statistical moments (i.e. on changes and the standard deviations of the respective variables.) As financial markets are by nature highly interlinked, one might expect that the uncertainty engendered by Brexit also has an impact on financial markets in several other countries. By analysing the impact of Brexit on financial markets, we might also gain some insights into market expectations about the magnitude of the economic impact beyond the UK and which other country might be most affected. For this purpose, we first use both the Diebold and Yilmaz (2012) and the Hafner and Herwartz (2008) method to estimate the time-varying interactions between UK policy uncertainty, which to a large extent is attributed to uncertainty about Brexit, and UK financial market volatilities (second statistical moment) and try to identify the direction of causality among them. Second, we use two other measures of the perceived probability of Brexit before the referendum, namely daily data released by Betfair and results of polls published by Bloomberg. Based on these datasets, and using both panel and single-country SUR (seemingly unrelated regressions) estimation methods, we analyse the Brexit effect on levels of stock returns, sovereign credit default swaps (CDS), 10-year interest rates in 19 predominantly European countries, and those of the British pound and the euro (first statistical moment). We show that Brexit-induced policy uncertainty will continue to cause instability in key financial markets and has the potential to damage the real economy in both the UK and other European countries, even in the medium run. The main losers outside the UK are the 'GIIPS' economies: Greece, Ireland, Italy, Portugal and Spain.
    Keywords: Brexit,causality tests,financial instability,Pound sterling,uncertainty,spillovers
    JEL: C58 D81 E44 F36 G15
    Date: 2016
  4. By: Belke, Ansgar; Domnick, Clemens; Gros, Daniel
    Abstract: This paper examines business cycle synchronization in the European Monetary Union with a special focus on the core-periphery pattern in the aftermath of the crisis. Using a quarterly index for business cycle synchronization by Cerqueira (2013), our panel data estimates suggest that it is countries belonging to the core that are faced with increased synchronization among themselves after 2007Q4, whereas peripheral countries decreased synchronization with regards to the core, non-EMU countries and among themselves. Correlation coefficients and nonparametric local polynomial regressions corroborate these findings. The usual focus on co-movements and correlations might be misleading, however, since we also find large differences in the amplitude of national cycles. A strong common cycle can thus lead to large differences in cyclical positions even if national cycles are strongly correlated.
    Keywords: business cycles,core-periphery,EMU,local polynomial regressions,synchronicity,common monetary policy
    JEL: E32 F15 R23
    Date: 2016
  5. By: Pablo Burriel (Banco de España); Alessandro Galesi (Banco de España)
    Abstract: We assess the effects of the ECB’s recent unconventional monetary policy measures by estimating a global VAR that exploits panel variation among all euro area economies and explicitly takes into account cross-country interdependencies. Unconventional monetary policy measures have benefi cial effects on activity, credit, infl ation and equity prices, and lead to a depreciation of the exchange rate. Most euro area members benefi t from these measures, but with a substantial degree of heterogeneity. Cross-country spillovers account for a sizable fraction of such dispersion, and substantially amplify effects. Countries with less fragile banking systems benefi t the most from unconventional monetary policy measures. Compared to expansionary conventional monetary policies, unconventional measures are particularly effective in reducing fi rms’ fi nancing costs and boosting credit.
    Keywords: unconventional monetary policy, euro area, GVAR, heterogeneity, spillovers
    JEL: C32 E52 E58
    Date: 2016–12
  6. By: Wildmer Daniel Gregori (Prometeia Associazione (Italy)); Wildmer Agnese Sacchi (Sapienza University of Rome (Italy) and Governance and Economics research Network (Spain))
    Abstract: This paper investigates whether speculation about Greece.s exit from the euro has spilled over into other euro area countries. sovereign bond yields. Our empirical analysis is based on more than 64,000 news items on Grexit between December 2014 and October 2015, collected daily via the Factiva database. We can take account of Grexit news generally and, also, distinguish news items according to individual country press, domestic political leaders, supranational executives and institutions. Our results suggest that more news about Grexit drives up bond yields in European peripheral countries, but that there are no effects on European core countries. Thus, speculations about Grexit seem to be confined to more vulnerable economies. In addition, financial markets in peripheral countries react more to Grexit news associated to supranational executives and related institutions compared to news related to domestic politicians and European political bodies, due possibly to higher perceived credibility of the former with respect to the latter.
    Keywords: Grexit, Financial markets, Government bond, News, Spillovers, Euro area, GARCH.
    JEL: E43 E62 G12 G14
    Date: 2016–12
  7. By: Petr Korab (Department of Finance, Faculty of Business and Economics, Mendel University in Brno)
    Abstract: This paper investigates the availability of bank credit to enterprises in the Eurozone after the recent financial crisis. The analysis draws from a rich firm-level dataset on perceived credit availability of micro, small and medium-sized, and large enterprises in 11 countries in the Euro Area during the time horizon 2010 – 2014. Employing probit and logit estimators, the empirical results suggest that GDP growth is a significant factor improving availability to small and medium-sized and large firms in the post-crisis period. On the contrary, the asset-purchase programmes of the European Central Bank did not show a significant impact on credit availability to micro and small and medium-sized enterprises. The findings support the decision of the ECB to further intensify asset purchasing and officially introduce the program of quantitative easing in 2015.
    Keywords: credit availability, credit rationing, credit constraints, credit supply, financial crisis recovery
    JEL: E51 E52
    Date: 2016–12
  8. By: Belke, Ansgar; Osowski, Thomas
    Abstract: This paper identifies and measures fiscal spillovers in the EU countries empirically using a global vector autoregression (GVAR) model. Our aim is to look at the sign and the absolute values of fiscal spillovers in a country-wise perspective and at the time profile (impulse response) of the impacts of fiscal shocks. We find moderate spillover effects of fiscal policy shocks originating in Germany and France. However, there is significant variation regarding magnitude of the spillovers among destination countries and country clusters. Furthermore, we find some evidence that spillovers generated by German or French fiscal spillovers are stronger for EMU than non-EMU countries in Europe.
    Keywords: EMU versus "Rest of Europe",fiscal policy coordination,fiscal spillovers,GVAR analysis,regional shocks,impulse response analysis,trade weights
    JEL: C50 E61 F15 F42 H60
    Date: 2016
  9. By: Claudio Morana (Università di Milano - Bicocca and CeRP-Collegio Carlo Alberto)
    Abstract: The paper investigates the determinants of the US$/€ exchange rate since its introduction in 1999, with a special focus on the recent subprime mortgage and sovereign debt financial crises. The econometric model is grounded on the asset pricing theory of exchange rate determination, which posits that current exchange rate fluctuations are determined by the entire path of current and future revisions in expectations about fundamentals. In this perspective, we innovate the literature by conditioning on Fama-French and Charart risk factors, which directly measures changing market expectations about the economic outlook, as well as on new financial condition indexes and a large set of macroeconomic variables. The macro-finance augmented econometric model has a remarkable in-sample and out of sample predictive ability, largely outperforming a standard autoregressive specification neglecting macro-financial information. We also document a stable relationship between the US$/€-Charart momentum conditional correlation (CCW) and the euro area business cycle, potentially exploitable also within a system of early warning indicators of macro-financial imbalances. Comparison with available measures of economic sentiments shows that CCW yields a more accurate assessment, signaling a progressive weakening in euro area economic conditions since June 2014, consistent with the sluggish and scattered recovery from the sovereign debt crisis and the new Greek solvency crisis exploded in late spring/early summer 2015.
    Date: 2016–01
  10. By: Hassan, Fadi; Di Mauro, Filippo; Ottaviano, Gianmarco I. P.
    Abstract: Financial institutions are key to allocate capital to its most productive uses. In order to examine the relationship between bank credit and firm-level productivity in the context of different financial markets set-ups, we introduce a model of overlapping generations of entrepreneurs under complete and incomplete credit markets. Then, we exploit firm-level data for a group of European countries to explore the relation between bank credit and productivity following the main predictions of the model. We estimate an extended set of elasticities of bank credit with respect to a series of productivity measures of firms. We focus not only on the elasticity between bank credit and productivity during the same year, but also on the elasticity between credit and future realised productivity. Our estimates show a clear Euro-zone core-periphery divide, for instance the elasticities between credit and productivity estimated in France and Germany are consistent with complete markets, whereas in Italy they are consistent with incomplete markets. The implication is that in countries that are consistent with an incomplete market setting, firms turn to be constrained in their long-term investments and bank credit is allocated less efficiently than in other countries. Hence capital misallocation by banks can be a key driver of the long-standing slow productivity growth that characterises periphery countries.
    Keywords: Bank Credit,Capital Allocation,Productivity,Credit Constraints
    JEL: G10 G21 G31 D92 O16
    Date: 2016
  11. By: Harald Schmidbauer (BRU-IUL, ISCTE Business Research Unit, ISCTE-IUL, Lisboa, Portugal); Angi Rosch (FOM University of Applied Sciences, Munich, Germany); Erhan Uluceviz (Kemerburgaz University, Istanbul, Turkey)
    Abstract: Cycles in the behavior of stock markets have been widely documented. There is an increasing body of literature on whether stock markets anticipate business cycles or its turning points. Several recent studies assert that financial integration impacts positively on business cycle comovements of economies. We consider three Western equity markets, represented by their respective stock indices: DJIA (USA), FTSE 100 (UK), and Euro Stoxx 50 (euro area). Connecting these three markets together via vector autoregressive processes in index returns, we construct \propagation values" to measure and trace, on a daily basis, the relative importance of a market as a volatility creator within the network, where volatility is due to a return shock in a market. A cross-wavelet analysis reveals the joint frequency structure of pairs of the propagation value series, in particular whether or not two series tend to move in the same direction at a given frequency. Our main findings are: (i) From 2001 onwards, the daily propagation values of markets have been fluctuating much less than before, and high frequencies have become less pronounced; (ii) the European markets are in phase at business cycle frequency, while the US market is not in phase with either European market; (iii) in 2008, the euro area has taken over the leading role. This approach not only provides new insight into the time-dependent interplay of equity markets, but it can also replicate certain findings of traditional business cycle research, and it has the advantage of using only readily available stock market data.
    Keywords: Equity market network; propagation value; cycle; synchronization; wavelet analysis; phase difference.
    JEL: C32 C58 E32 F44 G15
    Date: 2016–12
  12. By: Tomislav Globan
    Abstract: Abstract This paper introduces a new composite index – the financial supply index (FSI), which measures the level of supply of foreign capital to 11 new EU 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. The FSI includes both the financial and economic determinants of capital flows and is estimated using Kalman filtering, principal components and a 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 of and demand for foreign capital, to quantify the external refinancing conditions and risk faced by the government. We are able to distinguish 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: financial cycles, financial supply, new EU Member States, capital flows, refinancing conditions
    JEL: F21 F36 H63
    Date: 2016–12
  13. By: Bertola, Giuseppe (University of Turin)
    Abstract: This paper painstakingly restores a vintage empirical model of unemployment determination by interacting shocks and institutions, and runs it on recent data featuring dramatic shocks and controversial institutional change. Theoretical insights and empirical results suggest that reforms and capital ?ows contribute sensible and interrelated explanations for the recent twists and turns of unemployment rates in Europe and elsewhere.
    Date: 2016–12
  14. By: Zuzana FUNGACOVA (Bank of Finland); Anastasiya SHAMSHUR (University of East Anglia); Laurent WEILL (LaRGE Research Center, Université de Strasbourg)
    Abstract: Despite the extensive debate on the effects of bank competition, only a handful of single-country studies deal with the impact of bank competition on the cost of credit. We contribute to the literature by investigating the impact of bank competition on the cost of credit in a cross-country setting. Using a panel of firms from 20 European countries covering the period 2001–2011, we consider a broad set of measures of bank competition, including two structural measures (Herfindahl-Hirschman index and CR5), and two non-structural indicators (Lerner index and H-statistic). We find that bank competition increases the cost of credit and observe that the positive influence of bank competition is stronger for smaller companies. Our findings accord with the information hypothesis, whereby a lack of competition incentivizes banks to invest in soft information and conversely increased competition raises the cost of credit. This positive impact of bank competition is however influenced by the institutional and economic framework, as well as by the crisis.
    JEL: G21 L11
    Date: 2016
  15. By: Pilar Poncela (European Commission - JRC); Filippo Pericoli (European Commission - JRC); Anna Manca (European Commission - JRC); Filippo Michela Nardo (European Commission - JRC)
    Abstract: We analyse if consumption can be internationally detached from GDP domestic shocks due to cross border risk sharing mechanisms. We update the measurement of risk sharing for industrialized OECD countries and for several subsets of European ones. We use panel VAR models to capture the dynamic behaviour of cross border consumption smoothing through the capital markets, government and credit market channels. We also check for the substitutability among channels. Finally, we track the evolution of risk sharing over time for each channel.
    Keywords: consumption smoothing, GDP shocks, panel VAR, risk sharing
    JEL: C3 E21 F00
    Date: 2016–12
  16. By: Lopes, Luís; Antunes, Margarida
    Abstract: In the contemporary capitalism model and in relation to the functioning of the economy there is a counterproductive view of the state as an institution. This has led to a reversal of the hierarchy between the state and the private sector, since it subordinates states to markets. Fiscal policy has been seen as a channel through which to implement this idea and is no longer associated with the functions that were traditionally assigned to it. Consequently, the state budget as a policy instrument was transformed into the subject of policy objectives, particularly in the Euro Zone with the framing of national fiscal policies. Supiot calls this "governance by numbers" , a form of governance that adopts an "indicators-objective". Portugal has followed the contemporary capitalism model of governance since the 1980s, although Portuguese fiscal policy in the beginning also reflected the development of the welfare state. In the 1990s, the Portuguese government assumed "governance by numbers" and since joining the Euro Zone practically the only objective of Portugal's fiscal policy has been compliance with their "indicators-objective". This article aims to analyse the reconfiguration of Portuguese fiscal policy as a result of the "governance by numbers" of the Euro Zone. In the final section, we will also present some considerations regarding points that must be taken into account in debates on the European budgetary rules.
    Keywords: Portuguese fiscal policy,Policy-making,Contemporary capitalism model,Euro Zone,Budgetary rules
    JEL: E62 E65 H5
    Date: 2016
  17. By: Jan Pablo Burgard; Matthias Neuenkirch; Matthias Nöckel
    Abstract: In this paper, we estimate a logit mixture vector autoregressive (Logit-MVAR) model describing monetary policy transmission in the euro area over the period 1999–2015. MVARs allow us to differentiate between different states of the economy. In our model, the state weights are determined by an underlying logit model. In contrast to other classes of non-linear VARs, the regime affiliation is neither strictly binary nor binary with a (short) transition period. We show that monetary policy transmission in the euro area can indeed be described as a mixture of two states. The first (second) state with an overall share of 80% (20%) can be interpreted as a “normal state” (“crisis state”). In both states, output and prices are found to decrease after monetary policy shocks. During “crisis times,” the contraction is much stronger, as the peak effect is more than twice as large when compared to “normal times.” In contrast, the effect of monetary policy shocks is less enduring in crisis times. Both findings provide a strong indication that the transmission mechanism is indeed different for the euro area during times of economic and financial distress.
    Keywords: Economic and financial crisis, euro area, mixture VAR, monetary policy transmission, state-dependency
    JEL: C32 E52 E58
    Date: 2016
  18. By: Philippe Andrade (Banque de France); Filippo Ferroni (Banque de France and University of Surrey)
    Abstract: In this paper, we study the impact of the ECB announcements on the market-based expectations of interest rates and of in ation rates. We nd that the impact of the ECB announcements on in ation expectations has changed over the last fteen years. In particular, while in the central part of our sample the ECB announcements were read as a signal about the economic conditions (i.e. Delphic component), in latest episodes they have been interpreted as a commitment device on future monetary policy accommodation (i.e. Odyssean component). We propose an approach to separately identify the Delphic and Odyssean component of the ECB monetary policy announcements and we measure their dynamic impact on the economy.
    JEL: C10 E52 E32
    Date: 2016–10
  19. By: Ewa Karwowski (Kingston University); Mimoza Shabani; Engelbert Stockhammer
    Abstract: The financialisation literature has grown over the past two decades. While there is a generally accepted definition, effectively financialisation has been used to describe very different phenomena. This paper proposes a multi-faceted notion of financialisation by distinguishing between financialisation of non-financial companies, households and the financial sector and using activity as well as vulnerability measures of financialisation. We identify seven financialisation hypotheses in the literature and empirically investigate them in a cross-country analysis for 17 OECD countries for the 1997-2007 period. We find that different financialisation measures are only weakly correlated, which suggests the existence of distinct financialisation processes. There is strong evidence across all sectors that financialisation is closely linked to asset price inflation and correlated with a debt-driven demand regime. Financial deregulation encourages financialisation, especially in the financial and household sector. By contrast, there is limited evidence that market-based financial systems tend to be more financialised, meaning financialisation can occur with large banks. Foreign financial inflows do not seem to be a main driver. We do not find indication that a secular investment slowdown precedes financialisation. Overall, our findings suggest that financialisation should be understood as variegated process, playing out differently across economic sectors in different countries.
    Keywords: financialisation, cross country analysis, financial deregulation, property prices
    JEL: B50 B51 G10 G20 G30 P51
    Date: 2016–12

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