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on European Economics |
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Issue of 2017‒01‒08
eleven papers chosen by Giuseppe Marotta Università degli Studi di Modena e Reggio Emilia |
| By: | Sergio Cesaratto |
| Abstract: | A number of economists warned that a political union was a prerequisite for a viable currency union. This paper disputes the feasibility of such a political union. A fully-fledged federal union, that would likely please peripheral Europe, is impracticable since it implies a degree of fiscal solidarity that just does not exist. A Hayekian minimal federal state, that would appeal to core-Europe, would be refused by peripheral members, since residual fiscal sovereignty would be surrendered without any clear positive economic and social return. Even an intermediate solution based on coordinated Keynesian policies would be unfeasible, since it would be at odds with German ‘monetary mercantilism’. The euro area is thus trapped between equally unfeasible political perspectives. In this bleak context, austerity policies are mainly explained by the necessity of readdressing the euro area BoP crisis. This crisis presents striking similarities to traditional financial crises in emerging economies associated with fixed exchange regimes. Therefore, the ECB's delayed response to the sovereign debt crisis cannot be seen as the culprit of the euro area crisis. The ECB’s monetary refinancing mechanisms, Target 2 and the ECB's belated OMT intervention impeded a blow-up of the currency union, but could not solve its deep causes. The current combination of austerity policies and moderate ECB intervention aims to rebalance intra-eurozone foreign accounts and to force competitive deflation strategy. |
| Keywords: | European crisis, political and currency unions, ECB, balance of payments crisis, mercantilism |
| JEL: | E11 F33 N14 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:usi:wpaper:736&r=eec |
| By: | Jack Bekooij; Jon Frost; Remco van der Molen; Krzysztof Muzalewski |
| Abstract: | Sovereign-bank feedback loops have been at the heart of the euro area crisis and many previous debt crises. We regress a market measure of interdependency - the correlation between sovereign and bank credit default swaps (CDS) - against various fundamental indicators of interlinkages and risk for 65 banks from 23 countries from Q1 2006 to Q4 2015. We find evidence that direct sovereign debt holdings of banks, implicit contingent liabilities of the government to banks and market volatility are significantly linked to higher correlations. While such CDS correlations are generally higher for banks in countries bank-based financial systems, we do not find these channels to be stronger in these countries than market-based systems. Finally, we find that bank CDS levels perform better in explaining sovereign CDS levels in periods of high volatility. Overall, these results support the notion of non-linear effects and spillovers in CDS markets. |
| Keywords: | sovereign debt; banking crises; financial stability; CDS markets |
| JEL: | G01 G21 H63 |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:541&r=eec |
| By: | Ugo Albertazzi (Bank of Italy); Andrea Nobili (Bank of Italy); Federico M. Signoretti (Bank of Italy) |
| Abstract: | Using a new monthly dataset on bank-level lending rates, we study the transmission of conventional and unconventional monetary policy in the euro area via shifts in the supply of credit. We find that a bank lending channel is operational for both types of measures, though its functioning differs: for standard operations the transmission is weaker for banks with more capital and a more solid funding structure, in line with an important role of asymmetric information. However, in response to non-standard measures lending supply expands by more at banks with stronger capital and funding positions, suggesting a crucial role for regulatory and economic constraints. We also find that the transmission of unconventional measures is attenuated by their negative effect on future bank’s capital position via the net interest income (reverse bank capital channel). Finally, we find that large sovereign exposures mute the response of lending rates to conventional policy, but amplify the transmission of unconventional measures. |
| Keywords: | unconventional monetary policy, lending rates, bank lending channel, bank capital channel, fragmentation |
| JEL: | E30 E32 E51 |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1094_16&r=eec |
| By: | Kirstin Hubrich; Frauke Skudelny |
| Abstract: | The period of extraordinary volatility in euro area headline inflation starting in 2007 raised the question whether forecast combination methods can be used to hedge against bad forecast performance of single models during such periods and provide more robust forecasts. We investigate this issue for forecasts from a range of short-term forecasting models. Our analysis shows that there is considerable variation of the relative performance of the different models over time. To take that into account we suggest employing performance-based forecast combination methods, in particular one with more weight on the recent forecast performance. We compare such an approach with equal forecast combination that has been found to outperform more sophisticated forecast combination methods in the past, and investigate whether it can improve forecast accuracy over the single best model. The time-varying weights assign weights to the economic interpretations of the forecast stemming from different models. The combination methods are evaluated for HICP headline inflation and HICP excluding food and energy. We investigate how forecast accuracy of the combination methods differs between pre-crisis times, the period after the global financial crisis and the full evaluation period including the global financial crisis with its extraordinary volatility in inflation. Overall, we find that, first, forecast combination helps hedge against bad forecast performance and, second, that performance-based weighting tends to outperform simple averaging. |
| Keywords: | Forecasting ; Euro area inflation ; Forecast combinations ; Forecast evaluation |
| JEL: | C32 C52 C53 E31 E37 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2016-104&r=eec |
| By: | Mark Mink; Jan Jacobs; Jakob de Haan |
| Abstract: | We argue that if currency union member states have different potential output per capita, output growth rates, or trade balances, the common monetary policy may not be optimal for all of them. Euro area imbalances for potential output and for trade balances are quite large, while output growth imbalances are more modest. Member states with larger imbalances of one type also have larger imbalances of both other types, but a decline of one imbalance need not coincide with a decline of the others. We also show that imbalances are fairly persistent, and are larger in poorer and smaller member states. |
| Keywords: | euro area macroeconomic imbalances; common monetary policy; economic convergence; business cycle synchronization; euro crisis |
| JEL: | E30 F45 O47 |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:540&r=eec |
| By: | Glötzl, Florentin; Rezai, Armon |
| 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. (authors' abstract) |
| Keywords: | net lending and net borrowing; Euro crisis; Ricardian equivalence; twin deficit; current account imbalances |
| Date: | 2016–07–20 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wus045:5109&r=eec |
| By: | Salvador Barrios (European Commission - JRC); Mathias Dolls (ZEW); Anamaria Maftei (European Commission - JRC); Andreas Peichl (ZEW); Sara Riscado (European Commission - JRC); Janos Varga (European Commission – DG ECFIN); Christian Wittneben (ZEW) |
| Abstract: | In this paper, we present a dynamic scoring analysis of tax reforms for European countries. In this analysis we account for the feedback effects resulting from the adjustment in the labour market and for the economy-wide reaction to tax policy changes. We combine the microsimulation model EUROMOD, extended to incorporate an estimated labour supply model, with the new Keynesian DSGE model QUEST, used by the European Commission for analysing fiscal and structural reform in EU member states. These two models are connected in two ways: by introducing tax policy shocks in QUEST, derived from computing changes in implicit tax rates using EUROMOD; and by calibrating the elasticity of labour supply and the non-participation rates, by skill categories, in QUEST from values calculated using EUROMOD and the estimated labour supply function. Moreover, we discuss aggregation issues and the consistency between the micro and macro modelling of labour supply and interpret the model interaction in terms of tax incidence analysis. We illustrate the methodological approach with the results obtained when scoring specific reforms in three EU Member States, namely, Italy, Belgium and Poland. We compare two different scenarios – one in which the behavioural response to tax changes over the medium term is ignored and another scenario where this behavioural/micro-dimension is embedded into the microsimulation model. In this particular set-up, we do not find evidence of strong second-round effects, and the fiscal and distributional effects of the reforms tend to overlap in both scenarios. We attribute these results to existing rigidities in labour and product markets, which have shrunk further the small tax policy shocks introduced into the macroeconomic model. |
| Keywords: | Dynamic scoring, tax reforms, first and second round effects, labour market behaviour |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:ipt:taxref:201603&r=eec |
| By: | Brunella Bruno; Giacomo Nocera; Andrea Resti |
| Abstract: | Supranational institutions, academics and market analysts have increasingly questioned the reliability of bank risk-weighted assets (RWAs), a cornerstone of the system of minimum capital ratios designed by the Basel Committee on Banking Supervision. In fact, significant differences can be found in the banks’ average risk weights, both over time and across countries. Such differences can be explained by several factors, some of which may reflect the actual risk content of bank’s assets, while others may conceal distortions due to “RWA tweaking” and supervisory segmentations. We analyze a sample of 50 large European banks between 2008 and 2012 and document several meaningful findings. First, risk weights are affected by the banks’ size, business model and asset mix. Second, the adoption of internal ratings based (IRB) approaches is (as expected) a powerful driver of bank risk-weighted assets. Third, lower risk weights are positively linked to the banks’ capital cushion. Fourth, IRB adoption is more widespread in countries where supervisory capture is potentially stronger, due to a banking industry that is both larger (compared to GDP) and concentrated. Fifth, regulatory risk weights are not disconnected from market-based measures of bank risk. |
| Keywords: | Banks, capital, risk-weighted assets, regulation, Basel accords |
| JEL: | G21 G28 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:baf:cbafwp:cbafwp1509&r=eec |
| By: | Italo Colantone; Piero Stanig |
| Abstract: | Using disaggregated referendum returns and individual-level data, we show that support for the Leave option in the referendum regarding European Union membership of the United Kingdom was systematically higher in regions hit harder by economic globalization. We focus on the shock of surging imports from China over the past three decades. An instrumental variables approach supports a causal interpretation. We claim that this effect is driven by the displacement determined by globalization in the absence of effective compensation of its losers. On the other hand, neither stocks nor inflows of immigrants in a region are associated with support for the Leave option. The analysis of individual data from the British Election Study shows that attitudes towards immigration are strongly correlated with vote choice. Yet, attitudes about immigration are more closely related to the import shock than to the actual incidence of immigration in a region. |
| Keywords: | Brexit, Globalization, Economic Vote |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:baf:cbafwp:cbafwp1644&r=eec |
| By: | Biewen, Martin; Ungerer, Martin; Löffler, Max |
| Abstract: | We analyze the potential influence of a number of factors on the distribution of equivalized net incomes in Germany over the period 2005/2006 to 2010/11. While income inequality considerably increased in the years before 2005/2006, this trend was stopped after 2005/2006. Among many other factors, we consider the role of the employment boom and the development of inequality in wage incomes after 2005/2006. Our results suggest that, despite further increases in wage inequality, inequality in equivalized net incomes did not increase further after 2005/2006 because increased within-year employment opportunities compensated otherwise rising inequality in annual labour incomes. On the other hand, income inequality did not fall in a more marked way after 2005/2006 because also the middle and the upper part of the distribution benefitted from the employment boom. Other factors, such as changing household structures, population aging and changes in the tax and transfer system had no important effects on the distribution. Finally, we find little evidence that the distribution of equivalized net incomes was affected in any important way by the financial crisis and the subsequent great recession. |
| Keywords: | income inequality,poverty |
| JEL: | C14 D31 I30 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:16088&r=eec |
| By: | Filippo De Marco; Tomasz Wieladek |
| Abstract: | We study the effects of bank-specific capital requirements on Small and Medium Enterprises (SMEs) in the UK from 1998 to 2006. Following a 1% increase in capital requirements, SMEs’ asset growth contracts by 6.9% in the first year of a new bankfirm relationship, but the effect declines over time. We also compare the effects of capital requirements to those of monetary policy. Monetary policy only affects firms with higher credit risk and those borrowing from small banks, whereas capital requirements affect both. Capital requirement changes, instead, do not affect firms with alternative sources of finance, but monetary policy shocks do. |
| Keywords: | Capital requirements, SME real effects, relationship lending, microprudential and monetary policy |
| JEL: | G21 G28 E51 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:baf:cbafwp:cbafwp1640&r=eec |