nep-eec New Economics Papers
on European Economics
Issue of 2017‒01‒15
seventeen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Non-performing loans in the euro area: are core-periphery banking markets fragmented? By Dimitrios Anastasiou; Helen Louri; Mike G. Tsionas
  2. When Keynes goes to Brussels : a New Fiscal Rule for the EMU ? By Francesco Saraceno
  3. Causes and timing of the European debt crisis: An econometric evaluation By Valerio Filoso, Valerio; Panico, Carlo; Papagni, Erasmo; Francesco, Purificato; Vázquez Suarez, Marta
  4. The Impact of Sovereign Bond Yields on Fiscal Discipline By Karlis Vilerts; Olegs Tkacevs
  5. Macroeconomic Imbalances and Business Cycle Synchronization. Why Common Economic Governance is Imperative for the Eurozone By Lukmanova, Elizaveta; Tondl, Gabriele
  6. Interest rates, corporate lending and growth in the Euro Area By Tondl, Gabriele
  7. Celtic phoenix or leprechaun economics? The politics of an FDI led growth model in Europe By Aidan Regan; Samuel Brazys
  8. International Housing Markets, Unconventional Monetary Policy and the Zero Lower Bound By Huber, Florian; Punzi, Maria Teresa
  9. Sovereign Risk Spillover Effects and the Role of Systemically Important Financial Institutions: Evidence from the European Debt Crisis By Haoshen Hu; Jörg Prokop; Hans‐Michael Trautwein
  10. Ambiguous Policy Announcements By Michelacci, Claudio; Paciello, Luigi
  11. The Impact of Workforce Aging on European Productivity By Shekhar Aiyar; Christian H Ebeke
  12. European Fiscal Compact in Action: Can Independent Fiscal Institutions Deliver Effective Oversight? By Michal Horvath
  13. The effect of conventional and unconventional euro area monetary policy on macroeconomic variables By Halberstadt, Arne; Krippner, Leo
  14. Exploring Differences in Household Debt Across the United States and Euro Area Countries By Dimitris Christelis; Michael Ehrmann; Dimitris Georgarakos
  15. Determinants of Bank Lending in Europe and the US. Evidence from Crisis and Post Crisis Years By Brunella Bruno; Alexandra D’Onofrio; Immacolata Marino
  16. Policy effectiveness is limited by a flat Phillips curve, stabilization as practiced in Europe and the US information By David Kiefer
  17. Financial Structure and Corporate Investment in Europe: Evidence from the Crisis Years By Brunella Bruno; Alexandra D’Onofrio; Immacolata Marino

  1. By: Dimitrios Anastasiou (Athens University of Economics); Helen Louri (Athens University of Economics, Bank of Greece and Research Associate LSE EI/HO); Mike G. Tsionas (Athens University of Economics and Business)
    Abstract: The objective of this study is to examine the causes of non-performing loans (NPLs) in the banking system of the euro area for the period 2003-2013 and distinguish between core and periphery country determinants. The increase in NPLs post crisis has put into question the robustness of many European banks and the stability of the whole sector. It still remains a serious challenge, especially in peripheral countries which are hardest hit by the financial crisis. By employing both Fully Modified OLS and Panel Cointegrated VAR we estimate that NPLs are affected by the same macroeconomic and bank-specific conditions but the responses are stronger in the periphery. Following the FMOLS estimations NPLs in the euro area have performed an upward (much higher in the periphery) shift after 2008 and are mostly related to worsening macroeconomic conditions especially with respect to unemployment, growth and taxes. Fiscal consolidation and interest rate margins are significant for the periphery while credit to GDP is significant only for the core. Quality of management and loans to deposits play an important role, while size is negatively significant only in the periphery. Most of these findings were confirmed by the panel Cointegrated VAR results. A chi-square test comparing the estimated coefficients for the core and periphery NPLs rejects the hypothesis of equality revealing another aspect of banking fragmentation in the euro area. Such findings can be helpful when designing macro-prudential as well as NPL resolution policies, which should be adjusted appropriately to the different responses between core and periphery banks.
    Keywords: Non-performing loans; Macroeconomic determinants; Bank-specific determinants; Financial Fragmentation; FMOLS estimation; Panel Cointegrated VAR
    JEL: C23 C51 G21 G2
    Date: 2016–12
  2. By: Francesco Saraceno (OFCE Sciences PO)
    Abstract: The Economic and Monetary Union (EMU) institutions are consistent with a New Consensus that emerged in the 1980s, limiting the role for macroeconomic (particularly fiscal) policy to short term stabilizations by means of rules. I will argue that the policy inertia induced by the Consensus may have played a role in the disappointing performance of EMU economies even before the crisis. The crisis of the Consensus, and the debate on secular stagnation, proved that Keynesian (and possibly) persistent excesses of savings over investment may hamper growth. This has put fiscal policy back to the center of the scene, and given the General Theory, at eighty, a second youth. I will argue therefore that the EMU fiscal rule should be amended to allow semi-permanent negative government savings. I will finally argue that a modified Golden Rule may serve this objective, and allow EU-wide policy coordination. This seems the only reasonable reform with some chances of being adopted by the EU divided policy makers.
    Keywords: Fiscal rules, fiscal policy, EMU, golden rule, secular stagnation, Keynes, policy mix, public investment
    JEL: B22 E02 E62 E65
    Date: 2016–12
  3. By: Valerio Filoso, Valerio; Panico, Carlo; Papagni, Erasmo; Francesco, Purificato; Vázquez Suarez, Marta
    Abstract: According to the literature, two main factors sparked the European debt crisis: (1) macroeconomic imbalances originated by national governments and (2) institutional design flaws leading to feeble response by European authorities; still, economists disagree on the factors' strength. Using Bai and Perron's technique, we contribute to the debate by identifying break dates in Greece, Italy and Spain daily values of 10-year public bonds’ interest rates and link them to key political and institutional events. Also, employing GARCH and EGARCH models, we investigate how interest rates spreads' volatility reacted to crucial and long-lasting events. Our results uncover the following facts about the crisis: a) it began in May 2010, while the first aid programme for Greece was approved; b) worsened after summer 2011, as the European authorities hastened restructuring the Greek sovereign debt; c) improved only during summer 2012, when the ECB Governing Council approved a programme for the purchase of sovereign bonds. On the whole, our results point at institutional failures as the main cause of the European debt crisis.
    Keywords: European debt crisis, Interest rates, Public debt, Event study
    JEL: E42 E44 G12 G14 H63
    Date: 2016–12–28
  4. By: Karlis Vilerts (Bank of Latvia); Olegs Tkacevs (Bank of Latvia)
    Abstract: This paper studies the impact of sovereign bond yields on fiscal discipline against the background of unprecedentedly low interest rates in advanced economies brought about by ultra-expansionary monetary policies of recent years. By employing the panel data econometric approach for a sample of OECD, EU and euro area countries over the period 1980–2014, the study suggests a positive and statistically significant impact of long-term sovereign bond yields on primary balances (PBs), indicating that a decrease in borrowing costs leads to a statistically significant deterioration of fiscal balances. The findings herein also suggest that falling bond yields pass on to fiscal balances through increases in government expenditure rather than revenue reduction. From the economic policy perspective, these findings imply that monetary policy measures resulting in ultra-low interest rates may cause negative side effects for fiscal discipline.
    Keywords: fiscal policy, fiscal reaction function, sovereign bond yields, panel data
    JEL: E62 H62
    Date: 2016–12–23
  5. By: Lukmanova, Elizaveta; Tondl, Gabriele
    Abstract: This paper investigates a new category of influential factors on business cycle synchronization (BCS), so far hardly regarded in the BCS literature: It provides an empirical assessment of the impact of macroeconomic imbalances, as monitored by the European Commission by the scoreboard indicators since 2011, on BCS in the Euozone. We use a quarterly data set covering the period 2002-2012 and estimate the direct and indirect effects of macroeconomic imbalances in the pre- and post-crisis period in a simultaneous equations model. Business cycle correlation between EA members is measured by the recently proposed dynamic conditional correlation of Engle 2002 which can better identify synchronous and asynchronous behaviour of BC than the commonly used measures. We find that appearing differences between EA members in the current account, in government deficit and public debt, in private debt and unit labor cost developments have reduced BCS in the EA, even more in the post-crisis period than before. Moreover, these explanatory factors of BCS, generally reinforce each other and are also influenced by other critical macro imbalances. Since BCS is essential in a monetary union, this paper provides clear support that a stronger, common economic governance would be important for the functioning and survival of the Eurozone. (authors' abstract)
    Keywords: Business cycle synchronization; Macroeconomic imbalances; Monetary union; Euro Area; Simultaneous equations model; Panel data
    Date: 2016–06
  6. By: Tondl, Gabriele
    Abstract: The sluggish development of corporate lending has remained the central concern of EU monetary policy makers as it is considered to hinder seriously the resurgence of growth. This paper looks at the development of loans to large corporations vs SMEs in the pre-crisis and post-crisis period and wishes to answer: (i) to which extent do allocated loan volumes actually contribute to Output growth? (ii) which factors determine the development of loans, considering above all loan interest rates? and (iii) what causes differences in loan interest levels across the EA? The results indicate that different loan developments in the EA explain very well differences in output development, loans to SMEs contribute even more to output growth than those for large corporations. Loan development itself is negatively influenced by the interest level which differs significantly across EA members, with small loans in addition always being charged an interest premium over large loans. The capitalization of banks, the size of banks and their internationalization play a role as well. A part of the sluggish growth of loans can be explained by the increasing use of alternative financial instruments by large firms. Interest rates in turn are following the ECB interest rate, - but this link has become looser in the post-crisis period, and long term government bond rates. Different risks faced by banks and different bank structures have become important explanatories of interest rates in the post-crisis period. (author's abstract)
    Keywords: Corporate lending; Credit market fragmentation; Interest pass-through; Bank lending rates; Finance and growth; Euro Area
    Date: 2016–06
  7. By: Aidan Regan (School of Politics and International Relations, University College Dublin); Samuel Brazys (School of Politics and International Relations and Geary Institute for Public Policy, University College Dublin)
    Abstract: In this paper we argue that Ireland’s post-crisis economic recovery in Europe was driven by foreign direct investment (FDI) from Silicon Valley, and whilst this growth model was made possible by Ireland’s low corporate tax rates, it was also a result of these firms using Ireland to directly access the European labour market. We evidence this contention via sectoral and geographic analyses while simultaneously showing that Irish fiscal policies have not redistributed gains from the recovery to the broader population. As a result, the economic recovery has been most actively felt by those in the FDI sectors, including foreign-national workers from the EU and beyond. We suggest that this experience indicates that Ireland’s FDI-led model of capitalist development has created clear winners and losers, with significant distributional implications. The FDI growth regime been made possible by inward migration and European integration, but given the unequal distribution of the economic benefits that this generates, it is unlikely to be politically, or electorally, sustainable.
    Date: 2017–01–12
  8. By: Huber, Florian; Punzi, Maria Teresa
    Abstract: In this paper we propose a time-varying parameter VAR model for the housing market in the United States, the United Kingdom, Japan and the Euro Area. For these four economies, we answer the following research questions: (i) How can we evaluate the stance of monetary policy when the policy rate hits the zero lower bound? (ii) Can developments in the housing market still be explained by policy measures adopted by central banks? (iii) Did central banks succeed in mitigating the detrimental impact of the financial crisis on selected housing variables? We analyze the relationship between unconventional monetary policy and the housing markets by using the shadow interest rate estimated by Krippner (2013b). Our findings suggest that the monetary policy transmission mechanism to the housing market has not changed with the implementation of quantitative easing or forward guidance, and central banks can affect the composition of an investors portfolio through investment in housing. A counterfactual exercise provides some evidence that unconventional monetary policy has been particularly successful in dampening the consequences of the financial crisis on housing markets in the United States, while the effects are more muted in the other countries considered in this study. (authors' abstract)
    Keywords: Zero Lower Bound; Shadow interest rate; Housing Market; Time-varying parameter VAR
    Date: 2016–01–25
  9. By: Haoshen Hu (University of Oldenburg); Jörg Prokop (University of Oldenburg - Finance and Banking; ZenTra - Center for Transnational Studies); Hans‐Michael Trautwein (Carl von Ossietzky Universität Oldenburg; ZenTra - Center for Transnational Studies)
    Abstract: We analyse two-way spillover effects between sovereign ratings and bank ratings across 17 Eurozone countries for the period 2002-2013. We show that sovereign rating actions including watchlist placements and outlooks have a significant impact on bank ratings. During the financial crisis, downgrade spillovers from sovereigns to systematically important financial institutions (SIFIs) are stronger than spillovers to non-SIFIs. Moreover, we provide evidence on the existence of a bank-to-sovereign rating transmission channel. Downgrades of SIFIs increase the probability of multiple-notch downgrades of sovereign ratings. Dividing the sample into PIIGS and non-PIIGS subsets, we find bank-to-sovereign spillovers to exist only in the PIIGS subsample.
    Keywords: bank rating, sovereign rating, two-way spillover effect, European sovereign debt crisis
    JEL: F36 G15 G24
    Date: 2016–11
  10. By: Michelacci, Claudio; Paciello, Luigi
    Abstract: We study the effects of monetary policy announcements in a New Keynesian model, where ambiguity-averse households with heterogenous net financial wealth use a worst-case criterion to assess the credibility of announcements. The announcement of a future loosening of monetary policy leads to the rebalancing of financial asset positions, it can cause credit crunches, and it may prove to be contractionary in the interim before implementation. This is because the households with positive net financial wealth (creditors) are those that are most likely to believe the announcement, due to the potential loss of wealth from the prospective policy easing. And when creditors believe the announcement more than debtors, their expected wealth losses are larger than the wealth gains that debtors expect. So aggregate net wealth is perceived to fall, and the economy can contract owing to lack of aggregate demand, which is more likely when the inequality in wealth is more pronounced. We evaluate the importance of this mechanism, focusing on the start of the ECB's practice of offering forward guidance in July 2013. The inflation expectations of households have responded in accordance with the theory. After matching the entire distribution of European households' net financial wealth, we find that the ECB's announcement is contractionary in our model. In general, redistributing expected wealth may have perverse effects when agents are ambiguity-averse.
    Date: 2017–01
  11. By: Shekhar Aiyar; Christian H Ebeke
    Abstract: The age-distribution of Europe’s workforce has shifted towards older workers over the past few decades, a process expected to accelerate in the years ahead.. This paper studies the effect of the aging of the workforce on labor productivity, identifies the main transmission channels, and examines what policies might mitigate the effects of aging. We find that workforce aging reduces growth in labor productivity, mainly through its negative effect on TFP growth. Projected workforce aging could reduce TFP growth by an average of 0.2 percentage points every year over the next two decades. A variety of policies could ameliorate this effect.
    Keywords: Aging;Euro Area;Economic growth;Total factor productivity;Labor force participation;Demographic transition;Workforce Aging; Productivity; Policies
    Date: 2016–12–08
  12. By: Michal Horvath (Department of Economics and Related Studies, University of York)
    Abstract: The paper explores if EU independent fiscal institutions (IFIs) are in a position to exercise effective scrutiny over national fiscal policies. It identifies substantial heterogeneity across IFIs in resources which is not matched by a similar diversity in mandates, and highlights the role of local ownership as a potentially important factor in explaining this. In addition to financial and human resources, better access to information, effective comply-or-explain mechanisms and closer links with legislatures could enhance fiscal scrutiny and accountability in the EU. The paper provides rankings of individual IFIs constructed based on measures that quantitatively aggregate these pre-conditions for effective fiscal scrutiny.
    Keywords: Fiscal Compact, European Union, fiscal councils, fiscal policy, democracy
    JEL: E62 F45 H61 H77
    Date: 2017–01
  13. By: Halberstadt, Arne; Krippner, Leo
    Abstract: We investigate the e ect of monetary policy on European macroeconomic variables using a small-scale vector autoregression (VAR) and the "Effective Monetary Stimulus" (EMS). The EMS is a monetary policy metric obtained from yield curve data that is designed to consistently reflect the overall stance of monetary policy across conventional and uncoventional monetary policy environments. Empirically, using the EMS in our VAR obtains plausible and stable structural relationships with prices and output developments across and within conventional and unconventional environments, and more so than short-maturity rates or alternative metrics, suggesting that it provides a useful practical monetary policy metric for policy makers. The VAR results show that European monetary policy shocks have been accommodative since 2007, although their e ect has become more uncertain compared to the conventional policy period.
    Keywords: Monetary Policy,Zero Lower Bound,Dynamic Term Structure Model
    JEL: E43 E44 E52
    Date: 2016
  14. By: Dimitris Christelis (University of Naples Federico II, CSEF, CFS and CEPAR); Michael Ehrmann (European Central Bank); Dimitris Georgarakos (European Central Bank, CFS and University of Leicester)
    Abstract: Household debt has played a central role in the global financial crisis, yet our understanding of it remains limited. We put U.S. household leverage in an international perspective, using household-level data for the United States and ten euro area economies. U.S. households have the highest prevalence of collateralized and non-collateralized debt, hold comparatively large amounts, and face higher debt-service burdens despite having higher income. We find that the U.S. economic environment is more conducive to holding debt, primarily because a given level of collateral is associated with higher prevalence and larger amounts of collateralized debt in the United States.
    Keywords: household debt, debt burden, household finance, counterfactual decompositions.
    JEL: D12 E21 G11
    Date: 2017–01–09
  15. By: Brunella Bruno (Università Bocconi); Alexandra D’Onofrio (Assonime); Immacolata Marino (Università di Napoli Federico II and CSEF)
    Abstract: We investigate bank lending patterns and their determinants in Europe and the US over 2008-2014. Precisely, we relate bank characteristics prior to the financial crisis to their lending behaviour during and after the crisis period. Our analyis confirms the existence of a bank lending channel, that is stronger in Europe than in the US and especially if we look at corporate loans rather than at the whole loan portfolio.
    Keywords: bank loans, corporate loans, bank lending channel, crisis.
    JEL: G21 G18 G01
    Date: 2017–01–09
  16. By: David Kiefer
    Abstract: A standard model of activist macroeconomic policy derives a monetary reaction rule by assuming that governments have performance objectives, but are constrained by an augmented Phillips curve. In addition to monetary policy, governments apply a variety of instruments to influence inflation and output, including fiscal policy, bailouts and foreign exchange policy, but effectiveness is limited by Phillips curve flatness. Solving the Phillips curve and reaction rule for a reduced form, we study this theory with a panel of countries. A textbook version of the activist model leads to disappointing results; the activist model fits the data only slightly better than a flat-Phillipscurve benchmark. The econometric results are enhanced by accounting for autocorrelated shocks. Although results are mixed, our interpretation favors inertial inflation expectations over rational ones. An extension of this approach suggests that US policy is more effective than that of European governments, finding that the US Phillips curve is more than twice as steep.
    Keywords: stabilization policy, inflation targets, expectations JEL Classification: E61, E63
    Date: 2016
  17. By: Brunella Bruno (Università Bocconi); Alexandra D’Onofrio (Assonime); Immacolata Marino (Università di Napoli Federico II and CSEF)
    Abstract: We present detailed stylized facts on European corporates during the period of financial and sovereign crisis. In particular, we observe that investment in fixed assets declined over the crisis period in all countries. To understand the determinants of corporate investment we implement an econometric analysis to specifically explore the differential impact of leverage and debt maturity structure on investment. We find that in crisis years (i) leverage exerts a strong and negative effect on the level of investment and (ii) firms with more long-term debt invest less. We also uncover heterogeneous reactions to crisis due to debt level and its maturity by sorting firms by country-specific and firm specific-characteristics. In particular, we find that firms who cut back most investment in crisis years (conditional on the level of leverage and maturity) are (i) located in Periphery countries and (ii) featured by a small-scale. Factors that help firms alleviate financial frictions and shield investment are reliance on multiple bank relationships and ability to generate internal resources (cash flows). We find no evidence of a positive nexus between cash and investment, and only little evidence of a positive effect on investment of access to capital markets, to mitigate the negative impact of debt in crisis years.
    Keywords: investment, leverage, long-term debt, crisis.
    Date: 2017–01–09

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