nep-eec New Economics Papers
on European Economics
Issue of 2017‒03‒26
fifteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Are There Common Structural Determinants of Potential Output Growth in Europe?: An empirical exercise for 11 EMU countries By De Santis, Roberta; Esposito, Piero; Masi, Elena
  2. Business Cycle Synchronization in the EMU: Core vs. Periphery By Belke, Ansgar; Domnick, Clemens; Gros, Daniel
  3. The Walking Debt Crisis By Tobias Basse; Robinson Kruse; Christoph Wegener
  4. International Effects of Euro Area versus US Policy Uncertainty: A FAVAR Approach By Belke, Ansgar; Osowski, Thomas
  5. How Immigrants Helped EU Labor Markets to Adjust during the Great Recession By Kahanec, Martin; Guzi, Martin
  6. Quantitative easing and exuberance in government bond markets: Evidence from the ECB's expanded asset purchase program By Ryan van Lamoen; Simona Mattheussens; Martijn Dröes
  7. Risk Sharing in the Euro Zone: the Role of European Institutions By Valentina Milano
  8. Sovereign yield spreads in the EMU: crisis and structural determinants By António Afonso; Frederico Silva Leal
  9. How close are we to a Capital Markets Union? By Thomadakis, Apostolos
  10. The macroeconomic effects of quantitative easing in the Euro area : evidence from an estimated DSGE model By HOHBERGER, Stefan; PRIFTIS, Romanos; VOGEL, Lukas
  11. Impact of QE on European sovereign bond market By Franck Martin; Jiangxingyun Zhang
  12. The case for a common European refugee policy By Massimo Bordignon; Simone Moriconi
  13. Identification of Global and National Shocks in International Financial Markets via General Dynamic Factor Models By Matteo Barigozzi; Marc Hallin; Stefano Soccorsi
  14. Assessing shadow banking – non-bank financial intermediation in Europe By Laurent Grillet-Aubert; Jean-Baptiste Haquin; Clive Jackson; Neill Killeen; Christian Weistroffer
  15. The Trade Effects of Border Controls: Evidence from the European Schengen Agreement By Gabriel Felbermayr; Jasmin Gröschl; Thomas Steinwachs

  1. By: De Santis, Roberta (ISTAT-LUISS); Esposito, Piero (LUISS School of European Political Economy); Masi, Elena (MEF-­DT)
    Abstract: GDP growth in the Eurozone during the last twenty years continuously decreased. In addition, the global financial crisis and subsequent events seem to have, on average, shifted the trajectory of the Eurozone’s potential output downward. A key question is whether this trend is a permanent result of “secular stagnation” or if economic policies might improve the situation. In this paper, we intend to test the impact of several structural determinants of potential output growth using a dynamic panel data methodology for 11 main EMU members for the period 1996-2014. We also take into account the role of fiscal policy stance and debt dynamics to assess whether European fiscal rules, especially in the aftermath of the financial and sovereign debt crises, contributed to the slowdown of potential growth. Estimated results suggest that population, tertiary education, research and development expenditure, trade and financial openness, and institutional quality contributed significantly to potential output growth in the EMU during the period under examination. By estimating a quadratic relation between debt and potential growth, we find that negative effects dominate for values above 132%; however, the impact of public debt is statistically uncertain even for levels slightly below 100%. Once debt dynamics are taken into account, we find that excessive and prolonged consolidation, measured using the cyclically adjusted primary balance, might have, at best, no effect on potential growth when debt levels do not exceed the threshold level.
    Keywords: determinants of growth; potential output growth; reforms
    JEL: O29 O41 O43 O47
    Date: 2017–03–17
  2. 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
    JEL: E32 F15 R23
    Date: 2017
  3. By: Tobias Basse (Norddeutsche Landesbank Girozentrale); Robinson Kruse (University of Groningen and CREATES); Christoph Wegener (Ipag Business School and Center for Risk and Insurance)
    Abstract: This article sheds light on the question whether arising sovereign credit risk in the EMU has been triggered by the US subprime crunch. By adapting recent econometric methodologies suggested in the related field of speculative bubbles, we find clear evidence for fast diverging (and even explosive) behavior of EMU government bond yields of peripheral countries relative to Germany during the financial and the European debt crisis. This might be caused by flight-to-quality effects to German government bonds coincident with the collapse of Lehman Brothers and by a loss of confidence in the fiscal stability of Greece, Ireland, Italy, Portugal and Spain during the European debt crisis. First, we find compelling evidence for bubbles in the Dow Jones Equity Real Estate Investment Trust (REITs) index which serves as a weekly measure of economic activity in the North American real estate sector. Second, in our main analysis, we test whether the collapsing bubble in the housing market triggered the diverging government bond yields during two crisis regimes. Our findings indicate that this was the case in the course of the financial, but not during the EMU sovereign debt crisis. These results suggest that the severe fiscal problems in peripheral countries are homemade rather than imported from the US.
    Keywords: Sovereign Debt Crisis, Sovereign Credit Risk, Subprime Crisis, Bubbles, Explosive Behavior, Bubble Migration
    JEL: C22 C52 C53
    Date: 3001
  4. By: Belke, Ansgar; Osowski, Thomas
    Abstract: Building on the growing evidence on the importance of large data sets for empirical macroeconomic modeling, we estimate a large-scale FAVAR model for 18 OECD member countries. We quantify the global effects of economic policy uncertainty shocks and check whether the signs, the magnitude, and the persistence profile are consistent with the literature on the real and financial sector effects of uncertainty. In that respect, we compare the impacts of a US and a Euro area uncertainty shock. According to our results, an increase in uncertainty has a strong negative impact on economic activity, consumer prices, equity prices and interest rates. Uncertainty shocks cause deeper recessions in Continental Europe (except Germany) than in Anglo- Saxon countries. This pattern is compatible with the view that continental Europe still suffers from institutions which prevent flexible markets. And US uncertainty shocks have a bigger impact than their European counterparts. Uncertainty does not only impact that country where the shock originates but also has large cross-border effects. In that respect, Switzerland turns out to be the most affected non-Euro area European country. We also find a high degree of synchronization among the responses of national variables to a (foreign) uncertainty shock, indicating evidence of an international business cycle. With respect to the responses of national long-term interest rates to an uncertainty shock, our results reveal a strong “North-South” divide within EMU with rates decreasing less significantly in the South. Another important result is that uncertainty shocks emerging in one region quickly raise uncertainty outside the region of origin which appears to be an important transmission channel of uncertainty.
    Keywords: Economic policy uncertainty,Europe,FAVAR analysis,large-scale econometric models,option value of waiting,uncertainty effects,international uncertainty spillovers,United States
    JEL: C32 F42 D80
    Date: 2017
  5. By: Kahanec, Martin; Guzi, Martin
    Abstract: The economic literature starting with Borjas (2001) suggests that immigrants are more flexible than natives in responding to changing sectoral, occupational, and spatial shortages in the labor market. In this paper, we study the relative responsiveness to labor shortages by immigrants from various origins, skills and tenure in the country vis-à-vis the natives, and how it varied over the business cycle during the Great Recession. We show that immigrants in general have responded to changing labor shortages across EU member states, occupations and sectors more fluidly than natives. This effect is especially significant for low-skilled immigrants from the new member states or with the medium number of years since immigration, as well as with high-skilled immigrants with relatively few (1-5) or many (11+) years since migration. The relative responsiveness of some immigrant groups declined during the crisis years (those from Europe outside the EU or with eleven or more years since migration), whereas other groups of immigrants became particularly fluid during the Great Recession, such as those from new member states. Our results suggest immigrants may play an important role in labor adjustment during times of asymmetric economic shocks, and support the case for well-designed immigration policy and free movement of workers within the EU. The paper provides new insights into the functioning of the European Single Market and the roles various immigrant groups play for its stabilization through labor adjustment during times of uneven economic development across sectors, occupations, and countries.
    Keywords: immigrant worker,labor supply,skilled migration,labor shortage,wage regression,Great Recession
    JEL: J24 J61 J68
    Date: 2017
  6. By: Ryan van Lamoen; Simona Mattheussens; Martijn Dröes
    Abstract: This paper examines the impact of Quantitative Easing (QE) in the Eurosystem on government bond yields and to what extent QE is causing government bond prices to deviate from their fundamental determinants. We apply a novel recursive estimation procedure developed by Phillips et al. (2015) to examine the existence of exuberant price behavior. The results show that government bond markets experienced exuberant price behavior in Euro Area countries following the announcement and implementation of several QE programs in 2014 and 2015. Especially the Public Sector Purchase Program (PSPP) contributed to exuberant price behavior as all countries experienced a divergence between observed and fundamental yield levels. However, almost no evidence of exuberance in government bond markets is found when QE policies are treated as drivers of government bond yields in addition to the traditional determinants. Given the influence of QE on government bond yields and prices, our findings imply that caution is warranted when this policy is eventually reversed.
    Keywords: Government bond yields; asset price bubbles; monetary policy
    JEL: G12 G15 E52
    Date: 2017–03
  7. By: Valentina Milano (LUISS "Guido Carli" University)
    Abstract: We study risk sharing in the Euro Area (EA) and compare it to the US federation. Using the method of variance decomposition first implemented by Asdrubali et al. (1996), we update and revisit the main channels of risk sharing (net factor income, international transfers and credit markets). We contribute to this literature by splitting the credit market channel into two parts: smoothing achieved through private institutions (markets) and the public sector (national governments and official European institutions). We find that the role played by European institutions (i.e., public lending from the ESFS, ESFM, ESM and the European Commission) has been quite relevant during the recent financial crisis and largely compensated the reduced role of national governments.
    Keywords: Risk sharing, Euro Area, European transfers, income insurance, international financial integration.
    JEL: E2 E6 F15 G15
    Date: 2017
  8. By: António Afonso; Frederico Silva Leal
    Abstract: We use a panel of 11 EMU countries in the period 2000-2014 to assess the importance of political and economic determinants as explanatory factors in sovereign bond yield spreads. According to the results, there is evidence that those spread determinants gained importance after the beginning of the financial crisis. Following the crisis, the debt ratio, fiscal balance, expenditure on pension funds, the level of liquidity, GDP growth rate, and structural reforms have become relevant determinants of sovereign spreads, while fiscal rules have reduced spreads. Key Words : Public Debt, Sovereign Spreads, Fiscal Policy, Financial Crisis, EMU
    JEL: E43 E62 G01 H63
    Date: 2017–03
  9. By: Thomadakis, Apostolos
    Abstract: The European Commission’s flagship initiative of the Capital Markets Union (CMU) aims to unlock funding for capital markets and find ways of linking investors and savers with growth. A number of very disparate measures will, it is hoped, have a cumulative but significant impact on the creation of a single market for capital. By the end of 2017, the Commission expects to have finalised and implemented the first phase of CMU measures, which include: an EU framework for simple, transparent and standardised securitisation; prospectus rules that facilitate access to capital markets and generate more, but less costly, financing opportunities; and improvements to the current venture capital and social entrepreneurship regulations. This year will therefore be crucial for the successful implementation of the CMU Action Plan and the delivery of its full potential to support growth in Europe. Nevertheless, notes the author of this ECMI Commentary, the impact of Brexit and the French and German national elections on CMU remains to be seen. The current climate of political instability and uncertainty places the EU at a crossroads, and it appears that the goal of completing the Capital Markets Union by 2019 is an increasingly remote one. This Commentary is a contribution to the public consultation on the Capital Markets Union mid-term review, 2017.
    Date: 2017–03
  10. By: HOHBERGER, Stefan; PRIFTIS, Romanos; VOGEL, Lukas
    Abstract: This paper analyses the macroeconomic effects of the ECB's quantitative easing programme using an open-economy DSGE model estimated with Bayesian techniques. Using data on government debt stocks and yields across maturities we identify the parameter governing portfolio adjustment in the private sector. Shock decompositions suggest a positive contribution of ECB QE to EA year-on-year output growth and inflation of up to 0.4 and 0.5 pp in the standard linearized version of the model. Allowing for an occasionally binding zero-bound constraint by using piecewise linear solution techniques raises the positive impact up to 1.0 and 0.7 pp, respectively.
    Keywords: Quantitative easing; Portfolio rebalancing; Bayesian estimation; Open-economy DSGE model; Real GDP
    JEL: E44 E52 E53 F41
    Date: 2017
  11. By: Franck Martin (Université de Rennes 1, CREM CNRS, France); Jiangxingyun Zhang (Université de Rennes 1, CREM CNRS, France)
    Abstract: This paper tries to evaluate the impact of the ECB's QE programs on the equilibrium of European sovereign bond markets. For this purpose, we develop an original theoretical model to understand the formation of long-term sovereign rates in the euro area. Precisely, it's an international bond portfolio choice model with two countries which generalizes the traditional results of the term structure interest rates theory. Particularly, except for traditional properties, long-term equilibrium rates depend as well as on the anticipated variances and covariances, considered as a component of a volatility risk premium, of future bond yields. By using CDS as a variable to control default risks, the model is tested empirically over the period January 2006 to September 2016. We can conclude that the ECB's QE programs beginning from March 2015, have accelerated the "defragmentation process" of the European bond markets, already initiated since the OMT. However, according to the test à la Forbes and Rigobon, it seems difficult to affirm that QE programs have led to a significant increase in the conditional correlations between bond markets. In a supplementary empirical test, we show that QE has significantly reduced the sensitivities of bond yield spreads to the premiums paid on sovereign CDS.
    Keywords: QE impact, Term structure interest rates
    Date: 2017–03
  12. By: Massimo Bordignon; Simone Moriconi
    Abstract: Legal and political issues left the management of the 2015-16 refugee crisis mostly in the hands of national governments, but this is incompatible with an integrated economic area that has largely abolished internal borders. It is also incompatible with some founding European Union principles, such as the existence of a common European policy on the mobility of people. A greater role for European institutions and policies is needed both for policing the common borders and imposing common welcome policy standards for refugees, based on best practices. EU measures are also required to face the long-term problems related to immigration, as it is very likely that economic and demographic differences between the EU and neighbouring countries will lead to further crises in the future. Planning for this requires ample and dedicated resources, and a long-term strategy based on agreements with immigrants’ countries of origin, a task that no EU country can pursue alone. Some progress has been made to strengthen the role of the EU, with the adoption of new directives, such as the Asylum Procedures Directive, and the establishment of the European Border and Coast Guard Agency. However, the situation is still far from satisfactory. There are major differences in refugee welcome and integration policies in EU countries, as shown by differences in asylum request outcomes in different countries and the different integration processes. There is also a serious lack of information about the skills and competences of refugees in different countries. This is a problem because this information is a necessary first step for an integrated welcome policy that might transform a challenge into an opportunity for aging European economies. Such differences between EU countries are not only inequitable but also inefficient. They lead to massive distortions in the functioning of European labour markets and create incentives for refugees to seek asylum in specific countries. Moreover, the promise made by EU institutions of a refugee relocation programme is presently not being kept, leaving the countries of first entry to carry disproportionate burdens. Legal procedures are part of the problem because the Dublin Regulation, approved under different circumstances, obliges the first-entry country to examine asylum requests. However, political obstacles play the main role. EU countries are very different in terms of their cultural attitudes towards immigration and it is difficult to impose a common solution on them. Practical solutions, based on the countries that do not want refugees making compensation payments, are probably the most realistic avenues to follow.
    Date: 2017–03
  13. By: Matteo Barigozzi; Marc Hallin; Stefano Soccorsi
    Abstract: We employ a two-stage general dynamic factor model method to analyse the co-movements between returns and between volatilities of stocks belonging to the US, European, and Japanese financial markets. We find evidence of two common shocks driving the dynamics of volatilities - one global (worldwide) shock and one US-European shock and four "national" shocks in the panel of returns, but no global one. Co-movements in the returns and volatilities panels increased considerably in the period 2007-2012 associated with the Great Financial Crisis and the European Sovereign Debt Crisis. We interpret this finding as the sign of a surge, during crises, of interdependencies across markets, as opposed to contagion. Finally, we show that the global volatility shock, identified via natural timing assumptions, has homogeneous dynamic effects within each individual market but more heterogeneous effects across them, and also has good predictive power on aggregate realised volatilities.
    Keywords: dynamic factor models; volatility; financial crises; contagion; interdependence
    JEL: C32 G00 C50 C30 G15
    Date: 2017–03
  14. By: Laurent Grillet-Aubert; Jean-Baptiste Haquin; Clive Jackson; Neill Killeen; Christian Weistroffer
    Abstract: Owing to the disruptive events in the shadow banking system during the global financial crisis, policymakers and regulators have sought to strengthen the monitoring framework and to identify any remaining regulatory gaps. In accordance with its mandate, the European Systemic Risk Board (ESRB) has engaged in developing a monitoring framework to assess systemic risks in the European Union (EU) shadow banking sector. This assessment framework provides the basis for the EU Shadow Banking Monitor, which will be published each year by the ESRB. The framework also feeds into the ESRB’s Risk Dashboard, internal risk assessment processes and the formulation and implementation of related macro-prudential policies. The ESRB’s Joint Advisory Technical Committee (ATC)-Advisory Scientific Committee (ASC) Expert Group on Shadow Banking (JEGS) has accordingly engaged in: conducting a stocktake of relevant available data and related data gaps; defining criteria for risk mapping in line with the work of the Financial Stability Board (FSB) in this area; deriving indicators using this methodology for the purposes of the ESRB’s risk monitoring and assessment. Shadow banking can be broadly defined as credit intermediation performed outside the traditional banking system. This is consistent with the definition used at the global level by the FSB. Against this background, this paper describes the structure of the shadow banking system in Europe and discusses a range of methodological issues which must be considered when designing a monitoring framework. The paper applies both an “entity-based” approach and an “activity-based” approach when mapping the broad shadow banking system in the EU. In turn, the analysis focuses primarily on examining liquidity and maturity transformation, leverage, interconnectedness with the regular banking system and credit intermediation when assessing the structural vulnerabilities within the shadow banking system in Europe. This approach appears the most appropriate for the purpose of assessing shadow banking related risks within the EU financial system. On this basis, the paper complements the EU Shadow Banking Monitor by providing further methodological detail on the development of risk metrics. The paper presents the analysis underpinning the construction of risk metrics for the shadow banking system in Europe and highlights a number of areas where more granular data are required in order to monitor risks related to certain market activities and interconnectedness within the broader financial system. JEL Classification: G23, G18
    Keywords: shadow banking, intermediation, systemic risk
    Date: 2016–07
  15. By: Gabriel Felbermayr; Jasmin Gröschl; Thomas Steinwachs
    Abstract: The Schengen Agreement is an important milestone in the European integration process. The purpose is to facilitate the flow of goods, services, and persons across intra-European borders. How successful is it in achieving this goal? We apply an econometric gravity analysis to bilateral trade. Unlike earlier analysis, we acknowledge that Schengen treats di?erent country pairs di?erently, depending on their relative geographical location. Moreover, we find it crucial to carefully control for other elements of European integration such as membership in the customs union, the single market or the currency union, and to factor in countries' trade with themselves. Schengen has boosted trade by about 2.81% on average, on top of the EU's trade e?ects (equivalent to a drop in tari?s between 0.46 and 1.02 percentage points). Trade creation e?ects for services are stronger than for goods, but estimates feature larger parameter uncertainty. Peripheral countries benefit more than central ones. Other aspects of EU integration matter much more for trade than Schengen.
    Keywords: Trade Integration, European Integration, Schengen Agreement, Gravity
    JEL: F10 F15 N74 N94
    Date: 2017–03

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