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on European Economics |
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Issue of 2017‒04‒02
fifteen papers chosen by Giuseppe Marotta Università degli Studi di Modena e Reggio Emilia |
| By: | Matteo Crosignani; Miguel Faria-e-Castro; Luís Fonseca |
| Abstract: | We study the design of lender of last resort interventions and show that the provision of long-term liquidity incentivizes purchases of high-yield short-term securities by banks. Using a unique security-level data set, we find that the European Central Bank’s three-year Long-Term Refinancing Operation incentivized Portuguese banks to purchase short-term domestic government bonds that could be pledged to obtain central bank liquidity. This “collateral trade” effect is large, as banks purchased short-term bonds equivalent to 8.4% of amount outstanding. The resumption of public debt issuance is consistent with a strategic reaction of the debt agency to the observed yield curve steepening. JEL Classification: E58, G21, G28, H63 |
| Keywords: | Lender of Last Resort, Unconventional Monetary Policy, Sovereign Debt |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:srk:srkwps:201631&r=eec |
| By: | Gehrig, Thomas; Iannino, Maria Chiara |
| Abstract: | This paper analyses the evolution of the safety and soundness of the European banking sector during the various stages of the Basel process of capital regulation. In the first part we document the evolution of various measures of systemic risk as the Basel process unfolds. Most strikingly, we find that the exposure to systemic risk as measured by SRISK has been steeply rising for the highest quintile, moderately rising for the second quintile and remaining roughly stationary for the remaining three quintiles of listed European banks. This observation suggests that the Basel process has succeeded in containing systemic risk for the majority of European banks but not for the largest institutions. In the second part we analyse the drivers of systemic risk. We find compelling evidence that the increase in exposure to systemic risk (SRISK) is intimately tied to the implementation of internal models for determining credit risk as well as market risk. Based on this evidence, the sub-prime crisis found especially the largest and more systemic banks ill-prepared and lacking resiliency. This condition has even aggravated during the European sovereign crisis. Banking Union has not (yet) brought about a significant increase in the safety and soundness of the European banking system. Finally, low interest rates affect considerably to the contribution to systemic risk across the whole spectrum of banks. |
| Keywords: | capital shortfall; internal risk models; quantile regressions; resilience; systemic risk |
| JEL: | B26 E58 G21 G28 H12 N24 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11920&r=eec |
| By: | Ad van Riet |
| Abstract: | At the 25th anniversary of the Maastricht Treaty, this paper reviews the merits of introducing a safe sovereign asset for the eurozone. The triple euro area crisis showed the costly consequences of ignoring the ‘safety trilemma’. Keeping a national safe sovereign asset (the German bund) as the cornerstone of the financial system is incompatible with having free capital mobility and maintaining economic and financial stability in a monetary union. The euro area needs a single safe sovereign asset. However, eurobonds are only foreseen after full fiscal integration. To address the safety trilemma member countries must therefore act as the joint sovereign behind the euro and choose from two options. First, they could establish a credible multipolar system of safe national sovereign assets. For this purpose, they could all issue both senior and junior tranches of each national government bond in a proportion such that the expected safety of the senior tranche is the same across countries while the junior tranche would absorb any sovereign default risk. Additional issuance of national GDP-linked bonds could insure governments against a deep recession that might lead to a self-fulfilling default and thereby help to make the junior tranche less risky. The second option is that the member countries together produce a common safe sovereign asset for a truly integrated and stable monetary union by creating synthetic eurobonds comprising both a safe senior claim and a risky junior claim on a diversified portfolio of national government bonds. This appears a more effective solution to the safety trilemma – especially when euro area governments would also issue national GDP-linked bonds – but it requires flanking measures to control for moral hazard. JEL Classification: F33, F34, G15, H63, H7 |
| Keywords: | safety trilemma, capital mobility, safe sovereign asset, synthetic eurobonds |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:srk:srkwps:201735&r=eec |
| By: | Antonella Cavallo; Antonio Ribba |
| Abstract: | This paper aims to assess the effects of external macroeconomic shocks on business cycles of Central and Eastern European Countries, not yet Euro-area members. Using quarterly data from 1999 to 2015 and the structural near-VAR methodology, we focus on the effects of Euro-area monetary policy and global oil price shocks on prices and output of the analyzed countries. Results show that business cycle fluctuations are mainly explained by domestic shocks in the short run, while monetary policy and oil price shocks play an increasing role in the medium run. Adding domestic fiscal shocks the overall picture does not change significantly, since fiscal policy turns out to be a minor driver of business cycle fluctuations in CEECs. |
| Keywords: | CEECs; Business Cycle Fluctuations; Euro Area; Common Shocks; near-Structural VAR |
| JEL: | C32 E32 Q43 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:mod:recent:128&r=eec |
| By: | Rossella Bardazzi (Dipartimento di Scienze per l'Economia e l'Impresa); Leonardo Ghezzi |
| Abstract: | The Eurozone crisis has exposed several weaknesses of the European Monetary Union economies. Slow productivity growth and competitiveness losses on international markets have been growing since the beginning of the 2000s and became evident during the recent downturn. A policy action to increase capital stock accumulation through investment could generate a double dividend: increasing domestic demand and stimulating the competitive position of European economies on international markets. This paper aims to assess the impact of an expansionary capital stock policy on the external competitiveness of EU. The analysis employs a Bilateral Trade Model built at INFORUM with several distinguishing characteristics: a comprehensive bilateral dataset, econometric estimation of key parameters, and emphasis on sectoral details. Our findings show that a capital stock increase is effective in enhancing EU trade shares although differences between sectors and markets are significant in two key destinations of European commodity exports: China and the US. |
| Keywords: | Bilateral trade, multisectoral modelling, EU competitiveness, policy simulation |
| JEL: | F14 C51 C55 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:frz:wpaper:wp2017_01.rdf&r=eec |
| By: | Markus Behn; Carsten Detken; Tuomas Peltonen; Willem Schudel |
| Abstract: | We estimate a multivariate early-warning model to assess the usefulness of private credit and other macro-financial variables in predicting banking sector vulnerabilities. Using data for 23 European countries, we find that global variables and in particular global credit growth are strong predictors of domestic vulnerabilities. Moreover, domestic credit variables also have high predictive power, but should be complemented by other macro-financial indicators like house price growth and banking sector capitalization that play a salient role in predicting vulnerabilities. Our findings can inform decisions on the activation of macroprudential policy measures and suggest that policy makers should take a broad approach in the analytical models that support risk identification and calibration of tools. JEL Classification: G01, G21, G28 |
| Keywords: | early-warning model, banking crises, signalling approach, systemic risk |
| Date: | 2016–11 |
| URL: | http://d.repec.org/n?u=RePEc:srk:srkwps:201629&r=eec |
| By: | Timo Baas; Ansgar Belke |
| Abstract: | Member countries of the European Monetary Union (EMU) initiated wide-ranging labor market reforms in the last decade. This process is ongoing as countries that are faced with serious labor market imbalances perceive reforms as the fastest way to restore competitiveness within a currency union. Among observers, however,there are fears about a beggar-thy-neighbor policy that leaves non-reforming countries with a loss in competitiveness and an increase in foreign debt. By analyzing the impact of reforms on foreign debt, we contribute to the debate on whether labor market reforms increase or reduce current account imbalances. Using a two-country, two-sector search and matching DSGE model, we analyze the impact of labor market reforms on the transmission of macroeconomic shocks in both, non-reforming and reforming countries.In the case of a positive technology shock hitting a reforming country with the characteristics of a typical EMU member, fears about a beggar-thy-neighbor cannot be corroborated by us for the specic bundle of reforms considered. The positive effect of a reduction in the replacement rate more than compensates negative spillovers from increases in matching ef- ciency and a decrease in vacancy posting costs. This does not hold for a negative productivity shock in the non-reforming country, as the second reform measure, a reduction in vacancy posting costs in the tradable sectors,is dominating the overall impact of labor market reforms and, thus, increasing the foreign debt of the non-reforming country. |
| Keywords: | Eurozone, Business cycles, Labor market issues |
| Date: | 2015–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:ekd:008007:8484&r=eec |
| By: | Hein, Eckhard; Dünhaupt, Petra; Alfageme, Ayoze; Kulesza, Marta |
| Abstract: | In this paper we analyse the effects of financialisation on income distribution, before and after the Great Financial Crisis and the Great Recession. The focus is on functional income distribution and thus on the relationship between financialisation and the wage share or the gross profit share. The analysis is based on a Kaleckian theory of income distribution adapted to the conditions of financialisation. Financialisation may thus affect aggregate wage or gross profit shares of the economy as a whole through three channels: first, the sectoral composition of the economy, second the financial overhead costs and profit claims of the rentiers, and third the bargaining power of workers and trade unions. We examine empirical indicators for each of these channels for six OECD economies, both before and after the crisis. The country set contains the 'private demand boom' economies before the crisis, the US, the UK, and Spain, the 'export-led mercantilist' economies Germany and Sweden, and France representing a 'domestic demand-led' economy. We find that these countries have shown broad similarities regarding redistribution before the crisis, however, with major differences in the underlying determinants. These differences have carried through to the period after the crisis and have led to different results regarding the development of distribution since then. |
| Keywords: | financialisation,distribution,financial and economic crisis,Kaleckian theory of distribution |
| JEL: | D31 D33 D43 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ipewps:852017&r=eec |
| By: | Ciminelli, Gabriele; Ernst, Ekkehard; Giuliodori, Massimo; Merola, Rossana |
| Abstract: | We analyse the effects of tax-based consolidations on income inequality, output and labour market conditions for a sample of 16 OECD countries over the period 1978-2012 employing a panel vector autoregressive methodology. We find that tax-based consolidations reduce income inequality, but at the cost of weaker economic activity. However, tax composition does matter. We show that indirect taxes reduce income inequality by more than direct taxes, possibly due to the operation of a positive labour supply channel. Among indirect taxes, value added and sale taxes are the most successful tool for policy-makers to balance efficiency and equity. Finally, we show that tax-based consolidations reduce disposable income inequality via a decrease in market income disparities and an increase in government redistribution respectively in countries with a weaker and a stronger preference for redistribution. |
| Keywords: | Income distribution,Tax-based consolidation,Fiscal consolidation,Labour force participation,Tax composition |
| JEL: | E2 H2 O1 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:glodps:25&r=eec |
| By: | Tatiana Gaelle Yongoua Tchikanda |
| Abstract: | The global financial crisis raised concerns about the European financial system structure. The systemic nature of financial institutions, especially banking institutions, was highlighted, questioning the bottom-up approach used so far to ensure the financial stability as a whole. In this study, we legitimize the calibration of micro-prudential instruments for macro-prudential purposes in order to measure and manage systemic risk. The debate on the best way to eliminate the negative externalities of systemic risk is politically controversial and economically complicated. Using bank balance sheet and daily stock market data from listed banks classified as Monetary Financial Institutions (MFIs) across EU-17 over the period 1999-2013, we investigate whether more individual bank soundness is conducive for financial stability. Through a 2SLS model to correct the observed endogeneity between the individual risk, measured by Z-score (Roy, 1952) and the systemic risk, measured by SRISK (Acharya, Engle and Richardson, 2012), our strong empirical results suggest that riskier banks contribute more to systemic risk. Thus, individual bank soundness increases the banking system resilience to potential shocks. On the one hand, this finding seems to challenge the traditional bottom-up approach. Indeed, our outcome emphasizes the fallacy of composition prior the crisis. Nevertheless, it shows that even if the sum of the risks borne by financial institutions does not reflect the global risks borne by the entire system, it is an important addition. On the other hand, this result justifies the calibration of micro-prudential tools for macro-prudential purposes; taking into account individual factors that are sources of systemic fragilities and a part of individual risk-taking. This study has important policy implications for designing and implementing new regulations to improve the financial system stability, in particular for MFIs because systemic risk remains misunderstood and its measuring tools are still ongoing (Hansen, 2012). |
| Keywords: | Financial stability, Bank risk-taking, systemic risk, financial structure. |
| JEL: | G21 G28 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2017-16&r=eec |
| By: | Paul J.J. Welfens (Europäisches Institut für Internationale Wirtschaftsbeziehungen (EIIW)) |
| Abstract: | European economic recovery has made progress since the Banking and the Euro Crises, respectively, however there is still need for broader strategic growth progress in the EU. Following the BREXIT referendum result, medium term output forecasts for many European countries have seen a downward revision by the IMF WEO Update of July 19th, 2016. Europe could raise economic growth through a quintuple package: namely, a first element of growth-enhancing policy focusing on the Eurozone, a second element with emphasis on Eastern European EU countries and a third element with a broad emphasis on European infrastructure investment and digital modernization that would include the UK and other non-EU countries in Europe. The list of 11 growth drivers identified by MGI could largely be implemented at the national policy layer. Moreover, the Eurozone countries could adopt a virtual fiscal policy fund for part of both infrastructure and military expenditures so that a better policy mix and more efficient stabilization will be achieved. The UK and the EU27 countries should agree to set up a joint climate R&D funding agency in which the UK and the EU27 would jointly contribute funds so that sustained green innovation and growth projects could be financed in Europe. Beyond new institutions, other growth-enhancing measures which have a clear analytical basis should be adopted. A growth-enhancing G20 element as a follow-up to the Brisbane summit approach would be useful. A decisive focus of a success-promising plan for a dynamic EU27 and Europe, respectively, should be on understanding that the 21st century will be largely digital, shaped by Asian countries and Schumpeterian dynamics. Thus, securing FTAs between the EU and ASEAN, Japan and India are key challenges. A special joint fund for training/retraining in Eastern Europe would also be useful for economic convergence and reduced inequality. |
| Keywords: | Growth, Brexit, R&D, Research, Development, EU, Europe,Institutions, Policy, Reforms |
| JEL: | O11 O3 O43 E02 F5 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:bwu:eiiwdp:disbei231&r=eec |
| By: | Gregory De Walque (NBB, Economics and Research Department); Thomas Lejeune (NBB, Economics and Research Department); Yuliya Rychalovska (University of Namur); Rafael Wouters (NBB, Economics and Research Department) |
| Abstract: | We develop a two-country New Keynesian model with sticky local currency pricing,distribution costs and a demand elasticity increasing with the relative price. These features help to reduce the exchange rate pass-through to import price at the border and down the chain towards consumption price, both in the short and the long run. Oil and imported goods enter at the same time as inputs in the production process and as consumption components. The model is estimated using Bayesian full information maximum likelihood techniques and based on real and nominal macroeconomic series for the euro area and the United States together with the bilateral exchange rate and oil prices. The estimated model is shown to perform well in an out-of-sample forecasting exercise and is able to reproduce most of the cross-series co-variances observed in the data. It is then used for forecast error variance decomposition and historical decomposition exercises. |
| Keywords: | Open-economy macroeconomics, DSGE models, exchange-rate pass through, Bayesian inference, forecasting, policy analysis |
| JEL: | C11 E32 E37 F41 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:201703-317&r=eec |
| By: | Plehwe, Dieter; Krämer, Werner; Neujeffski, Moritz; Meland, Alexander; Guérot, Ulrike |
| Abstract: | The European financial and economic crisis has shaken traditional beliefs and confidence in a one-directional move towards an ever closer union. Discussions regarding "Grexit" and the public vote in favor of "Brexit" have signaled strong anti-EU sentiment far beyond previous instances of dissatisfaction expressed by popular votes in France and the Netherlands opposing the European constitution, for example. Mainstream European integration scholars have started to seriously address disintegration theory; once a preserve of Marxist critiques of mainstream integration scholarship. European right-wing parties, foundations and think tanks openly advocate (partial) disintegration and, in particular, aim to interrupt centrist Social Democratic, Green, Liberal and Conservative cooperation in the European Parliament. What has been the response to these conceptual and political challenges from the pro-European political forces in European politics? In the shadow of Syriza's anti-austerity campaign from Greece and Podemos' grassroots mobilization in Spain, a range of new pro-European think tanks of different political-philosophical leanings have been founded after the crisis, or developed new activities in response to the crisis. The paper will examine the publications of organizations like European Alternatives, Project for a Democratic Europe and EuropaNova in order to observe if and how a new cross-cutting network of pro-European intellectuals, think tanks and ideas address the present crisis, and if and in which ways we can speak of new conceptual and political approaches to European integration that promise innovation and progressive (in the sense of pro-European integration) learning. Do they look beyond neoliberal restrictions to Europe's "sui generis" Union (Hayek's version of interstate federalism), something closer to real (fiscal) federalism - or something different? We will also examine if and how they differ from more centrist institutional efforts to envision the future, such as those uttered by Commission officials, MEPs of the Spinelli-Group, or experts like those assembled in the Glienicker Group. Last, but not least, we will try to establish if and to what extent new conceptual efforts reverberate in pro-European integration debating platforms like Publixphere, OneEurope or Krytyka Polityczna (Political Critique), which are considered more likely echo chambers for pro-European integration think tanks than mainstream media. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:wzbisp:spi2016202&r=eec |
| By: | Dorothea Schäfer; Andreas Stephan; Khanh Trung Hoang |
| Abstract: | We examine whether monetary transmission during the financial and sovereign debt crisis was dominated by the cost channel or by the demand-side channel effect. We use two approaches to track down the potential passthrough of changes in the monetary policy rate to those in consumer prices. First, we utilize panel data from the German manufacturing industry. Second, we conduct time series analyses for Germany, Italy, and Spain. We find that when manufacturing firms’ interest costs drop, the changes in their respective industry’s price index are smaller one year later. This finding is consistent with the cost channel theory. Taken together, the results of both panel data and time series analyses imply that the ECB’s low interest rate policy has worked better for boosting inflation in Italy and Spain than in Germany |
| Keywords: | Inflation, cost channel, monetary transmission |
| JEL: | G01 E31 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1654&r=eec |
| By: | Willi Semmler (Department of Economics, New School for Social Research); Brigitte Young (University of Muenster) |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:new:wpaper:1713&r=eec |