nep-eec New Economics Papers
on European Economics
Issue of 2017‒04‒23
fourteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Fiscal spillovers in the euro area a model-based analysis By Attinasi, Maria Grazia; Lalik, Magdalena; Vetlov, Igor
  2. Illiquid Collateral and Bank Lending during the European Sovereign Debt Crisis By Jean Barthélémy; Vincent Bignon; Benoît Nguyen
  3. Proposals for a policy mix in the euro area By Georg Feigl; Markus Marterbauer; Miriam Rehm; Matthias Schnetzer; Sepp Zuckerstätter; Lars Andersen; Thea Nissen; Signe Dahl; Peter Hohlfeld; Benjamin Lojak; Thomas Theobald; Achim Truger; null null; Guillaume Allegre; Céline Antonin; Christophe Blot; Jérôme Creel; Bruno Ducoudre; Paul Hubert; Sabine Lebayon; Sandrine Levasseur; Hélène Périvier; Raul Sampognaro; Aurélien Saussay; Vincent Touze; Sébastien Villemot; Xavier Timbeau
  4. Fiscal reaction function and fiscal fatigue: evidence for the euro area By Checherita-Westphal, Cristina; Žďárek, Václav
  5. The Cost Channel Effect of Monetary Transmission: How Effective is the ECB's Low Interest Rate Policy for Increasing Inflation? By Schäfer, Dorothea; Stephan, Andreas; Trung Hoang, Khanh
  6. Theory and Practice of Crisis in Political Economy: the Case of the Great Recession in Spain By Juan Pablo Mateo
  7. The Effectiveness of Forward Guidance in an Estimated DSGE Model for the Euro Area: the Role of Expectations By Roberta Cardani; Alessia Paccagnini; Stelios D. Bekiros
  8. Unconventional monetary policy: interest rates and low inflation: A review of literature and methods By Mariarosaria Comunale; Jonas Striaukas
  9. Did the crisis permanently scar the Portuguese labour market? Evidence from a Markov-switching Beveridge curve analysis By Vansteenkiste, Isabel
  10. Government Debt and Corporate Leverage: International Evidence By Irem Demirci; Jennifer Huang; Clemens Sialm
  11. Strengthening economic resilience: Insights from the post-1970 record of severe recessions and financial crises By Aida Caldera Sánchez; Alain de Serres; Filippo Gori; Mikkel Hermansen; Oliver Röhn
  12. Scarcity effects of QE: A transaction-level analysis in the Bund market By Kathi Schlepper; Heiko Hofer; Ryan Riordan; Andreas Schrimpf
  13. Does monetary policy generate asset price bubbles ? By Christophe Blot; Paul Hubert; Fabien Labondance
  14. Pension reforms in the EU since the early 2000's: achievements and challenges ahead By Carone, Giuseppe; Eckefeldt, Per; Giamboni, Luigi; Laine, Veli; Pamies, Stephanie

  1. By: Attinasi, Maria Grazia; Lalik, Magdalena; Vetlov, Igor
    Abstract: The fiscal consolidation measures adopted in many euro area countries over 2010–13 reduced excessive domestic fiscal imbalances, but came at the cost of short-term output losses. This simultaneous tightening of fiscal policy raised concerns that such output losses might be exacerbated by negative spillovers from other countries. This paper presents some model-based simulations for the euro area with a view to gauge the cross-country impact of the fiscal measures adopted over 2010–13. The paper finds that the output effects of the fiscal consolidation were heterogeneous across countries, reflecting the different amounts and composition of fiscal measures adopted. We find that the trade channel is able to generate sizeable cross-border fiscal spillovers in the euro area. However, once the analysis takes into account the remaining channels (e.g. monetary policy reaction, exchange rate, and risk premium) total spillovers are estimated to be relatively small. In general, when compared to the growth fallout of domestic fiscal policies, negative fiscal spillovers do not seem to have added much to the economic growth woes of vulnerable countries. JEL Classification: E42, E32, F42, F45
    Keywords: Fiscal consolidation, macroeconomic models, policy spillovers
    Date: 2017–03
  2. By: Jean Barthélémy; Vincent Bignon; Benoît Nguyen
    Abstract: This paper assesses the effect on banks’ lending activity of accepting illiquid collateral at the central bank refinancing facility in times of wholesale funding stress. We exploit original data on the loans granted by the 177 largest euro area banks between 2011m1 and 2014m12 and on the composition of their pool of collateral pledged with the Eurosystem. During this period, two-thirds of the banks in our sample experienced a sizable loss of wholesale funding. Panel regression estimates show that the banks that pledged more illiquid collateral with the Eurosystem reduced their lending to non-financial firms and households less: a one standard deviation increase in the volume of illiquid collateral pledged corresponded to a 0.6% increase in loans to the economy. This result holds for banks that were and were not run. Our finding thus suggests that the broad range of collateral eligible in the euro area may have helped to mitigate the credit crunch during the euro debt crisis.
    Keywords: collateral, loans, central bank, euro crisis.
    JEL: E52 E58 G01 G21
    Date: 2017
  3. By: Georg Feigl (Institute of Anatomy); Markus Marterbauer; Miriam Rehm; Matthias Schnetzer; Sepp Zuckerstätter; Lars Andersen; Thea Nissen; Signe Dahl; Peter Hohlfeld; Benjamin Lojak; Thomas Theobald; Achim Truger; null null (Macroeconomic Policy Institute (IMK)); Guillaume Allegre (Observatoire français des conjonctures économiques); Céline Antonin (Observatoire français des conjonctures économiques); Christophe Blot (Observatoire français des conjonctures économiques); Jérôme Creel (Observatoire français des conjonctures économiques); Bruno Ducoudre (Observatoire français des conjonctures économiques); Paul Hubert (Observatoire français des conjonctures économiques); Sabine Lebayon; Sandrine Levasseur (Observatoire français des conjonctures économiques); Hélène Périvier (Observatoire français des conjonctures économiques); Raul Sampognaro (Observatoire français des conjonctures économiques); Aurélien Saussay (Observatoire français des conjonctures économiques); Vincent Touze (Observatoire français des conjonctures économiques); Sébastien Villemot (Observatoire français des conjonctures économiques); Xavier Timbeau (Observatoire français des conjonctures économiques)
    Abstract: Since 2009, central banks have implemented expansionary policies to support activity and prevent industrialized economies from falling into deflation. In a recessionary environment, policy rates reached an effective lower bound (ELB) which has led central banks to resort to unconventional measures. These policies have resulted in an expansion of their balance sheets, reflecting liquidities provided by central banks to the financial system and asset purchases. These actions have raised many questions about their impact on real activity because recovery has been weak in the Eurozone, notably compared to the United States and the United Kingdom (see chapter 1). In the following, we focus on ECB policies’ impact on investment (section a) and on the impact of credit conditions on investment (section b). Questions have also been raised concerning the possible responsibility of monetary policy in generating financial bubbles (section c). The end of QE finally raises the issue of next engine of growth for the euro area (section d).
    Keywords: Policy Mix; Monetary Policy; Credit; Investment
    Date: 2016–12
  4. By: Checherita-Westphal, Cristina; Žďárek, Václav
    Abstract: This paper estimates a fiscal reaction function (FRF) framework for euro area countries and derives a novel approach to measure fiscal fatigue. As in previous studies, we find evidence that euro area sovereigns abide, on average, by (weak) sustainability constraints. The primary balance improves by about 0.03–0.05 for every 1 percentage point increase in the debt-to-GDP ratio after controlling for other relevant factors. The positive reaction of primary surpluses to higher debt strengthened over the crisis. Based on this framework, we propose a simple, practical measure of fiscal fatigue that can be used to assess the capacity of sovereigns to maintain primary surpluses over extended periods of time. This measure can be derived by comparing simulated primary balance paths in the context of debt sustainability analyses with countries’ track-record, adjusted for the change in debt with the estimated fiscal reaction coefficient. The evidence of fiscal fatigue in non-linear FRF specifications is weaker for our euro area sample. JEL Classification: H60, E62, F41, C33
    Keywords: debt sustainability, euro area, financial crisis, fiscal fatigue, fiscal reaction function
    Date: 2017–03
  5. By: Schäfer, Dorothea (DIW Berlin, JIBS and CERBE); Stephan, Andreas (Linnæus University, Ratio Institute and JIBS); Trung Hoang, Khanh (DIW Berlinn)
    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: E31 E43 E43 G01 G01
    Date: 2017–03–23
  6. By: Juan Pablo Mateo (Department of Economics, New School for Social Research and University of Valladolid)
    Abstract: This paper addresses the Marx´s theory of crisis in order to analyze the Great Recession in Spain, a peripheral economy within the Eurozone. It is shown the underlying problem in the capacity to generate surplus value behind the housing bubble, which in turn explain some particularities related to the capital composition and productivity, as well as wages and finance. The document also carries out a critic of both orthodox and heterodox approaches that focus i) on a profit squeeze caused by labor market rigidities, ii) underconsumption because of stagnant wages, as well as iii), finances: interest rates and indebtedness.
    Keywords: Theory of crisis, profit rate, Spain, housing bubble, interest rates, wages
    JEL: B14 E11 E20 E43 J30
    Date: 2017–04
  7. By: Roberta Cardani; Alessia Paccagnini; Stelios D. Bekiros
    Abstract: We assess the effectiveness of the forward guidance undertaken by European Central Bank using a standard medium-scale DSGE model à la Smets and Wouters (2007). Exploiting data on expectations from surveys, we show that incorporating expectations should be crucial in performance evaluation of models for the forward guidance. We conduct an exhaustive empirical exercise to compare the pseudo out-of-sample predictive performance of the estimated DSGE model with a Bayesian VAR and a DSGE-VAR models. DSGE model with expectations outperforms others for inflation; while for output and short term-interest rate the DSGE-VAR with expectations reports the best prediction.
    Keywords: DSGE Bayesian estimation; Survey professional forecasts; Real time data
    JEL: C52 C53 E58 E52
    Date: 2017–01
  8. By: Mariarosaria Comunale; Jonas Striaukas
    Abstract: In this paper, we review a range of approaches used to capture monetary policy in a period of Zero Lower Bound (ZLB). We concentrate here on methods closely linked to interest rates, which include: spreads, synthetic indices from principal component analysis, and different shadow rates. Next, we calculate these measures for the euro area, draw comparisons among different approaches, and look at the effects on main macroeconomic variables, with a special focus on inflation. By and large, the impact of unconventional monetary policy shocks on inflation is found to be significantly positive across studies and methods. Finally, we summarize the literature on the Natural Real Rate of Interest. This overview may help to assess how long low (real) interest rates in a ZLB stay in place, potentially leading to more accurate policy recommendations.
    Keywords: Unconventional monetary policy, zero lower bound, shadow rates, natural interest rate, inflation.
    JEL: E43 E52 E58 F42
    Date: 2017–04
  9. By: Vansteenkiste, Isabel
    Abstract: In this paper we analyse to what extent the outward shift in the Portuguese Beveridge curve since 2007 has been due to structural or cyclical factors and how likely the outward shift will persist. We do this by empirically estimating the Beveridge curve in a Markov-switching panel setting with time-varying transition probabilities for the US, Portugal and Spain using monthly data for the period 1986m1-2014m12. These time-varying transition probabilities are in turn determined by a set of structural indicators which could affect the matching efficiency in the labour market. The results show that the sharp outward shift in the Portuguese Beveridge curve was to a large extent driven by cyclical factors. However, it was compounded by some structural factors, namely, the relatively high level of employment protection together with the relatively high minimum wage ratio and the relatively generous unemployment benefit system. JEL Classification: C23, C24, J63, J64, J65
    Keywords: Beveridge Curve, Labour market policies, Markov-Switching Model, Panel data
    Date: 2017–04
  10. By: Irem Demirci; Jennifer Huang; Clemens Sialm
    Abstract: We investigate the impact of government debt on corporate financing decisions. We document a negative relation between government debt and corporate leverage using data on 40 countries between 1990 and 2014. This negative relation holds only for government debt that is financed domestically and is stronger for larger and more profitable firms and in countries with more developed equity markets. In order to address potential endogeneity concerns, we use an instrumental variable approach based on military spending and a quasi-natural experiment based on the introduction of the Euro currency. Our findings suggest that government debt crowds out corporate debt.
    JEL: F21 F34 F36 F65 G28 G32 G38 H63
    Date: 2017–04
  11. By: Aida Caldera Sánchez (OECD); Alain de Serres (OECD); Filippo Gori (OECD); Mikkel Hermansen (OECD); Oliver Röhn (OECD)
    Abstract: Considering the deep and long-lasting impact of severe recessions, such as the 2008-09 financial crisis, it is important that measures be taken to minimise the risk of such event. But in doing so the benefits need to be balanced against the potential costs in terms of lower average growth that some of the actions to lower vulnerabilities to bad events could entail. Insofar as the risk-mitigating measures can involve a trade-off between growth and crisis risk, the most cost-effective actions need to be identified, spanning both macro and structural policies. The work summarised in this paper has explored this issue using two complementary empirical approaches, both providing insights on the impact of various policy settings on average GDP growth on the one hand, and either crisis risks or GDP growth at the (negative) tail end, on the other. The results indicate that pro-growth product and labour market policies generally have little impact on the exposure to crisis. More significant tradeoffs between efficiency and crisis risk arise in the case of financial market policies.
    Keywords: financial crisis, financial liberalisation, GDP tail risk, resilience, severe recession
    JEL: E02 E61 F32 G01
    Date: 2017–04–22
  12. By: Kathi Schlepper; Heiko Hofer; Ryan Riordan; Andreas Schrimpf
    Abstract: This paper investigates the scarcity effects of quantitative easing (QE) policies, drawing on intra-day transaction-level data for German government bonds, purchased under the public sector purchase program (PSPP) of the ECB/Eurosystem. This paper is the first to match high-frequency QE purchase data with high-frequency inter-dealer data. We find economically significant price impacts at high (minute-by-minute) and low (daily) frequencies, highlighting the relevance of scarcity effects in bond markets. Asset purchase policies are not without side effects, though, as the induced scarcity has an adverse impact on liquidity conditions as measured by bid-ask spreads and inter-dealer order book depth. We further show that the price impact varies greatly with market conditions: it is considerably higher during episodes of illiquidity and when yields are higher.
    Keywords: Easing, European Central Bank, Scarcity Channel, Bond Market Liquidity, High-Frequency Data
    Date: 2017–04
  13. By: Christophe Blot (Observatoire français des conjonctures économiques); Paul Hubert (Observatoire français des conjonctures économiques); Fabien Labondance (Observatoire français des conjonctures économiques)
    Abstract: This paper empirically assesses the effect of monetary policy on asset price bubbles and aims to disentangle the competing predictions of theoretical bubble models. First, we take advantage of the model averaging feature of Principal Component Analysis to estimate bubble indicators, for the stock, bond and housing markets in the United States and Euro area, based on the structural, econometric and statistical approaches proposed in the literature to measure bubbles. Second, we assess the linear and non-linear effect of monetary shocks on these bubble components using local projections. The main result of this paper is that monetary policy does not affect asset price bubble components, except for the US stock market for which we find evidence in favor of the prediction of rational bubble models.
    Keywords: Asset price bubbles; Monetary polikcy; Quantitative easing; Federal Reserve; ECB
    JEL: E44 G12 E52
    Date: 2017–02
  14. By: Carone, Giuseppe; Eckefeldt, Per; Giamboni, Luigi; Laine, Veli; Pamies, Stephanie
    Abstract: Most EU Member States have carried out substantial pension reforms over the last decades in order to enhance fiscal sustainability, while maintaining adequate pension income. The intensity of pension reforms has been particularly strong since 2000. These reforms have been implemented through a wide range of measures that have substantially modified the pension system rules and parameters. One of the most important elements of pension reforms, aside of whether countries engaged or not in a systemic change, has been the introduction of mechanisms aimed at automatically adjusting (indexing) the key pension parameters (pension age, benefits, financing resources) to demographic pressure (e.g. changes in life expectancy, increase in the dependency ratio). Indeed, since the mid-1990's, half of the EU Member States have adopted either automatic balancing mechanisms, sustainability factors and / or automatic links between retirement age and life expectancy. All these pension reforms are projected to have a substantial impact on containing future pension expenditure trends. According to the latest long-term projections in the 2015 Ageing Report, public pension expenditure is projected to be close to 11% of GDP over the long run in the EU, almost the same as in 2013. However, the fiscal impact of ageing is still projected to be substantial in many EU countries, becoming apparent already over the course of the next two decades. This is also due to the very gradual phasing in of already legislated reforms, an issue that raises questions about the intergenerational fairness of the reforms and poses some doubt on the time-consistency of their implementation. Indeed, the sustainability-enhancing pension reforms legislated in a majority of EU countries will lead to a reduction of generosity of public pension schemes for future generations of retirees. But to make sure that these reforms will not have to face political and social resistance and risk of reversal in the moment they start to be implemented in full, other "flanking" policy measures are likely to be necessary: for example, reforms that boost retirement incomes by effectively extending working lives and employability of older workers (also through flexible working arrangements that allow people to keep working beyond current formal retirement age and to step down gradually from full-time to part-time to very part-time work) and provide other means of retirement incomes (e.g. private pensions) and appropriate social-safety nets to avoid that low-wage people follow back in poverty at old age.
    Keywords: Pensions, ageing population, public expenditure, debt, deficit, potential growth, structural reforms, retirement age, older workers, longevity risk.
    JEL: H52 H55 J1 J26
    Date: 2016–12–20

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