nep-eec New Economics Papers
on European Economics
Issue of 2017‒05‒14
seventeen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Are risk-based capital requirements detrimental to corporate lending? Evidence from Europe By Bruno, Brunella; Nocera, Giacomo; Resti, Andrea Cesare
  2. Quantitative Easing in the Euro Area By Urbschat, Florian; Watzka, Sebastian
  3. Formation of inflation expectations in turbulent times. Recent evidence from the European Survey of Professional Forecasters By Tomasz Łyziak; Maritta Paloviita
  4. Spillovers among sovereign debt markets: identification by absolute magnitude restrictions By De Santis, Roberto A.; Zimic, Srečko
  5. Drivers of systemic risk: Do national and European perspectives differ? By Buch, Claudia M.; Krause, Thomas; Tonzer, Lena
  6. Bid-to-cover and yield changes around public debt auctions in the euro area By Beetsma, Roel; Giuliodori, Massimo; Hanson, Jesper; de Jong, Frank
  7. International effects of euro area versus US policy uncertainty: A FAVAR approach By Belke, Ansgar; Osowski, Thomas
  8. Budgetary stability and structural reforms in Spain By Rafael Doménech; José Manuel González Páramo
  9. "The Dynamics of Government Bond Yields in the Eurozone" By Tanweer Akram; Anupam Das
  10. Feasibility and Added Value of a European Unemployment Benefits Scheme By Beblavý, Miroslav; Lenaerts, Karolien
  11. Would a euro's depreciation improve the French economy? By Riccardo Magnani; Luca Piccoli; Martine Carré; Amedeo Spadaro
  12. Do stress tests matter? Evidence from the 2014 and 2016 stress tests By Georgescu, Oana-Maria; Gross, Marco; Kapp, Daniel; Kok, Christoffer
  13. European Fiscal Union: Economic rationale and design challenges By Thirion, Gilles
  14. Whatever it takes: The Real Effects of Unconventional Monetary Policy By Acharya, Viral V; Eisert, Tim; Eufinger, Christian; Hirsch, Christian
  15. International financial integration, crises and monetary policy: evidence from the Euro area interbank crises By Puriya Abbassi; Falk Bräuning; Falko Fecht; José-Luis Peydró
  16. Flow effects of central bank asset purchases on euro area sovereign bond yields: evidence from a natural experiment By De Santis, Roberto A.; Holm-Hadulla, Fédéric
  17. Why is Europe Falling Behind? Structural Transformation and Services' Productivity Differences between Europe and the U.S. By Buiatti, C.; Duarte, J. B.; Saenz, L. F.

  1. By: Bruno, Brunella; Nocera, Giacomo; Resti, Andrea Cesare
    Abstract: In this paper, we first explore the main drivers of the differences in RWAs across European banks. We also assess the impact of RWA-based capital regulation on bank's asset allocation in 2008-2014. We find that risk weights are affected by bank size, business models, and asset mix. We also find that the adoption of internal ratings-based approaches is an important driver of bank risk-weighted assets and that national segmentations explain a significant (albeit decreasing) share of the variability in risk weights. As for the impact on internal rating on banks' asset allocation, we uncover that banks using IRB approaches more extensively have reduced more (or increased less) their corporate loan portfolio. Such effect is somehow stronger for banks located in Euro periphery countries during the 2010-12 sovereign crisis. We do not find evidence, however, of a reallocation from corporate loans to government exposures, pointing to the fact that other motives prevail in explaining the banks' shift towards government bonds during the Euro sovereign crisis, including the "financial repression" channel.
    Date: 2017–04
  2. By: Urbschat, Florian; Watzka, Sebastian
    Abstract: We examine the effects of the Asset Purchase Programme (APP) gradually introduced by the European Central Bank from September 2014 onwards. Studying the short-term reaction of financial markets after APP press releases, we analyse the development of bond yields and spreads around these releases. More precisely, we try to estimate different asset price channels by quantifying the cumulative decrease of spreads and by running event regressions for several Euro Area countries. Focusing on the signalling channel, measured by the OIS rate, and the portfolio rebalancing channel, proxied by the conditional bond-OIS spread, we find that the effects in yield and spread reduction were most pronounced for the announcement on the Public Sector Purchase Programme (PSPP) but declined afterwards for additional announcements. Possible explanations for this are the declining degree to which the ECB surprised markets and the increasingly burdensome institutional set-up of the APP. Moreover, our evidence suggests that portfolio rebalancing had a far larger impact on periphery than core countries’ bonds, which supports argument made by Cúrdia and Woodford (2011).
    Keywords: Large Scale Asset Purchase; Yield curve; Quantitative Easing; APP; Event study
    JEL: E43 E44 E52 E58 G14
    Date: 2017–05
  3. By: Tomasz Łyziak (Narodowy Bank Polski); Maritta Paloviita (Bank of Finland)
    Abstract: This paper analyses formation of inflation expectations in the euro area. At the beginning we analyse forecast accuracy of ECB inflation projections relative to private sector forecasts. Then, using the ECB Survey of Professional Forecasters, we estimate a general model integrating two theoretical concepts, i.e. the hybrid model of expectations, including rational and static expectations, and the sticky-information (epidemiological) model. Among determinants of inflation expectations we consider – except backward-looking factors – rational expectations assumption and the effects of the ECB inflation projections. We examine whether ECB inflation projections are still important in expectations’ formation once the impact of forwardlookingness of economic agents has been taken into account. We also assess the consistency of implicit (perceived) inflation targets with the ECB inflation target. Our analysis indicates that recent turbulent times have contributed to changes in expectations’ formation in the euro area, as the importance of backward-looking mechanisms has decreased and the importance of the perceived inflation target has increased. We also find that the perceived inflation target has remained broadly consistent with the official ECB inflation target in the medium-term. However, the downward trend of the perceived target signals some risks of de-anchoring of inflation expectations. The importance of ECB inflation projections for mediumterm private sector inflation expectations has increased over time, but the magnitude of this effect is rather small. However, SPF inflation forecasts remain consistent with the ECB communication, being ether close to ECB projections or between ECB projections and the inflation target.
    Keywords: Formation of inflation expectations, survey data, euro area, financial crisis, low inflation
    JEL: D84 E52 E58
    Date: 2017
  4. By: De Santis, Roberto A.; Zimic, Srečko
    Abstract: This paper studies spillovers among US and European sovereign yields. We provide a new method based on absolute magnitude restrictions of the impact matrix to identify the countries that were the main sources of spillovers. Despite the large size of shocks from euro area stressed countries, connectedness among sovereign yields declined between 2008 and 2012 due to financial fragmentation, particularly between countries with more divergent business and fiscal cycles. We show that none of the sovereign yields are insulated from foreign shocks and that shocks to the Greek bond market in 2010 explained 20-30% of the variance of sovereign yields in stressed countries, while in 2011-2012 Italy (not Spain) was the source of systemic risk. JEL Classification: C3, G2
    Keywords: connectedness, contagion, fragmentation, sovereign risk, spillovers, SVAR identification
    Date: 2017–05
  5. By: Buch, Claudia M.; Krause, Thomas; Tonzer, Lena
    Abstract: In Europe, the financial stability mandate generally rests at the national level. But there is an important exception. Since the establishment of the Banking Union in 2014, the European Central Bank (ECB) can impose stricter regulations than the national regulator. The precondition is that the ECB identifies systemic risks which are not adequately addressed by the macroprudential regulator at the national level. In this paper, we ask whether the drivers of systemic risk differ when applying a national versus a European perspective. We use market data for 80 listed euro-area banks to measure each bank's contribution to systemic risk (SRISK) at the national and the euro-area level. Our research delivers three main findings. First, on average, systemic risk increased during the financial crisis. The difference between systemic risk at the national and the euro-area level is not very large, but there is considerable heterogeneity across countries and banks. Second, an exploration of the drivers of systemic risk shows that a bank's contribution to systemic risk is positively related to its size and profitability. It decreases in a bank's share of loans to total assets. Third, the qualitative determinants of systemic risk are similar at the national and euro-area level, whereas the quantitative importance of some determinants differs.
    Keywords: systemic risk,bank regulation,Banking Union
    JEL: G01 G21 G28
    Date: 2017
  6. By: Beetsma, Roel; Giuliodori, Massimo; Hanson, Jesper; de Jong, Frank
    Abstract: Earlier research has shown that euro area primary public debt markets affect secondary markets. We find that more successful auctions of euro area public debt, as captured by higher bid-to-cover ratios, lead to lower secondary-market yields following the auctions. This effect is stronger when market volatility is higher. We rationalize both findings using a simple theoretical model of primary dealer behavior, in which the primary dealers receive a signal about the value of the asset auctioned. JEL Classification: G11, G12, G14, G18
    Keywords: bid-to-cover ratios, primary and secondary markets, primary dealers, public debt auctions, volatility
    Date: 2017–05
  7. 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
  8. By: Rafael Doménech; José Manuel González Páramo
    Abstract: We analyse the fiscal policy lessons from the recent recession in the Spanish economy and the options for the future. Our results indicate that budget balance and public debt trends showed clear signs of unsustainability between 2009 and 2011, with few alternatives available other than reducing the fiscal deficit.
    Keywords: Economic Analysis , Spain , Working Paper
    JEL: E62 H62 H63
    Date: 2017–05
  9. By: Tanweer Akram; Anupam Das
    Abstract: This paper investigates the determinants of nominal yields of government bonds in the eurozone. The pooled mean group (PMG) technique of cointegration is applied on both monthly and quarterly datasets to examine the major drivers of nominal yields of long-term government bonds in a set of 11 eurozone countries. Furthermore, autoregressive distributive lag (ARDL) methods are used to address the same question for individual countries. The results show that short-term interest rates are the most important determinants of long-term government bonds' nominal yields, which supports Keynes's (1930) view that short-term interest rates and other monetary policy measures have a decisive influence on long-term interest rates on government bonds.
    Keywords: Government Bond Yields; Interest Rates; Monetary Policy; Eurozone
    JEL: E43 E50 E60 G10 G12 O16
    Date: 2017–05
  10. By: Beblavý, Miroslav; Lenaerts, Karolien
    Abstract: This CEPS e-Book presents the final report of a comprehensive project on the Feasibility and Added Value of a European Unemployment Benefits Scheme, initiated by the European Parliament and commissioned by the European Commission, Directorate-General for Employment, Social Affairs and Inclusion. The aim of the study is to assess the legal and operational feasibility of introducing a European unemployment benefits scheme (EUBS), as well as the economic added value that such as scheme could bring. Some 18 different variants of an EUBS are analysed in terms of their design, legal and operational challenges and economic effects. The study presents the most comprehensive work on the subject to date. For each of these 18 variants, the impact on the individual member states, EMU and the EU has been examined. The 18 variants vary across a range of features, such as the replacement rate and caps used, the duration of unemployment benefits and the eligibility conditions that apply. If an EUBS were to be selected as one of the potential stabilisation mechanisms to explore further, this study provides evidence and insights on the barriers ahead and different ways to deal with them.
    Date: 2017–02
  11. By: Riccardo Magnani (CEPN - Centre d'Economie de l'Université Paris Nord - Université Paris 13 - USPC - Université Sorbonne Paris Cité - CNRS - Centre National de la Recherche Scientifique); Luca Piccoli (Université des Iles Baléares - Arqueobalear); Martine Carré (LEDa - Laboratoire d'Economie de Dauphine - Université Paris-Dauphine); Amedeo Spadaro (PSE - Paris-Jourdan Sciences Economiques - ENS Paris - École normale supérieure - Paris - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique)
    Abstract: In this paper, we use a Micro-Macro mo del to evaluate the e ects of a euro's depreciation on the French economy, both at the macro and micro level. Our Micro-Macro model consists of a Microsimulation mo del that includes an arithmetical mo del for the French fiscal system and two behavioral mo dels used to simulate the eff ects on consumption b ehavior and lab or supply, and a multisectoral CGE model which simulates the macro economic e ects of a reform or a shock. The integration of the two mo dels is made using an iterative (or sequential) approach. We find that a 10% euro's depreciation stimulates the aggregate demand by increasing exports and reducing imports which increases production and reduces the unemployment rate in the economy. At the individual level, we nd that the macro economic shock reduces poverty and, to a lesser extent, income inequality. In particular, the decrease in the equilibrium wage, determined in the macro mo del, slightly reduces the available income for people who have already a job, while the reduction in the level of unemployment permits to some individuals to find a job, substantially increasing their income and, in many cases, bringing them out of poverty.
    Keywords: Exchange rates,Microsimulation,CGE models
    Date: 2017–04–28
  12. By: Georgescu, Oana-Maria; Gross, Marco; Kapp, Daniel; Kok, Christoffer
    Abstract: Stress tests have been increasingly used in recent years by regulators to foster confidence in the banking sector by not only increasing its resilience via mandatory capital increases but also by enhancing transparency to allow investors to better discriminate between banks. In this study, using an event study approach, we explore how market participants reacted to the 2014 Comprehensive Assessment and the 2016 EBA EU-wide stress test. The results show that stress test disclosures revealed new information that was priced by the markets. We also provide evidence that the publication of stress test results enhanced price discrimination as the impact on bank CDS spreads and equity prices tended to be stronger for the weaker performing banks in the stress test. Finally, we provide some evidence that also sovereign funding costs were affected in the aftermath of the stress test publications. The results provide insights into the effects and usefulness of stress test-related disclosures. JEL Classification: G14, G18, G21
    Keywords: bank stress tests, disclosure, event study
    Date: 2017–05
  13. By: Thirion, Gilles
    Abstract: Proposals for different types of elements of a fiscal union have flourished in recent years, both from academic and policy circles. Since a fiscal union could take a constellation of various different forms, this paper first provides an analytical framework pinpointing the five key elements of a fiscal union. It takes stock of the existing features of economic and monetary union (EMU) that embed some form of fiscal union, and then critically analyses the main arguments for and against further fiscal integration. Finally, It surveys the key proposals for a fiscal capacity and different types of Eurobonds. Gilles Thirion is a Researcher at CEPS. This paper was prepared as a deliverable for the Horizon 2020 FIRSTRUN project on “‘Fiscal Rules and Strategies under Externalities and Uncertainties” commissioned by the European Commission.
    Date: 2017–01
  14. By: Acharya, Viral V; Eisert, Tim; Eufinger, Christian; Hirsch, Christian
    Abstract: Launched in Summer 2012, the European Central Bank (ECB)'s Outright Monetary Transactions (OMT) program indirectly recapitalized European banks through its positive impact on periphery sovereign bonds. However, the stability reestablished in the banking sector did not fully translate into economic growth. We document zombie lending by banks that remained undercapitalized even post-OMT. In turn, firms receiving loans used these funds not to undertake real economic activity such as employment and investment but to build up cash reserves. Creditworthy firms in industries with a high zombie firm prevalence suffered significantly from this credit misallocation, which further slowed down the economic recovery.
    Date: 2017–04
  15. By: Puriya Abbassi; Falk Bräuning; Falko Fecht; José-Luis Peydró
    Abstract: We analyze how financial crises affect international financial integration, exploiting euro-area proprietary interbank data, crisis and monetary shocks, and loan terms to the same borrower-day by domestic versus foreign lenders. Crisis shocks reduce the supply of cross-border liquidity, with stronger volume than pricing effects, thereby impairing international financial integration. On the extensive margin, there is flight to home—but independently of quality. On the intensive margin, however, GIPS-headquartered debtor banks suffer in the Lehman crisis, but effects are stronger in the sovereign-debt crisis, especially for riskier banks. Nonstandard monetary policy improves interbank liquidity, but without fostering strong cross-border financial re-integration.
    Keywords: financial integration, financial crises, cross-border lending, monetary policy, euro area sovereign crisis, liquidity
    JEL: E58 F30 G01 G21 G28
    Date: 2017–04
  16. By: De Santis, Roberto A.; Holm-Hadulla, Fédéric
    Abstract: We estimate the response of euro area sovereign bond yields to purchase operations under the ECBs Public Sector Purchase Programme (PSPP), using granular data on all PSPP-eligible securities at daily frequency. To avoid simultaneity bias in the estimated relationship between yields and purchase volumes, we exploit a PSPP design feature that renders certain securities temporarily ineligible for reasons unrelated to their yields. Using these temporary purchase restrictions as an instrument to identify exogenous variation in purchase volumes, we find that the “flow effect” of PSPP operations has, on average, led to a temporary 7 basis-point decline in sovereign bond yields on the day of purchase. This impact estimate is well above those found in similar studies for the US; at the same time, our results imply that flow effects have accounted for only a limited share of the downward pressure of PSPP on sovereign yields, most of which instead derived from anticipation and announcement effects at the onset of the programme. JEL Classification: E52, E58, E65, G12
    Keywords: monetary policy, natural experiment, quantitative easing, sovereign yields
    Date: 2017–05
  17. By: Buiatti, C.; Duarte, J. B.; Saenz, L. F.
    Abstract: We explain labor productivity differences of the service sector between Europe and the U.S. through the labor allocation taking place within the service sector. We measure labor productivity using a multisector structural transformation model that decomposes services into 11 sub-sectors comparable across Europe and the U.S. We identify wholesale and retail trade as well as business services to be the two sectors responsible for most of the lack of catch-up in labor productivity between Europe and the U.S. We also investigate which institutional characteristics are associated with the different performances of sectoral productivity across sectors. We empirically explore our country-sector panel measures of labor productivity levels, and our results suggest that differences in taxation, pro-business attitudes, ICT diffusion and rates of innovation are disproportionally correlated with the productivity of wholesale, retail and business services relative to the rest of the sectors in the economy.
    Keywords: Structural Transformation, Service Sector, Nonho-mothetic CES preferences, Labor Productivity.
    JEL: O41 O47 O57
    Date: 2017–01–27

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