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on European Economics |
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Issue of 2017‒05‒21
seventeen papers chosen by Giuseppe Marotta Università degli Studi di Modena e Reggio Emilia |
| By: | Feldkircher, Martin; Gruber, Thomas; Huber, Florian |
| Abstract: | As a consequence of asset purchases by the European Central Bank (ECB), longer-term yields in the euro area decline, and spreads between euro area long-term yields narrow. To assess spillovers of these recent financial developments, we use a Bayesian variant of the global vector autoregressive (BGVAR) model with stochastic volatility and propose a novel mixture of zero impact and sign restrictions that we impose on the cross-section of the data. Both shocks generate positive and significant spillovers to industrial production in Central, Eastern and Southeastern Europe (CESEE) and other non-euro area EU member states. These effects are transmitted via the financial channel (mainly through interest rates and equity prices) and outweigh costs of appreciation pressure on local currencies vis-á-vis the euro (trade channel). While these results represent general trends, we also find evidence for both cross-country heterogeneity of effects within the euro area and region-specific spillovers thereof. |
| Keywords: | Euro area monetary policy, quantitative easing, spillovers |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wus005:5554&r=eec |
| By: | Alessandro Ferrari; Anna Rogantini Picco |
| Abstract: | This paper aims at empirically assessing the effect of the adoption of the euro on the ability of euro area member states to smooth consumption and share risk. With the objective of evaluating the economic performance of euro area countries in the scenario where the euro had not been adopted, we construct a counterfactual dataset of macroeconomic variables via the Synthetic Control Method. In order to get some preliminary measures of risk sharing, we first compute bilateral consumption correlations and Brandt-Cochrane- Santa Clara Indexes across euro area member states. We then decompose risk sharing in different channels by means of the Asdrubali, Sorensen and Yosha (1996) output decomposition. Our preliminary measures and our decomposition of risk sharing are computed with both actual and synthetic data so as to identify whether there has been any effect of the adoption of the euro on risk sharing and through which channels it has occurred. We find that the euro has not affected the level of risk sharing across euro area countries, but has partially reduced the ability of member states to smooth consumption. We attribute this change to the higher GDP growth generated by the adoption of the euro, which has been accompanied by a greater output volatility. We also report differential effects for core and periphery countries, showing that the former have not suffered any negative effects from the adoption of the euro in terms of risk sharing. |
| Keywords: | Risk Sharing Mechansims, Consumption Smoothing Channels, Euro Area, Synthetic Control Method |
| JEL: | F32 F36 F41 |
| Date: | 2016–07–20 |
| URL: | http://d.repec.org/n?u=RePEc:stm:wpaper:17&r=eec |
| By: | Marcin Bielecki (Narodowy Bank Polski, University of Warsaw); Michał Brzoza-Brzezina (Narodowy Bank Polski, Warsaw School of Economics); Marcin Kolasa (Narodowy Bank Polski, Warsaw School of Economics); Krzysztof Makarski (Narodowy Bank Polski, Warsaw School of Economics) |
| Abstract: | Boom-bust cycles in the eurozone periphery almost toppled the common currency and recent experience suggests that they may return soon. We check whether monetary or macroprudential policy could have prevented the periphery’s violent boom and bust after the euro adoption. We estimate a DSGE model for the two euro area regions, core and periphery, and conduct a series of historical counterfactual experiments in which monetary and macroprudential policy follow optimized rules that use area-wide welfare as the criterion. We show that common monetary policy could have better stabilized output in both regions, but not the housing market or the periphery’s trade balance.In contrast, region-specific macroprudential policy could have substantially smoothed the credit cycle in the periphery and reduced the build-up of external imbalances. |
| Keywords: | euro-area imbalances, monetary policy, macroprudential policy, Bayesian estimation |
| JEL: | E32 E44 E58 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:263&r=eec |
| By: | Buchholz, Manuel; Schmidt, Kirsten; Tonzer, Lena |
| Abstract: | This paper investigates how declines in the deposit facility rate set by the European Central Bank (ECB) affect bank behavior. The ECB aims to reduce banks' incentives to hold reserves at the central bank and thus to encourage loan supply. However, given depressed margins in a low interest environment, banks might reallocate their liquidity toward more profitable liquid assets other than traditional loans. Our analysis is based on a sample of euro area banks for the period from 2009 to 2014. Three key findings arise. First, banks reduce their reserve holdings following declines in the deposit facility rate. Second, this effect is heterogeneous across banks depending on their business model. Banks with a more interest-sensitive business model are more responsive to changes in the deposit facility rate. Third, there is evidence of a reallocation of liquidity toward loans but not toward other liquid assets. This result is most pronounced for non-GIIPS countries of the euro area. |
| Keywords: | bank portfolio,central bank reserves,monetary policy |
| JEL: | E52 G11 G21 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:iwhdps:122017&r=eec |
| By: | Daniel P. Monteiro; Romanos Priftis |
| Abstract: | This paper constructs stylized scenarios to assess the lending constraints faced by the banking sectors of euro area Member States arising from a combination of low profitability, adverse bank equity markets and the phase in of new capital requirements. In this connection, it also presents a comprehensive review of the potential sources of increases in minimum bank capital requirements, providing projections for their evolution at Member State level. The combination of the aforementioned factors is seen to carry the potential to significantly constrain bank lending over the period of transition to higher capital ratios which, according to DSGE model simulations, can noticeably impair growth and investment levels in the short run. |
| JEL: | G21 G28 E22 E27 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:euf:dispap:043&r=eec |
| By: | Nicolas Veron (Peterson Institute for International Economics) |
| Abstract: | European policymakers and analysts often appear to assume that most euro area banks are publicly listed companies with ownership scattered among many institutional investors, a structure in which no single shareholder has controlling influence and that allows for considerable flexibility to raise capital when needed. Such an ownership structure is indeed prevalent among banks in advanced countries such as Australia, Canada, the United Kingdom, and the United States. Veron shows, however, that listed banks with dispersed ownership are the exception rather than the rule among the euro area’s significant banks, especially if one looks beyond the very largest banking groups. The bulk of these significant banks are government-owned or cooperatives, or uniquely influenced by one or several large shareholders, or otherwise prone to direct political influence. As a result, the public transparency of many banks is low, with correspondingly low market discipline; they have weak incentives to prioritize profitability; their ability to shore up their balance sheets through either retained earnings or external capital raising is limited, resulting in insufficient capital flexibility; they take unnecessary risks due to political interference; and their links with governments perpetuate the vicious circle between banks and sovereigns, which has been a key driver of the euro area crisis. |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:iie:pbrief:pb17-18&r=eec |
| By: | Belke, Ansgar; Osowski, Thomas |
| Abstract: | This paper empirically identifies and measures fiscal spillovers in the EU countries using a global vector autoregression (GVAR) model. Our aim is to look at the sign and the absolute values of fiscal spillovers in a country-wise perspective and at the time profile (impulse response) of the impacts of fiscal shocks. We find moderate spillover effects of fiscal policy shocks originating in Germany and France. However, there is significant variation regarding the magnitude of the spillovers among destination countries and country clusters. Furthermore, we find some evidence that spillovers generated by German or French fiscal spillovers are stronger for EMU than non-EMU countries in Europe. |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:eps:cepswp:12109&r=eec |
| By: | Jarocinski, Marek; Mackowiak, Bartosz Adam |
| Abstract: | When monetary and fiscal policy are conducted as in the euro area, output, inflation, and government bond default premia are indeterminate according to a standard general equilibrium model with sticky prices extended to include defaultable public debt. With sunspots, the model mimics the recent euro area data. We specify an alternative configuration of monetary and fiscal policy, with a non-defaultable eurobond. If this policy arrangement had been in place since the onset of the Great Recession, output could have been much higher than in the data with inflation in line with the ECB's objective. |
| Keywords: | fiscal theory of the price level; eurobond; self-ful lfiling expectations; zero lower bound |
| JEL: | E31 E32 E63 |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12020&r=eec |
| 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 linearised 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: | E44, E52, E53, F41 |
| JEL: | E44 E52 F41 |
| Date: | 2017–03–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:78955&r=eec |
| By: | Gilles Mourre; Caterina Astarita; Anamaria Maftei |
| Abstract: | This paper provides an assessment of the uncertainty surrounding revenue predictions, through an ex post analysis of European Commission’s forecasts over the last 15 years. It estimates the forecast errors affecting revenue for all 28 Member States, using the different vintages of the autumn and spring Commission forecasts. It analyses both the direction and magnitude of errors, using standard summary statistics. The paper looks into the various components of forecast errors to better understand their drivers (forecasting error related to real GDP, inflation or revenue-to-GDP ratio) and which types of revenues (direct tax, indirect tax or social security contributions) are particularly affected. The paper also examines the pattern of revenue errors over time and in particular how revenue forecasts perform before, during and after the crisis. To further deepen the analysis, a set of tests are carried out on the quality of the prediction (serial correlation, unbiasedness, weak and informational efficiency). The estimator-based tests confirm the sound track record of the European Commission’s forecasts. This is also shown by a comparison with the OECD’s revenue forecasts. Lastly, the paper reviews various possible determinants of forecast errors and examines their significance by means of a pooled time series technique. The econometric study allows for the identification of factors which increase or reduce the risk of over-forecasting revenue. |
| JEL: | C1 E60 E66 |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:euf:dispap:039&r=eec |
| By: | Zuzana Mucka (Council for Budget Responsibility); Ludovit Odor (Council for Budget Responsibility) |
| Abstract: | We use a sovereign default model developed by Hatchondo et al. (2015) to study the implications of adopting constitutional debt limits. It can be shown, that for a benevolent government issuing long-term debt it is welfare-enhancing to introduce credible fiscal rules to mitigate the so called "debt dilution" problem. By calibrating the theoretical model to Slovak data, we estimate the optimal (net) debt brake threshold at 48 percent of the mean annual output. Compared to a no-rule economy, the introduction of a fully-credible debt limit represents a substantial decrease in average sovereign spreads (50 basis points). In the empirical part of the paper we find that the introduction of the constitutional Fiscal Responsibility Act in Slovakia in 2011 might have helped to lower sovereign spreads compared to euro area peers by 20-30 basis points. |
| Keywords: | sovereign default risk, debt dilution, fiscal rules, debt limits |
| JEL: | H1 H63 H8 |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:cbe:wpaper:201701&r=eec |
| By: | Rodolfo Arioli; Colm Bates; Heinz Dieden; Ioana Duca; Roberta Friz; Christian Gayer; Geoff Kenny; Aidan Meyler; Iskra Pavlova |
| Abstract: | This report updates and extends earlier assessments of quantitative inflation perceptions and expectations of consumers in the euro area and the EU, using an anonymised micro data set collected by the European Commission in the context of the Harmonised EU Programme of Business and Consumer Surveys. Confirming earlier findings, consumers' quantitative estimates of inflation are found to be higher than actual HICP (Harmonised Index of Consumer Prices) inflation over the entire sample period (2004-2015). The analysis shows that European consumers hold different opinions of inflation depending on their income, age, education and gender. Although many of the features highlighted for the EU and the euro area aggregates are valid across individual Member States, differences exist also at the country level. Despite the higher inflation estimates, there is a high level of co-movement between measured and estimated (perceived/expected) inflation. Even respondents providing estimates largely above actual HICP inflation, demonstrate understanding of the relative level of inflation during both high and low inflation periods. Based on these economically plausible results, the report concludes that further work should be devoted to defining concrete aggregate indicators of consumers' quantitative inflation perceptions and expectations on the basis of the dataset used in this study. Moreover, it outlines a number of future research topics that can be addressed by exploiting the enormous potential of the data set. |
| JEL: | D8 D12 E31 |
| Date: | 2016–11 |
| URL: | http://d.repec.org/n?u=RePEc:euf:dispap:038&r=eec |
| By: | Pilar Beneito (Department of Economic Analysis, University of Valencia, Avda. dels Tarongers s/n, 46022 Valencia (Spain).); Carlos Chafer (Department of Economic Structure, University of Valencia, Avda. dels Tarongers s/n, 46022 Valencia (Spain).) |
| Keywords: | current account imbalances, cost competitiveness, EMU, diff-in-differences |
| JEL: | F32 F45 C21 C23 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:eec:wpaper:1703&r=eec |
| By: | Gilles Mourre; Adriana Reut |
| Abstract: | This paper examines the characteristics of government non-tax revenue in the European Union. Nontax revenue includes a large number of diverse income sources, such as fees charged for the provision of public services, income from financial assets and government property, and EU funds. Receipts from sources other than taxes account for slightly more than one-tenth of total revenue, but the fiscal risk stemming from the volatility of non-tax revenue is three times higher than that from the volatility of tax revenue. We present measurements of volatility in non-tax receipts in the Member States that can help identify the uncertainty around annual projections of revenue. Panel data analysis is used to examine whether macroeconomic and fiscal variables can explain the differences in non-tax revenue among Members States. Government spending, tax receipts and the size of financial assets held by government are found to explain close to a third of the cross-sectional variation in non-tax revenue. Granger causality tests are used to examine the direction of causality across Member States between non-tax revenue, tax receipts, and government spending. |
| JEL: | E62 H27 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:euf:dispap:044&r=eec |
| By: | Gächter, Martin; Macki, Piotr; Moder, Isabella; Polgár, Éva Katalin; Savelin, Li; Żuk, Piotr |
| Abstract: | This paper reviews and assesses financial stability challenges in countries preparing for EU membership i.e. Albania, Bosnia and Herzegovina, Kosovo, the former Yugoslav Republic of Macedonia, Montenegro, Serbia and Turkey. The paper focuses on the period since 2014 and on the banking sectors that dominate financial systems in this group of countries. It identifies two main near-term challenges applying to most of them. The first relates to credit risk, which remains substantial despite some progress in reducing the burden of non-performing loans on banks’ balance sheets in the period under review. However, progress so far is limited, partly owing to structural impediments. The second relates to the still high share of foreign exchange denominated loans and deposits, which poses an indirect credit risk in the case of lending to unhedged borrowers and impairs the monetary transmission channel. In addition, profitability is worth monitoring going forward, as it remains subdued in many countries given high provisioning needs and a lacklustre credit growth and low interest rate environment. These concerns are generally met with a solid shock-absorbing capacity, as exemplified by robust capital and liquidity buffers. JEL Classification: F31, F34, F36, G15, G21, G28 |
| Keywords: | banking sector, credit growth, cross-border flows, deleveraging., EU accession, financial stability, foreign exchange lending, Western Balkans |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2017190&r=eec |
| By: | Daniel Ordoñez-Callamand (Banco de la República de Colombia); Jose Eduardo Gomez-Gonzalez (Banco de la República de Colombia); Luis Fernando Melo-Velandia (Banco de la República de Colombia) |
| Abstract: | We study the determinants of sovereign default risk for a group of 23 OECD countries using quarterly data spanning the period between 2000:Q1 and 2016:Q3. Applying the recently developed panel dynamic heterogeneous common correlated effects estimator of Chudik and Pesaran [2015] our study innovates in considering potential endogeneity issues and cross-sectional dependence. We control for global risk appetite and country risk ratings. The results show that common factors are the main drivers of solvency risk for our set of countries. Specially relevant, we find that macroeconomic determinants are not significant predictors of long-term sovereign spreads. Classification JEL: C33, F34, G15. |
| Keywords: | Dynamic Heterogeneous Panel; Sovereign Default Risk; Common Correlated Effects. |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:bdr:borrec:996&r=eec |
| By: | Bindseil, Ulrich; Corsi, Marco; Sahel, Benjamin; Visser, Ad |
| Abstract: | The Eurosystem collateral framework ESCF) has played a key role in the ECB monetary policy implementation since 1999. Moreover, the financial and sovereign debt crisis and with it the increased reliance of banks on central bank credit have underlined the importance of central bank collateral frameworks. Broad collateral frameworks have helped prevent large-scale liquidity-driven defaults of financial institutions in all major advanced economies. More recently, they have allowed central banks to provide a large amount of – at times targeted – longer-term credit. Nevertheless, a number of authors have argued that the ESCF is too forthcoming or broad and that it does not afford the central bank sufficient protection. This paper first explains and justifies the logic of collateral frameworks in general and that of the ESCF in particular. It then reviews the main critical comments. It concludes that the ESCF has been effective (i) in providing an adequate level of elasticity for Eurosystem credit, and (ii) in protecting the Eurosystem from financial losses despite the severity of the financial and sovereign debt crisis and the large amounts of longer-term credit provided by the Eurosystem. JEL Classification: E58 |
| Keywords: | central banking, collateral, ECB, Eurosystem, lender of last resort, operations |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2017189&r=eec |