nep-eec New Economics Papers
on European Economics
Issue of 2017‒06‒04
fourteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Contingent convertible bonds: Who invests in European CoCos? By Martijn Boermans; Sweder van Wijnbergen
  2. The impact of ECBs conventional and unconventional monetary policies on European banking indexes returns. By Salvatore Perdichizzi
  3. Is the recent increase in long-term interest rates a threat to euro-area recovery? By Grégory Claeys; Konstantinos Efstathiou
  4. The US Unemployment Insurance, a Federal-State Partnership: Relevance for Reflections at the European Level By Fischer, Georg
  5. Estimating Fiscal multipliers in the Eurozone. A Nonlinear Panel Data Approach. By Salvatore Perdichizzi
  6. Public debt, central bank and money: Some clarifications By Paul Mercier
  7. Efficient Implementation of the Europe 2020 Strategy Goals: Is Social Equality Achievable Reality or Myth Perhaps? By Michaela Stanickova
  8. Testing European Business cycles asymmetry By Zlatko J. Kovacic; Milos Vilotic
  9. Macroeconomic Uncertainty, Growth and Inflation in the Eurozone: A Causal Approach By Vasilios Plakandaras; Rangan Gupta; Periklis Gogas; Theophilos Papadimitriou
  10. Business models of the banks in the euro area By Farne, Matteo; Vouldis, Angelos
  11. “Let the data do the talking: Empirical modelling of survey-based expectations by means of genetic programming” By Oscar Claveria; Enric Monte; Salvador Torra
  12. New market conduct rules for financial intermediaries: Will complexity bring transparency? By Lannoo, Karel
  13. Financial Globalisation, Monetary Policy Spillovers and Macro-modelling: Tales from 1001 Shocks By Georgiadis, Georgios; Jancokova, Martina
  14. Factors Influencing the Formation of Autopoietic Economic Structures in the Baltic States By Mangirdas Morkunas; Viktorija Skvarciany; Jelena Titko

  1. By: Martijn Boermans; Sweder van Wijnbergen
    Abstract: Using a comprehensive dataset on issuances and holdings of contingent convertible debt instruments (CoCos) issued by European banks we investigate who invests in European CoCos. The results indicate that most European CoCos are not directly held by euro area investors. Foreign investors outside the euro area and investment funds located in Ireland and Luxembourg hold the large majority. Euro area banks, insurers and pension funds only have very limited direct exposures. Households in the euro area hold almost no direct positions in European CoCos, although there could be indirect holdings through non-euro area entities and euro area investment funds. Concerns for contagion through cross-holdings of CoCos by banks seem to be unwarranted.
    Keywords: contingent convertible debt; CoCos; banks; systemic risk; securities holdings
    JEL: G11 G21 G23
    Date: 2017–02
  2. By: Salvatore Perdichizzi (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore)
    Abstract: This paper investigates how conventional and unconventional monetary policies announcements a ect European banking indexes returns through an event-study analysis. We use data of 11 European banking indexes for the periods 1999-2015. We examine the state dependency of such e ects and focus on the surprise elements of policy changes derived from the Euribor futures market. Overall, we nd a positive relation between the unexpected changes in the ECBs reference rate and European banking indexes returns. We also discover that the e ect is stronger during the nancial crisis, especially during the sovereign debt crisis. Moreover, we identify a positive relation between the announcements of unconventional policies and the European banking indexes returns , particularly where the banking system was more risky such as Spain, France and Italy but with a low degree of magnitude than expected. Hence, the Euro banks reactions to monetary policies announcements seem to be more relevant through conventional measures with respect to non-conventional ones.
    Keywords: Banking,Conventional and Unconventional Monetary Policy, Interest rate, ECB.
    JEL: G01 E44 E52
    Date: 2017–05
  3. By: Grégory Claeys; Konstantinos Efstathiou
    Abstract: After reaching historically low levels in the first half of 2016, European long-term sovereign yields experienced a notable increase in the second half of 2016 and at the beginning of 2017, before stabilising in the last few months. The nominal long-term interest rate can be decomposed into the following components - a risk-free rate, various premia to compensate investors for future inflation and potential defaults, and a term premium. All of these components have been on a downward trend over the last few years. But some of these trends might have reversed in the second half of 2016, leading to an increase in long-term yields. Understanding the main factors driving interest rates higher in recent months is important. If the rise in interest rates is driven by good news for the economic outlook for the euro area, it would represent a welcome normalisation of the European situation. However, if higher rates are unjustified by economic fundamentals (ie higher growth and inflation expectations), it would represent an unwarranted tightening of financial conditions that could jeopardise the recovery. In fact, the recent movement in sovereign yields in the euro area has resulted from the combination of several factors - 1) a rise in country-specific risks arising mainly from political uncertainty in some euro-area countries; 2) a revision of market expectations for inflation, growth and the path of future interest rates because of good news about the recovery in the euro area; 3) spill-overs from increasing yields in the US coming from the normalisation of monetary policy by the Fed and a potential fiscal policy shift by the new administration; and 4) an increase in the term premium reflecting uncertainty around markets’ expectations. The recent rise is thus mainly driven by good news and does not represent a strong tightening of financial conditions for euro-area households and companies, nor does it currently endanger public finances. Moreover, from an historical perspective (especially when compared to the significant decline in yields over recent decades), the recent rise is of a relatively moderate magnitude and very much similar to previous benign episodes of yield increases (such as in early 2015). The ECB should monitor the situation carefully but it should not be a major concern for the moment. Nevertheless, if in the future sovereign yields from euro-area member states drift away from levels compatible with economic fundamentals, or threaten the European recovery and the return of inflation towards 2 percent (which is not the case at the moment) the EuropeanCentral Bank’s expanded toolbox should be sufficient to influence the yield curve.
    Date: 2017–05
  4. By: Fischer, Georg (European Commission)
    Abstract: This paper describes the US Unemployment Insurance (UI) in particular the federal-state partnership in governance, funding and policy making. It discusses “national interest” as defined by the Federal authorities in relation to UI: income support, economic and employment stabilization and reemployment. The corresponding policy objectives might not be (fully) shared by the states and tensions and policy conflicts emerge. The paper assesses the capacity of the UI system to deliver on those nationwide defined objectives in particular during and after the Great Recession. The UI system had considerable anticyclical impact reinforce by federal intervention. The paper discusses the federal tools to influence state schemes and how they encourage the acceptance of national standards through conditional funding. During the great recession this proved to be temporarily successful for access to and duration of benefits. The often announced shift to more pro-active programs was seemingly more difficult to achieve. Recent policy proposals including those by the outgoing Obama Administration and by the Republican Speaker of the House, Paul Ryan, are reviewed. The paper concludes with reflections on the relevance of the US experience for European level unemployment benefit or welfare schemes. Given the strong position of the EU member states the US Federal-State partnership could be a more pertinent reference than the highly centralised UI systems in other federal states. The relation between federation wide standards and incentives for the reform of state systems, for sustainable financing and shifts to more pro-active policies might be of interest. Finally strengthening the anti-cyclical impact through federal intervention including funding mirrors debates on the role of automatic stabilisation mechanisms in the Euro Area.
    Keywords: unemployment insurance, stabilization, adequacy, funding, federal-state partnership, USA, European Union
    JEL: J65 J68 H75
    Date: 2017–05
  5. By: Salvatore Perdichizzi (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore)
    Abstract: During the sovereign debt crisis, all euro countries have deployed \aus- terity packages", believing that they could regain the path of growth im- plementing structural reforms and cutting government spending. Such policies should have led to an initial decline in GDP followed by recov- ery and a reduction of the debt to gdp ratio. A key issue is the size of scal multipliers when the economy is in recession. We estimate a non- linear model allowing variations based on the state of the economy and we control for the macroeconomic characteristics across the Euro Area. The empirical evidence suggests that, an increase in government spending will be particularly e ective to boost aggregate demand, increase private consumption and investment in the short-to-medium run, without raising the debt to gdp ratio but rather decreasing it.
    Keywords: Fiscal Multipliers, State-Dependent, Fiscal Policy, Public Finance.
    JEL: E32 E62
    Date: 2017–05
  6. By: Paul Mercier
    Abstract: The purchase of securities, and more specifically government bonds, belongs to the monetary policy implementation framework of many central banks, the Eurosystem being no exception for that matter. However, as for the euro zone, that tool remained unused until 2010, while present in the Eurosystem’s toolkit since its creation. Its implementation in times of crisis raised many debates, comments and even resorts to courts of justice. One of the central issues relates to the monetary financing of the public sector which in turn questions the relations between public debt, central banks and money. This paper does not aim at providing a definite answer to the many questions, or to offer an arbitrage between the different arguments and schools of thoughts. More simply, in view of the often confused state of discussions, it goes back to the basic concepts of money creation, more specifically to the one of money creation by central banks for the benefit of the public sector. Through a series of “typical cas es” of interactions between central banks, commercial banks, public sector and households, the paper favours a better understanding of the quite complex mechanic of money creation through the purchase of public bonds by central and commercial banks. It also addresses a connected topic, i.e. the article 123 of the treaty on the Functioning of the European Union that prohibits the direct purchase by central bank on the primary market of debt instruments issued by the public sector.
    Keywords: monetary policy implementation, central bank, money creation, monetary financing, public debt.
    JEL: E58 E59
    Date: 2017–05
  7. By: Michaela Stanickova (VŠB-Technical University of Ostrava, Czech Republic)
    Abstract: Economic crisis hit all the European Union Member States hard, the impact of crisis varied considerably. The low growth performance in the EU has increased concerns regarding an increasing wage dispersion, income inequality at large, and social exclusion in line with poverty. Inequality should be seen as a cornerstone of both sustainable and inclusive growth under the Europe 2020 Strategy. Social inequality in the EU is a very real problem which hampers sustainable economic growth. The purpose of this study is to introduce evaluation of social development convergence and divergence trend between EU28 Member States in the context of the Europe 2020 Strategy. The study gives an outline of the issues of labour market and income disparities and poverty. Policy-makers must be clear about what social objectives they are aiming to achieve, therefore special attention is paid to headline national goals of the Europe 2020 Strategy. The main tasks of this study is to assess social dimension and inequalities problems in the EU27 by applying Data Envelopment Analysis method, resp. time-series dynamic efficiency analysis in the form of output-oriented Malmquist Productivity Index. This study contain changes of key social equality indicators related to the Europe 2020 Strategy and compares objectives and general outlines of period 2010-2015, as well as its impact on national economics and living conditions. Results contain elements of typology premises of the EU28 and point to a large diversity in inequality patterns, as author observe both increases and decreases in inequality at the EU level. Recent changes in social inequality have been associated with the business cycle, particularly with the accessibility of the labour market and, of course, with income inequality. Additionally the development challenges are discussed for improvement of the socioeconomic well-being of the EU27 and to avoid social disparities.
    Keywords: DEA Method, Economic Crisis, EU28, Europe 2020 Strategy, Social Inequality.
    JEL: C67 E24 E61 O52 P51
    Date: 2017–05
  8. By: Zlatko J. Kovacic (The Open Polytechnic of New Zealand, New Zealand); Milos Vilotic (My Statistical Consultant Ltd.)
    Abstract: One of business cycles stylised facts is that contractions are shorter than expansions, but less persistent, more volatile and therefore asymmetric. Investigating existence and type of business cycles asymmetry is important for analysis of economic policy and statistical modeling. Economic implication of business cycles asymmetry is that economic policy should be different in period of contractions than expansion. Statistical implication is that linear models of business cycles cannot capture this stylised fact. The article has two objectives: extend the literature on the business cycles asymmetry by testing data from 36 European countries including countries never been analysed before and test robustness of the results to extraction methods and asymmetry tests used. Quarterly GDP series from Eurostat database covering period 2000q1-2016q3 were used. Series were prepared by removing seasonal component using X13-ARIMA procedure. To assess robustness of asymmetry tests results to alternative methods of detrending business cycles were extracted using two filters: Corbae-Ouliaris ideal band filter and double Hodrick-Prescott filter. For testing the deepness and steepness asymmetry three tests were used: Mills, Mira and Sichel tests. Weaker evidence of deepness asymmetry was found in Cyprus, Montenegro and Turkey cycles where all three tests statistics for both filters have negative sign. However, only for one of the tests in each country the result was statistically significant. For two other countries, Germany and Sweden, four of six tests indicated deepness asymmetry, but only one of these tests results was statistically significant. Most of the cycles show steepness asymmetry, with exception of Ireland business cycles and to certain extent cycles of Poland, Malta, Montenegro and Spain.
    Keywords: business cycle, asymmetry, Mills test, Mira test, Sichel test
    JEL: C12 C14 E32
    Date: 2017–05
  9. By: Vasilios Plakandaras (Department of Economics, Democritus University of Thrace, Komotini, Greece); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa); Periklis Gogas (Department of Economics, Democritus University of Thrace, Komotini, Greece); Theophilos Papadimitriou (Department of Economics, Democritus University of Thrace, Komotini, Greece)
    Abstract: In this paper, we evaluate the causal relationship between macroeconomic uncertainty indices, inflation and growth rate for 17 Eurozone countries on a county level examination. In performing a series of linear and non-linear causality tests we find little evidence of a causal relationship between uncertainty and macroeconomic variables. Thus, macroeconomic analysis based on uncertainty indices should be treated with caution.
    Keywords: Output growth, inflation, uncertainty, causality
    JEL: C32 E23 E27 E31 E37
    Date: 2017–05
  10. By: Farne, Matteo; Vouldis, Angelos
    Abstract: The paper identifies the business models followed by banks in the euro area utilising a proprietary dataset collected in the context of the supervisory reporting of the Single Supervisory Mechanism. The concept of a ‘business model’ has been neglected by economic theory and is defined here with respect to the set of activities performed by banks. We adopt a clustering methodology to provide evidence for the existence of distinct business models. Clustering is combined with dimensionality reduction optimally, given the nature of our dataset which features a large number of dimensions for each bank (‘fat’ data). The method produces a level and a contrast factor which are intuitive in the economic sense. Four business models are identified alongside a set of ‘outlier’ banks that follow unique business models. The risk and performance indicators of each cluster are examined and evidence is provided that they follow distinct statistical distributions. JEL Classification: C63, G21, L21, L25
    Keywords: banking sector, business models, cluster analysis, single supervisory mechanism
    Date: 2017–05
  11. By: Oscar Claveria (AQR-IREA, University of Barcelona); Enric Monte (Polytechnic University of Catalunya (UPC)); Salvador Torra (Riskcenter-IREA, University of Barcelona)
    Abstract: In this study we use agents’ expectations about the state of the economy to generate indicators of economic activity in twenty-six European countries grouped in five regions (Western, Eastern, and Southern Europe, and Baltic and Scandinavian countries). We apply a data-driven procedure based on evolutionary computation to transform survey variables in economic growth rates. In a first step, we design five independent experiments to derive the optimal combination of expectations that best replicates the evolution of economic growth in each region by means of genetic programming, limiting the integration schemes to the main mathematical operations. We then rank survey variables according to their performance in tracking economic activity, finding that agents’ “perception about the overall economy compared to last year” is the survey variable with the highest predictive power. In a second step, we assess the out-of-sample forecast accuracy of the evolved indicators. Although we obtain different results across regions, Austria, Slovakia, Portugal, Lithuania and Sweden are the economies of each region that show the best forecast results. We also find evidence that the forecasting performance of the survey-based indicators improves during periods of higher growth.
    Keywords: Economic indicators; Qualitative survey data; Expectations; Symbolic regression; Evolutionary algorithms; Genetic programming JEL classification: C51; C55; C63; C83; C93
    Date: 2017–05
  12. By: Lannoo, Karel
    Abstract: The financial crisis led to a raft of new or updated EU conduct rules to ensure the orderly functioning of markets and market operators. The core measure is known as MiFID II, which is a radical update of the 2004 Markets in Financial Instruments Directive. MiFID II is now in the implementation phase and may bring further structural change to Europe's securities markets. Other measures have also been issued or updated, such as the rules against market manipulation and on short selling, and the formation and use of benchmarks. This ECMI Policy Brief reviews these new measures and discusses their effects.
    Date: 2017–05
  13. By: Georgiadis, Georgios (European Central Bank); Jancokova, Martina (European Central Bank)
    Abstract: Financial globalisation and spillovers have gained immense prominence over the last two decades. Yet, powerful cross-border financial spillover channels have not become a standard element of structural monetary models. Against this background, we hypothesise that New Keynesian DSGE models that do not feature powerful financial spillover channels confound the effects of domestic and foreign disturbances when confronted with the data. We derive predictions from this hypothesis and subject them to data on monetary policy shock estimates for 29 economies obtained from more than 280 monetary models in the literature. Consistent with the predictions from our hypothesis we find: Monetary policy shock estimates obtained from New Keynesian DSGE models that do not account for powerful financial spillover channels are contaminated by a common global component; the contamination is more severe for economies that are more susceptible to financial spillovers in the data; and the shock estimates imply implausibly similar estimates of the global output spillovers from monetary policy in the US and the euro area. None of these findings applies to monetary policy shock estimates obtained from VAR and other statistical models, financial market expectations and the narrative approach.
    JEL: C50 E52 F42
    Date: 2017–05–01
  14. By: Mangirdas Morkunas (Mykolas Romeris University, Lithuania); Viktorija Skvarciany (Vinius Gediminas Technical University, Lithuania); Jelena Titko (University of Economics and Culture, Lithuania)
    Abstract: The concept of autopoiesis was initially developed in the field of biology and it was used to explain the behavior of biological systems. However it has been successfully applied in other fields of science, including economics and management. Although researches on economic entities using autopoietic systems’ theory are performed in Western Europe and USA, this scientific approach still is not developed in Baltic countries. This paper addresses to this vacuum of scientific researches on autopoiesis of economic structures in small open markets. The paper aims to identify and evaluate factors that turn on self-organization mechanisms of autopoietic economic structures in Baltic States, in particular in Latvia. Expert survey was used to identify the most important factors affecting the formation of meso-economic entities in the Baltic States. Analytic Hierarchy Process (AHP) with fuzzy numbers was employed to process the data. Two different scales of evaluation (inverse linear and balanced) were used. The factors influencing the process of formation of business groups were evaluated by experts. Research results allow making conclusions regarding the causes of the business integration, and impact of diversified integrated business structures on the country's business system in Central Europe.
    Keywords: autopoiesis, formation of a firm, Baltic States
    JEL: D21 L22
    Date: 2017–05

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