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on European Economics |
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Issue of 2017‒07‒30
twelve papers chosen by Giuseppe Marotta Università degli Studi di Modena e Reggio Emilia |
| By: | Rolf Strauch (European Stability Mechanism); Juan Rojas (European Stability Mechanism); Frank O'Connor (NTMA - Ireland); Cristina Casalinho (IGCP - Portugal); Pablo de Ramón-Laca Clausen (Tesoro - Spain); Phaedon Kalozois (PDMO - Cyprus) |
| Abstract: | A defining feature of the euro crisis, which we experienced over the past few years, is that market access broke down for some countries or was impaired. Some countries could not find sufficient investors to cover their needs or could not do so entirely at a sustainable cost. In the past crisis, this happened to Greece, Ireland, Portugal, Spain, and Cyprus. This discussion paper collects the experiences of several of these euro area countries as they developed strategies to regain access to affordable financial market financing. Euro area governments created a crisis resolution framework that included the European Financial Stability Facility (EFSF), and European Stability Mechanism (ESM), to help countries regain market access. Governments undergo adjustment programmes or undertake measures to repair the banking sector – that is, to “bring their house in order” and regain investors’ trust. For the programme period, a country’s financing gap is covered by the EFSF/ESM. During this period, DMOs managed to keep to different degrees some limited market financing and importantly had to launch a strategy to regain full market access. By now, four of the five countries that underwent an EFSF or ESM programme have successfully exited. The objective of this discussion paper is to document the steps which DMOs in Ireland, Portugal, Spain, and Cyprus took to structure their financing during the programme period, where possible, and the strategy they launched in approaching domestic and international bond markets. Approaches to regaining market access in Ireland, Portugal, and Cyprus show similar phases. It starts with a renewed ramping up of communication and investor contacts, opportunistic issuances and then more broad-based bill and bond issuance. Spain maintained broader market access over the programme period and therefore deviates in this respect. However, interestingly, all countries embarked on some innovation in their investor relations, products or issuance technologies, when comparing the pre- and post-programme period. The differences reflect both each country’s specific market conditions and common factors. An important commonality seems to be the reliance on a sizeable cash buffer as an assurance for investors if a country re-enters markets at a sub-investment grade rating. Market access strategies are not deployed in isolation, but their success hinges on domestic and European policies. First, firm and credible programme implementation is a key condition for gaining investors’ trust and successfully accessing markets. Second, the EFSF and ESM terms of lending at concessional rates and very long maturities facilitate private sector engage-ment in the programme and post-programme period. Third, monetary policy crucially determines market conditions. The impact of low interest rates and the European Central Bank’s quantitative easing programme can hardly be over-emphasised in explaining investor demand and yields for former pro-gramme countries. The DMOs from Ireland, Portugal, Spain, and Cyprus for contribute their experiences to this paper. They explain and put in context their strategies to regaining full market access. Presenting the DMOs’ account on market access of former programme countries fills a gap in the narrative of the country experiences through the crisis. It also offers lessons to better understand market reactions and DMOs’ capabilities which may be helpful in the future. |
| Date: | 2016–06–20 |
| URL: | http://d.repec.org/n?u=RePEc:stm:dpaper:2&r=eec |
| By: | Jacopo Cimadomo (European Central Bank, Germany); Oana Furtuna (University of Amsterdam and Tinbergen Institute, the Netherlands); Massimo M. Giuliodori (University of Amsterdam and Tinbergen Institute, The Netherlands) |
| Abstract: | This paper investigates the contribution of private and public channels for consumption risk sharing in the EMU over the period 1999-2015. In particular, we explore the role of financial integration versus international financial assistance for private consumption smoothing in this set of countries. In addition, we present a time-varying test which allows estimating how risk sharing has evolved since the start of the EMU, and in particular during the recent crisis. Our results suggest that, whereas in the early years of the EMU only about 40% of output shocks were smoothed, in the aftermath of the euro zone’s sovereign debt crisis about 65% of output shocks were absorbed, therefore reducing consumption growth differentials across countries. This progressive improvement of the shock absorption capacity is due to a higher financial integration, but also to the activation of the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM) channelling official loans to distressed euro zone economies. We also show that cross-border holdings of equities and debt seem to be more effective than cross-border bank loans in isolating households from country-specific shocks, therefore contributing to consumption smoothing. |
| Keywords: | risk sharing; time-variation; financial integration; international financial assistance |
| JEL: | C23 E62 G11 G15 |
| Date: | 2017–07–18 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20170064&r=eec |
| By: | Ebru Turhan (Turkish-German University) |
| Abstract: | Germany?s European policy and German influence in the EU have been subject to hot discussions in academic and political circles. The German influence in the EU took a new turn in recent years with federal government?s readiness to enhance its leadership status in the EU and to undertake unilateral actions, when the EU has entered an era of multiple crises in view of severe challenges including the Eurozone crisis and the more recent refugee crisis. This paper discusses Germany?s actorness in regards to the management of the Eurozone crisis and refugee crisis on the basis of the gradually increasing ?domestication? of its European policy. It reveals that Germany?s European policy throughout the two most prominent crises the EU has been lately challenged with, namely the Eurozone crisis and refugee crisis, has been largely shaped by the preferences of the influential domestic actors, who took into account the negative externalities that were likely to arise from the introduction of policies that would impose significant costs on them. Germany?s unilateral actions and leadership role in the management of these two crises (including the making of the EU-Turkey deal on the management of the refugee crisis) should be evaluated in light of the constraints imposed by domestic constituencies. |
| Keywords: | Germany, Eurozone crisis, refugee crisis, EU, Turkey, European policy, domestication, migration |
| JEL: | F50 F59 F55 |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:sek:iacpro:4607857&r=eec |
| By: | Politronacci, Emmanuelle; Ninlias, Élodie B.; Palazzeschi, Enda E.; Torre, Ghjuvanni |
| Abstract: | Despite the well-known difficulties to measure national euro circulations within the euro area, several methods have been used to estimate the national demand for euro banknotes in France, such as key-based calculations (ECB capital), approaches using average return time of banknotes or extrapolated data from legacy currencies historical trends, methods relying on the replacement indicators of the first euro banknote series. This paper proposes an update of these approaches and complements them with two additional methods. First, exportations of banknotes data enable to infer the French national circulation from the difference between banknotes issued by the Banque de France and the banknotes it shipped outside the euro area, directly or via the French wholesale bank. Second, a “bottom-up” approach can be built-up, where the cash holdings of the different institutional sectors (MFIs, households, non-financial corporations) are summed up in order to estimate the use of cash for transactional purpose. Bearing in mind that those various approaches do not always separate the hoarding from the transactional purposes nor take into account banknotes migrations flows across countries, the analysis of the similarities and differences between those several methods sheds light on the French national demand for cash by giving hints on both the low and the top ends of the range. |
| Keywords: | banknotes in circulation,cash usage,payment instruments |
| JEL: | E41 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:iccp17:162913&r=eec |
| By: | Marcin Bielecki (University of Warsaw; Narodowy Bank Polski); Michał Brzoza-Brzezina (Narodowy Bank Polski; Warsaw School Economics); Marcin Kolasa (Narodowy Bank Polski; Warsaw School Economics); Krzysztof Makarski (Narodowy Bank Polski; Warsaw School Economics; Group for Research in Applied Economics (GRAPE)) |
| Abstract: | Boom-bust cycles in the eurozone periphery almost toppled the single 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 single 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 |
| JEL: | E32 E44 E58 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:fme:wpaper:17&r=eec |
| By: | Marta Gómez-Puig (Risckcenter Research group–IREA. Av. Diagonal 696; 08034 Barcelona,Spain.); Simón Sosvilla-Rivero (Complutense Institute for International Studies, Universidad Complutense de Madrid; 28223 Madrid, Spain.) |
| Abstract: | In this paper we analyse the effects of all sources of the accumulation of nonfinancial debt (household, corporate as well as government) on economic growth in ten euro-area countries during the 1980-2015 period. To this end, we make use of three models (a baseline, an asymmetric and a threshold model) based on the empirical growth literature augmented by debt to assess whether a debt change has an impact on growth over and above other determinants, treating the different types of borrowers separately. By exploring the time series dimension in order to properly account for the historical experience of each country in the sample, we aim to detect potential heterogeneities in the relationship across euro area countries. Our results with both the baseline and the asymmetric models suggest that although the effects on nonfinancial debt accumulation clearly differ across countries, on average, the highest marginal impact of a rise in debt corresponds to the household and public sector, with an increase in private debt being more harmful in peripheral than in central countries; in contrast, the average effect of a rise in public debt does not differ between these two groups of countries. As for the effects of a debt increase beyond the turning point estimated in the threshold model, our findings indicate that the highest marginal impact corresponds to the household sector. |
| Keywords: | Public debt, household debt, nonfinancial corporate debt, economic growth, heterogeneity, euro area, peripheral EMU countries, central EMU countries. JEL classification: C22, D12, F33, H63, O16, O40, O52. |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:ira:wpaper:201714&r=eec |
| By: | Darracq-Pariès, Matthieu; Kühl, Michael |
| Abstract: | We analyse the effects of central bank government bond purchases in an estimated DSGE model for the euro area. In the model, central bank asset purchases are relevant in so far as agency costs distort banks' asset allocation between loans and bonds, and households face transaction costs when trading government bonds. Such frictions in the banking sector induce inefficient time-variation in the term premia and allow for a credit channel of central bank government bond purchases. Considering ad hoc asset purchase programmes like the one implemented by the ECB, we show that their macroeconomic multipliers get stronger when the lower bound on the policy rate becomes binding and when the purchasing path is fully communicated and anticipated by the agents. From a more normative standpoint, interest rate policy and asset purchases feature strong strategic complementarities during both normal and crisis times. In an environment when nominal interest rates reach their effective lower bound, optimal monetary policy is to keep the policy rate low for a longer period in time and to engage in asset purchases. Our results also point to a clear sequencing of the exit strategy, first stopping the asset purchases and later raising the policy rate. In terms of macroeconomic stabilisation, optimal asset purchase strategies deliver sizeable benefits and have the potential to largely offset the costs of the lower bound on the policy rate. |
| Keywords: | Zero Lower Bound,Optimal Monetary Policy,Banking,Quantitative Easing,DSGE |
| JEL: | C61 E52 G11 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:222017&r=eec |
| By: | Demary, Markus; Matthes, Jürgen |
| Abstract: | The EU Commission proposes establishing Sovereign-Backed Securities (SBSs) as a class of safe assets for the euro area. SBSs are generated by an issuing agency that would purchase a large diversified portfolio of national sovereign bonds, and finance the purchases by issuing (at least) two types of structured bonds: a risk-free senior SBSs tranche and a risky junior SBSs tranche. Overall, we recognise that the SBSs concept has the theoretical potential to improve financial stability and financial integration in the euro area, provided it is built on a sound framework that overcomes several potential technical and political problems. However, SBSs could pose the risk of eventually leading to unconditional debt mutualisation in times of severe crisis. With regard to technical problems, it is not clear whether the SBSs concept represents a viable business model for a private entity, and whether senior and junior SBSs would find sufficient demand, particularly in times of crisis. If the market for the junior tranche broke down, the whole concept would collapse. In such instances, the political risk could arise that rescue measures are taken that, in contrast to existing rescue mechanisms (ESM and OMT), are not subject to sufficient controls by Member States, solvency tests and reform requirements (conditionality). Another political risk relates to the introduction of the SBSs concept, which is regarded here as one part of a political compromise. We foresee the danger that the second part - de-privileging national sovereign bonds in banking regulation to sever the sovereign-banking nexus - may not be followed through, due to political resistance and to sequencing problems with introducing SBSs. Other political problems concern possible market distortions even in non-crisis times (particularly in primary markets), and the potential irreversibility of the concept. [...] |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:iwkpps:122017&r=eec |
| By: | Matthew Greenwood-Nimmo (Department of Economics, The University of Melbourne); Viet Hoang Nguyen (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne); Yongcheol Shin (Department of Economics and Related Studies, University of York) |
| Abstract: | We develop an empirical network model to study bilateral sovereign credit risk spillovers during the European debt crisis. We show that the spillover density is typically asymmetric with heavy tails. This confounds efforts to track time-variation in spillover activity using the mean-based summary statistics that are widespread in the literature. Density-based measures — specifically divergence criteria — yield stronger and timelier signals of changes in spillover activity than mean-based measures. This is particularly apparent for sovereign bailouts, which principally affect the tails of the spillover density. Consequently, densitybased measures provide valuable additional information about changes in the credit risk environment. |
| Keywords: | Sovereign credit risk, credit default swaps (CDS), network models and connectedness, spillover density, divergence criteria |
| JEL: | C58 F45 G15 H63 |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:iae:iaewps:wp2017n17&r=eec |
| By: | Jörg Döpke (Hochschule Merseburg (University of Applied Sciences Merseburg)); Ulrich Fritsche (Universität Hamburg (University of Hamburg)); Gabi Waldhof (Leibniz-Institut für Agrarentwicklung in Transformationsökonomien) |
| Abstract: | The paper reports results of a survey among active forecasters of the German business cycle. Relying on 82 respondents from 37 different institutions, we investigate what models and theories forecasters subscribe to and find that they are pronounced conservative in the sense, that they overwhelmingly rely on methods and theories that have been well-established for a long time, while more recent approaches are relatively unimportant for the practice of business cycle forecasting. DSGE models are mostly used in public institutions. In line with findings in the literature there are tendencies of “leaning towards consensus†(especially for public institutions) and “sticky adjustment of forecasts†with regard to new information. We find little evidence that the behaviour of forecasters has changed fundamentally since the Great Recession but there are signs that forecast errors are evaluated more carefully. Also, a stable relationship between preferred theories and methods and forecast accuracy cannot be established. |
| Keywords: | Forecast error evaluation, questionnaire, survey, business cycle forecast, professional forecaster |
| JEL: | E32 E37 C83 |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:hep:macppr:201701&r=eec |
| By: | Matej Nevrla (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic) |
| Abstract: | In this paper, we perform analysis of systemic risk in the financial and energy sector in Europe. In our investigation, we work with daily time series of CDS spreads. We employ factor copula model with GAS dynamics of Oh and Patton (2016) for estimation purposes of dependency structures between market participants. Based on the estimated models, we perform Monte Carlo simulations in order to obtain future values of CDS spreads, and then we measure probability of systemic events in given time points. We conclude that substantially higher systemic risk is present within the financial sector than in the energy sector. We also find that the most systemic vulnerable financial and energy companies come from Spain. |
| Keywords: | Credit Default Swap, Energy Sector, Factor Copula, Financial Sector, Generalized Autoregressive Score Model, Systemic Risk |
| JEL: | C53 C55 C58 G17 |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2017_11&r=eec |
| By: | Boeing-Reicher, Claire A.; Boysen-Hogrefe, Jens |
| Abstract: | Recent calculations have suggested that the German federal government has saved roughly EUR 90-100 billion, cumulatively, due to low bond yields since the onset of the Euro crisis. In order to determine the contribution of the "flight to quality" to this sum, we define the flight to quality as a factor which has caused German bond yields and crisis country bond yields to move in opposite directions. Estimates show that only a small share is due to the flight to quality. Comparison with other approaches suggests that our factor approach is a promising way to look at the flight to quality. |
| Keywords: | flight to quality,Euro crisis,bond yields,Germany,factor model |
| JEL: | C32 C58 G12 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwkwp:2086&r=eec |