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on European Economics |
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Issue of 2017‒08‒27
twelve papers chosen by Giuseppe Marotta Università degli Studi di Modena e Reggio Emilia |
| By: | Prüser, Jan; Schlösser, Alexander |
| Abstract: | Recent events such as the financial and sovereign debt crisis have triggered an increase in European Economic Policy Uncertainty (EPU). We use a TVP-FAVAR model with hierarchical priors on the hyperparameters to investigate the effect of EPU on a wide range of macroeconomic variables for eleven European Monetary Union (EMU) countries. First, we find that EPU shocks are transmitted through various channels, such as the real options-, the precautionary savings- and the financial channel. Second, we are able to distinguish between a group of fragile countries (GIIPScountries) and a group of stable countries (northern countries), where the former are more strongly affected by EPU shocks. Third, while the IRFs for most variables differ only in magnitude and not in sign between groups of countries, responses of long term interest rates to EPU shocks have a different sign across countries. Fourth, we discover that investors and traders react more sensitively than consumers to uncertainty. Fifth, we find that EPU shocks affect monetary policy decisions. Sixth, we provide evidence that the transmission of EPU shocks is quite stable over time. Finally, the increase in EPU can partly be explained by the state of the European economy and should therefore be treated as an endogenous variable. |
| Keywords: | TVP-FAVAR,economic policy uncertainty,fat data,hyperparameter,European Monetary Union,hierarchical prior |
| JEL: | C11 C32 E20 E60 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:rwirep:708&r=eec |
| By: | Leonidas S. Rompolis (Athens University of Economics and Business) |
| Abstract: | This paper examines the impact of unconventional monetary policy of ECB measured by its balance sheet expansion on euro area equity market uncertainty and investors risk aversion within a structural VAR framework. An expansionary balance sheet shock decreases both risk aversion and uncertainty at least in the medium-run. A negative shock on policy rates has also a negative impact on risk aversion and uncertainty. These results are generally robust to different specifications of the VAR model, estimation procedures and identification schemes. Conversely, periods of high uncertainty are followed by a looser conventional monetary policy. The effect of uncertainty on ECB’s total assets and of risk aversion on conventional or unconventional monetary policy is not always statistically significant. |
| Keywords: | Unconventional monetary policy; euro area; risk aversion; uncertainty |
| JEL: | C32 E44 E52 G12 |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:231&r=eec |
| By: | Periklis Boumparis (University of Liverpool, UK); Costas Milas (Management School, University of Liverpool, UK; The Rimini Centre for Economic Analysis); Theodore Panagiotidis (Department of Economics, University of Macedonia, Greece; The Rimini Centre for Economic Analysis) |
| Abstract: | We employ a panel quantile framework that quantifies the relative importance of quantitative and qualitative factors across the conditional distribution of sovereign credit ratings in the Eurozone area. We find that regulatory quality and competitiveness have a stronger impact for low rated countries whereas GDP per capita is a major driver of high rated countries. A reduction in the current account deficit leads to a rating or outlook upgrade for low rated countries. Economic policy uncertainty impacts negatively on credit ratings across the conditional distribution; however, the impact is stronger for the lower rated countries. In other words, the creditworthiness of low rated countries takes a much bigger ‘hit’ than that of high rated countries when European policy uncertainty is on the rise. |
| Keywords: | credit ratings, sovereign debt, panel quantile, Eurozone, uncertainty |
| JEL: | C5 F3 G1 |
| Date: | 2017–08 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:17-21&r=eec |
| By: | Corsetti, Giancarlo; Erce, Aitor; Uy, Timothy |
| Abstract: | In response to the euro area crisis, European policymakers took a gradual, incremental approach to official lending, at first relying on the approach followed by the International Monetary Fund, then developing their own crisis resolution framework. We review this development, marked by a substantial divergence in the terms of official loans offered to the crisis countries by the IMF and the euro-area official lenders. Based on a unique dataset, we use event analysis to assess the impact of changing maturity and spreads of official loans on bond yields, liquidity and market access. In light of the euro-area experience, we discuss arguments for rebalancing Debt Sustainability Analysis and programme design towards cash-flow management. While the official assistance granted to crisis countries in the euro area may not be replicable elsewhere, key lessons from it could foster a reconsideration of the modalities by which official lending institutions handle crises. |
| Keywords: | Crisis management; debt sustainability; loans maturity; market access; private sector involvement; seniority; yield curve. |
| JEL: | F33 F34 H12 |
| Date: | 2017–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12228&r=eec |
| By: | Ellul, Reuben |
| Abstract: | This paper investigates correlation in Malta government stock (MGS) yields and assesses correlation between these yields and those of Malta’s major euro area partners. Correlation coefficients are found to be high, indicating the existence of a long-run relationship in the setting of MGS yields with short-term deviations. The analysis also includes an MGARCH-DCC(1,1) system based on spreads over the German ten-year bond, which are modelled for eleven euro area countries. Dynamic conditional correlations (DCCs) confirm that Maltese ten-year bond yields tend to be broadly insulated from event specific volatility in other countries’ yields. Simple ‘benchmark’ regressions are estimated over the period 2007 – 2016, allowing the comparison of actual ten-year bond yields with composite equation outputs. The benchmarked yields based on euro area bonds track consistently actual MGS yields, while from mid-2015 onwards, MGS yields follow closely a benchmark derived on the basis of underlying economic fundamentals. |
| Keywords: | correlation, sovereign bond yields, MGARCH-DCC, Malta |
| JEL: | E43 E44 E63 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:80795&r=eec |
| By: | Bouvatier, Vincent; Capelle-blancard, Gunther; Delatte, Anne-Laure |
| Abstract: | Since the Great Financial Crisis, several scandals have exposed a pervasive light on banks' presence in tax havens. Taking advantage of a new database, this paper provides a quantitative assessment of the importance of tax havens in international banking activity. Using comprehensive individual country-by-country reporting from the largest banks in the European Union, we provide several new insights: 1) The average effect of being a tax haven is an extra presence of foreign affiliates by 168%; 2) For EU banks, the main tax havens are located within Europe: Luxembourg, Isle of Man and Guernsey rank at the top; 3) Attractive tax rates are not sufficient to drive extra activity; 4) But lenient regulatory environment attract extra commercial presence; 4) Banks avoid the most opaque countries with weak governance; 5) The tax savings for EU banks is estimated between Euro 1 billion and Euro 3.6 billion. |
| Keywords: | Tax evasion; International banking; Tax havens; Country-by-country reporting |
| JEL: | F23 G21 H22 H32 |
| Date: | 2017–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12222&r=eec |
| By: | Alexander Meyer-Gohde; |
| Abstract: | This paper examines magnitudes and business cycle dynamics of social security contributions (SSC). In most OECD countries studied, we document a negative covariation of payroll tax burdens with GDP and GDP growth at business cycle and lower frequencies. We assess the overall magnitude of the distortion following Barro and Redlick (2011). For most countries, average marginal SSC tax rates exceed average rates, but the latter tracks the former tightly. Changes in average payroll tax burdens are mostly accounted for by changes in tax schedules rather than shifts in the earnings distribution over time. For many countries, SSC rates behave like estimated values of the “labor wedge” (Chari et al. 2007, Brinca et al., 2016). |
| Keywords: | business cycle, payroll tax, social security contributions, labor wedge |
| JEL: | E24 E32 J32 H55 |
| Date: | 2017–08 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2017-018&r=eec |
| By: | Cécile Couharde; Anne-Laure Delatte; Carl Grekou; Valérie Mignon; Florian Morvillier |
| Abstract: | The aim of this paper is to present EQCHANGE, the new database developed by the CEPII on effective exchange rates. EQCHANGE includes two sub-databases containing data on (i) nominal and real effective exchange rates, and (ii) equilibrium real effective exchange rates and corresponding currency misalignments for advanced, emerging and developing countries. More specifically, the first sub-database delivers effective exchange rates for 187 countries that are computed under three different weighting schemes and two panels of trading partners (186 and top 30) over the 1973-2016 period. The second sub-database provides behavioral equilibrium exchange rate (BEER) estimates and corresponding currency misalignments for 182 economies over the 1973-2016 period. We describe the construction of the two datasets and illustrate some possible uses by presenting results concerning the evolution and main characteristics of currency misalignments in the world from 2015 to 2016. By providing publicly available indicators of equilibrium exchange rates, EQCHANGE aims to contribute to key debates in international macroeconomics. |
| Keywords: | Exchange Rates;Equilibrium Exchange Rates;Currency Misalignments |
| JEL: | F31 C23 C82 |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2017-14&r=eec |
| By: | Ronald B. Davies; Zuzanna Studnicka |
| Abstract: | The UK's decision to leave the EU is surrounded by several studies simulating its potential effects. Alternatively, we examine expectations embodied in stock returns using a two-part estimation process. While most firms' prices fell, there was considerable heterogeneity in their relative changes. We show that this heterogeneity can be explained by the firm's global value chain, with heavily European firms doing relatively worse. For firms with few imported intermediates, this was partially offset by a greater Sterling depreciation. These changes were primarily in the first two days and highly persistent. Understanding these movements gives a better understanding Brexit's potential effects. |
| Keywords: | Global value chaine; Event study; Brexit |
| JEL: | F15 F23 G14 |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:ucn:wpaper:201708&r=eec |
| By: | Abbassi, Puriya (Deutsche Bundesbank); Brauning, Falk (Federal Reserve Bank of Boston); Fecht, Falko (Frankfurt School of Finance & Management); Peydro, Jose Luis (Universitat Pompeu Fabra) |
| Abstract: | We analyze how financial crises affect international financial integration, exploiting euro area proprietary interbank data, crisis and monetary policy shocks, and variation in loan terms to the same borrower on the same day by domestic versus foreign lenders. Crisis shocks reduce the supply of crossborder liquidity, with stronger volume effects than pricing effects, thereby impairing international financial integration. On the extensive margin, there is flight to home — but this is independent 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 reintegration. |
| Keywords: | financial integration; financial crises; cross-border lending; monetary policy; euro area sovereign crisis; liquidity |
| JEL: | E58 F30 G01 G21 G28 |
| Date: | 2017–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:17-6&r=eec |
| By: | Alain Galli |
| Abstract: | For policy institutions such as central banks, it is important to have a timely and ac-curate measure of past and current economic activity and the business cycle situation. The most prominent example for such a measure is gross domestic product (GDP). However, GDP is only released at a quarterly frequency and with a substantial delay. Furthermore, it captures elements that are not directly linked to the business cycle and the underlying momentum of the economy. In this paper, I construct a new business cycle index for the Swiss economy, which uses state-of-the-art methods, is available at a monthly frequency and can be calculated in real-time, even when some indicators are not yet available for the most recent periods. The index is based on a large and broad set of monthly and quarterly indicators. As I show, for the case of Switzerland, it is important to base a business-cycle index on a broad set of indicators instead of only a small subset. This result contrasts with the results for other countries. |
| Keywords: | Business cycle index, dynamic factor model, mixed frequency, Switzerland |
| JEL: | C32 C38 C53 E32 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:snb:snbwpa:2017-08&r=eec |
| By: | Theodoros S. Papaspyrou (Bank of Greece) |
| Abstract: | This paper proposes a new approach to EMU governance and integration consisting of the following elements: (i) an optimal use of the existing EU institutional framework for economic, fiscal and financial policies is necessary and possible at each level of EMU integration that is politically feasible, in order to strengthen synergies between stability and growth policies, complete the single market, support public and private investment, and improve macroeconomic and fiscal coordination and surveillance, (ii) priority should be given to financial union which would facilitate the smooth transmission of monetary policy, enhance financial stability and economic growth and contribute to macroeconomic stabilization through private risk sharing, (iii) the drive to fiscal union should be focused on the creation of fiscal backstops to banking union, enhancing its solidity and credibility (iv) initiatives towards deeper EMU integration should be undertaken where there is strong evidence, within the EU and beyond, of their usefulness and for which widespread political support exists, maximizing benefits and avoiding controversial proposals, and (v) institutional strengthening and democratic accountability are indispensable elements for a successful EMU and should be pursued by following the “Community approach”, based on the Treaties, in contrast to the “intergovernmental approach” increasingly used in recent years. |
| Keywords: | Economic governance and integration in EMUq macroeconomic and fiscal adjustment in a monetary unionq economic policy coordinationq banking and capital markets unionq European Stability Mechanism |
| JEL: | E42 E44 E52 E61 F32 F33 F41 G18 G28 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:229&r=eec |