nep-eec New Economics Papers
on European Economics
Issue of 2017‒09‒10
eight papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. The Eurozone Convergence through Crises and Structural Changes By Merih Uctum; Remzi Uctum; Chu-Ping C. Vijverberg
  2. Monetary-Fiscal Interactions and the Euro Area's Malaise By Marek Jarociński; Bartosz Maćkowiak
  3. The Nordic model of economic development: shocks, reforms and future prospects By Iacono, Roberto
  4. Official Sector Lending Strategies During the Euro Area Crisis By Corsetti, G.; Erce, A.; Uy, T.
  5. Forecasting the return volatility of European equity markets under different market conditions:A GARCH-MIDAS approach By Afees A. Salisu; Umar N. Ndako
  6. Why MREL won't help much: Minimum requirements for bail-in capital as insufficient remedy for defunct private sector involvement under the European bank resolution framework By Tröger, Tobias H.
  7. Informal one-sided target zone model and the Swiss franc By Yu-Fu Chen; Michael Funke; Richhild Moessner
  8. Reward effects and incentive effects on the labor market: Empirical evidence for European countries By Sell, Friedrich L.; Öllinger, Michael

  1. By: Merih Uctum; Remzi Uctum; Chu-Ping C. Vijverberg
    Abstract: In light of several economic and financial crises and institutional changes experienced by the Eurozone countries, we examine whether the adoption of the euro led to business cycle synchronization or fostered convergence of growth rates. Controlling for reverse causality, we conduct multiple endogenous break tests and find that while output growth was synchronized for some countries, convergence occurred in a nonlinear way for others: (i) convergence was not triggered by adoption of the euro but by international or idiosyncratic shocks; (ii) in several countries convergence started long before the introduction of the euro, accelerated during the 1990s and continued since then, reflecting persistent influence of the core countries; (iii) convergence has been prevalent among the non-Eurozone economies in our sample.
    Keywords: Convergence, business cycle synchronization, euro, crises, structural breaks.
    JEL: E3 F4
    Date: 2017
  2. By: Marek Jarociński; Bartosz Maćkowiak
    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.
    JEL: E31 E32 E63
    Date: 2017–08
  3. By: Iacono, Roberto
    Abstract: The aim of this research is to provide novel evidence regarding the functioning of the Nordic model of economic development and the robustness of its institutions. At first, the paper defines a conceptual analytical framework identifying the key features of the model for the Nordic economies (Denmark, Finland, Norway, and Sweden), by synthesizing relevant background literature. Secondly, this framework is used to interpret a set of shocks, reforms and ongoing trends: the effect of resource revenues on the labor market and income inequality in Norway compared to the other Nordic countries; the design of a novel minimum income scheme in Finland and its effects on preferences for social insurance; and the implications of population ageing and increased automation for indicators of sustainability for the Nordic welfare states.
    Keywords: Nordic model,Income inequality,Welfare states,Ageing,Automation
    JEL: H53 I38 J31 P47 P51
    Date: 2017
  4. By: Corsetti, G.; Erce, A.; Uy, T.
    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 that 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: 2017–08–17
  5. By: Afees A. Salisu (Centre for Econometric and Allied Research, University of Ibadan); Umar N. Ndako (Monetary Policy Department, Central Bank of Nigeria, Nigeria.)
    Abstract: In this paper, we employ the GARCH-MIDAS modelling framework to forecast the return volatility of the European equity markets on the basis of the predictive powers of such macroeconomic information as realised volatility, the level of economic activities and macroeconomic uncertainty. We distinctly evaluate the behaviour of the return volatilities under different market conditions designated as „Pre Euro Regime,‟ „Euro /Pre-GFC Regime,‟ and „Euro/Post-GFC Regime‟. Our findings show that the macroeconomic information considered in the model are good predictors of the return volatility of the European equity markets. Also, the in-sample and out-of-sample forecast results of these predictors are sensitive to data sample and the market conditions.
    Keywords: FIFA, World cup, Second round qualification, Binary Choice Model (BCM)
    JEL: C58 F37 G17
    Date: 2017–09
  6. By: Tröger, Tobias H.
    Abstract: The bail-in tool as implemented in the European bank resolution framework suffers from severe shortcomings. To some extent, the regulatory framework can remedy the impediments to the desirable incentive effect of private sector involvement (PSI) that emanate from a lack of predictability of outcomes, if it compels banks to issue a sufficiently sized minimum of high-quality, easy to bail-in (subordinated) liabilities. Yet, even the limited improvements any prescription of bail-in capital can offer for PSI's operational effectiveness seem compromised in important respects. The main problem, echoing the general concerns voiced against the European bail-in regime, is that the specifications for minimum requirements for own funds and eligible liabilities (MREL) are also highly detailed and discretionary and thus alleviate the predicament of investors in bail-in debt, at best, only insufficiently. Quite importantly, given the character of typical MREL instruments as non-runnable long-term debt, even if investors are able to gauge the relevant risk of PSI in a bank's failure correctly at the time of purchase, subsequent adjustment of MREL-prescriptions by competent or resolution authorities potentially change the risk profile of the pertinent instruments. Therefore, original pricing decisions may prove inadequate and so may market discipline that follows from them. The pending European legislation aims at an implementation of the already complex specifications of the Financial Stability Board (FSB) for Total Loss Absorbing Capacity (TLAC) by very detailed and case specific amendments to both the regulatory capital and the resolution regime with an exorbitant emphasis on proportionality and technical fine-tuning. What gets lost in this approach, however, is the key policy objective of enhanced market discipline through predictable PSI: it is hardly conceivable that the pricing of MREL-instruments reflects an accurate risk-assessment of investors because of the many discretionary choices a multitude of agencies are supposed to make and revisit in the administration of the new regime. To prove this conclusion, this chapter looks in more detail at the regulatory objectives of the BRRD's prescriptions for MREL and their implementation in the prospectively amended European supervisory and resolution framework.
    Keywords: MREL,TLAC,G-SIB,bail-in,bank resolution
    JEL: G01 G18 G21 G28 K22 K23
    Date: 2017
  7. By: Yu-Fu Chen; Michael Funke; Richhild Moessner
    Abstract: This paper develops a new theoretical model with an asymmetric informal one-sided exchange rate target zone, with an application to the Swiss franc following the removal of the minimum exchange rate of CHF 1.20 per euro in January 2015. We extend and generalize the standard target zone model of Krugman (1991) by introducing perceived uncertainty about the lower edge of the band. We find that informal soft edge target zone bands lead to weaker honeymoon effects, wider target zone ranges and higher exchange rate volatility than formal target zone bands. These results suggest that it would be beneficial for exchange rate policy intentions to be stated clearly in order to anchor exchange rate expectations and reduce exchange rate volatility. We also study how exchange rate dynamics can be characterized in models in which financial markets are aware of occasional changes in the policy regime. We show that expected changes in the central bank's exchange rate policy may lead to exchange rate oscillations, providing an additional source of exchange rate volatility, and to capture this it is important to take into account the possibility of regime changes in exchange rate policy.
    Keywords: Swiss franc, target zone model, exchange rate interventions
    JEL: F31 E42 C61
    Date: 2017–08
  8. By: Sell, Friedrich L.; Öllinger, Michael
    Abstract: In this investigation, a political economy model of the labor market is proposed, where unions offer their (old and new) affiliates the combinations between the average real wage level and the standard deviation of wages or salaries. Globalization and other forces, however, have made it recently more difficult to the unions to pursue their policy in the backdrop of a declining union density. This has been established empirically for selected European countries. In an econometric exercise, we have also tested directly the impact of changes in real wages, minimum wage rate, and the effect of 90 to 10 decile ratio on the change in the degree of affiliation, which the unions were able to achieve in the recent past.
    Keywords: political Economy of the labor market,union density,wage dispersion,average and minimum wages
    JEL: J51 D72 J31 O15
    Date: 2017

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