nep-eec New Economics Papers
on European Economics
Issue of 2017‒09‒17
eighteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. The United States-Euro Area Growth Gap Puzzle By Fritz Breuss
  2. Domestic and foreign demand for euro banknotes issued in Germany By Bartzsch, Nikolaus; Uhl, Matthias
  3. Quantitative Easing and Exuberance in Government Bond Markets: Evidence from the ECB's Expanded Assets Purchase Program By Martijn (M.I.) Droes; Ryan van Lamoen; Simona Mattheussens
  4. Crimea and punishment: the impact of sanctions on Russian and European economies By Kholodilin, Konstantin A.; Netšunajev, Aleksei
  5. The financial market effects of the ECB's asset purchase programs By Lewis, Vivien; Roth, Markus
  6. Did quantitative easing boost bank lending? The Slovak experience By Adriana Lojschova
  7. A composite index of inflation tendencies in the euro area By Marcello Miccoli; Marianna Riggi; Lisa Rodano; Laura Sigalotti
  8. The Eurosystem’s asset purchase programme and TARGET balances By Eisenschmidt, Jens; Kedan, Danielle; Schmitz, Martin; Adalid, Ramón; Papsdorf, Patrick
  9. Applying complexity theory to interest rates: Evidence of critical transitions in the euro area By Jan Willem van den End
  10. Corporate debt and investment: a firm level analysis for stressed euro area countries By Gebauer, Stefan; Setzer, Ralph; Westphal, Andreas
  11. Tax Evasion and Inequality By Annette Alstadsæter; Niels Johannesen; Gabriel Zucman
  12. Agent-Based Risk Assessment Model of the European Banking Network By Tomas Klinger; Petr Teply
  13. The derivatives through the lens of the financial accounts: measurement and analysis By Luigi Infante; Bianca Sorvillo
  14. Banks in Tax Havens: First Evidence based on Country-by-Country Reporting By Vincent Bouvatier; Gunther Capelle-Blancard; Anne-Laure Delatte
  15. Macroprudential Policy in a Monetary Union By Salim, DEHMEJ; Leonardo, GAMBACORTA
  16. Credit prices vs. credit quantities as predictors of economic activity in Europe: which tell a better story? By Guender, Alfred V.
  17. Euro area banks' interest rate risk exposure to level, slope and curvature swings in the yield curve By Foos, Daniel; Lütkebohmert, Eva; Markovych, Mariia; Pliszka, Kamil
  18. On the Effectiveness of Central Bank Intervention in the Foreign Exchange Market: The Case of Slovakia, 1999-2007 By Juraj Zeman; Biswajit Banerjee; Ludovit Odor; William O. Riiska Jr.

  1. By: Fritz Breuss (WIFO)
    Abstract: Ten years ago, the global financial crisis started to unwind in the USA and triggered the greatest recession since World War II. Although the crisis of 2007-08 was caused in the USA, their economy was not hit so hard in the Great Recession of 2009 as in Europe, and in particular in the Euro area. The USA also recovered more rapidly and sustained from the crisis than the Euro area. Additionally, the specific Euro (debt) crisis of 2010 led to a double-dip recession in the Euro area, not joined by the USA. This divergent post-crisis development since then accumulated to a considerable growth gap between the USA and the Euro area. What are the factors behind this different performance? Would a more aggressive fiscal and/or monetary policy in the Euro area have closed the growth gap? As our simulation exercises show: the answer is no. However, the unconventional monetary policy by the ECB since 2014-15 contributed to the most recent recovery in the Euro area. We identify the pivotal reason of Euro areas growth lagging behind the USA in the different experiences in the crises management. The USA has a long-lasting experience in handling financial crises. In historical comparison, the Euro area – the Economic and Monetary Union (EMU) of the EU – is still a "teenager". The crises revealed, that the legal basis of the institutional set-up of EMU and hence of the Euro area was not enough crises-proven. Rescue instruments had newly to be implemented. The global financial crisis was the first great shock which was badly absorbed by the still quite heterogeneous Euro countries. The Euro area, shattered by a succession of external (global financial crisis, Great Recession) and internal (Euro crisis) shocks, could therefore not unfold its growth potential in the last decade. If – hypothetically – the Euro area would have profited from the faster-growing production inputs (capital and labour) as in the USA, the growth gap could have been closed.
    Keywords: USA, Euro area, European integration, business cycles; economic growth
    Date: 2017–09–01
  2. By: Bartzsch, Nikolaus; Uhl, Matthias
    Abstract: To facilitate a more detailed study of the volume of euro banknotes in circulation issued by the Deutsche Bundesbank, it is broken down into the components of foreign demand, domestic hoarding and domestic transaction balances. These banknote demand components are estimated using the direct approach “net shipments and foreign travel” as well as an indirect approach known as the “seasonal method”. According to the new estimates, which are based on a combination of the two approaches, around 65% to 70% of the arithmetical volume of euro banknotes issued by the Bundesbank were in circulation outside Germany at the end of 2015; of this figure, 40 to 50 percentage points were in circulation outside the euro area, and 20 to 30 percentage points in other euro-area countries. Between 30% and 35% of the Bundesbank’s cumulated net issuance was in circulation in Germany, of which 25 percentage points were hoarded and 5 to 10 percentage points held for transaction purposes. The newly estimated time series for domestic hoardings does not feature a noticeable break due to the euro area’s low-interest-rate environment; instead, Bundesbank-issued euro banknotes may be circulating in other euro-area countries in greater numbers.
    Keywords: Euro banknote demand,foreign demand,transaction balances,hoardings
    JEL: E41 E58
    Date: 2017
  3. By: Martijn (M.I.) Droes (University of Amsterdam & Amsterdam School of Real Estate; Tinbergen Institute, The Netherlands); Ryan van Lamoen (Dutch Central Bank); Simona Mattheussens (Dutch Central Bank)
    Abstract: This paper examines whether the ECB's Quantitative Easing (QE) policy is causing government bond prices to deviate from their fundamental value. We use a recent advance in the methodology to measure exuberant price behavior in financial time series introduced by Phillips et al. (2015). We extend this methodology and apply it to government bond prices. The results show that the QE policy substantially inflated government bond prices in Euro Area countries to such an extent that bond prices are no longer in line with the underlying fundamental value. We argue that careful monitoring is required when the QE policy is eventually reversed. The test procedure outlined in this paper provides a monitoring tool to do so.
    Keywords: government bond yields; asset price bubbles; monetary policy
    JEL: G12 G15 E52
    Date: 2017–09–05
  4. By: Kholodilin, Konstantin A.; Netšunajev, Aleksei
    Abstract: The conflict between Russia and Ukraine that started in March 2014 led to bilateral economic sanctions being imposed on each other by Russia and Western countries, including the members of the euro area. The paper investigates the impact of the sanctions on the real side of the economies of Russia and the euro area. The effects of sanctions are analysed with a structural vector autoregression. To pin down the effect we are interested in, we include in the model an index that measures the intensity of the sanctions. The sanction shock is identified and separated from the oil price shock by narrative sign restrictions. We find a very high probability that Russian GDP declined as a result of the sanctions. In contrast to that, the effects of the sanctions on the euro area are limited to real effective exchange rate adjustments
    Keywords: political conflict; sanctions; economic growth; Russia; euro area; structural vector autoregression
    JEL: C32 F51
    Date: 2017–09–11
  5. By: Lewis, Vivien; Roth, Markus
    Abstract: The European Central Bank's asset purchase programs, while intended to stabilize the economy, may have unintended side effects on financial stability. This paper aims at gauging the effects on financial markets, the banking sector, and lending to non-financial firms. Using a structural vector autoregression analysis, we find both in the euro area and in Germany a positive effect on output, while prices do not respond significantly. Asset purchases reduce financial stress, but this beneficial effect is overturned in the medium run. In Germany, implicit firm default rates rise, while loan write-offs by banks decrease. This could point to an avoidance of balance sheet repair in the financial sector.
    Keywords: asset purchase programs,balance sheet,monetary policy,central bank,shock identification,VAR
    JEL: C32 E44 E52 E58
    Date: 2017
  6. By: Adriana Lojschova (National Bank of Slovakia)
    Abstract: We find evidence that households in Slovakia do benefit from the ECB asset purchase programme. On the individual banklevel data of 26 financial institutions (full representation of the banking sector) we establish and confirm a traditional relationship between bank lending and changes to deposit ratio. We find the long-run relationship to be twice as strong in the household sector as in the sector of non-financial corporations. Controlling for interest rate changes and other factors, we also introduce asset purchases into the model. We document some, although limited, evidence of the presence of the bank lending channel of asset purchases in the household sector.
    Keywords: Bank lending channel, quantitative easing, panel data
    JEL: E52 G21
    Date: 2017–06
  7. By: Marcello Miccoli (Bank of Italy); Marianna Riggi (Bank of Italy); Lisa Rodano (Bank of Italy); Laura Sigalotti (Bank of Italy)
    Abstract: Assessing underlying inflation developments is crucial for a correct calibration of the monetary policy stance. To monitor the adjustment in the path of euro area inflation towards the ECB’s definition of price stability, we select a number of indicators of price dynamics in the area. We then construct a composite index summarizing the information contained in those indicators by estimating several univariate probability models. The index, which provides a synthetic measure of inflationary pressures net of the most volatile components, can be interpreted as gauging the probability of inflation returning to 1.9 per cent or over within a given time horizon. Our findings, which are based on the information available in July 2017, signal that, despite the improvement in price dynamics since the beginning of the year, the adjustment of inflation rates towards levels below, but close to, 2 per cent over the medium term is still limited and far from being sustained.
    Keywords: euro area, determinants of inflation, inflation, statistical aggregation
    JEL: C35 C38 E31 E58
    Date: 2017–09
  8. By: Eisenschmidt, Jens; Kedan, Danielle; Schmitz, Martin; Adalid, Ramón; Papsdorf, Patrick
    Abstract: TARGET balances have risen during the period of the Eurosystem’s asset purchase programme (APP). The APP gives rise to substantial cross-border flows of reserves at the time of asset purchases and beyond, reflecting the interaction of decentralised monetary policy implementation and the integrated euro area financial structure. This financial structure, in which only a handful of locations act as gateways between the euro area and the rest of the world, leads to rising TARGET balances at the time of APP purchases and the persistence of TARGET balances in the context of subsequent portfolio rebalancing. TARGET balances per se are not necessarily an indicator of stress in bank funding markets, financial market fragmentation or unsustainable balance of payments developments. JEL Classification: E58, G02, F32
    Keywords: asset purchase programme, balance of payments, excess liquidity, financial structure, TARGET2
    Date: 2017–09
  9. By: Jan Willem van den End
    Abstract: We apply complexity theory to financial markets to show that excess liquidity created by the Eurosystem has led to critical transitions in the configuration of interest rates. Complexity indicators turn out to be useful signals of tipping points and subsequent regime shifts in interest rates. We find that the critical transitions are related to the increase of excess liquidity in the euro area. These insights can help central banks to strike the right balance between the intention to support the financial system by injecting liquidity and potential unintended side-effects on market functioning.
    Keywords: interest rates; central banks and their policies; monetary policy
    JEL: E43 E58 E52
    Date: 2017–09
  10. By: Gebauer, Stefan; Setzer, Ralph; Westphal, Andreas
    Abstract: This paper investigates the link between corporate debt and investment for a group of five peripheral euro area countries. Using firm-level data from 2005-2014, we postulate a non-linear corporate leverage-investment relationship and derive thresholds beyond which leverage has a negative and significant impact on investment. The investment sensitivity of debt increased after 2008 when financial distress intensified and firms had a lower capacity to finance investment from internal sources of funds. Our results also suggest that even moderate levels of debt can exert a negative influence on investment for smaller firms or when profitability is low. JEL Classification: E22, F34, G31, G32
    Keywords: corporate debt, debt overhang, investment, leverage, threshold model
    Date: 2017–09
  11. By: Annette Alstadsæter; Niels Johannesen; Gabriel Zucman
    Abstract: This paper attempts to estimate the size and distribution of tax evasion in rich countries. We combine random audits—the key source used to study tax evasion so far—with new micro-data leaked from large offshore financial institutions—HSBC Switzerland (“Swiss leaks”) and Mossack Fonseca (“Panama Papers”)—matched to population-wide wealth records in Norway, Sweden, and Denmark. We find that tax evasion rises sharply with wealth, a phenomenon random audits fail to capture. On average about 3% of personal taxes are evaded in Scandinavia, but this figure rises to close to 30% in the top 0.01% of the wealth distribution, a group that includes households with more than $45 million in net wealth. A simple model of the supply of tax evasion services can explain why evasion rises steeply with wealth. Taking tax evasion into account increases the rise in inequality seen in tax data since the 1970s markedly, highlighting the need to move beyond tax data to capture income and wealth at the top, even in countries where tax compliance is generally high. We also find that after reducing tax evasion—by using tax amnesties—tax evaders do not legally avoid taxes more. This result suggests that fighting tax evasion can be an effective way to collect more tax revenue from the very wealthy.
    JEL: E21 H26
    Date: 2017–09
  12. By: Tomas Klinger; Petr Teply
    Abstract: The 2007-2009 financial crisis highlighted the vulnerabilities in the global banking system and shifted research focus to the study of systemic risk. Network theory and agent-based simulation have been used to investigate complex banking systems that would be difficult to model analytically. Nevertheless, the difficulty of obtaining accurate data, as well as the computational complexity of running such models, are limiting their ability to capture the complexities that are emerging in real-world scenarios. In this paper, we use an agent-based simulation combined with innovative calibration techniques in order to model the European banking system as accurately as possible. We extend the existing network approach by adding the ability to model banks of different sizes as well as the detailed connections of individual banks across countries. Our model consists of 286 banks in 9 European countries. We believe that the experiments in this model provide valuable insights into systemic risk within the European banking system as well as useful guidelines for creating new policies.
    Keywords: agent-based models; bank, contagion; network models; systemic risk
    JEL: C63 D85 G21
    Date: 2017–08
  13. By: Luigi Infante (Bank of Italy); Bianca Sorvillo (Bank of Italy)
    Abstract: This paper studies the performance of the market value of the derivatives for Italian banks by using the financial accounts and proposing an international comparison. An estimate of the market value was also obtained for the period from the first quarter of 2001 to the third quarter of 2008 by exploiting the continuity of the notional values found in the supervisory reports. Our analysis of the performance of banking derivatives in the major countries shows that their value has significantly decreased since the financial crisis. At the end of 2015, the amount of financial derivatives reported in the assets of monetary financial institutions was 4 per cent of the total financial assets in Italy, a much lower value than in the UK, Germany and France.
    Keywords: derivatives, financial accounts, banks
    JEL: C82 E01 G1 G2
    Date: 2017–09
  14. By: Vincent Bouvatier; Gunther Capelle-Blancard; Anne-Laure Delatte
    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) Tax havens attract large extra banking activity beyond the regular gravity factors (+168% according to our estimates); 2) For EU banks, the main tax havens are located within Europe: Luxembourg, Isle of Man and Guernsey rank at the top of the foreign affiliates; 3) Attractive low tax rates are not sufficient to drive extra activity; 4) High quality of governance is not a driver, but banks avoid countries with weakest governance; 5) Banks also avoid the most opaque countries; 6) The tax savings for EU banks is estimated between €1 billion and €3.6 billion, i.e. 5 and 20% of fiscal revenues.
    Keywords: Tax evasion;International banking;Tax havens;Country-by-country reporting
    JEL: F23 G21 H22 H32
    Date: 2017–09
  15. By: Salim, DEHMEJ (Bank Al-Maghrib, Département de la Recherche); Leonardo, GAMBACORTA (Bank for International Settlements (BIS))
    Abstract: Using a simple New Keynesian model of a monetary union that incorporates financial frictions, we show that country-targeted macroprudential policy could complement a single monetary policy at the union level. In particular, macroprudential policy helps taming financial and economic imbalances in presence of countercyclical financial shocks and imperfect transmission of monetary policy to financial conditions in a monetary union. These results are even stronger when different economies are hit by asymmetric shocks that cancel out without provoking any monetary policy reaction. In addition, we show that when coordinated with monetary policy, country-targeted macroprudential policy (implemented by national or supranational authorities) has advantages over a federally implemented policy that reacts to average financial indicators.
    Keywords: Monetary Union; Macroprudential Policy; New-Keynesian Model
    JEL: E12 E50 G18
    Date: 2017–09–07
  16. By: Guender, Alfred V.
    Abstract: This paper examines the role of credit providers in the EMU and assesses the effects of credit spreads and credit quantities on economic activity. Movements in credit spreads are far more successful than movements in the external finance mix in predicting near-term changes in real economic activity in ten EMU countries. However, the forecasting performance of the three credit spreads evaluated in this paper is uneven. A risk premium extracted from individual corporate bond yields predicts three measures of economic activity fairly well in Germany and Southern Europe. Two other credit spreads, the ‘spread’ and the ‘ECB-spread’, have predictive power for some measures of economic activity but they fail to predict consistently across either a range of economic indicators or countries
    Keywords: credit spreads, finance mix, bank vs open market debt, economic activity, financial crises
    JEL: E3 E4 G1
    Date: 2017–09–11
  17. By: Foos, Daniel; Lütkebohmert, Eva; Markovych, Mariia; Pliszka, Kamil
    Abstract: This paper investigates interest rate risk exposures of listed euro area banks which fall under the Single Supervisory Mechanism (SSM). We analyze the period 2005 to 2014, as it includes times of very low interest rates in which banks may have pursued a more risky maturity transformation strategy. First, we use the Bayesian DCC M-GARCH model to assess banks' stock price sensitivities to principal components of changes in the yield curve describing shifts in its level, slope and curvature. Second, we investigate how these sensitivities vary depending on bank-level characteristics (e.g., balance sheet composition, reliance on interest income). Our findings reveal that, on average, banks benefit from positive level shifts and steepening yield curves. Curvature changes affect banks' share prices as well, particularly in times of crises. Further, these sensitivities change in time and depend heavily on the bank's business model and balance sheet composition. Our analysis reveals that banks with larger balance sheets, higher capital ratios, higher parts of customer loans and lower parts of deposits are particularly sensitive to interest rate movements.
    Keywords: Bayesian DCC M-GARCH model,interest rate risk,maturity transformation,swings in the yield curve
    JEL: C11 C51
    Date: 2017
  18. By: Juraj Zeman (National Bank of Slovakia); Biswajit Banerjee (Bank of Slovenia); Ludovit Odor (EU Independent Fiscal Institution); William O. Riiska Jr. (Hutchin Hill Capital)
    Abstract: Based on intra-day high-frequency data, this paper investigates the effect of sterilized interventions on the Slovak koruna/euro exchange rate for different time windows during a period that coincides with Slovakia’s preparation for EU accession and euro adoption. Results confirm a significant relationship between intervention and exchange rate change. The maximum effect of intervention is reflected in the exchange rate change within a couple of hours and the effect over longer time windows weakens only gradually. The initial impact of sales interventions is stronger than that of purchase interventions.
    Keywords: Foreign exchange market intervention, koruna/euro exchange rate, monetary policy framework, ERM II participation, Slovakia
    JEL: E44 E58 F31 G15
    Date: 2017–09

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