nep-eec New Economics Papers
on European Economics
Issue of 2017‒10‒08
twenty papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Austerity & Competitiveness in the Eurozone: a misleading linkage By Walter Paternesi Meloni
  2. Macroeconomic effects of non-standard monetary policy measures in the euro area: the role of corporate bond purchases By Anna Bartocci; Lorenzo Burlon; Alessandro Notarpietro; Massimiliano Pisani
  3. ?Whatever it takes? to resolve the European sovereign debt crisis? Bond pricing regime switches and monetary policy effects By Afonso, Ant¢nio; Arghyrou, Michael G; Gadea, Mar¡a Dolores; Kontonikas, Alexandros
  4. Spreading the word or reducing the term spread? Assessing spillovers from euro area monetary policy By Feldkircher, Martin; Gruber, Thomas; Huber, Florian
  5. Benefits of EMU Participation : Estimates using the Synthetic Control Method By Verstegen, Loes; van Groezen, Bas; Meijdam, Lex
  6. What does “below, but close to, two percent” mean? Assessing the ECB’s reaction function with real time data By Paloviita, Maritta; Haavio, Markus; Jalasjoki, Pirkka; Kilponen, Juha
  7. Brexit: The Economics of International Disintegration By Thomas Sampson
  8. Brexit and the Future of Globalization? By John Van Reenen
  9. External stress early warning indicators By César Martín Machuca
  10. Predicting Ordinary and Severe Recessions with a Three-State Markov-Switching Dynamic Factor Model. An Application to the German Business Cycle By Heinrich, Markus; Carstensen, Kai; Reif, Magnus; Wolters, Maik
  11. Natural rates across the Atlantic By Stefano Neri; Andrea Gerali
  12. Overnight Indexed Swap Market-Based Measures of Monetary Policy Expectations By Lloyd, S. P.
  13. Persistence and stochastic convergence of euro area unemployment rates: evidence from LM and RALS-LM unit root tests with breaks By Irena Raguž Krištić; Lucija Rogić Dumančić; Vladimir Arčabić
  14. Mortgaging Europe’s periphery By Dorothee Bohle
  15. US monetary regimes and optimal monetary policy in the Euro Area By Kostas Mavromatis
  16. What do we learn about redistribution effects of pension systems from internationally comparable measures of Social Security Wealth? By Michele Belloni; Agar Brugiavini; Raluca E. Buia; Ludovico Carrino; Danilo Cavapozzi; Cristina E. Orso; Giacomo Pasini
  17. Synchronicity of real and financial cycles and structural characteristics in EU countries By Mariarosaria Comunale
  18. Business Cycle Dating and Forecasting with Real-time Swiss GDP Data By Christian Glocker; Philipp Wegmüller
  19. The response of long-term yields to negative interest rates: evidence from Switzerland By Christian Grisse; Silvio Schumacher
  20. Access to finance in the Western Balkans By Moder, Isabella; Bonifai, Niccolò

  1. By: Walter Paternesi Meloni
    Abstract: After focusing on fiscal indiscipline, the debate on the Eurozone crisis switched over persistent external imbalances among the European Monetary Union countries. Current account differentials were almost exclusively ascribed to the weak price competitiveness of deficit countries – neglecting demand-side factors – and consequently austerity measures have been imposed to peripheral countries in order to foster their competitiveness with the purpose of adjusting external imbalances through export growth. In this context, the contribution of this paper is twofold. Firstly, we identify this view as competitive austerity (in parallel with the expansionary austerity narrative), as the set of measures which, according to policy makers, would stimulate trade balance, output and employment. Secondly, we criticize this approach since fiscal restraints were proved to be counterproductive. We conclude by disproving the austerity-competitiveness linkage from a Keynesian perspective as well as by means of some macroeconomic evidence, and we provide an alternative recipe for the Eurozone issues.
    Keywords: austerity, competitiveness, European imbalances, current account, fiscal policy, aggregate demand
    JEL: E63 F32
    Date: 2017–09
  2. By: Anna Bartocci (Bank of Italy); Lorenzo Burlon (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: This paper evaluates the macroeconomic effects of the corporate sector purchase programme (CSPP) implemented in the euro area by the Eurosystem. For this purpose we calibrate and simulate a monetary-union dynamic general equilibrium model. We assume that entrepreneurs can finance their spending by issuing bonds in the domestic corporate bond market and by borrowing from domestic banks. We found that the March 2016 CSPP boosts euro-area GDP by around 0.3% in the second year (peak level). Inflation rises too but by a smaller amount. Second, taking into account the programme’s extension in December 2016, its overall impact on GDP amounts to 0.6%. Third, the CSPP also stimulates banking activity, because the improvement in macroeconomic conditions leads to higher demand for loans from households and entrepreneurs. Fourth, an early exit from the CSPP negatively impacts its macroeconomic effectiveness, while forward guidance on monetary policy rate enhances it.
    Keywords: DSGE models, financial frictions, open-economy macroeconomics, non-standard monetary policy, corporate bonds, forward guidance, euro area
    JEL: E43 E44 E52 E58
    Date: 2017–09
  3. By: Afonso, Ant¢nio (ISEG-UL ? Universidade de Lisboa); Arghyrou, Michael G (Cardiff Business School); Gadea, Mar¡a Dolores (Department of Applied Economics, University of Zaragoza); Kontonikas, Alexandros (Essex Business School, University of Essex)
    Abstract: This paper investigates the role of unconventional monetary policy as a source of time-variation in the relationship between sovereign bond yield spreads and their fundamental determinants. We use a two-step empirical approach. First, we apply a time-varying parameter panel modelling framework to determine shifts in the pricing regime characterising sovereign bond markets in the euro area over the period January 1999 to July 2016. Second, we estimate the impact of ECB policy interventions on the time-varying risk factor sensitivities of spreads. Our results provide evidence of a new bond-pricing regime following the announcement of the Outright Monetary Transactions (OMT) programme in August 2012. This regime is characterised by a weakened link between spreads and fundamentals, but with higher spreads relative to the pre-crisis period and residual redenomination risk. We also find that unconventional monetary policy measures affect the pricing of sovereign risk not only directly, but also indirectly through changes in banking risk. Overall, the actions of the ECB have operated as catalysts for reversing the dynamics of the European sovereign debt crisis.
    Keywords: euro area, spreads, crisis, time-varying relationship, unconventional monetary policy
    JEL: E43 E44 F30 G01 G12
    Date: 2017–09
  4. By: Feldkircher, Martin; Gruber, Thomas; Huber, Florian
    Abstract: As a consequence of asset purchases by the European Central Bank (ECB), longer- term yields in the euro area decline, and spreads between euro area long-term yields narrow. To assess spillovers of these recent financial developments, we use a Bayesian variant of the global vector autoregressive (BGVAR) model that uses shrinkage priors coupled with stochastic volatility. We find positive and signif- icant spillovers to industrial production in Central, Eastern and Southeastern Europe (CESEE) and other non-euro area EU member states. These effects are transmitted via the financial channel (mainly through interest rates and equity prices) and outweigh costs of appreciation pressure on local currencies vis-a-vis the euro (trade channel). That both shocks yield rather similar results adds narrowing longer-term yields in the euro area as a viable alternative to the pol- icymakers' toolkit. While these results represent general trends, we also find evidence for both cross-country heterogeneity of effects within the euro area and region-specific spillovers thereof.
    Keywords: Euro area monetary policy,quantitative easing,spillovers
    JEL: C30 E52 F41 E32
    Date: 2017
  5. By: Verstegen, Loes (Tilburg University, Center For Economic Research); van Groezen, Bas (Tilburg University, Center For Economic Research); Meijdam, Lex (Tilburg University, Center For Economic Research)
    Abstract: This paper investigates quantitatively the benefits from participation in the Economic and Monetary Union for individual Euro area countries. Using the synthetic control method, we estimate how real GDP per capita would have developed for the EMU member states, if those countries had not joined the EMU. The estimates show that most countries have profited from having the euro, though the crisis leads to negative effects of EMU membership. The PIGS countries, in particular, would have been better off if they had not been an EMU member during the crisis, however, Greece, Portugal and Spain experienced the largest benefits of EMU participation in the pre-crisis period.
    Keywords: economic growth; euro area; synthetic control method; monetary union
    JEL: C23 E65 F33 F36 F43
    Date: 2017
  6. By: Paloviita, Maritta; Haavio, Markus; Jalasjoki, Pirkka; Kilponen, Juha
    Abstract: We estimate the ECB’s monetary policy reaction function by using real time Eurosystem/ECB staff macroeconomic projection data, which are presented to the ECB’s Governing Council when it assesses the monetary policy stance in the euro area. Alternative specifications of the reaction function account for a possible credibility loss due to persistent deviations of past inflation from the ECB’s inflation target. The results provide support for two alternative interpretations of the definition of price stability. First, the ECB dislikes inflation rates above two percent more than rates below two percent. Second, the ECB policy responses to past inflation gaps are symmetric with respect to a target of 1.6 - 1.7 percent. The out-of-sample predictions of the reaction function based on the second interpretation of the definition of price stability track well an estimated shadow interest rate during the zero lower bound period.
    JEL: E52 E58
    Date: 2017–10–05
  7. By: Thomas Sampson
    Abstract: This paper reviews the literature on the likely economic consequences of Brexit and considers the lessons of the Brexit vote for the future of European and global integration. Brexit will make the United Kingdom poorer because it will lead to new barriers to trade and migration between the United Kingdom and the European Union. Plausible estimates put the costs to the United Kingdom at between 1 and 10 percent of income per capita. Other European Union countries will also suffer economically, but their estimated losses are much smaller. Support for Brexit came from a coalition of less-educated, older, less economically successful and more socially conservative voters. Why these voters rejected the European Union is poorly understood, but will play an important role in determining whether Brexit proves to be merely a diversion on the path to greater international integration or a sign that globalization has reached its limits.
    Keywords: Brexit, European Union, trade agreements, quantitative trade models, globalization
    JEL: F1 F5
    Date: 2017–09
  8. By: John Van Reenen
    Abstract: Alongside the victory of Donald Trump in the 2016 US elections, Britain's vote to leave the European Union ("Brexit") in June 2016 reflects a global upsurge in populism. I find that under all plausible scenarios Brexit will make the average UK household poorer than the alternative of remaining in the European Union. The welfare loss is larger if the UK leaves the Single Market (a "hard Brexit) and larger still (6% to 9% of GDP) when the dynamic effects of productivity losses are factored in. This damage hits the poor as much as the rich and is unlikely to be offset by new trade deals which cannot replicate the sustained reduction in non-tariff barriers that the Single Market has engineered.
    Keywords: brexit, globalization, populism
    JEL: D92 E22 D8 C23
    Date: 2017–09
  9. By: César Martín Machuca (Banco de España)
    Abstract: We examine the determinants of external stress episodes through probit analysis, focusing on the role of foreign liabilities in order to build an external crisis early warning indicator for a set of selected EMU countries. We use a panel country data spanning 1970-2011 from External Wealth Dataset (Phillip Lane). Our results show that the ratio of net and gross foreign liabilities to GDP and current account balances — which measure external debt accumulation speed — are significant stress predictors, although (net) FDI liabilities seem an offset factor. Early warning indicators are based on a signalling approach and exploit panel dimension of the data to develop a country specific indicator. We find that EMU peripheral countries’ external indebtedness remains higher than risk threshold, in spite of the external adjustment accumulated in the last years in some countries. This result highlights the necessity of going on structural reforms that reinforce competitiveness of these economies.
    Keywords: International investment positions, external debt, external vulnerability, current account imbalances.
    JEL: E44 F32 F34 G15 H63
    Date: 2017–10
  10. By: Heinrich, Markus; Carstensen, Kai; Reif, Magnus; Wolters, Maik
    Abstract: We use a Markow-switching dynamic factor model with three states for Germany with indicators selected by the Elastic Net. The states represent expansions, normal - and severe recessions. Adding a third state helps to identify all business cycle turning points in-sample and in real-time. Combining the factor and the recession probabilities with a GDP forecasting model yields accurate nowcasts and a correct prediction of the timing of the Great Recession and its recovery one quarter in advance.
    JEL: C53 E32 E37
    Date: 2017
  11. By: Stefano Neri (Bank of Italy); Andrea Gerali (Bank of Italy)
    Abstract: The paper estimates a closed-economy medium-scale model for the United States and the euro area to assess the current level of the natural rate of interest and shed light on its drivers. The dynamics of the model are driven by permanent and transitory shocks that bear some connection to the explanations put forward in the literature to explain the secular downward trend in interest rates. The analysis shows that the natural rate has declined, contributing to a lowering of nominal and real rates. Risk premium shocks, a short-cut for changes in agents’ preference for safe assets, have been an important driver in the euro area; in the United States, shocks to the risk premium and to the efficiency of investment, which proxy the functioning of the financial sector, have played a major role. These differences in the importance of the shocks underscore the need to adopt a structural model with a rich stochastic structure, featuring permanent and transitory shocks.
    Keywords: natural rate of interest, monetary policy, DSGE model, Bayesian methods
    JEL: C51 E32 E43 E52
    Date: 2017–09
  12. By: Lloyd, S. P.
    Abstract: A growing literature has begun to use overnight indexed swap (OIS) rates to measure market expectations of future short-term interest rates. In this paper, I assess the empirical success of OIS rates in predicting the future path of monetary policy. I first compare US OIS rates to federal funds futures (FFFs), which have regularly been used to construct financial market-based measures of interest rate expectations. For the 2002-2016 period, I find that 1 to 11-month OIS rates provide measures of investors' interest rate expectations that are as good as those from comparable-horizon FFFs contracts. More generally, I find that, on average, 1 to 24-month US, UK, Eurozone and Japanese OIS rates accurately measure expectations of future short-term interest rates. To date, many methods used by monetary economists rely on FFFs data to measure monetary policy expectations. This has limited the application of these methods to US data only. Motivated by the results in this paper, researchers can look to OIS rates as a globally-comparable measure of monetary.
    Keywords: Federal Funds Futures, Overnight Indexed Swaps, Monetary Policy Expectations
    JEL: E43 E44 E52 G1
    Date: 2017–09–20
  13. By: Irena Raguž Krištić (Faculty of Economics and Business, University of Zagreb); Lucija Rogić Dumančić (Faculty of Economics and Business, University of Zagreb); Vladimir Arčabić (Faculty of Economics and Business, University of Zagreb)
    Abstract: The goal of this paper is to determine if the euro area (EUA) accession and membership had a significant impact on the unemployment rates of the EUA countries. The hypothesis of the paper is that there is unemployment hysteresis and EUA accession thus contributed to the economic integration and convergence of the unemployment rates in the EUA. The paper employs LM and RALS-LM unit root tests with two breaks to analyze the persistence, test the stochastic convergence and locate structural break(s) in the seasonally adjusted quarterly unemployment rates, covering the period from 1995q1 to 2016q2. The most interesting results are that: (i) there are EUA-related down breaks in unemployment rates with hysteresis, (ii) EUA-related breaks are followed by the periods of convergence to the EUA11 average, (iii) crisis-related breaks are followed by the periods of divergence and (iv) the EUA membership is not a sufficient condition for stochastic convergence.
    Keywords: Unemployment, Euro area, Hysteresis, Stochastic convergence, Unit root, Structural breaks
    JEL: E24 O52
    Date: 2017–09–28
  14. By: Dorothee Bohle
    Abstract: This paper is concerned with the development of housing finance in peripheral European states. Interestingly, the biggest mortgage and housing booms and busts prior to the Global Financial Crisis (GFC) have occurred in these countries, rather than in the core. This is surprising, given the comparatively low level of mortgage debt and the unsophisticated financial sectors in the periphery. The mortgage and housing booms and busts have also made these countries highly vulnerable to the fallout from the GFC, and have often been associated with severe banking and even sovereign debt crises. The paper asks why peripheral countries have been particularly vulnerable to housing and mortgage booms and busts; how these have shaped their exposure to the GFC, and how the GFC has affected peripheral housing finance. Building on literature on housing financialization and varieties of residential capitalism, the paper traces trajectories of housing-induced financialization before and after the GFC in four European peripheral countries: Hungary, Latvia, Ireland and Iceland. The paper argues that their differences notwithstanding, Europe’s East and peripheral Northwest have been characterized by high homeownership rates and unsophisticated mortgage markets. The evolving EU framework for free movement of capital and provision of financial services as well as the availability of ample and cheap credit has induced a trajectory of financialization, which has taken two major but not mutually exclusive forms: domestic financial institutions’ reliance on funding from wholesale markets, and direct penetration of foreign financial institutions. These two forms of financialization attest to a core-periphery relationship in the recent episode of housing financialization, whose hierarchical character played out in the crisis. Peripheral European countries experienced sudden stops and reversals of capital flows, which badly affected their banking systems. Unable to solve the looming banking crises on their own, they had to turn to creditors to gain access to much needed capital inflows. Different combinations of international conditionality, domestic policy responses and the original level of mortgage debt result in different trajectories in housing finance after the crisis.
    Keywords: comparative political economy, international political economy, housing, financialization, peripheral capitalism
    Date: 2017–09
  15. By: Kostas Mavromatis
    Abstract: Monetary policy in the US has been documented to have switched from reacting weakly to inflation fluctuations during the '70s, to fighting inflation aggressively from the early '80s onwards. In this paper, I analyze the impact of the US monetary policy regime switches on the Eurozone. I construct a New Keynesian two-country model where foreign (US) monetary policy switches regimes over time. I estimate the model for the US and the Euro Area using quarterly data and find that the US has switched between those two regimes, in line with existing evidence. I show that foreign regime switches affect home (Eurozone) inflation and output volatility and their responses to shocks, substantially, as long as the home central bank commits to a time invariant interest rate rule reacting to domestic conditions only. Optimal policy in the home country instead requires that the home central bank reacts strongly to domestic producer price inflation and to international variables, like imported goods relative prices. In fact, I show that currency misalignments and relative prices play a crucial role in the transmission of foreign monetary policy regime switches internationally. Interestingly, I show that only marginal gains arise for the Euro Area when the ECB adjusts its policy according to the monetary regime in the US. Thus, a simple time-invariant monetary policy rule with a strong reaction to PPI inflation and relative prices is enough to counteract the effects of monetary policy switches in the US.
    Keywords: Monetary Policy; Markov-switching DSGE and Bayesian estimation; optimal monetary policy; international spillovers
    JEL: C3 E52 F3 F41 F42
    Date: 2017–09
  16. By: Michele Belloni (Department of Economics, University Of Venice Cà Foscari; Netspar; Cerp-Collegio Carlo Alberto); Agar Brugiavini (Department of Economics, University Of Venice Cà Foscari); Raluca E. Buia (Department of Economics, University Of Venice Cà Foscari); Ludovico Carrino (Department of Economics, University Of Venice Cà Foscari; King’s College London); Danilo Cavapozzi (Department of Economics, University Of Venice Cà Foscari; Netspar); Cristina E. Orso (Department of Economics, University Of Venice Cà Foscari); Giacomo Pasini (Department of Economics, University Of Venice Cà Foscari; Netspar)
    Abstract: We present novel estimates of Social Security Wealth (SSW) at the individual level based on the SHARE survey. Our estimates are based on a rigorous methodology taking into account country-specific legislations, the earnings history and the longevity prospects of individuals. The key advantage over existing estimates is that our measures of SSW is fully comparable across countries. This allows us to construct several indexes of the redistribution enacted by the pension systems in Europe. Moreover, simple correlations between SSW and alternative measures of private wealth are presented to provide descriptive evidence of the displacement effect of SSW on private wealth.
    Keywords: Social Security Wealth, SHARE, redistribution
    Date: 2017
  17. By: Mariarosaria Comunale (Economics Department, Bank of Lithuania)
    Abstract: In this paper, we examine the relationships between real, credit and house price cycles, by using a synchronicity index, and structural characteristics and macroeconomic variables of 17 EU countries. We find that the cycles between credit variables and the real cycle with the property or equity prices cycles seem relatively well synchronised. Credit and GDP fluctuations seem to be less synchronised, mostly because credit volumes tend to lag the real cycle by several quarters. The high rates of private homeownership tend to be associated with larger cycles in GDP, credit, and house prices. Higher Loan-To-Value ratios, seen as a proxy of borrowing constraints, and a higher percentage of flexible-rate mortgages, could also indicate that a country is more sensitive to shocks and possibly increase pro-cyclicality and increase cycle volatility. Finally, the pro-cyclicality of the credit and housing market to the GDP cycle can be linked to the fluctuation in current accounts and their misalignments with respect to the theoretical equilibrium value. The synchronicity and the cycles of credit may also be considered for signaling recessions.
    Keywords: cycles; synchronicity; housing market; credit; European Union
    JEL: E32 E44 F36
    Date: 2017–09–25
  18. By: Christian Glocker (WIFO); Philipp Wegmüller
    Abstract: We develop a small-scale dynamic factor model for the Swiss economy based on an appropriately selected set of indicators. The resulting business cycle factor is in striking accordance with historical Swiss business cycle fluctuations. Our proposed model demonstrates a remarkable performance in short-term and medium-term forecasting. Using real-time GDP data since 2004, the model successfully anticipates the downturn of 2008-09 and responds in a timely manner to the recent sudden drop following the removal of the Swiss Franc lower bound. In a Markov-switching extension, we propose that our model could be used for Swiss recession dating. Our model does not indicate a regime-switch following the removal of the Swiss Franc lower bound.
    Keywords: Dynamic Factor Model, Nowcasting, Real-Time Data, Markov-Switching
    Date: 2017–10–02
  19. By: Christian Grisse; Silvio Schumacher
    Abstract: This paper studies the transmission of changes in short-term interest rates to longer-term government bond yields when interest rates are at very low levels or negative. We focus on Switzerland, where short-term interest rates have been at zero since late 2008 and negative since the beginning of 2015. The expectations hypothesis of the term structure implies that as nominal interest rates approach their lower bound, the effect of short-term rates on longer-term yields should decline, and positive short rate changes should have larger absolute effects than negative short rate changes. Contrary to studies of other countries, we find no evidence for a decline in the effect of short rate changes for the low-interest rate period using Swiss data. However, we do find evidence for the predicted asymmetric effect for positive and negative short rate changes during the period when short-term rates are close to zero. This asymmetry normalized again after the introduction of negative interest rates.
    Keywords: monetary policy, negative interest rates, zero lower bound, yield curve
    JEL: E43 E52
    Date: 2017
  20. By: Moder, Isabella; Bonifai, Niccolò
    Abstract: Limited access to finance is one of the main obstacles for firms located in the Western Balkans and hampers economic growth as well as the transmission of monetary policy. The aim of this paper is to undertake an in-depth analysis of access to finance constraints in this region, where countries as EU candidates or potential candidates have a prospect of joining the European Union. Besides touching upon macroeconomic and banking sector indicators that influence access to finance, this paper empirically assesses firm-level factors that determine whether a firm operating in the Western Balkans is credit-constrained, both in actual and perceived terms. In line with the literature, the results suggest that size, age, location, being audited, having outstanding loans and expectations about future performance matter for actual credit availability. The econometric analysis is complemented by a review of the Western Balkan countries’ Economic Reform Programmes, which indicate that financing constraints are tackled by most national authorities through specific policy measures, mostly for small and medium-sized enterprises. JEL Classification: E22, G30, O16
    Keywords: economic development, financing constraints, SMEs
    Date: 2017–09

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