nep-eec New Economics Papers
on European Economics
Issue of 2017‒10‒22
sixteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Investigating First-Stage Exchange Rate Pass-Through: Sectoral and Macro Evidence from Euro Area Countries By Nidhaleddine Ben Cheikh; Christophe Rault
  2. Export Hysteresis, Capacity Constraints and Uncertainty: A Smooth-Transition Analysis for Euro Area Member Countries By Ansgar Belke; Jan Wagemester
  3. Large net foreign liabilities of euro area countries By Zorell, Nico
  4. Business financing in Europe: How will higher interest rates affect companies' financial situation? By Bendel, Daniel; Demary, Markus; Voigtländer, Michael
  5. Fiscal stabilisation in the Euro-Area: A simulation exercise By Nicolas Carnot; Magdalena Kizior; Gilles Mourre
  6. Interest Rates and Exchange Rates in Normal and Crisis Times By Forti Grazzini, Caterina; Rieth, Malte
  7. The Transmission Mechanism of Credit Support Policies in the Euro Area By Jef Boeckx; Maite De Sola Perea; Gert Peersman
  8. Regulation, Institutions and Aggregate Investment: New Evidence from OECD Countries By Balazs Egert
  9. Do we want these two to tango? On zombie firms and stressed banks in Europe By Storz, Manuela; Koetter, Michael; Setzer, Ralph; Westphal, Andreas
  10. Financial Structure and Macroeconomic Volatility : a Panel Data Analysis By Emiel F.S. van Bezooijen; J.A. Bikker
  11. The Troika’s variations on a trio: Why the loan programmes worked so differently in Greece, Ireland, and Portugal By Niamh Hardiman; Joaquim Filipe Araújo; Muiris MacCarthaigh; Calliope Spanou
  12. The Role of Structural Funding for Stability in the German Banking Sector By Schupp, Fabian; Silbermann, Leonid
  13. Monetary policy and bank profitability in a low interest rate environment By Altavilla, Carlo; Boucinha, Miguel; Peydró, José-Luis
  14. International spillovers in global asset markets By Belke, Ansgar; Dubova, Irina
  15. The Sovereign-Bank Interaction in the Eurozone Crisis By Maximilian Goedl
  16. IGEM-PA: a Variant of the Italian General Equilibrium Model for Policy Analysis By Barbara Annicchiarico; Claudio Battiati; Claudio Cesaroni; Fabio Di Dio; Francesco Felici

  1. By: Nidhaleddine Ben Cheikh; Christophe Rault
    Abstract: In this paper, we evaluate the first-stage pass-through, namely the responsiveness of import prices to the exchange rate changes, for a sample of euro area (EA) countries. Our study aims to shed further light on the role of microeconomic factors vs. macroeconomic factors in influencing the extent of the exchange rate pass-through (ERPT). As a first step, we conduct a sectoral analysis using disaggregated import prices data. We find a much higher degree of pass-through for more homogeneous goods and commodities, such as oil and raw materials, than for highly differentiated manufactured products, such as machinery and transport equipment. Our results confirm that cross-country differences in pass-through rates may be due to divergences in the product composition of imports. The higher share of imports from sectors with lower degrees of pass-through, the lower ERPT for an economy will be. In a next step, we investigate for the impact of some macroeconomics factors or common events experienced by EA members on the extent of pass-through. Using the System Generalized Method of Moments within a dynamic panel-data model, our estimates indicate that decline of import-price sensitivity to the exchange rate is not significant since the introduction of the single currency. Our findings suggest instead that the weakness of the euro during the first three years of the monetary union significantly raised the extent of the ERPT. This outcome could explain why the sensitivity of import prices has not fallen since 1999. We also point out a significant role played by the inflation in the Eurozone, as the responsiveness of import prices to exchange rate fluctuations tends to decline in a low and more stable inflation environment. Overall, our findings support the view that the extent of pass-through is comprised of both macro- and microeconomic aspects that policymakers should take into account.
    Keywords: exchange rate pass-through, import prices, dynamic panel data
    JEL: E31 F31 F40
    Date: 2017
  2. By: Ansgar Belke; Jan Wagemester
    Abstract: We argue that, under certain conditions described by a sunk cost hysteresis model, firms consider exports as a substitute for domestic demand. This is valid also on the macroeconomic level where the switch from the domestic market to the export market and vice versa takes place in a smooth manner. Areas of weak reaction of exports to changes in domestic demand are widened by uncertainty. Our econometric model for six euro area countries suggests domestic demand and capacity constraints as additional variables for export equations. We apply the exponential and logistic variant of a smooth transition regression model and find that domestic demand developments and uncertainty are relevant for short-run export dynamics particularly during more extreme stages of the business cycle. A substitutive relationship between domestic and foreign sales can most clearly be found for France, Greece and Ireland (ESTR model) and France, Portugal and Italy (LSTAR model), providing evidence of the importance of sunk costs and hysteresis in international trade in these EMU member countries. What is more, our empirical results are robust to the inclusion of a variable measuring European policy uncertainty. In some cases (Italy, Greece and Portugal) the results underscore the empirical validity of the export hysteresis under uncertainty model.
    Keywords: domestic demand pressure, exports, error-correction models, hysteresis, modelling techniques, smooth-transition models, sunk costs, uncertainty
    JEL: F14 C22 C50 C51 F10
    Date: 2017
  3. By: Zorell, Nico
    Abstract: Over recent years, several euro area countries have registered large and persistent net foreign liabilities. This paper examines the risks arising from these external stock imbalances, the prospects for their smooth unwinding and the menu of policy options. The paper demonstrates that external stock imbalances remain a source of vulnerabilities in the (former) programme countries and, to a lesser extent, the euro area countries in central and eastern Europe. The net foreign liabilities of these economies stand at levels that are typically associated with an increased susceptibility to external crises. Mechanical projections indicate that the net foreign liabilities of the (former) programme countries will remain at elevated levels over the next decade despite some gradual adjustments, while those of the central and eastern European (CEE) countries could return to more sustainable levels more quickly. There are also vulnerabilities related to the composition of external positions, most notably the unfavourable debt-equity mix in the (former) programme countries. However, the long maturity of public external debt – which is often owed to official creditors – and, in the CEE countries, the prevalence of stable foreign direct investment should mitigate external sustainability risks. Furthermore, the net payments associated with the external positions of the euro area debtor countries are relatively low at the current juncture, although the burden could increase markedly if euro area interest rates were to normalise again. Against this backdrop, a timely and well-designed policy response would provide critical support to the orderly unwinding of the remaining external stock imbalances in the euro area. An optimal policy mix would consist of measures simultaneously fostering GDP growth and sustainable current account improvements in the debtor economies, in particular reforms aimed at enhancing productivity growth and export performance. JEL Classification: F21, F32, F34, F36, F45
    Keywords: external adjustment, external imbalances, external sustainability, international investment positions, valuation effects
    Date: 2017–10
  4. By: Bendel, Daniel; Demary, Markus; Voigtländer, Michael
    Abstract: Companies' access to finance has a significant impact on their profitability and growth prospects. Without external financing, most firms are not able to invest, which is a prerequisite for economic growth. In contrast to the US, which has a capital market-based financial system, banks are the dominant lenders for firms in the euro area. Banking crises endanger access to finance. In the wake of the banking and sovereign debt crisis in the euro area, risk premiums for sovereign debt went up and spilled over to banking markets. Besides sovereigns, firms too faced credit constraints, especially in countries with presumably less sustainable public debt. After the European Central Bank (ECB) accelerated its accommodative monetary policy stance even further, interest rates for sovereigns and firms fell considerably, enabling firms to lend money at historically low rates. With the strengthened recovery of the euro area, the end of this ultra-low interest rate environment seems to be near, posing new challenges for firms in the euro area. The aim of this study is to analyse how firms have dealt with this changing financing environment in recent years and to what extent companies are ready for a change towards higher interest rates. To answer this research question, we have used data from the survey on the access to finance of enterprises (SAFE) provided by the ECB. We identify companies that are vulnerable to rising interest rates, as they will presumably encounter economic problems when financing costs rise. The percentage of vulnerable companies is extremely high in Greece (9.4 percent), Italy (8.5 percent) and France (5.7 percent). The lowest rate is in Germany (0.7 percent). In relation to the size of the national business sectors, 39 percent of all vulnerable firms are located in Italy, 23 percent in France and 15 percent in Spain. When the ECB starts to normalize monetary policy, these countries could be hit hard through their business sectors' vulnerability. As a comparatively many large companies are prone to the risk of rising interest rates in Portugal (4.0 percent of big Portuguese companies) and Greece (10.0 percent of big Greek companies), the labour markets in those countries could be disproportionally affected when interest rates rise too quickly or become too high.
    JEL: E32 E44 G30
    Date: 2017
  5. By: Nicolas Carnot; Magdalena Kizior; Gilles Mourre
    Abstract: This paper simulates a euro area stabilisation instrument that addresses some concerns often levied against such ideas. The simulation uses a 'double condition' over observed unemployment rates for triggering the payments to, as well as the contributions from, participating Member States. The functioning is symmetric between good and bad times and includes a form of experience rating as a further safeguard. The behaviour of the fund is assessed with simulations over the past three decades and with 'real time' simulations dating from the euro’s inception as a crucial robustness check. The simulations show that a significant and timely degree of stabilisation can be achieved, complementing national stabilisers without introducing permanent transfers or increasing overall debt. The paper also explores variants of the basic scheme including the introduction of a threshold for restricting the activity of the fund to large shocks.
    Keywords: Macroeconomic stabilisation; risk-sharing; income smoothing; fiscal stabilisers; transfer scheme
    JEL: E61 E62 F36 F42 H77
    Date: 2017–10–16
  6. By: Forti Grazzini, Caterina; Rieth, Malte
    Abstract: The paper studies the relation between the US-Dollar/Euro exchange rate and US and euro area interest rates during normal and crisis times. We describe each asset price within a multifactor model and identify the causal contemporaneous relations through heteroskedasticity. We find that US rates and macroeconomic conditions dominate exchange rate and interest rate movements before and during the global financial crisis, while this pattern sharply reverses during the European debt crisis.
    JEL: E44 F31 G1
    Date: 2017
  7. By: Jef Boeckx; Maite De Sola Perea; Gert Peersman
    Abstract: We use an original monthly dataset of 131 individual euro area banks to examine the effectiveness and transmission mechanism of the Eurosystem’s credit support policies since the start of the crisis. First, we show that these policies have indeed been succesful in stimulating the credit flow of banks to the private sector. Second, we find support for the “bank lending view†of monetary transmission. Specifically, the policies have had a greater impact on loan supply of banks that are more constrained to obtain unsecured external funding, i.e. small banks (size effect), banks with less liquid balance sheets (liquidity effect), banks that depend more on wholesale funding (retail effect) and low-capitalized banks (capital effect). The role of bank capital is, however, ambiguous. Besides the above favorable direct effect on loan supply, lower levels of bank capitalization at the same time mitigate the size, retail and liquidity effects of the policies. The drag on the other channels has even been dominant during the sample period, i.e. better capitalized banks have on average responded more to the credit support policies of the Eurosystem as a result of more favourable size, retail and liquidity effects.
    Keywords: unconventional monetary policy, bank lending, monetary transmission mechanism
    JEL: E51 E52 E58 G01 G21
    Date: 2017
  8. By: Balazs Egert
    Abstract: This paper investigates the relationship linking investment (capital stock) and structural policies. Using a panel of 32 OECD countries from 1985 to 2013, we show that more stringent product and labour market regulations are associated with less investment (lower capital stock). The paper also sheds light on the existence of non-linear effects of product and labour market regulation on the capital stock. Several alternative testing methods show that the negative influence of product and labour market regulation is considerably stronger at higher levels. The paper uncovers important policy interactions between product and labour market policies. Higher levels of product market regulations (covering state control, barriers to entrepreneurship and barriers to trade and investment) tend to amplify the negative relationships between product and labour market regulations and the capital stock. Equally important is the finding that the rule of law and the quality of (legal) institutions alters the overall impact of regulations on capital deepening: better institutions reduce the negative effect of more stringent product and labour market regulations on the capital stock, possibly through the reduction of uncertainty as regards the protection of property rights.
    Keywords: aggregate investment, capital deepening, structural policy, product market regulation, labour market regulation, policy interaction, OECD
    JEL: E24 C13 C23 C51 L43 L51
    Date: 2017
  9. By: Storz, Manuela; Koetter, Michael; Setzer, Ralph; Westphal, Andreas
    Abstract: We show that the speed and type of corporate deleveraging depends on the interaction between corporate and financial sector health. Based on granular bank-firm data pertaining to small and medium-sized enterprises (SME) from five stressed and two non-stressed euro area economies, we show that “zombie” firms generally continued to lever up during the 2010–2014 period. Whereas relationships with stressed banks reduce SME leverage on average, we also show that zombie firms that are tied to weak banks in euro area periphery countries increase their indebtedness even further. Sustainable economic recovery therefore requires both: deleveraging of banks and firms. JEL Classification: E44, G21, G32
    Keywords: bank stress, debt overhang, zombie lending
    Date: 2017–10
  10. By: Emiel F.S. van Bezooijen; J.A. Bikker
    Abstract: In 2015, the European Commission (EC) launched its action plan for the creation of a European Capital Markets Union. The EC aims to return the European economy to sustainable growth and to enhance its shock absorbing capacity by reducing the reliance on bank finance and stimulating financial deepening and cross-border integration of Europe’s capital markets. Financial diversification and integrated European capital markets are expected to improve risk sharing among households, supporting economic stability. However, the economic literature reveals a lack of theoretical and empirical consensus on the superiority of either a bank-based or a market-based financial system in promoting growth or reducing macroeconomic volatility. This paper is the first to include bond markets in its financial structure indicators, besides stock markets and bank lending. Using panel data on 55 countries between 1975 and 2014 and three different measures of financial structure, we investigate the effect of the structure of the financial system on the volatility of output and investment growth as well as their cyclical components. We do not find evidence that market-based financial structures dampen volatility of output or overall investment. Increase of the stock market size relative to that of the banking sector has a significant positive effect on the business cycle volatility of investments.
    Keywords: financial developmen, financial system structure, macroeconomic volatility, market-based finance, bank-based finance, capital market integration, business cycle
    Date: 2017–09
  11. By: Niamh Hardiman (School of Politics and International Relations, and Geary Institute for Public Policy, University College Dublin, Ireland); Joaquim Filipe Araújo (Department of International Relations and Public Administration, University of Minho, Braga, Portugal); Muiris MacCarthaigh (School of History, Anthropology, Philosophy and Politics, and the George J. Mitchell Institute for Global Peace, Security and Justice, Queen’s University Belfast, UK); Calliope Spanou (Department of Political Science and Public Adminstration, National and Kapodistrian University of Athens, Greece)
    Abstract: Portugal and Ireland exited Troika loan programmes; Greece did not. The conventional narrative is that different outcomes are best explained by differences in national competences in implementing programme requirements. This paper argues that three factors distinguish the Greek experience from that of Ireland and Portugal: different economic, political, and institutional starting conditions; the ad hoc nature of the European institutions’ approach to crisis resolution; and the very different conditionalities built into each of the loan programmes as a result. Ireland and Portugal show some signs of recovery despite austerity measures, but Greece has been burdened beyond all capacity to recover convincingly.
    Keywords: Loan programme, Eurozone crisis, Troika, European periphery, conditionality
    JEL: E02 E62 G01 H30 H77 H87
    Date: 2017–10–17
  12. By: Schupp, Fabian; Silbermann, Leonid
    Abstract: We analyze whether, and if so by how much, stable funding would have contributed to the financial soundness of German banks in the time period between 1995 and 2013, before the Basel III liquidity regulation to address excessive maturity mismatches in the wake of the financial crisis via the Net Stable Funding Ratio can be expected to have been fully implemented.
    JEL: G21 G28 C23 C25
    Date: 2017
  13. By: Altavilla, Carlo; Boucinha, Miguel; Peydró, José-Luis
    Abstract: We analyse the impact of standard and non-standard monetary policy measures on bank profitability. For empirical identification, the analysis focuses on the euro area, thereby exploiting substantial bank and country heterogeneity within a monetary union where the central bank has implemented a broad range of unconventional policies, including quantitative easing and negative interest rates. We use both proprietary and commercial data on individual bank balance sheets and financial market prices. Our results show that monetary policy easing – a decrease in short-term interest rates and/or a flattening of the yield curve – is not associated with lower bank profits once we control for the endogeneity of the policy measures to expected macroeconomic and financial conditions. Importantly, our analysis indicates that the main components of bank profitability are asymmetrically affected by accommodative monetary conditions, with a positive impact on loan loss provisions and non-interest income largely offsetting the negative one on net interest income. We also find that a protracted period of low interest rates might have a negative effect on profits that, however, only materialises after a long period of time and tends to be counterbalanced by improved macroeconomic conditions. In addition, while more operationally efficient banks benefit more from monetary policy easing, banks engaging more extensively in maturity transformation experience a higher increase in profitability after a steepening of the yield curve. Finally, we assess the impact of unconventional monetary policies on market-based measures of expected bank profitability and credit risk, by employing an event study analysis using high frequency data, and find that accommodative monetary policies tend to increase bank stock returns and reduce credit risk. JEL Classification: E52, E43, G01, G21, G28
    Keywords: bank profitability, lower bound, monetary policy, negative rates, quantitative easing
    Date: 2017–10
  14. By: Belke, Ansgar; Dubova, Irina
    Abstract: The paper estimates the financial transmission between bond and equity markets within and between across the four largest global financial markets - the United States, the Euro area, Japan, and the United Kingdom. In a globalized world, where the complex transmission process across various financial assets is not restricted to just domestic market, we argue that international bond and equity markets are highly interconnected both within and across asset classes.
    JEL: E52 E58 F42
    Date: 2017
  15. By: Maximilian Goedl (University of Graz, Austria)
    Abstract: This paper investigates the relationship between government debt default, the banking sector and the wider economy. It builds a model of the public bond market, the banking sector and the real economy to study the mechanism by which a government default affects the other sectors and shows that this model can explain some "stylized facts" of the Eurozone crisis. The key aspect of the model is a friction in the financial market which forces banks to hold part of their assets in the form of government bonds. In such a model, an exogenous increase in the probability of default can lead to the joint occurrence of a credit crunch (i.e. declining bank lending and rising spreads between loan interest rates and deposit rates) and a decline in output. The paper also shows that an adverse technology shock (an exogenous decline in total factor productivity) cannot fully explain these phenomena.
    Keywords: Government default; Financial frictions; Business cycle model
    JEL: E37 E44 H63
    Date: 2017–10
  16. By: Barbara Annicchiarico; Claudio Battiati; Claudio Cesaroni; Fabio Di Dio; Francesco Felici
    Abstract: This paper extends IGEM, the dynamic general equilibrium model for the Italian economy currently in use at the Italian Department of the Treasury for economic policy analysis. In this new variant of the model the public sector is explicitly modelled as suppliers of goods and services. With this tool in hand we are able to present an in-depth analysis of expenditure-based fiscal multipliers and ameliorate our understanding of the potential macroeconomic effects of several policy interventions,such as those aimed at the rationalization of public spending, at the improvement of the business environment and at fostering productivity of the public administration (PA).
    Keywords: Structural Reforms, Dynamic General Equilibrium Model, Italy, Public Administration Fiscal Multipliers, Simulation Analysis
    JEL: E27 E30 E60
    Date: 2017–05

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