nep-eec New Economics Papers
on European Economics
Issue of 2017‒10‒29
fourteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Macroeconomic Stabilization, Monetary-Fiscal Interactions, and Europe's Monetary Union By Corsetti, Giancarlo; Dedola, Luca; Jarocinski, Marek; Mackowiak, Bartosz Adam; Schmidt, Sebastian
  2. Equilibrium Real Interest Rates and Secular Stagnation: An Empirical Analysis for Euro-Area Member Countries By Ansgar Belke; Jens Klose
  3. Predicting Ordinary and Severe Recessions with a Three-State Markov-Switching Dynamic Factor Model. An Application to the German Business Cycle By Kai Carstensen; Markus Heinrich; Magnus Reif; Maik H. Wolters
  4. Central Bank Communication and the Yield Curve By Paul Whelan; Gyuri Venter; Andrea Vedolin; Matteo Leombroni
  5. Friends Without Benefits? New EMU Members and the "Euro Effect" on Trade By Alina Mika; Robert Zymek
  6. The Macroeconomic Effects of Quantitative Easing in the Euro Area: Evidence from an Estimated DSGE Model By Vogel, Lukas; Hohberger, Stefan; Priftis, Romanos
  7. Monetary dynamics in the euro area : a disaggregate panel approach By J. Liu; C.J.M. Kool
  8. Exit Strategies, Capital Flight and Speculative Attacks: Europe's Version of the Trilemma By Steiner; Steinkamp; Westermann
  9. What Drives the Sovereign-Bank Nexus? By Schnabel, Isabel; Schüwer, Ulrich
  10. Back on track? A macro-micro narrative of Italian exports By Matteo Bugamelli; Silvia Fabiani; Stefano Federico; Alberto Felettigh; Claire Giordano; Andrea Linarello
  11. Financial Stability in Europe: Banking and Sovereign Risk By Jan Bruha; Evžen Kocenda
  12. Unconventional Monetary Policy in a Financially Heterogeneous Monetary Union By Benjamin Schwanebeck
  13. How do ideas shape national preferences? The Financial Transaction Tax in Ireland By Niamh Hardiman; Saliha Metinsoy
  14. The Currency Union Effect: A PPML Re-assessment with High-Dimensional Fixed Effects By Mario Larch; Joschka Wanner; Yoto V. Yotov; Thomas Zylkin

  1. By: Corsetti, Giancarlo; Dedola, Luca; Jarocinski, Marek; Mackowiak, Bartosz Adam; Schmidt, Sebastian
    Abstract: The euro area recently experienced a prolonged period of weak economic activity and very low inflation. This paper reviews models of business cycle stabilization with an eye to formulating lessons for policy in the euro area. According to standard models, after a large recessionary shock accommodative monetary and fiscal policy together may be necessary to stabilize economic activity and inflation. The paper describes practical ways for the euro area to be able to implement an effective monetary-fiscal policy mix.
    Keywords: eurobond; Government bonds; Joint Analysis of Fiscal and Monetary Policy; Lower Bound on Nominal Interest Rates; Self-Fulfilling Sovereign Default
    JEL: E31 E62 E63
    Date: 2017–10
  2. By: Ansgar Belke; Jens Klose
    Abstract: Is secular stagnation—a period of persistently lower growth such as that seen following the financial crisis of 2008/09—a valid concern for euro-area countries? We tackle this question using the well-established Laubach-Williams model to estimate the unobservable equilibrium real interest rate and compare it to the actual real rate. In light of the considerable increase in heterogeneity among EU member countries since the beginning of the financial crisis, we apply our approach to twelve euro-area countries to provide country-level answers to the question of secular stagnation. The presence of secular stagnation in a number of euro-area countries has important implications for ECB decision-making (i.e., voting power in the Governing Council) and EU governance. Our results indicate that secular stagnation is not a significant threat to most euro-area countries, with one possible exception: Greece.
    Keywords: equilibrium real interest rate, secular stagnation, euro-area countries, heterogeneity
    JEL: E43 C32
    Date: 2017–12
  3. By: Kai Carstensen; Markus Heinrich; Magnus Reif; Maik H. Wolters
    Abstract: We estimate a Markow-switching dynamic factor model with three states based on six leading business cycle indicators for Germany preselected from a broader set using the Elastic Net soft-thresholding rule. The three states represent expansions, normal recessions and severe recessions. We show that a two-state model is not sensitive enough to reliably detect relatively mild recessions when the Great Recession of 2008/2009 is included in the sample. Adding a third state helps to clearly distinguish normal and severe recessions, so that the model identifies reliably all business cycle turning points in our sample. In a real-time exercise the model detects recessions timely. Combining the estimated factor and the recession probabilities with a simple GDP forecasting model yields an accurate nowcast for the steepest decline in GDP in 2009Q1 and a correct prediction of the timing of the Great Recession and its recovery one quarter in advance.
    Keywords: Markov-Switching Dynamic Factor Model, business cycles, Great Recession, leading indicators, turning points, GDP-nowcasting, GDP-forecasting
    JEL: C53 E32 E37
    Date: 2017
  4. By: Paul Whelan (Copenhagen Business School); Gyuri Venter (Copenhagen Business School); Andrea Vedolin (London School of Economics); Matteo Leombroni (Stanford)
    Abstract: We decompose ECB monetary policy surprises into target and communication shocks and document a number of novel findings. First, consistent with the idea that concurrent implementation of monetary policy is largely anticipated, we find that target shocks only have a limited effect on yields. However, we show that communication shocks have a large and economically significant impact on sovereign yields, displaying a hump-shaped pattern across maturity. Second, we document that around the European debt crisis communication had the effect of driving a wedge between yields on core versus peripheral countries. We study two explanations for this finding, revelation of the ECB’s private information and credit risk, and argue that neither channel can explain the effect on yield spreads. Motivated by this, we consider an alternative explanation in which central bank communication affects the aggregate demand due to the presence of reaching-for-yield investors. We show that a resulting risk premium channel helps to rationalize our findings.
    Date: 2017
  5. By: Alina Mika; Robert Zymek
    Abstract: We re-visit the evidence about the trade benefits of European Monetary Union (EMU), focusing on the experience of countries which adopted the common currency since 2002. Based on “state of the art†gravity estimations for the period 1992-2013, we reach three main conclusions. First, estimates from an appropriately specified and estimated gravity equation provide no evidence of a euro effect on trade flows among early euro adopters up to the year 2002. Second, this finding is robust to extending the sample period to incorporate data up to 2013, covering five additional euro accessions. Third, while there is no robust evidence of a euro effect, there is evidence that intra-EU trade flows have expanded faster than the global average during the 2002-2013 period. Using the functional form of a theory-consistent gravity equation, we perform pseudo out-of-sample forecasts of trade flows for recent euro joiners. In line with our estimation results, we show that pseudo forecasts of the change in trade flows after euro accession, assuming no euro effect, outperform forecasts based on the expectation of a significantly positive effect. This suggests that euro accession countries should not expect a significant boost to their trade from joining EMU.
    Keywords: euro, trade, gravity, poisson
    JEL: F14 F15 F17 F33
    Date: 2017
  6. By: Vogel, Lukas; Hohberger, Stefan; Priftis, Romanos
    Abstract: This paper analyses the macroeconomic effects of the ECB’s quantitative easing using an open-economy DSGE model estimated with Bayesian techniques. Shock decompositions for real GDP growth and CPI inflation suggest positive contributions of up to 0.4 and 0.5 pp in the standard linearized version of model. Using piecewise linear solution techniques to allow for an occasionally binding zero-bound constraint raises the positive impact on growth and inflation to 0.8 and 0.7 pp.
    JEL: E52
    Date: 2017
  7. By: J. Liu; C.J.M. Kool
    Abstract: In this paper, we use panel cointegration estimation to analyze the determinants of heterogeneous monetary dynamics in ten euro area member countries over the period 1999-2013. In particular, we investigate the role of real house prices, real equity prices and cross border bank credit. For the period up till 2008 we find a significantly positive income effect, a significantly negative interest rate effect, a significantly negative effect of net foreign credit and a significantly positive housing price effect. Inclusion of the financial crisis shows evidence of a structural break in money demand and some sign reversals, most significantly so for the interest rate effect. Finally, we find evidence of a divide in the long-term money demand relation between the Northern and Southern parts of the euro area, potentially complicating monetary policy.
    Date: 2017–09
  8. By: Steiner (University of Groningen); Steinkamp (Osnabrück University); Westermann (Osnabrück University)
    Abstract: In the winter 2011/12 a wave of internal capital flight prompted the ECB to abandon its exit strategy and to announce an unprecedented monetary expansion. We analyze this episode in several dimensions: (i) by providing an event-study analysis covering key variables from national central banks' balance sheets, (ii) by rationalizing their patterns in a portfolio balance model of the exchange rate, augmented by institutional characteristics of the TARGET2 system, and (iii) by proposing a theory-based index of exchange market pressure within the euro area. We argue that the euro area entails an inherent policy trilemma that makes it prone to speculative attacks.
    Keywords: Currency Union; Exchange Market Pressure; Policy Trilemma; Speculative Attack; TARGET2.
    JEL: E42 F36 F41
    Date: 2017–10–23
  9. By: Schnabel, Isabel; Schüwer, Ulrich
    Abstract: The positive relationship between bank and sovereign credit risk in the Eurozone is seen as a major threat for the stability of the Eurozone. This paper explores potential bank-level and country-level drivers of this relationship. We find that banks' home bias in their sovereign exposures and their low equity ratios as well as countries' high debt-to-GDP ratios and low perceived government effectiveness are positively related to the sovereign-bank nexus.
    JEL: G21 G28
    Date: 2017
  10. By: Matteo Bugamelli (Bank of Italy); Silvia Fabiani (Bank of Italy); Stefano Federico (Bank of Italy); Alberto Felettigh (Bank of Italy); Claire Giordano (Bank of Italy); Andrea Linarello (Bank of Italy)
    Abstract: We provide an in-depth analysis of Italy’s export performance relative to the other main euro-area countries over the last two decades, using both macro and micro data. We argue that the relatively unsatisfactory performance of Italian goods exports until the eve of the 2008-09 crisis is the result of the interplay between the appreciation of the real effective exchange rate, the initial specialization in types of production that were particularly exposed to increasing competition from low-wage countries, and the size distribution of exporters, skewed towards small firms. Since 2010 signs of structural improvement have emerged, alongside cyclical factors, in connection with a shift in the specialization of exports towards sectors that are less exposed to competitive pressures and particularly effective in activating domestic value added. Moreover, the selection process triggered by the exceptional difficulties encountered by micro and small firms both before and during the global financial crisis might have structurally strengthened the population of Italian exporters, making it more resilient to negative shocks and more capable of keeping pace with external demand.
    Keywords: exports, competitiveness, specialization, firm size
    JEL: F14 L11 L60
    Date: 2017–10
  11. By: Jan Bruha; Evžen Kocenda
    Abstract: We analyze the link between banking sector quality and sovereign risk in the whole European Union over 1999–2014. We employ four different indicators of sovereign risk (including market- and opinion-based assessments), a rich set of theoretically and empirically motivated banking sector characteristics, and a Bayesian inference in panel estimation as a methodology. We show that a higher proportion of non-performing loans is the single most influential sector-specific variable that is associated with increased sovereign risk. The sector’s depth provides mixed results. The stability (capital adequacy ratio) and size (TBA) of the industry are linked to lower sovereign risk in general. Foreign bank penetration and competition (a more diversified structure of the industry) are linked to lower sovereign risk. Our results also support the wake-up call hypothesis in that markets re-appraised a number of banking sector-related issues in the pricing of sovereign risk after the onset of the sovereign crisis in Europe.
    Keywords: sovereign default risk, banking sector, global financial crisis, financial stability, European Union
    JEL: E58 F15 G21 G28 H63
    Date: 2017
  12. By: Benjamin Schwanebeck (University of Kassel)
    Abstract: The cross-country interbank market in the euro area was a crucial transmission channel of financial stress. By using a two-country DSGE model of a financially heterogeneous monetary union where banks in one country lend funds to their foreign counterparts, I examine its role as shock amplifier and the implications for unconventional policy interventions Using the international interbank market to pool and insure against shocks is not neutral, the resulting spillovers rather act as shock multipliers on union output. Country-specific unconventional policies of direct lending to firms seem to be the most effective interventions in terms of union and relative output stabilization. The higher the size of the interbank market, the more effective are these policies in terms of union stabilization. The effectiveness of interventions in the interbank market seems to be very sensitive to the type of shock and the interbank market size. Hence, the central bank should rather shy away from this policy as it is only useful under specific circumstances.
    Keywords: financial intermediation; financial frictions; interbank market; monetary union; unconventional policy;
    JEL: E32 E44 E58
    Date: 2017
  13. By: Niamh Hardiman (UCD School of Politics and International Relations, and UCD Geary Institute for Public Policy); Saliha Metinsoy (UCD School of Politics and International Relations, and UCD Geary Institute for Public Policy)
    Abstract: European countries have been required to formulate a national preference in relation to the EU Financial Transaction Tax. The two leading approaches to explaining how the financial sector makes its views felt in the political process – the structural power of the financial services sector based on potential disinvestment, and its instrumental power arising from direct political lobbying – fall short of providing a comprehensive account. The missing link is how and why policy-makers might be willing to adopt the priorities of key sectors of the financial services industry. We outline how two levels of ideational power might be at work in shaping outcomes, using Ireland as a case study. We argue firstly that background systems of shared knowledge that are institutionalized in policy networks generated broad ideational convergence between the financial sector and policymakers over the priorities of industrial policy in general. Secondly, and against that backdrop, debate over specific policy choices can leave room for a wider range of disagreement and indeed political and ideational contestation. Irish policymakers proved responsive to industry interests in the case of the FTT, but not for the reasons normally given. This work seeks to link literatures in two fields of inquiry. It poses questions for liberal intergovernmentalism in suggesting that the translation of structurally grounded material interests into national policy preferences is far from automatic, and argues that this is mediated by ideational considerations that are often under-estimated. It also contributes to our understanding of how constructivist explanations of policy outcomes work in practice, through a detailed case study of how material and ideational interests interact.
    JEL: F02 F15 F23 F55 H25 H70 P16
    Date: 2017–10–17
  14. By: Mario Larch; Joschka Wanner; Yoto V. Yotov; Thomas Zylkin
    Abstract: Recent work on the effects of currency unions (CUs) on trade stresses the importance of using many countries and years in order to obtain reliable estimates. However, for large samples, computational issues limit choice of estimator, leaving an important methodological gap. To address this gap, we unveil an iterative PPML estimator which flexibly accounts for multilateral resistance, pair-specific heterogeneity, and correlated errors across countries and time. When applied to a comprehensive sample with more than 200 countries trading over 65 years, these innovations flip the conclusions of an otherwise rigorously-specified linear model. Our estimates for both the overall CU effect and the Euro effect specifically are economically small and statistically insignificant. The effect of non-Euro CUs, however, is large and significant. Notably, linear and PPML estimates of the Euro effect increasingly diverge as the sample size grows.
    Keywords: currency unions, PPML, high-dimensional fixed effects
    JEL: C13 C21 F10 F15 F33
    Date: 2017

This nep-eec issue is ©2017 by Giuseppe Marotta. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.