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on European Economics |
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Issue of 2017‒11‒05
nineteen papers chosen by Giuseppe Marotta Università degli Studi di Modena e Reggio Emilia |
| By: | Gustav A. Horn; Andrew Watt |
| Abstract: | This paper addresses the issue of current account imbalances of countries within a monetary union, now widely agreed to have been a major contributor to the persistent economic crisis in the EMU. In particular we focus on the role of wages for current account developments and a possible role for nominal incomes policies in limiting and correcting imbalances. We set out why national current accounts remain important in a monetary union and examine the forces driving the current account balance. We present empirical evidence on current account developments in the Euro Area, focusing on countries in which a correction has occurred. Detailed counter-factual model-based simulations for Germany show that “wage policy” on its own is scarcely able to make an impact on its huge and destabilising surplus; what is needed is a combined approach in which nominal wages follow a wage norm (productivity plus ECB target inflation rate) while aggregate demand is managed (in this case stimulated) to fully utilise productive potential. Against this analytical background we develop a proposal for institutional reform of the Euro Area, building on existing institutions. Key elements are: reinstating the Broad Economic Policy Guidelines as the conceptual framework guiding economic policy, expanding the remit of the Fiscal Council and the Productivity Boards to cover the entire policy mix, and substantially developing the EU Macroeconomic Dialogue in particular by setting up MEDs at Euro Area and Member State levels. |
| JEL: | D40 E31 L51 |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:euf:dispap:059&r=eec |
| By: | Lucas Hafemann; Peter Tillmann |
| Abstract: | This paper studies the transmission of ECB monetary policy, both at the aggregate euro area and the country level. We estimate a VAR model for the euro area in which monetary policy shocks are identified using an external instrument that reflects policy surprises. For that purpose we use the change in German bunds at meeting days of the Governing Council. The identified monetary policy shock is then put into country-specific local projections in order to derive country-specific impulse responses. We find that (i) the transmission is very heterogeneous, both across channels and across countries, (ii) policy is transmitted through spreads, yields and the exchange rate, but less through banks and the stock market, and (iii) the strength of the transmission depends on structural characteristics of member countries, among them are current account balanced, debt to GDP levels, and the strength of banking systems. |
| JEL: | E52 E32 E44 |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:euf:dispap:063&r=eec |
| By: | Athanasios Orphanides |
| Abstract: | This paper explores the reasons for the suboptimal fiscal-monetary policy mix in the euro area in the aftermath of the global financial crisis and ways in which the status quo can be improved. A comparison of fiscal and monetary policies and of economic outcomes in the euro area and the United States suggests that both fiscal and monetary policy in the euro area have been overly tight. Fiscal policy has been hampered by the institutional framework which constrains individual states and lacks instruments to secure an appropriate aggregate stance. ECB monetary policy has been hampered by the distributional effects of balance sheet policies which needed to be adopted at the zero lower bound, and by discretionary decisions taken before the crisis such as the reliance on credit rating agencies for determining collateral eligibility for monetary operations. The compromising of the “safe asset” status of euro area sovereign debt during the crisis complicated fiscal and monetary policy. Changes in the discretionary decisions governing the implementation of monetary policy in the euro area can potentially reduce the distributional effects of policy and improve the fiscal-policy mix and longerterm prospects for the euro area. |
| JEL: | E52 E58 E61 E62 G01 |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:euf:dispap:060&r=eec |
| By: | Cinzia Alcidi |
| Abstract: | This paper examines the impact of the financial cycle on the capacity of the economy to deal with shocks, with a particular focus on fiscal policy in the euro area member states. It starts by measuring national financial cycles and investigating the synchronisation across them as well as their relationship to the medium-term business cycle. It finds that financial cycles tend to be synchronised but their amplitudes differ significantly across countries. Business cycles tend to be positively correlated with the financial cycle, but they usually are smaller. The paper then examines if and how the financial cycle affects international risk-sharing among euro area member states and finds that economic booms and busts are often associated with phases of financial integration and disintegration at the level of the euro area. Such developments are reflected in the degree of international risk-sharing, which turns out to behave procyclically. Lastly, the capacity of domestic fiscal policy to smooth asymmetric shocks in the euro area declines dramatically during recessionary phases of the domestic financial cycle. The paper concludes that macroprudential policies are an important tool for preventing excessive swings in the financial cycle, but they should be complemented by a central stabilisation mechanism, which can make both capital markets and fiscal policy more resilient to disruption associated with the financial cycle. |
| JEL: | G01 E62 H30 |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:euf:dispap:052&r=eec |
| By: | Andrea Mercatanti (Bank of Italy and Luxembourg Institute of Socio-Economic Research, Program evaluation and Big Data Unit); Taneli Mäkinen (Bank of Italy); Andrea Silvestrini (Bank of Italy) |
| Abstract: | We reinvestigate the question of whether corporate investment during the financial crisis depended to a significant extent, and differently than in the pre-crisis period, on firms' short-term liquidity and indebtedness. Using data on listed firms in the euro area and the United Kingdom, we employ a correlated random coefficient panel data model estimated with instrumental variables in order to address potential endogeneity concerns. First, we find that to attain plausible identification, we must allow for the possibility that the unobserved firm-specific component of investment changed with the onset of the financial crisis. Second, our results suggest that neither cash reserves nor short-term debt, considered separately, were significant determinants of investment. However, we do find evidence of a negative conditional dependence between corporate investment and short-term debt net of cash reserves. |
| Keywords: | capital expenditure, financing constraints, financial crisis, correlated random coefficient, panel data models, instrumental variables |
| JEL: | G01 G31 G32 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1148_17&r=eec |
| By: | Viral V. Acharya; Sascha Steffen |
| Abstract: | Government bond markets in the Euro Area are highly fragmented causing further fragmentation in bond and equity markets. Capital Markets Union with fully integrated capital markets across member countries can only work when the status of member country sovereign bonds as risk-free assets is restored. Banking Union and fiscal union are both required for this outcome. However, the Banking Union remains an unfinished project without a European deposit insurance framework and there is little consensus at the moment for a fiscal union in the Euro Area. It appears thus that the fate of the Capital Markets Union solely rests with the European Central Bank in the near to medium term. |
| JEL: | G01 G21 G28 |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:euf:dispap:062&r=eec |
| By: | Giuseppe Bertola |
| Abstract: | Reforms observed in EMU do not conform to commonly expressed views that international economic integration comes with labour market deregulation, and that both are beneficial. This essay examines the country-specific policy reforms evidence generated by inception of Economic and Monetary Union and by its disruption during the Great Recession and the Eurozone crisis, outlines non-technically how a distributional perspective can explain key features of those experiences, and discusses how these empirical observations and theoretical insights may bear on the sources and consequences of more general tensions between Europe’s policymaking framework and market integration process. |
| JEL: | F2 D33 J08 |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:euf:dispap:054&r=eec |
| By: | Florian Urbschat; Sebastian Watzka |
| Abstract: | We examine the effects of the Asset Purchase Programme (APP) gradually introduced by the European Central Bank from September 2014 onwards. Studying the short-term reaction of financial markets after APP press releases, we analyse the development of bond yields and spreads around these releases. More precisely, we try to estimate different asset price channels by quantifying the cumulative decrease of spreads and by running event regressions for several Euro Area countries. Focusing on the signalling channel, measured by the OIS rate, and the portfolio rebalancing channel, proxied by the conditional bond-OIS spread, we find that the effects in yield and spread reduction were most pronounced for the initial announcement on the Public Sector Purchase Programme (PSPP) but declined afterwards for additional announcements. Possible explanations for this are the declining degree to which the ECB surprised markets and the increasingly burdensome institutional set-up of the APP. While yield reductions were larger for periphery countries’ than for core countries’ bonds, our evidence suggests that this stronger reduction is mostly due to a decreasing risk component of southern bonds. In fact, once controlling for this implicit credit risk reduction we find rather mild effects from portfolio rebalancing for all countries. |
| Keywords: | large scale asset purchase, yield curve, quantitative easing, APP, event study |
| JEL: | E43 E44 E52 E58 G14 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6709&r=eec |
| By: | Wolfinger, Julia; Köhler, Ekkehard |
| Abstract: | This paper explores the process of re-convergence of GIIPS sovereign bond yields, which restarted in Q3 2012. We empirically analyse the impact of conventional and unconventional monetary policy and fiscal support measures in the EMU on bond pricing behaviour. We find that yield re-convergence of 2-, 5- and 10-year bond yield spreads and 5- and 10-year CDS spreads can be explained by crisis policy actions unknown to investors before uncertainty spread on markets. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc17:168265&r=eec |
| By: | Steven Brakman; Harry Garretsen; Tristan Kohl |
| Abstract: | The United Kingdom has opted to leave the European Union. The trade and welfare consequences of this decision are large; most studies predict a trade and welfare loss for both the UK and the EU. The UK parliament has indicated that it aims for new and ambitious trade agreements following Brexit, but has not been explicit what type of trade agreements it envisions (except that it should be broad) or with whom specifically. In this paper, we consider the UK’s options. We first confirm, in line with existing studies, that the negative trade consequences of Brexit are substantial, especially for the UK and also for the EU. After reviewing all potential options, we have a simple answer to the question whether the UK has an alternative for the existing trade agreement with the EU. The answer is: No. Only a trade agreement with the EU can compensate for the negative trade consequences of Brexit. |
| Keywords: | Brexit, Gravity Model, trade predictions |
| JEL: | F13 F14 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6448&r=eec |
| By: | Paulo Santos Monteiro |
| Abstract: | This paper proposes a method to identify how labour market institutions and product market regulation interact with economic shocks, and affect unemployment and wage dynamics during periods of external imbalances corrections. This is done using a general equilibrium model of trade, external imbalances and unemployment that incorporates labour market frictions via a structural wage equation, and implies equilibrium cross-sectional dispersion of unemployment rates. We apply the method to study the role of macroeconomic shocks, labour market institutions and product market regulation in the correction of external imbalances in the European Monetary Union (EMU) over the last decade, and the concurrent heterogeneous unemployment dynamics. |
| JEL: | E52 E58 E61 E62 G01 |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:euf:dispap:061&r=eec |
| By: | Sven Steinkamp; Aaron Tornell; Frank Westermann |
| Abstract: | The Single Supervisory Mechanism was introduced to eliminate the common-pool problem and limit uncontrolled lending by national central banks (NCBs). We analyze its effectiveness. Second, we model how, by forbearing and providing refinancing credit, NCBs avoid domestic resolution costs and, instead, share potential losses within the Euro Area. This results in “evergreening” of bad loans. Third, we construct a new evergreening index based on a large worldwide survey administered by the ifo institute. Regressions show evergreening is significantly greater in the Euro Area and where banks are in distress. Finally, greater evergreening accompanies higher growth of NCB-credit and Target2-liabilities. |
| Keywords: | single supervisory mechanism, evergreening, nonperforming loans, common-pool problem |
| JEL: | F33 F55 E58 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6670&r=eec |
| By: | Alessandro Barattieri; Matteo Cacciatore; Francesco Costamagna |
| Abstract: | Calls for market reforms to help improve economic performance have become a mantra in European policy discussions. In the recent years, fears of a new wave of protectionism reopened the debate on the macroeconomic effects of raising tariff and non-tariff barriers. In this policy paper, we evaluate the consequences of such policy options for economies in a liquidity trap - i.e. at times of major slack and binding constraints on monetary policy easing (such as when the zero lower bound on nominal interest rates is binding). First, we analyse the consequences of protectionism through the lens of a benchmark business cycle model. We show that raising trade barriers has contractionary effects both domestically and abroad. Such detrimental effects are larger in a liquidity trap. We conclude that Europe should not engage in protectionism, even in response to an increase in the level of tariffs imposed by a major trading partner (such as the U.S.). We then review recent trends in product and labor market regulation across the European Union members. Using results from the academic literature, we argue that market reforms in Europe are unlikely to induce significant deflationary effects, suggesting that the inability of monetary policy to deliver interest rate cuts might not be a relevant obstacle to reform. While coordinated structural reforms across the EU members would maximise short- and long-term gains, legal considerations of the implementation of reforms across countries pose challenges to the harmonisation process. |
| JEL: | F10 F40 E20 L60 |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:euf:dispap:053&r=eec |
| By: | Simone Auer (Bank of Italy) |
| Abstract: | Financial Conditions Indexes (FCIs) are analytical tools devised to synthesize the information contained in a set of financial variables in order to identify how financial conditions affect economic activity. In this paper, for each of the three main Central and Eastern EU member states outside the euro area (Hungary, Poland and the Czech Republic) an FCI is constructed as an unobserved factor estimated using the EM algorithm. After having assessed their performance in providing information about future economic activity (both in-sample and out-of-sample), these FCIs are used to describe the evolution of financial conditions in the three economies between 2001 and 2016. The overall findings of this study support a narrative whereby all three economies, after their integration into the EU, enjoyed very accommodative financial conditions until 2008; the Czech Republic and Hungary subsequently turned out to have been more exposed than Poland to the spillover effects from both the global financial crisis and euro sovereign debt crisis. |
| Keywords: | Financial Conditions Index, dynamic factor models, forecasting, macro-financial linkages |
| JEL: | C43 E5 E17 E44 G01 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1145_17&r=eec |
| By: | Jonas A. Gunnarsson; Gylfi Zoega |
| Abstract: | We study a sample of individuals in 20 European countries that includes eight East European countries in order to identify whether these eight countries differ from the Western countries in the popularity of right-wing populist parties once we have controlled for personal attributes. The results show variation among the East European countries so that they are not distinct from Western Europe. In particular, in Hungary and Poland populist right-wing parties enjoy greater support once account is taken of the variables above. Moreover, we find that a right-wing identity, a negative view of immigrants, not being satisfied with democracy, being negative on homosexuality, and mistrust in both the national and the European parliament seem to be the factors heavily correlated with voting for a right-wing populist party in Europe. Also, men are more likely to vote for a right-wing populist party as are the old and the less educated. Having experienced unemployed also increased the probability of voting for these parties. |
| Keywords: | populist right-wing parties, survey evidence |
| JEL: | P16 Z18 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6663&r=eec |
| By: | Reinhilde Veugelers |
| Abstract: | Over the medium- to longer term, trends in total factor productivity growth and innovation will determine the growth and convergence trajectories of the EU economies. However, already before the crisis, Europe has suffered from disappointing innovation performance and productivity growth, and developments since then have only reinforced this trend. Persistent innovation and productivity growth divergences among EU countries, and in particular euro area countries, raise concerns of rising income differentials and long-term cohesion across countries. In this contribution we will start with describing the major trends of total factor productivity growth in the EU and EURO member countries and compared to its major global competitors. As the creation and adoption of innovations is seen as a major driver of TFP, we will describe the major trends and convergence/divergence in innovation capacity and its components directly. How big are the differences and they diminishing over time, establishing convergence? Are the laggards catching up? Or the leaders forging ahead? The analysis finds that there is substantial heterogeneity in innovation capacity among EU Member States. This heterogeneity is very stable, avoiding strong divergence, but also no consistent convergence signs. The divide between the Innovation Leaders in the North and the Innovation Laggards from the South and the East proves to be difficult to address. |
| JEL: | O33 |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:euf:dispap:066&r=eec |
| By: | António Afonso; Michael G. Arghyrou; María Dolores Gadea; Alexandros Kontonikas |
| 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. 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. |
| Keywords: | euro area, spreads, crisis, time-varying relationship, unconventional monetary policy |
| JEL: | E43 E44 F30 G01 G12 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6691&r=eec |
| By: | Eric McCoy; Ulrich Clemens |
| Abstract: | In the face of the lower bound on interest rates, central banks have relied on unconventional policy tools such as large-scale asset purchases and forward guidance to try to affect long-term interest rates and provide monetary stimulus to the economy. Assessing the impact of these measures and summarising the overall stance of monetary policy in this new environment has proven to be a challenge for academics and central banks. As a result, researchers have worked on modifying current term structure models and have adapted them to the current situation of close to zero or even negative interest rates. The paper begins by providing a non-technical overview of Leo Krippner's two-factor shadow rate model (K-ANSM2), explaining the underlying mechanics of the model through an illustrative example. Thereafter, the paper presents the results obtained from calibrating Krippner's KANSM2 shadow rate model to the euro area using genetic algorithms and discusses the pros and the cons of using genetic algorithms as an alternative to the optimisation method currently used (Nelder-Mead optimisation routine). Finally, the paper ends by analysing the strengths and weaknesses of using the shadow short rate as a tool to illustrate the stance and the dynamics of monetary policy. |
| JEL: | E43 E44 E52 E58 |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:euf:dispap:051&r=eec |
| By: | Alexander Bick; Nicola Fuchs-Schündeln |
| Abstract: | We document contemporaneous differences in the aggregate labor supply of married couples across 17 European countries and the US. Based on a model of joint household decision making, we quantify the contribution of international differences in non-linear labor income taxes and consumption taxes to the international differences in hours worked in the data. Through the lens of the model, taxes, together with wages and the educational composition, account for a significant part of the small differences in married men’s and the large differences in married women’s hours worked in the data. Taking the full non-linearities of labor income tax codes, including the tax treatment of married couples, into account is crucial for generating the low cross-country correlation between married men’s and women’s hours worked in the data, and for explaining the variation of married women’s hours worked across European countries. |
| Keywords: | taxation, two-earner households, hours worked |
| JEL: | E60 H20 H31 J12 J22 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6325&r=eec |