nep-eec New Economics Papers
on European Economics
Issue of 2017‒11‒19
eleven papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. "Whatever it takes" to resolve the European sovereign debt crisis? Bond pricing regime switches and monetary policy effects By António Afonso; Michael G. Arghyrou; María Dolores Gadea; Alexandros Kontonikas
  2. Debunking the Myth of Southern Profligacy. A DSGE Analysis of Business Cycles in the EMU’s Big Four By Alice, Albonico; Roberta, Cardani; Patrizio, Tirelli
  3. Financial Crisis, banking sector performance and economic growth in the European Union By Cândida Ferreira
  4. A Mechanism to Regulate Sovereign Debt Restructuring in the Euro Area By Jochen Andritzky; Désirée I. Christofzik; Lars P. Feld; Uwe Scheuering
  5. Euro Area Imbalances By Mark Mink; Jan Jacobs; Jakob de Haan
  6. Breaking the Shackles: Zombie Firms, Weak Banks and Depressed Restructuring in Europe By Dan Andrews; Filippos Petroulakis
  7. The appropriateness of the macroeconomic imbalance procedure for Central and Eastern European countries By Kämpfe, Martina; Knedlik, Tobias
  8. The recalibration of the European System of Financial Supervision in regard of the insurance sector: From dreary to dreamy or vice versa? By Gal, Jens; Gründl, Helmut
  9. The EU's FTA Strategies in Its New Trade Policy Initiatives and Policy Implications By Kim, Heung Chong; Lee, Cheol-Won; Lee, Hyun Jean; Yang, Hyoeun; Kang, Yoo-Duk
  10. Structure of Capital Flows and Exchange Rate: The Case of Croatia By Maja Bukovšak; Gorana Lukinić Čardić; Nina Ranilović
  11. Insolvency Regimes, Technology Diffusion and Productivity Growth: Evidence from Firms in OECD Countries By Muge Adalet McGowan; Dan Andrews; Valentine Millot

  1. 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. 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 fact or sensitivities of spreads. Our results provide evidence of a new bond-pricing regime following the announcement of the Outright Monetary Transactions (OMT) programmein 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
  2. By: Alice, Albonico; Roberta, Cardani; Patrizio, Tirelli
    Abstract: We investigate the drivers of EMU big fours' business cycles in a DSGE model. Our approach allows to disentangle the role of demand and technology shocks, where the latter may generate permanent consequences on national productivity levels. For the years before the financial crisis we cannot find evidence of a demand-driven boom in Spain and Italy relative to what happened in France and Germany. The aftermath of the sovereign bond crisis was characterized by a sequence of adverse permanent technology shocks both in Spain and in Italy. These latter results are consistent with recent theoretical developments that emphasize the adverse supply-side effects of a credit crunch.
    Keywords: Asymmetric Euro crisis, two-country DSGE, Bayesian estimation
    JEL: C11 C13 C32 E21 E32 E37
    Date: 2017–11–05
  3. By: Cândida Ferreira
    Abstract: This paper uses static and dynamic panel estimates in a sample including all 28 European Union countries during the last decade and provides empirical evidence on the important role that well-functioning EU banking institutions can play in promoting economic growth.The banking sector performance is proxied by the evolution of some relevant financial ratios and economic growth is represented by the annual Gross Domestic Product growth rate. In order to analyse the possible differences arising after the outbreak of the recent international financial crisis, the estimations consider two panels: one for the time period 1998–2012 and another for the subinterval 2007–2012. The results obtained allow us to draw conclusions not only on the importance of the variation of the different operational, capital, liquidity and assets quality financial ratios to economic growth but also on some differences evidenced in the two considered panels, reflecting the consequences of the recent financial crisis and the correspondent reactions of the European banking institutions.
    Keywords: ank performance, economic growth, European Union, financial crisis, panel estimates
    JEL: F30 F40 G20 G30 O40
    Date: 2017–10
  4. By: Jochen Andritzky; Désirée I. Christofzik; Lars P. Feld; Uwe Scheuering
    Abstract: To make the no-bailout clause credible and enhance the effectiveness of crisis assistance, a consistent institutional and legal framework is needed to ensure that private creditors contribute to crisis resolution. Getting activated as part of ESM crisis assistance, we propose a two-stage mechanism that allows to postpone the fateful distinction between liquidity and solvency crises: At the onset of a ESM programme, the framework demands an immediate maturity extension if the debt burden is high, followed by deeper debt restructuring if post-crises debt proves unsustainable. The mechanism is easily implemented by amending ESM guidelines and compelling countries to issue debt with Creditor Participation Clauses (CPCs). As debt is rolled over, the mechanism gradually phases in, leaving countries time to reduce debt. Given that private sector in-volvement reduces financing needs, the ESM could provide longer programmes and more time for reforms.
    Keywords: sovereign debt restructuring mechanism, no-bailout clause, creditor participation clauses, ESM
    JEL: E62 F36 H63
    Date: 2016
  5. By: Mark Mink; Jan Jacobs; Jakob de Haan
    Abstract: We argue that if currency union member states have different potential output per capita, output growth rates, or trade balances, the common monetary policy may not be optimal for all of them. Euro area imbalances for potential output and for trade balances are quite large, while output growth imbalances are more modest. Member states with larger imbalances of one type also have larger imbalances of both other types, but a decline of one imbalance need not coincide with a decline of the others. We also show that imbalances are fairly persistent, and are larger in poorer and smaller member states.
    Keywords: euro area macroeconomic imbalances, common monetary policy, economic convergence, business cycle synchronization, euro crisis
    JEL: E30 O47
    Date: 2016
  6. By: Dan Andrews (OECD); Filippos Petroulakis (OECD)
    Abstract: This paper explores the connection between “zombie” firms (firms that would typically exit in a competitive market) and bank health and the consequences for aggregate productivity in 11 European countries. Controlling for cyclical effects, the results show that zombie firms are more likely to be connected to weak banks, suggesting that the zombie firm problem in Europe may at least partly stem from bank forbearance. The increasing survival of zombie firms congests markets and constrains the growth of more productive firms, to the detriment of aggregate productivity growth. Our results suggest that around one-third of the impact of zombie congestion on capital misallocation could be directly attributed to bank health and additional analysis suggests that this may partly be due to reduced availability of credit to healthy firms. Finally, improvements in bank health are more likely to be associated with a reduction in the prevalence of zombie firms in countries where insolvency regimes do not unduly inhibit corporate restructuring. Thus, leveraging the important complementarities between bank strengthening efforts and insolvency regime reform would contribute to breaking the shackles on potential growth in Europe.
    Keywords: Credit Constraints, Factor Reallocation, Productivity, Zombie Firms
    JEL: D24 G21 L25 O47
    Date: 2017–11–20
  7. By: Kämpfe, Martina; Knedlik, Tobias
    Abstract: The experience of Central and Eastern European countries (CEEC) during the global financial crisis and in the resulting European debt crises has been largely different from that of other European countries. This paper looks at the specifics of the CEEC in recent history and focuses in particular on the appropriateness of the Macroeconomic Imbalances Procedure for this group of countries. In doing so, the macroeconomic situation in the CEEC is highlighted and macroeconomic problems faced by these countries are extracted. The findings are compared to the results of the Macroeconomic Imbalances Procedure of the European Commission. It is shown that while the Macroeconomic Imbalances Procedure correctly identifies some of the problems, it understates or overstates other problems. This is due to the specific construction of the broadened surveillance procedure, which largely disregarded the specifics of catching-up economies.
    Keywords: macroeconomic imbalances procedure,Central and Eastern European countries,signals approach,early warning system
    JEL: E60 F53 G01
    Date: 2017
  8. By: Gal, Jens; Gründl, Helmut
    Abstract: Coming (great) events cast their (long) shadow before. As the financial crisis gave birth to the creation of the European System of Financial Supervision (ESFS), the imminent Brexit now serves as an impulse to rather extensively reorganize it. Pursuant to the preferences of the Commission-as revealed in its draft for a regulation amending the regulations founding the European Supervisory Authorities (ESA)-the supervision (and regulation) of the financial sectors should be further centralized and integrated and additional powers should be given to the ESAs. To a large degree these alterations are intended to adjust the competences of the European Securities and Markets Authority (ESMA) to better meet its new objectives under the Capital Markets Union ('CMU'). In view that an equivalent to the CMU or the Banking Union-in the sense of a European Insurance Union-is not yet on the horizon for the insurance sector (or the occupational pensions sector), one could prima vista take the view that insurance supervision and regulation is once again taken captive by the necessity of regulatory reforms stemming from other financial sectors. However, even if that is partially the case, the outcome of the intended reforms might still be advantageous for the insurance sector and an important step in the right direction. Therefore, it needs to be intensively discussed. At this stage, some of the most prominent envisioned changes to the structure, tasks and powers of the European Insurance and Occupational Pensions Authority (EIOPA) and their necessity, usefulness or counter-productivity still have to be examined.
    Keywords: European Insurance Union,European Supervisory Authorities,EIOPA,European Insurance and Occupational Pensions Authority,Insurance Supervision
    Date: 2017
  9. By: Kim, Heung Chong (Korea Institute for International Economic Policy); Lee, Cheol-Won (Korea Institute for International Economic Policy); Lee, Hyun Jean (Korea Institute for International Economic Policy); Yang, Hyoeun (Korea Institute for International Economic Policy); Kang, Yoo-Duk (Hankuk University of Foreign Studies)
    Abstract: Beginning with the Global Europe Initiative in 2006, the EU has conducted active trade policy measures to contribute to economic growth, job creation and social cohesion in the European community. Comprehensive and high-leveled bilateral FTA initiatives, among others, have rapidly emerged as a major tool of the new trade policy to achieve such goals. More than a decade has passed since the Global Europe Initiative was declared. In the meantime, the EU successfully established several new generational FTAs with the Republic of Korea, Singapore, Vietnam and others, despite harsh economic turmoil led by global and European financial crises, the Greek crisis, Brexit, etc. This paper aims to illuminate how the goals of the new trade policy have been achieved through the EU's FTA strategies over the years since the Global Europe Initiative. To do this, we focus on three topics: EU standards, the evaluation process of market openness and the global value chain (GVC). In other words, we will evaluate how much the EU's FTA strategies have contributed to achieving globalization of EU standards, job creation through careful evaluation processes, and economic growth of the community by utilizing GVCs.
    Keywords: New Trade Policy; EU standard; Evaluation process; GVC
    Date: 2017–09–05
  10. By: Maja Bukovšak (The Croatian National Bank, Croatia); Gorana Lukinić Čardić (The Croatian National Bank, Croatia); Nina Ranilović (The Croatian National Bank, Croatia)
    Abstract: The paper analyses the impact of different types of capital flows to Croatia on the kuna exchange rate. SVAR models based on Cholesky decomposition with block exogeneity restrictions are estimated using different types of capital flows and the key finding is that the structure of capital flows matters for their impact on the exchange rate. On the one hand, debt capital inflows lead to kuna appreciation, irrespective of their maturity, while in terms of sectoral structure this is mostly due to corporate and government borrowing. On the other hand, equity capital flows seem to affect it in the opposite direction, which is in line with results from other empirical research. The opposite effects of debt and equity flows could stem from the differences in their relative orientations towards the tradable versus the non-tradable sector, with the latter being more prominent in debt flows. The paper also confirms that capital flows to the banking sector have no effect on the exchange rate, providing support to the intensive use of countercyclical macroprudential measures by the central bank. These findings are relevant for the design of monetary policy, especially in countries like Croatia where central bank uses the exchange rate of the kuna against the euro as the main tool for achieving its primary objective of price stability.
    Keywords: capital inflows, kuna exchange rate, SVAR with block exogeneity
    JEL: F32 F41 C51 C32
    Date: 2017–07
  11. By: Muge Adalet McGowan (OECD); Dan Andrews (OECD); Valentine Millot (OECD)
    Abstract: This paper explores the link between the design of insolvency regimes across countries and laggard firms’ multi-factor productivity (MFP) growth, using new OECD indicators of the design of insolvency regimes. Firm-level analysis shows that reforms to insolvency regimes that lower barriers to corporate restructuring are associated with higher MFP growth of laggard firms. These results are consistent with the idea that insolvency regimes that do not unduly inhibit corporate restructuring can incentivise experimentation and provide scope to reconfigure production and organisational structures in order to faciliate technological adoption. The results also highlight policy complementarities, with insolvency regimes that reduce the cost of entrepreneurial failure potentially enhancing the MFP gains from lowering administrative entry barriers in product markets. Finally, we find that reducing debt bias in corporate tax systems and well-developed venture capital markets are associated higher laggard firm MFP growth, suggesting that equity financing can also be an important driver of technological diffusion. These findings carry strong policy implications, in light of the fact that there is much scope to reform insolvency regimes in many OECD countries and given evidence that stalling technological diffusion has contributed to the aggregate productivity slowdown.
    Keywords: equity financing, insolvency, laggard firms, Productivity, technological diffusion, venture capital
    JEL: D24 G33 G34 K35 O16 O40 O43 O47
    Date: 2017–11–06

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