nep-eec New Economics Papers
on European Economics
Issue of 2017‒11‒26
twenty-one papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Structural Factor Analysis of Interest Rate Pass Through In Four Large Euro Area Economies By Anindya Banerjee; Victor Bystrov; Paul Mizen
  2. Fundamentals versus market sentiments in the euro bond markets: implications for QE By de Grauwe, Paul; Ji, Yuemei; Macchiarelli, Corrado
  3. The international bank lending channel of unconventional monetary policy By Gräb, Johannes; Żochowski, Dawid
  4. Eurozone bond market dynamics, ECB monetary policy and financial stress By Christophe Blot; Jérôme Creel; Paul Hubert; Fabien Labondance
  5. The distribution of excess liquidity in the euro area By Baldo, Luca; Hallinger, Benoît; Helmus, Caspar; Herrala, Niko; Martins, Débora; Mohing, Felix; Petroulakis, Filippos; Resinek, Marc; Vergote, Olivier; Usciati, Benoît; Wang, Yizhou
  6. The legacy of a fractured Eurozone: the Greek Dra(ch)ma By Hatgioannides, John; Karanassou, Marika; Sala, Hector; Karanasos, Menelaos G.; Koutroumpis, Panagiotis
  7. Inflation Expectations and Monetary Policy Surprises By Snezana Eminidou; Marios Zachariadis; Elena Andreou
  8. The European deposit insurance in perspective By Kiriazidis, Theo
  9. New evidence on Trade and FDI: how large is the Euro effect? By Miriam Camarero; Estrella Gómez-Herrera; Cecilio Tamarit
  10. The Macroeconomic Impact of Money Market Freezes By Marie Hoerova; Harald Uhlig; Fiorella De Fiore
  11. International expansion and riskiness of Banks By Faia, Ester; Ottaviano, Gianmarco I. P.; Sanchez Arjona, Irene
  12. The Nature of Shocks in the Eurozone and Their Absorption Channels By Cinzia Alcidi; Mathias Dolls; Clemens Fuest; Carla Krolage; Florian Neumeier
  13. Capitalising on the euro. Options for strengthening the EMU By Jeroen Hessel; Niels Gilbert; Jasper de Jong
  14. Contribution of increased life expectancy to economic growth: evidence from CEE countries By Gindrute Kasnauskiene; Karol Michnevich
  15. Policy representation by the 2017 Bundestag By Tangian, Andranik S.
  16. Between a rock and a hard place: social partners and reforms in the wage- setting system in Greece under austerity By Voskeritsian, Horen; Veliziotis, Michail; Kapotas, Panos; Kornelakis, Andreas
  17. Labour force participation and job polarization : evidence from Europe during the Great Recession By Gregory Verdugo; Guilllaume Allègre
  18. On the Design of a European Unemployment Insurance Mechanism By Ramon Marimon
  19. Burden sharing in deficit countries: a questionnaire-experimental investigation By Gaertner, Wulf; Schwettmann, Lars
  20. Making sense of the costs and benefits of Brexit: challenges for economists By Begg, Iain
  21. Bank Restructuring, Competition, and Lending Supply: Evidence from the Spanish Banking Sector By P. Giannoccolo; J. M. Mansilla-Fernández

  1. By: Anindya Banerjee (University of Canterbury); Victor Bystrov; Paul Mizen
    Abstract: In this paper we examine the influence of unconventional monetary policy at the ECB on mortgage and business lending rates offered by banks in the major euro area countries (Germany, France, Italy and Spain). Since there are many different policy measures that have been undertaken, we utilise a dynamic factor model based on the Bernanke Boivin and Eliasz (2005) approach, which allows examination of impulse responses to a policy rate conditioned by structurally identified latent factors. The distinct feature of this paper is that it explores the effects of all three phases of monetary policy to emphasize the transmission channels - through short-term rates, long-term yields and and perceived risk - ultimately directed towards bank lending rates. Further analysis of unconventional monetary policy is provided through rolling window impulse responses and variance decompositions of the identified financial factors on lending rates to demonstrate the changing influence of different policy measures on lending rates.
    Keywords: monetary policy, dynamic factor models, interest rates, pass through
    JEL: C32 C53 E43 E4
    Date: 2017–11–01
  2. By: de Grauwe, Paul; Ji, Yuemei; Macchiarelli, Corrado
    Abstract: Despite the partial realignment of European long-term government bonds after the crisis in 2012, there has been some renewed divergence in yields in the last years. We analyse the sources of these divergences and find that the government bond markets in the Eurozone are highly sensitive to changing market sentiments, both in time and across countries. We analyse the implications of this finding for the QE-programme. Our analysis of the recent developments in the bond markets and in the macroeconomic developments of the euro area suggests that pulling the plug on QE too soon might undo some of the benefits of QE in the countries of the periphery and may lead to increases in the refinancing costs of member states with little or no fiscal space
    JEL: F3 G3
    Date: 2017–06–01
  3. By: Gräb, Johannes; Żochowski, Dawid
    Abstract: We use a confidential euro area bank-level data set of close to 250 banks to assess outward and inward spillovers of unconventional monetary policies on bank lending. We find that euro area banks increase lending to the rest of the world in response to non-standard ECB monetary policy accommodation. We also find strong evidence that euro area banks increase lending to the domestic non-financial private sector in response to accommodative unconventional monetary policy measures in the US. Inward and outward spillovers are substantially stronger for euro area banks which are liquidity constrained and which rely more on internal capital markets. This suggests that bank-specific supply effects, stemming from banks’ increased ability to lend following a central bank balance sheet expansion, are a major driver of monetary policy spillovers, providing strong support to the existence of an international bank lending channel that prevails at the effective lower bound. JEL Classification: E44, E52, G01
    Keywords: cross-border spillovers, international bank lending channel, monetary policy, quantitative easing
    Date: 2017–11
  4. By: Christophe Blot (OFCE, Sciences Po Paris, France); Jérôme Creel (OFCE, Sciences Po Paris, France); Paul Hubert (OFCE, Sciences Po Paris, France); Fabien Labondance (OFCE, Sciences Po Paris, France)
    Abstract: We investigate the role of both ECB’s asset purchases and market sentiment in the Eurozone sovereign debt crisiscontext. We explain the evolution of long-term interest rates in the Eurozone and in some Member States since the ECB started to purchase various securities for monetary policy purposes. We control for four categories offundamentals: macroeconomic, international, financial and expectations. We show that unconventional monetary policies and country-specific market sentiment have significant negative and positive effects respectively. Our results suggest that ECB’s unconventional policies have been effective in mitigating the disruption in the channels of transmission across the different Eurozone countries
    Keywords: Asset purchase programmes, ECB, sovereign yields, unconventional monetary policies, CISS
    JEL: E52 E58
    Date: 2017–09
  5. By: Baldo, Luca; Hallinger, Benoît; Helmus, Caspar; Herrala, Niko; Martins, Débora; Mohing, Felix; Petroulakis, Filippos; Resinek, Marc; Vergote, Olivier; Usciati, Benoît; Wang, Yizhou
    Abstract: Since 2008, excess liquidity – defined as the sum of holdings of central bank reserves in excess of reserve requirements and holdings of equivalent central bank deposits – has tended to accumulate in specific euro area countries and in a small, slowly changing group of credit institutions. Despite the stability of the concentration of excess liquidity in specific countries over time, the relevance of individual drivers has changed. First, risk aversion has played a much smaller role in explaining the concentration since 2013 than it did at the time of “flight-to-quality” phenomena in the period 2010-12. Second, the location of the relevant market infrastructures (i.e. central securities depositories, securities settlement systems and TARGET2 accounts) used by counterparties that sold assets to the Eurosystem has been a more important driver directing flows in the period 2015-16. In addition, the more recent concentration of excess liquidity is explained by the combination of a number of factors, such as banks following strict internal credit limits, investment incentives created by yield differences across the euro area and the “home bias” in euro area government bond holdings. Overall, the net cross-border flows of liquidity that resulted also determined TARGET2 balances. At the individual bank level, when controlling for banks’ capital, non-performing loans, credit risk and profitability, excess liquidity holdings in relation to total assets are found to be higher for smaller and better-capitalised banks, and for banking groups with liquidity centralised at the head institution. In addition, participation in Eurosystem longer-term refinancing operations and deposit inflows are associated with liquidity accumulation. Finally, new regulatory initiatives such as the liquidity coverage ratio are explained to be creating incentives to hold or not to distribute liquidity, thereby affecting its distribution. JEL Classification: D39, E41, E44, E50, G01, G28
    Keywords: asset purchase programme, bank characteristics, excess liquidity, financial structure, regulatory changes
    Date: 2017–11
  6. By: Hatgioannides, John; Karanassou, Marika; Sala, Hector; Karanasos, Menelaos G.; Koutroumpis, Panagiotis
    Abstract: This paper addresses the acute Greek economic and social crisis that was inflicted on Greece since 2010 with the unleashing of the 3 consecutive bailout plans and the implementation of fierce austerity policies. We further scrutinise the composition of the soaring Greek debt and, most importantly, the unsettling utilisation of the Troika loans for the 2010-2015 period. We provide evidence that the vast bulk of the loans went overwhelmingly not to benefiting a "profligate" Greek state but to avoiding the write downs of bad loans made by reckless creditors (mainly, German and French banks) to the Greek government and private banks. We propose the temporary adoption of a parallel currency in the form of government IOUs, together with other drastic measures to reboot the ailing Greek economy inside the Eurozone.
    Keywords: Greek crisis; Eurozone; sovereign debt; austerity; parallel currency
    JEL: N0
    Date: 2017–09
  7. By: Snezana Eminidou (University of Cyprus); Marios Zachariadis (University of Cyprus); Elena Andreou (University of Cyprus)
    Abstract: We use monthly data across fifteen euro-area economies for the period 1985:1-2015:3 to obtain monetary policy changes that can be regarded as surprises for different types of consumers. A novel feature of our empirical approach is the estimation of monetary policy surprises based on changes in monetary policy that were unanticipated according to the consumers stated beliefs about the economy. We go on to investigate how these monetary policy surprises affect consumers' inflation expectations. We find that such monetary policy surprises can have the opposite impact on inflation expectations to those obtained under the assumption that consumers are well informed about a set of macroeconomic variables describing the state of the economy. More specifically, when we relax the assumption of well informed consumers by focusing instead on their stated beliefs about the economy, unanticipated increases in the interest rate raise inflation expectations. This is consistent with imperfect information theoretical settings where unanticipated increases in interest rates are interpreted as positive news about the state of the economy by consumers that know policymakers have relatively more information. This impact changes sign since the Crisis.
    Date: 2017
  8. By: Kiriazidis, Theo
    Abstract: The DI operates as a rent-sharing arrangement. This paper argues that such an arrangement can operate effectively only if the appropriate level of deposits is mobilized towards this end, and highlights the inevitable outcome: fierce competition for deposits amongst the Eurozone MSs. To deepen the argument data analysis is provided indicating the existence of regulatory subsidy in the form ofimplicit though effective DI, moral hazard and adverse selection. Against this background, the EU Commission promotes the creation of an EDIS as the third pillar of the BU. The EDIS proposal is considered by Economic institutions in strictly economic terms. Yet, the EP promotes a restrictive course supporting a liquidity providing EDIS. The paper argues that such an EDIS would render regulatory subsidy and rent-seeking behavior persisting, by allowing national policies to be pursued with considerable discretionary power and in the context of increasing competition for deposits. This would run contrary to the BU objectives and constitute a major failure of the programme.
    JEL: F3 G3
    Date: 2017–08
  9. By: Miriam Camarero (Jaume I University. Department of Economics, Av. de Vicent Sos Baynat s/n, E-12071 Castellón, Spain); Estrella Gómez-Herrera (University of Granada. Department of Economics, Av. del Hospicio s/n, E-18010 Granada, Spain); Cecilio Tamarit (University of Valencia, INTECO Joint Research Unit. Department of Applied Economics II. PO Box 22.006 - E-46071 Valencia, Spain)
    Abstract: In this paper we analyse the effect that the euro has had on trade using a gravity model for 26 OECD countries and covering the period 2002-2013. Our gravity specification includes time-varying fixed effects, correcting any possible bias that may arise from multilateral resistance variables or unobserved time-varying heterogeneity. Additionally, we explore the potential complementarity or substitution relationship between FDI and trade by including FDI inward and outward stocks in the specification. The time period in the dataset covers the creation and evolution of the European Monetary Union (EMU), starting from the introduction of notes and coins and including the recent economic crisis. Overall, our results show a positive effect of the EMU on trade and reveal the existence of a complementary relationship between trade and FDI.
    Keywords: FDI, trade, euro effect
    JEL: F10 F15
    Date: 2017–09
  10. By: Marie Hoerova (European Central Bank); Harald Uhlig (University of Chicago); Fiorella De Fiore (European Central Bank)
    Abstract: We build a general equilibrium model featuring unsecured and secured interbank markets, and collateralized central bank funding. The model accounts for some key facts about the European money markets since 2008: i) the decline in the ratio of interbank liabilities in total bank assets since the onset of the global financial crisis; ii) the reduced ability of banks to access the unsecured market during the sovereign crisis, and their shift to secured market funding; iii) the increased reliance on central bank funding, particularly for banks in countries with a vulnerable sovereign. Using the calibrated model, we find that a decline in the share of unsecured to secured interbank market transactions, as observed during the crisis, generates a sizeable macroeconomic impact.
    Date: 2017
  11. By: Faia, Ester; Ottaviano, Gianmarco I. P.; Sanchez Arjona, Irene
    Abstract: We exploit an original dataset on European G-SIBs to assess how expansion in foreign markets affects their riskiness. We find a robust negative correlation between foreign expansion and bank risk (proxied by various individual and systemic risk metrics). Given individual bank riskiness, banks’expansion reduces the average riskiness of the banks’ pool (between effect). Moreover, foreign expansion of any given bank reduces its own risk (within effect). Diversification, competition and regulation channels are all important. Expansion in destination countries with different business cycle co-movement, stricter regulations and higher competition than the origin country decreases a bank’s riskiness.
    Keywords: banks' risk; systemic risk; global expansion; competition; diversification; regulation
    JEL: G32 F3 G3
    Date: 2017–04
  12. By: Cinzia Alcidi; Mathias Dolls; Clemens Fuest; Carla Krolage; Florian Neumeier
    Abstract: We investigate the degree of (a)symmetry of macroeconomic fluctuations within the euro area (EA). Our findings indicate, first, a high degree of co-movement of cyclical GDP across EA member states. However, the amplitudes of national business cycles appear to vary notably, meaning that booms and recessions differ with regard to their severity across EA member states. Second, the co-movement of cyclical unemployment is somewhat less pronounced than that of cyclical GDP and the sensitivity to common shocks is even more heterogeneous, suggesting that differences in labour market conditions play an important role with regard to the vulnerability to common shocks. Turning to potential stabilization mechanisms, we find that in general, the private sector has a huge potential to absorb asymmetric shocks. However, in international comparison, the shock-absorption capacity of the private sector in the EA is rather weak. Recent evidence suggests that promoting capital market integration may improve the private sector’s shock absorption capacity.
    Date: 2017
  13. By: Jeroen Hessel; Niels Gilbert; Jasper de Jong
    Abstract: Soon after the Second World War, Germany, France, Italy and Benelux countries Belgium, the Netherlands and Luxembourg sought closer collaboration. Their efforts sixty years ago culminated in the creation of what would become the EU. Over time, their partnership widened to encompass 28 Member States. Concentrating mainly on economic aspects, it brought them considerable economic benefits. The Netherlands turned out to be one of the major beneficiaries, given its large export sector and itsposition as Europe's gateway port.
    Date: 2017–07
  14. By: Gindrute Kasnauskiene (Vilnius university); Karol Michnevich (Vilnius university)
    Abstract: Population ageing in a backdrop of growing average life expectancy can be seen in many advanced economies, but the rapid pace of these demographic changes in Central and Eastern Europe (CEE) makes it a pressing matter for the region. We investigate these two phenomenon and compare results with prior research to determine their separate and combined effect on output growth in a panel regression model using Eurostat data for the period 1996 to 2013. Our findings point to both life expectancy and population ageing exerting a statistically significant, overlapping effect on real output. The conclusions of our research demonstrate the utility of augmenting macroeconomic models with a demographics-sensitive component.
    Keywords: demographics, life expectancy, population ageing, economic growth, CEE countries
    JEL: E10 J10 J11
    Date: 2017–10
  15. By: Tangian, Andranik S.
    Abstract: The paper estimates the policy representation of 34 German parties that have participated in the 2017 Bundestag (federal) election. For this purpose, the party positions on 31 topical issues are compared with the results of recent public opinion polls. Then we construct the party indices of popularity (the average percentage of the population represented) and universality (frequency in representing a majority). Regarding policy representation, the election winner, the conservative union CDU/CSU is ranked only 27th. The most representative among six Bundestag parties is the GRÜNE, constituting the smallest faction. In turn, the Bundestag indices of representativeness are about 40%, meaning that it is non-representative rather than representative. However, if the Bundestag were elected using 'the third vote', i.e. if the size of the Bundestag factions were made proportional to the indices of representativeness, it could significantly gain in policy representation.
    Keywords: policy representation,representative democracy,direct democracy,elections,coalitions
    JEL: D71
    Date: 2017
  16. By: Voskeritsian, Horen; Veliziotis, Michail; Kapotas, Panos; Kornelakis, Andreas
    Abstract: The paper focuses on the reforms in the wage-setting system in Greece in the context of a severe recession and against the backdrop of EU bailout agreements.The analysis reveals that the reforms are also contested among key actors, and that the fault lines between social partners are not fully consistent with the notion of a binary pro-reform (from business associations) vs. anti-reform stance (from labour associations). Instead, our interview data expose hitherto hidden fractures in the employers’ camp. Employers’ representatives express –in varying degrees– their scepticism towards the efficacy of the institutional changes and generally towards technocratic solutions. More broadly this analysis reflects on the contested and controversial nature of the policy reforms on wage setting, for which there is no consensus either in the academic or policy literature, and delves deeper into the views and perspectives of key actors on the efficacy and consequences of the main institutional changes in wage setting
    Keywords: social partners; wage setting system; reforms; Greece; austerity; crisis
    JEL: N0
    Date: 2017–09
  17. By: Gregory Verdugo (Centre d'Economie de la Sorbonne, OFCE-Sciences PO Paris & IZA); Guilllaume Allègre (OFCE Sciences Po Paris)
    Abstract: Job polarization accelerated during the Great recession in Europe. Because of higher occupational segregation by gender and larger shocks to middling occupations that employ mostly male workers, employment opportunities declined much more for men relative to women in Europe compared to the US. We find that the labour force participation and employment rates of women increased considerably in regions most affected by the destruction of men’s jobs, particularly for married women with less than high-school education. For men, the decline in demand in middling occupations explains some of the recent decline in their participation. For both men and women, the Great recession mostly accelerated pre-existing trends. This suggests that a large share of the recent increases in women’s participation in Europe is a response to job polarization
    Keywords: labour force participation, Job polarization, Women, Europe, Great Recession
    JEL: J22 J24
    Date: 2017–05–10
  18. By: Ramon Marimon (European University Institute and UPF - Barcelona GSE)
    Abstract: European labour markets are subject to idiosyncratic shocks (and idiosyncratic responses to common shocks), resulting in countercyclical unemployment expenses difficult to accommodate under existing, fiscal compact, budget rules. These and other factors (solidarity, labour market integration) provide a rationale for European unemployment risk sharing. We study the potential benefits, and problems, of creating a European Unemployment Insurance Mechanism (EUIM). Following Krusell et al. (2011 and 2015), we use a dynamic general equilibrium model with search frictions to analyze workers' flows (employment, unemployment and inactivity) and their cyclical properties, to assess the potential benefits of a EUIM under alternative common (and jointly financed) unemployment insurance policies. Our analysis shows that country-specific structural differences play a determinant role in explaining labour market differences, leaving limited space for welfare improvements with an EUIM. The framework would also allow to study the optimal design of an EUIM, subject to redistributional and incentive (moral hazard and free riding) constraints.
    Date: 2017
  19. By: Gaertner, Wulf; Schwettmann, Lars
    Abstract: This paper studies the problem of burden sharing in countries that were forced to introduce severe budget cuts after the collapse of Lehman Brothers in 2008 which had unleashed a financial crisis in many industrialised countries of the Western world. We do not ask how the burden was actually split in each country examined but how the burden should have been shared among different income groups of society. In order to answer this question, a questionnaire-experimental investigation was run among students from Cyprus, Greece, Ireland, Italy, Portugal, and Spain. Our study offered the students seven different schemes of taxation amongst which we had specified a proportional rule and two progressive schemes of differing severity. A key result within our investigation is the finding that a large majority of students in all countries involved rarely opted for a proportional rule of burden sharing but picked one of the two progressive schemes instead. However, there were differences between countries with respect to the frequencies of these three rules, whereby Greece and Ireland were polar cases. The other rules received only minor support.
    Keywords: Burden sharing Proportional rule Progressive schemes Questionnaire studies
    JEL: N0 F3 G3
    Date: 2017–06–01
  20. By: Begg, Iain
    Abstract: The UK’s decision to leave the European Union will have a wide-ranging effect on the British economy, but the scale and sequencing of the likely effects are hard to gauge. The uncertainties surrounding how a country separates itself from a regional economic bloc have posed challenges to the economics profession about how best to analyse the many consequences. The paper discusses the main lines of relevant economic argumentation, and reviews the evidence from studies of the likely effects of “Brexit”. It then considers how the UK’s economic linkages with the EU might evolve and examines some of the ensuing political economy challenges. The concluding section ponders the role of economists in so contentious a political development.
    JEL: N0
    Date: 2017–08–07
  21. By: P. Giannoccolo; J. M. Mansilla-Fernández
    Abstract: This article analyses the effects of the bank restructuring process performed in Spain between 2010 and 2016. First, we create a unique dataset by combining information from Bankscope and the Table of Public Financial Assistance released by the Bank of Spain. Second, we investigate whether these reforms affected (i) the stability, (ii) the degree of competition, and (iii) lending and liquidity supply of the Spanish banking industry. The main results suggest that the restructuring process reduced the degree of competition but increased financial stability in the Spanish banking industry. In particular, we find that two divergent forces affected the Spanish financial stability. On the one hand, the bail out dampened financial instability. On the other hand, the increasing bank market power fostered financial stability (i.e., lower risk-taking behaviour). Furthermore, we demonstrate that the restructuring process: (i) increased the Lerner index, (ii) did not increase the collusion among banks (iii) diminished the gap in cost efficiency between weak and healthy banks. Finally, we find that there are not improvements in lending and liquidity supply.
    JEL: G21 G28 G32 G34
    Date: 2017–11

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