nep-eec New Economics Papers
on European Economics
Issue of 2017‒12‒03
sixteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. On fiscal and monetary integration in Europe By Verstegen, Loes
  2. The Financial Connectedness between Eurozone Core and Periphery: A Disaggregated View By Magkonis, Georgios; Tsopanakis, Andreas
  3. Liquidity provision as a monetary policy tool: the ECB’s non-standard measures after the financial crisis By Quint, Dominic; Tristani, Oreste
  4. ECB Policies Involving Government Bond Purchases: Impact and Channels By Arvind Krishnamurthy; Stefan Nagel; Annette Vissing-Jorgensen
  5. ECB Policies Involving Government Bond Purchases: Impacts and Channels By Krishnamurthy, Arvind; Nagel, Stefan; Vissing-Jorgensen, Annette
  6. The (Unintended?) Consequences of the Largest Liquidity Injection Ever By Crosignani, Matteo; Faria-e-Castro, Miguel; Fonseca, Luis
  7. The effect of income distribution and fiscal policy on growth, investment, and budget balance By Thomas Obst; Özlem Onaran; Maria Nikolaidi
  8. Fiscal Consolidation Programs and Income Inequality By Pedro Brinca; Miguel H. Ferreira; Francesco Franco; Hans A. Holter; Laurence Malafry
  9. US Monetary Policy and the Euro Area By Max Hanisch
  10. Quality enhancements in Government Finance Statistics since the introduction of the euro - Econometric evidence By Maurer, Henri; Keweloh, Sascha
  11. The use of cash by households in the euro area By Esselink, Henk; Hernández, Lola
  12. On the optimal design of place-based policies: A structural evaluation of EU regional transfers By Yashar Blouri, Maximilian v. Ehrlich
  13. Interconnectedness of Global Systemically-Important Banks and Insurers By Sheheryar Malik; TengTeng Xu
  14. Financial Fragility and the Keynesian Multiplier By van der Kwaak, Christiaan; van Wijnbergen, Sweder
  15. The "dark ages" of German macroeconomics and other alleged shortfalls in German economic thought By Feld, Lars P.; Köhler, Ekkehard A.; Nientiedt, Daniel
  16. How should the European Central Bank ‘normalise’ its monetary policy? By Grégory Claeys; Maria Demertzis

  1. By: Verstegen, Loes (Tilburg University, School of Economics and Management)
    Abstract: This dissertation consists of three chapters on fiscal and monetary integration in Europe. The first chapter investigates quantitatively the benefits from participation in the Economic and Monetary Union for individual Euro area countries. The synthetic control method is used to estimate how real GDP per capita would have developed for the EMU member states, if those countries had not joined the EMU. The estimates show that most countries have profited from having the euro, though the crisis leads to negative effects of EMU membership. The PIGS countries in particular would have been better off if they had not been an EMU member during the crisis. The second chapter examines the effectiveness of an automatic fiscal transfer mechanism for the Economic and Monetary Union. A transfer scheme is incorporated into a DSGE model for a monetary union with an extensive fiscal sector. Using a heterogeneous setup, the model is estimated for the North and the South of Europe using Bayesian methods. The transfer mechanism is shown to be effective in stabilizing the economy of the southern block of countries during the financial crisis, although the total welfare effect for the EMU is negative, though small. Ex ante, a transfer mechanism would be beneficial for both the North and the South in terms of welfare and stabilization purposes. In the third chapter, an EMU-wide unemployment insurance is incorporated into an estimated DSGE model for the Euro area. The European unemployment benefit scheme, if introduced in 2013 replacing the regional systems, would have had positive risk sharing effects on the North and the South. If this introduction would have led to a higher level of the unemployment benefit in a region, unemployment would have increased. Ex ante, the European unemployment benefit scheme would be beneficial for both the northern and southern block of countries in terms of welfare and stabilization of employment. Labor market harmonization would lead to higher gains from European unemployment insurance.
    Date: 2017
  2. By: Magkonis, Georgios (BUniversity of Bradford); Tsopanakis, Andreas (Cardiff Business School)
    Abstract: This paper examines the financial stress interconnectedness among GIIPS economies and Germany. Based on market level financial stress indices, it examines the stress transmission process as well as the causal network relationships in banking sector, bond, money and stock markets. The period under investigation, 2001-2013, allows to test the effects of financial crisis of 2008 as well as the subsequent European sovereign crisis. Using two alternative techniques for connectedness analysis, our evidence suggests that the peripheral economies of Italy and Spain play a highly significant role in the stress transmission in all markets, especially in the cases of banks and equity markets. Moreover, we visualize our results using network analysis. Contrary to common wisdom, Portugal, Ireland, and mainly Greece, do not seem to have an important role in amplifying stress levels.
    Keywords: Eurozone, stress transmission, connectedness analysis, spillovers, networks
    JEL: C43 G15 F30
    Date: 2017–11
  3. By: Quint, Dominic; Tristani, Oreste
    Abstract: We study the macroeconomic consequences of the money market tensions associated with the financial crisis in the euro area. In a structural VAR, we identify a liquidity shock rooted in the interbank market and use its impulse response functions to calibrate key parameters of a Smets and Wouters (2003) closed-economy model augmented with a banking sector à la Gertler and Kiyotaki (2010). We highlight two main results. First, an identified liquidity shock causes a sizable and persistent fall in investment. The shock can account for one third of the observed, large fall in euro area aggregate investment in 2008–09. Second, the liquidity injected in the market by the ECB played an important role in attenuating the macroeconomic impact of the shock. According to our counterfactual simulations based on the structural model, in the absence of ECB liquidity injections interbank spreads would have been at least 200 basis points higher and their adverse impact on investment would have been more than twice as severe. JEL Classification: E44, E58
    Keywords: ECB, euro area, financial crisis, financial frictions, interbank market, non-standard monetary policy
    Date: 2017–11
  4. By: Arvind Krishnamurthy; Stefan Nagel; Annette Vissing-Jorgensen
    Abstract: We evaluate the effects of three ECB policies (the Securities Markets Programme, the Outright Monetary Transactions, and the Long-Term Refinancing Operations) on government bond yields. We use a novel Kalman-filter augmented event-study approach and yields on euro-denominated sovereign bonds, dollar-denominated sovereign bonds, corporate bonds, and corporate CDS rates to understand the channels through which policies reduced sovereign bond yields. On average across Italy, Spain and Portugal, considering both the Securities Markets Programme and the Outright Monetary Transactions, yields fall considerably. Decomposing this fall, default risk accounts for 37% of the reduction in yields, reduced redenomination risk for 13%, and reduced market segmentation effects for 50%. Stock price increases in distressed and core countries suggest that these policies also had beneficial macro-spillovers.
    JEL: E4 G01 G18
    Date: 2017–11
  5. By: Krishnamurthy, Arvind; Nagel, Stefan; Vissing-Jorgensen, Annette
    Abstract: We evaluate the effects of three ECB policies (the Securities Markets Programme, the Outright Monetary Transactions, and the Long-Term Refinancing Operations) on government bond yields. We use a novel Kalman-filter augmented event-study approach and yields on euro-denominated sovereign bonds, dollar-denominated sovereign bonds, corporate bonds, and corporate CDS rates to understand the channels through which policies reduced sovereign bond yields. On average across Italy, Spain and Portugal, considering both the Securities Markets Programme and the Outright Monetary Transactions, yields fall considerably. Decomposing this fall, default risk accounts for 37% of the reduction in yields, reduced redenomination risk for 13%, and reduced market segmentation effects for 50%. Stock price increases in distressed and core countries suggest that these policies also had beneficial macro-spillovers.
    Date: 2017–10
  6. By: Crosignani, Matteo (Federal Reserve Board); Faria-e-Castro, Miguel (Federal Reserve Bank of St. Louis); Fonseca, Luis (London Business School)
    Abstract: We study the design of lender of last resort interventions and show that the provision of long-term liquidity incentivizes purchases of high-yield short-term securities by banks. Using a unique security-level data set, we find that the European Central Bank's three-year Long-Term Refinancing Operation caused Portuguese banks to purchase short-term domestic government bonds that could be pledged to obtain central bank liquidity. This "collateral trade" effect is large, as banks purchased short-term bonds equivalent to 10.6% of amounts outstanding. The steepening of peripheral sovereign yield curves after the policy announcement is consistent with the equilibrium effects of the collateral trade.
    Keywords: Lender of Last Resort; Unconventional Monetary Policy; Collateral; Sovereign Debt; Eurozone Crisis
    JEL: E58 G21 G28 H63
    Date: 2017–11–01
  7. By: Thomas Obst; Özlem Onaran; Maria Nikolaidi
    Abstract: This paper develops a multi-country post-Kaleckian demand-led growth model that incorporates the role of the government. One novelty of this paper is to integrate crosscountry effects of both changes in income distribution and fiscal policy. The model is used to estimate econometrically the effects of income distribution and fiscal policy on the components of aggregate demand in EU15 countries. The results show that a policy mix that combines the simultaneous implementation of a pro-labour wage policy, an expansionary fiscal policy and a progressive tax policy in all EU countries leads to a significant rise in the EU15 GDP. The impact of wage policies is positive but small; the overall stimulus becomes much stronger with fiscal expansion. This policy mix leads to an improvement in the budget balance in all the EU15 countries, suggesting that expansionary fiscal policy is sustainable when it is combined with wage and progressive tax policy.
    Keywords: Wage Share, Growth, European Multiplier, Demand Regime, Fiscal Policy
    JEL: E12 E22 E25 E62
    Date: 2017
  8. By: Pedro Brinca; Miguel H. Ferreira; Francesco Franco; Hans A. Holter; Laurence Malafry
    Abstract: Following the Great Recession, many European countries implemented fiscal con- solidation policies aimed at reducing government debt. Using three independent data sources and three different empirical approaches, we document a strong positive re- lationship between higher income inequality and stronger recessive impacts of fiscal consolidation programs across time and place. To explain this finding, we develop a life-cycle, overlapping generations economy with uninsurable labor market risk. We calibrate our model to match key characteristics of a number of European economies, in- cluding the distribution of wages and wealth, social security, taxes and debt, and study the effects of fiscal consolidation programs. We find that higher income risk induces precautionary savings behavior, which decreases the proportion of credit-constrained agents in the economy. Credit-constrained agents have less elastic labor supply re- sponses to fiscal consolidation achieved through either tax hikes or public spending cuts, and this explains the relationship between income inequality and the impact of fiscal consolidation programs. Our model produces a cross-country correlation between inequality and the fiscal consolidation multipliers, which is quite similar to that in the data. JEL codes: E21, E62, H31, H50
    Keywords: fiscal consolidation, income inequality, fiscal multipliers, public debt, income risk
    Date: 2017
  9. By: Max Hanisch
    Abstract: This study investigates the international spillover effects of contractionary US monetary policy and its transmission channels on members of the euro area (EA) before and after the implementation of the euro. I find the multilateral spillover effects on individual EA economies' real activity and inflation to be asymmetric, i.e. the responses are mainly expansionary but not exclusively so. While the effects are diverse and rather large before 1999, responses become more homogeneous and smaller in size after the implementation of the euro. However, country-specific asymmetries remain. Trade and interest rates but also credit, stock and housing markets are identified as important transmission channels.
    Keywords: Structural dynamic factor model, sign restrictions, monetary policy, US, Euro area, spillover effects
    JEL: C32 E52 E58
    Date: 2017
  10. By: Maurer, Henri; Keweloh, Sascha
    Abstract: This paper reviews the development of the quality of the main fiscal data released through the Excessive Deficit Procedures (EDP) since the euro's introduction. As such, this paper presents the outcome of various econometric tests based on all the vintages of the annual main fiscal data (deficit, change in debt) to assess whether qualitative progress took place over the years. Sound Government Financial Statistics (GFS) data are indeed crucial in the context of the fiscal surveillance carried out in the EU. Therefore, we find it useful to carry out a study responding to former criticisms which pointed out that Member States were beautifying their fiscal data and especially their first notified deficit. It was often assumed that Member States could abuse the initial recording of components which bridge the deficit to the change in debt (the so-called deficit-debt adjustments components). To assess this qualitative development properly, the study goes beyond the simple description of the revisions. It proposes innovative ways to identify whether each step of the revision is caused by the upward change in deficit. The study also seeks to better identify the datasets which triggered the qualitative progress observed. JEL Classification: H81, M48
    Keywords: Excessive Deficit Procedure (EDP), fiscal rules and creative accounting, recording of fiscal data, reliability of fiscal indicators, revisions of fiscal data, stock-flow adjustments
    Date: 2017–11
  11. By: Esselink, Henk; Hernández, Lola
    Abstract: Although euro banknotes and coins have been in circulation for fifteen years, not much is known about the actual use of cash by households. This paper presents an estimation of the number and value of cash transactions in all 19 euro area countries in 2016, based on survey results. It presents an extensive description of how euro area consumers pay at points of sale (POS). The aim of this study is to shed light on consumers’ payment behaviour and in particular to improve the understanding of consumers’ payment choices at POS, based on a large sample of countries. Therefore, it provides central banks and relevant payment system stakeholders with fundamental information for the development of their policies and strategic decisions that can contribute to improving the efficiency of the cash cycle and the payment system as a whole. Previous estimates of the value of cash usage by households in the euro area date from 2008. Since then some central banks have carried out their own research on cash usage. This paper is the first study to measure the transaction demand for cash in the euro area. The results show that in 2016 around 79% of all payments at POS were made with cash, 19% with cards and 2% with other payment instruments. In terms of value, the market share of main payment instruments was 54% for cash, 39% for cards and 7% for other instruments. However, results show substantial differences between euro area countries. JEL Classification: E41, E58, D12, D14
    Keywords: cash, consumer choice, money demand, payment behaviour, payment systems
    Date: 2017–11
  12. By: Yashar Blouri, Maximilian v. Ehrlich
    Abstract: We quantify general equilibrium e ects of place-based policies in a multiregion framework with mobility, trade and agglomeration economies. Using detailed data on EU transfers, we infer the local e ects of di erent transfer types on productivity, income and transportation cost. Based on these estimates and the general equilibrium model we derive the spatial distribution of economic activity and the resulting aggregate welfare e ects if (i) no transfers were paid and taxes set to zero, (ii) transfers were distributed uniformly, (iii) transfers were welfare-optimally distributed. Characterizing the optimal distributions, we reveal complementarities between transfer types and between transfers and local endowments.
    Keywords: economic geography; place-based policies; structural estimation; subsidies; public investments; European structural funds
    JEL: R10 R50 F10 F20 H20
    Date: 2017–10
  13. By: Sheheryar Malik; TengTeng Xu
    Abstract: Interconnectedness among global systemically important banks (GSIBs) and global systemically important insurers (GSIIs) has important financial stability implications. This paper examines connectedness among United States, European and Asian GSIBs and GSIIs, using publicly-available daily equity returns and intra-day volatility data from October 2007 to August 2016. Results reveal strong regional clusters of return and volatility connectedness amongst GSIBs and GSIIs. Compared to Asia, selected GSIBs and GSIIs headquartered in the United States and Europe appear to be main sources of market-based connectedness. Total system connectedness—i.e., among all GSIBs and GSIIs—tends to rise during financial stress, which is corroborated by a balance sheet oriented systemic risk measure. Lastly, the paper demonstrates significant influence of economic policy uncertainty and U.S. long-term interest rates on total connectedness among systemically important institutions, and the important role of bank profitability and asset quality in driving bank-specific return connectedness.
    Keywords: Equity prices;JEL Classification Numbers: G21, G22 and C32 Keywords: Global systemically important banks and insurers, connectedness, volatility, vector autoregression, Global systemically important banks and insurers, Time-Series Models, JEL Classification Numbers: G21 G22 and C32, Keywords: Global systemically important banks and insurers
    Date: 2017–09–29
  14. By: van der Kwaak, Christiaan; van Wijnbergen, Sweder
    Abstract: Abstract We investigate the effectiveness of fiscal stimuli when banks are undercapitalized and have large holdings of government bonds subject to sovereign default risk. Deficit-financed government purchases then crowd out private expenditure and fiscal multipliers can turn negative. Crowding out increases for longer maturity bonds and higher sovereign default risk. We estimate a DSGE model with financial frictions for Spain and find that investment crowding out indeed leads to a negative cumulative fiscal multiplier. When monetary policy is exogenous, like at the ZLB or in a currency union, fiscal stimuli become more effective but multipliers are reduced when banks are undercapitalized.
    Keywords: Financial Intermediation; Macrofinancial Fragility; Fiscal Policy; Sovereign Default Risk
    JEL: E44 E62 H30
    Date: 2017–10
  15. By: Feld, Lars P.; Köhler, Ekkehard A.; Nientiedt, Daniel
    Abstract: Ordoliberalism is often accused as being responsible for Germany's policy stance during the Eurozone crisis. Ordoliberalism originates from the so-called Freiburg School of Economics, founded by Walter Eucken during the 1930s at the University of Freiburg, which is in fact in Germany. It is however neither true that ordoliberal thought has continuously been predominant and a prevailing idea in German macroeconomic policy, nor that it is responsible for Germany's policy stance during the crisis in EMU. In this paper, we show why a proper analysis must arrive at this conclusion by referring to Eucken's thinking and the development of German ordoliberalism across time in relation to the "Rules vs. Discretion" debate and to Constitutional Economics. Although ordoliberalism may have had some influence on the design of EMU, pragmatism, the status-quo and national interests are dominant in German economic policy.
    Keywords: Ordoliberalism,Eurozone Crisis,Constitutional Economics,Monetary and Fiscal Policy
    JEL: B13 B26 B31 D78 E61 E63
    Date: 2017
  16. By: Grégory Claeys; Maria Demertzis
    Abstract: This policy contribution was prepared for the Committee on Economic and Monetary Affairs of the European Parliament (ECON) as an input for the Monetary Dialogue of 20 November 2017 between ECON and the President of the ECB. Copyright remains with the European Parliament at all times As the global financial crisis unfolded, the European Central Bank (ECB) and other central banks greatly extended their monetary policy toolboxes and adjusted their operational frameworks. These unconventional monetary policies have left central banks with large balance sheets. As growth picks up in the euro area, there are discussions about how to normalise monetary policy, but it is unclear if normalisation means returning to monetary policy as it was prior to the crisis, or whether there is a ‘new normal’ that would justify different monetary policies. The debate on the optimal size of the central bank’s balance sheet has not yet been settled. We discuss the benefits and drawbacks of central banks having permanently large balance sheets. It might be difficult to reduce them quickly without negatively affecting financial markets. In order to avoid market volatility, this process needs to be done gradually and preferably passively, by holding to maturity assets purchased during the crisis. The interest rate – the central banks’ main conventional tool – might stay at a much lower level than historical standards and closer to the zero-lower bound because of a fall in the neutral rate, implying that in the future monetary policy would have to rely more on balance sheet policies and less on interest rate cuts to provide accommodation during recessions. The combination of these two issues implies that the normalisation of monetary policy will be very slow and entail a long period with a large balance sheet. In the meantime, the ECB will not be able to go back to its pre-crisis operational framework. In terms of the sequencing of the normalisation process, the experience of the US Federal Reserve, which was one of the first central banks to use unconventional tools during the crisis, could provide useful pointers to the ECB. Following the Fed’s example would involve tapering (ie gradually reducing asset purchases), then increasing key policy rates slowly before reducing passively the size of the balance sheet. The Fed’s experience shows that the normalisation process needs to be communicated early in order to reduce uncertainty for market participants and avoid any disruption of financial markets. So far, the ECB has been quite successful in smoothly scaling back its asset purchases, but it has not yet provided a clear vision of what its monetary policy or operational framework will look like at the end of the normalisation process.
    Date: 2017–11

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