nep-eec New Economics Papers
on European Economics
Issue of 2018‒01‒22
fourteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Unemployment Insurance Union By Marius Clemens; Guillaume Claveres
  2. The financial and real performance of non-financial corporations in the Euro area: 1999-2015 By Vicente Salas; Lucio San Juan; Javier Vallés
  3. The zero risk fallacy? Banks' sovereign exposure and sovereign risk spillovers By Kirschenmann, Karolin; Korte, Josef; Steffen, Sascha
  4. The Determinants Of Public Debt In The Euro Area: A Panel ARDL Approach By Chirwa, Themba G; Odhiambo, Nicholas M.
  5. A Dynamic Correlation Analysis of Financial Contagion: Evidence from the Eurozone Stock Markets By Trabelsi, Mohamed Ali; Hmida, Salma
  6. PIIGS in the Euro area: An empirical DSGE model By Alice Albonico; Alessia Paccagnini; Patrizio Tirelli
  7. Tradability and Productivity Growth Differentials Across EU Member States By Klaus S. Friesenbichler; Christian Glocker
  8. Implications of Macroeconomic Volatility in the Euro Area By Niko Hauzenberger; Maximilian B\"ock; Michael Pfarrhofer; Anna Stelzer; Gregor Zens
  9. Risk reduction through Europe’s distressed debt market By Alexander Lehmann
  10. Financial Cycles in Credit, Housing and Capital Markets: Evidence from Systemic Economies By Amat Adarov
  11. Distribution, wealth and demand regimes in historical perspective. USA, UK, France and Germany, 1855-2010 By Stockhammer, Engelbert; Rabinovich, Joel; Reddy, Niall
  12. Does Monetary Policy Influence Banks' Perception of Risks? By Simona Malovana; Dominika Kolcunova; Vaclav Broz
  13. How diabolic is the sovereign-bank loop? The effects of post-default fiscal policies By Diniz, Andre; Guimaraes, Bernardo
  14. Incorporating Macro-Financial Linkages into Forecasts Using Financial Conditions Indices: The Case of France By Piyabha Kongsamut; Christian Mumssen; Anne-Charlotte Paret; Thierry Tressel

  1. By: Marius Clemens (German Institute for Economic Research (DIW Berlin)); Guillaume Claveres (Universite Paris 1 Pantheon-Sorbonne)
    Abstract: A European unemployment insurance scheme has gained increased attention as a new and ambitious common fiscal instrument which could be used for temporary cross-country transfers. Part of the national stabilizers composing unemployment insurance schemes would be transferred to the central level. Unemployed are then insured by both layers. When a country is hit by an asymmetric shock, it would receive positive net transfers from the central fund in the form of reduced taxes and increased benefits, providing risk-sharing for the whole union. We build a two-country DSGE model with supply, demand and labor market shocks in order to capture the recent national insurance system and the unemployment insurance union (UIU) design. The model is calibrated to the euro area core and periphery data and matches the empirically observed cyclicality of the net replacement rate, the wage and unemployment dynamics. This baseline scenario is then compared to a optimal unemployment insurance union with passive and active benefit policies. For all underlying shocks, we find that the UIU reduces the fluctuation of consumption and unemployment while it increases the fluctuation of the trade balance. In case of a positive domestic government spending shock the UIU reduces the negative crowding out effect on private consumption and investment. The model will be used to analyze the effects of national and supranational benefit policies on labour market patterns and welfare.
    Date: 2017
  2. By: Vicente Salas (Universidad de Zaragoza); Lucio San Juan (Banco de España); Javier Vallés (Banco de España)
    Abstract: This paper documents the aggregated performance of non-financial corporations in the largest euro area economies and compares it with the performance of the US corporate sector as reported by National Economic Accounts and Financial Accounts. We find significant cross-country structural differences in the behaviour of real and financial indicators that remain long after the creation of the single currency, although therehas been convergence in the average cost of debt paid by corporations and in the deleveraging process unfolding after the financial crisis. German corporations stand out, with higher productivity of operating capital and profit margins. Moreover, a lower average cost of debt and also a lower average corporate tax rate have contributed to a higher return of equity in Germany compared with the return in other EU countries and the US. Since the crisis years, German and Spanish companies have joined the US corporations in saving more than they invest. We also find some evidence of a declining proportion of cash-flows allocated to capital investment.
    Keywords: Non-financial corporations, Sectoral National Accounts, financial performance, rates of return of assets and equity, euro area
    JEL: G30
    Date: 2017–12
  3. By: Kirschenmann, Karolin; Korte, Josef; Steffen, Sascha
    Abstract: European banks are exposed to a substantial amount of risky sovereign debt. The "missing bank capital" resulting from the zero-risk weight exemption for European banks for European sovereign debt amplifies the co-movement between sovereign CDS spreads and facilitates cross-border financial-crisis spillovers. Risks spill over from risky periphery sovereigns to safer core countries, but not in the opposite direction nor for exposures to countries not exempted from risk-weighting. We consider the trade-off of benefits of sovereign debt (for banks and sovereigns) and spillover risk when applying risk-weights. More bank capital as well as positive risk-weighting for sovereign exposures mitigates spillovers.
    Keywords: sovereign debt,sovereign risk,bank risk,CDS,contagion,zero risk weight,Basel III,CRD,EBA capital exercise
    JEL: G01 G21 G28 G14 G15 F23
    Date: 2017
  4. By: Chirwa, Themba G; Odhiambo, Nicholas M.
    Abstract: This study investigates the determinants of public debt in the EURO area that are either debt-reducing or debt-creating using panel data from 10 European Countries. Using a panel ARDL approach, the study results show that though the real interest rate ??? economic growth differential in debt dynamics can be used to show whether debt is explosive or non-explosive, we find the speed of adjustment to be a good predictor. The study results also reveal that while economic growth is debt-reducing mainly in the short-run, the real exchange rate, investment, population growth are debt-reducing in the long run. Similarly, though the real interest rate is debt-creating both in the short- and long-run, government consumption is debt-creating in the long run while the relationship is mixed in the short-run and differentiated across groups. These results have important policy implications for the European Union. They include the need to continue having differentiated Medium-Term Budgetary Objectives implemented across member states that focus on fiscal sustainability as well as take into account all factors that may be debt-creating or debt-reducing. Furthermore, there is need for European authorities to implement strategies that would encourage lower or stable long-term interest rates as a strategy to reduce the accumulation of public debt in the future.
    Keywords: Euro Area; Panel ARDL Models; Cointegration; Public Debt
    Date: 2018–01–11
  5. By: Trabelsi, Mohamed Ali; Hmida, Salma
    Abstract: The contagion generated by the US subprime crisis and the European sovereign debt crisis that hit the Eurozone stock markets is still a highly debated subject. In this paper, we try to determine whether there are contagion effects across the Greek stock market and the Belgian, French, Portuguese, Irish, Italian and Spanish stock markets during both crises periods. To this end, we used a bivariate DCC-GARCH model to measure the extent of dynamic correlations between stock returns of our sample. Our results point to the presence of a contagion effect between all market pairs during the subprime crisis and between the Greek and Portuguese stock markets during the European sovereign debt crisis. On the other hand, our results indicate that credit ratings revisions have a relatively limited effect on the dynamic correlations of the Eurozone stock markets.
    Keywords: Financial contagion; European debt crisis; Dynamic conditional correlations
    JEL: C22 G01 G15
    Date: 2017
  6. By: Alice Albonico; Alessia Paccagnini; Patrizio Tirelli
    Keywords: PIIGS, Euro crisis, two-country DSGE, Bayesian estimation
    JEL: E32 E21 C13 C32 C11 E37
    Date: 2017–10
  7. By: Klaus S. Friesenbichler (WIFO); Christian Glocker (WIFO)
    Abstract: This study examines the lack of convergence among EU countries from a structural perspective. We apply the tradable-non-tradable framework (T-NT) to evaluate the heterogeneity in labour productivity before and after the great recession. We find that, across all countries, non-tradables were less relevant for aggregate productivity. The low productivity growth in peripheral EU countries was accompanied by a specific structural change pattern: there was a sharp production increase of non-tradables before the crisis relative to other EU countries. For most peripheral countries concerns about unfavourable sector structures remain, implying a continuation of unsustainable growth patterns. This has implications for the European Commission's macroeconomic imbalance procedures, since it allows identifying patterns of real divergence on a disaggregated level. Finally, we identify a link between sectoral growth asymmetries and the quality of domestic governance institutions. Especially differences in the legal system help to explain the observed productivity growth differentials.
    Keywords: Tradability, Labour Productivity, Growth, Institutions, EU, Imbalance
    Date: 2018–01–08
  8. By: Niko Hauzenberger; Maximilian B\"ock; Michael Pfarrhofer; Anna Stelzer; Gregor Zens
    Abstract: In this paper, we estimate a Bayesian vector autoregressive (VAR) model with factor stochastic volatility in the error term to assess the effects of an uncertainty shock in the Euro area (EA). This allows us to incorporate uncertainty directly into the econometric framework and treat it as a latent quantity. Only a limited number of papers estimates impacts of uncertainty and macroeconomic consequences jointly, and most literature in this sphere is based on single countries. We analyze the special case of a shock restricted to the Euro area, whose countries are highly related by definition. Among other variables, we find significant results of a decrease in real activity measured by GDP in most Euro area countries over a period of roughly a year following an uncertainty shock.
    Date: 2018–01
  9. By: Alexander Lehmann
    Abstract: A version of this Policy Contribution was originally prepared as the in-depth section of Analysis of developments in EU capital flows in the global context, a report by Bruegel for the European Commission. The study is also available on the European Commission’s webpage. The market for distressed debt will need to play a more prominent role in Europe’s emerging strategy to tackle the legacy of non-performing loans (NPLs). This market could speed up NPL resolution and allow greater flexibility in bank balance sheet management. Investors could contribute crucial skills and possibly capital to the process of workout and restructuring. The loan sale process potentially suffers from a number of market imperfections which manifest themselves in high valuation gaps, and in the market failing to cover certain asset types. In Europe, turnover from distressed debt sales remains limited relative to the total stock of €870 billion in non-performing loans, and the additional stock of €1.1 trillion of so-called non-core banking assets, which banks also seek to divest in this market. There has so far been little market demand for the bulk of unsecured assets among small and medium-sized companies and other corporate borrowers, loans held by smaller banks with their higher NPL ratios, or exposures to larger enterprises that could benefit from comprehensive debt restructuring and additional finance. Significant further supply might now come into the market as stricter supervisory guidelines are implemented, and as new accounting guidelines force higher provisioning levels. Improved national restructuring and insolvency regimes are beginning to attract a wider range of investors. An initiative by EU finance ministers to improve transparency around loan quality and foster greater liquidity through transaction platforms might lower transaction-specific fixed costs somewhat. More decisive public support, for instance through asset management companies or in securitisation structures, might be needed. As a significant share of Europe’s banking assets might move into the hands of little-known investors, some of the benefits of relationship banking could be lost, and the conduct of the loan servicers will come into the focus of regulators.
    Date: 2018–01
  10. By: Amat Adarov (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: The study estimates aggregate financial cycles and segment-specific cycles for credit, equity, bond and housing markets of the USA, the UK, Germany and Japan over the period 1960-2015 using dynamic factor models with state-space techniques based on a range of variables conveying market price, quantity and risk dynamics. The analysis reveals a highly persistent and recurring nature of financial cycles reflecting the build-up of financial imbalances in each segment with an estimated average cycle duration of about ten years. The significant co-movements and spillovers that we find among many of the segment-specific cycles suggest that well-diversified financial systems are prone to the risks associated with the mutual amplification of nominal shocks via linkages between financial market segments, which needs to be taken into account in the design of policies addressing asset bubbles and financial imbalances.
    Keywords: financial cycles, asset bubbles, financial stability, housing prices, equity, debt securities, credit, capital markets, spillovers, Kalman filter, factor models
    JEL: E44 E50 F37 G15
    Date: 2017–12
  11. By: Stockhammer, Engelbert (Kingston University London); Rabinovich, Joel (Université Paris-13); Reddy, Niall (New York University)
    Abstract: Most empirical macroeconomic research limited to the period since World War II. This paper analyses the effects of changes in income distribution and in private wealth on consumption and investment covering a period from as early as 1855 until 2010 for the UK, France, Germany and USA, based on the dataset of Piketty and Zucman (2014). We contribute to the post-Keynesian debate on the nature of demand regimes, mainstream analyses of wealth effects and the financialisation debate. We find that overall domestic demand has been wage-led in the USA, UK and Germany. Total investment responds positively to higher wage shares, which is driven by residential investment. For corporate investment alone, we find a negative relation. Wealth effects are found to be positive and significant for consumption in the USA and UK, but weaker in France and Germany. Investment is negatively affected by private wealth in the USA and the UK, but positively in France and Germany.
    Keywords: historical macroeconomics; demand regimes; Bhaduri-Marglin model; wealth effects; financialisation
    JEL: B50 E11 E12 E20 E21 N10
    Date: 2017–11–09
  12. By: Simona Malovana; Dominika Kolcunova; Vaclav Broz
    Abstract: This paper studies the extent to which monetary policy may affect banks' perception of credit risk and the way banks measure risk under the internal ratings-based approach. Specifically, we analyze the effect of different monetary policy indicators on banks' risk weights for credit risk. We present robust evidence of the existence of the risk-taking channel in the Czech Republic. Further, we show that the recent prolonged period of accommodative monetary policy has been instrumental in establishing this relationship. Finally, we obtain comparable results by extending the analysis to cover all the Visegrad Four countries. The presented findings have important implications for the prudential authority, which should be aware of the possible side-effects of monetary policy on how banks measure risk.
    Keywords: Banks, financial stability, internal ratings-based approach, risk-taking channel
    JEL: E52 E58 G21 G28
    Date: 2017–12
  13. By: Diniz, Andre; Guimaraes, Bernardo
    Abstract: The deleterious effect of debt restructuring on banks’ balance sheets and, consequently, on the economy as a whole has been a key policy issue. This paper studies how post-default fiscal policy interacts with this sovereign-bank loop and shape the response of a model economy. Calibration of the model matches characteristics of the Greek economy at the time of the Bond Exchange. Debt restructuring in place of higher lump-sum taxation or non-productive government spending harms the economy even if no other cost of default is considered. However, the sovereign-debt loop is less costly to the economy than increases in labour or capital taxes to service debt. Even so, if fiscal policy is too responsive, a crowding-out effect inhibits the recovery of capital markets, hence a more conservative fiscal stance is desirable. Thus how diabolic the post-default sovereign-bank loop is depends to a large extent on the way fiscal policy responds
    Keywords: financial frictions; fiscal policy; sovereign default; sovereign-bank loop.
    JEL: E32 E62 F34 H63
    Date: 2017–01
  14. By: Piyabha Kongsamut; Christian Mumssen; Anne-Charlotte Paret; Thierry Tressel
    Abstract: How can information on financial conditions be used to better understand macroeconomic developments and improve macroeconomic projections? We investigate this question for France by constructing country-specific financial conditions indices (FCIs) that are tailored to movements in GDP, investment, private consumption and exports respectively. We rely on a VAR approach to estimate the weights of the financial components of each FCI, including equity market returns (which turn out having a relatively strong weight across all FCIs), private sector risk premiums, long-term interest rates, and banks’ credit standards. We find that the tailored FCIs are useful as leading indicators of GDP, investment, and exports, and as a contemporaneous indicator of private consumption. Credit volumes turn out to be lagging indicators of growth. The indices inform us on macro-financial linkages in France and are used to improve the accuracy of quarterly forecasting models and high-frequency “nowcast” models. We show that FCI-augmented models could have significantly improved forecasts during and after the global financial crisis.
    Date: 2017–12–01

This nep-eec issue is ©2018 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.