nep-eec New Economics Papers
on European Economics
Issue of 2018‒03‒05
fifteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. “Incorporating creditors' seniority into contingent claim models:Application to peripheral euro area countries” By Marta Gómez-Puig; Simón Sosvilla-Rivero; Manish K. Singh
  2. “The robustness of the sovereign-bank interconnection: Evidence from contingent claims analysis” By Marta Gómez-Puig; Simón Sosvilla-Rivero; Manish K. Singh
  3. Financial repression and high public debt in Europe By van Riet, Ad
  4. Sovereign - bank risk interconnections during the Greek financial crisis and the role of the Italian debt By Giulio Cifarelli; Giovanna Paladino
  5. On the origin of current account deficits in the Euro area periphery: A DSGE perspective By Christoph Zwick
  6. One Money, Many Markets - A Factor Model Approach to Monetary Policy in the Euro Area with High-Frequency Identification By Corsetti, G.; Duarte, J. B.; Mann, S.
  7. A New Wave of ECB’s Unconventional Monetary Policies: Domestic Impact and Spillovers By Richard Varghese; Yuanyan Sophia Zhang
  8. Nowcasting real economic activity in the euro area : Assessing the impact of qualitative surveys By Raïsa Basselier; David de Antonio Liedo; Geert Langenus,
  9. Coherence of Business Cycles and Economic Shocks between Croatia and Euro Area Member States By Karlo Kotarac; Davor Kunovac; Rafael Ravnik
  10. One or Many Cohesion Policies of the European Union? On the Diverging Impacts of Cohesion Policy across Member States By Riccardo Crescenzi; Mara Giua
  11. Economic Convergence in the Euro Area: Coming Together or Drifting Apart? By Jeffrey R. Franks; Bergljot B Barkbu; Rodolphe Blavy; William Oman; Hanni Schoelermann
  12. Unraveling the economic performance of the CEEC countries. The role of exports and global value chains By Jan Hagemejer; Jakub Muck
  13. What if supply-side policies are not enough? The perverse interaction of exibility and austerity By Dosi, Giovanni; Pereira, Marcelo C.; Roventini, Andrea; Virgillito, Maria Enrica
  14. Are Eastern European Taylor Reaction Functions Asymmetric in Inflation or Output: Empirical Evidence for four Countries By Jens Klose
  15. Openness and Productitvity of the Swiss Economy By Föllmi, Reto; Fuest, Angela; an de Meulen, Philipp; Micheli, Martin; Schmidt, Thorsten; Zwick, Lisa

  1. By: Marta Gómez-Puig (Risckcenter Research group–IREA. Av. Diagonal 696; 08034 Barcelona ,Spain); Simón Sosvilla-Rivero (Complutense Institute of International Economics, Universidad Complutense de Madrid, Spain); Manish K. Singh (Risckcenter Research group–IREA. Av. Diagonal 696; 08034 Barcelona ,Spain)
    Abstract: This paper highlights the role of multilateral creditors (i.e., the ECB, IMF, ESM etc.) and their preferred creditor status in explaining the sovereign default risk of peripheral euro area (EA) countries. Incorporating lessons from sovereign debt crises in general, and from the Greek debt restructuring in particular, we define the priority structure of sovereigns' creditors that is most relevant for peripheral EA countries in severe crisis episodes. This new priority structure of creditors, together with the contingent claims methodology, is then used to derive a set of sovereign credit risk indicators. In particular, the sovereign distance-to-default indicator, proposed in this paper (which includes both accounting metrics and market-based measures) aims to isolate sovereign credit risk by using information from the public sector balance sheets to build it up. Analyzing and comparing it with traditional market-based measures of sovereign risk suggests that the measurement and predictive ability of credit risk measures can be vastly improved if we account for the changing composition of sovereigns' balance sheet risk based on creditors' seniority.
    Keywords: Sovereign default risk, peripheral euro area countries, contingent claims,distance-to-default. JEL classification:E62, H3, C11.
    Date: 2018–02
  2. By: Marta Gómez-Puig (Risckcenter Research group–IREA. Av. Diagonal 696; 08034 Barcelona ,Spain); Simón Sosvilla-Rivero (Complutense Institute of International Economics, Universidad Complutense de Madrid, Spain); Manish K. Singh (Risckcenter Research group–IREA. Av. Diagonal 696; 08034 Barcelona ,Spain)
    Abstract: We analyze the interconnection between the sovereign and banking sector risk in the peripheral euro area countries over the 2004Q4-2013Q2 period. Applying the contingent claims methodology, we build indicators of sovereign and banking sector risk (incorporating both market and balance sheet based information) and assess their interconnection in comparison with existing market-based indicators of banking and sovereign distress. We use three different statistical measures of interconnection based on principal components analysis, Granger causality network and Diebold-Yilmaz's connectedness index, and apply them to quarterly credit risk data. The empirical results shows strong connectedness and comovement between country-level banking and sovereign risk indicators. We find evidence of bi-directional bank-sovereign linkage for Spain and Italy during the European sovereign debt crisis period. For the late crisis period, we find weak interconnection and more divergence across the various risk indicators. Our findings also suggest that secondary and derivatives market indices are more driven by common underlying factors than are contingent claim based risk measures.
    Keywords: sovereign risk, bank risk, sovereign-bank nexus, contingent claims. JEL classification:G13, G21, G33, H63.
    Date: 2018–02
  3. By: van Riet, Ad (Tilburg University, School of Economics and Management)
    Abstract: The sharp rise in public debt-to-GDP ratios in the aftermath of the global financial crisis of 2008 posed serious challenges for fiscal policy in euro area countries. This thesis examines whether and to what extent modern financial repression has been applied in Europe to address these challenges. Financial repression is defined as the government’s strategy – supported by monetary and financial policies – to gain privileged access to capital markets at preferential credit conditions and divert resources to the state with the aim to secure and, if necessary, enforce public debt sustainability. This study shows that national public debt management, EU financial regulation, EMU crisis management as well as ECB monetary policy have significantly supported euro area governments in dealing with their fiscal predicament. Taken on their own, these public policies were targeted at supporting fiscal, financial and monetary stability in the wake of the euro area crisis. This study argues that the respective authorities have in fact applied the tools of financial repression and thereby contributed to relieving sovereign liquidity and solvency stress.
    Date: 2018
  4. By: Giulio Cifarelli (Dipartimento di Scienze per l'Economia e l'Impresa); Giovanna Paladino
    Abstract: The Greek crisis has brought to light the strong nexus between the credit risks of European banks and their sovereign. We study this phenomenon in Germany, France, Italy and Spain by estimating the conditional correlations between sovereign and bank CDS bond spreads over the period 2006-2015. A trivariate time-varying regime switching correlation analysis, the STCC-GARCH, is implemented to associate the state shifts to the dynamics of the so-called “transition variable†. We start selecting as transition variable the first difference of the spread between Greek and German sovereign bond yields. We then expand the model – via a DSTCC-GARCH parameterization - and introduce a second transition variable, representing the influence of the Italian sovereign debt. There is a clear evidence of significant changes in the correlations structure due to the evolution of the Greek crisis and to the sustainability of the Italian debt, which in turns impinges on the tenability of the euro project. The role of Italy on the nexuses of France and Germany increases after 2011.
    Keywords: CDS spreads, Greek financial crisis, STCC- and DSTCC-GARCH correlation analysis, contagion
    JEL: E43 E52 F36 C32
    Date: 2018
  5. By: Christoph Zwick (University of Graz, Austria)
    Abstract: This paper studies the sources of current account deficits in Greece, Ireland, Portugal and Spain after the introduction of the Euro. I lay out a DSGE model with a rich structure of the external sector and estimate it separately on each periphery country. A three-region model structure allows for interactions between the respective periphery country, a “Rest of the Euro Area” aggregate and a “Rest of the World” block. I show that the model exhibits a solid in-sample-fit across periphery countries and use it to quantitatively assess the relevance of several explanations concerning the origin of the deficits.
    Keywords: Current account; Competitiveness; Euro area; DSGE
    JEL: C32 E42 E52 F32 F41
    Date: 2018–02
  6. By: Corsetti, G.; Duarte, J. B.; Mann, S.
    Abstract: We reconsider the effects of common monetary policy shocks across countries in the euro area, using a data-rich factor model and identifying shocks with high-frequency surprises around policy announcements. We show that the degree of heterogeneity in the response to shocks, while being low in financial variables and output, is significant in consumption, consumer prices and macro variables related to the labour and housing markets. Mirroring country-specific institutional and market differences, we find that home ownership rates are significantly correlated with the strength of the housing channel in monetary policy transmission. We document a high dispersion in the response to shocks of house prices and rents and show that, similar to responses in the US, these variables tend to move in different directions.
    Keywords: Monetary Policy, High-Frequency Identification, Monetary Union, Labour Market, Housing Market.
    JEL: E21 E31 E44 E52 F44
    Date: 2018–02–22
  7. By: Richard Varghese; Yuanyan Sophia Zhang
    Abstract: ECB President Draghi’s Jackson Hole speech in August 2014 arguably marked a new phase of unconventional monetary policies (UMPs) in the euro area. This paper examines the market impact and tranmission channels of this new wave of UMPs using a modified event study framework. They are found to have a more prominent impact on inflation expectations and exchange rates compared to the earlier UMP announcements. The impact on bank equity, however, is less significant in part due to narrowing profit margin in a low interest rate environment; and the marginal effect on sovereign spread compression has diminished. By extracting components of monetary policy shocks from the yield curve, we find that the traditional signaling channel of the monetary policy transmission continued to play an important role, but the portfolio rebalancing channel became more important in the new phase. Spillovers to non-euro area EU countries (the Czech Republic, Denmark, Poland, and Sweden) are transmitted mainly through the portfolio rebalancing channel, largely affecting sovereign yields and exchange rates.
    Date: 2018–01–24
  8. By: Raïsa Basselier (Economics and Research Department, NBB); David de Antonio Liedo (R&D Statistics, NBB); Geert Langenus, (Economics and Research Department, NBB)
    Abstract: This paper analyses the contribution of survey data, in particular various sentiment indicators, to nowcasts of quarterly euro area GDP. It uses a genuine real-time dataset that is constructed from original press releases in order to transform the actual dataflow into an interpretable flow of news. The latter is defined as the difference between the released values and the prediction of a mixedfrequency dynamic factor model. Our purpose is twofold. First, we aim to quantify the specific value added for nowcasting GDP from a set of heterogeneous data releases including not only sentiment indicators constructed by Eurostat, Markit, the National Bank of Belgium, IFO, ZEW, GfK or Sentix, but also hard data regarding industrial production or retail sales in the aggregate euro area and individually in some of the largest euro area countries. Second, our quantitative analysis is used to draw up an overall ranking of the indicators, on the basis of their average contribution to updates of the nowcast. Among the survey indicators, we ??nd the strongest impact for the Markit Manufacturing PMI and the Business Climate Indicator in the euro area, and the IFO Business Climate and IFO Expectations in Germany. The widely monitored consumer con??dence indicators, on the other hand, typically do not lead to signi??cant revisions of the nowcast. In addition, even if euro area industrial production is a relevant predictor, hard data generally contribute less to the nowcasts: they may be more closely correlated with GDP but their relatively late availability implies that they can to a large extent be anticipated by nowcasting on the basis of survey data and, hence, their ‘news’ component is smaller. Finally, we also show that, in line with the previous literature, the NBB’s own business confidence indicator appears to be useful for predicting euro area GDP. The prevalence of survey data remains also under a counterfactual scenario in which hard data are released without any delay. This finding confirms that, in addition to being available in a more timely manner, survey data also contain relevant information that does not seem to be captured by hard data.
    Keywords: JDemetra+Nowcasting, surveys, news, dynamic factor models, press releases, realtime data, Bloomberg, Forex Factory, Kalman gain
    JEL: C32 C53 C87
    Date: 2017–12
  9. By: Karlo Kotarac (The Croatian National Bank, Croatia); Davor Kunovac (The Croatian National Bank, Croatia); Rafael Ravnik (European Central Bank)
    Abstract: The paper analyses the coherence of business cycles and supply and demand shocks between Croatia and euro area core countries. The results obtained point to several basic conclusions. Firstly, the coherence of business cycles and the correlation of supply and demand shocks between Croatia and euro area core countries are relatively high. Secondly, symmetric (common) shocks are dominant for explaining the dynamics in domestic GDP, while the contributions of asymmetric shocks are significantly smaller. Thirdly, the results point to the convergence of supply and demand shocks and business cycles between Croatia and euro area core countries. Based on all of the above, we may conclude that the introduction of the euro and the related adoption of the common countercyclical monetary policy should not result in significant costs for the Croatian economy.
    Keywords: cycle coherence, aggregate supply and demand shocks, symmetric and asymmetric shocks
    JEL: F33 F44 E42 C32
    Date: 2017–10
  10. By: Riccardo Crescenzi; Mara Giua
    Abstract: Do regions in all Member States (MSs) of the European Union (EU) benefit from Cohesion Policy? Are regional impacts persistently diversified across countries? In order to answer these questions this paper explores how the impact of the EU Cohesion Policy on growth and employment varies across countries. A spatial Regression Discontinuity Design (RDD) makes it possible estimate distinct but fully comparable impacts for each individual MS both before the Great Recession and during recovery. The results show that Cohesion Policy has exerted a positive and significant EU-wide impact on both regional economic growth and employment. However, regional impacts are not evenly distributed across MSs. Large part of the regional growth bonus generated by Cohesion Policy is concentrated in Germany. Conversely, impacts on regional employment are confined to the United Kingdom. The picture for beneficiary regions in Southern European Member States is less rosy with positive impacts on employment in Italy until the Great Recession and on economic growth in the recovery period in Spain.
    Keywords: Cohesion policy, European Union, regions, growth, employment
    JEL: O18 R11 R58
    Date: 2018–02
  11. By: Jeffrey R. Franks; Bergljot B Barkbu; Rodolphe Blavy; William Oman; Hanni Schoelermann
    Abstract: We examine economic convergence among euro area countries on multiple dimensions. While there was nominal convergence of inflation and interest rates, real convergence of per capita income levels has not occurred among the original euro area members since the advent of the common currency. Income convergence stagnated in the early years of the common currency and has reversed in the wake of the global economic crisis. New euro area members, in contrast, have seen real income convergence. Business cycles became more synchronized, but the amplitude of those cycles diverged. Financial cycles showed a similar pattern: sychronizing more over time, but with divergent amplitudes. Income convergence requires reforms boosting productivity growth in lagging countries, while cyclical and financial convergence can be enhanced by measures to improve national and euro area fiscal policies, together with steps to deepen the single market.
    Keywords: Business cycles;Economic integration;Euro Area;Financial cycles;Convergence, synchronization, Economic and Monetary Union, Optimum Currency Area, Financial Aspects of Economic Integration
    Date: 2018–01–23
  12. By: Jan Hagemejer; Jakub Muck
    Abstract: In this study we assess the importance of exports and global value chains (GVC) participation for economic growth. Using novel methods and an extensive dataset, we decompose GDP growth in the Central and Eastern European (CEEC) countries to show that in a large part of the period of transition and integration with the EU, exports have played a predominant role in shaping economic growth. We also show that exports have been the major factor driving the convergence of the CEEC countries with their advanced counterparts. We employ panel methods to analyze the determinants of growth of exported value added and show that the major growth drivers in the analyzed period of 1995-2014 are GVC participation, imports of technology and capital deepening.
    Keywords: economic growth, international trade, GVC, heterogeneous panels, common correlated effects estimation, CEEC
    JEL: C23 F21 O33
    Date: 2018–02
  13. By: Dosi, Giovanni; Pereira, Marcelo C.; Roventini, Andrea; Virgillito, Maria Enrica
    Abstract: In this work we develop a set of labour market and fiscal policy experiments upon the labour and credit augmented "Schumpeter meeting Keynes" agent-based model. The labour market is declined under two institutional variants, the "Fordist" and the "Competitive" set- ups meant to capture the historical transition from the Fordist toward the post "Thatcher- Reagan" period. Inside these two regimes, we study the different effects of supply-side active labour market policies (ALMPs) vs. demand-management passive labour market ones (PLMPs). In particular, we analyse the effects of ALMPs aimed at promoting job search, and at providing training to unemployed people. Next, we compare the effects of these policies with unemployment benefits simply meant to sustain income and therefore aggregate demand. Considering the burden of unemployment benefits in terms of public budget, we link such provision with the objectives of the European Stability and Growth Pact. Our results show that (i) an appropriate level of skills is not enough to sustain growth when workers face adverse labour demand; (ii) supply-side policies are not able to reverse the perverse interaction between exibility and austerity; (iii) PLMPs outperform ALMPs in reducing unemployment and workers' skills deterioration; and (iv) demand-management policies are better suited to mitigate inequality and to improve and sustain long-run growth.
    Keywords: Industrial-relation Regimes,Flexibility,Active Labour Market Policies,Austerity,Agent-based models
    JEL: C63 E24 H53 J88
    Date: 2018
  14. By: Jens Klose (THM Business School)
    Abstract: Do central banks in Eastern European countries react asymmetrically and in a non-linear fashion to changes in inflation and output? We tackle this question by expanding the standard Taylor reaction function for the four inflation targeting countries Czech Republic, Hungary, Poland and Romania. We do so taking explicitly inflation rates below or above target and output below or above potential, the so-called state of the economy, into account. The results reveal that there are indeed substantial asymmetries in the reaction function of the Czech, Polish and Romanian central bank, which are only evident when the combination of inflation and output thresholds is explicitly modelled in one estimation equation. For these three central banks also non-linearities in the inflation and output response could be verified.
    Keywords: Taylor reaction function, Asymmetries, Eastern European countries
    JEL: E52 E58
    Date: 2018
  15. By: Föllmi, Reto; Fuest, Angela; an de Meulen, Philipp; Micheli, Martin; Schmidt, Thorsten; Zwick, Lisa
    Abstract: This paper analyzes the connection between openness and economic performance in Switzerland. Considering different dimensions of openness, we show that the Swiss economy classifies as relatively open. Nevertheless, there still is potential to further increase international integration, particularly through deregulation in the services sector. We also show that for some branches in the Swiss manufacturing sector, increases in international trade are associated with higher productivity in the long run. With regard to financial openness, we show that in the aftermath of the financial crisis, Switzerland mainly suffered from capital retrenchment. Foreign capital inflows were of minor importance. Short-run costs due to the high volatility of capital flows might therefore be lower than widely perceived.
    Keywords: Productivity, Openness, Trade Barriers
    JEL: O40 F10 F30
    Date: 2018–03

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