nep-eec New Economics Papers
on European Economics
Issue of 2018‒04‒02
twenty-two papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Capital Flows in the Euro Area and TARGET2 Balances By Nikolay Hristov; Oliver Hülsewig; Timo Wollmershäuser
  2. Labour tax reforms, cross-country coordination and the monetary policy stance in the euro area: a structural model-based approach By Jacquinot, Pascal; Lozej, Matija; Pisani, Massimiliano
  3. Quantitative easing and preferred habitat investors in the euro area bond market By Martijn Boermans; Robert Vermeulen
  4. Stabilising virtues of central banks: (re)matching bank liquidity By V. Legroux; I. Rahmouni-Rousseau; U. Szczerbowicz; N. Valla
  5. Is there a trade-off between free capital mobility, financial stability and fiscal policy flexibility in the EMU? By Canale, Rosaria Rita; de Grauwe, Paul; Foresti, Pasquale; Napolitano, Oreste
  6. Structural Change in Times of Increasing Openness By Claudius Gräbner; Philipp Heimberger; Jakob Kapeller; Bernhard Schütz
  7. The Relation between Monetary Policy and the Stock Market in Europe By Helmut Lütkepohl; Aleksei Netsunajev
  8. Cross-border banking in the EU since the crisis: what is driving the great retrenchment? By Emter, Lorenz; Schmitz, Martin; Tirpák, Marcel
  9. European Union services liberalisation in CETA By Julia Magntorn; L. Alan Winters
  10. The Search for a Euro Area Safe Asset By Leandro, Alvaro; Zettelmeyer, Jeromin
  12. Implementing Macroprudential Policy in NiGEM By Oriol Carreras; E Philip Davis; Ian Hurst; Iana Liadze; Rebecca Piggott; James Warren
  13. Overnight index swap market-based measures of monetary policy expectations By Lloyd, Simon
  14. The impact of the Bank of England’s Corporate Bond Purchase Scheme on yield spreads By Boneva, Lena; de Roure, Calebe; Morley, Ben
  15. Unit Labour Costs and the Dynamics of Output and Unemployment in the Southern European Crisis Countries By Juan Carlos Cuestas; Karsten Staehr; Javier Ordóñez
  16. The Interplay between the Circular Economy and the European Semester: An assessment By Behrens, Arno; Rizos, Vasileios
  17. Analyzing Credit Risk Transmission to the Non-Financial Sector in Europe: A Network Approach By Christian Gross; Pierre L. Siklos
  18. Testing the effect of population ageing on national saving rates: panel data evidence from Europe. By Marta Pascual-Sáez; David Cantarero-Prieto; María González-Diego
  19. How much does book value data tell us about systemic risk and its interactions with the macroeconomy? A Luxembourg empirical evaluation By Xisong Jin
  20. Business investment, cost of capital and uncertainty in the United Kingdom — evidence from firm-level analysis By Melolinna, Marko; Tatomir, Srdan; Miller, Helen
  21. Foreign ownership and market power: the special case of European banks By Panayotis D. Alexakis; Ioannis G. Samantas
  22. The crisis in Greece: the semi-rentier state hypothesis By Huliaras, Asteris; Sotiropoulos, Dimitri A.

  1. By: Nikolay Hristov; Oliver Hülsewig; Timo Wollmershäuser
    Abstract: We estimate a panel VAR model for the euro area to quantitatively asses the contribution of the TARGET2 system to the propagation of different types of structural economic shocks as well as to the historical evolution of aggregate economic activity in euro area member countries. Our results suggest that TARGET2 has significantly affected the transmission of capital ow shocks while leaving the macroeconomic responses to other aggregate shocks virtually unaltered. Furthermore, on basis of counterfactual analyses, we find that TARGET2 has contributed substantially to avoid deeper recessions in distressed periphery member countries like Spain, Italy, Ireland and Portugal, while to a smaller degree depressing aggregate economic activity in core member states, such as Germany, the Netherlands and Finland.
    Keywords: euro area, TARGET2 balances, capital inflow shocks, panel vector autoregressive model
    JEL: E42 F32 F41
    Date: 2018
  2. By: Jacquinot, Pascal; Lozej, Matija; Pisani, Massimiliano
    Abstract: We evaluate the effects of permanently reducing labour tax rates in the euro area (EA) by simulating a large-scale open economy dynamic general equilibrium model. The model features the EA as a monetary union, split in two regions (Home and the rest of the EA - REA), the US, and the rest of the world, region-specific labour markets with search and matching frictions, and public employment. Our results are as follows. First, a permanent reduction in labour tax rates in the Home region would have stimulating effects on domestic economic activity and employment. Second, reducing labour tax rates simultaneously in both Home and REA would have additional expansionary effects on the Home region. Third, in the short run the expansionary effects on the EA economy of a EA-wide tax reduction are enhanced if the EA monetary policy is accommodative. JEL Classification: E24, E32, E52, E62, F45
    Keywords: DSGE models, labour taxes, monetary union, open-economy macroeconomics, unemployment
    Date: 2018–02
  3. By: Martijn Boermans; Robert Vermeulen
    Abstract: Quantitative easing (QE) aims to lower long term interest rates and stimulate economic growth via the portfolio rebalancing channel. One of the assumptions for QE to work is that there are investors with strong preferences to hold long term bonds, i.e. so called preferred habitat investors. This paper investigates whether the ECB's Public Sector Purchase Programme (PSPP) affected euro area investors' demand for bonds using granular securities holdings data. The results show strong evidence that euro area investors acted as preferred habitat investors. These findings hold across all major euro area investors (banks, insurance companies, pension funds and investment funds). The results suggest that since the sellers of bonds in response to QE in the euro area are different from those that sold to the Fed, BoE and BoJ, policymakers need to pay particular attention to demand by non-euro area investors, especially if the ECB plans to reduce its balance sheet.
    Keywords: quantitative easing; sovereign bonds; European Central Bank; PSPP; securities holdings statistics
    JEL: E58 F42 G11 G15
    Date: 2018–02
  4. By: V. Legroux; I. Rahmouni-Rousseau; U. Szczerbowicz; N. Valla
    Abstract: The liquidity of financial system plays a central role in systemic crises. In this paper, we show that the ECB haircut policies provided an important liquidity support to distressed financial institutions during the euro area sovereign debt turmoil. Using novel, micro data on the pool of collateral eligible to ECB open market operations, we construct a “public” liquidity mismatch indicator (LMI) for the French aggregate banking sector based on the ECB haircuts. We then compare it to the “private” LMI based on the haircuts in private repo markets in a spirit of Bai et al. (2018). The difference between the two indicators represents a new measure of the ECB liquidity support. Our results suggest that the ECB haircut policies have indeed helped French banks to reduce the liquidity mismatch.
    Keywords: Bank liquidity, liquidity mismatch, monetary policy, central bank, haircuts, collateral framework.
    JEL: E58 G21 G28
    Date: 2018
  5. By: Canale, Rosaria Rita; de Grauwe, Paul; Foresti, Pasquale; Napolitano, Oreste
    Abstract: The recent dynamics characterizing the Eurozone economy suggest the existence of a new policy trilemma faced by its member countries. According to this policy trilemma, there is a trade-off between free capital mobility, financial stability and fiscal policy flexibility. In this paper, we analyze the foundations of such a trade-off and, based on the data for 11 Eurozone countries, present an empirical investigation on the existence of the trilemma. The results highlight the existence of the trade-off, with some differences between member countries. The existence of this trilemma in the Eurozone provides arguments for implementing centralized financial supervision together with fiscal and monetary reforms that should strengthen the currency union
    Keywords: EMU; Policy trilemma; Eurozone; Free capital mobility; Fiscal policy; Financial stability; Financial crisis
    JEL: C21 C23 E61 F41
    Date: 2018–12–12
  6. By: Claudius Gräbner; Philipp Heimberger (The Vienna Institute for International Economic Studies, wiiw); Jakob Kapeller; Bernhard Schütz
    Abstract: Assessing Path Dependency in European Economic Integration This paper analyses the dynamics of structural polarisation and macroeconomic convergence vs. divergence in the context of European integration, where the latter is understood primarily as an increase in economic and financial openness. In the process of estimating the dynamic effects of openness shocks on 26 EU countries, we develop a taxonomy of European economies that consists of core, periphery, financialised and Eastern European catch-up economies. As these four country groups have responded in a distinct way to the openness shocks imposed by European integration, we argue that the latter should be seen as an evolutionary process that has given rise to different path-dependent developmental trajectories. These trajectories relate to the sectoral development of European economies and the evolution of their technological capabilities. We propose a set of interrelated policy measures to counteract structural polarisation and to promote macroeconomic convergence in Europe.
    Keywords: Europe, path dependency, European integration, economic openness, competitiveness
    JEL: B5
    Date: 2018–03
  7. By: Helmut Lütkepohl; Aleksei Netsunajev
    Abstract: We use a cointegrated structural vector autoregressive model to investigate the relation between euro area monetary policy and the stock market. Since there may be an instantaneous causal relation we consider long-run identifying restrictions for the structural shocks and also use (conditional) heteroskedasticity in the residuals for identification purposes. Heteroskedasticity is modelled by a Markov-switching mechanism. We find a plausible identification scheme for stock market and monetary policy shocks which is consistent with the second order moment structure of the variables. The model indicates that contractionary monetary policy shocks lead to a long-lasting down-turn of real stock prices.
    Keywords: Cointegrated vector autoregression, heteroskedasticity, Markov-switching model, monetary policy analysis
    JEL: C32
    Date: 2018
  8. By: Emter, Lorenz; Schmitz, Martin; Tirpák, Marcel
    Abstract: This paper examines the drivers of the retrenchment in cross-border banking in the European Union (EU) since the global financial crisis, which stands out in international comparison as banks located in the euro area and in the rest of the EU reduced their cross-border claims by around 25%. Particularly striking is the sharp and sustained reduction in intra-EU claims, especially in the form of deleveraging from cross-border interbank loans. Examining a wide range of possible determinants, we identify high non-performing loans as an important impediment to cross-border lending after the crisis, highlighting the spillovers from national banking sector conditions across the EU. We also find evidence that prudential policies can entail spillovers via cross-border banking in the EU, albeit with heterogeneity across instruments in terms of direction, magnitude and significance. Our results do not point to a major role of newly introduced bank levies in explaining cross-border banking developments. JEL Classification: F21, F30, F42, G15, G28
    Keywords: bank levy, cross-border banking, deleveraging, financial integration, international capital flows, prudential policies, regulation
    Date: 2018–02
  9. By: Julia Magntorn (UK Trade Policy Observatory, University of Sussex); L. Alan Winters (UK Trade Policy Observatory, University of Sussex)
    Abstract: The Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada has been suggested as a template for a future UK-EU trade relationship. To inform the ongoing debate surrounding a ‘Canada plus’ deal post-Brexit, this paper assesses in detail the services and investment chapters of CETA. We have scored each of the EU’s detailed commitments in CETA according to their degree of liberalisation, and aggregated the scores across member states and sub-sectors to provide a broad comparison between sectors. We find that, while in some sectors the EU is relatively open in CETA, in other sectors important to the UK such as financial services and transport services it remains significantly restricted. Further, we evaluate the extent to which the EU’s commitments in CETA improve on its pre-CETA commitments under the General Agreement on Trade in Services (GATS). This shows that although CETA generally offers a bit more liberalisation than the EU’s GATS schedule, it nevertheless follows the latter closely, so that sectors that are relatively protected under GATS remain protected in CETA.
    Keywords: services trade; CETA; GATS; Brexit
    JEL: F15 F53 G28 L8
    Date: 2018–03
  10. By: Leandro, Alvaro; Zettelmeyer, Jeromin
    Abstract: This paper evaluates four approaches to create "safe assets" or asset portfolios for the euro area: (1) a diversified portfolio of senior tranches of sovereign debt ("national tranching"); (2) a senior security backed by a diversified pool of national sovereign debt ("ESBies"); (3) debt issued by a senior financial intermediary, backed by a diversified pool of national debt ("E-bonds"); and (4) debt issued by a euro area budget or a leveraged wealth fund, based on member state contributions or dedicated direct revenue sources. None of these approaches envisages explicit guarantees by member states, and all could potentially produce safe assets in sufficient quantities to replace euro area sovereign bond holdings in euro area banks. At the same time, the four approaches differ across several important dimensions. A euro area budget or wealth fund could create the largest volume of safe assets, followed by ESBies, E-bonds, and national tranching. A euro area budget or wealth fund is also likely to have the lowest impact on the structure and liquidity of national bond markets, while national tranching would have the largest impact. ESBies and E-bonds occupy an intermediate position. ESBies and potentially bonds issued by a euro area budget would offer their holders greater protection from deep national defaults than the other two proposals. Both ESBies and national tranching would avoid cross-country redistribution by construction, whereas E-bonds and a euro area budget could have significant distributional consequences, depending on their design. E-bonds are unique in that they would raise the marginal cost of sovereign debt issuance at higher levels of debt, thereby exerting fiscal discipline, without necessarily raising average debt costs for lower-rated borrowers.
    Keywords: Banking Crisis; ESBies; Euro crisis; safe assets; Sovereign debt
    JEL: F33 F36 G21 H63
    Date: 2018–03
  11. By: Aleksandra Kordalska (Gdansk University of Technology, Gdansk, Poland); Magdalena Olczyk (Gdansk University of Technology, Gdansk, Poland)
    Abstract: This paper aims to assess the impact of determinants on service exports in both value added terms and in gross terms for seven Central Eastern European economies in years 1995-2011. The results confirm the importance of increasing labour productivity and highly-skilled and medium-skilled workers for growth in services trade. Exports of services are also supported by linkages between domestic services, especially business services, and the manufacturing sector. The results show the impacts of the determinants are fairly similar when exports are measured in value added terms or in gross terms, however the strength of impact differs in some subgroup of analysed countries.
    Keywords: gross exports, value added exports, CEE economies, trade in services
    JEL: C23 F14 L80
    Date: 2018–03
  12. By: Oriol Carreras; E Philip Davis; Ian Hurst; Iana Liadze; Rebecca Piggott; James Warren
    Abstract: In this paper we incorporate a macroprudential policy model within a semi-structural global macroeconomic model, NiGEM. The existing NiGEM model is expanded for the UK, Germany and Italy to include two macroprudential tools: loan-to-value ratios on mortgage lending and variable bank capital adequacy targets. The former has an effect on the economy via its impact on the housing market while the latter acts on the lending spreads of corporate and households. A systemic risk index that tracks the likelihood of the occurrence of a banking crisis is modelled to establish thresholds at which macroprudential policies should be activated by the authorities. We then show counterfactual scenarios, including a historic dynamic simulation of the subprime crisis and the endogenous response of policy thereto, based on the macroprudential block as well as performing a cost-benefit analysis of macroprudential policies. Conclusions are drawn relating to use of this tool for prediction and policy analysis, as well as some of the limitations and potential further research.
    Keywords: macroprudential policy, house prices, credit, systemic risk, macroeconomic modelling
    JEL: E58 G28
    Date: 2018–03
  13. By: Lloyd, Simon (Bank of England)
    Abstract: I assess the use of overnight indexed swap (OIS) rates as measures of monetary policy expectations. I find that one to twelve-month US OIS rates provide measures of investors’ interest rate expectations that are comparable to those from corresponding-horizon federal funds futures rates, which have regularly been used as financial market-based measures of US interest rate expectations. More generally, I find that one to 24-month US, euro-zone and Japanese OIS rates and one to 18-month UK OIS rates tend to accurately measure expectations of future short-term interest rates. Motivated by these results, researchers can look to OIS rates as globally comparable measures of monetary policy expectations.
    Keywords: Federal funds futures; overnight indexed swaps; monetary policy expectations
    JEL: E43 E44 E52
    Date: 2018–03–01
  14. By: Boneva, Lena (Bank of England); de Roure, Calebe (Bank of Australia); Morley, Ben (Bank of England)
    Abstract: As part of its August 2016 policy package, the Bank of England announced a scheme to purchase up to £10 billion of corporate bonds. Only sterling investment-grade bonds issued by firms making a ‘material’ contribution to the UK economy were eligible to be purchased. So eligible bonds constitute a natural treatment group to estimate the announcement effect of the policy in a difference-in-differences approach. Our results suggest that the scheme reduced spreads of eligible bonds by 13–14 basis points compared to foreign bonds issued by the same set of firms, and by 2–5 basis points compared to ineligible sterling corporate bonds. But because of spillover effects, these estimates should be interpreted as a lower bound.
    Keywords: Central bank asset purchases; corporate bond; announcement effect
    JEL: E43 E58 G12
    Date: 2018–03–26
  15. By: Juan Carlos Cuestas; Karsten Staehr; Javier Ordóñez
    Abstract: The GIPS countries, the Southern European crisis countries, have seen depressed output dynamics and high unemployment since the outbreak of the global financial crisis. This paper considers the effects of measures that seek to improve competitiveness by reducing real unit labour costs. The results are derived in structural vector autoregressive models for each of the GIPS counties, and for the reference countries Germany and the Netherlands. The responses of output and unemployment to innovations in real unit labour costs are economically and statistically significant for Germany and the Netherlands, whereas the responses are typically small and imprecise estimated for the GIPS countries. The small and uncertain effects raise doubts regarding the efficacy of measures that seek to lower real unit labour costs in the GIPS countries.
    Date: 2018–03–22
  16. By: Behrens, Arno; Rizos, Vasileios
    Abstract: The European Semester is the European Union’s annual cycle of economic policy guidance and oversight. Although monitoring the achievement of Europe 2020 Strategy targets, some of which focus on energy and climate change, is among the key actions of the European Semester, the reviewers so far have concentrated on economic policies in the aftermath of the financial and economic crisis. The circular economy is currently part of the European Commission’s agenda for jobs, growth and investment, which are important themes of the Semester. Against this background, this paper assesses the extent to which the European Semester genuinely takes the circular economy into account in its review process. Based on a close examination of the 2017 cycle of the Semester and interviews with experts in the field, our analysis shows that the exercise has devoted limited attention to the circular economy. Several explanations are offered for this situation, along with recommendations for the way forward.
    Keywords: circular economy, European Semester, resource efficiency, macroeconomic impacts
    Date: 2017–12
  17. By: Christian Gross; Pierre L. Siklos
    Abstract: A high-dimensional network of European CDS spreads is modeled to assess the transmission of credit risk to the non-financial corporate sector in Europe. We build on a network connectedness approach that uses variance decompositions in vector autoregressions (VARs) to characterize the dependence structure in the panel of CDS spreads. Our main findings suggest a sectoral clustering in the CDS network, where financial institutions are located in the center of the network and non-financial as well as sovereign CDS are grouped around the financial center. The network has a geographical component re flected in differences in the magnitude and direction of real-sector risk transmission across European countries. We identify an increase in the transmission of financial and sovereign credit risk to the non-financial sector during the global financial crisis and the European debt crisis. By contrast, we find that the transmission of risk within the non-financial sector remains largely unaffected by crisis events.
    Keywords: networks, financial-real linkages connectedness, systemic risk, credit risk, contagion
    JEL: C01 C32 G01 G15
    Date: 2018–03
  18. By: Marta Pascual-Sáez; David Cantarero-Prieto; María González-Diego
    Abstract: The objective of this study is to test the relationships between population ageing and gross saving rates in European countries. We use panel data techniques to explore the possible non-linearity between it. We show that the dependency ratio, when is significant, negatively affects gross saving rates. Besides, life expectancy has non-linear effects on saving rates and rising longevity is a main factor to explain saving rates at national levels. European countries are concerned about the delivery of benefits and services and financial sustainability of their welfare state and increase gross national savings rates can help to fill this gap.
    Keywords: population ageing, gross saving rates, old-age dependency ratio, life expectancy, longevity, European countries.
    JEL: J11 E21
    Date: 2018–03
  19. By: Xisong Jin
    Abstract: In order to effciently capture the contribution to the aggregated systemic risk of each financial institution arising from various important balance-sheet items, this study proposes a comprehensive approach of “Mark-to-Systemic-Risk" to integrate book value data of Luxembourg financial institutions into systemic risk measures. It first characterizes systemic risks and risk spillovers in equity returns for 33 Luxembourg banks, 30 European banking groups, and 232 investment funds.1 The forward-looking systemic risk measures delta CoES, Shapley – delta CoES, SRISK and conditional concentration risk are estimated by using a large-scale dynamic grouped t-copula, and their common components are determined by the generalized dynamic factor model. Several important facts are documented during 2009-2016: (1) Measured by delta CoES of equity returns, Luxembourg banks were more sensitive to the adverse events from investment funds compared to European banking groups, and investment funds were more sensitive to the adverse events from banking groups than from Luxembourg banks. (2) Ranked by Shapley - delta CoES values, money market funds had the highest marginal contribution to the total risk of Luxembourg banks while equity funds exhibited the least share of the risk, and the systemic risk contribution of bond funds, mixed funds and hedge funds became more important toward the end of 2016. (3) The macroeconomic determinants of the aggregate systemic risk of banking groups, Luxembourg banks and investment funds, and the marginal contributions from 15 countries to the aggregate systemic risk of Luxemburg banks and their parent banking groups are all different.
    Keywords: _nancial stability; systemic risk; macro-prudential policy; dynamic copulas; value at risk; shapley values; risk spillovers
    JEL: C1 E5 F3 G1
    Date: 2018–02
  20. By: Melolinna, Marko (Bank of England); Tatomir, Srdan (Bank of England); Miller, Helen (Institute for Fiscal Studies)
    Abstract: We use new firm-level estimates of the cost of capital and uncertainty to study the drivers of UK business investment in a neoclassical investment model. We construct firm-specific measures of the cost of capital and uncertainty and use new UK survey data to estimate firm-specific investment hurdle rates. There is substantial variation in the cost of capital and uncertainty faced by firms and we find both matter for investment. Firm heterogeneity might help explain the difference in firms’ investment paths shortly after the Great Recession. This suggests that, while common shocks, that is, aggregate uncertainty matters, it is also important to capture firm-specific uncertainty to better explain investment dynamics. Overall, between 2000 and 2015 investment responded relatively sluggishly to the cost of capital and more sharply to uncertainty, especially after the financial crisis. There are implications for monetary and macroeconomic policy. The relative importance of measures that alleviate uncertainty compared to changes in monetary policy rates could be larger than generally recognised.
    Keywords: Investment; micro data; panel regression; hurdle rates; cost of capital; uncertainty
    JEL: C23 D22 E22 E44
    Date: 2018–03–02
  21. By: Panayotis D. Alexakis (National and Kapodistrian University of Athens); Ioannis G. Samantas (National and Kapodistrian University of Athens)
    Abstract: The paper examines the nexus of foreign ownership and market power in 26 European banking sectors, for the period 1997-2013. The sample comprises 11,761 bank-year estimates of marginal cost and market power, which are then matched with data on the foreign ownership status and presence across all host countries. The analysis reports strong evidence over the significant effect of well-capitalised foreign-owned banks on their monopolistic conduct. There is also a weaker indication that foreign presence leads to higher margins in large-sized foreign banks in fast-growing economies and markets of stricter regulation on capital, in which foreign penetration lies above 14% of the host banking industry.
    Keywords: Market power; European banks; foreign banking; semiparametric modeling
    JEL: C14 D40 G2 L40
    Date: 2018–02
  22. By: Huliaras, Asteris; Sotiropoulos, Dimitri A.
    Abstract: This article offers an alternative explanation of the ‘Greek crisis’ by using the rentier-state theory. Past explanations referred to domestic pitfalls of the Greek economic development or to external constraints such as the incomplete architecture of the Eurozone. Without rejecting these interpretations, we offer a complementary interpretation underlining the facility and large scale with which external funds have flowed into Greece. This pattern was reminiscent of cases of resource-rich countries of the developing world and have created a semi-rentier state. External resources have spread a ‘rentier mentality’ among state actors and a ‘get-rich-quick mentality’ among business entrepreneurs and interest groups. Political decisions were characterised by riskaverse attitudes, while private actors spent their energy in seeking political protection rather than in initiating new enterprises. Three factors that played a significant role in shaping the Greek crisis and continue to plague Greece are foreign loans, EU funds and tax evasion.
    Keywords: Greece; European Union; rentier state theory; economic crisis; state
    JEL: N0 F3 G3
    Date: 2018–01

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