nep-eec New Economics Papers
on European Economics
Issue of 2018‒05‒28
eleven papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Effects of asset purchases and financial stability measures on term premia in the euro area By Richhild Moessner
  2. Regulating the doom loop By Alogoskoufis, Spyros; Langfield, Sam
  3. Foreign Currency Bank Funding and Global Factors By Signe Krogstrup; Cédric Tille;
  4. ECB monetary policy and the euro exchange rate By Martina Cecioni
  5. The analysis of the economic impact of Brexit on the European Union By Ana-Maria Holobiuc
  6. Financial Market Contagion and the Sovereign Debt Crisis: A Smooth Transition Approach By Susana Martins; Cristina Amado
  7. Economic Growth in the EU: Is Flexicurity a Help or a Hindrance? By Hilary Clistina Ingham
  8. Competitiveness at the country-sector level: New measures based on global value chains By Marczak, Martyna; Beissinger, Thomas
  9. The drivers of household indebtedness re-considered: an empirical evaluation of competing macroeconomic arguments on the determinants of household indebtedness in OECD countries By Glenn Lauren Moore
  10. he Natural Rate of Interest: Information Derived from a Shadow Rate Model By Viktors Ajevskis
  11. On the Bi- and Uni-lateral Trade Effects of EMU Membership By Larch, Mario; Wanner, Joschka; Yotov, Yoto

  1. By: Richhild Moessner
    Abstract: We study the effects of the announcements of ECB asset purchases and of financial stability measures in the euro area on ten-year government bond term premia in eleven euro area countries in the wake of the global financial crisis and the euro area sovereign debt crisis. We find that the term premia of euro area countries with higher sovereign risk, as measured by sovereign CDS spreads, decreased more in response to the announcements of asset purchases and financial stability measures. Term premia of countries with the lowest sovereign risk either increased as in Germany, or were not significantly affected or fell slightly, as in the Netherlands and Finland.
    Keywords: monetary policy, asset purchases, financial stability, term premia
    JEL: E58 G15
    Date: 2018–05
  2. By: Alogoskoufis, Spyros; Langfield, Sam
    Abstract: Euro area governments have committed to break the doom loop between bank risk and sovereign risk. But policymakers have not reached consensus on whether and how to reform the regulatory treatment of banks’ sovereign exposures. To inform policy discussions, this paper simulates portfolio reallocations by euro area banks under scenarios for regulatory reform. Simulations highlight a tension in regulatory design between concentration and credit risk. An area-wide low-risk asset—created by pooling and tranching cross-border portfolios of government debt securities— would resolve this tension by expanding the portfolio opportunity set. Banks could therefore reinvest into an asset that has both low concentration and low credit risk. JEL Classification: G01, G11, G21, G28
    Keywords: bank regulation, sovereign risk, systemic risk
    Date: 2018–05
  3. By: Signe Krogstrup (International Monetary Fund); Cédric Tille (The Graduate Institute of International and Development Studies);
    Abstract: The literature on drivers of capital flows stresses the prominent role of global financial factors. Recent empirical work, however, highlights how this role varies across countries and time, and this heterogeneity is not well understood. We revisit this question by focusing on financial intermediaries’ funding flows in different currencies. A portfolio model shows that the sign and magnitude of the response of foreign currency funding flows to global risk factors depend on the financial intermediary’s pre-existing currency exposure. Analysis of data on European banks’ aggregate balance sheets lends support to the model predictions, especially in countries outside the euro area.
    Keywords: Currency mismatch, capital flows, push factors, spillovers, cross-border transmission of shocks, European bank balance sheets
    JEL: F32 F34 F36
    Date: 2018–05–11
  4. By: Martina Cecioni (Bank of Italy)
    Abstract: The paper provides empirical evidence on the effects of ECB conventional and unconventional monetary policy on the euro exchange rate, focusing on the period from January 2013 to September 2017. Innovations to conventional and unconventional monetary policies are identified through changes in, respectively, short- and long-term interest rates immediately after Governing Council meetings. Both types of measures contributed to the depreciation of the euro from mid-2014; surprises associated with conventional measures had a stronger and more persistent effect than those associated with unconventional ones. Time-varying estimates of the effects of conventional surprises since 1999 show that the responsiveness of exchange rates to monetary news increased markedly from 2013. State-dependence analysis finds that the exchange rate became more sensitive to monetary policy when the ECB adopted a policy of negative interest rates and when conventional and unconventional monetary surprises moved in the same direction.
    Keywords: unconventional monetary policy, exchange rates, European Central Bank
    JEL: E52 E58 F31
    Date: 2018–04
  5. By: Ana-Maria Holobiuc (Bucharest University of Economic Studies)
    Abstract: The European Union has been considered over time a guarantor of the regional stability and prosperity, being also recognized as one of the most influential player in the global economic arena. However, the European Union has recently faced significant political and economic challenges, such as the migration and refugee crisis, the United Kingdom’s withdrawal, the increasing power of Russia and the enhancement of the terrorist threat. The purpose of this paper is to present the economic consequences of the United Kingdom's withdrawal from the European Union, a decision that represents a turning point in the history of over half a century of the regional group. In this regard, the study encompasses the critical review of the literature on this topic and the analysis of the relevant statistical data. The perspectives of theoreticians are extensive and sometimes diverging. While some analysts believe that Brexit will undermine the European integration project, others consider that the effects will be manageable by the remaining 27 Member States. Analyzing the statistical data on GDP, stocks of FDI, trade in goods and services, we have revealed that the United Kingdom plays an important role in shaping the economic power of the European bloc. Consequently, with the completion of Brexit, it is likely that the economic power of the European Union will diminish, particularly in terms of GDP and trade in goods and services.
    Keywords: European Union, Brexit, economic power, international trade
    JEL: F15 F50
    Date: 2018–05
  6. By: Susana Martins (University of Minho and NIPE); Cristina Amado (University of Minho and NIPE, CREATES and Aarhus University)
    Abstract: In this paper, we investigate the timing and extent of sovereign debt contagion across nine Eurozone countries using daily returns on 10-year government bonds from 2007 until 2017. The novelty lies in modelling bond return correlations using a multivariate GARCH model with a multiplicative decomposition of the variance and time-varying conditional correlations. The model introduces flexibility by allowing the individual unconditional variances to be time-dependent and the correlations to change smoothly between two extreme states according to time and observable financial variables. The main results provide no evidence of asymmetric response of comovements to negative shocks, as opposed to the size of innovations from the periphery which is expected to affect the dynamics of correlations. Our findings further indicate the presence of long-run contagion effects across peripheral countries following the more acute phase of the sovereign crisis. Interestingly, periods of high turbulence in the European stock market do not seem to drive financial contagion.
    Keywords: Financial contagion; European sovereign debt crisis; Multivariate GARCH model; Dynamic correlations; Multiplicative decomposition of volatility
    JEL: C32 C58 G01 G15
    Date: 2018
  7. By: Hilary Clistina Ingham
    Abstract: In the light of the recent economic crisis, flexicurity has permeated many European Union (EU) policies with the hope that more flexible labour markets alongside modern social security systems and active learning can reinvigorate economic growth. This paper employs a variant of the Solow growth model to examine the impact that flexicurity had on economic growth in 27 EU Member States for the years 2000 to 2015. Using principal components to capture the multi-faceted concept of flexicurity, the results reveal that, in isolation, flexicurity failed to provide any growth stimulus. Lifelong learning, active labour market policy and modern security systems proved However, incorporating the role of the social partners and trust into the model provided a more positive picture of the flexicurity-growth relationship.
    Keywords: Economic Growth, Flexicurity, European Union
    JEL: J38 J48 J51 J83 O47
    Date: 2018
  8. By: Marczak, Martyna; Beissinger, Thomas
    Abstract: We propose the so-called domestic "embodied unit labor costs" (EULC) at the country-sector level as a new cost-related basis for measures of international competitiveness. EULC take into account that a sector's labor costs constitute only a small share of its total cost which to a large extent consist of expenses for inter- mediate goods from other sectors. In line with a simple Leontief-type model, the proposed measure is constructed as a weighted average of unit labor costs of all do- mestic sectors contributing to the final goods of a specific sector. The contribution is expressed in value-added terms and takes global supply chains into account. We also show how EULC can be consistently calculated for sectoral aggregates such as the tradable goods sector. Based on EULC we propose the 'embodied real effec- tive exchange rate' (EREER) at the country-sector level as a new competitiveness indicator where the relevance of trading partners is quantified by an appropriate value-added measure. The chosen value-added concept replaces gross exports tra- ditionally used as the weight basis in effective exchange rates. Using the World Input-Output Database (WIOD) we employ the proposed indicators to shed new light on changes in cost competitiveness at the sectoral level for Germany, and compare the empirical evidence with selected other euro area countries.
    Keywords: unit labor costs,real effective exchange rate,global supply chains,input-output analysis,sectoral analysis,international competitiveness,WIOD,Germany
    JEL: J30 C67 E01 F16 F23
    Date: 2018
  9. By: Glenn Lauren Moore (Department of Economics, SOAS, University of London, UK)
    Abstract: Household debt is at a record high in most OECD countries and it played a crucial role in the recent financial crisis. Several arguments on the macroeconomic drivers of household debt have been put forward, and most have been empirically tested, albeit in isolation of each other. This paper empirically tests seven competing hypotheses on the macroeconomic determinants of household indebtedness together in one econometric study. Existing arguments suggest that residential house prices, upward movements in the prices of assets demanded by households, the income share of the top 1%, falling wages, the rolling back of the welfare state, the age structure of the population and the short-term interest rate drive household indebtedness. We formulate these arguments as hypotheses and test them for a panel of 13 OECD countries over the period 1993 - 2011 using error correction models. We also investigate whether effects differ in boom and bust phases of the debt and house price cycles. The results show that the most robust macroeconomic determinant of household debt is real residential house prices, and that the phase of the debt and house price cycles plays a role in household debt accumulation.
    Keywords: household debt; house prices; cycles
    JEL: E19 E21 R20
    Date: 2018–05
  10. By: Viktors Ajevskis (Bank of Latvia)
    Abstract: The study proposes an estimation method of the natural rate of interest based on the shadow rate term structure of interest rates model and using information from nominal yields data. For the purpose of comparison and robustness check, different samples for the estimation of the natural rate of interest – three for the euro area and two for the US – are considered. The estimates based on all considered samples show a downturn trend in the estimated natural rates of interest for the euro area. However, since the beginning of 2013, this downward trend has levelled off. Compared to the results obtained by affine models, the shadow rate model produces lower estimates of natural rates of interest. From the beginning of 2013, the dynamics of estimated series of the US natural rate of interest closely follows the series produced by Laubach–Williams. However, before that the series are more divergent. In order to demonstrate the use of the natural rate of interest, we employ the estimated series of the natural rate of interest in the balance-approach version of the Taylor rule. The results imply that, at the end of the sample in July 2017, Taylor rule-suggested policy rates were in line with the actual ECB policy rates.
    Keywords: natural rate of interest, term structure of interest rates, lower bound, non-linear Kalman filter
    JEL: C24 C32 E43 E58 G12
    Date: 2018–04–20
  11. By: Larch, Mario (University of Bayreuth); Wanner, Joschka (University of Bayreuth); Yotov, Yoto (Drexel University)
    Abstract: We propose a simple theoretically consistent adjustment for structural gravity estimations of the EMU impact on international trade. Our methods result in two contributions to the related literature. First, we show that proper control for intra-national trade flows leads to larger, positive, and statistically significant bilateral EMU effects. Second, the introduction of intra-national trade flows enables us to identify unilateral EMU effects on trade between members and non-member countries. The unilateral effects are also positive, sizable and statistically significant.
    Keywords: Currency Unions; Euro Effects; EMU; Unilateral EMU Effect; Structural Gravity Models
    JEL: F10 F14 F15 F33
    Date: 2018–04–30

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