nep-eec New Economics Papers
on European Economics
Issue of 2018‒07‒09
24 papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Tackling non-performing loans in the Euro area: What are the costs of getting banks fit for a European Deposit Insurance Scheme? By Demary, Markus
  2. Macroeconomic imbalances in the euro area: where do we stand? By Pierluigi, Beatrice; Sondermann, David
  3. EU financial services policy since 2007: crisis, responses and prospects By Nicolas Véron
  4. Structural policies in the euro area By Masuch, Klaus; Anderton, Robert; Setzer, Ralph; Benalal, Nicholai
  5. Overcoming Euro Area fragility By Andrew Watt; Sebastian Watzka
  6. Central Bank Communication and the Yield Curve By Leombroni, Matteo; Vedolin, Andrea; Venter, Gyuri; Whelan, Paul
  7. State-Dependent Transmission of Monetary Policy in the Euro Area By Jan Pablo Burgard; Matthias Neuenkirch; Matthias Nöckel
  8. Financial Institutions’ Business Models and the Global Transmission of Monetary Policy By Isabel Argimon; Clemens Bonner; Ricardo Correa; Patty Duijm; Jon Frost; Jakob de Haan; Leo de Haan; Viktors Stebunovs
  9. Foreign currency bank funding and global factors By Krogstrup, Signe; Tille, Cédric
  10. The international transmission of monetary policy By Buch, Claudia; Bussiere, Matthieu; Goldberg, Linda; Hills, Robert
  11. Credit shocks, employment protection, and growth: firm-level evidence from Spain By Laeven, Luc; McAdam, Peter; Popov, Alexander
  12. Young Enterprises and Bank Credit Denials By Mascia, Danilo V.
  13. Financial and Fiscal Interaction in the Euro Area Crisis : This Time was Different By Caruso, Alberto; Reichlin, Lucrezia; Ricco, Giovanni
  14. International monetary policy spillovers through the bank funding channel By Lindner, Peter; Loeffler, Axel; Segalla, Esther; Valitova, Guzel; Vogel, Ursula
  15. Sovereign Default in a Monetary Union By de Ferra, Sergio; Romei, Federica
  16. A note on the predictive power of survey data in nowcasting euro area GDP By Kurz-Kim, Jeong-Ryeol
  17. International confidence spillovers and business cycles in small open economies By Michał Brzoza-Brzezina; Jacek Kotłowski
  18. Are long-run output growth rates falling? By Ivan Mendieta-Munoz; Mengheng Li
  19. Estimation of the common component in Dynamic Factor Models By Peña Sánchez de Rivera, Daniel; Caro Navarro, Ángela
  20. Crisis and Extremism: Can a Powerful Extreme Right Emerge in a Modern Democracy? Evidence from Greece’s Golden Dawn By Costas Roumanias; Spyros Skouras; Nicos Christodoulakis
  21. The long run impact of foreign direct investment, exports, imports and GDP: evidence for Spain from an ARDL approach By Verónica Cañal-Fernández; Julio Tascón Fernández
  22. International Currencies and Capital Allocation By Maggiori, Matteo; Neiman, Brent; Schreger, Jesse
  23. A heterogeneous-agent model of growth and inequality for the UK By Meenagh, David; Minford, Patrick; Yang, Xiaoliang
  24. Uncertainty about QE effects when an interest rate peg is anticipated By Gerke, Rafael; Giesen, Sebastian; Kienzler, Daniel

  1. By: Demary, Markus
    Abstract: The study of non-performing loans (NPLs) is highly relevant when looking for a solution to the ongoing structural weaknesses in the Euro area banking sectors, especially in light of the planned completion of the banking union and the introduction of a European Deposit Insurance System (EDIS). While the aggregate data on non-performing loans shows some improvements, it cannot be ruled out that problems within large and systemically important banks may persist. For the quantification of these risks, the analysis of NPLs must be based on individual bank data. In order to gain a greater insight, I therefore built a dataset of 76 large and systemically relevant banks in the Euro area, which cover 74.6 percent of the non-performing loans in the Euro area. Although data points had to be imputed with the help of other data sources, the dataset provides a helpful impression of the ongoing problems with NPLs. The analysis reveals that banks with an NPL ratio of 25 percent or higher represent 10.5 percent of the systemically important banks studied here. Moreover, close to 20 percent of the outstanding amounts of the NPLs concentrates on banks with an NPL ratio of 25 percent or higher. When it comes to the dynamics of the NPLs, the decline in the aggregate NPL ratio of the Euro area was mainly driven by banks with moderate NPL ratios that reduced their NPLs further, while banks with higher NPL ratios contributed negatively to the aggregate NPL ratio. In order to demonstrate the extent to which NPLs can be reduced, I ran several simulations with the dataset. A reduction of NPLs in the amount of the loan-loss provisions of the banks is simulated first. It can be seen that the share of banks with an NPL ratio of only up to three percent could increase from 31.6 percent to 53.9 percent. However, the divide in the banking sector also shows up when it comes to write-offs: banks with a low NPL ratio can easily reduce it even further, while banks with a high NPL ratio have a hard time in reducing it significantly. The problem becomes even more severe at the long end of the NPL distribution. Although the number of banks with an NPL ratio of more than 25 percent can be reduced from 10.5 percent to 3.9 percent, there still remains two large with an NPL ratio of more than 25 percent. I also simulated an additional write-off together with recapitalisation measures with the aim of finding banks with NPL ratios of 3 percent or lower and equity capital ratios of at least 7 percent. The recapitalisation costs of the banks in Cyprus would then amount to 2.4 percent of the GDP for each year from 2019 to 2022, while the yearly recapitalisation of the Greek banks would amount to 2.0 percent of the Greek GDP. In Italy, yearly recapitalisation measures would amount to 0.8 percent of the Italian GDP. Less exposed would be Spain with yearly recapitalisation costs of 0.4 percent of the GDP. I conclude from these results, that there are still significant risks in the national banking sectors of the Eurozone, which implies the danger of rendering a common Euro area Deposit Insurance System into a transfer mechanism. If neither the governments nor the private sectors were willing to bear the costs of reducing NPLs and recapitalising their banks, it would be better to abandon the idea of a common deposit insurance or to postpone it far into the future in the hope that banks will grow out of their NPL problems.
    JEL: G21 G28
    Date: 2018
  2. By: Pierluigi, Beatrice; Sondermann, David
    Abstract: This occasional paper reviews the macroeconomic developments in the euro area countries over the past 20 years. It analyses the accumulation of macroeconomic imbalances in the first decade of the EMU and their unwinding during the second decade. It shows that while flow imbalances have been corrected to a large extent, stock imbalances persist. The presence of large stock imbalances implies that the adjustment process needs to continue in the years to come. Accordingly, this paper reviews the national responses so far and the importance of well-functioning national economic structures for facilitating the adjustment process within the EMU. It shows that national structural policies are able to stimulate the supply side of the economy, increase adjustment capacity and mitigate the adverse growth effects of high debt and deleveraging. Finally, it gives an overview of the European response to address macroeconomic imbalances, i.e. the establishment of the Macroeconomic Imbalance Procedure (MIP). The MIP has contributed to increasing the general attention given to macroeconomic imbalances in the euro area and to the critical role that structural reforms play in facilitating their adjustment. Looking forward, further steps would appear to be warranted in order to move from greater awareness towards stronger ownership and implementation of reforms. JEL Classification: E02, F45, O52
    Keywords: economic resilience, macroeconomic imbalance procedure, Monetary Union, stock and flow imbalances, structural reforms
    Date: 2018–06
  3. By: Nicolas Véron
    Abstract: This paper has been first published in Global Policy Volume 9, Supplement 1, June 2018, and available here. It is republished by Bruegel with permission. This paper presents a holistic description and assessment of the European Union’s financial services policy since the start of financial crisis in mid-2007. The decade-long sequence is divided into four themes, in broadly chronological order - the initial reaction to the 2007-08 financial shock; subsequent initiatives framed by political developments at the EU and G20 level; the banking union from mid-2012; and more recent events centred on the United Kingdom vote to exit the EU (Brexit). The analysis identifies banking union as the watershed moment, and correspondingly assesses the EU policy response as mostly inadequate in the first half and mostly effective in the second half of the period covered. Recommendations for future reforms are made in the conclusion. Key recommendations - Complete the task of breaking the bank-sovereign vicious circle in the euro area with a reform package that includes a European Deposit Insurance Scheme that equally protects all insured deposits, the introduction of sovereign concentration charges to reduce the home bias in banks’ sovereign exposures, and the phasing out of national authorities’ ability to ring-fence banks’ capital and liquidity. Move towards a simpler, ‘twin-peaks’ architecture for financial supervision in the European Union with a strengthening of the governance and funding of the European Securities and Markets Authority and an expansion of its scope of direct responsibility over financial business conduct. A long-haul effort of further harmonisation in both banking and non-bank activities (banking union and capital markets union) to move closer to the vision of a single market for financial services, including areas such as accounting, auditing, insolvency legislation and investment taxation.
    Date: 2018–06
  4. By: Masuch, Klaus; Anderton, Robert; Setzer, Ralph; Benalal, Nicholai
    Abstract: Structural policies in the euro area are of great interest for the Eurosystem, particularly as they can support the smooth functioning of the Economic and Monetary Union (EMU) and the effectiveness of monetary policy. This paper adopts a broad definition of structural policies, analysing not only the benefits of efficient labour, product and financial market regulations, but also emphasising the importance of good governance and efficient institutions that ensure high quality and impartial public services, the rule of law and the control of rent-seeking. The paper concludes that there are many opportunities for enhanced structural policies in EU and euro area countries which can yield substantial gains by boosting long-term income and employment growth and supporting social fairness, also via better and more equal opportunities. It provides empirical and model-based analyses on the impacts and the interactions of structural policies, highlighting synergies between growth and inclusiveness, while acknowledging that structural policy changes need to be country-specific to reflect national conditions and social preferences. Welldesigned structural policies would also strengthen economic resilience and convergence of Member States, bringing the euro area closer to the requirements of an optimal currency area and improving the transmission of monetary policy. The paper also discusses the political economy causes of the sluggish implementation of socially beneficial structural policies and assesses ways to deal with possible shortterm costs of reforms. JEL Classification: D60, E24, G28, H11, J08, O47, O43
    Keywords: economic resilience, euro area, governance, inclusive growth, institutional quality, political economy, structural reforms
    Date: 2018–06
  5. By: Andrew Watt; Sebastian Watzka
    Abstract: Some important progress has been made since the crisis, belatedly and often imperfectly, in reforming the institutional framework of the Euro Area. However, the existential weaknesses - redenomination risk given doubts about the effectiveness of the Lender-of-Last-Resort function and the inadequacy of measures to address inherent divergence trends between member countries - have not been resolved. For as long as that is so, the euro area will remain on shaky ground. This report reviews proposals to strengthen the institutional setup of the euro area. A package is proposed that would rectify the over-reliance on the ECB as a firefighter, and put euro area institutions and member states - with the involvement of governments, parliaments and social partners - in charge of dealing with intra-euro area imbalances and keeping growth close to potential. The more a preventive approach can be reinforced, the less recourse is needed to euro-level emergency measures, the greater will be the confidence that such measures can be introduced without risking "moral hazard".
    Date: 2018
  6. By: Leombroni, Matteo; Vedolin, Andrea; Venter, Gyuri; Whelan, Paul
    Abstract: Using the institutional features of ECB monetary policy announcements, we provide direct evidence for the risk premium channel of central bank communication. We show that on days when the ECB announces its monetary policy almost all of the variation of bond yields is driven by communication. Moreover, while the effect of monetary policy is homogeneous across countries before the European debt crisis, we document dramatic differences post crisis and show that communication shocks drive a wedge between peripheral and core yields. We empirically link the periphery-core wedge to break-up and credit risk premia, and study this channel theoretically through the lens of an equilibrium model in which central bank communication reveals information about the state of the economy.
    Keywords: central bank communication; Eurozone; interest rates; monetary policy; risk premia
    JEL: E42 E58 G12
    Date: 2018–06
  7. By: Jan Pablo Burgard; Matthias Neuenkirch; Matthias Nöckel
    Abstract: In this paper, we estimate a logit mixture vector autoregressive (Logit-MVAR) model describing monetary policy transmission in the euro area over the period 1999-2015. MVARs allow us to differentiate between different states of the economy. In our model, the time-varying state weights are determined by an underlying logit model. In contrast to other classes of non-linear VARs, the regime affiliation is neither strictly binary, nor binary with a transition period, and based on multiple variables. We show that monetary policy transmission in the euro area can indeed be described as a mixture of two states. The first (second) state with an overall share of 84% (16%) can be interpreted as a “normal state” (“crisis state”). In both states, output and prices are found to decrease after monetary policy shocks. During “crisis times” the contraction is much stronger, as the peak effect is roughly one-and-a-half times as large when compared to “normal times.” In contrast, the effect of monetary policy shocks is less enduring in crisis times. Both findings provide a strong indication that the transmission mechanism is indeed different for the euro area during times of economic and financial distress.
    Keywords: economic and financial crisis, euro area, mixture VAR, monetary policy transmission, state-dependency
    JEL: C32 E52 E58
    Date: 2018
  8. By: Isabel Argimon; Clemens Bonner; Ricardo Correa; Patty Duijm; Jon Frost; Jakob de Haan; Leo de Haan; Viktors Stebunovs
    Abstract: Global financial institutions play an important role in channeling funds across countries and, therefore, transmitting monetary policy from one country to another. In this paper, we study whether such international transmission depends on financial institutions' business models. In particular, we use Dutch, Spanish, and U.S. confidential supervisory data to test whether the transmission operates differently through banks, insurance companies, and pension funds. We find marked heterogeneity in the transmission of monetary policy across the three types of institutions, across the three banking systems, and across banks within each banking system. While insurance companies and pension funds do not transmit home-country monetary policy internationally, banks do, with the direction and strength of the transmission determined by their business models and balance sheet characteristics.
    Keywords: Monetary policy transmission ; Global financial institutions ; Bank lending channel ; Portfolio channel ; Business models
    JEL: E5 F3 F4 G2
    Date: 2018–05–29
  9. By: Krogstrup, Signe; Tille, Cédric
    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
  10. By: Buch, Claudia (Deutsche Bundesbank); Bussiere, Matthieu (Banque de France); Goldberg, Linda (Federal Reserve Bank of New York); Hills, Robert (Bank of England)
    Abstract: This paper presents the novel results from an internationally coordinated project by the International Banking Research Network (IBRN) on the cross-border transmission of conventional and unconventional monetary policy through banks. Teams from 17 countries use confidential micro-banking data for the years 2000 through 2015 to explore the international transmission of monetary policies of the US, euro area, Japan, and United Kingdom. Two other studies use international data with different degrees of granularity. International spillovers into lending to the private sector do occur, especially for US policies, and bank-specific heterogeneity influences the magnitudes of transmission. The effects are supportive of the international bank lending channel and the portfolio channel of monetary policy transmission. They also show that the frictions that banks face matter; in particular, foreign currency funding and hedging considerations can be a key source of heterogeneity. The forms of bank balance sheet heterogeneity that differentiate spillovers across banks are not uniform across countries. International spillovers into lending can be large for some banks, even while the average international spillovers of policies into non-bank lending generally are not large.
    Keywords: Monetary policy; international spillovers; cross-border transmission; global bank; global financial cycle
    JEL: E52 G15 G21
    Date: 2018–06–01
  11. By: Laeven, Luc; McAdam, Peter; Popov, Alexander
    Abstract: We offer new evidence on the real effects of credit shocks in the presence of employment protection regulations by exploiting a unique provision in Spanish labor laws: dismissal rules are less stringent for Spanish firms with fewer than 50 employees, lowering the cost of hiring new workers. Using a new dataset, we find that during the financial crisis, healthy firms with fewer than 50 employees borrowing from troubled banks grew faster in sectors where capital and labor were sufficiently substitutable. This result does not obtain when we use a different cut-off for Spain or the same cut-off for firms in Germany. Our evidence suggests that labor market flexibility can dampen the negative effect of credit shocks by allowing firms to keep growing by substituting labor for capital. JEL Classification: G21, J80, D20
    Keywords: capital-labor substitution, credit crunch, employment protection, firmgrowth
    Date: 2018–07
  12. By: Mascia, Danilo V. (Asian Development Bank Institute)
    Abstract: By employing a sample of 20,956 observations of nonfinancial small and medium-sized enterprises (SMEs) headquartered in the euro area, between 2009 and 2015, we test whether young businesses are more likely to face credit rejections from lenders than their older peers. Our findings appear to confirm our suspicions that new enterprises consistently experience higher denials from banks compared with more established businesses. Such a result is stable to different model specifications and is also confirmed once we handle the issue of sample selection bias potentially affecting our data. Additional tests also reveal that credit constraints are particularly difficult for young SMEs located in Southern and Central Europe, as well as for those operating in the “trade” industry. Overall, our evidence suggests that actions from the policy maker could be desirable to support the viability of credit and, thus, ensure the growth of young businesses in the euro area.
    Keywords: SMEs; young enterprises; bank loans; credit rationing
    JEL: D82 G20 G21 G30 L26 M13
    Date: 2018–05–09
  13. By: Caruso, Alberto (Université Libre de Bruxelles); Reichlin, Lucrezia (London Business School ; CEPR); Ricco, Giovanni (OFCE ; SciencesPo)
    Abstract: This paper highlights the anomalous characteristics of the Euro Area `twin crises' by contrasting the aggregate macroeconomic dynamics in the period 2009-2013 with the business cycle fluctuations of the previous decades. We report three stylised facts. First, the contraction in output was marked by an anomalous downfall in investment, while consumption, savings and unemployment followed their historical relation with GDP. Second, households' and financial corporations' debts, and house prices deviated from their pre-crisis trends. Third, the jump in the public decit GDP ratio in 2008-2009 was unprecedented and so was the scal consolidation that followed. Our analysis points to the financial nature of the crisis as a likely explanation for these facts. Importantly, the `anomaly' in public deficit is in large part explained by extraordinary measures in support of the financial sector, which show up in the stockflow adjustments and reveal a key interaction between the fiscal and the financial sectors.
    Keywords: Euro Area ; government debt ; recessions ; financial crises ; business cycles
    JEL: C11 C32 C54 E52 E62
    Date: 2018
  14. By: Lindner, Peter; Loeffler, Axel; Segalla, Esther; Valitova, Guzel; Vogel, Ursula
    Abstract: In this paper, we examine the international transmission of monetary policies of major advanced economies (US, UK, euro area) through banks in Austria and Germany. In particular, we compare the role of banks' funding structure, broken down by country of origin as well as by currency denomination, in the international transmission of monetary policy changes to bank lending. We find weak evidence for inward spillovers. The more a bank is funded in US dollars, the more its domestic real sector lending is affected by monetary policy changes in the US. This effect is more pronounced in Germany than in Austria. We do not find evidence for outward spillovers of euro area monetary policy through a bank funding channel.
    Keywords: monetary policy spillover,global banks,bank funding channel
    JEL: E52 F33 G21
    Date: 2018
  15. By: de Ferra, Sergio; Romei, Federica
    Abstract: In the aftermath of the global fi nancial crisis, sovereign default risk and the zero lower bound have limited the ability of policy-makers in the European monetary union to achieve their stabilization objective. This paper investigates the interaction between sovereign default risk and the conduct of monetary policy, when borrowers can act strategically and they share with their lenders a single currency in a monetary union. We address this question in an endogenous sovereign default model of heterogeneous countries in a monetary union, where the monetary authority may be constrained by the zero lower bound. We uncover three main results. First, in normal times, debtors have a stronger incentive to default to induce more expansionary monetary policy. Second, the zero lower bound, or constraints on monetary policy, may act as a disciplining device to enforce repayment of sovereign debt. Third, sovereign default risk induces countries with a preference for tight monetary policy to accept a laxer policy stance. These results help to shed light on the recent European experience of high default risk, expansionary monetary policy and low nominal interest rates.
    Keywords: Heterogeneous Countries; monetary union; sovereign default; zero lower bound
    JEL: F34 F42 H63
    Date: 2018–06
  16. By: Kurz-Kim, Jeong-Ryeol
    Abstract: This paper investigates the trade-off between timeliness and quality in nowcasting practices. This trade-off arises when the frequency of the variable to be nowcast, such as GDP, is quarterly, while that of the underlying panel data is monthly; and the latter contains both survey and macroeconomic data. These two categories of data have different properties regarding timeliness and quality: the survey data are timely available (but might possess less predictive power), while the macroeconomic data possess more predictive power (but are not timely available because of their publication lags). In our empirical analysis, we use a modified dynamic factor model which takes three refinements for the standard dynamic factor model of Stock and Watson (2002) into account, namely mixed frequency, pre-selections and co-integration among the economic variables. Our main finding from a historical nowcasting simulation based on euro area GDP is that the predictive power of the survey data depends on the economic circumstances, namely, that survey data are more useful in tranquil times, and less so in times of turmoil.
    Keywords: nowcasting,dynamic factor model,mixed frequency,pre-selections,co-integration,survey data,trade-off between timeliness and quality,turmoil and tranquility
    JEL: C22 C38 C53 E37
    Date: 2018
  17. By: Michał Brzoza-Brzezina (Narodowy Bank Polski and Warsaw School of Economics); Jacek Kotłowski (Narodowy Bank Polski and Warsaw School of Economics)
    Abstract: This paper draws from two observations in the literature. First, that shocks to entrepreneur or household confidence matter for economic outcomes. Second, that it is hard to explain the extent of cyclical comovement between economies taking into account their trade links only. We check empirically to what extent confidence fluctuations matter for business cycles and in particular for their comovement between economies. We focus on a large (euro area) and a small, nearby economy (Poland). Our results show that confidence fluctuations account for approximately 40% of business cycle fluctuations in the euro area. Spillovers of confidence shocks are also large. Our main finding is that the their direct impact (i.e. not via trade but through the cross-border spread of news and business sentiment) accounts for almost 40% of business cycle fluctuations in Poland.
    Keywords: International spillovers, animal spirits, sentiments, business cycle
    JEL: C32 E32 F44
    Date: 2018
  18. By: Ivan Mendieta-Munoz; Mengheng Li
    Abstract: This paper studies the evolution of long-run output and labour productivity growth rates in the G-7 countries during the post-war period. We estimate the growth rates consistent with a constant unemployment rate using time-varying parameter models that incorporate both stochastic volatility and a Heckman-type two-step estimation procedure that deals with the possible endogeneity problem in the econometric models. The results show a significant decline in long-run growth rates that is not associated with the detrimental effects of the Great Recession, and that the rate of growth of labour productivity appears to be behind the slowdown in long-run GDP growth.
    Keywords: Long-run output growth rates, unobserved components, Kalman filter, time- varying parameter models, stochastic volatility, Heckman two-step bias correction. JEL Classification: O41, O47, C15, C32
    Date: 2018
  19. By: Peña Sánchez de Rivera, Daniel; Caro Navarro, Ángela
    Abstract: One of the most effective techniques that allows a low-dimensional representation of Big Datasets is the Dynamic Factor Model (DFM). We analyze the finite sample performance of the well-known Principal Component estimator for the common component under different scenarios. Simulation results show that for data samples with large number of observations and small time series dimension, the variance-covariance matrix specification with lags provides better estimations than the classic variance-covariance matrix. However, in high-dimension data samples the classic variance-covariance matrix performs better no matter the sample size. Second, we apply the Principal Component estimator to obtain estimates of the business cycles of the Euro Area and its country members. This application, together with a cluster analysis, studies the phenomenon known as the Two-Speed Europe with two groups of countries not geographically related.
    Keywords: Time series ; Factor Models ; Principal Components ; Canonical Correlations
    Date: 2018–06–15
  20. By: Costas Roumanias; Spyros Skouras; Nicos Christodoulakis
    Abstract: By local and international standards, Golden Dawn (GD) is at the far end of Extreme Right, yet it has emerged as Greece’s third largest party, gaining most of its electoral support within months, in early 2012. Its electoral rise has been attributed to the severe economic crisis the country had previously and since experienced. We investigate this remarkable case study econometrically, using both panel vote-share, and individual vote-intent regressions. Dramatic changes in parameters provide congruent evidence that GD’s success was due to a change in voter behaviour, rather than changes in individual characteristics or contextual conditions. Around one third of this change was due to GD’s success in taking ownership of the previously ownerless niche issues of immigration and law-and-order; the remaining change is attributed to its success in attracting financially distressed voters and voters fitting a typical Extreme Right demographic. Auxiliary evidence suggests this change was driven by a massive realignment of voters fleeing mainstream parties, after a coalition government imposed harsh austerity measures.
    Date: 2018–06
  21. By: Verónica Cañal-Fernández (Department of Economics Faculty of Economics and Business University of Oviedo); Julio Tascón Fernández (Department of Economics Faculty of Economics and Business University of Oviedo)
    Abstract: This paper analyses the relationship between foreign direct investment (FDI), exports and economic growth in Spain using annual time series data for the period 1970 to 2016. To examine these linkages the autoregressive distributed lag (ARDL) bounds testing approach to cointegration for the long-run is applied. The error correction model (ECM) is used to examine the short-run dynamics and the vector error correction model (VECM) Granger causality approach is used to investigate the direction of causality. The results confirm a long-run relationship among the examined variables. The Granger causality test indicates a strong unidirectional causality between FDI and exports with direction from FDI to exports. Besides, the results for the relationship between FDI and economic growth are interesting and indicate that there is no significant Granger causality from FDI to economic growth and vice-versa.
    Keywords: Foreign direct investment; exports; imports; GDP; ARDL bounds; causality
    JEL: C22 E31 E50
    Date: 2018–04
  22. By: Maggiori, Matteo; Neiman, Brent; Schreger, Jesse
    Abstract: We establish that global portfolios are driven by an often neglected aspect: the currency of denomination of assets. Using a dataset of $27 trillion in security-level investment positions, we demonstrate that investor holdings are biased toward their own currencies to such an extent that each country holds the bulk of all debt securities denominated in their own currency, even those issued by foreign borrowers in developed countries. Surprisingly, currency is such a strong predictor of the nationality of a security's holder that the nationality of the issuer - to date, the most powerful predictor in a voluminous literature on cross-border portfolios - adds very little explanatory power. While large firms issue bonds in foreign currency and borrow from foreigners, the vast majority of firms issue only in local currency and do not directly access foreign capital. These patterns hold broadly across countries with the exception of countries, like the United States, that issue an international currency. The global willingness to hold the US dollar means that even smaller US firms that borrow exclusively in dollars have little difficulty borrowing from abroad. Global portfolios shifted sharply away from the euro and toward the dollar starting with the 2008 financial crisis, further cementing the dollar's international role and potentially amplifying the benefit that its status brings to the US.
    Keywords: Capital Flows; Exorbitant Privilege; Home Bias; reserve currencies
    JEL: E42 E44 F3 F55 G11 G15 G23 G28
    Date: 2018–06
  23. By: Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School); Yang, Xiaoliang (Cardiff Business School)
    Abstract: This paper analyses the effect of wealth inequality on UK economic growth in recent decades with a heterogeneous-agent growth model where agents can enhance individual productivity growth by undertaking entrepreneurship. The model assumes wealthy people are more able to afford the costs of entrepreneurship. Wealth concentration therefore stimulates entrepreneurship among the rich and so aggregate growth, whose fruits in turn are largely captured by the rich. This process creates a mechanism by which inequality and growth are correlated. The model is estimated and tested by indirect inference and is not rejected. Policy-makers face a trade-off between redistribution and growth.
    Keywords: Heterogeneous-agent Model, Entrepreneurship, Aggregate Growth, Wealth Inequality, Redistribution, Indirect Inference
    JEL: E10 C63 O30 O40
    Date: 2018–06
  24. By: Gerke, Rafael; Giesen, Sebastian; Kienzler, Daniel
    Abstract: After hitting the lower bound on interest rates, the Eurosystem engaged in a public sector purchase programme (PSPP) and forward guidance (FG). We use prior and posterior predictive analysis to evaluate the importance of parameter uncertainty in an analysis of these policies. We model FG as an anticipated temporary interest rate peg. The degree of parameter uncertainty is considerable and increasing in the length of FG. The probability of being able to reset prices and wages is the most important factor driving uncertainty about inflation. In contrast, variations in financial intermediaries' net worth adjustment costs have little impact on in ation outcomes.
    Keywords: prior/posterior predictive analysis,anticipated interest rate peg,parameter uncertainty,euro area,QE,PSPP,forward guidance puzzle
    JEL: C53 E32 E52
    Date: 2018

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