nep-eec New Economics Papers
on European Economics
Issue of 2018‒07‒16
sixteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Making the Eurozone work: a risk-sharing reform of the European Stability Mechanism By Giovanni Dosi; Marcello Minenna; Andrea Roventini; Roberto Violi
  2. Asset price volatility in EU-6 economies: how large is the role played by the ECB? By Alessio Ciarlone; Andrea Colabella
  3. Uncertainty and spillover effects across the Euro area By Angelini, Giovanni; Costantini, Mauro; Easaw, Joshy
  4. Time-varying cointegrating regression analysis with an application to the long-run interest rate pass-through in the Euro Area By Afonso-Rodríguez, Julio A.; Santana-Gallego, María
  5. Could a national wage rule stabilize the current account and functional income distribution in the Euro area? By Camille Logeay; Heike Joebges
  6. Fiscal policies in the euro area: revisiting the size of spillovers By Mario Alloza; Pablo Burriel; Javier J. Pérez
  7. The Credit Default Swap market contagion during recent crises: International evidence By Saker Sabkha; Christian De Peretti; Dorra Hmaied
  8. Inequality in EMU: is there a core periphery dualism? By Enrico D’Elia; Roberta De Santis
  9. Montenegro’s Unilateral Euroization By Arslan Razmi
  10. Foreign-law bonds: can they reduce sovereign borrowing costs? By Chamon, Marcos; Schumacher, Julian; Trebesch, Christoph
  11. Credit Shocks, Employment Protection, and Growth: Firm-level Evidence from Spain By Laeven, Luc; McAdam, Peter; Popov, Alexander
  12. Fiscal decentralization in the EU: Common patterns through a club convergence analysis. By Francisco A. Blanco; Francisco J. Delgado; Maria J. Presno
  13. ECB vs Bundesbank: Diverging Tones and Policy E ectiveness By Peter Tillmann; Andreas Walter
  14. Short term forecasts of economic activity: are fortnightly factors useful? By Libero Monteforte; Valentina Raponi
  15. Dissecting the Input-Output Structure of the Greek Economy By Mariolis, Theodore; Leriou, Eirini; Soklis, George
  16. Fixed rate versus adjustable rate mortgages: evidence from euro area banks By Ugo Albertazzi; Fulvia Fringuellotti; Steven Ongena

  1. By: Giovanni Dosi; Marcello Minenna; Andrea Roventini; Roberto Violi
    Abstract: This work presents an original proposal for the reform of the Eurozone architecture according to an approach based on risk sharing (aiming to reach in the long-term the mutualization of public debt). The proposal envisages a new role for the European Stability Mechanism (ESM) which should gradually become the guarantor of the public debts of the EMU. In this way, the new ESM would support the full transition from national debts to a single Eurozone public debt (e.g. Eurobonds) with a single yield curve for all countries. Our proposal would benefit both core and peripheral EMU countries. Indeed, the riskiest countries, which would gain from the ESM conditional debt guarantee, should give up the possibility of redenominating their national debt and would pay to the ESM the corresponding market price of the guarantee. This would strengthen the capital endowment of the ESM and also allow it to use its leverage capability to support the realignment of the economic cycles of the different countries through profitable public investment plans concentrated in the weakest regions of the EMU. Such plans would be coordinated and implemented by the European Union. After a transition period, our Insurance Fund proposal would contribute to a much more resilient monetary union, with a European fiscal policy and debt. Admittedly this proposal presupposes a political consensus at the EU level to reinterpret to the no bailout rule enshrined in the treaties so that risk sharing institutions implemented with fairly priced insurance scheme can be allowed. New risk sharing institutions will foster a common vision of belonging to the same federal, political union in the making, the only one compatible with the abdication of fiscal sovereignty by national governments
    Keywords: Sovereign Debt, Risk-Sharing, Insurance Fund, ESM, ECB, OMT, QE, CDS spread, Investmentsù Multiplier, Bond-Market Discipline, Safe Asset
    Date: 2018–07–07
  2. By: Alessio Ciarlone (Banca d'Italia); Andrea Colabella (Banca d'Italia)
    Abstract: In this paper we provide evidence that the effects of the different waves of asset purchase programmes implemented by the ECB from 2009 onwards have spilled over into asset price volatility developments of a group of six Central and Eastern European economies belonging to the EU but not to the euro area. This has partly shielded their financial markets from the negative shocks that have influenced international investors’ degree of risk aversion in recent years. By means of a dynamic conditional correlation multivariate GARCH model, and by resorting to three different proxies to describe the functioning and measure the impact of the ECB’s asset purchase programmes, we show that such non-standard monetary measures have played a significant role in dampening volatility spikes in the financial markets of the countries at stake. This probably reflects how both a ‘risk taking’ and a ‘liquidity’ channel of transmission actually work. The results are generally robust to an extensive series of tests, and to changes made in the estimation methodology.
    Keywords: unconventional monetary policy, ECB, Central and Eastern Europe, international spillovers, asset prices, volatility, GARCH models
    JEL: C32 E52 E58 F3 F4 F16 F37 G1 G11 G14
    Date: 2018–06
  3. By: Angelini, Giovanni; Costantini, Mauro; Easaw, Joshy (Cardiff Business School)
    Abstract: This paper investigates how macroeconomic uncertainty shocks spillover over four Eurozone countries. It also evaluates their impact on real economic activity. The paper proposes a simple two-country model with a core and a periphery economy, where uncertainty shocks spread from one country to another, with potential feedback fromthe periphery economy to the core one. An empirical analysis is conducted using a Structural Vector Autoregressive (SVAR) model with two regimes: pre-crisis period and crisis period. The findings point to uncertainty spillovers among the Eurozone countries, with some feedback from periphery economies to the core economies during the financial crisis period. Further, there is a need to account for spillovers when studying the impact of uncertainty on real economic activity.
    Keywords: Uncertainty, EuroArea, Spillover effects, Real Economic Activity
    JEL: C32 C50 E32
    Date: 2018–06
  4. By: Afonso-Rodríguez, Julio A. (Department of Applied Economics and Quantitative Methods, University of La Laguna); Santana-Gallego, María (Department of Applied Economics, University of the Balearic Islands)
    Abstract: This paper study the mechanism of transmission between the money and the retail credit markets stated in terms of the long-run relationship between the harmonized interest rates for different credit categories and for a subset of countries of the EMU (European Monetary Union). This mechanism, known as the interest rate pass-through (IRPT) phenomenon, has been analyzed in many empirical studies using a variety of econometric techniques, for different samples of countries and periods of time, and the general conclusion is that the pass-through seems to be incomplete in the long-run. Except for a few recent works, the analysis is performed on the basis on a time-invariant long-run relationship which may not be appropriate in this case and could condition this result. To evaluate the robustness of these findings we extend the analysis through a non-linear model for the long-run relationship between the money and the retail markets that incorporates in a very flexible form, and with minimum requirements on tuning parameters, the nonlinearity in the form of time-varying parameters. To that end we follow the approach initiated in Bierens (1997) and also propose some new tools to test for the existence of a stable time-varying cointegration relationship. The results obtained seems to support the former evidence of an incomplete pass-through.
    Keywords: retail interest rates, monetary policy, cointegration analysis, structural instability, time-varying cointegration
    JEL: E52 F36 C22
    Date: 2018–01
  5. By: Camille Logeay; Heike Joebges
    Abstract: Since the introduction of the euro, divergent nominal wage developments in member countries contributed to economic imbalances, prominently visible in the current account. Wages are factor costs and as such key determinants of the price competitiveness of the tradable sector and the domestic price level of the whole economy in a monetary union. As income, they are an important determinant of domestic demand and imports. Building on the work of Horn/Logeay (2004), Herr/Horn (2012), and Onaran/Stockhammer (2016), this paper discusses how the adoption of a wage rule in member countries can help address the problem of economic imbalances. Yet, in contrast to the debate about wage?led vs. profit?led countries, and the overall growth effect of wage developments, we focus on the relationship between wages and the current account as well as the one between wages, prices, and functional income distribution. While we recommend the wage rule for all member countries, this article focuses on selected crisis countries. We first assess two conditions which are necessary in order for the wage rule to be valid: 1) demand aspects (the increase in domestic demand resulting from increased wages) outweigh cost aspects (the decrease in price competitiveness resulting from higher wages), 2) distributional effects do not prevent the transmission from wages to prices. We conclude that the implementation of the wage rule in member countries would have dampened economic divergences in the euro area, including current account imbalances. To promote the inclusion of the wage rule in all member countries, we recommend including the wage rule as a relevant indicator for the MIP?scoreboard of the European Commission, alongside support for labour market institutions. Furthermore, in order to stabilize the functional income distribution, profits (and taxes) would have to follow a similar rule.
    Date: 2018
  6. By: Mario Alloza (Banco de España); Pablo Burriel (Banco de España); Javier J. Pérez (Banco de España)
    Abstract: The issue of the size of fiscal spillovers in the euro area has gained prominence recently, given proposals to coordinate fiscal policies that aim at achieving an appropriate “aggregate fiscal stance”, consistent with economic and monetary policy conditions. Given the heterogeneous fiscal positions of member states, such stance would be achieved by fine-tuning policies of countries with enough fiscal space. Appealing as they are, such proposals have so far been based on limited empirical evidence. On the one hand, the literature based on calibrated/estimated general equilibrium models tends to find that fiscal spillovers within the euro area are small once all channels are considered (trade channel vs. monetary policy reaction, exchange rate, and risk premium). On the other hand, the available empirical studies hinge on pools of countries, given data limitations, and do not provide robust country-specific estimates. In our paper we revisit the issue at hand. To do so, first, we compile quarterly datasets of fiscal policy variables for the four major euro area economies (1980q1-2016q4), based on consistent and comparable criteria and sources. This rich dataset allows us to effectively exploit exclusion restrictions within a structural VAR framework to identify country-specific government spending shocks. We use these shocks to explore the dynamic effects of fiscal changes in one country on neighbor countries (spillovers), finding significant and economically-relevant effects. We document that these spillover effects are notably heterogeneous in euro area countries and are particularly powerful when the fiscal actions are based on public investment expansions. We find that trade is a key transmission mechanism in explaining our results.
    Keywords: fiscal policy; fiscal spillovers; euro area; vector autoregressions
    JEL: E62 E32 C32
    Date: 2018–07
  7. By: Saker Sabkha (SAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon); Christian De Peretti (SAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon); Dorra Hmaied (IHEC - Institut des Hautes Etudes Commerciales de Carthage)
    Abstract: This paper analyzes Credit Default Swaps spread dynamic to determine whether the sovereign Credit Default Swap market is subject to contagion effects. Analysis is performed on credit spreads data of 35 worldwide countries belonging to four different economic categories over a period from 2006 until 2014, covering the subprime crisis and the European sovereign debt crisis. A novel approach is proposed to estimate the dynamic conditional correlations between CDS spreads using AR(1)-FIEGARCH(1,d,1)-DCC model. Based on our findings, we put a slant on the financial market vulnerability, reinforced by contagion effects during the different phases of the crises. Furthermore, analysis of each county solely show that contagion effects are sterner during the Eurozone crisis comparing to the global financial crisis and that the level of exposure to crises differs across global markets and regions. Yet, our approach provides evidences that crises spread to countries across the world regardless their economic status or geographical positions.
    Keywords: Dynamic Conditional Correlation ,Sovereign risk spillover,Credit Default Swaps,Contagion phenomenon
    Date: 2018–06–05
  8. By: Enrico D’Elia (Ministry of Economic Affairs and Finance (Italy)); Roberta De Santis (Istituto Nazionale di Statistica (ISTAT))
    Abstract: Income inequality has a minor role in the European integration process’ institutional framework. This is particularly unfitting given that reducing disparities has been one of the most explicit and resolute goals of the EU, which has consequently devoted an increasing share of its budget to regional policy. This issue has potentially relevant policy implications because if EMU does not converge endogenously and increases inequalities more efforts to reform European governance and more strict policy coordination among members are needed to limit the risk of a break-up. In fact, recent events proved that inequality concerns in combination with other factors can boost protest vote. This paper intends to assess inequality determinants in EMU countries and whether the European economic integration within the broader globalization process has been itself among them. We run an empirical analysis on a panel of 17 EU members in the period 1980 and 2015. Our contribution to the existing literature in twofold: i) it focused on the effects of globalization on inequality in EMU 15 over the last 25 years, ii) it tries to identify the separate effects of globalization on core and periphery and new entrants EMU members shedding some light on the mechanisms behind the so called “core periphery dualism”.
    Keywords: Trade openness, Income inequality, Panel data analysis
    JEL: D63 D31 H23
    Date: 2018
  9. By: Arslan Razmi (Department of Economics, University of Massachusetts Amherst)
    Abstract: Unilateral euroization is underexplored even in comparison to unilateral dollarization (taken to mean the adoption of the US dollar as legal tender). This paper attempts to partly fill this gap in the literature by investigating the case of Montenegro, which is one of the two countries that have unilaterally adopted the euro as the legal tender. Montenegro's limited monetary policy options make the nature of business cycles important. The evidence presented here suggests that Montenegro has a low degree of synchronization, limited structural similarity, and weak trade integration with the Eurozone. Moreover, there is limited evidence for endogenous structural assimilation following euroization. The case for currency union is weak for Montenegro and appears to be defensible only on grounds of policy credibility.
    Keywords: Montenegro, euroization, dollarization, currency union, optimal currency areas.
    JEL: F15 E32 E52
    Date: 2018
  10. By: Chamon, Marcos; Schumacher, Julian; Trebesch, Christoph
    Abstract: Governments often issue bonds in foreign jurisdictions, which can provide additional legal protection vis-à-vis domestic bonds. This paper studies the effect of this jurisdiction choice on a bond prices. We test whether foreign-law bonds trade at a premium compared to domestic-law bonds. We use the euro area 2006-2013 as a unique testing ground, controlling for currency risk, liquidity risk, and term structure. Foreign-law bonds indeed carry significantly lower yields in distress periods, and this effect rises as the risk of a sovereign default increases. These results indicate that, in times of crisis, governments can borrow at lower rates under foreign law. JEL Classification: F34, G12, K22
    Keywords: creditor rights, law and finance, seniority, sovereign debt
    Date: 2018–06
  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.
    Keywords: capital-labor substitution; credit crunch; employment protection; Firm Growth
    JEL: D20 G21 J80
    Date: 2018–06
  12. By: Francisco A. Blanco; Francisco J. Delgado; Maria J. Presno
    Abstract: We study the degree of convergence in fiscal decentralization in the European Union in the period 1995–2015 analysing non-central expenditure and revenue as percentages of GDP and of the total expenditure or revenue. The sigma convergence analysis shows only a smooth convergence in the non-central revenue with regard to GDP, with significant divergences in the other indicators, especially after the beginning of the Great Recession. However, the club convergence approach indicates some clustering, with three clubs in the GDP perspective and four to five in the total approach. We also analyse the gap between the expenditure and the revenue as a proxy of fiscal responsibility, with sigma divergence for the entire sample, and now with three and two clubs respectively, with Denmark as the divergent country. These results show how European countries are quite heterogeneous in their views of fiscal federalism and decentralization.
    Keywords: decentralization, European Union, convergence
    JEL: H77
    Date: 2018–07
  13. By: Peter Tillmann (Justus-Liebig-University Giessen); Andreas Walter (Justus-Liebig-University Giessen)
    Abstract: The present paper studies the consequences of con flicting narratives for the transmission of monetary policy shocks. We focus on con flict between the presidents of the ECB and the Bundesbank, the main protagonists of monetary policy in the euro area, who often disagreed on policy over the past two decades. This con flict received much attention on financial markets. We use over 900 speeches of both institutions' presidents since 1999 and quantify the tone conveyed in speeches and the divergence of tone among both both presidents. We find (i) a drop towards more negative tone in 2009 for both institutions and (ii) a large divergence of tone after 2009. The ECB communication becomes persistently more optimistic and less uncertain than the Bundesbank's after 2009, and this gap widens after the SMP, OMT and APP announcements. We show that long-term interest rates respond less strongly to a monetary policy shock if ECB-Bundesbank communication is more cacophonous than on average, in which case the ECB loses its ability to drive the slope of the yield curve. The weaker transmission under high divergence re ects a muted adjustment of the expectations component of long-term rates.
    Keywords: Central bank communication, diverging tones, speeches, text analysis, monetary transmission
    JEL: E52 E43 E32
    Date: 2018
  14. By: Libero Monteforte (Bank of Italy); Valentina Raponi (Imperial College London and Sapienza University of Rome)
    Abstract: A short term mixed-frequency model is proposed to estimate and forecast the Italian economic activity fortnightly. Building on Frale et al. (2011), we introduce a dynamic factor model with three frequencies (quarterly, monthly and fortnightly), by selecting indicators that show significant coincident and leading properties and are representative of both demand and supply. We find that high-frequency indicators improve the real time forecasts of Italian GDP. Moreover, the model provides a new fortnightly indicator of GDP, consistent with the official quarterly series. Our results emphasize the potential benefit of the high frequency series, providing forecasting gains beyond those based on monthly variables alone.
    Keywords: factor models, Kalman filter, temporal disaggregation, mixed frequency data, forecasting
    JEL: C53 E17 E32 E37
    Date: 2018–06
  15. By: Mariolis, Theodore; Leriou, Eirini; Soklis, George
    Abstract: Using input-output table data and a system of basic and derivative indices, the analysis in this paper provides a dissection of the Greek economy for the years 2005 and 2010. The findings suggest that: (i) the structural features of the economy have been shaped well before the emergence of the so-called Greek (or PIIGS) crisis; (ii) a well-targeted effective demand management policy could be mainly based on the service and primary production sectors; and (iii) industrial policy would be necessary and could primarily focus on nine highly import-dependent commodities of the industry sector. Therefore, it seems that a change in the intersectoral structure of the Greek economy is necessary.
    Keywords: Domestic and foreign value added; Greek economy; Industrial policy; Interindustry linkages and leakages; Management of effective demand; Structural transformation
    JEL: C67 D57 E61 F14 O25
    Date: 2018–06–25
  16. By: Ugo Albertazzi (European Central Bank); Fulvia Fringuellotti (University of Zurich); Steven Ongena (University of Zurich)
    Abstract: Why do some residential mortgages carry a fixed interest rate and others an adjustable rate? To answer this question we studied unique data from 103 banks belonging to 73 different banking groups across twelve countries in the euro area. To explain the large cross-country and time variations observed, we distinguished between the conditions that determine the local demand for credit and the characteristics of banks that supply credit. As bank funding mostly occurs at the group level, we disentangled these two sets of factors by comparing the outcomes observed for the same banking group across the different countries. Local demand conditions dominate. In particular we find that the share of new loans with a fixed rate is larger when: (1) the historical volatility of inflation is lower, (2) the correlation between unemployment and the short-term interest rate is higher, (3) households' financial literacy is lower, and (4) the use of local mortgages to back covered bonds and of mortgage-backed securities is more widespread.
    Keywords: mortgages, financial duration, cross-border banks
    JEL: F23 G21
    Date: 2018–06

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