nep-eec New Economics Papers
on European Economics
Issue of 2018‒08‒13
thirteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Euro Area unemployment insurance at the time of zero nominal interest rates By Guillaume Claveres; Jan Stráský
  2. Attitudes towards Euro Area Reforms: Evidence from a Randomized Survey Experiment By Mathias Dolls; Nils Wehrhöfer
  3. Life below zero: bank lending under negative policy rates By Heider, Florian; Saidi, Farzad; Schepens, Glenn
  4. Greek Economic Policy Uncertainty: Does it Matter for the European Union? By Nikolaos Antonakakis; David Gabauer; Rangan Gupta
  5. Empirical assessment of alternative structural methods for identifying cyclical systemic risk in Europe By Jorge E. Galán; Javier Mencía
  6. Heterogeneous Effects of Unconventional Monetary Policy on Loan Demand and Supply. Insights from the Bank Lending Survey By Martin Guth
  7. Brexit No Deal: The Budgetary Impact on CAP - Greece and the EU27 By Oliver Mas
  8. Cash in Circulation and the Shadow Economy: An Empirical Investigation for Euro Area Countries and Beyond By Franz Seitz; Hans-Eggert Reimers; Friedrich Schneider
  9. NKPC-Based Inflation Forecasts with a Time-Varying Trend By Stephen McKnight; Alexander Mihailov; Fabio Rumler
  10. Did Austerity Cause Brexit? By Fetzer, Thiemo
  11. Banks’ Trading after the Lehman Crisis – The Role of Unconventional Monetary Policy By Isabel Schnabel; Johannes Tischer
  12. The rise and fall of the natural interest rate By Gabriele Fiorentini; Alessandro Galesi; Gabriel Pérez-Quirós; Enrique Sentana
  13. Unconventional monetary policies and central bank profits By Jörg Bibow

  1. By: Guillaume Claveres; Jan Stráský
    Abstract: The discussion about a fiscal stabilisation capacity as a way of providing more fiscal integration in the euro area has strengthened in the aftermath of the European sovereign debt crisis. Among the instruments that can be used for temporary macroeconomic stabilisation in the presence of both asymmetric and area-wide shocks, a euro area unemployment insurance scheme has attracted increased attention. We build a two-region DSGE model with supply, demand and labour market frictions and introduce in it an area-wide unemployment insurance scheme that is entitled to borrow in financial markets. The model is calibrated to the euro area core and periphery data. For a country-specific negative demand shock hitting the periphery, we find the scheme to reduce the drop in Periphery output by about one fifth and the drop in union output by about a third. The scheme is effective when some households are cut from financial markets, and even more so when the national government also loses market access.
    Keywords: fiscal union, search and matching, Unemployment insurance, zero lower bound
    JEL: E32 E52 E63 J65
    Date: 2018–08–03
  2. By: Mathias Dolls; Nils Wehrhöfer
    Abstract: We present the first evidence on public attitudes towards two prominent euro area reform proposals (European Unemployment Benefit Scheme and Sovereign Insolvency Procedure) and assess potential impediments to their implementation by means of a randomized survey experiment in Germany. We find that there is a low willingness among German voters to accept fiscal risk-sharing through common unemployment insurance, while a sovereign insolvency procedure aimed at strengthening market discipline is supported by a majority of the electorate. Our randomized treatments confronting survey participants with potential adverse effects of the reforms lead to significant downward shifts in approval rates. Altruism, cosmopolitanism, political preferences and income are important predictors of support for the reform proposals. We also show that there is a striking contrast between the low level of support for transfers to other euro area member states and a broad acceptance of inner German transfers.
    Keywords: public attitudes, euro area reforms, European unemployment insurance, sovereign insolvency procedure
    JEL: H55 H24 J26 D14
    Date: 2018
  3. By: Heider, Florian; Saidi, Farzad; Schepens, Glenn
    Abstract: We show that negative policy rates affect the supply of bank credit in a novel way. Banks are reluctant to pass on negative rates to depositors, which increases the funding cost of high-deposit banks, and reduces their net worth, relative to low-deposit banks. As a consequence, the introduction of negative policy rates by the European Central Bank in mid-2014 leads to more risk taking and less lending by euro-area banks with greater reliance on deposit funding. Our results suggest that negative rates are less accommodative, and could pose a risk to financial stability, if lending is done by high-deposit banks. JEL Classification: E44, E52, E58, G20, G21
    Keywords: bank balance-sheet channel, bank risk-taking channel, deposits, negative interest rates, zero lower bound
    Date: 2018–08
  4. By: Nikolaos Antonakakis (Department of Business and Management, Webster Vienna Private University, Vienna, Austria, and Economics and Finance Subject Group, University of Portsmouth, Portsmouth Business School, Portsmouth, United Kingdom); David Gabauer (Department of Business and Management, Webster Vienna Private University, Vienna, Austria); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa)
    Abstract: We examine the propagation of economic policy uncertainty shocks within Greece and across Europe. Our analysis reveals that Greek economic policy uncertainty was dominating the European economic policy uncertainty nearly permanently throughout the period of analysis. In particular, uncertainty related to the Greek banking sector (capital controls) and currency issues (Grexit possibility) had a significant impact on European economic policy uncertainty. Further evidence suggests that, within Greece, fiscal policy uncertainty was driven by shocks related to currency, banking and monetary policy uncertainty.
    Keywords: TVP-VAR-SV, Dynamic Connectedness, Dynamic Connectedness Decomposition, Categorical Economic Policy Uncertainty Spillovers
    JEL: C32 C50 F42
    Date: 2018–07
  5. By: Jorge E. Galán (Banco de España); Javier Mencía (Banco de España)
    Abstract: The credit-to-GDP gap, as proposed by the Basel methodology, has become the reference measure for the activation of the Countercyclical Capital Buffer (CCyB) due to its simplicity and good predictive power for future systemic crises. However, it presents several shortcomings that could lead to suboptimal decisions in many countries if it were used as an automatic rule for the activation of the CCyB. We study to what extent the purely statistical nature of the Basel methodology is responsible for these undesired effects by considering potential complementary credit gap measures that incorporate economic fundamentals. Specifically, we analyse the performance of two alternative (semi-) structural models that may account for these factors. We assess the proposed measures using time series data from the 70’s for six European countries and compare them to the Basel gap. We find that the proposed models provide more accurate early warning signals of the build-up of cyclical systemic risk than the Basel gap, as well as lower upward and downward biases after rapid changes in fundamentals. Nonetheless, results evidence heterogeneity in the ability from different models and specifications across countries to forewarn about future crises. This result evidences the differences in the financial cycles and their drivers across countries, and shows the importance in macroprudential policy of considering flexible approaches that adapt to national specificities.
    Keywords: Credit imbalances, cyclical systemic risk, early-warning models, macroprudential policy, model-based indicators.
    JEL: C32 E32 E58 G01 G28
    Date: 2018–08
  6. By: Martin Guth
    Abstract: This paper analyzes the bank lending channel and the heterogeneous effects on the euro area, providing evidence that the channel is indeed working. The analysis of the transmission mechanism is based on structural impulse responses to an unconventional monetary policy shock on bank loans. The Bank Lending Survey (BLS) is exploited in order to get insights on developments of loan demand and supply. The contribution of this paper is to use country-specific data to analyze the consequences of unconventional monetary policy, instead of taking an aggregate stance by using euro area data. This approach provides a deeper understanding of the bank lending channel and its effects. That is, an expansionary monetary policy shock leads to an increase in loan demand, supply and output growth. A small north-south disparity between the countries can be observed.
    Date: 2018–07
  7. By: Oliver Mas (Ministry of Rural Development and Food (Greece))
    Abstract: The EU and the UK are currently negotiating the framework of a new bilateral relationship as a result of the UK’s decision to leave the EU. This briefing paper explores the direct consequences of Brexit on the Common Agricultural Policy (CAP) Budget of the European Union for final years (2019-2020) of the current Multi-annual Financial Framework (MFF) and investigates the ramifications for CAP Budgets of all EU Member States with a case study of Greece. Drawing on various recent contributions to the debate on the consequences of Brexit and the future of Europe, such as the research for the EU AGRI Committee and the budgetary research conducted by Alan Matthews. The paper will evaluate the scenario that the UK leaves the EU without a deal on the 29th March 2019 resulting in no transition deal or financial settlement. This scenario would leave an unprecedented funding gap for final year and three quarters of the current MFF period. This paper will also evaluate the options the EU has in order to limit the budgetary impact. The negotiations see both the EU and UK increasing rhetoric of a ‘No Deal’ outcome and both preparing for the consequences of a ‘No Deal’, thus the significance of understanding the potential implications of a ‘No Deal’ is of increasing importance.
    Keywords: Brexit; CAP; Greece; Agricultural Policy
    JEL: Q18
    Date: 2018
  8. By: Franz Seitz; Hans-Eggert Reimers; Friedrich Schneider
    Abstract: We analyze the net issues of the national euro area central banks in relation to the dynamics of the shadow economy within a panel cointegration framework. Besides the total net issues, we distinguish between large, medium and small euro banknotes and take due account of other determinants of cash demand. We find a significant and positive relationship between the net issues and the size of the shadow economy only for medium notes. And this result seems to be driven by the smaller euro area countries. The use of large and small denominations is obviously not driven by the shadow economy. For comparison purposes, we also present panel results for eight non-euro area countries (Australia, Canada, Japan, Norway, Sweden, Switzerland, UK, US). For these countries, we are not able to establish an economically meaningful and statistically significant cash demand equation including the shadow economy.
    Keywords: banknotes, net issues, shadow economy, cash demand function, panel cointegration
    JEL: C23 E41 E58
    Date: 2018
  9. By: Stephen McKnight (El Colegio de México); Alexander Mihailov (University of Reading); Fabio Rumler (Oesterreichische Nationalbank)
    Abstract: Does theory aid inflation forecasting? This paper develops a forecasting procedure based upon a generalized New Keynesian Phillips Curve that in- corporates time-varying trend inflation. Using quarterly data for the Euro Area and the United States over the period 1970-2015, we decompose infla- tion into trend and cyclical components and generate theory-implied predic- tions for both, which are recombined to obtain an overall inflation forecast. We find that our forecasting procedure outperforms in predictive accuracy the conventional random walk benchmark at all horizons considered (up to 20 quarters). Moreover, it also outperforms quantitatively the agnos- tic Atkeson-Ohanian (2001) benchmark that previous studies have found dificult to beat.
    Keywords: time-varying trend, generalized New Keynesian Phillips Curve, inflation dynamics, inflation forecasts, predictive accuracy
    JEL: C53 D43 E31 E37 F41 F47
    Date: 2018–07
  10. By: Fetzer, Thiemo (Department of Economics, University of Warwick)
    Abstract: Did austerity cause Brexit? This paper shows that the rise of popular support for the UK Independence Party (UKIP), as the single most important correlate of the subsequent Leave vote in the 2016 European Union (EU) referendum, along with broader measures of political dissatisfaction, are strongly and causally associated with an individual’s or an area’s exposure to austerity since 2010. In addition to exploiting data from the population of all electoral contests in the UK since 2000, I leverage detailed individual level panel data allowing me to exploit within-individual variation in exposure to specific welfare reforms as well as broader measures of political preferences. The results suggest that the EU referendum could have resulted in a Remain victory had it not been for a range of austerity-induced welfare reforms. Further, auxiliary results suggest that the welfare reforms activated existing underlying economic grievances that have broader origins than what the current literature on Brexit sug gests. Up until 2010, the UK’s welfare state evened out growing income differences across the skill divide through transfer payments. This pattern markedly stops from 2010 onwards as austerity started to bite.
    Keywords: Political Economy ; Austerity ; Globalization ; Voting ; EU
    JEL: H2 H3 H5 P16 D72
    Date: 2018
  11. By: Isabel Schnabel; Johannes Tischer
    Abstract: Based on a unique trade-level dataset, we analyze the proprietary trading reaction of German banks to the Lehman collapse and the subsequent unconventional monetary policy measures in 2008. After the Lehman collapse, we observe that market liquidity tightened. However, there is no evidence of broad-based fire sales in the German banking sector. Instead, we observe a flight to liquidity. The European Central Bank’s unconventional measures had a strong impact on banks’ trading behavior by inducing shifts towards eligible securities and reducing pressure on market liquidity. This suggests that the unconventional measures helped stabilizing the financial system after the Lehman collapse.
    Keywords: Proprietary trading, fire sales, flight to liquidity, Lehman crisis, market liquidity, unconventional monetary policy
    JEL: E44 E50 G01 G11 G21
    Date: 2018–08
  12. By: Gabriele Fiorentini (Università di Firenze); Alessandro Galesi (Banco de España); Gabriel Pérez-Quirós (Banco de España); Enrique Sentana (CEMFI)
    Abstract: We document a rise and fall of the natural interest rate (r*) for several advanced economies, which starts increasing in the 1960’s and peaks around the end of the 1980’s. We reach this conclusion after showing that the Laubach and Williams (2003) model cannot estimate r* accurately when either the IS curve or the Phillips curve is fl at. In those empirically relevant situations, a local level specifi cation for the observed interest rate can precisely estimate r*. An estimated Panel ECM suggests that the temporary demographic effect of the young baby-boomers mostly accounts for the rise and fall.
    Keywords: natural rate of interest, Kalman fi lter, observability, demographics.
    JEL: E43 E52 C32
    Date: 2018–07
  13. By: Jörg Bibow
    Abstract: This study investigates the evolution of central bank profits as fiscal revenue - or: seigniorage - before and in the aftermath of the global financial crisis of 2008/9. Focusing on a select group of central banks, namely: the Bank of England, United States Federal Reserve System, Bank of Japan, Swiss National Bank, European Central Bank and the Eurosystem (specifically: Deutsche Bundesbank, Banca d'Italia, and Banco de España), we research the impact of experimental monetary policies on central bank profits, profit distributions, and financial buffers, and the outlook for these measures going forward as monetary policies are seeing their gradual "normalization". Seigniorage exposes the connections between currency issuance and public finances, and between monetary and fiscal policies. Central banks' financial independence rests on seigniorage, and in normal times seigniorage largely derives from the note issue supplemented by "own" resources. Essentially, the central bank's income-earning assets represent fiscal wealth, a national treasure hoard that supports its central banking functionality. The analysis sheds new light on the interdependencies between monetary and fiscal policies.Just as the size and composition of central bank balance sheets experienced huge changes in the context of experimental monetary policies, the study's findings also indicate significant changes regarding central banks' profits, profit distributions, and financial buffers in the aftermath of the crisis, with considerable cross-country variation.
    Date: 2018

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