nep-eec New Economics Papers
on European Economics
Issue of 2018‒08‒27
twelve papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. The Financial Connectedness between Eurozone Core and Periphery: A Disaggregated View By Georgios Magkonis; Andreas Tsopanakis
  2. The True Size of the ECB: New Insights from National Central Bank Balance Sheets By Stephen Wright; Charmaine Portelli
  3. Bank use of sovereign CDS in the eurozone crisis: Hedging and risk incentives By Acharya, Viral V.; Gündüz, Yalin; Johnson, Tim
  4. Fiscal stability during the Great Recession: Putting decentralization design to the test By Santiago Lago-Peñasa; Jorge Martinez-Vazquez; Agnese Sacchic
  5. The UK productivity puzzle through the magnifying glass: A sectoral perspective By Rafał Kierzenkowski; Gabriel Machlica; Gabor Fulop
  6. International Spillovers of Monetary Policy: Evidence from France and Italy By Julia Schmidt; Marianna Caccavaio; Luisa Carpinelli; Giuseppe Marinelli
  7. Unconventional monetary policy, bank lending, and security holdings: The yield-induced portfolio rebalancing channel By Paludkiewicz, Karol
  8. Demographics, monetary policy and the zero lower bound By Marcin Bielecki; Marcin Kolasa; Michał Brzoza-Brzezina
  9. With a little help from my friends: Survey-based derivation of euro area short rate expectations at the effective lower bound By Geiger, Felix; Schupp, Fabian
  10. Meaningful Information for Domestic Economies in the Light of Globalization – Will Additional Macroeconomic Indicators and Different Presentations Shed Light? By Silke Stapel-Weber; Paul Konijn; John Verrinder; Henk Nijmeijer
  11. Does the Swiss debt brake induce sound federal finances? A synthetic control analysis By Pfeil, Christian F.; Feld, Lars P.
  12. Fiscal buffers, private debt and recession: the good, the bad and the ugly By Nicoletta Batini; Giovanni Melina; Stefania Villa

  1. By: Georgios Magkonis (University of Portsmouth); Andreas Tsopanakis (Cardiff University)
    Abstract: This paper examines the financial stress interconnectedness among GIIPS economies and Germany. Based on market level financial stress indices, it examines the stress transmission process as well as the causal network relationships in banking sector, bond, money and stock markets. The period under investigation, 2001†2013, allows to test the effects of financial crisis of 2008 as well as the subsequent European sovereign crisis. Using two alternative techniques for connectedness analysis, our evidence suggests that the peripheral economies of Italy and Spain play a highly significant role in the stress transmission in all markets, especially in the cases of banks and equity markets. Moreover, we visualize our results using network analysis. Contrary to common wisdom, Portugal, Ireland, and mainly Greece, do not seem to have an important role in amplifying stress levels.
    Keywords: Eurozone, stress transmission, connectedness analysis, spillovers, networks
    JEL: C43 G15 F30
    Date: 2018–08–12
  2. By: Stephen Wright (Birkbeck, University of London); Charmaine Portelli (University of Malta)
    Abstract: The balance sheet of the European Central Bank (ECB) represents a very small fraction (onetenth) of the reported balance sheet of the Euro Area system as a whole. This paper presents evidence that the effective size of the ECB’s balance sheet is massively higher than this, and indeed is significantly higher even than the reported balance sheet of the Eurosystem as a whole. We point to strong evidence that most NCBs (especially those of the larger countries) effectively act on autopilot, as branches of a near-monolithic institution which we term the “Mega-ECB”. The lending behaviour of the “Mega-ECB” appears to have been driven primarily by the borrowing needs of the distressed countries of the EU’s southern periphery.
    Keywords: central bank balance sheet, capital key, ECB, Eurosystem, national central canks, Target2.
    JEL: E52 E58 F36
    Date: 2018–05
  3. By: Acharya, Viral V.; Gündüz, Yalin; Johnson, Tim
    Abstract: Using a comprehensive dataset from German banks, we document the usage of sovereign credit default swaps (CDS) during the European sovereign debt crisis of 2008-2013. Banks used the sovereign CDS market to extend, rather than hedge, their long exposures to sovereign risk during this period. Lower loan exposure to sovereign risk is associated with greater protection selling in CDS, the effect being weaker when sovereign risk is high. Bank and country risk variables are mostly not associated with protection selling. The findings are driven by the actions of a few non-dealer banks which sold CDS protection aggressively at the onset of the crisis, but started covering their positions at its height while simultaneously shifting their assets towards sovereign bonds and loans. Our findings underscore the importance of accounting for derivatives exposure in building a complete picture and understanding fully the economic drivers of the bank-sovereign nexus of risk.
    Keywords: Credit derivatives,Credit default swaps,Sovereign credit risk,Eurozone,Sovereign debt crisis,Depository Trust and Clearing Corporation (DTCC)
    JEL: G01 G15 G21 H63
    Date: 2018
  4. By: Santiago Lago-Peñasa (Governance and Economics research Network (GEN), University of Vigo); Jorge Martinez-Vazquez (International Center for Public Policy (Georgia State University) & Governance and Economics research Network (GEN)); Agnese Sacchic (La Sapienza University of Rome (Italy) & Governance and Economics research Network (GEN))
    Abstract: There is a longstanding debate in the economics literature on whether fiscally decentralized countries are inherently more fiscally unstable. The Great Recession provides a fertile testing ground for analyzing how the degree of decentralization does actually affect countries’ ability to implement fiscal stabilization policies in response to macroeconomic shocks. We provide an empirical analysis aiming at disentangling the roles played by decentralization design itself and several recently introduced budgetary institutions such as subnational borrowing rules and fiscal responsibility laws on country’s fiscal stability. We use OECD countries’ data since 1995, which includes both a boom period of worldwide economic growth and the Great Recession. Our main finding is that well-designed decentralized systems are not destabilizing. But, in addition, sub-national fiscal and borrowing rules should be at work to improve the overall fiscal stability performance of decentralized countries.
    Date: 2018–02
  5. By: Rafał Kierzenkowski; Gabriel Machlica; Gabor Fulop
    Abstract: Since the start of the Great Recession, labour productivity growth has been weak in the United Kingdom, weaker than in many other OECD countries. The productivity shortfall, defined as the gap between actual productivity and the level implied by its pre-crisis trend growth rate, was nearly 20% for output per hour at the end of 2016. This study assesses the UK productivity puzzle and discusses its possible determinants at the sectoral level. Most of the UK productivity underperformance is structural rather than cyclical. Half of the productivity shortfall is explained by non-financial services (with information and communication being the largest contributor), a fourth by financial services, and another fourth by manufacturing, other production and construction. All but non-financial services and the construction sectors contribute disproportionately to the productivity shortfall compared to their shares in overall output and hours worked of the UK economy. In non-financial services, large increases in self-employed with no employees, reduced matching of skills to jobs and a lower capital-output ratio may have been a drag on productivity. Stagnant productivity in the financial sector is mainly linked to reduced risk-taking and leverage, as reflected by declining total factor productivity following its steep increases in the run-up to the crisis. Greater substitution of labour for capital and weak corporate restructuring have both held back productivity improvements in the manufacturing sector. Some causes of the productivity puzzle pre-date the crisis, including low tangible investment, too rapid expansion of financial services, weak innovation in the manufacturing sector, and a secular decline of oil and gas industries.This Working Paper relates to the 2018 OECD Economic Survey of the United-Kingdom ( y-united-kingdom.htm).
    Keywords: capital, employment, growth, hours, investment, output, productivity, sectors, United Kingdom
    JEL: D24 L6 L7 L8
    Date: 2018–08–08
  6. By: Julia Schmidt; Marianna Caccavaio; Luisa Carpinelli; Giuseppe Marinelli
    Abstract: In this paper we provide empirical evidence on the impact of US and UK monetary policy changes on credit supply of banks operating in Italy and France over the period 2000-2015, exploring the existence of an international bank lending channel. Exploiting bank balance sheet heterogeneity, we find that monetary policy tightening abroad leads to a reduction of credit supply at home, in particular for US monetary policy changes. Our results show that USD funding plays an important role in the transmission mechanism, especially for French banks which rely to a larger extent on USD funding. We also show that banks adjust their euro and foreign currency lending differently, thus implying that funding sources in different currencies are not perfect substitutes. This is especially the case when tensions in currency swap markets are high, thus resulting in costly cross-currency funding.
    Keywords: Spillovers, Monetary Policy, International Banking
    JEL: E52 F42 G21
    Date: 2018
  7. By: Paludkiewicz, Karol
    Abstract: Exploiting a granular dataset of banks' security holdings I assess the impact of unconventional monetary policy on bank lending and security holdings. Using a difference-in-differences regression setup and holding the security composition of each bank constant at its level in January 2014, well in advance of an anticipation of the ECB's asset purchase program (APP), this paper provides evidence for the presence of a yield-induced portfolio rebalancing channel: Banks experiencing a higher average yield decline of their securities portfolio - induced by unconventional expansionary monetary policy - increase their real sector lending more strongly relative to other banks. The effect is stronger for banks facing many reinvestment decisions. Moreover, I find that banks with a higher average yield decline reduce their overall investments in securities more intensely, especially in those securities that had larger valuation gains. These novel findings suggest that banks target a specific yield level and shift their investments from the securities to the (higher-yielding) credit portfolio. Making use of data on bank-specific TLTRO uptakes, my results do not seem to be driven by alternative, liquidity-driven transmission channels.
    Keywords: Unconventional Monetary Policy,Quantitative Easing,Portfolio Rebalancing
    JEL: E44 E51 E52 E58 G21
    Date: 2018
  8. By: Marcin Bielecki (University of Warsaw and Narodowy Bank Polski); Marcin Kolasa (Narodowy Bank Polski); Michał Brzoza-Brzezina (Narodowy Bank Polski)
    Abstract: The recent literature shows that demographic trends may affect the natural rate of interest (NRI), which is one of the key parameters affecting stabilization policies implemented by central banks. However, little is known about the quantitative impact of these processes on monetary policy, especially in the European context, despite persistently low fertility rates and an ongoing increase in longevity in many euro area economies. In this paper we develop a New Keynesian life-cycle model, and use it to assess the importance of population ageing for monetary policy. The model is fitted to euro area data and successfully matches the age profiles of consumption-savings decisions made by European households. It implies that demographic trends have contributed significantly to the decline in the NRI, lowering it by 2 percentage points between 1980 and 2030. Despite being spread over a long time, the impact of ageing on the NRI may lead to a sizable and persistent deflationary bias if the monetary authority fails to account for this slow moving process in real time. We also show that, with the current level of the inflation target, demographic trends have already exacerbated the risk of hitting the lower bound (ZLB) and that the pressure is expected to continue. Delays in updating the NRI estimates by the central bank elevate the ZLB risk even further.
    Date: 2018
  9. By: Geiger, Felix; Schupp, Fabian
    Abstract: The estimation of dynamic term structure models (DTSMs) turns out to be challenging in the presence of a small sample. It is exacerbated if the sample is characterized by a prolonged period of low interest rates near a time-varying effective lower bound. These challenges all weigh heavily when estimating a DTSM for the euro area OIS yield curve. Against this background, we propose a shadow-rate term structure model (SRTSM) that includes a time-varying effective lower bound and accounts for the spread between the policy and short-term OIS rate. It also allows for future changes in the effective lower bound and incorporates survey information. The model allows to adequately assess short-term monetary policy rate expectations and it generates far-distant rate expectations that are correlated with an estimated equilibrium nominal short rate derived from a macroeconomic model set-up. Our results also highlight the signaling channel of non-standard monetary policy shocks in the run-up to asset purchases identified based on a non-linear high-frequency external instrument approach. Our model outperforms DTSM specifications without above modeling features from a statistical and economic perspective. We confirm our findings employing a Monte Carlo simulation.
    Keywords: term structure modeling,short rate expectations,lower bound,survey information,yield curve decomposition,monetary policy,euro area
    JEL: E32 E43 E44 E52
    Date: 2018
  10. By: Silke Stapel-Weber; Paul Konijn; John Verrinder; Henk Nijmeijer
    Abstract: Globalisation presents significant statistical challenges, particularly for small and open economies in terms of measuring macroeconomic level and growth indicators and communicating the results in a meaningful way. In the aftermath of the so-called “Irish case”, Eurostat with its partners in the European Statistical System is looking into how, within the existing accounting frameworks, additional indicators and presentations of the accounts that allow users to follow domestic and global developments could be conceived. The work takes account of recommendations which have been developed by a high level group in Ireland for improving insight into the Irish economy2. However it goes beyond that, as any new indicator or breakdown, particularly in a European context, should be comparable across countries and not be seen as a GDP or GNI "a la carte" for each country to choose from under specific circumstances. The paper presents the findings of the respective European work streams to date in terms of methodology, indicators, building new statistical infrastructural elements and new cooperation models between statistical compilers. It invites a critical review of the suggestions put forward.
    JEL: E01
    Date: 2018–07
  11. By: Pfeil, Christian F.; Feld, Lars P.
    Abstract: The Swiss debt brake is widely appreciated as one of the most rationally designed fiscal rules in the world and was thus also discussed as blueprint in the debates about fiscal rules in Germany, the European Union member states and Israel. However, evidence that this rule really contributes to sound federal finances does not exist yet. We investigate the effectiveness of the Swiss debt brake by employing the Synthetic Control Method. We find that the introduction of this fiscal rule improved the budget balance by about 3.6 percentage points on average in a post-intervention period covering five years.
    Keywords: Swiss debt brake,cyclically adjusted budget balance,government debt,synthetic control method
    JEL: H11 H6
    Date: 2018
  12. By: Nicoletta Batini (International Monetary Fund (IMF)); Giovanni Melina (International Monetary Fund (IMF)); Stefania Villa (Bank of Italy)
    Abstract: Focusing on Euro-Area countries, we show empirically that higher private debt leads to deeper recessions while higher public debt does not, unless its level is especially high. We then build a general equilibrium model that replicates these dynamics and use it to design a policy that can mitigate the recessionary consequences of private deleveraging. In the model, in the aftermath of financial shocks, recessions are milder and public debt is more contained when the government lends directly to those households and firms that face binding borrowing constraints. As a consequence, large fiscal buffers are critical to enhance macroeconomic resilience to financial shocks.
    Keywords: private debt, public debt, financial crisis, financial shocks, borrowing constraints, fiscal limits
    JEL: E44 E62 H63
    Date: 2018–07

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