nep-eec New Economics Papers
on European Economics
Issue of 2018‒10‒01
fourteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Germany in fundamental macroeconomic disequilibrium - the external surplus By Jan Priewe
  2. What are the real effects of financial market liquidity? Evidence on bank lending from the euro area By Dombret, Andreas R.; Foos, Daniel; Pliszka, Kamil; Schulz, Alexander
  3. Measuring the Signaling Effect of the ECB’s Asset Purchase Programme at the Effective Lower Bound By Zhou, Siwen
  4. Monetary Policy and Long-Run Systemic Risk-Taking By Gilbert Colletaz; Grégory Levieuge; Alexandra Popescu
  5. To sign or not to sign? On the response of prices to financial and uncertainty shocks By Meinen, Philipp; Röhe, Oke
  6. Excess liquidity and bank lending risks in the euro area By Zsolt Darvas; David Pichler
  7. Adapting lending policies when negative interest rates hit banks’ profits By Óscar Arce; Miguel García-Posada; Sergio Mayordomo; Steven Ongena
  8. Did the Basel process of capital regulation enhance the resiliency of European Banks? By Gehrig, Thomas; Iannino, Maria Chiara
  9. Fiscal rules for sub-central governments: Design and impact By Douglas Sutherland; Robert Price; Isabelle Joumard
  10. An Aggregate View of Portuguese Exports and Competitiveness By Pedro Bação; António Portugal Duarte; Diogo Viveiros
  11. Fiscal multipliers of central, state and local government and of the social security funds in Germany: Evidence of a SVAR By Hollmayr, Josef; Kuckuck, Jan
  12. What Explains Austria’s Export Market Performance? By Philipp Heimberger
  13. Deviations in real exchange rate levels in the OECD countries and their structural determinants By Martin Berka; Daan Steenkamp
  14. The geopolitical impact of Nord Stream 2 By Balazs Sziklai; Laszlo A. Koczy; David Csercsik

  1. By: Jan Priewe
    Abstract: Despite performing very positively on some key macroeconomic indicators in recent years, the German economy is in grave disequilibrium if the high current account surplus is included in the analysis. The paper scrutinises the evolution of Germany's external surplus since the inception of the Euro in 1999. This is done by identifying the main determinants of exports and imports and by analysing the accounting identity in which the current account is national saving less total fixed investment. While price competitiveness measured by real exchange rates is strongly improved by German imports for exports within international value chains, also by real undervaluation against other member countries, the focus is on the combination of price- and non-price competitiveness. The latter is mainly determined by the global income elasticity for imports from Germany, relative to the income elasticity for imports to Germany. Despite heavy fluctuations, the past trend shows a clear wedge between the growth of exports and imports of almost one percentage point. If this trend continues the German trade balance would reach 15% of GDP in 2026 which would be a time bomb for the cohesion of the European Monetary Union. Market-based rebalancing is not in sight. It is the built-in dynamics of the external surplus that is hazardous. The problem is aggravated as Germany sits in the same boat with three other hard-core surplus seeking countries (Netherlands, Ireland, Luxembourg). In recent years the imbalances within EMU have changed, pulling former deficit countries in mild surplus but leaving the diversity of current account balances among EMU members at a spread of 8-10 percentage points, with an external trade surplus of EMU as a whole of 4.5% and 3.5% current account surplus. Germany carries nearly 77% and 55% of the current account and the trade surplus, respectively, and has - far ahead others - become the largest surplus country on the globe, in absolute terms. This constellation is unsustainable and requires policy action in Germany, in the European Union, the Euro Area and also by global authorities.
    Keywords: balance of payments, global imbalances, real exchange rates, competitiveness, European Monetary Union
    JEL: E5 E6 F14 F15 F41 F42
    Date: 2018
  2. By: Dombret, Andreas R.; Foos, Daniel; Pliszka, Kamil; Schulz, Alexander
    Abstract: We analyze the impact of market liquidity on bank lending in the euro area for different segments over the period 2003 to 2016. Our results on the aggregate level show that market liquidity is positively related to loan volumes and negatively related to credit spreads. Particularly during the financial crisis of 2007-09 and the subsequent European debt crisis, lending was reduced and we observe that banks requested higher credit spreads. Of particular importance is that market liquidity has an asymmetric effect on bank lending: The negative impact of a reduction in liquidity is more significant than the positive impact of an increase in liquidity. This is particularly true for corporate loans where lending conditions would be restricted first in times of impaired market liquidity. The bank-level data confirm the strong impact of market liquidity on bank lending as well. More specifically, we show that non-listed banks, less profitable banks and banks which rely relatively more on net interest income, as well as banks with a high funding liquidity are particularly strongly exposed to market liquidity. Therefore, properly functioning and sufficiently liquid markets are necessary to avoid negative consequences of restrictions in bank lending which would eventually hamper the real economy. This is of the utmost importance against the background of the envisaged capital markets union in the European Union and the potential exit of the United Kingdom from the EU.
    Keywords: financial markets,bank lending,liquidity risk
    JEL: G15 G21 G32
    Date: 2018
  3. By: Zhou, Siwen
    Abstract: This paper analyses the signaling effect of the European Central Bank’s (ECB) statements related to its asset purchase programme (APP) on market expectations for the future path of short-term interest rates in the euro area. Considering a broad set of event days and daily changes in euro area stock indices as surprise reactions to the statements, an event-study analysis is employed to capture the changes in country-specific short-term interest rate expectations, as extracted from an effective lower bound (ELB) consistent shadow-rate term structure model. The empirical results generally support the presence of signaling effects in the euro area, but the estimated effectiveness of the channel has a considerable degree of uncertainty. Regarding country-specific differences, the reaction of interest rate expectations in the periphery countries tends to be stronger for dovish APP statement surprises, and thus these countries may benefit more from the signaling channel. Lastly, the responses of interest rate expectations to APP statement surprises are found to vary considerably depending on the identification strategy of the APP statements, which ultimately shows that these conclusions based on the empirical results are likely to be fragile.
    Keywords: Quantitative Easing, Asset Purchase Programme, European Central Bank, Shadow-Rate Term Structure Model, Signaling Channel
    JEL: C54 E43 E52 G15
    Date: 2018
  4. By: Gilbert Colletaz; Grégory Levieuge; Alexandra Popescu
    Abstract: As an extension to the literature on the risk-taking channel of monetary policy, this paper studies the existence of a systemic risk-taking channel (SRTC) in the Eurozone, through an original macroeconomic perspective based on causality measures. Because the SRTC is effective after an “incubation period”, we make a distinction between short and long-term causality, following the methodology proposed by Dufour and Taamouti (2010). We find that causality from monetary policy to systemic risk, while not significant in the very short term, robustly represents 75 to 100% of the total dependence between the two variables in the long run. Reverse causality is rejected: systemic risk did not influence the policy of the European Central Bank before the global financial crisis. However, central banks must be aware that a too loose monetary policy stance may be conducive to a build-up of systemic risk.
    Keywords: Monetary Policy, Systemic Risk-Taking, Long Run Causality, SRisk.
    JEL: E52 E58 G21
    Date: 2018
  5. By: Meinen, Philipp; Röhe, Oke
    Abstract: Based on SVAR models identified by sign restrictions, we estimate the macroeconomic effects of financial and uncertainty shocks in the euro area and the US, paying particular attention to their effects on prices. While our results confirm that such disturbances are important drivers of output fluctuations in both economies, we find the shock responses of consumer prices to be ambiguous. Moreover, restricting prices to co-moving with output can considerably attenuate the measured impact of financial and uncertainty shocks on real activity.
    Keywords: Financial Shocks,Uncertainty Shocks,Sign Restrictions,Euro Area,United States
    JEL: C11 C32 E32 E44
    Date: 2018
  6. By: Zsolt Darvas; David Pichler
    Abstract: This Policy Contribution was prepared for the European Parliament’s Committee on Economic and Monetary Affairs (ECON) as an input to the Monetary Dialogue of 24 September 2018 between ECON and the President of the European Central Bank. Copyright remains with the European Parliament at all times. Excess liquidity (defined as all kinds of commercial bank deposits held by the Eurosystem minus the minimum reserve requirements) in the euro area exceeded €1,900 billion, or 17 percent of euro-area GDP, in September 2018. Holding such excess liquidity is costly for commercial banks, given that the currently negative (-0.4 percent) deposit facility interest rate applies on excess liquidity holdings. The current stock of excess liquidity implies an annual €7.6 billion cost in total for those banks that hold this liquidity. More generally, the European Central Bank’s negative deposit interest rate and asset purchases further reduced market interest rates, with a negative impact on banks’ net interest income and thus profitability. This could incentivise a reach-for-yield race among banks. Additionally, the access to liquidity eased significantly and removed the liquidity constraint for most banks’ lending activities. These factors might incentivise banks to engage in risky lending in order to improve their profits. This in turn might create financial stability risks. The authors clarify the definition of excess liquidity, to highlight the reasons why such a large amount of it is being held, and to assess its financial stability implications.
    Date: 2018–09
  7. By: Óscar Arce (Banco de España); Miguel García-Posada (Banco de España); Sergio Mayordomo (Banco de España); Steven Ongena (University of Zurich, SFI, KU LEUVEN and CEPR)
    Abstract: What is the impact of negative interest rates on bank lending and risk-taking? To answer this question we study the changes in lending policies using both the Euro area Bank Lending Survey and the Spanish Credit Register. Banks whose net interest income is adversely affected by negative rates are concurrently lowly capitalized, take less risk and adjust loan terms and conditions to shore up their risk weighted assets and capital ratios. These banks also increase non-interest charges more. But, importantly, we find no differences in banks’ credit supply or standard setting, neither in the Euro area nor in Spain. These findings suggest that negative rates do not necessarily contract the supply of credit and that the so-called “reversal rate” may not have been reached yet.
    Keywords: negative interest rates, risk taking, lending policies
    JEL: G21 E52 E58
    Date: 2018–09
  8. By: Gehrig, Thomas; Iannino, Maria Chiara
    Abstract: This paper analyses the evolution of the safety and soundness of the European banking sector during the various stages of the Basel process of capital regulation. In the first part we document the evolution of various measures of systemic risk as the Basel process unfolds. Most strikingly, we find that the exposure to systemic risk as measured by SRISK has been steeply rising for the highest quintile, moderately rising for the second quintile and remaining roughly stationary for the remaining three quintiles of listed European banks. This observation suggests that the Basel process has succeeded in containing systemic risk for the majority of European banks but not for the largest and most risky institutions. In the second part we analyze the drivers of systemic risk. We find compelling evidence that the increase in exposure to systemic risk (SRISK) is intimately tied to the implementation of internal models for determining credit risk as well as market risk. Based on this evidence, the sub-prime crisis found especially the largest and more systemic banks ill-prepared and lacking resiliency. This condition has even aggravated during the European sovereign crisis. Banking Union has not restored aggregate resiliency to pre-crises levels. Finally, low interest rates considerably a ect the contribution to systemic risk for the safer banks.
    JEL: B26 E58 G21 G28 H12 N24
    Date: 2018–09–27
  9. By: Douglas Sutherland (OECD); Robert Price (OECD); Isabelle Joumard (OECD)
    Abstract: Against a background of mounting demands for spending on services provided by sub-central governments, this paper examines how fiscal rules can help to ensure that pressure on resources is minimised and available resources are used efficiently. Drawing on questionnaire responses and other sources, this paper gives a detailed picture of fiscal rules for sub-central governments in place among a number of OECD countries. The paper examines the rationales for using fiscal rules, the various impacts fiscal rules can have, the factors making for effective implementation and the interactions between the various types of rule. It then constructs a number of synthetic sub-indicators designed to assess the extent to which sub-central government fiscal frameworks exhibit favourable characteristics for the achievement of fiscal objectives. It concludes with the construction of a composite indicator based on the combined impacts in the different areas of fiscal policy.
    Keywords: fiscal discipline, fiscal rules, indicators, Sub-central government
    JEL: C43 D78 H71 H72 H74 H81
    Date: 2018–09–26
  10. By: Pedro Bação (CeBER - Centre for Business and Economics Research); António Portugal Duarte (CeBER - Centre for Business and Economics Research); Diogo Viveiros (Banco de Portugal)
    Abstract: The purpose of this paper is to study the relation between Portuguese exports of goods and a set of variables that theoretical models suggest as the main determinants of export behavior.Given that the exchange rate is one of the key variables identified by the theoretical models, we begin by reviewing the evolution of Portugal’s exchange rate policy between the 1977 and 1999, when Portugal joined the European Monetary Union. In addition, we discuss how the exchange rate policy has been related to the issue of competitiveness of Portuguese firms. We then present the theoretical models and proceed to an empirical analysis of their adequacy.The results of our empirical analysis indicate that the perfect competition model does not provide an acceptable representation of the behavior of Portugal's exports of goods. The result s improve when the monopolistic competition model is estimated. The estimation of a modified version of the monopolistic competition model suggests that Portugal's exports of goods are very elastic with respect to demand and productivity, but very inelastic with respect to wages. Nevertheless, certain variables are not significant, which indicates that there are problems to be solved either in the theoretical framework or in the empirical approach.The estimates reported support the conclusion that to foster exports a focus on wage costs and on exchange rate fluctuations is probably inefficient or even misguided. Productivity and demand seem to be more important determinants of exports. If one believes in this conclusion, then views of competitiveness based on the importance of wage repression or exchange rate control must be revised.
    Keywords: competitiveness, exchange rate, exports, productivity, wages.
    JEL: D24 F11 F14 F31
  11. By: Hollmayr, Josef; Kuckuck, Jan
    Abstract: By applying a Structural Vector Autoregressive (SVAR) approach this paper estimates the effects of fiscal policy shocks of different government sub-sectors on aggregate GDP in Germany. From a general government perspective, the results show that besides investment, it is particularly changes in social contributions that yield significant output effects. The GDP response to fiscal policy shocks of the various government sub-sectors turns out to be very heterogeneous. Investment expenditures at all public authorities (central, state and local) trigger positive and statistically significant output effects at least on impact. By contrast, it is only government consumption at state government level and monetary benefits at state government and social security level that induce statistically significant and positive effects on economic activity. Overall, the disaggregated results suggest that besides investment, it is chiefly expenditure with a large share of personnel-related outlays that can have positive effects on aggregate output.
    Keywords: Fiscal Policy,Multipliers,VAR,Disaggregated Government Levels and Instruments
    JEL: H71 H5 H30
    Date: 2018
  12. By: Philipp Heimberger (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: This paper analyses Austria’s export market performance by exploring four channels that can impact on exports a) cost competitiveness, b) ties to trading partners through their demand for import goods, c) global investment demand, and d) offshoring of goods production. By using cointegration analysis and error corrections, we estimate an export model based on quarterly data over the time period 1997-2016. The main results underscore that it is not only price competitiveness that influences Austria’s export performance, as global export demand and trading partners’ demand for capital goods are shown to have a significant long-run impact on Austrian goods exports. Cost competitiveness does play a role in determining export market performance, but over the last twenty years the relative contributions of changes in the real effective exchange rate based on unit labour costs to export growth are shown to be relatively small. While Austria’s international competitiveness has only recorded small variations since the financial crisis, this paper provides evidence that lower export growth and the falling global export market share of goods since 2007 largely reflect relatively weak economic activity of many of Austria’s important trading partners including Eastern Europe.
    Keywords: competitiveness, export performance, exports, trade, Austria, Europe
    JEL: B5
    Date: 2018–09
  13. By: Martin Berka; Daan Steenkamp
    Abstract: We study the validity of an augmented Balassa-Samuelson theory in a panel of real exchange rate levels across 17 OECD countries between 1970 and 2012 using a unique panel of levels of total factor productivity (TFP) across sectors. We find that real exchange rates can be explained by relative sectoral TFP levels both across countries and over time in the direction predicted by Balassa-Samuelson hypothesis. We also show that drivers of labour wedges such as structural labour market differences are important in explaining real exchange rate levels. Nevertheless, large average conditional deviations in real exchange rate levels remain across countries in our sample.
    Keywords: Balassa-Samuelson;Real Exchange Rates;OECD;Total Factor Productivity;Labour Wedge;Unit Labour Cost
    JEL: E12 E23 E24 F31 F33 F41 F43
    Date: 2018–09
  14. By: Balazs Sziklai (Game Theory Research Group Centre for Economic and Regional Studies, Hungarian Academy of Sciences and Corvinus University of Budapest Department of Operations Research and Actuarial Sciences); Laszlo A. Koczy (Game Theory Research Group Centre for Economic and Regional Studies, Hungarian Academy of Sciences and Keleti Faculty of Business and Management, Óbuda University, Budapest); David Csercsik (Pázmány Péter Catholic University, Budapest)
    Abstract: We investigate the geopolitical impact and the possible consequences of the construction of the Nord Stream 2 pipeline. We model the European gas network as a cooperative game between regions as players over the pipeline network, where LNG is also treated as a separate player. We focus on the change of influence of the players in three different scenarios. We investigate how the power of the agents shift when the Nord Stream pipeline is expanded, when the Ukrainian pipeline is shut down and finally when both of these happen. Our calculations show that when Nord Stream 2 is operational, Russia and Western Europe improve their position compared to the base scenario, while other suppliers, notably Norway, together with Central, Eastern and Southern Europe suffer losses, especially when the Ukrainian route is dismissed. The results highlight that both the supporters and adversaries of Nord Stream 2 are governed by self-interest and solidarity and trust, the values proclaimed by the EU and the Energy Union, remain but a slogan.
    Keywords: gas supply, pipeline network, Shapley value, cooperative games, Nord Stream
    JEL: C61 Q40
    Date: 2018–09

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