nep-eec New Economics Papers
on European Economics
Issue of 2018‒10‒08
nine papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Real and Imagined Constraints on Euro Area Monetary Policy By Patrick Honohan
  2. Intraday Effect of News on Emerging European Forex Markets: An Event Study Analysis By Evžen Kocenda; Michala Moravcová
  3. Fiscal structural reforms: the effect of card payments on vat revenue in the euro area By George Hondroyiannis; Dimitrios Papaoikonomou
  4. Non-Performing Loans, Cost of Capital, and Lending Supply: Lessons from the Eurozone Banking Crisi By G. Chiesa; J. M. Mansilla-Fernández
  5. ECB spillovers and domestic monetary policy effectiveness in small open economies By Saskia Ter Ellen; Edvard Jansen; Nina Larsson Midthjell
  6. Impact of the Credit Rating Revision on the Eurozone Stock Markets By Trabelsi, Mohamed Ali; Hmida, Salma
  7. Uniting European fiscal rules: How to strenghten the fiscal framework By Christofzik, Désirée; Feld, Lars P.; Reuter, Wolf Heinrich; Yeter, Mustafa
  8. Exchange Rates and Prices: Evidence from the 2015 Swiss Franc Appreciation By Auer, Raphael; Burstein, Ariel; Lein, Sarah M.
  9. Fiscal Sustainability in the EU After the Global Crisis: Is there any Progress? By Maciej Wysocki; Cezary Wójcik

  1. By: Patrick Honohan (Peterson Institute for International Economics)
    Abstract: Although the European Central Bank (ECB) has been pursuing an aggressively expansionary policy since 2012, previously the ECB was behind the curve in lowering interest rates and making asset purchases to combat the prolonged euro area recession. This paper argues that part of the delay can be attributed to the multi-country nature of the euro area. Over-interpreting the limitations of the ECB’s statutory mandate, some ECB decision makers were wary of being accused of circumventing the prohibition on monetary financing by intervening in the market of the debt of weaker governments. Some were also mesmerized by the relatively strong performance of the German economy in the crisis and attributed the slower post-crisis recovery of most other member states to national policy failures that should not be offset by euro area monetary policy. All of this was exacerbated by the ECB’s adoption of and (at least until 2011) adherence to a seductive but analytically flawed “separation principle,” which misled some of its decision makers into overestimating the adequacy of the monetary expansion that was being applied. The ECB’s toolbox is indeed somewhat limited by its statute, reflecting multi-country considerations, but abandonment of the separation principle should help ensure a more effective, holistic approach to monetary policy design in the future.
    Keywords: European Central Bank, monetary policy, financial crises, European Union, political economy
    JEL: E52 E58 G01
    Date: 2018–08
  2. By: Evžen Kocenda; Michala Moravcová
    Abstract: We analyze the impact of Eurozone/Germany and U.S. macroeconomic news announcements and the communication of the monetary policy settings of the ECB and the Fed on the forex markets of new EU members. We employ an event study methodology to analyze intra-day data from 2011–2015. Our comprehensive analysis of the wide variety of macroeconomic information during the post-GFC period shows that: (i) macroeconomic announcements affect the value of the new-EU-country exchange rates, (ii) the origin of the announcement matters, (iii) the type of announcement matters, (iv) different types of news (good, bad, or neutral) result in different reactions, (v) markets react not only after the news release but also before, (vi) when the U.S. dollar is a base currency the impact of the news is larger than in the case of the euro, (vii) announcements on ECB monetary policy result in stronger effects than those of the Fed, (viii) temporary inefficiencies are present on new-EU-country forex markets, (ix) new-EU-country exchange rates react differently on positive US news during the EU debt crisis when compared to the rest of the period.
    Keywords: foreign exchange markets, intraday data, abnormal returns, event study, macroeconomic announcements, monetary policy settings, European Union, new EU members
    JEL: C52 F31 F36 G15 P59
    Date: 2018
  3. By: George Hondroyiannis (Bank of Greece and Harokopio University); Dimitrios Papaoikonomou (Bank of Greece)
    Abstract: The use of traceable payment methods presents an additional reform option for improving tax compliance. As regards consumption, card payments are the main alternative to cash in the euro area. Although the use of micro-data has provided clear evidence in favour of increasing information trails, time series evidence on the role of card payments in increasing compliance have been scarce and confined to the recent experience of Greece. The effect of card payments on VAT revenue is investigated using quarterly panel data for the 19 euro area economies covering the period 2003q1-2016q4. Time-varying coefficient methods are employed in order to estimate the country-specific contribution of compliance to revenue growth as a function of card payments. In line with the micro-data literature, the analysis indicates that increasing the share of card payments in private consumption expenditure improves VAT tax compliance. The gains are found to increase: (i) the lower the initial level of card use; (ii) the higher the share of self-employment and (iii) the lower the level of revenue efficiency. The highest benefits are estimated for Greece and Italy.
    Keywords: VAT; card payments; tax compliance; time-varying coefficients; Euro area
    JEL: H21 H25 H26
    Date: 2018–09
  4. By: G. Chiesa; J. M. Mansilla-Fernández
    Abstract: This paper develops a theoretical model as a foundation of empirical analysis of the transmission channel of non-performing loans (NPLs) on bank cost of capital, credit and liquidity creation in the Eurozone. Empirical results confirm the model’s predictions and suggest that holding non-performing loans increases the cost of capital for banks in the short-term and the long-term. Moreover, the increased cost of capital reduces credit and liquidity creation, and the more so the less capitalized is the bank. This phenomenon is found to be economically more significant for European periphery country banks than for core country banks. The identification of the transmission channel is robust to the Granger predictability test.
    JEL: G11 G21 G32 H63
    Date: 2018–10
  5. By: Saskia Ter Ellen (Norges Bank); Edvard Jansen (Formuesforvaltning); Nina Larsson Midthjell (Norges Bank)
    Abstract: In this paper we study financial spillovers from the European Central Bank's (ECB) monetary policy and communication, and whether they have consequences for the effectiveness of domestic monetary policy of small open economies. Recent work suggests that the "trilemma" in international economics as we used to know it, is actually a dilemma: small open economies with floating exchange rate regimes can only have independent monetary policies when the capital account is managed. Our findings show that domestic monetary policy is still effective, but that spillover effects, particularly from the ECB's communication, reduce domestic control over the longer end of the yield curve.
    Keywords: monetary policy, forward guidance, international spillovers, asset prices, small open economies
    JEL: E43 E44 E52 E58 G12
    Date: 2018–09–25
  6. By: Trabelsi, Mohamed Ali; Hmida, Salma
    Abstract: The contagion generated by the US subprime crisis and the European sovereign debt crisis that hit the Eurozone stock markets is still a highly debated subject. In this paper, we try to analyze the revision effect of the credit ratings of the Eurozone countries. To this end, we used a bivariate DCC-GARCH model to measure the extent of dynamic correlations between stock returns of our sample. Our results indicate that credit ratings revisions have a relatively limited effect on the dynamic correlations of the Eurozone stock markets.
    Keywords: Financial contagion; European debt crisis; Dynamic conditional correlations
    JEL: C22 G01 G15
    Date: 2018
  7. By: Christofzik, Désirée; Feld, Lars P.; Reuter, Wolf Heinrich; Yeter, Mustafa
    Abstract: The current European fiscal framework is highly complex. The multitude of fiscal rules and the discretion in their enforcement precludes an effective oversight and weakens the effectiveness of fiscal rules substantially. Against this background, we present a proposal for a careful refocusing of the framework to promote fiscal sustainability. The proposal is centered around an expenditure rule as an annual operational target supplemented by a debt-correction factor and a multi-purpose adjustment account which implements a medium-term structural balance rule. Together with a significant reduction in exemptions and escape clauses as well as less discretion in the imposition of sanctions, the proposal increases transparency and efficacy of fiscal rules at the European level.
    Keywords: Expenditure rule,Fiscal rules,Public finance,European fiscal framework
    JEL: H50 H60 E62
    Date: 2018
  8. By: Auer, Raphael; Burstein, Ariel; Lein, Sarah M. (University of Basel)
    Abstract: The removal of the lower bound on the EUR/CHF exchange rate in January 2015 provides a unique setting to study the implications of a large and sudden appreciation in an otherwise stable macroeconomic environment. Using transaction-level data on non-durable goods purchases by Swiss consumers, we measure the response of border and consumer retail prices to the CHF appreciation and how household expenditures responded to these price changes. Consumer prices of imported goods and of competing Swiss-produced goods fell by more in product categories with larger reductions in border prices and a lower share of CHF-invoiced border prices. These price changes resulted in substantial expenditure switching between imported and Swiss-produced goods. While the frequency of import retail price reductions rose in the aftermath of the appreciation, the average size of these price reductions fell (and more so in product categories with larger border price declines and a lower share of CHF-invoiced border prices), contributing to low pass-through into import prices.
    Keywords: Large exchange rate shocks; exchange rate pass-through; invoicing currency; expenditure switching; price-setting; nominal and real rigidities; monetary policy
    JEL: D4 E31 E50 F41 L11
    Date: 2018–09
  9. By: Maciej Wysocki; Cezary Wójcik
    Abstract: In response to the global crisis a number of new institutional measures have been introduced in the fiscal framework, both on the UE and on the member states’ level, and the question is: have these measures provided better fiscal sustainability outcomes? We approach this question by looking at the evolution of fiscal sustainability in Poland, which is an interesting case of a member state that without significant market pressure (the only EU country without recession during the crisis) actively promoted several changes in the EU fiscal framework (e.g. 6-pack) and effectively internalized some of these key changes in its domestic fiscal policy, including a domestic expenditure fiscal rule. Our analysis reveals that the fiscal sustainability in Poland has significantly improved in the post-crisis period of 2009-2017: we detect both improvement of the fiscal sustainability parameters and structural breaks in the fiscal outcomes after the crisis. Namely, in comparison to the whole sample of 2004-2017 the strength of reaction of the primary deficit to a change of the public debt increased in the post-crisis time by nearly 50%. Importantly, these results are robust with respect to the pension fund reform which led to a one-off redemption of T-bonds in amount of 8.5% of GDP. The analysis also reveals a cycle of structural breaks of 2-and 4 years lags: for the output gap in 2008 Q4, for the primary deficit in 2010 Q4 and for the public debt in 2014 Q1. The case of Poland seems to suggest that the post-crisis EU fiscal measures can be effectively used to increase fiscal sustainability, if properly approached and internalized into the domestic fiscal framework. More research should be devoted to understanding the political and economic conditions under which such positive outcomes were possible.
    Keywords: fiscal sustainability, fiscal policy, global crisis
    JEL: C22 E60 H63
    Date: 2018

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