nep-eec New Economics Papers
on European Economics
Issue of 2019‒02‒04
sixteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Measuring Redenomination Risks in the Euro Area - New Evidence from Survey Data By Jens Klose
  2. The transmission of unconventional monetary policy to bank credit supply: evidence from the TLTRO By António Afonso; Joana Sousa-Leite
  3. The Short-Run Effect of Monetary Policy Shocks on Credit Risk: An Analysis of the Euro Area By Chi Hyun Kim; Lars Other
  4. Money, credit, monetary policy and the business cycle in the euro area: what has changed since the crisis? By Giannone, Domenico; Lenza, Michele; Reichlin, Lucrezia
  5. Bad Sovereign or Bad Balance Sheets? Euro Interbank Market Fragmentation and Monetary Policy, 2011-2015 By Gabrieli, Silvia; Labonne, Claire
  6. The euro at twenty: Follies of youth? By Ricardo Cabral; Francisco Louçã
  7. Greece after the Bailouts: Assessment of a Qualified Failure By George Pagoulatos
  8. Leaning against the wind: macroprudential policy and the financial cycle By Kockerols, Thore; Kok, Christoffer
  9. Further evidence of the relationship between social transfers and income inequality in OECD countries By Giorgio D'Agostino; Luca Pieroni; Margherita Scarlato
  10. Home Ownership and Monetary Policy Transmission By Winfried Koeniger; Marc-Antoine Ramelet
  11. An arbitrage-free yield net model with application to the euro debt crisis By Zhiwu Hong; Linlin Niu
  12. CoMap: mapping contagion in the euro area banking sector By Covi, Giovanni; Gorpe, Mehmet Ziya; Kok, Christoffer
  13. The economic consequences of terrorism for the European Union By Krieger, Tim; Meierrieks, Daniel
  14. Bank credit allocation and productivity: stylised facts for Portugal By Nuno Azevedo; Márcio Mateus; Álvaro Pina
  15. Off the Radar: Exploring the Rise of Shadow Banking in the EU By Martin Hodula
  16. The effect of the single currency on exports: Comparative firm-level evidence By Lalinsky, Tibor; Meriküll, Jaanika

  1. By: Jens Klose (THM Business School)
    Abstract: This article introduces a new indicator to measure redenomination risks in Euro area countries. The measure is based on survey data. The influence of this indicator in determining sovereign bond yield spreads is tested using an ARDL-approach. The results for ten EMU countries in the period June 2012 to January 2018 show that the risk of a depreciation is almost abandoned for Euro area countries, i.e. the former crisis countries Ireland and Portugal. If anything an appreciation may occur for some countries once they leave the EMU. The only countries facing depreciation problems once leaving the monetary union are Italy and to some extent Spain.
    Keywords: Redenomination Risk, Euro Area, Exit
    JEL: E43 G01
    Date: 2019
  2. By: António Afonso; Joana Sousa-Leite
    Abstract: We assess the transmission of the Targeted Longer-Term Refinancing Operations (TLTRO) to the bank credit supply for the Euro area (2014:05-2018:01) and for Portugal (2011:01-2018:01), using a panel data setup. For the Euro area, we find a positive relationship between the TLTRO and the amount of credit granted to the real economy. For the vulnerable countries, the effects of the TLTRO on the stock of credit increased from 2016 to 2017. Among the group of small banks, the effects are stronger in less vulnerable countries. We also find that competition has no statistically significant impact on the transmission of the TLTRO to the bank credit supply for the Euro area. For Portugal, using a difference-in-differences model, we find no statistically significant impact of the TLTRO on credit granted by banks. Finally, bidding banks set lower interest rates than non-bidding banks and the difference seems to be larger in 2017. In Portugal, the effects of the TLTRO on loan interest rates also increased from 2016 to 2017 and are stronger for small banks.
    JEL: C33 C87 E50 E51 E52 E58
    Date: 2019
  3. By: Chi Hyun Kim; Lars Other
    Abstract: We examine the credit channel of monetary policy from 2000 to 2015 in the Euro Area using daily monetary policy shock and credit risk measures in an autoregressive distributed lag model. We find that an expansionary monetary policy shock leads to a short-run increase in the credit risk of non-financial corporations. This dysfunctionality of the credit channel is driven by the crisis-dominated post-2009 period. During this period, market participants may have interpreted expansionary monetary policy shocks as a signal of worsening economic prospects. We further distinguish policy shocks aiming at short- and long-run expectations of market participants, i.e. target and path shocks. The adverse effect disappears for crisis countries when the European Central Bank targets long-run rather than short-run expectations.
    Keywords: Credit channel, credit spreads, Euro area financial markets, forward guidance, monetary policy, Zero lower bound
    JEL: C22 E44 E52 G12
    Date: 2019
  4. By: Giannone, Domenico; Lenza, Michele; Reichlin, Lucrezia
    Abstract: This paper studies the relationship between the business cycle and financial intermediation in the euro area. We establish stylized facts and study their stability during the global financial crisis and the European sovereign debt crisis. Long-term interest rates have been exceptionally high and long-term loans and deposits exceptionally low since the Lehman collapse. Instead, short-term interest rates and short-term loans and deposits did not show abnormal dynamics in the course of the financial and sovereign debt crisis. JEL Classification: E32, E51, E52, C32, C51
    Keywords: euro area, loans, monetary policy, money, non-financial corporations
    Date: 2019–01
  5. By: Gabrieli, Silvia (Banque de France); Labonne, Claire (Federal Reserve Bank of Boston)
    Abstract: We measure the relative role of sovereign-dependence risk and balance sheet (credit) risk in euro area interbank market fragmentation from 2011 to 2015. We combine bank-to-bank loan data with detailed supervisory information on banks’ cross-border and cross-sector exposures. We study the impact of the credit risk on banks’ balance sheets on their access to, and the price paid for, interbank liquidity, controlling for sovereign-dependence risk and lenders’ liquidity shocks. We find that (i) high non-performing loan ratios on the GIIPS portfolio hinder banks’ access to the interbank market throughout the sample period; (ii) large sovereign bond holdings are priced in interbank rates from mid-2011 until the announcement of the OMT; (iii) the OMT was successful in closing this channel of cross-border shock transmission; it reduced sovereign-dependence and balance sheet fragmentation alike.
    Keywords: interbank market; credit risk; fragmentation; sovereign risk; country risk; credit rationing; market discipline
    JEL: E43 E58 G01 G15 G21
    Date: 2018–07–12
  6. By: Ricardo Cabral; Francisco Louçã
    Abstract: This paper overviews the early history of the euro and argues that the euro was suboptimally designed, without monetary sovereignty of Eurozone (EZ) Member States, in order to comply with political goals set by wealthier Member States. Given this constraint, the euro architects designed a single currency in which its irreversibility is achieved through the EZ banking system, with recourse to the TARGET2 payment system. This allowed the banking systems of deficit Member States to fund large cumulative current account deficits in the first decade of the euro. The euro crisis led EZ policy makers to define new far more demanding fiscal rules and a new Banking Union to constrain the ability of EZ banking systems to fund sovereigns and current account deficits. Thus, the euro at twenty has become more fragile.
    Keywords: Euro crisis, fiscal rules, banking union, Eurozone, austerity strategy
    JEL: F32 F34 E62 E52 F36 F42
    Date: 2019–01
  7. By: George Pagoulatos
    Abstract: Lax fiscal oversight, loose credit following euro-accession, and credibility conferred by Eurozone membership led Greece to a debt-driven growth funded by external capital inflows. These private flows came to a “sudden stop” in 2010, forcing a bailout. The first adjustment program viewed the problem as one of liquidity rather than solvency, imposing heavily front-loaded austerity, that accentuated recession and led to complete target slippage. The second program included debt restructuring, exhibited greater flexibility, and focused on decreasing labour costs to improve competitiveness. The third program, whose size increased by the 2015 deterioration of the economy, contained much of what had been left undone, and was the only one completed. Despite deleveraging, both public and private debt as share of GDP continued to grow because of the steep recession, procyclical policy mix, and bank-sovereign doom loop. Eventually, hard external conditionality overcame much of the resistance of status quo coalitions to reforms. Despite the successive reform programmes, the Greek economy continues to suffer a weak public administration, slow functioning justice system, low savings, high consumption, small average business size, and a still weak export sector. Prolonged austerity has left a heavy legacy in terms of poverty, social vulnerability, and weakened productive capacity, as steep disinvestment and the decline of employment are dragging down the economy’s growth potential. On the other hand, the twin deficits (fiscal and current account) have been eradicated, a wide array of significant structural reforms have been implemented, exports have increased, and the administrative capacity of the state has relatively improved. Greece represented a Mediterranean market economy, driven by domestic demand and deficit-financing; the crisis has brought about an evolving rebalancing of the economy towards a fiscally disciplined, reform-driven, and more export-oriented growth model.
    Keywords: Lax fiscal oversight, credibility, Eurozone, growth, bailout, liquidity, austerity, competitiveness, reforms, Greece
    Date: 2018–11
  8. By: Kockerols, Thore; Kok, Christoffer
    Abstract: Should monetary policy lean against financial stability risks? This has been a subject of fierce debate over the last decades. We contribute to the debate about “leaning against the wind” (LAW) along three lines. First, we evaluate the cost and benefits of LAW using the Svensson (2017) framework for the euro area and find that the costs outweigh the benefits. Second, we extend the framework to address a critique that Svensson does not consider the lower frequency financial cycle. Third, we use this extended framework to assess the costs and benefits of monetary and macroprudential policy. We find that macroprudential policy has net marginal benefits in addressing risks to financial stability in the euro area, whereas monetary policy has net marginal costs. This would suggest that an active use of macroprudential policies targeting financial stability risks would alleviate the burden on monetary policy to “lean against the wind”. JEL Classification: E58, G01
    Keywords: financial cycle, leaning against the wind, macroprudential policy
    Date: 2019–01
  9. By: Giorgio D'Agostino; Luca Pieroni; Margherita Scarlato
    Abstract: In this paper, we have revised the estimates of the e ect of social transfers on income in- equality. We have accounted for reverse causality using an instrumental variable derived by a theoretical model, which identi es the main driver of social transfers from the interaction between electoral system and coalition or party winning the elections, and have estimated in the OECD countries that a 1% increase of the share of social transfers reduces the income in- equality by half a percentage point. This result appears to be robust to di erent components of expenditure, alternative model speci cations and falsi cation tests. Only countries with a high corruption level seems to make this empirical regularity questionable; our estimates show that bureacratic ineciencies by corruption are identi ed as responsible of the bene t lacks of social transfers on economic inequality.
    Keywords: Welfare policy; Social spending; Income inequality; Instrumental variable esti- mation.
    JEL: H53 I38 C26
    Date: 2019–01
  10. By: Winfried Koeniger; Marc-Antoine Ramelet
    Abstract: We present empirical evidence on the heterogeneity in monetary policy transmission across countries with different home ownership rates. We use household-level data together with shocks to the policy rate identified from high-frequency data. We find that housing tenure reacts more strongly to unexpected changes in the policy rate in Germany and Switzerland –the OECD countries with the lowest home ownership rates–compared with existing evidence for the U.S. An unexpected decrease in the policy rate by 25 basis points increases the home ownership rate by 0.8 percentage points in Germany and by 0.6 percentage points in Switzerland. The response of non-housing consumption in Switzerland is less heterogeneous across renters and mortgagors, and has a different pattern across age groups than in the U.S. We discuss economic explanations for these findings and implications for monetary policy.
    Keywords: Monetary policy transmission, Home ownership, Housing tenure, Consumption
    JEL: E21 E52 R21
    Date: 2018
  11. By: Zhiwu Hong; Linlin Niu
    Abstract: We develop a parsimonious arbitrage-free yield net model for consistent bond pricing across maturities and issuers. Containing a core curve and multiple periphery curves, the yield net is spanned by three layers of factors: base factors spanning all curves, common spread factors spanning all periphery yield spreads, and specific factors each spanning yield spreads of a periphery issuer. Under the arbitrage-free assumption, we prove a parsimonious solution to the risk-neutral process that guarantees strong identification on the latent risk factors and parameters. We apply the model to Treasury yields of Germany and GIIPS countries from 2009 to 2016. The model fits data remarkably well and disentangles the common credit risk, market liquidity risk, and country-specific risks. The results demonstrate that relative risk pricing determines signs and magnitudes of the "flight to liquidity" effect and spillover effects among bonds of different issuers.
    Keywords: Term structure models, European debt crisis, Liquidity, Sovereign credit risk, Nelson-Siegel factors
    JEL: C33 E43 G15
    Date: 2019–01–30
  12. By: Covi, Giovanni; Gorpe, Mehmet Ziya; Kok, Christoffer
    Abstract: This paper presents a novel approach to investigate and model the network of euro area banks’ large exposures within the global banking system. Drawing on a unique dataset, the paper documents the degree of interconnectedness and systemic risk of the euro area banking system based on bilateral linkages. We then develop a Contagion Mapping (CoMap) methodology to study contagion potential of an exogenous default shock via counterparty credit and funding risks. We construct contagion and vulnerability indices measuring respectively the systemic importance of banks and their degree of fragility. Decomposing the results into the respective contributions of credit and funding shocks provides insights to the nature of contagion which can be used to calibrate bank-specific capital and liquidity requirements and large exposures limits. We find that tipping points shifting the euro area banking system from a less vulnerable state to a highly vulnerable state are a non-linear function of the combination of network structures and bank-specific characteristics. JEL Classification: D85, G17, G33, L14
    Keywords: interconnectedness, large exposures, macroprudential policy, network analysis, stress test, systemic risk
    Date: 2019–01
  13. By: Krieger, Tim; Meierrieks, Daniel
    Abstract: In recent years, a number of major terrorist attacks in EU member states has put the fight against homegrown and international terrorism at the top of the agenda of European policy-makers. This paper analyzes the costs of terrorism in the European Union from both a theoretical and empirical perspective in order to evaluate counter-terrorism policies by comparing their costs and benefits. Two important policy implications can be derived from our exercise. First, individuals' behavioral predispositions typically result in a biased perception of the risk of terrorism leading to too high a demand for counter-terrorism measures relative to what the objective probability of terrorist events suggests. This results in a tendency to favor repressive over preventive measures against terrorism. Second, uncoordinated European policies against terrorism have the potential to undermine the effectiveness of counter-terrorism measures. If there is a justification for the existence of the European Union (which an increasing number of populist parties in Europe seems to doubt), then it is to provide supranational answers to coordination failure in European counter-terrorism policies.
    Keywords: terrorism,home-grown terrorism,European Union,counter-terrorism policies,coordination failure,behavioral responses to terrorism
    JEL: D74 H56 N44
    Date: 2019
  14. By: Nuno Azevedo; Márcio Mateus; Álvaro Pina
    Abstract: With a dataset covering 95% of total outstanding credit to non-financial corporations recorded in the Portuguese credit register, we investigate whether outstanding loans by resident banks to 64 economic sectors have been granted to the most productive firms. We find evidence of misallocation, which reflects the joint effects of credit supply and credit demand decisions taken over the course of time, and the adverse cyclical developments following the accumulation of imbalances in the Portuguese economy for a protracted period. In 2008-2016, the share of outstanding credit granted to firms with very low productivity (measured or inferred) was always substantial, peaking at 44% in 2013, and declining afterwards with the rebound in economic activity and the growing allocation of new loans towards lower risk firms and away from higher risk firms. Furthermore, we find that misallocation is associated with slower reallocation. The responsiveness of credit growth to firm relative productivity is much lower in sectors with relatively more misallocated credit and when banks have a high share of such credit in their portfolios.
    JEL: D24 G21 O16 O40 O47
    Date: 2018
  15. By: Martin Hodula
    Abstract: This paper uses novel ECB/Eurosystem data on non-bank financial intermediation to investigate the potential factors of shadow banking growth for a panel of 24 EU countries. Consistent with several strands of literature, the EU shadow banking system is found to be highly procyclical and positively related to increasing demand of long-term institutional investors, more stringent capital regulation, and faster financial development. In addition, the paper offers two findings that have not been reported in the literature. First, it shows that the relationship between monetary policy and shadow banking growth is level-dependent and may be determined by the relative magnitude of interest rates in the economy. In this respect, two main motives driving the relationship are identified - the "funding cost" motive and the "search for yield" motive. Second, the driving forces of shadow banking differ between the old and new EU countries, largely due to the missing legal framework for securitization in the new members.
    Keywords: European Union, monetary policy, panel data analysis, shadow banking
    JEL: E44 E52 G21 G23
    Date: 2018–12
  16. By: Lalinsky, Tibor; Meriküll, Jaanika
    Abstract: We investigate how adopting the euro affects exports using firm-level data from Slovakia and Estonia. In contrast to previous studies, we focus on countries that adopted the euro individually and had different exchange rate regimes prior to doing so. Following the New Trade Theory we consider three types of adjustment: firm selection, changes in product varieties and changes in the average value of the exports that compose the exports of individual firms. The euro effect is identified by a difference in differences analysis comparing exports by firms to the euro area countries with exports to the EU countries that are not members of the euro area. The results highlight the importance of the transaction costs channel related to exchange rate volatility. We find the euro has a strong pro-trade effect in Slovakia, which switched to the euro from a floating exchange rate, while it has almost no effect in Estonia, which had a fixed exchange rate to the euro prior to the euro changeover. Our findings indicate that the euro effect manifested itself mainly through the intensive margin and that the gains from trade were heterogeneous across firm characteristics.
    Keywords: international trade,common currency areas,euro adoption,transaction costs,Slovakia,Estonia,firm-level data
    JEL: F14 F15
    Date: 2019

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