nep-eec New Economics Papers
on European Economics
Issue of 2019‒03‒04
eight papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Public Support for the Euro and Trust in the ECB: The first two decades of the common currency By Roth, Felix; Jonung, Lars
  2. Multidimensional Inequality and Divergence: The Eurozone Crisis in Retrospect By Philipp Poppitz
  3. Information effects of euro area monetary policy: New evidence from high-frequency futures data By Kerssenfischer, Mark
  4. Eurozone Real Output and Covered Interest Parity Deviations: Can Stronger Real Output Lessen the Deviations? By Ibhagui, Oyakhilome
  5. The impact of Brexit on Francophone Africa By Kohnert, Dirk
  6. The Rise of the Dollar and Fall of the Euro as International Currencies By Maggiori, Matteo; Neiman, Brent; Schreger, Jesse
  7. Wider Covered Interest Parity Deviations and Lower Stock Returns: Evidence from the Eurozone By Ibhagui, Oyakhilome
  8. B for Brexit: A Survey of the Economics Academic Literature By Campos, Nauro F

  1. By: Roth, Felix; Jonung, Lars
    Abstract: This paper examines the evolution of public support for the euro since its introduction as a virtual currency in 1999, using a unique set of data not available for any other currency. We focus on the role of economic factors in determining the popularity of the euro. We find that a majority of citizens support the euro in each individual member country of the euro area (EA). The economic crisis in the EA following the Great Recession led to a slight decline in public support, but the recent economic recovery has strengthened that support, which is now approaching historically high levels after two decades of its existence. We detect a similar, but less pronounced upturn in trust in the ECB during the recovery. Our econometric work demonstrates that unemployment is a key driver of support behind the euro. Given these developments, we discuss whether the large and persistent majority support enjoyed by the euro equips the currency to weather populist challenges during its third decade.
    Keywords: Euro,public support,trust,unemployment,optimum currency area,monetary union,ECB
    JEL: E42 E52 E58 F33
    Date: 2019
  2. By: Philipp Poppitz (University of Oldenburg, Department of Economics)
    Abstract: Variation in living standards across Europe, especially in income, has decreased over the last few decades, but the last recession brought convergence to a halt. This paper asks, rst, whether sigma-convergence is found when other dimensions of inequality are taken into account, and second, whether the recent economic recovery led to renewed convergence. To assess sigma-convergence, I estimate transnational inequality in the euro area (EA-13) using a decomposable multidimensional inequality measure including income, occupational prestige, education, and employment status as key dimensions economic wellbeing and inequality. I quantify the contribution of factor shares to within- and between-group inequality across the euro area using a counterfactual decomposition method together with bootstrapped condence intervals. The results show that, like income, multidimensional inequality increased signicantly starting in 2008, mainly driven by income and employment status. Just two years later, in 2010, sigma-convergence started to decline, and in 2014 reached a level of divergence that had only been seen previously before the introduction of the euro. The income dimension best explains between-country divergence, but dierences in employment status and the correlation between dimensions contributed substantially to within-country inequality. A formal club convergence test shows two of the European country clubs—Central Europe and Southern Europe—to be key drivers of divergence, with the exception of Spain as a potential outlier. The results show that the recent economic recovery in the euro area has brought about initial relief in multidimensional inequality, but that the level of transnational and between-country inequality as well as divergence remains high.
    Keywords: multidimensional inequality, convergence, euro area, transnationalization, composite index
    Date: 2019–02
  3. By: Kerssenfischer, Mark
    Abstract: Central bank announcements move financial markets. The response of inflation and growth expectations, on the other hand, is often small or even counterintuitive. Based on tick-by-tick futures prices on bonds and stock prices, I confirm these seemingly puzzling results for the euro area and provide evidence that they are due to central bank information effects. That is, ECB announcements convey information not only about monetary policy, but also about economic fundamentals. I separate these "information shocks" from "pure policy shocks" via sign restrictions and find intuitive effects of both shocks on a wide set of financial market prices and survey measures of economic expectations.
    Keywords: Monetary Policy,High-Frequency Identification,Central Bank Information
    JEL: E52 E44 E32 C32
    Date: 2019
  4. By: Ibhagui, Oyakhilome
    Abstract: Evidence shows that covered interest parity deviations have expanded over time in the EUR/USD cross currency basis swap market – the world’s largest basis swap market – even across the less erratic long-end of the basis swap curve. We analyze the long-run impact and dynamic interdependencies of eurozone macroeconomic factors on the long-end of the EUR/USD cross-currency basis swap spread, utilizing quarterly data from 2003–2018. Our stylized model predicts that a rise in euro area real output relative to the US would lead to a tighter euro basis swap spread; however, an increase in euro area money supply relative to the US as well as a depreciation of the euro would widen the euro basis in the long run. Our model suggests that the magnitude of the effect of real output on the basis is particularly more pronounced than the magnitude of the individual or combined effect of money supply increases and euro depreciation on the basis. Interestingly, our empirical results are consistent with these predictions. In addition, after examining convergence to long run, we find that among the eurozone variables, it is the cross-currency basis that is the predominant adjusting variable in the event of a divergence from the estimated long-run relation. Finally, using accumulated impulse response, we show that shocks to the exchange rate which strengthen the US dollar have permanent effects on the basis.
    Keywords: eurozone, exchange rates, money supply, real output and euro cross-currency basis
    JEL: F3
    Date: 2019–01–03
  5. By: Kohnert, Dirk
    Abstract: Whereas the impact of Brexit on Anglophone Africa was a major issue in the controversial British discussions on the pros and cons of Brexit, possible repercussions on French-speaking Africa have been rarely mentioned up to now. If at all, mostly indirect general effects were declared, both concerning the former British Empire in Africa and a fortifori for the former French colonies as well. Yet, the range of possible Brexit effect is impressive. It spreads from direct influence on farm-gate cocoa-prices in the CFA-currency regions and subsequent percussions on the state budget of these countries, over more indirect effects, e.g. on the cooperation between CEMAC, WAEMU and the EU concerning EDF-programs of which Great Britain has been a major contributor so far, as well as enforced re-negotiation of controversial EPAs, to the revival of progressive social networks in Francophone Africa. The latter are already demanding more political and economic sovereignty, for example with respect to the increasingly anachronistic F CFA currency. Yet, in view of the lack of countervailing power of Britain within the EU in the case of Brexit, the murky network of Françafrique could be re-vitalized and consolidated as well. Besides, there could develop also direct effects of the Brexit. For example, on coca-farmers in Francophone West Africa, because their product is traditionally traded in Pound Sterling. Thus, any fall in the value of the Pound Sterling against the Euro once Britain leaves the EU would have damaging consequences, not only for the producers but also for public finances, because cocoa is priced in Sterling and the CFA franc is linked to the Euro. This impacts also on the revival of the long-standing controversy on the ill-adapted and increasingly anachronistic F CFA. African activists already demand a genuine African debate and a referendum on these issues similar to the Brexit vote.
    Keywords: Brexit, UK, EU, Françafrique, post-colonialism, development, international trade, ODA, WAEMU, CEMAC, Sub-Saharan Africa
    JEL: F13 F2 F35 F54 G15 H26 N17 N47 N77 O17 P16 Z13
    Date: 2019–02–18
  6. By: Maggiori, Matteo; Neiman, Brent; Schreger, Jesse
    Abstract: The modern notion of an international currency involves use in areas of international finance and trade that extend well beyond central banks' coffers. In addition to their important roles as foreign exchange reserves, international currencies are most frequently used to denominate corporate and government bonds, bank loans, and import and export invoices. These currencies offer unrivaled liquidity, constituting large shares of the volume on global foreign exchange markets, and are commonly chosen as the anchors targeted by countries with pegged or managed exchange rate regimes. In this short article, we provide evidence suggesting a recent rise in the use of the dollar, and fall of the use in the euro, with similar patterns manifesting across all these aspects of international currency use.
    Date: 2018–12
  7. By: Ibhagui, Oyakhilome
    Abstract: Financial economists have in recent times begun to analyze the reasons for and determinants of the non-zero cross-currency basis swap spread, a measure of the extent of deviations from covered interest parity (CIP) and risk-less arbitrage. They have however not examined the potential effects of the basis on the market performance of major asset classes, particularly the riskiest asset class – stocks – and how stock markets behave in response to changes in the basis. This paper addresses this question by examining how stock returns in the eurozone respond to changes in and shocks to the euro cross-currency basis. Our results show that there is a positive relationship between changes in the basis and stock market returns. Wider deviations from CIP go pari-passu with declines in stock returns, especially for the long-end basis. The relationship is strongest and most significant during periods of crisis but is generally preserved across the whole sample period. Although the effect of global risk sentiment, proxied by the VIX, on returns is generally the strongest, we show that the positive relation between stock returns and changes in the basis is preserved even after controlling for VIX, dollar exchange rate and other stock-return drivers.
    Keywords: Cross-currency basis, stock market returns, exchange rates and risk sentiment
    JEL: F0 G0
    Date: 2019–02–23
  8. By: Campos, Nauro F (Brunel University)
    Abstract: This paper surveys the economics academic literature on Brexit. It is organised in: pillars, channels, and consequences. The two building blocks to understand Brexit are the economic history of the UK-EU relationship and the literature on the political economy of globalisation and populism. The paper then reviews the evidence on the standard mechanisms through which the UK benefited from EU integration (trade, migration and FDI). Next it surveys the short-run effects of the vote and discuss expected long-term consequences of "Brexit proper." It concludes by identifying some main gaps in the economics literature on Brexit.
    Keywords: Brexit, migration
    JEL: F22 F10
    Date: 2019–02

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