nep-eec New Economics Papers
on European Economics
Issue of 2019‒03‒18
seventeen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Private bank deposits and macro/fiscal risk in the euro-area By Michael G. Arghyrou; Maria Dolores Gadea
  2. Heterogeneity within the Euro Area: New Insights into an Old Story By Virginie Coudert; Cécile Couharde; Carl Grekou; Valérie Mignon
  3. The euro exchange rate and Germany's trade surplus By Stefan Hohberger; Marco Ratto; Lukas Vogel
  4. Does monetary policy affect income inequality in the euro area? By Anna Samarina; Anh D.M. Nguyen
  5. Quantifying the transmission of European sovereign default risk By Dumitru, Ana-Maria; Holden, Thomas
  6. 'Whatever it Takes' to Change Belief: Evidence from Twitter By Michael Stiefel; Rémi Vivès
  7. On the design of stabilising fiscal rules By Reuter, Wolf Heinrich; Tkačevs, Oļegs; Vilerts, Kārlis
  8. What drives sovereign debt portfolios of banks in a crisis context? By Lamas, Matías; Mencía, Javier
  9. Target balances and financial crises By Krahnen, Jan Pieter
  10. The impact of size, composition and duration of the central bank balance sheet on inflation expectations and market prices By Stephanie Titzck; Jan Willem van den End
  11. Measuring economic and economic policy uncertainty, and their macroeconomic effects: the case of Spain By Corinna Ghirelli; María Gil; Javier J. Pérez; Alberto Urtasun
  12. (Since when) are east and west German business cycles synchronised? By Gießler, Stefan; Heinisch, Katja; Holtemöller, Oliver
  13. A cointegration model of money and wealth By Assenmacher-Wesche, Katrin; Beyer, Andreas
  14. Quantitative Easing and the Hot Potato Effect: Evidence from Euro Area Banks By Ellen Ryan; Karl Whelan
  15. Sovereign Spread Volatility and Banking Sector By Vivek Sharma; Edgar Silgado-Gómez
  16. The role of country factors in the 2018 EBA stress test By Bianchi, Benedetta
  17. An application of dynamic factor models to nowcast regional economic activity in Spain By María Gil; Danilo Leiva-Leon; Javier J. Pérez; Alberto Urtasun

  1. By: Michael G. Arghyrou; Maria Dolores Gadea
    Abstract: We examine the relationship between private bank deposits and macro/fiscal risk in the euro area. We test three hypotheses: First, private bank deposits relative to Germany are determined by macro/fiscal risk factors. Second, this relationship is time-varying. Third, time-variation is driven by the level of macro/fiscal risk. Our findings validate all three tested hypotheses. They also reveal persistent fragmentation between EMU core and periphery banking systems caused by a deficit of trust in periphery banking systems, unmitigated by the introduction of OMT and European Banking Union. Our findings have implications for the introduction of the European Deposits Insurance Scheme (EDIS), for which they offer tentative support.
    Keywords: private bank deposits, macro/fiscal risk, Eurozone, TVP panel, fragmentation
    JEL: F30 F36 G11 G15
    Date: 2019
  2. By: Virginie Coudert; Cécile Couharde; Carl Grekou; Valérie Mignon
    Abstract: We assess cross-country heterogeneity within the eurozone and its evolution over time by measuring the distances between the equilibrium exchange rates’ paths of member countries. These equilibrium paths are derived from the minimization of currency misalignments, by matching real exchange rates with their economic fundamentals. Using cluster and factor analyses, we identify two distinct groups of countries in the run-up to the European Monetary Union (EMU), Greece being clearly an outlier at that time. Comparing the results with more recent periods, we find evidence of rising dissimilarities between these two sets of countries, as well as within the groups themselves. Overall, our findings illustrate the building-up of macroeconomic imbalances within the eurozone before the 2008 crisis and the fragmentation between its member countries that followed.
    Keywords: Euro Area;Equilibrium Exchange Rates;Cluster Analysis;Factor Analysis;Macroeconomic Imbalances
    JEL: F33 C38 E5
    Date: 2019–03
  3. By: Stefan Hohberger; Marco Ratto; Lukas Vogel
    Abstract: We estimate a three-region (DE-REA-RoW) structural macroeconomic model, and we provide a counterfactual on how nominal exchange rate flexibility would have affected the German trade balance (TB) by simulating the shocks of the estimated model under a counterfactual flexible exchange rate regime. The actual and counterfactual TB trajectories are similar overall. Results suggest an around 2 pp lower trade surplus during 2012-15 together with a stronger real effective exchange rate in the counterfactual. The latter shows a similar upward trend in the TB, however, and the 2012-15 gap between actual and counterfactual closes at the end of the sample.
    Keywords: Germany, euro, exchange rate, trade balance
    JEL: E44 E52 E53 F41
    Date: 2019
  4. By: Anna Samarina; Anh D.M. Nguyen
    Abstract: This paper examines how monetary policy affects income inequality in 10 euro area countries over the period 1999-2014. We distinguish macroeconomic and financial channels through which monetary policy may have distributional effects. The macroeconomic channel is captured by wages and employment, while the financial channel by asset prices and returns. We find that expansionary monetary policy in the euro area reduces income inequality, especially in the periphery countries. The macroeconomic channel leads to these equalizing effects: monetary easing reduces income inequality by raising wages and employment. However, there is some indication that the financial channel may weaken the equalizing effect of expansionary monetary policy.
    Keywords: income inequality: monetary policy; euro area
    JEL: D63 E50 E52
    Date: 2019–03
  5. By: Dumitru, Ana-Maria; Holden, Thomas
    Abstract: We build a non-stationary Hawkes model of sovereign credit risk for seven European countries, and estimate it on CDS data from the run-up to the Greek default. We model a country's credit risk as partly driven by a weighted combination of risks across countries. We find Spain and Portugal are the chief drivers of this component, with Greece's contribution also significant. Greece and Portugal are found to be particularly sensitive to external risk, with a Greek default 35% less likely in our period without shocks elsewhere. Our novel maximum-likelihood procedure permits tractable estimation of high-dimensional Hawkes models with unobserved events.
    Keywords: sovereign CDS spreads,credit risk,multivariate self-exciting point process,systemic risk
    JEL: G01 G12 G15 C32 C58
    Date: 2019
  6. By: Michael Stiefel (Department of Economics, University of Zurich); Rémi Vivès (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)
    Abstract: The sovereign debt literature emphasizes the possibility of avoiding a self-fulfilling default crisis if markets anticipate the central bank to act as lender of last resort. This paper investigates the extent to which changes in belief about an intervention of the European Central Bank (ECB) explain the sudden reduction of government bond spreads for the distressed countries in summer 2012. We study Twitter data and extract belief using machine learning techniques. We find evidence of strong increases in the perceived likelihood of ECB intervention and show that those increases explain subsequent decreases in the bond spreads of the distressed countries.
    Keywords: self-fulfilling default crisis,unconventional monetary policy,Twitter data
    Date: 2019–02
  7. By: Reuter, Wolf Heinrich; Tkačevs, Oļegs; Vilerts, Kārlis
    Abstract: Utilising data of the EU28 Member States for the period 1996-2015, this paper confirms the findings of previous studies that the stipulation of fiscal rules reduces fiscal volatility and consequently contributes to macroeconomic stability. Yet, we document that this result only holds for rules which are designed to be unaffected by the current state of the business cycle, i.e. which are "a-cyclical". Those can, e.g. be budget balance rules that set ceilings in cyclically adjusted terms or expenditure rules that set a limit relative to potential instead of current output. Furthermore, the stringency of fiscal rules amplifies their stabilising effect. Actual year-to-year compliance with fiscal rules seems to play no systematic role, such that effects of the rules can be observed even if they are not complied with year-to-year. Overall, our paper suggests that strong, properly designed numerical rules act as an anchor for fiscal policy makers and contribute to more stable discretionary fiscal policy.
    Keywords: fiscal rules,fiscal policy volatility,panel data,compliance
    JEL: C23 E62 E32 H60
    Date: 2018
  8. By: Lamas, Matías; Mencía, Javier
    Abstract: We study determinants of sovereign portfolios of Spanish banks over a long time-span, starting in 2008. Our findings challenge the view that banks engaged in moral hazard strategies to exploit the regulatory treatment of sovereign exposures. In particular, we show that being a weakly capitalized bank is not related to higher holdings of domestic sovereign debt. While a strong link is present between central bank liquidity support and sovereign holdings, opportunistic strategies or reach-for-yield behavior appear to be limited to the non-domestic sovereign portfolio of well-capitalized banks, which might have taken advantage of their higher risk-bearing capacity to gain exposure (via central bank liquidity) to the set of riskier sovereign bonds. Furthermore, we document that financial fragmentation in EMU markets has played a key role in reshaping sovereign portfolios of banks. Overall, our results have important implications for the ongoing discussion on the optimal design of the risk-weighted capital framework of banks.
    Keywords: banks´ sovereign holdings, central bank liquidity, EMU financial fragmentation, moral hazard, sovereign crisis
    Date: 2019–03
  9. By: Krahnen, Jan Pieter
    Abstract: Recently, Fuest and Sinn (2018) have demanded a change of rules for the Eurozone's Target 2 payment system, claiming it would violate the Statutes of the European System of Central Banks and of the European Central Bank. The authors present a stylized model based on a set of macro-economic assumptions, and show that Target 2 may lead to loss sharing among national central banks (NCBs), thus violating the no risk-sharing requirement laid out by the Eurosystem Statutes. In this note, I present an augmented model that incorporates essential features of the micro- and macroprudential regulatory and supervisory regime that today is hard-wired into Europe's banking system. The model shows that the original no-risk-sharing principle is not necessarily violated during a financial crisis of a member state. Moreover, it shows that under a banking union regime, financial crisis asset value losses at or below the 99.9th percentile are borne by private investors, not by taxpayers, and particularly not by central banks. Therefore, policy conclusions from the micro-founded model differ significantly from those suggested by Fuest and Sinn (2018).
    Keywords: Target 2,payment system,central banks,Eurosystem
    Date: 2019
  10. By: Stephanie Titzck; Jan Willem van den End
    Abstract: We analyse the effects of announcements of changes in the Eurosystem's balance sheet size, duration and composition on inflation expectations, the exchange rate and the 10-year euro area government bond yield, using local projections. We explicitly take into account interaction effects between the three balance sheet dimensions. We provide evidence for the duration extraction channel of monetary policy transmission, as we find that the bond yield is sensitive to the combined impact of shocks to balance sheet size and duration. The exchange rate is also affected by a joint size-duration shock. Moreover, the bond yield and exchange rate are sensitive to the joint effect of changes in size and composition. The results indicate that interactions between balance sheet dimensions matter.
    Keywords: central banks and their policies; monetary policy
    JEL: E58 E52
    Date: 2019–03
  11. By: Corinna Ghirelli (Banco de España); María Gil (Banco de España); Javier J. Pérez (Banco de España); Alberto Urtasun (Banco de España)
    Abstract: We provide additional evidence on the relationship between uncertainty and economic activity. For this purpose, we gather and construct a wide range of proxy indicators of economic and economic policy uncertainty from Spain. We distinguish between the relative merits of different types of measures based on: (i) the volatility of financial markets; (ii) economic analysts’ disagreement; (iii) economic policy uncertainty. We show that the first and the third block of measures are the most relevant to grasp the negative effects of unexpected changes in uncertainty on aggregate economic developments, as measured by real GDP. In addition, we find that economic policy uncertainty and financial uncertainty shocks produce visible negative effects on private consumption. The negative responses on capital goods investments are initially bigger in magnitude but vanish more quickly.
    Keywords: economic uncertainty, economic policy uncertainty, impact of uncertainty shocks
    JEL: D8 C43 E2 E3
    Date: 2019–03
  12. By: Gießler, Stefan; Heinisch, Katja; Holtemöller, Oliver
    Abstract: This paper analyses whether and since when East and West German business cycles are synchronised. We investigate real GDP, unemployment rates and survey data as business cycle indicators and employ several empirical methods. Overall, we find that the regional business cycles have synchronised over time. GDP-based indicators and survey data show a higher degree of synchronisation than the indicators based on unemployment rates. However, recently synchronisation among East and West German business cycles seems to become weaker, in line with international evidence.
    Keywords: business cycles,synchronisation,East Germany
    JEL: C32 E32 R11
    Date: 2019
  13. By: Assenmacher-Wesche, Katrin; Beyer, Andreas
    Abstract: Extending the data set used in Beyer (2009) to 2017, we estimate I(1) and I(2) money demand models for euro area M3. After including two broken trends and a few dummies to account for shifts in the variables following the global financial crisis and the ECB's non-standard monetary policy measures, we find that the money demand and the real wealth relations identified in Beyer (2009) have remained remarkably stable throughout the extended sample period. Testing for price homogeneity in the I(2) model we find that the nominal-to-real transformation is not rejected for the money relation whereas the wealth relation cannot be expressed in real terms.
    Keywords: money demand,wealth,cointegration,vector error correction model,I(2) analysis
    JEL: E41 C32 C22
    Date: 2019
  14. By: Ellen Ryan; Karl Whelan
    Abstract: We use a bank-level data set to examine the behaviour of central bank reserves in the euro area banking system over the course of the ECB QE programme. Previous research on QE has generally paid little attention to the role of reserve dynamics within the banking system and some have assumed that the system passively absorbs additional reserves generated by asset purchases. However, with a negative deposit rate in place throughout the sample we study, euro area banks have had a disincentive to hold excess reserves and thus could wish to treat them as a “hot potato” that is preferably passed on to other banks. We find evidence for this hot potato effect, reporting substantial month-to-month churn in bank reserves as well as evidence that banks are responding to high reserve balances by pushing them off their balance sheets. Unlike in the traditional money multiplier model, where excess reserves are used in loan creation, banks appear to be primarily managing reserves through debt security purchases. As such, this hot potato effect seems likely to have had an effect on European bond yields that is distinct from the portfolio rebalancing effect emphasised in the QE literature thus far.
    Keywords: Quantitative easing; Reserves; Central banks
    JEL: E4 E5 G21
    Date: 2019–01
  15. By: Vivek Sharma (LUISS Guido Carli, Department of Economics and Finance); Edgar Silgado-Gómez (University of Rome "Tor Vergata" & European Central Bank)
    Abstract: Using structural vector autoregression augmented with stochastic volatility (SVAR-SV), we document that in late 2000s there were large spikes in volatility of spreads on peripheral eurozone government bonds. This increased volatility entailed a significant decline in bank credit to nonfinancial sector and real economic activity. We rationalize these results in a New Keynesian dynamic stochastic general equilibrium (DSGE) model with financial intermediation. In our framework, a rise in spread volatility erodes banks’ net worth and constrains their balance sheets. The banks respond by slashing their lending to real sector, dampening the economy as a whole. Results from the model match our empirical findings.
    Keywords: Sovereign Spread Volatility, Banks, SVAR-SV, NK-DSGE
    JEL: E32 E44 F30
    Date: 2019–03–08
  16. By: Bianchi, Benedetta (Central Bank of Ireland)
    Abstract: This note looks at the role of country factors in the 2018 EBA stress test. This is a European exercise but its severity varies between jurisdictions. We show that two thirds of the cross-country variation in the key variables of the adverse scenario are explained by country factors. This suggests that - although the severity of the headline stress scenario varies across countries - the overarching approach to the calibration of the stress is consistent across countries. Moreover, we show that the adjustments made to the original calibration increase the extent to which the shocks map to these country factors.
    Date: 2019–02
  17. By: María Gil (Banco de España); Danilo Leiva-Leon (Banco de España); Javier J. Pérez (Banco de España); Alberto Urtasun (Banco de España)
    Abstract: The goal of this paper is to propose a model to produce nowcasts of GDP growth of Spanish regions, by means of dynamic factor models. This framework is capable to incorporate in a parsimonious way the relevant information available at the time that each forecast is made. We employ a Bayesian perspective to provide robust estimation of all the ingredients involved in the model. Accordingly, we introduce the Bayesian Factor model for Regions (BayFaR), which allows for the inclusion of missing data and combines quarterly data on regional real output growth (taken from the database of the AIReF and from the individual regional statistics institutes, when available) and monthly information associated to indicators of regional real activity. We apply the BayFaR to nowcast the GDP growth of the four largest regions of Spain, and illustrate the real-time nowcasting performance of the proposed framework for each case. We also apply the model to nowcast Spanish GDP in order to be able to assess the relative growth of each region.
    Keywords: regional activity, nowcasting, dynamic factor model
    JEL: C32 E37 R13
    Date: 2019–03

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