nep-eec New Economics Papers
on European Economics
Issue of 2019‒07‒08
twenty 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. Trade Models in the European Union By Claudius Graebner; Dennis Tamesberg; Timo Kapelari; Philipp Heimberger; Jakob Kapeller
  3. Impact of higher capital buffers on banks’ lending and risk-taking: evidence from the euro area experiments By Cappelletti, Giuseppe; Peeters, Jonas; Budrys, Žymantas; Varraso, Paolo; Marques, Aurea Ponte
  4. Revisions of potential output estimates in the EU after the Great Recession By Jonas Dovern; Christopher Zuber
  5. Bank asset quality and monetary policy pass-through By Kelly, Robert; Byrne, David
  6. New Informed trading in a two-tier market structure under financial distress By Claudio Impenna; Paola Paiardini
  7. Analyzing credit risk transmission to the non-financial sector in Europe: A network approach By Christian Gross; Pierre L. Siklos
  8. Does one size fit all in the Euro Area? Some counterfactual evidence By Destefanis, Sergio; Fragetta, Matteo; Gasteiger, Emanuel
  9. High and low prices and the range in the European stock markets: a long-memory approach By Guglielmo Maria Caporale; Luis A. Gil-Alana; Carlos Poza
  10. Measuring euro area monetary policy By Altavilla, Carlo; Brugnolini, Luca; Gürkaynak, Refet S.; Motto, Roberto; Ragusa, Giuseppe
  11. Lower bank capital requirements as a policy tool to support credit to SMEs: evidence from a policy experiment By Sandrine Lecarpentier; Mathias Lé; Henri Fraisse; Michel Dietsch
  12. Deposit Insurance and Banks’ Deposit Rates: Evidence from the 2009 EU Policy By Matteo Gatti; Tommaso Oliviero
  13. A Model-Based Assessment of the Distributional Impact of Structural Reforms By Werner Roeger; Janos Varga; Jan in 't Veld; Lukas Vogel
  14. A tale of two surplus countries: China and Germany By Yin-Wong Cheung; Sven Steinkamp; Frank Westermann
  15. Compliance effects of sovereign debt cuts By Eckhard Janeba; Armin Steinbach
  16. Testing for breaks in the cointegrating relationship: On the stability of government bond markets' equilibrium By Rodrigues, Paulo M.M.; Sibbertsen, Philipp; Voges, Michelle
  17. Ideology in times of crisis A principal component analysis of votes in the European Parliament, 2004-2019 By Anatole Cheysson; Nicolò Fraccaroli
  18. Firm-level employment, labour market reforms, and bank distress By Setzer, Ralph; Stieglitz, Moritz
  19. Demographic Headwinds in Central and Eastern Europe By Cristina Batog; Ernesto Crivelli; Anna Ilyina; Zoltan Jakab; Jaewoo Lee; Anvar Musayev; Iva Petrova; Alasdair Scott; Anna Shabunina; Xin Cindy Xu; Ruifeng Zhang
  20. Tracking foreign capital: the effect of capital inflows on bank lending in the UK By Christiane Kneer; Alexander Raabe

  1. By: Roth, Felix (Department of Economics, University of Hamburg); Jonung, Lars (Department of Economics, Lund University)
    Abstract: This chapter examines the evolution of public support for the euro and public trust in the European Central Bank (ECB) during the new currency’s first two decades. Using a unique set of opinion poll data that is not available for any other currency, we find that a majority of citizens in every member country of the euro area (EA) support the euro. The economic crisis in the EA following the Great Recession and the euro crisis led to a slight decline in public support for the euro but a sharp fall in trust in the ECB. The recent economic recovery has strengthened support for the euro as well as trust in the ECB. We suggest that support for the euro as a medium of exchange was not strongly affected by the crisis, while trust in the ECB, as the framer of monetary policy, was measurably weakened by the crisis. Our econometric work demonstrates that unemployment is a key driver of support for the euro and its governance. Given these developments, we discuss whether the present levels of support for the euro equip the currency to weather populist challenges in the coming decade.
    Keywords: Euro; public support; trust; unemployment; optimum currency area; monetary union; ECB; EU
    JEL: E42 E52 E58 F33
    Date: 2019–06–14
  2. By: Claudius Graebner (Institute for Comprehensive Analysis of the Economy, Johannes Kepler University Linz, Austria); Dennis Tamesberg (Department for Economic, Welfare and Social Policy, Chamber of Labour, Linz, Austria); Timo Kapelari (Institute for Comprehensive Analysis of the Economy, Johannes Kepler University Linz, Austria); Philipp Heimberger (Vienna Institute for International Economic Studies); Jakob Kapeller (Institute for Comprehensive Analysis of the Economy, Johannes Kepler University Linz, Austria; Institute for Socio-Economics, University of Duisburg-Essen, Germany)
    Abstract: By studying the factors underlying differences in trade performance across European economies, this paper derives six different "trade models" for 22 EU-countries and explores their developmental and distributional implications. We first introduce a typology of trade models by clustering countries based on four key dimensions of trade performance: endowments, technological specialization, labour market characteristics and regulatory requirements. The resulting clusters comprise countries that base their export success on similar trade models. Our results indicate the existence of six different trade models: the 'primary goods model' (Latvia, Estonia), the 'finance model' (Luxembourg), the 'flexible labour market model' (UK), the 'periphery model' (Greece, Portugal, Spain, Italy, France), the 'industrial workbench model' (Slovenia, Slovakia, Poland, Hungary, Czech Republic), and the 'high-tech model' (Sweden, Denmark, Netherlands, Belgium, Ireland, Finland, Germany and Austria). Subsequently, we comparatively analyse the economic development and trends in inequality across these trade models. We observe a shrinking wage share and increasing personal income inequality in most of the trade models. The 'high-tech model' is an exceptional case, being characterised by a relatively stable economic development and an institutional setting that managed to counteract rising inequality.
    Keywords: Trade policy, cluster analysis, European Union, trade models
    Date: 2019–06
  3. By: Cappelletti, Giuseppe; Peeters, Jonas; Budrys, Žymantas; Varraso, Paolo; Marques, Aurea Ponte
    Abstract: We study the impact of higher bank capital buffers, namely of the Other Systemically Important Institutions (O-SII) buffer, on banks' lending and risk-taking behaviour. The O-SII buffer is a macroprudential policy aiming to increase banks' resilience. However, higher capital requirements associated with the policy may likely constrain lending. While this may be a desired effect of the policy, it could, at least in the short-term, pose costs for economic activity. Moreover, by changing the relative attractiveness of different asset classes, a higher capital requirement could also lead to risk-shifting and therefore promote the build-up (or deleverage) of banks' risk-taking. Since the end of 2015, national authorities, under the EBA framework, started to identify banks as O-SII and impose additional capital buffers. The identification of the O-SII is mainly based on a cutoff rule, ie. banks whose score is above a certain threshold are automatically designated as systemically important. This feature allows studying the effects of higher capital requirements by comparing banks whose score was close to the threshold. Relying on confidential granular supervisory data, between 2014 and 2017, we find that banks identified as O-SII reduced, in the short-term, their credit supply to households and financial sectors and shifted their lending to less risky counterparts within the non-financial corporations. In the medium-term, the impact on credit supply is defused and banks shift their lending to less risky counterparts within the financial and household sectors. Our findings suggest that the discontinuous policy change had limited effects on the overall supply of credit although we find evidence of a reduction in the credit supply at the inception of the macroprudential policy. This result supports the hypothesis that the implementation of the O-SII's framework could have a positive disciplining effect by reducing banks' risk-taking while having only a reduced adverse impact JEL Classification: E44, E51, E58, G21, G28
    Keywords: bank capital-based measures, bank risk-shifting, credit supply, macroprudential policy, systemic risk
    Date: 2019–06
  4. By: Jonas Dovern; Christopher Zuber
    Abstract: Using European Commission real-time data, we show that potential output (PO) estimates were substantially and persistently revised downwards after the Great Recession. We decompose PO revisions into revisions of the capital stock, trend labor, and trend total-factor productivity (TFP). Initially, trend TFP revisions contribute most to the overall PO revisions while all three components are almost equally important in the longer run. Revisions of the capital stock happen quickly while revisions of trend labor, mainly driven by revisions of the non-accelerating wage rate of unemployment (NAWRU), are made gradually. The relative contributions of the components to overall PO revisions differ systematically across countries. This suggests that heterogeneous policies are needed to push different countries back to their previous growth paths.
    Keywords: potential output, trend, output gap, hysteresis, EC
    JEL: E32
    Date: 2019
  5. By: Kelly, Robert; Byrne, David
    Abstract: The funding mix of European firms is weighted heavily towards bank credit, which underscores the importance of efficient pass-through of monetary policy actions to lending rates faced by firms. Euro area pass-through has shifted from being relatively homogenous to being fragmented and incomplete since the financial crisis. Distressed loan books are a crisis hangover with direct implications for profitability, hampering banks ability to supply credit and lower loan pricing in response to reductions in the policy rate. This paper presents a parsimonious model to decompose the cost of lending and highlight the role of asset quality in diminishing pass-through. Using bank-level data over the period 2008-2014, we empirically test the implications of the model. We show that a one percentage point increase in the impairment ratio lowering short run pass-through by 3 percent. We find that banks with severely impaired balance sheets do not adjust their loan pricing in response to changes in the policy rate at all. We derive a measure of the hidden bad loan problem, the NPL gap, which we define as the excess of non-performing loans over impaired loans. We show that it played a significant role in the fragmentation of euro area pass-through post-crisis. JEL Classification: D43, E51, E52, E58, G21
    Keywords: impaired loans, interest rates, monetary policy pass-through, non-performing loans
    Date: 2019–07
  6. By: Claudio Impenna (Bank of Italy); Paola Paiardini (University of Birmingham)
    Abstract: The sovereign bond market has traditionally been the dominant segment of the euro area bond market and it is one of the largest in the world. Secondary market liquidity is an essential feature of a well-functioning and resilient government bond market. The secondary market of the European sovereign bonds is organised as a two-tier electronic market, with an inter-dealer and a dealer-to-customer segment. The previous literature uses a sequential trade model, to investigate the probability of informed trading (PIN) in the parallel trading of the same bond on these two venues, finding that the PIN is significantly lower in the dealer-to-customer segment than in the inter-dealer one. We contribute to the existing literature analysing this two-tier market for a longer period, which includes episodes of financial distress in the Eurozone and various ECB interventions to try to contain the crisis. We show that the crisis deeply affected the two segments of the market, reverting the conclusion about the presence of informed traders in the two platforms for some periods, and questioning the need for this trading structure and its stability.
    Keywords: Market microstructure; Informed trading; Government bonds
    JEL: G10 G12 G14
    Date: 2019–06
  7. By: Christian Gross; Pierre L. Siklos
    Abstract: We use a factor model and elastic net shrinkage to model a high-dimensional network of European CDS spreads. Our empirical approach allows us to assess the joint transmission of bank and sovereign risk to the non-financial corporate sector. Our findings identify a sectoral clustering in the CDS network, where financial institutions are in the center and non-financial entities as well as sovereigns are grouped around the financial center. The network has a geographical component reflected in different patterns of real-sector risk transmission across countries. Our framework also provides dynamic estimates of risk transmission, a useful tool for systemic risk monitoring.
    Keywords: networks, financial-real linkages, connectedness, systemic risk, credit risk, contagion, large datasets
    JEL: C32 C38 F3 G01 G15
    Date: 2019–06
  8. By: Destefanis, Sergio; Fragetta, Matteo; Gasteiger, Emanuel
    Abstract: This paper examines whether Euro Area countries would have faced a more favorable inflation output variability tradeoff without the Euro. We provide evidence that this claim is true for the periods of the Great Recession and the European Sovereign Debt Crisis. For the Euro Area as a whole, the deterioration of the tradeoff becomes insignificant with Draghi's "whatever it takes" announcement onwards. However, a more detailed analysis shows that the detrimental effect of the Euro is more severe and long-lasting for peripheral countries, pointing to structural differences among Euro Area countries as a key element of the detrimental effect of the Euro. We base our results on a novel empirical strategy that, consistently with monetary theory, models the joint determination of the variability of inflation and output conditional on structural supply shocks. Moreover, our findings are robust to potential endogeneity concerns related to adoption of the Euro.
    Keywords: Euro Area,Monetary Policy,Difference-in-Differences
    JEL: C32 E50
    Date: 2019
  9. By: Guglielmo Maria Caporale; Luis A. Gil-Alana; Carlos Poza
    Abstract: This paper uses fractional integration techniques to examine the stochastic behaviour of high and low stock prices in Europe and then to test for the possible existence of long-run linkages between them by looking at the range, i.e., the difference between the two logged series. Specifically, monthly, weekly and daily data on the following five European stock market indices are analysed: DAX30 (Germany), FTSE100 (UK), CAC40 (France), FTSE MIB40 (Italy) and IBEX35 (Spain). In all cases, the order of integration of the range is lower than that of the original series, which implies the existence of a long-run equilibrium relationship between high and low prices. Further, the estimated fractional differencing parameter is positive in all cases, which represents evidence of long memory.
    Keywords: high and low prices, range, fractional integration
    JEL: C22 G15
    Date: 2019
  10. By: Altavilla, Carlo; Brugnolini, Luca; Gürkaynak, Refet S.; Motto, Roberto; Ragusa, Giuseppe
    Abstract: We study the information flow from the ECB on policy dates since its inception, using tick data. We show that three factors capture about all of the variation in the yield curve but that these are different factors with different variance shares in the window that contains the policy decision announcement and the window that contains the press conference. We also show that the QE-related policy factor has been dominant in the recent period and that Forward Guidance and QE effects have been very persistent on the longer-end of the yield curve. We further show that broad and banking stock indices' responses to monetary policy surprises depended on the perceived nature of the surprises. We find no evidence of asymmetric responses of financial markets to positive and negative surprises, in contrast to the literature on asymmetric real effects of monetary policy. Lastly, we show how to implement our methodology for any policy-related news release, such as policymaker speeches. To carry out the analysis, we construct the Euro Area Monetary Policy Event- Study Database (EA-MPD). This database, which contains intraday asset price changes around the policy decision announcement as well as around the press conference, is a contribution on its own right and we expect it to be the standard in monetary policy research for the euro area.
    Keywords: ECB policy surprise,event-study,intraday,persistence,asymmetry
    JEL: E43 E44 E52 E58 G12 G14
    Date: 2019
  11. By: Sandrine Lecarpentier; Mathias Lé; Henri Fraisse; Michel Dietsch
    Abstract: Starting in 2014 with the implementation of the European Commission Capital Requirement Directive, banks operating in the Euro area were benefiting from a 25% reduction (the Supporting Factor or "SF" hereafter) in their own funds requirements against Small and Medium-sized enterprises ("SMEs" hereafter) loans. We investigate empirically whether this reduction has supported SME financing and to which extent it is consistent with SME credit risk. Economic capital computations based on multifactor models do confirm that capital requirements should be lower for SMEs. Taking into account the uncertainty surrounding their estimates and adopting a conservative approach, we show that the SF is consistent with the difference in economic capital between SMEs and large corporates. As for the impact on credit distribution, our differences-in-differences specification enables us to find a positive and significant impact of the SF on the credit supply.
    Keywords: SME finance, Credit supply, Basel III, Credit risk modelling, SME Supporting Factor
    JEL: C13 G21 G33
    Date: 2019
  12. By: Matteo Gatti (European University Institute); Tommaso Oliviero (Università di Napoli Federico II and CSEF)
    Abstract: In early 2009 the EU increased the minimum deposit insurance limit from €20,000 to €100,000 per bank account. Italy was the only country with a limit already set to €103,291 from 1994. To evaluate the impact of the new directive we run a diff-in-diff analysis and compare the bank-size weighted average deposit interest rates of the Eurozone countries with the Italian ones. We find that the increase of deposit insurance leads to a decrease of deposit rates in European countries relative to Italy between 0.3 and 0.7 percentage points. The drop in deposit rates is confirmed by a diff-in-diff analysis run at bank level after implementing a propensity score matching of Italian banks with European ones. We finally show that this effect mainly come from riskier banks confirming that deposit insurance negatively affects deposit rates by reducing the depositors’ required risk-premium.
    Keywords: Deposit Insurance, Bank Deposit Rates, Policy Evaluation
    JEL: G21 G28
    Date: 2019–06–26
  13. By: Werner Roeger; Janos Varga; Jan in 't Veld; Lukas Vogel
    Abstract: This paper studies the effects of structural reforms on the functional distribution of income in EU Member States. To study this mechanism we use a DSGE model (Roeger et al. 2008) with households supplying three types of labour, low-, medium- and high-skilled. We assume that households receive income from labour, tangible capital, intangible capital, financial wealth and transfers and we trace how structural reforms affect these types of incomes. The quantification of structural reforms is based on changes in structural indicators that can significantly close the gap of a country’s average income towards the best performing countries in the EU. We find a general trade-off between an increase in employment of a particular group and the income of the average group member relative to income per capita. In general, reforms which aim at increasing employment of low skilled workers are associated with a fall in wages relative to income per capita. Capital owners generally benefit from labour market reforms, with an increasing share in total income, due to limited entry into the final goods production sector. This suggests that labour market re-forms may lead to suboptimal distributional effects if there are rigidities in goods markets present, a finding which confirms the importance of ensuring that such reforms are accompanied or preceded by product market reforms.
    JEL: C53 E10 F47 O20 O30 O41
    Date: 2019–02
  14. By: Yin-Wong Cheung; Sven Steinkamp; Frank Westermann
    Abstract: We analyze current account imbalances through the lens of the two largest surplus countries; China and Germany. We observe two striking patterns visible since the 2007/8 Global Financial Crisis. First, while China has been gradually reducing its current account surplus, Germany’s surplus has continued to increase throughout and after the crisis. Second, for these two countries, there is a remarkable reversal in the patterns of exchange rate misalignment: China’s currency has turned from being undervalued to overvalued, Germany’s currency has erased its level of overvaluation and become undervalued. Our empirical analyses show that the current account balances of these two countries are quite well explained by currency misalignment, common economic factors, and country-specific factors. Furthermore, we highlight the global financial crisis effects and, for Germany, the importance of differentiating balances against euro and non-euro countries.
    Keywords: currency misalignment, current account surplus, global imbalances, global financial crisis
    JEL: F15 F31 F32
    Date: 2019
  15. By: Eckhard Janeba; Armin Steinbach
    Abstract: The controversy about sovereign debt cuts loomed prominently throughout crisis in the European Union (EU), as the EU legal rules were viewed to impose strict limitations on debt restructuring involving public creditors due to moral hazard concerns enshrined in the legal ban on bailouts. This analysis explores the economic plausibility of the legal regime, with the applicable legal standard capturing the impact of debt restructuring on the debtor’s expected compliance with fiscal rules. Our theory shows that the effect of debt cuts on fiscal compliance depends on two effects, the direction of which determines the overall effect on expected fiscal compliance. We empirically review the plausibility of our theoretical results by exploiting survey data from members of state parliaments in Germany. Data limitations notwithstanding, our results offer some plausibility that haircuts can make fiscal compliance more attractive and likely. The results call for re-visiting the legal framework applicable to debt cuts EU rules.
    Keywords: debt restructering, fiscal rules, compliance, German debt brake
    JEL: H00
    Date: 2019
  16. By: Rodrigues, Paulo M.M.; Sibbertsen, Philipp; Voges, Michelle
    Abstract: In this paper, test procedures for no fractional cointegration against possible breaks in the persistence structure of a fractional cointegrating relationship are introduced. The tests proposed are based on the supremum of the Hassler and Breitung (2006) test statistic for no cointegration over possible breakpoints in the long-run equilibrium. We show that the new tests correctly standardized converge to the supremum of a chisquared distribution, and that this convergence is uniform. An in-depth Monte Carlo analysis provides results on the finite sample performance of our tests. We then use the new procedures to investigate whether there was a dissolution of fractional cointegrating relationships between benchmark government bonds of ten EMU countries (Spain, Italy, Portugal, Ireland, Greece, Belgium, Austria, Finland, the Netherlands and France) and Germany with the beginning of the European debt crisis.
    Keywords: Fractional cointegration, Persistence breaks, Hassler-Breitung test, Changing Long-run equilibrium
    JEL: C12 C32
    Date: 2019–06
  17. By: Anatole Cheysson (European University Institute); Nicolò Fraccaroli (University of Rome "Tor Vergata")
    Abstract: This paper aims to identify the main dividing lines that determine the voting behaviour of Members of the European Parliament (MEPs) and their evolution throughout the crisis. Introducing a new database that collects and classifies the full population of plenary votes from 2004 to 2019, this work uses principal component analysis to identify the latent patterns on which MEPs ally and divide. Focussing on economic votes, it finds that, while pre-crisis votes were mainly determined by differences across the left-vs-right spectrum and, only secondly, by differences in support for European integration, the crisis inverted this trend, making support for Europe the most relevant dividing line in the European Parliament. In support of this evidence, the paper introduces a new vote-scraping technique to investigate the ideological nature of these dimensions. Vote scraping reveals that the left-right cleavage is mainly ideological but with limited impact on budgetary resources, whereas the European dimension mostly reflects a conflict over the budget, with higher legislative impact and seemingly low ideological content.
    Keywords: Ideology,European Parliament,Crisis
    JEL: P16 C38
    Date: 2019–06–28
  18. By: Setzer, Ralph; Stieglitz, Moritz
    Abstract: We explore the interaction between labour market reforms and financial frictions. Our study combines a new cross-country reform database on labour market reforms with matched firm-bank data for nine euro area countries over the period 1999 to 2013. While we find that labour market reforms are overall effective in increasing employment, restricted access to bank credit can undo up to half of long-term employment gains at the firm-level. Entrepreneurs without sufficient access to credit cannot reap the full benefits of more flexible employment regulation.
    Keywords: labour market reforms,bank stress,employment protection,unemployment insurance
    JEL: G21 J21 J80 K31
    Date: 2019
  19. By: Cristina Batog; Ernesto Crivelli; Anna Ilyina; Zoltan Jakab; Jaewoo Lee; Anvar Musayev; Iva Petrova; Alasdair Scott; Anna Shabunina; Xin Cindy Xu; Ruifeng Zhang
    Abstract: The populations of Central and Eastern European (CESEE) countries—with the exception of Turkey—are expected to decrease significantly over the next 30 years, driven by low or negative net birth rates and outward migration. These changes will have significant implications for growth, living standards and fiscal sustainability.
    Keywords: Central and Eastern Europe;Demographic indicators;Emigration and immigration (Economic Aspects);Labor productivity;Labor supply;Demographic changes; Labor supply; Productivity; Potential growth; Convergence
  20. By: Christiane Kneer; Alexander Raabe
    Abstract: This paper examines how UK banks channel capital inflows to the individual sectors of the domestic economy and to overseas residents. Information on the source country of foreign capital deposited with UK banks allows us to construct a novel Bartik instrument for capital inflows. Our results suggest that foreign funds boost bank lending to the domestic economy. This result is due to the positive effect of capital inflows on bank lending to non-financial firms and to other domestic financial institutions. Banks do not channel capital inflows directly to households or the public sector. Much of the foreign capital is also channeled back abroad, reflecting the role of the UK as a global financial center.
    Keywords: Capital flows, bank lending, credit allocation, international finance, instrumental variables, international financial linkages
    JEL: F21 F30 F32 F34 G00 G21
    Date: 2019–07

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