nep-eec New Economics Papers
on European Economics
Issue of 2019‒08‒12
seventeen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. The Real-Time Information Content of Financial Stress and Bank Lending on European Business Cycles By Jakob Fiedler; Josef Ruzicka; Thomas Theobald
  2. Voting With Their Money: Brexit and Outward Investment by UK Firms By Holger Breinlich; Elsa Leromain; Dennis Novy; Thomas Sampson
  3. Monetary policy shocks and the health of banks By Jung, Alexander; Uhlig, Harald
  4. On a low-competitiveness country joining the Eurozone: Are there lessons from Greece? By Skouras, Thanos
  5. The effect of the single currency on exports: comparative firm-level evidence By Tibor Lalinsky; Jaanika Merikull
  6. Inflation and deflationary biases in inflation expectations By Michael J. Lamla; Damjan Pfajfar; Lea Rendell
  7. Brexit trade impacts' and Mercosur's negotiations with Europe By J., Julio
  8. Creating a Euro Area Safe Asset without Mutualizing Risk (Much) By Alvaro Leandro; Jeromin Zettelmeyer
  9. The anatomy of the euro area interest rate swap market By Fontana, Silvia Dalla; Holz auf der Heide, Marco; Pelizzon, Loriana; Scheicher, Martin
  10. The cost-efficiency and productivity growth of euro area banks By Huljak, Ivan; Martin, Reiner; Moccero, Diego
  11. Foreign currency loan conversions and currency mismatches By Andreas M. Fischer; Pinar Yesin
  12. Cutting Red Tape for Trade in Services By Milena Kern; Jörg Pätzold; Hannes Winner
  13. Medium-term asymmetric fluctuations and EMU as an optimum currency area By Jeroen Hessel
  14. Data revisions to German national accounts: Are initial releases good nowcasts? By Strohsal, Till; Wolf, Elias
  15. Complexity of ECB Communication and Financial Market Trading By Bernd Hayo; Kai Henseler; Marc Steffen Rapp
  16. Is there any theory that explains the SEK? By Papahristodoulou, Christos
  17. Change and convergence of income distributions in the European Union during 2007-2014 By Cseres-Gergely, Zsombor; Kvedaras, Virmantas

  1. By: Jakob Fiedler; Josef Ruzicka; Thomas Theobald
    Abstract: We integrate newly created financial stress indices (FSIs) into an automated real-time recession forecasting procedure for the Euro area and Germany. The FSIs are based on a large number of financial indicators, each of them potentially signaling financial stress. A subset of these indicators is selected in real-time and their stress signal is summarized by principal component analysis (PCA). Besides conventional measures of realized financial stress, such as volatilities, we include variables related to the financial cycle, such as different types of credit growth, for which strong increases may anticipate future financial market stress. Building blocks in our fully automated real-time probit forecasts are then i. the use of a broad set of widely acknowledged macroeconomic and financial variables with predictive power for a real economic downturn, ii. the use of both general-to-specific and specific-to-general approaches for variable and lag selection, and iii. the averaging of different specifications into a composite forecast. As a real-time out-of-sample analysis shows, the inclusion of financial stress leads to an improved recession forecast for the Euro area, while the results for Germany are mixed. Finally, we also evaluate the predictive power of the change in bank lending (credit impulse) and find that it adds little additional information.
    Date: 2019
  2. By: Holger Breinlich; Elsa Leromain; Dennis Novy; Thomas Sampson
    Abstract: We study the impact of the 2016 Brexit referendum on UK foreign direct investment. Using the synthetic control method to construct appropriate counterfactuals, we show that by March 2019 the Leave vote had led to a 17% increase in the number of UK outward investment transactions in the remaining EU27 member states, whereas transactions in non-EU OECD countries were unaffected. These results support the hypothesis that UK companies have been setting up European subsidiaries to retain access to the EU market after Brexit. At the same time, we find that the number of EU27 investment projects in the UK has declined by around 9%, illustrating that being a smaller economy than the EU leaves the UK more exposed to the costs of economic disintegration.
    Keywords: Brexit, foreign direct investment, synthetic control method
    JEL: F15 F21 F23
    Date: 2019–07
  3. By: Jung, Alexander; Uhlig, Harald
    Abstract: Based on high frequency identification and other econometric tools, we find that monetary policy shocks had a significant impact on the health of euro area banks. Information effects, which made the private sector more pessimistic about future prospects of the economy and the profitability of the banking sector, were strongly present in the post-crisis period. We show that ECB communications at the press conference were crucial for the market response and that bank health benefitted from surprises, which steepened the yield curve. We find that the effects of monetary policy shocks on banks displayed some persistence. Other bank characteristics, in particular bank size, leverage and NPL ratios, amplified the impact of monetary policy shocks on banks. After the OMT announcement, we detect that the response of bank stocks to monetary policy shocks normalised. We discover that, in the post-crisis episode, Fed monetary policy shocks influenced euro area bank stock valuations. JEL Classification: E40, E52, G14, G21
    Keywords: high-frequency identification, information effects, local projections, panel of individual banks
    Date: 2019–07
  4. By: Skouras, Thanos
    Abstract: Seven remaining states are presently on the Eurozone’s enlargement agenda: Bulgaria, Croatia, the Czech Republic, Hungary, Poland, Romania and Sweden. Except Sweden, all these countries tend to have low competitiveness not only relative to Germany but also to most of the Eurozone countries (especially, Austria, Belgium, Finland, France, Ireland, Italy, Luxembourg and the Netherlands). For countries adopting the euro, issues of political economy may have a decisive effect on the eventual outcome and largely determine their economic prospects within the Eurozone. The Greek experience shows that the intensity of partisan strife is certainly an important element to be taken into account in a far from easy assessment of how entry will likely affect the country's economic progress. The crucial issue that needs to be considered is whether entry will improve or worsen the prospects for a substantial gain in competitiveness. It is the assessment of how entry will affect the forces favoring reforms relative to those opposing them that should ultimately determine the decision to opt for early or delayed entry.
    Keywords: Competitiveness, Eurozone, Greece, exchange rate, euro crisis, leverage.
    JEL: F15 F33 O52
    Date: 2019–05
  5. By: Tibor Lalinsky; Jaanika Merikull
    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 in 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: 2019–01–23
  6. By: Michael J. Lamla; Damjan Pfajfar; Lea Rendell
    Abstract: We explore the consequences of losing confidence in the price-stability objective of central banks by quantifying the inflation and deflationary biases in inflation expectations. In a model with an occasionally binding zero-lower-bound constraint, we show that both inflation bias and deflationary bias can exist as a steady-state outcome. We assess the predictions of this model using unique individual-level inflation expectations data across nine countries that allow for a direct identification of these biases. Both inflation and deflationary biases are present and sizable, but different across countries. Even among the euro-area countries, perceptions of the European Central Bank's objectives are very distinct.
    Keywords: inflation bias, deflationary bias, confidence in central banks, trust, effective lower bound, inflation expectations, microdata
    JEL: E31 E37 E58 D84
    Date: 2019–06
  7. By: J., Julio
    Abstract: We estimate that a hard Brexit (HB) would reduce UK agro-industrial-imports from the EU by around 50%. Following the dismantling of the Common Agricultural Policy (CAP) the UK Government has proposed to shift towards market-oriented agricultural policies and negotiating free trade agreements (FTAs) with interested countries. Assuming that the UK restores the previous level of agro industrial products, the paper estimates the net export gains that Mercosur could achieve in the UK market for different agro-industrial products. In the event of a Hard Brexit, and assuming that the Mercosur-EU negotiations are not completed before, Mercosur would then face two negotiations in Europe: with the EU27 and with the UK. We argue that failing Mercosur to give priority to talks with the UK, other countries are more than likely sign trade agreements and fill its import gap thus creating additional trade diversion effects against the Mercosur. We offer back-of-the-envelope estimates indicating that under such an FTA, Mercosur could double its agro-industrial exports to the UK. These significant export gains are concentrated in a group of products that are now highly protected by the CAP.
    Keywords: Brexit, Mercosur, trade diversion, trade institutions, agro-industrial trade, Common Agricultural Policy, free trade agreement
    JEL: D4 F13 F14 F15 F17 F5 F51 F53 F55
    Date: 2019–06
  8. By: Alvaro Leandro (Peterson Institute for International Economics); Jeromin Zettelmeyer (Peterson Institute for International Economics)
    Abstract: This paper explains and evaluates three proposals to create "safe assets" for the euro area based on sovereign bonds, in which sovereign risk is limited through diversification and some form of seniority. These assets would be held by banks and other financial institutions, replacing concentrated exposures to their own sovereigns. The paper focuses on three ideas: (1) to create multitranche "sovereign bond-backed securities" (SBBS), of which the senior tranche would constitute a safe asset; (2) to create a senior, publicly owned financial intermediary that would issue a bond backed by a diversified portfolio of sovereign loans ("E-bonds"); and (3) to issue sovereign bonds in several tranches and induce banks to hold a diversified pool of senior sovereign bonds ("multitranche national bond issuance"). Public attention (including public criticism) has so far focused on the first idea; the other two have not yet been seriously debated. We find that none of the competing proposals entirely dominates the others. SBBS do not deserve most of the criticism to which they have been subjected. At the same time, E-bonds and multitranche national bond issuance have several interesting features--including inducing fiscal discipline--and warrant further exploration.
    Keywords: safe assets, sovereign debt, banking crisis, euro crisis, eurobonds ESBies, SBBS, E-bonds
    JEL: F33 F36 G21 H63
    Date: 2019–08
  9. By: Fontana, Silvia Dalla; Holz auf der Heide, Marco; Pelizzon, Loriana; Scheicher, Martin
    Abstract: Using a novel regulatory dataset of fully identified derivatives transactions, this paper provides the first comprehensive analysis of the structure of the euro area interest rate swap (IRS) market after the start of the mandatory clearing obligation. Our dataset contains 1.7 million bilateral IRS transactions of banks and non-banks. Our key results are as follows: 1) The euro area IRS market is highly standardised and concentrated around the group of the G16 Dealers but also around a significant group of core "intermediaries"(and major CCPs). 2) Banks are active in all segments of the IRS euro market, whereas non-banks are often specialised. 3) When using relative net exposures as a proxy for the "flow of risk" in the IRS market, we find that risk absorption takes place in the core as well as the periphery of the network but in absolute terms the risk absorption is largely at the core. 4) Among the Basel III capital and liquidity ratios, the leverage ratio plays a key role in determining a bank's IRS trading activity.
    Keywords: derivatives,network analysis,interest rate risk,banking,risk management,hedging
    JEL: G21 E43 E44
    Date: 2019
  10. By: Huljak, Ivan; Martin, Reiner; Moccero, Diego
    Abstract: We use an industrial organisation approach to quantify the size of Total Factor Productivity Growth (TFPG) for euro area banks after the crisis and decompose it into its main driving factors. In addition, we disentangle permanent and time-varying inefficiency in the banking sector. This is important because lack of distinction may lead to biased estimates of inefficiency and because the set of policies needed in both cases is different. We focus on 17 euro area countries over the period 2006 to 2017. We find that cost efficiency in the euro area banking sector amounted to around 84% on average over the 2006 to 2017 period. In addition, we observe that Total Factor Productivity growth for the median euro area bank decreased from around 2% in 2007 to around 1% in 2017, with technological progress being the largest contributor, followed by technical efficiency. Given the need to boost productivity and enhance profitability in the euro area banking sector, these findings suggests that bank’s efforts in areas such as rationalisation of branches, digitalisation of business processes and possibly mergers and acquisitions should be intensified. JEL Classification: C23, D24, G21
    Keywords: banking sector, bank productivity, cost-efficiency frontier, euro area, financial stability, panel data, permanent inefficiency, time-varying inefficiency, total factor productivity
    Date: 2019–08
  11. By: Andreas M. Fischer; Pinar Yesin
    Abstract: This paper examines the effect of currency conversion programs from Swiss franc-denominated loans to other currency loans on currency risk for banks in Central and Eastern Europe (CEE). Swiss franc mortgage loans proliferated in CEE countries prior to the financial crisis and contributed to the volume of non-performing loans as the Swiss franc strongly appreciated during the post-crisis period. Empirical findings suggest that Swiss franc loan conversion programs reduced currency mismatches in Swiss francs but increased currency mismatches in other foreign currencies in individual countries. This asymmetric effect of conversion programs arises from the loan restructuring from Swiss francs to a non-local currency and the high level of euro mismatches in the CEE banking system.
    Keywords: Loan conversion programs, emerging markets, currency mismatch
    JEL: F15 F21 F32 F36 G15
    Date: 2019
  12. By: Milena Kern; Jörg Pätzold; Hannes Winner (WIFO)
    Abstract: Trade in services is often hampered by domestic administrative barriers, even when countries are members of the same regional trade agreement. We exploit a large reform in the European Union (the EU Service Directive) aimed at reducing such administrative hurdles in cross-border service provision to estimate its effects on service trade. We employ a difference-in-difference strategy and a Pseudo Poisson Maximum Likelihood (PPML) panel approach to estimate gravity equations with multiple fixed effects. On average, the reform increased intra-EU trade in targeted services between a lower bound of 27 percent and an upper bound of 55 percent, translating into an overall welfare increase between 0.35 and 1.04 percent. This effect of the reform on service trade is corroborated by several robustness and placebo checks. Finally, a disaggregated analysis reveals significant differences between countries and service sectors.
    Date: 2019–07–30
  13. By: Jeroen Hessel
    Abstract: Recent studies find that short-term fluctuations in EMU have been symmetric. This finding leads to benign views on the functioning of EMU as an optimum currency area (OCA), that are difficult to reconcile with the sovereign debt crisis. We try to solve this puzzle by looking at medium-term fluctuations instead, and reach five conclusions. First, medium-term fluctuations in EMU are much larger and less symmetric than short-term fluctuations. Second, medium-term fluctuations have become larger and less symmetric over time, while short-term fluctuations have become smaller and more symmetric. Third, medium-term fluctuations in EMU are less symmetric than in the US, while short-term fluctuations are more symmetric. Fourth, medium-term fluctuations in the euro area have become more strongly correlated with financial variables like credit and house prices, and less strongly correlated with real variables like productivity. Finally, medium-term fluctuations are more closely related to imbalances in price competitiveness, current accounts and budget deficits than short-term fluctuations. We conclude that our medium-term perspective has become relevant in the monetary union, due to the increasing importance of financial factors. It leads to less benign views on the functioning of EMU and on the endogenous OCA hypothesis.
    Keywords: EMU; optimum currency areas; economic fluctuations; financial cycle
    JEL: E44 E58 F36 G15 G21
    Date: 2019–07
  14. By: Strohsal, Till; Wolf, Elias
    Abstract: Data revisions to national accounts pose a serious challenge to policy decision making. Well-behaved revisions should be unbiased, small and unpredictable. This paper shows that revisions to German national accounts are biased, large and predictable. Moreover, using filtering techniques designed to process data subject to revisions, the real-time forecasting performance of initial releases can be increased by up to 17%. For total real GDP growth, however, the initial release is an optimal forecast. Yet, given the results for disaggregated variables, the averaging-out of biases and inefficiencies at the aggregate GDP level appears to be good luck rather than good forecasting.
    Keywords: Revisions,Real-Time Data,German National Accounts,Nowcasting
    JEL: C22 C53 C82 E66
    Date: 2019
  15. By: Bernd Hayo (Philipps-Universitaet Marburg); Kai Henseler (Philipps-Universitaet Marburg); Marc Steffen Rapp (Philipps-Universitaet Marburg)
    Abstract: We examine how the verbal complexity of ECB communications affects financial market trading based on high-frequency data from European stock index futures trading. Studying the 34 events between May 2009 and June 2017, during which the ECB Governing Council press conferences covered unconventional monetary policy measures, and using the Flesch-Kincaid Grade Level to measure the verbal complexity of introductory statements to the press conferences, we find that more complex communications are associated with a lower level of contemporaneous trading. Increasing complexity of introductory statements leads to a temporal shift of trading activity towards the subsequent Q&A session, which suggests that Q&A sessions facilitate market participants’ information processing.
    Keywords: ECB, central bank communication, textual analysis, linguistic complexity, readability, financial markets, European stock markets
    JEL: D83 E52 E58 G12 G14
    Date: 2019
  16. By: Papahristodoulou, Christos
    Abstract: This paper investigates if the value of the Swedish krona (SEK) against the US dollar ($) and the Euro (€) can be explained by some standard theories and fundamentals, such as the purchasing power parity, the interest rate parity, the debt-ratio and the trade balance ratio, using monthly data since Feb. 1993. All of them fail to explain why the SEK is so “weak”. The lower inflation rate in Sweden over the recent years has not strengthened the currency. Similarly, the theoretically stronger SEK implied by the lower interest rates in Sweden as the uncovered interest rate parity predicts, has not emerged yet. Finally, neither the persistent trade balance surpluses, nor the declining and very low debt ratio in Sweden have had any positive effects on the currency. It seems that the traders and investors ignore the fundamentals, speculate against the currency and keep it undervalued. Moreover, a number of simulated paths, predicted from various ARIMA-processes, based on the historic exchange rates, show that the worse exchange rates have already gone and by the end of 2020 the $ and the € will cost around 8 and 9.8 SEK respectively.
    Keywords: exchange rate, interest rate parity, purchasing power parity, forecasting
    JEL: E43 F31 F47
    Date: 2019–07–05
  17. By: Cseres-Gergely, Zsombor (European Commission); Kvedaras, Virmantas (European Commission)
    Abstract: Mainstream monitoring of income dynamics and inequality is based on summary measures that can miss important phenomena prevalent in income distributions. Relying on quantile functions and the adapted statistical framework suggested by Szekely and Rizzo (2004), we characterize the change and convergence of net equivalized income distributions among European Union countries. We exploit the scale-independence property of proper inequality metrics to evaluate not only the total but also the inequality-affecting (shape-influenced) convergence of distributions.
    Keywords: convergence, European Union, income distribution, inequality
    JEL: D31 D63 O15
    Date: 2019–07

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