nep-eec New Economics Papers
on European Economics
Issue of 2019‒09‒30
fourteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. The impact of quantitative easing on bank loan supply and monetary policy implementation in the euro area By Horst, Maximilian; Neyer, Ulrike
  2. A Time-Frequency Analysis of Sovereign Debt Contagion in Europe By Mustapha Olalekan Ojo; Luís Aguiar-Conraria; Maria Joana Soares
  3. When old meets young? Germany's population ageing and the current account By Schön, Matthias; Stähler, Nikolai
  4. Completing banking union By Huertas, Thomas F.
  5. Empirical Evaluation of the Help To Buy Initiative in England By Alla Koblyakova; Michael White
  7. Has banks' monitoring of other banks strengthened post-crisis? Evidence from the European overnight market By Tölö, Eero; Jokivuolle, Esa; Viren, Matti
  8. Investment: What holds Romanian firms back? By Pal, Rozalia; Wruuck, Patricia; Stamate, Amalia; Dumitrescu, Constantin Catalin
  9. What firms don't like about bank loans: New evidence from survey data By Kolev, Atanas; Maurin, Laurent; Ségol, Matthieu
  10. An Investigation of the Exchange Rate Pass-Through in the Baltic States By Mariarosaria Comunale
  11. The China Shock and Portuguese Manufacturing By Lee Branstetter; Ana Venancio; Brian Kovak
  12. The Effect of Brexit on the UK Economy (so far) By Sindri Engilbertsson; Gylfi Zoega
  13. Demographic Obstacles to European Growth By Thomas Cooley; Edwin Nusbaum; Espen Henriksen
  14. Private Credit and Housing Prices in the European Union Perspective By Sariye Akcay

  1. By: Horst, Maximilian; Neyer, Ulrike
    Abstract: In March 2015, the Eurosystem launched its QE-programme. The asset purchases induced a rapid and strong increase in excess reserves, implying a structural liquidity surplus in the euro area banking sector. Against this background, the first part of this paper analyses the Eurosystem's liquidity management during normal times, crisis times and times of too low in ation. With a focus on the latter, the second part of this paper develops a relatively simple theoretical model in which banks operate under a structural liquidity surplus. The model shows that increasing excess reserves have no or even a contractionary impact on bank loan supply. As the newly created excess reserves are heterogeneously distributed across euro area countries, the impact of QE on bank loan supply may differ across countries. Moreover, we derive implications for monetary policy implementation. Increases in the central bank's main refinancing rate as well as in the minimum reserve ratio and decreases in the central bank's deposit rate develop expansionary effects on loan supply - contrary to the case in which banks face a structural liquidity deficit.
    Keywords: monetary policy,quantitative easing (QE),monetary policy implementation,excess liquidity,loan supply,bank lending channel
    JEL: E43 E51 E52 E58 G21
    Date: 2019
  2. By: Mustapha Olalekan Ojo (NIPE and Economics Department, University of Minho.); Luís Aguiar-Conraria (NIPE and Economics Department, University of Minho.); Maria Joana Soares (NIPE and Department of Mathematics, University of Minho.)
    Abstract: This paper adopted a wavelet approach to investigate the financial contagion in the Eurozone debt market during various crisis-ridden periods in the zone. We used weekly 10-year bond yield data and showed that until the onset of the fi nancial crisis of 2007/2008, bond yields were highly synchronised among all countries. However, the bond yields in Greece, Ireland, Italy, Spain, and Portugal became unsynchronised with core countries after 2008. Similarly, there was no synchronisation among the periphery countries during this period, except for Italy and Spain. We found evidence of contagion emanating from Ireland during the fi rst part of the sovereign debt crisis until around 2010, and from Greece afterwards. We also established that contagion spread to Portugal, Greece and Ireland, and can be observed at high fre-quencies. However, Italy and Spain were not affected. At business cycle frequencies, we found that the Greek crisis propelled a flight-to-quality ow to Belgium, Finland, France and Germany.
    Keywords: Contagion; European Sovereign Debt; Cross-market Co-movements; Wavelet Partial Coherency; Partial Phase-Difference; Wavelet Distance
    Date: 2019
  3. By: Schön, Matthias; Stähler, Nikolai
    Abstract: In a three-region New Keynesian life-cycle model calibrated to Germany, the Euro area (without Germany) and the rest of the world, we analyze the impact of population ageing on net foreign asset and current account developments. Using unsynchronized demographic trends by taking those of Germany as given and assuming constant population everywhere else, we are able to generate German current account surpluses of up to 15% of GDP during the first half of this century. However, projected demographic trends from 2000 to 2080 in OECD countries (and China in an additional analysis) are much more synchronized. Feeding these into our model suggests that the average annual German current account surplus from 2000 to 2018 that should be attributed to ageing reduces to around 2.83% (1.23%) of GDP, with a maximum at 4.3% (2.7%) in 2006 (when taking into account China), turning negative around 2035.
    Keywords: Population Ageing,Net Foreign Assets,Global Imbalances,DSGE Models
    JEL: E43 E44 E52 E58
    Date: 2019
  4. By: Huertas, Thomas F.
    Abstract: To complete banking union, there should be a single European deposit insurance scheme (EDIS) alongside the single supervisor and the single resolution authority. This would ensure uniformity across the Eurozone and facilitate the removal of barriers to the mobility of liquidity and capital within the single market. That in turn would promote efficiency in the banking sector and in the economy at large - just at the time that the EU needs to boost growth in order to remain competitive with the US and China. The EDIS promise to promptly reimburse insured deposits at a failed bank in the Eurozone should be unconditional. But who will stand behind that commitment? Who is the "E" in EDIS? Is its promise credible, even in a crisis? If a deposit guarantee scheme fails to deliver what people expect, panic would very likely erupt. Instead of strengthening financial stability, deposit insurance could destroy it. Yet this is the risk that current proposals pose. They create the impression that there will be a single deposit guarantee scheme. There will not. Instead, there will be a complex set of liquidity and reinsurance arrangements among Member State schemes. These defects need to be remedied. To do so, we propose creating a European Deposit Insurance Corporation (EDIC) alongside national schemes. For banks that meet EDIC's strict entry criteria and decide to become members, EDIC will promise to reimburse promptly - in the event the member bank fails - 100 cents on the euro in euro for each euro of insured deposits, regardless of the Eurozone Member State in which the bank is headquartered. In effect, the single deposit guarantee scheme would be created via migration to EDIC rather than mutualisation of existing schemes. This would increase the mobility of capital and liquidity and lead to a convergence of interest rates across the Eurozone. That in turn will improve the effectiveness of monetary policy, foster integration and promote growth.
    Date: 2019
  5. By: Alla Koblyakova; Michael White
    Abstract: The global financial crisis after 2007, and the subsequent housing and mortgage market stagnation, significantly deteriorated households’ ability to buy a house. Responding to declining homeownership rates, the government introduced a range of initiatives to offset the negative impact of relatively high first time deposit requirements, and the associated overall mortgage costs, also providing a stimulus to the house-building market by assisting households to obtain a mortgage when purchasing a new-build house. The Help to Buy Scheme was designed to help first time buyers and households in need to enter homeownership, also aiming to stabilise house prices by stimulating supply of new homes. However, the strict and inflexible planning system in England may have significantly reduced responsiveness of housing supply to raising demand for housing debt. Such politically infeasible consequences may have led to destabilisation of house prices and a regionally unequal distribution of HTB benefits. Further, there is a possibility that the main beneficiaries may refer to lenders, since lending rates within the scheme may apply additional risk premiums, leading to additional profit margins. This article addresses these questions by employing a system of the four structural equations, exploring reverse causality and simultaneous relationships between the share of the HTB Equity Scheme, Supply of New Built houses, House Prices and spreads between average mortgage rates and base interest rates. The period of study covers 2013-2018, capturing the start and subsequent developments of the HTB Scheme in England. Empirical estimations employ two stage least squares and IV estimation techniques.
    Keywords: Deposit requirements; Homeownership; House Prices; Housing Supply; Mortgage Finance
    JEL: R3
    Date: 2019–01–01
  6. By: Mariam Camarero (Jaume I University. Department of Economics, Av. de Vicent Sos Baynat s/n, E-12071 Castellón, Spain); Laura Montolio (University of Valencia, Department of Applied Economics II, Av. dels Tarongers, s/n Eastern Department Building E-46022 Valencia, Spain); Cecilio Tamarit (University of Valencia, INTECO Joint Research Unit. Department of Applied Economics II. PO Box 22.006 - E-46071 Valencia, Spain)
    Abstract: Despite the sound theoretical foundations of FDI gravity models and its popularity in empirical studies, there is a lack of consensus regarding the econometric specification and the estimation of the gravity equation. This paper provides a comprehensive empirical evidence of the determinants of German outward FDI comparing several estimation methods in their multiplicative form. We use four versions of the Generalized Linear Model (GLM), namely, Poisson Pseudo Maximum Likelihood(PPML), Gamma Pseudo Maximum Likelihood (GPML), Negative Binomal Pseudo Maximum Likelihood (NBPML) and Gaussian-GLM. The results of the empirical application indicate that NBPML is the best performing estimator followed by GPML.
    Keywords: FDI determinants; Outward Foreign Direct Investment; Germany; Gravity models; Generalized linear models
    JEL: F21 F23 C13 C33
    Date: 2019–09
  7. By: Tölö, Eero; Jokivuolle, Esa; Viren, Matti
    Abstract: Using the Eurosystem’s proprietary interbank loan data from more than one thousand banks, practically all major banks in Europe for 2008-2016, we show that larger European banks have had a lower cost of overnight borrowing than smaller banks. The size premium remains significant after controlling for time, relationship lending, competitive environment of lenders, and bank risk characteristics but has decreased over time in countries that were stricken by the Sovereign Debt Crisis. Further, the ultra-short maturity of the overnight loans and the daily frequency at which we measure them provide for an ideal setting to use difference-in-differences analysis to study the potential effect of the Bank Recovery and Resolution Directive (BRRD) on the size premium in overnight rates and to avoid possible simultaneity problems. However, we find that changes in the size premium cannot be related to the implementation dates of the BRRD in different member countries.
    JEL: G21 G22 G24 G28
    Date: 2019–09–25
  8. By: Pal, Rozalia; Wruuck, Patricia; Stamate, Amalia; Dumitrescu, Constantin Catalin
    Abstract: In Romania, the share of firms carrying out investment is amongst the lowest in the European Union. This is despite strong economic growth in recent years and persistent needs for upgrading the capital stock in the country. This paper draws on information from two surveys - the EIB Investment Survey and a survey on access to finance conducted by the National Bank of Romania - to analyse the reasons for this subdued corporate investment activity. It also contributes to the debate on why investment in central, eastern and south eastern Europe has remained relatively subdued after the crisis.
    Date: 2019
  9. By: Kolev, Atanas; Maurin, Laurent; Ségol, Matthieu
    Abstract: We use the association between non-financial firms and their banks, an information available in the European Investment Bank Investment Survey (EIBIS), to disentangle the effects of borrowers' and lenders' financial weakness on the satisfaction with the loan contracted. The dataset matches survey data of non-financial firms about their satisfaction with bank lending with their financial data and the financial data of their banks. We find evidence of both demand and supply factors determining firm satisfaction with bank loan financing: non-financial firms with weaker finances and those financed by weaker banks are less satisfied with their bank financing. We also find that the impact of supply factors differs across regions within the EU: the effect of bank's financial weakness on borrower satisfaction is not significant in core countries but is in periphery countries.
    Keywords: financial constraints,bank lending,survey data,bank-firm matching,satisfaction with bank loans,bank weakness,EU regions
    JEL: E44 G01 G32 L25
    Date: 2019
  10. By: Mariarosaria Comunale (Bank of Lithuania & ECB)
    Abstract: In this paper, we investigate the Exchange Rate Pass-Through (ERPT) to import and consumer prices in the three Baltic states. We apply reduced form equations ?rst. Then, to look at measures of shock-dependent ERPT, we use Bayesian VARs with zero and sign restrictions and a local projection exercise, using common euro area shocks. We ?nd that results from reduced form equations are in line with the ERPT literature. As for shock-dependent ERPTs, the magnitudes are overall bigger than in the literature in the case of import prices. They get smaller for consumer prices and even smaller if we remove energy and food prices.
    Keywords: Exchange Rate Pass-Through, Baltic states, Shock dependence.
    JEL: E31 F3 F41
    Date: 2019–09–17
  11. By: Lee Branstetter (Carnegie Mellon University); Ana Venancio (ISEG (Lisbon School of Economics and Business), Universidade de Lisboa); Brian Kovak (Carnegie Mellon University)
    Abstract: In a widely cited series of papers, David Autor, Gordon Hanson, David Dorn, and their coauthors have documented the surprisingly strong effect of increased competition from Chinese exports on U.S. employment, political polarization, and even R&D spending and innovation (Autor et al., 2013; Autor et al., 2016a, b). China's exports to Western Europe have also grown sharply in recent decades. A number of papers have sought to follow Autor et al. (2013) in exploring the impact of these exports on European labor markets. The chief finding of this paper is that the nature of the impact of the China shock in Portugal and the mechanism through which it operates are quite different than that highlighted by Autor et al. (2013). We strongly suspect our findings for Portugal reflect economic realities common to other Southern European countries.
    Date: 2019
  12. By: Sindri Engilbertsson (University of Iceland); Gylfi Zoega (Birkbeck, University of London)
    Abstract: The political turmoil in the UK following the referendum on future membership of the European Union in 2016 provides a natural experiment for studying the effects of political uncertainty (in the Knightian sense) on the economy. We find that the subsequent confusion and infighting in British politics has not affected the real economy much – employment is at a historical high and output growth is positive – but there are some signs of slowing investment and house price increases. The stock market has also not been much affected although it did fall after the referendum of 2016. The main effect of the Brexit vote and the subsequent political developments is found in the currency market where news that make a hard Brexit more likely cause the currency to depreciate. We conclude that leaving the European Union without an agreement is likely to make the currency depreciate and the stock market fall while output declines. In contrast, leaving with an agreement that gives continued access to the Single Market would likely make the currency appreciate, the stock market rise and employment and output increase further
    Keywords: Brexit, growth, share price, currency market
    JEL: E24 E44 F31
    Date: 2019–09
  13. By: Thomas Cooley (New York University); Edwin Nusbaum (University of California, Santa Barbara); Espen Henriksen (University of California, Davis)
    Abstract: Since the early 1990’s there have been persistent slowdowns in the growth rates of the four largest European economies: France, Germany, Italy, and the United Kingdom. This persistence suggests a low-frequency structural change is at work. Aging populations, both in terms of longer individual life expectancies and declining fertility have caused a shift in the age-cohort distribution. Growth accounting identifies the following five sources of economic growth: total factor productivity, capital accumulation, labor supply on the intensive and extensive margin, and population growth. Changing demographics affect all these five margins. The effects of aging populations on economic growth are also exacerbated by the pension systems in place. In order to fund increasing liabilities with a shrinking tax base, tax rates must increase to balance budgets. This will impose distortions to individual factor-supply choices, providing further headwinds for economic growth. We quantify the additional growth effects resulting from these distortions.
    Date: 2019
  14. By: Sariye Akcay
    Abstract: The interaction between credit supply and housing prices can have an important effect on the economy because developments in either the housing markets or the mortgage markets can influence the whole financial sector or even the economy. In fact, the US subprime mortgage crisis which started in the second half of 2007 confirmed the importance of the interaction between both markets. Although there are numerous studies on the interaction between credit and housing prices at a country level, there are few cross-country studies. the first aim of the study is to examine the dynamic relationship between private credit and housing prices at both cross- country and country level in the EU. Secondly, the effect of the different monetary strategy within the EU on this relationhip will be investigated. Thirdly, the direction and size of this interaction will be explored by considering the different sub-samples as well as some individual countries in the EU. For this purpose, two methods are used: the vector autoregressive (VAR) model and the simultaneous equations model. The latter is applied for robustness check. The findings of the study show that the direction and size of this interaction change among the sub-groups of the EU. This is the same for the individual countries in the Eurozone.
    Keywords: Private Credit and Housing Prices in the European Union Perspective
    JEL: R3
    Date: 2019–01–01

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