nep-eec New Economics Papers
on European Economics
Issue of 2019‒10‒21
ten papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Making Use of Home Equity: The Potential of Housing Wealth to Enhance Retirement Security By Bravo, Jorge Miguel; Ayuso, Mercedes; Holzmann, Robert
  2. A non-parametric re-assessment of the trade effects of the euro using value added data By Pierluigi Montalbano; Silvia Nenci; Laura Dell'Agostino
  3. Small firms and domestic bank dependence in Europe’s great recession By Mathias Hoffmann; Egor Maslov; Bent E. Sørensen
  4. The Effective Rate of Interest on Target Balances By Hans-Werner Sinn
  5. News-driven housing booms: Spain vs. Germany By Laurentiu Guinea; Luis A. Puch; Jesús Ruiz
  6. The «burden» of Swiss public debt: Lessons from research and options for the future By Cédric Tille
  7. On the evolution of competitiveness in Central and Eastern Europe: Is it broken? By Juan Carlos Cuestas; Merike Kukk
  8. Forecasting Swiss Exports Using Bayesian Forecast Reconciliation By Florian Eckert; Rob J Hyndman; Anastasios Panagiotelis
  9. Real-time signals anticipating credit booms in Euro Area countries By Francesco Simone Lucidi
  10. Beyond the zero lower bound: negative policy rates and bank lending By Garyn Tan

  1. By: Bravo, Jorge Miguel (Universidade Nova de Lisboa); Ayuso, Mercedes (University of Barcelona); Holzmann, Robert (University of New South Wales)
    Abstract: The demographic change underway, declining adequacy levels from traditional pay-as-you-go old-age social security systems, structural reforms in pension schemes and the reduction in the traditional family support have increased the need for additional private savings to cover the old age income gap. In this paper we discuss the necessity, the role and the viability of home equity release schemes in supplementing public and private pensions in an integrated way. We use the latest European data from the Eurosystem Household Finance and Consumption Survey (HFCS) to analyse the household's wealth composition and accumulation process in the euro area. To quantify the size of the housing wealth and its potential to enhance existing and future retirement income, we compute the equity-to-value ratio (ETV) for all countries, estimate the time to loan payoff and compute the amount of home equity that is expected to be released over a 10-year period through regular monthly mortgage payments. We then catalogue and discuss the many alternative options for managing and accessing housing wealth over the life cycle, and highlight the main characteristics, risks, advantages and drawbacks of the two most important market products (home reversion plans and reverse mortgages). Finally, we discuss the main demand-side and supply-side obstacles and challenges to the development of equity release markets and extract some policy implications.
    Keywords: equity release schemes, housing wealth, reverse mortgage, homeownership, retirement income, pensions adequacy
    JEL: D1 G1 J1 R2 R3
    Date: 2019–09
  2. By: Pierluigi Montalbano (Department of Social Sciences and Economics, Sapienza University of Rome (IT); Department of Economics, Sussex University (UK).); Silvia Nenci (Department of Economics, Rome Tre University (IT).); Laura Dell'Agostino (Department of Management, Economics and Industrial Engineering, Politecnico di Milano (IT).)
    Abstract: This work presents an original contribution to the debate on the trade effects of the euro, recently revamped by Glick and Rose (2016). It provides a re-assessment of the effects of the euro by focusing on trade in value added and applying non-parametric matching techniques that control for non-linearity-with-self-selection. In line with Persson (2001), we show a less positive post-assessment of the euro effect on intra-EMU trade flows. However, we detect a robust positive impact of the euro on trade shares in selected value added components net to the single market effect. These results are robust to a large set of sensitivity checks.
    Keywords: trade in value added, monetary union, global value chains, production fragmentation, euro, non-parametric estimates.
    JEL: F10 F12 F15
    Date: 2019–10
  3. By: Mathias Hoffmann; Egor Maslov; Bent E. Sørensen
    Abstract: Small businesses (SMEs) depend on banks for credit. We show that the severity of the Eurozone crisis was worse in countries where firms borrowed more from domestic banks (“domestic bank dependence”) than in countries where firms borrowed more from international banks. Eurozone banking integration in the years 2000–2008 mainly involved cross-border lending between banks while foreign banks’ lending to the real sector stayed flat. Hence, SMEs remained dependent on domestic banks and were vulnerable to global banking shocks. We confirm, using a calibrated quantitative model, that domestic bank dependence makes sectors and countries with many SMEs vulnerable to global banking shocks.
    Keywords: Small and medium enterprises, SME access to finance, Banking integration, Domestic bank dependence, International transmission, Eurozone crisis
    JEL: F30 F36 F40
    Date: 2019–10
  4. By: Hans-Werner Sinn
    Abstract: While the formal decision of the ECB Council to impose interest on Target claims and liabilities is meaningless, this paper shows that the pooling of primary interest income among national central banks in the Eurozone implies that Target and cash balances do, in fact, bear an effective rate of interest. The magnitude of this effective rate of interest is given by a weighted average of the ECB’s policy interest rates where (i) the relative country sizes and (ii) the uses of alternative sources and sinks of international liquidity flows determine the weights. Without countervailing transactions, which would effectively service the Target claims and liabilities, Target balances grow with compound interest. The payment of interest on Target balances internalizes the competitive externality that otherwise could induce excessive money supply in a decentralized monetary system of the kind characterizing the Eurozone. It also implies that the recording of Target balances in the balance sheets of national central banks is compatible with fair value accounting.
    Keywords: Target2, ECB, interest, competitive seignorage externality
    JEL: E40 F41 H60
    Date: 2019
  5. By: Laurentiu Guinea (Universidad Complutense de Madrid and ICAE.); Luis A. Puch (Universidad Complutense de Madrid and ICAE.); Jesús Ruiz (Universidad Complutense de Madrid and ICAE.)
    Abstract: In this paper we investigate how the economy responds to anticipated (news) shocks to future investment decisions. Using structural vector autoregressions (SVARs), we show that news about the future relative price of residential investment explains a high fraction of the variance of output, aggregate investment and residential investment for Spain. In contrast, for Germany it is the news shocks on business structures and equipment that explain a higher fraction of the variance of output, consumption and non-residential investment. To interpret our empirical findings we propose a stylized two-sector model of the willingness to substitute current consumption for future investment in housing, structures or equipment. The model combines a wealth effect driven by the expectation of rising house prices, with frictions in labour reallocation. We find that the model calibrated for Spain displays a response to anticipated house price shocks that stimulate residential investment, whereas for Germany those shocks enhance investment in equipment and structures. The results stress that the propagation mechanism of anticipated shocks to future investment is consistent with the housing booms in Spain.
    Keywords: Investment-specifi technical change; News shocks; Housing booms; Wealth eff.
    JEL: C32 D84 E22 E32
    Date: 2019–09
  6. By: Cédric Tille (IHEID, Graduate Institute of International and Development Studies, Geneva)
    Abstract: The Swiss Federal government finances are in an excellent shape: debt is small (and decreasing), and carries a low interest rate. This paper reviews the prospects for the Swiss finances drawing on the recent literature. We argue that the current policy of running surpluses and paying down the debt is inefficient, and propose three alternatives. First, as the interest rate on the debt is much lower than the GDP growth rate – a pattern that is not unusual – Switzerland could stabilize the debt to GDP ratio and run a primary deficit of abut CHF 2.6 billion (0.37% of GDP). Second, the low cost of debt implies that investments in education and infrastructure are more attractive than in the past. Third, Switzerland could use its implicit asset (the trust of investors) and set up a sovereign wealth fund financed by government debt. We estimate that a fund amounting to 10% of GDP could generate an annual revenue between CHF 0.7 to 2 billion (0.1% to 0.3% of GDP), though these estimates could be refined further.
    Keywords: public debt, low interest rates, sovereign wealth fund, Switzerland
    JEL: E62 F3 H6
    Date: 2019–09–30
  7. By: Juan Carlos Cuestas (Department of Economics, Universitat Jaume I, Castellón, Spain); Merike Kukk (Department of Economics and Finance, Tallinn University of Technology, Estonia)
    Abstract: In this paper we aim to analyse the evolution of the real exchange rate (RER) as a measure of competitiveness for a group of Central and Eastern European countries. To do so, we apply unit root tests with breaks and estimate equations with structural breaks. The results show that even though RERs have become flatter, which means less competitiveness is lost against main trading partners, they have become less mean reverting, meaning that shocks now tend to have longer effects. Policy conclusions are derived from this analysis.
    Keywords: real exchange rates, Central and Eastern Europe, structural breaks, European integration
    JEL: C22 F15
    Date: 2019
  8. By: Florian Eckert; Rob J Hyndman; Anastasios Panagiotelis
    Abstract: This paper conducts an extensive forecasting study on 13,118 time series measuring Swiss goods exports, grouped hierarchically by export destination and product category. We apply existing state of the art methods in forecast reconciliation and introduce a novel Bayesian reconciliation framework. This approach allows for explicit estimation of reconciliation biases, leading to several innovations: Prior judgment can be used to assign weights to specific forecasts and the occurrence of negative reconciled forecasts can be ruled out. Overall we find strong evidence that in addition to producing coherent forecasts, reconciliation also leads to improvements in forecast accuracy.
    Keywords: hierarchical forecasting, Bayesian forecast reconciliation, Swiss exports, optimal forecast combination
    JEL: C32 C53 E17
    Date: 2019
  9. By: Francesco Simone Lucidi
    Abstract: This paper identifies credit booms in 11 Euro Area countries by tracking private loans from the banking sector. The events are associated with both financial crises and specific macro fluctuations, but the standard identification through threshold methods does not allow to catch credit booms in real time data. Thus, an early warning model is employed to predict the explosive dynamics of credit through several macro-financial indicators. The model catches a large part of the in-sample events and signals correctly both the global financial crisis and the sovereign debt crisis in an out-of-sample setting by issuing signals in real-time data. Moreover, while tranquil booms are driven by global dynamics, crisis-booms are related to the resilience of domestic banking systems to adverse financial shocks. The results suggest an ex-ante policy intervention can avoid dangerous credit booms by focusing on the solvency of the domestic banking system and financial market's overheating.
    Keywords: Credit Boom; Euro Area; Early Warning; Multivariate Logit
    JEL: C32 G01 E32 E51
    Date: 2019–10
  10. By: Garyn Tan
    Abstract: How do banks operate in a negative policy rate environment? Bank profitability is threatened by policy rate cuts in negative territory because the zero lower bound on retail deposit rates prevents banks from benefiting from cheaper deposit funding costs. Contrary to some earlier research, this paper finds that banks most affected by negative rates through this retail deposits channel increase their lending relative to less affected banks. The response is limited to mortgage lending, and is driven by banks with high household deposit ratios and banks with high overnight deposit ratios. Overall, net interest margins are unaffected, which implies that the volume effect is large enough to offset the adverse impact on bank profitability. However, the positive effect on lending dissipates as negative rates persist. This suggests that although the "reversal rate" has not been breached, it may creep up over time as banks become more limited in their options to maintain profit margins. The results also point to an important role for bank capitalisation - net interest margins of relatively highly capitalised banks are squeezed, whereas the net interest margins of less capitalised banks are unaffected. This can be explained by differences in capacity for shock absorbency.
    Keywords: negative rates; zero lower bound; bank lending channel; monetary policy Transmission
    JEL: E43 E52 E58 G20 G21
    Date: 2019–09

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