nep-eec New Economics Papers
on European Economics
Issue of 2019‒11‒25
nineteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. The Global Multi-Country Model (GM): An Estimated DSGE Model for Euro Area Countries By Alice Albonico; Ludovic Calés; Roberta Cardani; Olga Croitorov; Fabio Di Dio; Filippo Ferroni; Massimo Giovannini; Stefan Hohberger; Beatrice Pataracchia; Filippo Pericoli; Philipp Pfeiffer; Rafal Raciborski; Marco Ratto; Werner Roeger; Lukas Vogel
  2. The ECB after the crisis: existing synergies among monetary policy, macroprudential policies and banking supervision By Cassola, Nuno; Kok, Christoffer; Mongelli, Francesco Paolo
  3. Cruising at Different Speeds: Similarities and Divergences between the German and the French Economies By Guillaume Cléaud; Francisco de Castro Fernández; Jorge Durán Laguna; Lucia Granelli; Martin Hallet; Anne Jaubertie; Carlos Maravall Rodriguez; Diana Ognyanova; Balazs Palvolgyi; Tsvetan Tsalinski; Kai-Young Weißschädel; Johannes Ziemendorff
  4. Exchange rate dynamics and unconventional monetary policies: it�s all in the shadows By Andrea De Polis; Mario Pietrunti
  5. Eurozone periphery post-crisis By Ana Podvršič; Joachim Becker
  6. Unconventional Monetary Policy, (A)Synchronicity and the Yield Curve By Dilts Stedman, Karlye
  7. Interconnected banks and systemically important exposures By Roncoroni, Alan; Battiston, Stefano; D'Errico, Marco; Hałaj, Grzegorz; Kok, Christoffer
  8. Monetary Policy and Bank Equity Values in a Time of Low and Negative Interest Rates By Miguel Ampudia; Skander J. Van den Heuvel
  9. When Do Currency Unions Benefit From Default ? By Xuan Wang
  10. German Bond Yields and Debt Supply: Is There a “Bund Premium”? By Anne-Charlotte Paret; Anke Weber
  11. Domestic Banks as Lightning Rods? Home Bias and Information during the Eurozone Crisis By Orkun Saka
  12. The Semi-Elasticities Underlying the Cyclically-Adjusted Budget Balance: An Update and Further Analysis By Gilles Mourre; Aurélien Poissonnier; Martin Lausegger
  13. Monetary union and financial integration By Luca Fornaro
  14. Long-run relationship between exports and imports: current account sustainability tests for the EU By António Afonso; Florence Huart; João Tovar Jalles; Piotr Stanek
  15. Macroeconomic Responses to Fiscal Shocks in Portugal By Elva Bova; Violeta Klyviene
  16. Using credit variables to date business cycle and to estimate the probabilities of recession in real time By Valentina Aprigliano; Danilo Liberati
  17. The current account sustainability in Central and Eastern Europe: Has it changed? By Juan Carlos Cuestas
  18. US trade policy in numbers: how exposed is the EU? By Rita Cappariello; Michele Mancini
  19. Technology, profits and wages By Andrea Coveri; Mario Pianta

  1. By: Alice Albonico; Ludovic Calés; Roberta Cardani; Olga Croitorov; Fabio Di Dio; Filippo Ferroni; Massimo Giovannini; Stefan Hohberger; Beatrice Pataracchia; Filippo Pericoli; Philipp Pfeiffer; Rafal Raciborski; Marco Ratto; Werner Roeger; Lukas Vogel
    Abstract: This paper introduces the Global Multi-country (GM) model, an estimated multi-country Dynamic Stochastic General Equilibrium (DSGE) model of the world economy. We present the model in 3-region configurations for Euro area (EA) countries that include an individual EA Member State, the rest of the EA (REA), and the rest of the world (RoW). We provide and compare estimates of this model structure for the four largest EA countries (Germany, France, Italy, and Spain). The novelty of the paper is the estimation of ex-ante identical country models on the basis of a unified information set, which allows for clean crosscountry comparison of parameter estimates and drivers of economic dynamics. The paper also provides an overview of applications of the GM model such as the structural interpretation of business cycle dynamics, the contribution to the European Commission’s economic forecast, the scenario analysis and policy counterfactuals.
    JEL: C51 E32 F41 F45
    Date: 2019–07
  2. By: Cassola, Nuno; Kok, Christoffer; Mongelli, Francesco Paolo
    Abstract: The prolonged crisis exposed the vulnerability of a monetary union without a banking union. The Single Supervisory Mechanism (SSM), which started operating in November 2014, is an essential step towards restoring banks to health and rebuilding trust in the banking system. The ECB is today responsible for setting a single monetary policy applicable throughout the euro area and for supervising all euro area banks in order to ensure their safety and soundness, some directly and some indirectly. Its role in the area of financial stability has also expanded through the conferral of macroprudential tasks and tools that include tightening national measures when necessary. It thus carries out these complementary functions, while its primary objective of pursuing price stability remains unchanged. What are the working arrangements of this enlarged ECB, and what are the similarities and existing synergies among these functions? In the following pages, focusing on the organisational implications of the “new” ECB, we show the relative degrees of centralisation and decentralisation that exist in discharging these functions, the cycles of policy preparation and the rules governing interaction between them. JEL Classification: E42, E58, F36, G21
    Keywords: banking supervision, banking union, decision-making process, European Central Bank, financial stability, macroprudential policies, monetary policy, systemic risks
    Date: 2019–11
  3. By: Guillaume Cléaud; Francisco de Castro Fernández; Jorge Durán Laguna; Lucia Granelli; Martin Hallet; Anne Jaubertie; Carlos Maravall Rodriguez; Diana Ognyanova; Balazs Palvolgyi; Tsvetan Tsalinski; Kai-Young Weißschädel; Johannes Ziemendorff
    Abstract: GDP growth rates in France and Germany have differed significantly since the crisis. As a result, per-capita income and employment trends have diverged markedly. This Discussion Paper assesses a number of possible explanatory factors behind these developments and suggests, in particular, that differences in labour-market institutions appear critical. Social partners play a key role in both countries, but the application of collective bargaining at the firm level allows for more flexibility in Germany. However, the higher resilience and flexibility of the German labour market comes at the price of higher market-income inequality and poverty across individuals and age groups. There are also differences in economic structure, especially in the public sector, but to some extent also in the private sector, while nominal divergences appear less relevant in explaining recent income divergences. Although Germany’s growth model has allowed it to benefit from the strong post-crisis recovery in the global economy, especially among emerging economies – reflecting Germany’s favourable composition of products and export markets – it also makes it more exposed to swings in the global cycle. France’s growth model, by contrast, has relied more on domestic demand. Together with a larger public sector, this has helped to smoothen economic cycles, but has also implied some losses in cost competitiveness and a significantly higher tax burden.
    JEL: E0 E2 E6 H0 H2 H6 J3 J5 O3 O4 O5
    Date: 2019–07
  4. By: Andrea De Polis (Warwick Business School, University of Warwick); Mario Pietrunti (Bank of Italy)
    Abstract: In this paper we estimate an open economy New-Keynesian model to investigate the impact of unconventional monetary policies on the exchange rate, focusing on those adopted since the Global Financial Crisis in the euro area and in the United States. To this end we replace effective, short-term, interest rates with shadow rates, which provide a measure of the monetary stance when the former reach their effective lower bound. We find that since 2009 unconventional monetary policies significantly affected the dynamics of the euro-dollar exchange rate both in nominal and real terms: while the stimulus provided by the Fed prevailed between 2011 and 2014, contributing to the weakening of the dollar, in most recent years the depreciation of the euro mainly reflected the measures adopted by the ECB.
    Keywords: exchange rates, shadow rates, unconventional policies
    JEL: C11 E52 F31 F41
    Date: 2019–07
  5. By: Ana Podvršič (CEPN - Centre d'Economie de l'Université Paris Nord - UP13 - Université Paris 13 - USPC - Université Sorbonne Paris Cité - CNRS - Centre National de la Recherche Scientifique, CSEES - Centre for Southeast European Studies, Karl Franzens University Graz); Joachim Becker (Vienna University of Economics and Business - WU - Wirtschaftsuniversität Wien [Austria])
    Abstract: The article provides a comparative study of Slovenia and Slovakia to analyse the transformation of dependent accumulation regimes in the Eurozone periphery after 2010. The study of these two economies from CEE is particularly insightful to understand how the Eurozone countries from the industrial periphery coped with the challenges of restructuring after the outbreak of the crisis. The article combines dependency and régulationist approaches to study European asymmetrical accumulation regimes. We argue that the post-crisis economic trajectories in CEE continue to reflect main traits of the pre-crisis asymmetrical relationship with the core. The key vulnerabilities are linked to the ongoing reliance on FDI for export industrialisation, the narrow export specialisation, and, particularly in Slovakia, a rapid expansion of household debt. In Slovenia, under the EU supervision, the pre-crisis private debts were shifted to the public sector and henceforth burden public investment. Our findings suggest that financialisation as well the Eurozone monetary constraints should be systemically included in the analysis of post-crisis CEE growth trajectories. In addition, despite economic recovery, the accumulation regimes at Eurozone industrialised periphery continue to exhibit strong anti-labour bias.
    Keywords: financialisation,Slovakia,Eurozone crisis,uneven development,Slovenia
    Date: 2019–11
  6. By: Dilts Stedman, Karlye (Federal Reserve Bank of Kansas City)
    Abstract: This paper examines international spillovers from unconventional monetary policy between the United States, the euro area, the United Kingdom and Japan, and assesses the influence of asynchronous policy normalization on the slope of the yield curve. Using high frequency futures data to identify monetary policy surprises and controlling for contemporaneous news, I find that spillovers increase during periods of unconventional monetary policy and strengthen during asynchronous policy normalization. Local projections suggest persistent spillovers from the Federal Reserve, whereas other spillovers fade quickly. Through the lens of a shadow rate term structure model, I find that such spillovers elicit revisions, domestically and internationally, to both the expected path of short-term interest rates and required risk compensation, with the latter gaining importance at the effective lower bound of interest rates.
    Keywords: Monetary Policy; Spillovers
    JEL: E5 F42 G15
    Date: 2019–10–31
  7. By: Roncoroni, Alan; Battiston, Stefano; D'Errico, Marco; Hałaj, Grzegorz; Kok, Christoffer
    Abstract: We study the interplay between two channels of interconnectedness in the banking system. The first one is a direct interconnectedness, via a network of interbank loans, banks' loans to other corporate and retail clients, and securities holdings. The second channel is an indirect interconnectedness, via exposures to common asset classes. To this end, we analyze a unique supervisory data set collected by the European Central Bank that covers 26 large banks in the euro area. To assess the impact of contagion, we apply a structural valuation model NEVA (Barucca et al., 2016a), in which common shocks to banks' external assets are reflected in a consistent way in the market value of banks' mutual liabilities through the network of obligations. We identify a strongly non-linear relationship between diversification of exposures, shock size, and losses due to interbank contagion. Moreover, the most systemically important sectors tend to be the households and the financial sectors of larger countries because of their size and position in the financial network. Finally, we provide policy insights into the potential impact of more diversified versus more domestic portfolio allocation strategies on the propagation of contagion, which are relevant to the policy discussion on the European Capital Market Union. JEL Classification: C45, C63, D85, G21
    Keywords: bank stress test, cross-border contagion channels, financial contagion, financial networks, financial stability, systemic risk
    Date: 2019–11
  8. By: Miguel Ampudia; Skander J. Van den Heuvel
    Abstract: Does banks' exposure to interest rate risk change when interest rates are very low or even negative? Using a high-frequency event study methodology and intraday data, we find that the effect of surprise interest rate cuts announced by the ECB on European bank equity values – an effect that is normally positive – has become negative since interest rates in the euro area reached zero and below. Since then, a further unexpected cut of 25 basis points in the short-term policy rate lowered banks' stock prices by about 2% on average, compared to a 1% increase in normal times. In the cross section, this 'reversal' was far more pronounced for banks with a more traditional, deposit-intensive funding mix. We argue that the reversal as well as its cross-sectional pattern can be explained by the zero lower bound on interest rates on retail deposits.
    Keywords: Bank profitability ; Interest rate risk ; Monetary policy ; Negative interest rates ; ECB
    JEL: G21 E52 E58
    Date: 2019–08
  9. By: Xuan Wang
    Abstract: Since the Eurozone Crisis of 2010-12, a key debate on the viability of a currency union has focused on the role of a fiscal union in adjusting for country heterogeneity. However, a fully-fledged fiscal union may not be politically feasible. This paper develops a two-country international finance model to examine the benefits of the bankruptcy code of a capital markets union - in the absence of a fiscal union - as an alternative financial mechanism to improve the welfare of a currency union. When domestic credit risks are present, I show that a lenient union-wide bankruptcy code that allows for default in the cross-border capital markets union leads to a Pareto improvement within the currency union. However, if the union-wide bankruptcy code is too lenient, default may cause the collapse of the capital markets union and impede cross-border risk sharing. Moreover, the absence of floating nominal exchange rates removes a mechanism to neutralise domestic credit risks; I show that softening the union-wide bankruptcy code can recoup the lost benefits of floating nominal exchange rates. The model provides the economic and welfare implications of bankruptcy within a capital markets union in the Eurozone.
    JEL: E64 F55
    Date: 2019–11–07
  10. By: Anne-Charlotte Paret; Anke Weber
    Abstract: Are Bunds special? This paper estimates the “Bund premium” as the difference in convenience yields between other sovereign safe assets and German government bonds adjusted for sovereign credit risk, liquidity and swap market frictions. A higher premium suggests less substitutability of sovereign bonds. We document a rise in the “Bund premium” in the post-crisis period. We show that there is a negative relationship of the premium with the relative supply of German sovereign bonds, which is more pronounced for higher maturities and when risk aversion proxied by bond market volatility is high. Going forward, we expect German government debt supply to remain scarce, with important implications for the ECB’s monetary policy strategy.
    Date: 2019–11–01
  11. By: Orkun Saka
    Abstract: European banks have been criticized for holding excessive domestic government debt during the recent Eurozone crisis, which may have intensified the diabolic loop between sovereign and bank credit risks. By using a novel bank-level dataset covering the entire timeline of the Eurozone crisis, I first re-confirm that the crisis led to the reallocation of sovereign debt from foreign to domestic banks. In contrast to the recent literature focusing only on sovereign debt, I show that the banks’ private sector exposures were (at least) equally affected by the rise in home bias. Consistent with this pattern, I propose a new debt reallocation channel based on informational frictions and show that the informationally closer foreign banks increase their relative exposures when the sovereign risk rises. The effect of informational closeness is economically meaningful and robust to the use of different information measures and controls for alternative channels of sovereign debt reallocation.
    Keywords: home bias, information asymmetries, Eurozone crisis, sovereign debt
    JEL: F21 F34 F36 G01 G11 G21
    Date: 2019
  12. By: Gilles Mourre; Aurélien Poissonnier; Martin Lausegger
    Abstract: We update the semi-elasticities of the budget balance to output for the 28 EU Member States using new weights based on ESA2010 data (with unchanged elasticities for individual fiscal items). The revisions of the semi-elasticities are fairly small across Member States and leave the assessment of fiscal developments in the EU broadly unchanged. The revision of the Cyclically Adjusted Balance (CAB) is mainly driven by that in the headline balance and the estimated output gap, not by the update of the fiscal semi-elasticities. A sensitivity analysis shows that revenue and expenditure weights, if allowed to vary over time, can have a larger impact on the semi-elasticities than the present update would suggest, although this would affect the CAB only marginally. Based on the existing four vintages of the estimated semi-elasticities, exploratory panel data analysis confirms that semi-elasticities are country-specific structural parameters, mostly of fiscal nature: they are linked to the size of government, the share of unemployment-related spending, the share of non-tax revenue and tax progressivity. They can also be influenced by the belonging to specific country groupings and an emulation effect between neighbours.
    JEL: E62 H62 E32
    Date: 2019–05
  13. By: Luca Fornaro
    Abstract: Since the creation of the euro, capital flows among member countries have been large and volatile. Motivated by this fact, I provide a theory connecting the exchange rate regime to financial integration. The key feature of the model is that monetary policy affects the value of collateral that creditors seize in case of default. Under flexible exchange rates, national governments can expropriate foreign investors by depreciating the exchange rate. Anticipating this, investors impose tight limits on international borrowing. In a monetary union this source of exchange rate risk is absent, because national governments do not control monetary policy. Forming a monetary union thus increases financial integration by boosting borrowing capacity toward foreign investors. This process, however, does not necessarily lead to higher welfare. The reason is that a high degree of financial integration can generate multiple equilibria, with bad equilibria characterized by inefficient capital flights. Capital controls or fiscal transfers can eliminate bad equilibria, but their implementation requires international cooperation.
    Keywords: Monetary union, international financial integration, exchange rates, optimal currency area, capital flights, euro area.
    JEL: E44 E52 F33 F34 F36 F41 F45
    Date: 2019–11
  14. By: António Afonso; Florence Huart; João Tovar Jalles; Piotr Stanek
    Abstract: We assessthe sustainability of external imbalances for EUcountriesusing panel stationarity tests of Current Account(CA) balance-to-GDP ratiosand panel cointegration of exports and imports of goods and services, for the period 1970Q1-2015Q4. We find that: i) the country panel isnon-stationary; ii) cross-sectional dependence plays an important role; iii) there is non-stationarity of the CA, imports, and exportswith cross-sectional panel dependenceand multiple structural breaks; iv) however, there is a stable long-run relationship between exports and imports in the panel.Hence, trade imbalances can be less unsustainable but this is not sufficient to make current account imbalances sustainable.
    Keywords: current account, exports, imports, unit roots, cointegration
    JEL: C23 F32 F41
    Date: 2019–11
  15. By: Elva Bova; Violeta Klyviene
    Abstract: This study analyses the impact of fiscal shocks on GDP, inflation and interest rates in Portugal over 1995-2017. In line with the relevant literature, we estimate multipliers using a structural VAR a' la Blanchard and Perotti (2002) based on OECD elasticities. As fiscal shocks, we include changes in direct and indirect taxes on the revenue side, and, on the expenditure side, changes in public consumption, investment and transfers. We find small tax multipliers and larger government consumption multipliers for growth, while short-term responses to shocks in transfer and investment spending are found to be negligible. We find an ambiguous impact of fiscal shocks on inflation, with both indirect and direct taxes having an inflationary impact but government consumption having the contrary impact. Fiscal shocks of an expansionary nature are found to trigger declines in real interest rates, possibly through the inflation channel. The results are robust to different orderings of the variables used in the structural VAR and to the selection of alternative time periods. Overall, the analysis of output multipliers compares well with some other studies conducted on the Portuguese economy and confirms the importance of the disposable income channel in the transmission of fiscal shocks to the rest of the economy.
    JEL: E62 H3 C20
    Date: 2019–05
  16. By: Valentina Aprigliano (Bank of Italy); Danilo Liberati (Bank of Italy)
    Abstract: Following the debate on the relationship between business and financial cycle rekindled in the last decade since the global financial crisis, we assess the ability of some financial indicators to track the Italian business cycle. We mostly use credit variables to detect the turning points and to estimate the probability of recession in real time. A dynamic factor model with Markov-switching regimes is used to handle a large dataset and to cope with the nonlinear evolution of the business cycle. The in-sample results strongly support the capacity of credit variables to estimate the probability of recessions and the implied coincident indicator proves their ability to fit the business cycle. Also in real time the contribution of credit is not negligible compared to that of the industrial production, currently used for the conjunctural analysis.
    Keywords: business cycle, financial cycle, real time estimation, Markow-switching model, state-space model
    JEL: C53 E17 E32 E44 G21
    Date: 2019–07
  17. By: Juan Carlos Cuestas (Department of Economics, Universitat Jaume I, Castellón, Spain)
    Abstract: In this paper we aim to analyse the evolution of the current account as percentage of the GDP for a group of Central and Eastern European Countries. Instead of only analysing the variable for unit roots, we go a step further and test for different speeds of mean reversion dependent on break dates endogenously determined. We apply the Bai and Perron method to find that although most countries have managed to balance their current account but some of them should keep an eye on a low speed of mean reversion and deviating time trend from balance.
    Keywords: debt, Central and Eastern Europe, structural breaks, European integration
    JEL: C22 F15 F32
    Date: 2019
  18. By: Rita Cappariello (Bank of Italy); Michele Mancini (Bank of Italy)
    Abstract: Amid lingering uncertainty on future US trade policies towards the EU, this study provides an assessment of the implications of a change in US trade tariffs for the EU, with a focus on Italy. By examining trade flows and matching over 5.000 products to effective tariffs, the work quantifies, at the aggregate and sectoral level, actual bilateral average tariffs on trade in final goods and intermediates. Although US goods’ tariffs are generally lower than those imposed by partners, this asymmetry is not as marked for the EU. This study also evaluates the direct and indirect exposure of the EU’s and its major countries’ GDP to alternative scenarios of US tariff hikes. A change in US tariffs would affect around 2.8 per cent of total EU GDP. The EU GDP potentially affected by US tariffs only on automotive imports would be 0.4 per cent while the overall Italian exposure would be just below, 0.3 per cent, around 10 per cent in terms of the value-added produced in the motor vehicles sector.
    Keywords: tariffs, protectionism, US trade policy
    JEL: F13 F15
    Date: 2019–11
  19. By: Andrea Coveri; Mario Pianta
    Abstract: Building on a Post-Keynesian theoretical framework, integrated with an analysis of technology, this article investigates the structural determinants of income distribution. We develop a simultaneous model on wage and profit dynamics identifying as key determinants productivity growth, capital-labour conflict, the relevance of trade unions and different strategies of technological change and offshoring. We perform an industry-level analysis on 38 manufacturing and service sectors for six major European countries from 1994 to 2014. Wage and profit dynamics is shown to be rooted in structural change, productivity growth and capital-labour conflict, with profits driven by product innovation and offshoring, and wages rising faster where new products are relevant and trade unions have a greater role.
    Keywords: Income distribution; innovation; offshoring; Europe; industries.
    Date: 2019–11–13

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