nep-eec New Economics Papers
on European Economics
Issue of 2020‒10‒12
twelve papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Did the absence of a central bank backstop in the sovereign bond markets exacerbate spillovers during the euro-area crisis? By Heather D. Gibson; Stephen G. Hall; Deborah Gefang; Pavlos Petroulas; George S. Tavlas
  2. Risk Sharing in Europe: New Empirical Evidence on the Capital Markets Channel By Dufrénot Gilles; Gossé Jean-Baptiste; Clerc Caroline
  3. Debt holder monitoring and implicit guarantees: did the BRRD improve market discipline? By Cutura, Jannic Alexander
  4. An Empirical Assessment of Monetary Policy Channels on Income and Wealth Disparities By José Alves; Tomás Silva
  5. Banks' bail-in and the new banking regulation: an EU event study By Bellia, Mario; Maccaferri, Sara
  6. How resilient are the European regions? Evidence from the societal response to the 2008 financial crisis By Benczur, Peter; Joossens, Elisabeth; Manca, Anna Rita; Menyhert, Balint; Zec, Slavica
  7. A Suggestion for a Dynamic Multi Factor Model (DMFM) By Heather D. Gibson; Stephen G. Hall; George S. Tavlas
  8. Measuring Monetary Policy with Residual Sign Restrictions at Known Shock Dates By Harald Badinger; Stefan Schiman
  9. Financial integration in the EU28 equity markets: measures and drivers By Nardo, Michela; Ossola, Elisa; Papanagiotou, Evangalia
  10. International Spillover Effects of Unconventional Monetary Policies of Major Central Banks By Tomoo Inoue; Tatsuyoshi Okimoto
  11. Investment Home Bias in the European Union By António Martins
  12. "The Empirics of UK Gilts' Yields" By Tanweer Akram; Huiqing Li

  1. By: Heather D. Gibson (Bank of Greece); Stephen G. Hall (University of Leicester, Bank of Greece and University of Pretoria); Deborah Gefang (University of Leicester); Pavlos Petroulas (Bank of Greece); George S. Tavlas (Bank of Greece)
    Abstract: The euro-area sovereign debt crisis was characterized by feedback loops between (1) sovereign bond ratings and sovereign spreads in single jurisdictions and (2) sovereign spreads and ratings among jurisdictions. One explanation of this circumstance is that the ECB was unable to perform the role of lender of last resort in the sovereign bond markets during the crisis. We provide a spatial framework that allows us to distinguish among European countries whose central banks were permitted to function as lender of last resort in those markets and countries whose central banks were not permitted to do so. Our results are consistent with the view that the absence of a central bank backstop in the sovereign bond markets exacerbated feedback loops.
    Keywords: euro-area crisis, simultaneous spatial model, European banks, spreads, sovereign ratings
    JEL: E3 G01 G14 G21
    Date: 2020–07
  2. By: Dufrénot Gilles; Gossé Jean-Baptiste; Clerc Caroline
    Abstract: This paper assesses the effectiveness of risk sharing mechanisms in Europe by breaking down the factor income components into their sub-components, and aims to further examine whether financial integration and international portfolio diversification boosts or dampens risk sharing. Using a panel of European countries, we compare the years before and after the 2008 financial crisis. We extend the literature by properly taking into account the heterogeneity (in both country and time dimensions) in the panel through new econometric models. Our results show that financial income has become a major channel of risk sharing in recent years and that a higher integration in the bond and equity markets significantly improves risk sharing in the long term.
    Keywords: Euro Area, Risk Sharing, Financial Integration, Cross-Sectional Dependence.
    JEL: C23 C51 E21 F36
    Date: 2020
  3. By: Cutura, Jannic Alexander
    Abstract: This paper argues that the European Unions Banking Recovery and Resolution Directive (BRRD) improved market discipline in the European bank market for unsecured debt. The different impact of the BRRD on bank bonds provides a quasi-natural experiment that allows to study the effect of the BRRD within banks using a difference-in-difference approach. Identification is based on the fact that (otherwise identical) bonds of a given bank maturing before 2016 are explicitly protected from BRRD bail-in. The empirical results are consistent with the hypothesis that debt holders actively monitor banks and that the BRRD diminished bail-out expectations. Bank bonds subject to BRRD bail-in carry a 10 basis points bail-in premium in terms of the yield spread. While there is some evidence that the bail-in premium is more pronounced for non-GSIB banks and banks domiciled in peripheral European countries, weak capitalization is the main driver. JEL Classification: G18, G21, H81
    Keywords: bail-in, banking regulation, BRRD, moral hazard
    Date: 2020–10
  4. By: José Alves; Tomás Silva
    Abstract: Our paperaims at analysing the relation between monetary policy andits transmission channels on both income and wealthinequality for the Euro Area.We analysed three different channels identified by the literature (Income, Portfolio and Earnings Heterogeneity) that might explainhow monetary policy decisions may affect wealth and income distribution.In this empirical researchwe also set up a fourth regression combining all our selected explanatory variableswith the goal of studyingthe impact of the aforementionedchannels combined. For income inequality we analysed four different measures, namely Gini of disposable income(GDI), Gini of market income(GMI), share of income held by the top 1% and theshare of income of thetop 10%of society. In what regards to wealth inequality due to lack of data we had to createan alternative measure that can both translate the unequal savings rate of the Euro Area countries and evaluate the pace of capital accumulation in order to shed a lighton the gap between high-income and low-income household’sannual savings.So that our study could be conducted we developedan unbalancedpanel data analysis for the Eurozonecountriesbetween 1999 and 2017.The results we reached led us to conclude that the increase in asset prices, mainly equity, seems to be relevant to explain an increase in income inequality. However, it seems that the positive impact that MP had on unemployment by reducing it, contributed to avoid a higher increase on income inequality in the Euro Area.
    Keywords: Income inequalities; Wealth inequalities; Monetary Policy; Transmission Channels
    JEL: C23 D31 E25 E52 E58
    Date: 2020–09
  5. By: Bellia, Mario (European Commission); Maccaferri, Sara (European Commission)
    Abstract: The purpose of the study is to estimate the short term reaction of equity and CDS prices of a sample of European banks to various events and announcements, such as bail-ins, recapitalisations, and the proposal and final agreement of the EU reform package of prudential and resolution rules in banking (“banking package†). This study replicates and expand Schafer et al. (2017) to include more recent EU events, such as the resolution of Banco Popular and the further tightening of EU prudential and resolution rules in 2019. Overall, our analysis shows the most recent events did not seem to trigger abnormal reactions in bank funding markets after bank prudential and resolution reforms were implemented in the EU in 2016. An exception is the 2018 Council agreement on its general approach to the proposed banking package. While the 2016 and 2019 reforms of EU prudential and resolution rules seem to have increased perceived probabilities of
    Keywords: Too-Big-To-Fail, Bail-in, FSB, event study, Credit Default Swap, CDS
    JEL: G21 G28
    Date: 2020–09
  6. By: Benczur, Peter (European Commission - JRC); Joossens, Elisabeth (European Commission - JRC); Manca, Anna Rita (European Commission - JRC); Menyhert, Balint (European Commission - JRC); Zec, Slavica (European Commission - JRC)
    Abstract: This report proposes a new approach for measuring regional resilience that goes beyond the assessment of traditional economic dimensions. It defines resilience as the societal ability to preserve and generate well-being in the presence of shocks and persistent structural changes in a sustainable manner, without hindering the wellbeing of future generations. The empirical exercise concentrates on the 2008 financial and economic crisis and the subsequent overall response of EU regions to the economic shock. We implement a three-step methodology:(i) select an extensive list of economic and non-economic variables that span the entire production process of societal wellbeing; (ii) compute regional resilience indicators based on the joint dynamic response of these variables to the crisis; (iii) identify those pre-crisis characteristics that differentiate resilient regions from the non-resilient ones. Our analysis reveals substantial heterogeneity in resilience across the European regions. It confirms the importance of expanding the measurement strategy to a broader list of subjective and objective well-being measures (like social inclusion, social capital, and quality of life). We show that observed resilience performance is highly dependent on the time horizon: resilience rankings of European regions are markedly different in the short and long run. The analysis of the recovery time provides additional information on the strength and weaknesses of regions, and it is largely dependent on the specific dimensions (variables) considered. Finally, our results highlight that certain country-level and regional characteristics, such as private sector credit flows and the gender employment gap, are strong predictors of resilient regional behaviour after the crisis.
    Keywords: regional resilience, societal well-being, impact, recovery, medium run, bounce forward, financial and economic crisis, absorption, adaptation, transformation
    JEL: C50 I31 R11
    Date: 2020–09
  7. By: Heather D. Gibson (Bank of Greece); Stephen G. Hall (University of Leicester, Bank of Greece and University of Pretoria); George S. Tavlas (Bank of Greece)
    Abstract: We provide a new way of deriving a number of dynamic unobserved factors from a set of variables. We show how standard principal components may be expressed in state space form and estimated using the Kalman filter. To illustrate our procedure we perform two exercises. First, we use it to estimate a measure of the current-account imbalances among northern and southern euro-area countries that developed during the period leading up to the outbreak of the euro-area crisis, before looking at adjustment in the post-crisis period. Second, we show how these dynamic factors can improve forecasting of the euro-dollar exchange rate.
    Keywords: Principal Components;Factor Models; Underlying activity; Forecasts
    JEL: E3 G01 G14 G21
    Date: 2020–07
  8. By: Harald Badinger; Stefan Schiman
    Abstract: We propose a novel identification strategy to measure monetary policy in a structural VAR. It is based exclusively on known past policy shocks, which are uncovered from high-frequency data, and does not rely on any theoretical a-priori restrictions. Our empirical analysis for the euro area reveals that interest rate decisions of the ECB surprised financial markets at least fifteen times since 1999. This information is used to restrict the sign and magnitude of the structural residuals of the policy rule equation at these shock dates accordingly. In spite of its utmost agnostic nature, this approach achieves strong identification, suggesting that unexpected ECB decisions have an immediate impact on the short-term money market rate, the narrow money stock, commodity prices, consumer prices and the Euro-Dollar exchange rate, and that real output responds gradually. Our close to assumption-free approach obtains as an outcome what traditional sign restrictions on impulse responses impose as an assumption.
    Keywords: structural VAR, set identification, monetary policy, ECB
    JEL: C32 E52 N14
    Date: 2020
  9. By: Nardo, Michela (European Commission); Ossola, Elisa (European Commission); Papanagiotou, Evangalia (European Commission)
    Abstract: We examine time-invariant and time-varying market integration across European stock markets. Market integration has been increasing especially during the crisis period. Among others, market capitalization, technological developments and overall political uncertainty drive financial integration and systematic volatility, while macroeconomic variables do not impact idiosyncratic volatility. High market integration is associated with decreasing diversification benefit. During crisis periods investors select portfolios that are not explained only by firm characteristics.
    Keywords: financial integration, equity markets, common factor approach, diversification benefits, drivers of integration
    JEL: F3 C23
    Date: 2020–09
  10. By: Tomoo Inoue (Seikei University); Tatsuyoshi Okimoto (ANU - Australian National University)
    Abstract: This study examines the effects of unconventional monetary policies (UMPs) by the major central banks, namely the Bank of England (BOE), Bank of Japan (BOJ), European Central Bank (ECB) and the Federal Reserve (Fed) on the international financial markets, taking global spillovers into account. To this end, we apply the Global Vector Autoregressive (GVAR) model to 35 countries and one region for the period from March 2009 to July 2019. Our results indicate that the effects vary across four asset classes and central banks. For example, the UMPs of the Fed and the BOJ have signicant impacts on the regional sovereign bond markets, while the ECB UMPs show relatively stronger and broader effects on global bond markets. The global equity markets were also considerably affected by UMPs of the Fed, ECB, and BOJ. Furthermore, we found some evidence of monetary policy interactions amongst the four major central banks. This resulted in the effects being less persistent on the global bond markets for the Fed and the ECB, but more persistent on equity and foreign exchange markets for the Fed and the BOJ.
    Keywords: Unconventional Monetary policy,Financial linkage,International spillover,Global VAR
    Date: 2020–09
  11. By: António Martins
    Abstract: The creation of the European Single Market (ESM) and the adoption of the Euro elim-inated barriers for capital mobility. This paper analysis the dependency of investment on domestic savings across European Union (EU) economies over three different time frames split by major milestones in the economic history of the union. Using a panel error correction model, I find evidence of low capital mobility before the creation of the ESM and after the crisis of 2008, suggesting that a solvency constraint can bind investment to domestic savings even when barriers for capital mobility are eliminated.The estimates suggest that there is a long-run relationship between the aforementioned aggregates associated with a solvency constraint. However, this constraint does not appear to be binding between 1993 and 2007, matching with an increased spreadin the current account balances between high and low income economies among the EU.Between 2007 and 2020, restrictions on borrowing faced by some EU economies reduced capital mobility, despite the absence of capital controls and exchange rate risk.
    Keywords: Current Account, Savings, Investment, Capital Mobility, Feldstein-Horioka Puzzle
    Date: 2020–07
  12. By: Tanweer Akram; Huiqing Li
    Abstract: This paper analyzes the nominal yields of UK gilt-edged securities ("gilts") based on a Keynesian perspective, which holds that the short-term interest rate is the primary driver of the long-term interest rate. Quarterly data are used to model gilts' nominal yields. These models bring to light the complex dynamics relating the nominal yields on gilts to the short-term interest rate, inflation, the growth of industrial production, and the government debt ratio. The results show that the short-term interest rate has a crucial influence on the nominal yields on gilts, even after controlling for various factors. Contrary to widely held views, a higher government debt ratio does not lead to higher nominal yields.
    Keywords: UK Gilt-Edged Securities; Government Bonds; Long-Term Interest Rates; Nominal Bond Yields; Government Debt
    JEL: E43 E50 E58 E60 G10 G12
    Date: 2020–09

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