nep-eec New Economics Papers
on European Economics
Issue of 2022‒10‒31
twelve papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. "Dynamic connectedness between credit and liquidity risks in EMU sovereign debt markets". By Marta Gómez-Puig; Mary Pieterse-Bloem; Simón Sosvilla-Rivero
  2. The Uncertainty of Fairness: a Game Theory Analysis for a Debt Mutualization Scheme in the Euro Area By D'Andrea, Sara; Vassalli, Federica
  3. Should we care about ECB inflation expectations? By Roccazzella, Francesco; Candelon, Bertrand
  4. Protecting depositors and saving money: Why deposit guarantee schemes in the EU should be able to support transfers of assets and liabilities when a bank fails By Eule, Joachim; Kastelein, Wieger; Sala, Edoardo
  5. Bank interest rate margins in a negative interest rate environment By Jorien Freriks; Jan Kakes
  6. A tale of housing cycles and fiscal policy, not competitiveness. Growth drivers in southern Europe By Engelbert Stockhammer; Andre Novas Otero
  7. One size may not fit all: Financial fragmentation and European monetary policies By Marie‐hélène Gagnon; Céline Gimet
  8. How Brexit has raised UK food prices By Jan David Bakker; Nikhil Datta; Josh De Lyon; Luisa Opitz; Dilan Yang
  9. Another battle of the have-nots? The Impact of Immigration on the Poverty Risk of Western European By Martina Bazzoli; Joan E. Madia; Federico Podestà
  10. Silence is not Golden Anymore? Social media activity and stock market valuation in Europe By Christophe J. GODLEWSKI; Katarzyna BYRKA-KITA; Renata GOLA; Jacek CYPRYJANSKI
  11. The Opportunity Driven Entrepreneurship in the Context of Innovation Systems in Europe in the Period 2010-2019 By Leogrande, Angelo; Costantiello, Alberto; Laureti, Lucio
  12. Home Country Bias in International Emissions Trading: Evidence From the EU ETS By Hintermann, Beat; Ludwig, Markus

  1. By: Marta Gómez-Puig (Department of Economics and Riskcenter, Universitat de Barcelona. 08034 Barcelona, Spain.); Mary Pieterse-Bloem (Section Finance in Business Economics, Erasmus School of Economics, 3062 PA, Rotterdam, and Rabobank**, 3521 CB, Utrecht, the Netherlands. Phone: +316-5136 5132.); Simón Sosvilla-Rivero (Complutense Institute for Economic Analysis, Universidad Complutense de Madrid. 28223 Madrid, Spain.)
    Abstract: We examine the dynamic interconnection between sovereign credit and liquidity risks in ten euro area countries at the 5-year maturity with high-frequency data from MTS over the period January 2008-December 2018 using the extension of the TVP-VAR connectedness approach of Antonakakis et al. (2020). Our results indicate that for most periods net connectedness is from credit risk to liquidity risk, but this indicator is time-dependent, detecting some episodes where it goes from liquidity risk to credit risk. We set up an event study and find that the latter episodes can be related to several unconventional monetary policy measures of the ECB. Then, we examine the drivers of the connectedness indicator by means of a Probit model. Our results suggest that monetary policy shocks and economic policy uncertainty increase the probability of risk transmission from liquidity to credit, while global funding liquidity, tensions in financial markets and surprises in inflation and GDP are factors that reduce such probability.
    Keywords: Liquidity risk, Credit risk, Eurozone sovereign bonds, MTS bond market, Dynamic connectedness, Time-varying parameters. JEL classification: C22, C53, G12, G14, G15.
    Date: 2022–10
  2. By: D'Andrea, Sara; Vassalli, Federica
    Abstract: This paper aims to briefly present the fairness approach in game theory and its potential application. Fairness means that players consider not only personal payoffs but also others’ payoffs and beliefs regarding their actions. In this context, we distinguish two approaches, one based on the material payoff and the other on beliefs. We adopt the fairness approach in proposing three games for studying the strategic interaction between a hypothetical country and the European Union in proposing a debt mutualization scheme. We find that the optimal debt quota to share with the European Union is 50%; concerning the moral hazard problem, commitment to structural reforms for countries with high public debt leads to the best equilibrium, that can be preserved following an incentive strategy.
    Keywords: Game Theory, Fairness Approach, Debt Mutualization, Euro Area
    JEL: C7 H63
    Date: 2022–09–23
  3. By: Roccazzella, Francesco; Candelon, Bertrand (Université catholique de Louvain, LIDAM/LFIN, Belgium)
    Abstract: We use optimal combination of forecasts to introduce a novel forecast encompass- ing test to evaluate time-series and institutional inflation projections in the euro area. Combination weights reveal which forecasts are the most informative. Although, ECB is the most informative forecaster on average, it does not encompass its competitors and its weight varies over time. Macro-financial conditions and monetary policy ac- tions explain this variability. The greater the uncertainty surrounding inflation and the difference between current and the 2% inflation target, the less informative ECB’s forecasts are. The more contractionary the monetary policy, the more informative they are. ECB’s declining weight and the relation with its determinants raise a warning flag: the potential loss of informativeness damages ECB’s leading role at anchoring inflation expectations and questions whether the goal of preserving financial stability is compatible with the inflation targeting objective.
    Keywords: Forecast combinations ; Forecast evaluation ; Inflation ; euro area ; ECB
    Date: 2022–06–15
  4. By: Eule, Joachim; Kastelein, Wieger; Sala, Edoardo
    Abstract: In this paper we show that allowing deposit guarantee schemes (DGSs) the option of supporting asset and liability transfers in the event of a bank’s insolvency provides important economic benefits. However, only 11 EU Member States have so far included such “alternative measures” in their DGSs’ toolkits. The number of Member States where alternative measures have been actively used is even more limited. Based on our findings, we argue that giving deposit guarantee schemes in the EU the option of using alternative measures would improve the efficiency and effectiveness of the EU banking crisis management framework. It would speed up the handling of smaller banks’ failures while reducing upfront outlays and final costs for deposit guarantee schemes. It would improve the protection of deposits, thereby safeguarding depositor confidence and overall financial stability. It would also allow access to finance to be better preserved and enhance the level playing field for banks and depositors in the EU. We also argue that, apart from the availability of the option in law, the least cost test and the creditor hierarchy determine the de facto availability and potential magnitude of alternative measures. Currently, however, both the least cost test and the creditor hierarchy limit the possibility of supporting asset and liability transfers and may therefore need to be reformed in order for economically efficient results to be achieved. JEL Classification: G01, G21, G28
    Keywords: Banking union, deposit guarantee schemes, depositor protection, EU bank crisis management framework, transfers of assets and liabilities
    Date: 2022–10
  5. By: Jorien Freriks; Jan Kakes
    Abstract: This paper studies the impact of the negative interest rate policy (NIRP) on euro area banks’ interest rate margins, using bank-individual data for the 2007-2019 period. An important extension to other studies is our breakdown of banks’ interest rate margin into a funding and lending component. Because of banks’ reluctance to reduce the interest rate on household deposits below zero, the funding margin of banks more reliant on deposit funding has declined compared to that of other banks. Our evidence shows that these banks have been unwilling or unable to compensate this by boosting their lending margins. Therefore, negative rates have significantly reduced the overall net interest margin of deposit-dependent banks compared to other banks.
    Keywords: monetary policy; negative interest rates; banks, interest margin
    JEL: E43 E52 G21
    Date: 2021–07
  6. By: Engelbert Stockhammer; Andre Novas Otero
    Abstract: Southern European countries are widely considered a distinct type of capitalism, but they have experienced a varied growth performance, both over time and across countries. This paper investigates the growth drivers in southern Europe since the mid-1990s. We consider a broad set of potential growth drivers derived from the literature on Mediterranean capitalism and Comparative Political Economy more broadly. On the demand side these include the role of house prices (as the main financial variable; highlighted in parts of the growth models approach); the ‘financial curse’ hypothesis (which posits that financial inflows caused house price booms and crowded out manufacturing activities); and Keynesian arguments on the impact of fiscal policy. On the supply side, these encompass the cost competitiveness argument (consistent with mainstream economics and the Varieties of Capitalism approach), research-led technological change; and neo-structuralist arguments regarding the productive capacity. We find strong evidence for the growth contributions of house prices and fiscal policy. While these findings are generally supportive of extant analysis of these economies as finance-led rather than export-led, they call for a more serious integration of house prices in growth model analysis and for a more systematic analysis of the growth impact of fiscal policy.
    Keywords: Comparative Political Economy, growth models, growth drivers, southern Europe, house price cycles, fiscal policy
    JEL: B20 B50 E12 O43 P51
    Date: 2022–10
  7. By: Marie‐hélène Gagnon (ULaval - Université Laval [Québec], CRREP - Centre de recherche sur les risques, les enjeux économiques, et les politiques publiques - ULaval - Université Laval [Québec]); Céline Gimet (Institut d'Études Politiques [IEP] - Aix-en-Provence, AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This article investigates the impact of European Central Bank policies on credits considering financial and banking fragmentation. Using European data from the past decade, we estimate SVAR models to analyze the regional impact of conventional and unconventional measures on price and volume indicators of fragmentation. The risk-taking channel is studied using GVAR models to document the national consequences of this fragmentation. We find that unconventional measures increase credit in peripheral countries. Monetary policies alleviate fragmentation, but mostly in terms of price dispersion rather than credit volume. Finally, unconventional measures imply a rebalancing of European bank assets in favor of foreign currency denominated-assets.
    Keywords: banking fragmentation,financial fragmentation,monetary policy,risk-taking channel
    Date: 2022
  8. By: Jan David Bakker; Nikhil Datta; Josh De Lyon; Luisa Opitz; Dilan Yang
    Abstract: Some products imported to the UK from the European Union have been more affected by the post-Brexit trading rules than others. Jan David Bakker, Nikhil Datta, Josh De Lyon, Luisa Opitz and Dilan Yang find that leaving the single market and customs union has led to a 6% rise in food prices in the UK.
    Keywords: UK Economy, Brexit, supply chains, trade, prices, imports, uk, eu
    Date: 2022–06–21
  9. By: Martina Bazzoli; Joan E. Madia; Federico Podestà
    Abstract: This paper examines the impact of immigration on natives’ poverty risk in Western European countries. In doing so, it contributes to the academic debate on immigration impact in two manners. First, it introduces a novel outcome in this debate, i.e. natives’ poverty risk. Second, it brings together two strands of literature: that of the immigration impact on labour market outcomes and the one on the relationship between immigration and public finance. In fact, since poverty risk significantly varies in consequence of work attachment and public programs access, the impact of immigration on the poverty risks of European natives can be coherently investigated by combining the labour market channel with the public-finance channel. Empirically, we estimate to which extent immigrants affect poverty risk of natives, measured in terms of income poverty and material deprivation. Our analysis focuses on both the overall impact, i.e., how all immigrants affect the poverty risk of all natives, and the more specific skill-composition impact, i.e., how the share of low-skilled immigrants affects the poverty risk of low-skilled natives. To this end, we analysed an aggregate panel dataset composed by EU-15 countries plus Norway and Switzerland, annually observed for the period 2005-2018. Our findings indicate that higher shares of immigration do not increase the risk of poverty and material deprivation among natives.
    Keywords: Poverty risk of natives, Immigration, Western Europe
    JEL: J61 O15 I3
    Date: 2022–10
  10. By: Christophe J. GODLEWSKI (LaRGE Research Center, Université de Strasbourg); Katarzyna BYRKA-KITA (Institute of Economics and Finance, Uniwersytet Szczecinski); Renata GOLA (Institute of Economics and Finance, Uniwersytet Szczecinski); Jacek CYPRYJANSKI (Institute of Economics and Finance, Uniwersytet Szczecinski)
    Abstract: We investigate the link between social media activity and market valuation of listed European companies over the period January 2018 – June 2020. Using a large novel dataset from 39 European capital markets, we first provide a comprehensive “big picture” of social media activity of European listed companies, using data from all European capital markets. Second, we show that greater Twitter activity is associated with increased shareholders’ returns. Third, we find that portfolios with a larger number of tweets posted by a company exhibit larger market risks. Our findings support the idea that investors should consider social media activity when implementing investment strategies.
    Keywords: stock markets, valuation, CAPM, Twitter, social media, investor attention, information asymmetry, disclosure.
    Date: 2022
  11. By: Leogrande, Angelo; Costantiello, Alberto; Laureti, Lucio
    Abstract: In this article we have estimated the value of “Opportunity Driven Entrepreneurship” in Europe. We use data from European Innovation Scoreboard-EIS of the European Commission for 36 countries in the period 2010-2019. We use Panel Data with Fixed Effects, Panel Data with Random Effects, WLS, Pooled OLS, and Dynamic Panel. Our results show that “Opportunity Driven Entrepreneurship” is positively associated, among others, to “Innovation Friendly Environment” and “Turnover Share Large Enterprises”, while it is negatively associated, among others, to “Sales Impacts” and “R&D Expenditure Business Sectors”.
    Keywords: Innovation, and Invention: Processes and Incentives; Management of Technological Innovation and R&D; Diffusion Processes; Open Innovation
    JEL: O30 O31 O32 O33 O34
    Date: 2022–09–26
  12. By: Hintermann, Beat (University of Basel); Ludwig, Markus (University of Basel)
    Abstract: We examine the pattern of allowance trades in the European Union Emissions Trading System (EU ETS) using highly disaggregated trading data and identify a significant and robust home market bias. Our results point to informational transactions costs that increase when trading across national borders. The existing trade pattern in goods and services explains two thirds of the home bias, with the remainder due to other causes. Our finding suggests that firms make use of existing trade networks to overcome search costs in bilateral allowance trade. Since the home bias differs across firms, it follows that marginal abatement costs are not equalized across market participants of the EU ETS.
    Keywords: Emission permit market, EU ETS, transactions costs, gravity model, home bias
    JEL: F14 F18 Q52 Q54 Q58
    Date: 2022–10–02

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