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on European Economics |
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Issue of 2010‒10‒09
eighteen papers chosen by Giuseppe Marotta University of Modena and Reggio Emilia |
| By: | Gabe de Bondt (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Elke Hahn (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This study develops a new monthly euro Area-wide Leading Indicator (ALI) for the euro area business cycle. It derives the composite ALI by applying a deviation cycle methodology with a one-sided band pass filter and choosing nine leading series. Our main findings are that i) the applied monthly reference business cycle indicator (BCI) derived from industrial production excluding construction is close to identical to the real GDP cycle, ii) the ALI reliably leads the BCI by 6 months and iii) the longer leading components of the ALI are good predictors of the ALI and therefore the BCI up to almost a year ahead and satisfactory predictors by up to 2 years ahead. A real-time analysis for predicting the euro business cycle during the 2008/2009 recession and following recovery confirms these findings. JEL Classification: E32. |
| Keywords: | Leading indicator, Business cycle, Deviation cycle, Real-time analysis, Euro Area. |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101246&r=eec |
| By: | Michele Lenza (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Huw Pill (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Lucrezia Reichlin (London Business School.) |
| Abstract: | This paper describes the response of three central banks to the 2007-09 financial crisis: the European Central Bank, the Federal Reserve and the Bank of England. In particular, the paper discusses the design, implementation and impact of so-called "non-standard" monetary policy measures focusing on those introduced in the euro area in the aftermath of the failure of Lehman Brothers in September 2008. Having established the impact of these measures on various observable money market spreads, we propose an empirical exercise intended to quantify the macroeconomic impact of non-standard monetary policy measures insofar as it has been transmitted via these spreads. The results suggest that non-standard measures have played a quantitatively significant role in stabilising the financial sector and economy after the collapse of Lehman Bros., even if insufficient to avoid a significant fall in economic and financial activity. JEL Classification: E52, E58. |
| Keywords: | Non-standard monetary policy, financial crisis. |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101253&r=eec |
| By: | Matthieu Darracq Pariès (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Christoffer Kok Sørensen (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Diego Rodriguez Palenzuela (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | The financial crisis clearly illuminated the potential amplifying role of financial factors on macroeconomic developments. Indeed, the heavy impairments of banks’ balance sheets brought to the fore the banking sector’s ability to provide a smooth flow of credit to the real economy. However, most existing structural macroeconomic models fail to take into account the crucial role of banks’ balance sheet adjustment in the propagation of shocks to the economy. This paper contributes to fill this gap, analyzing the role of credit market frictions in business cycle fluctuations and in the transmission of monetary policy. We estimate a closed-economy dynamic stochastic general equilibrium (DSGE) model for the euro area with financially-constrained households and firms and embedding an oligopolistic banking sector facing capital constraints. Using this setup we examine the macroeconomic implications of various financial frictions on the supply and demand of credit, and in particular we assess the effects of introducing risk-sensitive and more stringent capital requirements. Finally, we explore the scope for counter-cyclical bank capital rules and the strategic complementarities between macro-prudential tools and monetary policy. JEL Classification: E4, E5, F4. |
| Keywords: | DSGE models, Bayesian estimation, Banking, Financial regulation. |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101251&r=eec |
| By: | Maudos Villarroya Joaquín (University of Valencia; Ivie); Fernández de Guevara Radoselovics Juan (University of Valencia; Ivie) |
| Abstract: | The aim of the paper is to analyze the process of financial integration in Europe and its impact on economic growth since the introduction of the Euro in 1999. In particular, we focus on how the international financial crisis that started in 2007 has affected integration and growth. By combining information at country, sector and firm level, we quantify the effect of financial integration on financial development and therefore on economic growth. Our results illustrate that a significant part (65%) of financial development is attributable to progress in integration, accounting for 1% of the euro area's GDP growth over the period 1999-2008. The financial retrenchment due to the crisis in 2008 has limited GDP growth by 0.75 pp which accounts for a very significant part (58%) of the observed contraction of GDP. However, the global nature of the crisis implies that financial integration has not been strongly reversed in comparison to financial development. Therefore, the decline in the degree of integration in 2008 explains a small percentage of the drop in total capitalization and, as a result, its impact on growth is also small. |
| Keywords: | Crisis, financial development, financial integration, economic growth |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:fbb:wpaper:20108&r=eec |
| By: | Angela Maddaloni (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); José-Luis Peydró (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | Using a unique dataset of the Euro area and the U.S. bank lending standards, we find that low (monetary policy) short-term interest rates soften standards, for household and corporate loans. This softening – especially for mortgages – is amplified by securitization activity, weak supervision for bank capital and too low for too long monetary policy rates. Conversely, low long-term interest rates do not soften lending standards. Finally, countries with softer lending standards before the crisis related to negative Taylor-rule residuals experienced a worse economic performance afterwards. These results help shed light on the origins of the crisis and have important policy implications. JEL Classification: G01, G21, G28, E44, E5. |
| Keywords: | lending standards, monetary policy, securitization, bank capital, financial stability. |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101248&r=eec |
| By: | Luca Gattini (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Paul Hiebert (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper presents a parsimonious model for forecasting and analysing euro area house prices and their interrelations with the macroeconomy. A quarterly vector error correction model is estimated over 1970-2009 using supply and demand forces central to the determination of euro area house prices in equilibrium and their dynamics: housing investment, real disposable income per capita and a mixed maturity measure of the real interest rate. In addition to house price forecasts using the resulting reduced form equation, a structural decomposition of the system is obtained employing a common trends framework of King, Plosser, Stock, and Watson (1991), which allows for the identification and economic interpretation of permanent and transitory shocks. The main results are twofold. First, the reduced form model tracks closely turning points in house prices when examining out-of-sample one- and two- step ahead forecasts. Moreover, the model suggests that euro area housing was overvalued in recent years, implying a period of stagnation to bring housing valuation back in line with its modelled fundamentals. Second, housing demand and financing cost shocks appear to have contributed strongly to the dynamism in euro area house prices over the sample period. While much of the increase appears to reflect a permanent component, a transitory component has also contributed from 2005 onwards. Specification tests suggest a robustness of the small model to alternative specifications, along with validity of the long-run restrictions. JEL Classification: R21, R31, C32. |
| Keywords: | House price, Forecasting, Vector autoregression. |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101249&r=eec |
| By: | Anton Nakov (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Carlos Thomas (Banco de España, Alcalá, 48, 28014 Madrid, Spain.) |
| Abstract: | We study optimal monetary policy in a flexible state-dependent pricing framework, in which monopolistic competition and stochastic menu costs are the only distortions. We show analytically that it is optimal to commit to zero inflation in the long run. Moreover, our numerical simulations indicate that the optimal stabilization policy is "price stability". These findings represent a generalization to a state-dependent framework of the same results found for the simple Calvo model with exogenous timing of price adjustment. JEL Classification: E31. |
| Keywords: | optimal monetary policy, price stability, stochastic menu costs, state-dependent pricing. |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101250&r=eec |
| By: | Karolina Konopczak (Warsaw School of Economics and Ministry of Finance, Financial Policy, Analysis and Statistics Department); Andrzej Torój (Warsaw School of Economics and Ministry of Finance, Financial Policy, Analysis and Statistics Department) |
| Abstract: | This paper estimates the magnitude of the Baumol-Bowen and Balassa-Samuleson effects in the Polish economy. The purpose of the analysis is to establish to what extent the differential price dynamics in Poland and in the euro area and the real appreciation of PLN against EUR are explained by the differential in respective productivity dynamics. The historical contribution of the Baumol-Bowen effect to Polish inflation rate is estimated at 0.7-1.0 percentage points in the short run. According to estimation results, the Balassa-Samuelson effect contributed around 0.9 to 1.3 percentage point per annum to the rate of relative price growth between Poland and the euro area and 0.9 to 1.6 p.p. to real exchange rate appreciation. Sub-sample calculations and productivity trends over the last decade suggest that this impact should be declining. However, its size is still non-negligible for policymakers in the context of euro adoption in Poland. |
| Keywords: | Balassa-Samuelson hypothesis, monetary integration, real appreciation, panel cointegration |
| JEL: | C33 E31 F31 F41 |
| Date: | 2010–09–27 |
| URL: | http://d.repec.org/n?u=RePEc:fpo:wpaper:6&r=eec |
| By: | Nicholas T. Longford (SNTL and UPF, Barcelona, Spain); Maria Grazia Pittau (Department of Statistics, Sapienza University of Rome); Roberto Zelli (Department of Statistics, Sapienza University of Rome); Riccardo Massari (Sapienza University of Rome) |
| Abstract: | The European Union Survey on Income and Living Conditions (EU-SILC) is the main source of information about living standards and poverty in the member states of the European Union. It provides reliable statistics at national level but sample sizes do not allow reliable estimates at sub-national level, despite a rising demand from policy makers and local authorities. We provide a comprehensive map of median income, inequality (Gini coefficient and Lorenz curve) and poverty (poverty rates), at country and regional levels, based on the equivalized household income in all the countries in which EU-SILC is conducted. We focus on personal income distribution within regions as opposed to per capita income distribution across regions to give a deeper insight into regional disparities. Small-area estimation is applied to improve estimates in regions with small sample size. Uncertainty of such complex non-linear statistics is assessed by bootstrap methods. Household-level sampling weights are taken into account in both the estimates and their relative bootstrapped standard errors. |
| Keywords: | European regional economics measurement; EU-SILC; Gini coefficient; Poverty rates; Small-area estimation. |
| JEL: | D31 I32 R10 C13 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:inq:inqwps:ecineq2010-182&r=eec |
| By: | Nuno Cassola (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Michael Huetl (University of St. Gallen, Swiss Institute of Banking and Finance, Rosenbergstrasse 52, 9000 St. Gallen, Switzerland.) |
| Abstract: | We analyze the impact of the recent financial market crisis on the Euro Overnight Index Average (EONIA) and interbank market trading and assess the effectiveness of the ECB liquidity policy between 07/2007 - 08/2008. We extend the model of [QM06] by (i) incorporating the microstructure of the EONIA market including the ECB fine-tuning operation on the last day of the maintenance period (MP) and banks’ daily excess liquidity, (ii) giving insight into banks’ trading behavior characterized by an endogenous regime-switch and suggesting an efficient procedure to simulate the entire MP, and (iii) proposing a model for market distortion due to lending constraints which lead to a bid-ask spread for the EONIA rate. The model is calibrated by simulation fitting daily EONIA rates and aggregate liquidity measures observed between March 2004 and September 2008. Besides lending constraints we consider market segmentation and aggregate liquidity shocks as possible market distortions in the crisis period. For a calibration cross-check and for estimating the timing of the endogenous regime-switch we use panel data covering liquidity data of 82 Euro Area commercial banks for the period 03/2003 - 07/2007. With the calibrated model the ECB policy of liquidity frontloading is evaluated and compared with a reserve band system policy similar to the Bank of England’s framework. We find that liquidity frontloading is a small scale central bank intervention which is capable of stabilizing interest rates in both frictionless and distorted markets. Simulations suggest that without frontloading the EONIA would have been, on average, 23 basis points above the policy rate (target); with frontloading, the overnight rate is, on average, on target. JEL Classification: E44, E52, G21. |
| Keywords: | liquidity management, open market operations, simulation, microstructure. |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101247&r=eec |
| By: | Steven Ongena (Tilburg University, Warandelaan 2 5037 AB Tilburg, Netherlands.); Alexander Popov (European Central Bank, Financial Research Division, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | We study the effect of interbank market integration on small firm finance in the build-up to the 2007-2008 financial crisis. We use a comprehensive data set that contains contract terms on individual loans to 6,047 firms across 14 European countries between 1998:01 and 2005:12. We account for the selection that arises in the loan request and approval process. Our findings imply that integration of interbank markets resulted in less stringent borrowing constraints and in substantially lower loan rates. The decrease was strongest in markets with competitive banking sectors. We also find that in the most rapidly integrating markets, firms became substantially overleveraged during the build-up to the crisis. JEL Classification: E51, G15, G21, G34. |
| Keywords: | interbank markets, selection, loan rates, bank competition, firm leverage. |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101252&r=eec |
| By: | Attila Csajbók (Magyar Nemzeti Bank); András Hudecz (Magyar Nemzeti Bank); Bálint Tamási (Magyar Nemzeti Bank) |
| Abstract: | The post-Lehman phase of the financial crisis has exposed a number of weaknesses in the banking sectors of the European Union’s New Member States (NMSs). One of these is the prevalence of lending in foreign currency. While banks themselves in these countries have not taken on sizeable currency risk directly, they passed it on to households and the corporate sector. With large depreciations taking place or looming in the region, the currency risk at households and corporates without a natural hedge is now being transformed into credit risk for the banking sector. This is creating a serious problem in maintaining financial stability and cripples monetary policy in countries where it operates primarily through the exchange rate channel. The patterns of foreign currency lending to households in NMSs vary widely both across countries and time periods. For example, FX lending to households is virtually non-existent in the Czech Republic while in some Baltic countries its share is close to 100 per cent of total household lending. The main goal of the paper is (1) to present the stylised facts of pre-crisis FX lending in NMSs systematically and (2) to try to explain these differing patterns in an econometric model. In order to do so, a panel database of household FX borrowing is compiled, covering 10 NMSs in the period 1999-2008. Our estimation results suggest that the degree of household FX borrowing depends on the interest rate differential, the institutional features of mortgage financing and the monetary regime. Household FX borrowing tends to be less prevalent if the interest rate differential is small, fixed interest rate mortgage financing is available and the monetary authority’s “fear of floating” is low. |
| Keywords: | foreign currency lending, new member states, credit risk, monetary policy |
| JEL: | E44 E50 G21 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:mnb:opaper:2010/87&r=eec |
| By: | Dolls, Mathias (University of Cologne); Fuest, Clemens (University of Oxford); Peichl, Andreas (IZA) |
| Abstract: | This paper analyzes the effectiveness of social protection systems in Europe and the US to provide (income) insurance against macro level shocks in terms of automatic stabilizers. We find that automatic stabilizers absorb 38% of a proportional income shock and 47% of an idiosyncratic unemployment shock in Europe, compared to 32% and 34% in the US. There is large heterogeneity within Europe with stabilization being much lower in Eastern and Southern than in Central and Northern Europe. Our results suggest that social transfers, in particular the rather generous systems of unemployment insurance in Europe, play a key role for the stabilization of disposable incomes and explain a large part of the difference in automatic stabilizers between Europe and the US. |
| Keywords: | automatic stabilization, economic crisis, taxes and benefits |
| JEL: | E32 E63 H2 H31 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izapps:pp18&r=eec |
| By: | Wagenvoort, Rien (European Investment Bank, Economic and Financial Studies); Zwart, Sanne (European Investment Bank, Economic and Financial Studies) |
| Abstract: | We introduce Longitudinal Factor Analysis (LFA) to extract the Common Risk Free (CRF)rate from a sample of sovereign bonds of countries in a monetary union. Since LFA exploits the typically very large longitudinal dimension of bond data, it performs better than traditional factor analysis methods that rely on the much smaller cross-sectional dimension. European sovereign bond yields for the period 2006-2010 are decomposed into a CRF rate, a default risk premium, and a liquidity risk premium, shedding new light on issues such as benchmark status, flight-to-quality and flight-to-liquidity hypotheses. Our empirical findings suggest that investors chase both credit quality and liquidity, and that liquidity is more valued when aggregate risk is high. |
| Keywords: | Factor analysis; risk free interest rate; sovereign bond; benchmark |
| JEL: | C19 E43 G12 |
| Date: | 2010–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:ris:eibefr:2010_005&r=eec |
| By: | Kappeler, Andreas (European Investment Bank, Economic and Financial Studies); Nemoz, Mathieu (European Investment Bank) |
| Abstract: | This paper offers an updated description of the macroeconomic and sectoral significance of PPPs in Europe - without assessing PPPs from a normative perspective. Builidng on Blanc-Brude et al. (2007), it looks at the evolution of PPPs in the EU, with a particular focus on the recent financial crisis. In 2009, PPP transactions stood at EUR 15.8 billion; a decrease of almost 50% compared to 2007. The total value of closed deals has declined more than the number of deals. At the same time, the PPP market in Europe continues to diversify across countries and sectors. In 2008, the UK share in the total number of EU-PPPs fell below 50%. In many respects, however, the reduction in the European PPP market observed during the financial crisis can be seen as a reversal of an extraordinary spike in the years preceding the crisis. |
| Keywords: | Public-Private Partnerships; Europe; PPP |
| JEL: | H54 L33 R42 |
| Date: | 2010–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:ris:eibefr:2010_004&r=eec |
| By: | Adrian Blundell-Wignall; Patrick Slovik |
| Abstract: | This working paper’s quantifications show that most sovereign debt is held on the banking books of banks, whereas the EU stress test considered only their small trading book exposures. It discusses why sovereign debt held in the banking book cannot be ignored by investors and creditors, because of: (a) recovery values in the event of individual bank failures; and (b) fiscal sustainability and structural competitiveness issues which mean the market cannot give a zero probability to debt restructurings beyond the period of the stress test and/or the period after which the role of the European Financial Stability Facility Special Purpose Vehicle (EFSF SPV) comes to an end. How the SPV could operate to shift sovereign risk from banks to the public sector is also an important part of the discussion. |
| Keywords: | financial stability |
| JEL: | E62 G21 G28 |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:oec:dafaad:4-en&r=eec |
| By: | Dalen, H.P. van (Tilburg University); Henkens, K. (Tilburg University) |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ner:tilbur:urn:nbn:nl:ui:12-4260808&r=eec |
| By: | Filipe Silva (Faculdade de Economia, Universidade de Coimbra, Portugal); Carlos Carreira (GEMF/Faculdade de Economia, Universidade de Coimbra, Portugal) |
| Abstract: | Today's shortage of financial resources calls for the attention of researchers to the problem of financial constraints faced by firms. In this paper we analyse firms' financial constraints by estimating both investment-cash flow sensitivities and cash-cash flow sensitivities upon a large unbalanced panel of Portuguese firms in order to obtain robust findings. Additionally, we classify firms according to characteristics that are generally believed to indicate the presence of constraints (size, age and dividend payment). Our results clearly show that Portuguese firms are, in general, financially constrained. Furthermore, we verify that such constraints are more severe for certain groups of firms, in particular those firms that are smaller and do not pay dividends. However, we do not find evidence that age as a good proxy for financial constraints. Finally, we cast some doubts on the direct implementation of the SA index as a measure of financial constraints. |
| Keywords: | Financial constraints; Firm-level studies; Portugal. |
| JEL: | D92 G32 L00 L2 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:gmf:wpaper:2010-15&r=eec |