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on European Economics |
| By: | Carlin, Wendy |
| Abstract: | In terms of macroeconomic performance, the Eurozone’s first decade is a story of successful inflation-targeting by the ECB for the common currency area as a whole combined with the persistence of real exchange rate and current account disequilibria at member country level. According to the standard New Keynesian model of a small member of a currency union, policy intervention at country level is not necessary to ensure adjustment to country-specific shocks. Self-stabilization of shocks takes place through the adjustment of prices and wages to ensure that the real exchange rate returns to equilibrium. That this did not happen in the Eurozone appears to be related to the presence of non-rational wage-setters in a number of member countries. A related second departure from the New Keynesian model was the transmission of nonrational inflation expectations to the real interest rate, propagating easy credit conditions in countries with inflation above target. Problems of real exchange rate misalignment among members were exacerbated by the ability of Germany’s wagesetting institutions to deliver self-stabilization. The implications for policy focus on using fiscal policy to target the real exchange rate and / or on reforms to labour markets that deliver real exchange rate oriented wage-setting. |
| Keywords: | Eurozone; fiscal policy; New Keynesian model; real exchange rate; wage-setting |
| JEL: | E61 E62 E65 F41 O52 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8918&r=eec |
| By: | Yener Altunbas (Centre for Banking and Financial Studies, University of Wales, Bangor, Gwynedd, LL57 2DG, United Kingdom.); Leonardo Gambacorta (Bank for International Settlements, Monetary and Economics Department, Centralbahnplatz 2, CH-4002 Basel, Switzerland.); David Marques-Ibanez (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | We analyze whether the impact of monetary policy on bank risk depends upon bank characteristics. We relate the materialization of bank risk during the financial crisis to differences in the monetary policy stance and bank characteristics in the pre-crisis period for a large sample of listed banks operating in the European Union and the United States. We find that the insulation effect produced by capital and liquidity buffers on bank risk was lower for banks operating in countries that, prior to the crisis, experienced a particularly prolonged period of low interest rates. JEL Classification: E44, E52, G21. |
| Keywords: | Risk-taking channel, monetary policy, credit crisis, bank characteristics. |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111427&r=eec |
| By: | Dániel Holló (Magyar Nemzeti Bank, 1054 Szabadság tér 8/9, 1850 Budapest, Hungary.); Manfred Kremer (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Marco Lo Duca (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper introduces a new indicator of contemporaneous stress in the financial system named Composite Indicator of Systemic Stress (CISS). Its specific statistical design is shaped according to standard definitions of systemic risk. The main methodological innovation of the CISS is the application of basic portfolio theory to the aggregation of five market-specific subindices created from a total of 15 individual financial stress measures. The aggregation accordingly takes into account the time-varying cross-correlations between the subindices. As a result, the CISS puts relatively more weight on situations in which stress prevails in several market segments at the same time, capturing the idea that financial stress is more systemic and thus more dangerous for the economy as a whole if financial instability spreads more widely across the whole financial system. Applied to euro area data, we determine within a threshold VAR model a systemic crisis-level of the CISS at which financial stress tends to depress real economic activity. JEL Classification: G01, G10, G20, E44. |
| Keywords: | Financial system, financial stability, systemic risk, financial stress index, macro-financial linkages. |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111426&r=eec |
| By: | Chiara Angeloni; Guntram B. Wolff |
| Abstract: | The strong relation between sovereign and banking stress is frequently emphasised, especially since the start of the European sovereign debt crisis. This working paper sheds light on the determinants of the link. It studies the stock market performance and the holdings of government debt of the banks stress tested by the European Banking Authority in July and December 2011. A number of results stand out: Banksâ?? holdings of the sovereign bonds of vulnerable countries generally decreased during the period December 2010 to September 2011. The average stock market performance of each countryâ??s banks was very uneven during 2011. The long-term refinancing operation (LTRO) had no material effect on banksâ?? stock market values. Greek debt holdings had an effect on banksâ?? market values in the period July to October 2011 while after October this effect disappeared. Holdings of Italian and Irish debt had a material effect on banksâ?? market value in the period October to December 2011. Holdings of debt of other periphery countries, in particular Spain, were not an issue. The July PSI deal did not substantially affect the risk resulting from holdings of debt other than Greek debt. The location of banks matters for their market value. This highlights the need to form a banking union in the euroarea. |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:bre:wpaper:717&r=eec |
| By: | O'Higgins, Niall (University of Salerno) |
| Abstract: | This paper looks at the effects of the 'Great Recession' on young people's labour market experiences in the European Union. The paper documents some of the key characteristics of young people's labour market experiences during the current recession and then seeks to provide some explanations of these applying both cross-section and time series rolling regression models in order, in particular, to better understand the role of labour market institutions as a determining factor of differing experiences across countries. The analysis finds that labour market flexibility contributed significantly to the negative consequences felt by young people during the recession. |
| Keywords: | recession, youth labour markets, human capital, EPL |
| JEL: | I28 J13 J23 J24 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp6434&r=eec |
| By: | Balázs Égert; Douglas Sutherland |
| Abstract: | This paper takes a fresh look at the nature of financial and real business cycles in OECD countries using annual data series and shorter quarterly and monthly economic indicators. It first analyses the main characteristics of the cycle, including the length, amplitude, asymmetry and changes of these parameters during expansions and contractions. It then studies the degree of economic and financial cycle synchronisation between OECD countries but also of economic and financial variables within a given country, and gauges the extent to which cycle synchronisation changed over time. Finally, the paper provides some new evidence on the drivers of the great moderation and analyses the banking sector's pro-cyclicality by using aggregate and bank-level data. The main findings show that the amplitude of the real business cycle was becoming smaller during the great moderation, but asset price cycles were becoming more volatile. In part this was linked to developments in the banking sector which tended to accentuate pro-cyclical behaviour. |
| Keywords: | real business cycles, financial cycles, great moderation, banking system, financial markets |
| JEL: | E32 E44 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2012-15&r=eec |
| By: | C.J. Polychroniou |
| Abstract: | We live in a terrifying world of policymaking-an age of free-market dogmatism where the economic ideology is fundamentally flawed. Europe's political leadership has applied neo-Hooverian (scorched-earth) policies that are shrinking economies and producing social misery as a result of massive unemployment. Large-scale government intervention is critical in reviving an economy, but the current public-policy mania, which imposes fiscal tightening in the midst of recession, can only lead to catastrophic failure. The bailouts, for example, do not solve Greece's debt crisis but simply postpone an official default. What is needed is a political and economic revolution that includes a return to Keynesian measures and a new institutional architecture-a United States of Europe. |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:lev:levypn:12-01&r=eec |